The Consumer Position on the Consumer Bankruptcy Controversy

February 20, 1998

Radical Pro-Creditor Change Would Hurt American Families and Undermine an Effective Legal System The consumer lending industry has hired seven top Washington lobbying firms and is spending millions of dollars on a campaign to discredit an important legal system which is helping American families. Proposed changes to the bankruptcy laws embodied in H.R. 2500, H.R. 3150, and S. 1301 go far beyond what is needed to address concerns about bankruptcy abuse.

Appropriate reforms to the bankruptcy laws must recognize:
• Most bankruptcy debtors are honest, hard-working American families facing unmanageable financial burdens including foreclosure, repossession, wage garnishment, utility shut-off, and crushing credit card debt. (Academic research shows that most bankruptcies are caused by unexpected life events such as illness or job loss rather than by financial mismanagement.)
• The credit industry shares responsibility for the current increase in filings. Aggressive credit card marketing at high interest rates to risky borrowers is at the heart of this complex problem. (Academic research shows that bankruptcies are increasing at the same rate as the amount of consumer credit outstanding.)
• The second chance embodied by a fresh start gives people an appropriate opportunity to focus their resources on essentials -- preserving a home and food for their families. (A provision for a fresh start every seven years is included in the Bible. Deuteronomy 15:1)
• vLegislation should not be based on research which was bought and paid for by Visa and MasterCard. Neutral researchers conclude that the number of chapter 7 debtors who can afford to pay any significant portion of their debts is less than 10%. The GAO, the CBO and neutral academic commentators have discredited credit industry research which purports to show that 25% of bankruptcy debtors can afford to pay a portion of their debts. Since the number who can pay is less than that, there is no justification for drastic change.

H.R. 2500 (McCollum) and H.R. 3150 (Gekas) are radical bills which need rethinking. They would vastly increase the cost of the system to taxpayers and to all bankruptcy debtors rather than target remedies to specific, identified problems. Bankruptcy judges and trustees have said that the new eligibility tests and audits proposed in the bills would involve exorbitant costs. H.R. 2500 and H.R. 3150 would force debtors into repayment plans which would undermine their ability to preserve their homes and double the cost of those plans. Since 67% of repayment plan cases already fail, the bills appear designed to perpetuate a cycle of failure and hardship. Only the rich, who could afford expensive legal counsel, would be able to navigate the complexities of these bills to obtain a fresh start. S. 1301 (Grassley/Durbin) is a more balanced bill but it still goes too far. S.1301 would create a blunt tool to address a problem which needs a scalpel -- that is finding the few debtors who research shows can afford to pay their debts. This bill would inappropriately create personal liability for attorneys and greatly increase the cost of administering each case. There is an alternative. Representatives Nadler and Conyers have introduced a bill under which debtors and creditors would share responsibility for making the bankruptcy system work as designed. It would provide relief for honest borrowers and lenders by addressing abuses by both debtors and creditors. Among the key features of the Consumer Lenders and Borrowers Accountability Act of 1998 (H.R. 3146) are provisions which would:

• stop lenders from making new loans to consumers who are overloaded with debt;
• encourage lenders to work with consumers facing financial hardship outside the bankruptcy system;
• prohibit wealthy borrowers from shielding assets by buying expensive homes; and
• increase incentives for debtors to voluntarily pursue a chapter 13 payment plan.

The bankruptcy laws are complex. Radical change has the potential to undermine the economy by changing the fundamental balance between debtors and creditors. Banks are continuing to report record profits. There is no reason to enact a creditor wish list of amendments or otherwise to take action which jeopardizes the safety net for low- and middle-class American families.