Consumer protection? Don't bank on it

New federal bankruptcy law protects corporate interests, not consumers

October 2, 2005

By Jonathan Baird
Member, New Hampshire Child Advocacy Network steering committee

On Oct. 17, a new bankruptcy law goes into effect. Known by the Orwellian heading Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, this law makes a contribution to the well-established American political tradition of false labeling. Substance is utterly contrary to title.

The last thing this law is about is protecting consumers. It is the baby of the credit card companies, banks and other corporate interests. They drafted this one-sided legislation eight years ago, nursed it along and ultimately shepherded it through Congress.

Under the new law, more people will be forced into five-year repayment plans to creditors. The fresh start, previously considered the great plus for financially strapped consumers, will be more elusive.

A new and different means test will be the vehicle for these changes. The means test will apply to debtors with income over the state's median - $50,411 for a single earner in New Hampshire. The new law will require the court to use predetermined government figures for expense items based on IRS guidelines for tax cheats. It will base a debtor's income on an average of the previous six months, even if the debtor has been laid off or his or her circumstances have otherwise changed for the worse.

Under current law, a bankruptcy court judge looks at a debtor's actual income and expenses in evaluating abuse and deciding whether a discharge of debt should be granted. A danger is that the new formula will result in overstated income and understated expenses, suggesting that debtors have greater repayment ability than actually exists.

The law essentially replaces a flexible, judicially supervised process that has worked well (at least in New Hampshire) with a mechanical one-size-fits-all model almost guaranteed to spawn more litigation. The means test is the place where it is most likely the consumer will be harmed since it remains unclear how much numbers will reflect reality.

There are many other objectionable aspects to this legislation, the scope of which is massive. Debtors will face increased costs and filing requirements. Even if they cannot afford it, they must obtain pre-bankruptcy credit counseling. They also must complete a personal financial management course. More debts will be classified non-dischargeable, and the ability of debtors to discharge credit card debt will be significantly reduced. It will be harder for tenants to use the bankruptcy law to protect themselves from eviction.

When the bill passed last spring, Congress voted down virtually every effort to afford some consumer protection. Amendments to discourage predatory lending, to protect the homes of the elderly and the medically infirm and to protect servicemen and women were all defeated.

Even the plight of hurricane victims was ignored. Your loan debt will continue to exist even if your house, car and all personal possessions are located somewhere in the Gulf of Mexico. On Sept. 8, Rep. John Conyers introduced further legislation to protect the hundreds of thousands of families devastated by Hurricane Katrina who will suffer under the anti-debtor provisions of the new bankruptcy law.

The corporate interests who sponsored the original legislation portrayed bankruptcy as a system where deadbeats totally escaped paying their debts. The consumer recklessly using credit cards for frivolous purpose was their image of choice. Think mall shopping spree with no intent to repay.

Behind the stereotype lies a complex set of reasons why consumers file bankruptcy. I would estimate that for every person gaming the system, there are at least 20 who file bankruptcy due to a personal tragedy like illness, job loss or divorce.

While federal statistics do not indicate why people file, we now have good academic data about who turns to the bankruptcy system. Professor Elizabeth Warren of Harvard Law School, a bankruptcy law expert, argues that the amount of medical debt is substantial. Warren has stated that more than one-quarter of all filers cite illness or injury as a specific reason for bankruptcy. Another quarter cite uncovered medical bills of over $1,000.

It is hard not to connect the inadequacy of health insurance coverage with the need for bankruptcy protection. Probably the most common scenario I have witnessed is illness leading to job loss resulting in big debt. If we had national health insurance, there would be far less bankruptcy. Gaps in coverage, underinsurance and no insurance all leave people at risk. Only really comprehensive health insurance would help.

This law does no credit to either political party. Shamefully, many Democrats supported it. If lawmakers are serious about consumer protection, they should look at the ridiculous extension of credit, including to minors. Credit card solicitations and profits have vastly increased. These companies have bled consumers dry with their fees, penalties and interest. The other side of bankruptcy is their predatory practices, which this legislation ignores.

Consumer protection has become a joke. A better name for this law would be the Credit Card Protection and Fleecing the Consumer Act of 2005. In passing it, Congress acted like a physician who misdiagnoses the patient and prescribes wrong treatment. Forgotten was the old medical maxim "First, do no harm."

Jonathan Baird lives in Wilmot and works for New Hampshire Legal Assistance