At a time when more Americans than ever are filing for personal bankruptcy and the system is administratively overburdened, reform measures are apparently long overdue. The prevalence of fraud and abuse likewise points to the need for drastic change. But the incidental consequence of Bill S. 256 is to vindicate the policy of commercial lenders to extend credit to high-risk borrowers at the expense of debtors who are most in need of bankruptcy protection.
"If this doesn't teach Americans not to have medical emergencies or get laid off, I don't know what will." Stacy, The Onion, Mar. 16.
This week, controversial Bill S. 256 was approved by the House Judiciary committee and sent to the House floor for further debate. Finally expected to pass in a bi-partisan vote, the bill has been extensively lobbied for by the credit card industry and has been debated in various forms by Congress over the past eight years.
Bill S. 256 presents an overall shift in consumer bankruptcy policy and practice from asset liquidation to scheduled repayment as a means to absolve debt loads. In a recent Judiciary Committee press release, Rep. Rick Boucher (D-Va.) contends that under current rules, Chapter 7 liquidation provisions allow debtors [to] treat bankruptcy as another financial planning tool and file for bankruptcy for simple convenience." New procedures, arising from the introduction of a financial means test, will filter more bankruptcy filings into the Chapter 13 category and make it more difficult to obtain Chapter 7 coverage.
The financial means test provides an objective standard for the bankruptcy courts to follow. Currently, roughly 70 percent of filings take place under Chapter 7. All non-exempt property is sold off with proceeds remitted to creditors, which at the end stage of a Chapter 7 filing accounts for very little. Though the stigma of a bankruptcy filing still attaches, there is a possibility of rapid recovery. By contrast, Chapter 13 allows debtors to keep their property so long as they are able to make scheduled repayments. Under the proposed bill, all debtors with the means to enter into such a repayment program will be compelled to do so. While debtors thus won’t lose the actual shirts off their backs, the encumbrances persist up to five years and the end result could still mean complete liquidation. To discourage frivolous filings and possibly preempt filing altogether, Bill S. 256 requires that approved credit counseling and money management sessions be completed in the six months prior to filing, to be paid for by the debtor.
Among many Democrats and some Republicans, there is great skepticism that these measures appropriately balance the interests of lenders with needs of consumers, especially those with special circumstances. Proposed amendments aimed to ease the restrictions for military families, victims of identity fraud, and those who file as a direct result of crushing medical expenses were struck down in committee: "There has been plenty of process on this bill over eight years," said the Judiciary Committee chairman, Rep. James Sensenbrenner (R-Wi.), advocating a take-it-or-leave-it vote on the bill.
While personal financial responsibility and fraud-avoidance are worthy goals for bankruptcy reform, the inordinate burden on the average middle class debtor does not balance favorably against the interests of consumer lenders in recovering payments.
Critics have accused credit card companies for acting irresponsibly or even lazily for the practice of extending credit and pre-approvals to high-risk consumers. What this characterization fails to recognize is that although assuredly high risk, this is a calculated business practice aimed at maximizing profits.
Any retail store faces cost-benefit choices about taking security measures. The costs of action (cameras, security guards, electronic tags, etc.) as well as the costs of inaction (theft) are passed along to consumers in the form of higher prices. Lenders similarly charge all customers interest rates and fees to compensate for inevitable defaults elsewhere in the system. Should lenders recoup losses arising from debtor fraud? Absolutely, just as retail stores should recover in the case of theft. But debtor fraud is a criminal activity and as it stands the means test does not distinguish between debtor fraud and legitimate financial catastrophe.
While performing due diligence to bring down the potential for default is one option, the credit card industry has instead chosen to lobby Congress for measures that would force more burdensome repayment regimes that are more lucrative for lenders. In effect, this bill will allow these creditors to recover their losses twice. Commented Sensenbrenner, "The responsible thing for credit-card issuers to do would be to reduce interest rates because there is less risk.”
I’m not holding my breath.
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Posted by: 1247136302 | July 09, 2009 at 05:45 AM