Today, the President signed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. It becomes law in 180 days.

As an outsider, the bankruptcy laws in this country astound me. It seems to me that every seven years Americans can file bankruptcy and get out from under their debts. Of course it is more complicated than that, but that is how it appears to the rest of the world.

So it seems right and proper that the laws should be reformed to make it more difficult to do this; that people should live within their means and pay their debts.

This bill has an interesting history behind it. Written by those wonderful folks in the Credit Card industry in 1997, it has been pushed by lobbyists ever since. This is an industry that is presumably sick of people legally avoiding their debts. These are the same folks who are continually saturation-bombing us with Credit-card solicitations when we have no money.

The first question to be asked is a simple one: Why do people declare bankruptcy? Most of us have images of profligate spenders who run up huge bills that they cannot possibly pay, then file for bankruptcy and hide behind the law instead of paying their debts. While there are undoubtedly people like that out there, the fact is that they are in the minority – most of the bankruptcies are due to medical bills, divorce or job loss.

Some Bankruptcy facts

  • Fewer than four percent of filings are by people who could actually pay their debts.
  • Many debtors put off declaring bankruptcy until they have lost their telephone service (40 percent), gone without necessary medicine (43 percent), or been too poor to buy food (19 percent) at least once.
  • Married couples with children and single mothers are respectively two and three times more likely to go bankrupt, respectively, than their childless counterparts.
  • Divorced mothers face an additional risk, because they often lose health coverage linked to their ex-husbands' jobs.
  • Three out of five can't afford to visit a doctor or dentist when they needed to, at least once during the two years before filing for bankruptcy.
  • Almost 40 percent of patients with terminal illnesses report having to cope with financial problems as they prepare to die.
  • Over half of bankruptcies are a result of medical emergency.
  • About half of all debtors file bankruptcy because of medical bills, even though three-quarters have health insurance during all or part of their illness (PDF).

Here's an examination of the bill (albeit in a democratic blog), along with the amendments that were shot down with extreme prejudice by every Republican senator and many Democrats."Let me tell my colleagues about Mary Bobbit. Mary Bobbit is a 70-year-old widow who lives in North Carolina, where the homestead exemption is only $10,000. According to a local news story, she recently lost her husband to cancer, a battle that left her with more than $175,000 in unpaid medical bills. Her only remaining asset is the home that her family built themselves 26 years ago, a home that she paid off just last year. And now she is faced with a horrible dilemma, because if she files for bankruptcy in North Carolina, she will lose the home that she and her husband worked so hard to build and pay for". That's what Senator Feingold said in defense of one of the proposed amendments… before it was tossed out.

"This is the same bill that has been considered each session for the past eight years. It was written by the credit industry and supported by huge donations to politicians. While it preaches "individual responsibility" and "reform", it is really designed to severely limit bankruptcy relief to consumers and to chase competent bankruptcy attorneys from the field." Says a Bankruptcy law firm.

Years ago, Bill Clinton Vetoed the bill as "unfair to consumers"

Under the new bill…

  • People who earn more than their state's average income might not be allowed to file for Chapter 7, regardless of their actual expenses. This will hurt those who dwell in cities, where salaries and expenses are far higher than state averages.
  • Judges would no longer be able to take individual circumstances into account, as they do now.
  • Wealthy debtors retain major loopholes under the new bill, such as the right to keep valuable homes and retain assets in special trusts.

Backers in Congress and the financial services industry argue that bankruptcy frequently is "the last refuge of gamblers, impulsive shoppers, divorced or separated fathers avoiding child support, and multimillionaires – often celebrities – who buy mansions in states with liberal homestead exemptions to shelter assets from creditors."

However, this does not really solve the problem. "Florida, Iowa, Kansas, South Dakota and Texas have unlimited homestead exemptions that allow wealthy people to file for bankruptcy and keep their mansions in those states sheltered from creditors."

In addition, the bill does nothing to address the growing use of "asset protection trusts," used by rich people to shield income from bankruptcy proceedings, or to rein in the unlimited use of the homestead exemption, which allows them to shield multimillion dollar homes from bankruptcy courts.

My other major objection to this bill is that it makes no exceptions for irresponsible lenders – rapacious businesses who lend to borrowers without checking them out first. I wonder if the bill makes any provision for predatory lenders that do not do their due diligence. I am willing to bet money that it does not. A lender who offer money to someone that they know is unlikely to repay the debt should share in the risk rather than pushing for legislation to eliminate their risks and increase their profit margins.

"The bill simply doesn't balance responsibility between families in debt trouble and the creditors whose practices have contributed to the rise in bankruptcies" said Travis Plunkett of the Consumer Federation of America in a written statement.

Amazingly, there is nothing to stop your Credit-card lender from raising your interest rate whenever they like – as some of us have found out – and to whatever level they want. If they decided to raise the interest rate to 35% there is nothing you can do beside take your business elsewhere.

It's easy for us to say "caveat emptor" and that "These people knew what they were getting into". I agree – I personally believe that it is not the Government's job to pass laws to protect people from their own stupidity. However, they do have a duty to prevent a rapacious financial industry from taking advantage of those that they are supposed to be representing.

There was a time when banking was a people business – when your local bank manager knew you personally – or knew your family. He knew your character, and knew how good a risk you were. He was empowered to, and responsible for, granting a loan. These days, the bank manager does not know you from Adam, and even if he does, he has no power to actually do anything. I would like to see a bill that put the banks back in the banking business and took them out of the junk mailing business. Like that's going to happen.

The more I read about this bill, the less I like it.

  • The bill is an exercise in unintended consequences.
  • This is a bill that puts corporations before families.
  • This is a bill that puts lobbyists' interests ahead of voters'.
  • This is a bill that makes life harder for single parents.
  • This is a bill that puts car payments before child support.
  • This is a bill that catches the small fish, but lets many of the big ones – and all of the sharks – go free.

Indeed, doing a quick Google search on "Bankruptcy Bill", it is difficult to find anyone speaking in favor of it… except for the Credit-Card industry, who stands to make an extra billion or so per year.

I am with the Democrats on this one. Not because I oppose bankruptcy reform, but because I object in principle to a law that is written by – and for – its chief beneficiaries. In that respect, this act resembles the DMCA, Check21 and the PATRIOT act.

The act is badly named… it does NOT protect consumers, it protects Credit Card companies – and their profits.

The moral to this story is simple: When a loved one is lying in a hospital bed, think hard about whether or not you can afford to pay for that lifesaving operation. Because if you can't, Bankruptcy as you have known it will no longer be an option and you will most likely lose your home.

The big question here is how did such a draconian bill get through both houses? The answer is sadly obvious; "…a lot of people don't realize that the industry that gave the most money to Washington over the past few years was not the oil industry, was not pharmaceuticals. It was consumer credit products. Those are the people. The credit card companies have been giving money, and they have influence." (Elizabeth Warren)

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