From the Salmon

Believe it or not, I had a few more points that I wanted to make in my previous post about the bankruptcy bill in the Senate. But the post was already plenty long, so I just decided to end it where I did.

In some ways, though, I think I left out the part of this debate that bothers me the most. This bill was first written and put forward back in 1997 at the behest of the credit card industry. I don’t know how necessary the bill was at the time, nor do I know how much the bill has changed since then. But as things stand today, the credit card companies really don’t seem to need this bill.

It’s true that personal bankruptcies are near an all-time high. In 2004, roughly 1.6 million families filed for bankruptcy, almost double the number that filed a decade ago. And if these were mostly deadbeats and predatory borrowers, then you’d expect to see some pretty destructive effects on the profits of an industry that needs this reform so desperately. But as the Los Angeles Times demonstrated in a recent chart (displayed at right), credit card company profits are also at an all-time high, raking in $31.6 billion in 2004.

Why are credit card company profits so high at a time when more and more of their customers are defaulting on their debt? In part, it’s because the credit card companies have built the risk of default into their business model. The L.A. Times article explains it thusly:

By charging customers different interest rates depending on how likely they are to repay their debts and by adding substantial fees for an array of items such as late payments and foreign currency transactions, the major card companies have managed to keep their profits rising steadily even as personal bankruptcies have soared, industry figures show.

When a credit card company charges a high-risk customer a high rate of interest, or risk premium, they are essentially wagering that the money the company will make due to the high interest rate on all like customers will outweigh the money they would lose if a customer defaults through bankruptcy. And these companies have clearly decided that this wager is worthwhile, because they have become more and more aggressive in marketing their products to potential high-risk customers.

And boy is it paying off. When you add punitive interest rates and penalty fees to the equation, customers can quickly find themselves in a situation called “negative amortization” where they make regular payments but their debt continues to increase. The same L.A. Times article tells the story of Ruth Owens, a woman living off of Social Security disability who was taken to a Cleveland court by Discover Bank:

According to court papers, Ruth M. Owens, a 53-year-old disabled woman, paid the company $3,492 over six years on a $1,963 debt only to find that late fees and finance charges had more than doubled the size of her remaining balance to $5,564.

When the firm took her to court to collect, she wrote the judge a note saying, “I would like to inform you that I have no money to make payments. I am on Social Security Disability�.... If my situation was different I would pay. I just don’t have it. I’m sorry.”

Judge Robert Triozzi ruled that Owens didn’t have to pay, saying she had “clearly been the victim of [Discover’s] unreasonable, unconscionable and unjust business practices.”

You could certainly make the argument that many people who sign up for a credit card know what they’re getting into. And there’s truth to that. Certainly, Americans could stand to learn more about financial responsibility, particularly when it comes to debt. But it’s also true that credit card companies know exactly what they’re getting into when they peddle their products to high-risk customers.

In a more fair marketplace, the threat of bankruptcy would be a necessary counterweight that would prevent credit card companies from giving credit to those who are likely to use it in a self-destructive manner. But it’s not a fair marketplace. The financial industry has donated millions of dollars to the campaigns of candidates at every level in the hopes that a bill like this bankruptcy bill will weaken that counterweight even further.

Harvard professor Elizabeth Warren, a guest poster on Talking Points Memo posts an email from a colleague who puts it this way:

Here’s what’s so strange: The credit card companies collect this risk premium, year in and year out. But when the risk actually happens and the borrower cannot pay, the lenders want the Federal government to intervene to force the debtor to pay, by passing a law prohibiting them from filing bankruptcy and discharging the debts. It’s as if a life insurance company took premium payments for years and then asked the government to pass a law prohibiting death!

The point is this. Credit card companies seek out high-risk customers, charge them high interest rates, charge them higher punitive rates and fees when they predictably miss a payment, and usually make back their initial investment plus a profit before their customer ever makes it to bankruptcy court. And this practice is making them billions of dollars. But that’s not enough. They want to make it even more difficult for these customers to free themselves from this destructive black hole of debt by passing an bill called, in part, the “Consumer Protection Act of 2005.”

The real tragedy is, this bill is going to pass. Unreasonable, unconscionable and unjust? You tell me. Better yet, tell your Senator; there’s a vote scheduled for this afternoon.

My church recently made a quiet switch from saying the version of the Lord’s Prayer with “forgive us our debts as we forgive our debtors” to the version that says “forgive us our trespasses as we forgive those who trespass against us.” (I really don’t know the reason behind the change, but it’s turned me into someone who can’t help but say “forgive us our debt...passes.")

I miss the old version, and it’s those words that keep running through my head as I read more and more about the bankruptcy bill that the Senate is scheduled to vote on early this week.

On the face of it, the bill sounds appropriate enough. It’s “The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005” or S. 256. The more I read about it, the more it’s clear that the authors of this bill and the party that is supporting it are much less interested in preventing abuse and protecting consumers than in helping the credit card industry maximize its ability to make a buck.

One of the major provisions of the bill is to substantially lower the income threshold under which someone is allowed to file for Chapter 7 bankruptcy, instead of the more stringent Chapter 13. Apparently, the credit card industry believes that Chapter 7 bankruptcy, as currently structured, makes it easy for people to game the system and avoid paying massive debts owed. And certainly, as with any system, some people will seek to figure out how to abuse the system for their advantage.

But a vast percentage of the people filing for bankruptcy are not “deadbeats” or “predatory borrowers.” They are people up and down the economic ladder who have been hit by something unexpected (illness, job loss, death in the family, divorce, etc.), didn’t have enough financial reserve to weather the storm, and haven’t been able to pull themselves out from under a continually compounding pile of debt. They turn to bankruptcy not because it’s easy and painless, but because they are willing to submit themselves to a humiliating process in order to get a little breathing room in their attempt to get back on their feet.

Maybe I’ll write about this more in the next few days, but you should really read a series of articles written by Peter Gosselin and published last fall in the Los Angeles Times. The thrust of the series is that Americans face increasing risk and income volatility, and that any number of financial shocks can send households into an unrelenting cycle of debt. Gosselin has also penned a follow-up article in recent days focusing even more on the issue of bankruptcy.

If it is true that credit card companies are being hurt by rampant fraud or “predatory borrowers,” then sensible bankruptcy reform would tighten loopholes and make the laws tougher and better enforced in a way that would still allow honest, desperate filers to benefit fully from the protections that the current bankruptcy process offers. But as I watch the debate unfold in the Senate, it is becoming clear to me that the Republican Senators (and a handful of their Democratic colleagues whose states benefit immensely from the credit card industry) are not interested in sensible reform.

How can I tell? In the last few days, the Republicans have unanimously (with an occasional defection) rejected several amendments that would have modified the bill to:

• Require credit card companies to inform their customers clearly as to their interest rate and how long it will take to pay off their current balance by making the minimum monthly payments;
• Limit maximum chargeable interest rates to 30%;
• Help people facing bankruptcy as the result of major medical expenses;
• Help people who were the victim of predatory lending practices;
• Protect military servicemembers and veterans from means testing, usurious interest rates and provide a property exemption for those serving in the military.

Now, to be fair… I know that sometimes congresspeople will introduce “poison pill” amendments to try to sink a bill that looks like it may otherwise pass. So it’s possible that Sen. Durbin’s amendment to protect military personnel whose small business goes under because they’re serving overseas may have also contained a provision to enshrine the “Hokey Pokey” as our new national anthem or declared the second Thursday of every month Free Abortion Day.

But barring such legislative hijinks, it seems to me that a party interested in serious, sensible reform that was truly focused on preventing abuse and protecting consumers wouldn’t summarily reject any of these amendments.

A sensible party also wouldn’t remove a provision preventing companies like Enron from “venue shopping” for a lenient state or judge, particularly after that same party used that same argument in reverse only weeks ago to limit class-action lawsuits. A party serious about eliminating fraud might consider closing a loophole allowing wealthy bankruptcy filers to protect assets in trusts and massive homesteads.

But it seems the Republican Senators are neither sensible nor serious about this kind of bankruptcy reform.

Many of these Senators are outspokenly Christian. When they say the Lord’s Prayer in church, I wonder which version they say. And if they pray — as I am so used to praying — “Forgive us our debts as we forgive our debtors,” I wonder if they really know what they’re asking.

Maybe you should contact your Senator and find out.