Bankruptcy bill fades. Why it won't go away. (July 19, 2004) By David R. Francis - www.csmonitor.com | Copyright © 2004 The Christian Science Monitor.
Bankruptcy expert Elizabeth Warren calls it the "vampire bill." That's because legislation designed to make it tougher for people to dissolve their debts in bankruptcy court has been pushed on Congress for seven years by banks, credit-card companies, retailers, and other financial institutions. The bill passes either the House or the Senate, even both houses in 2002. Yet it still dies. Then like the mythical vampire, the bill comes back to life in the following year.
Most bankruptcy lawyers, and Ms. Warren, a Harvard University law professor, wish Congress would put a stake through the heart of the bill. But it's likely to return next year. How come?
"There is money behind it," says Warren. "This is about paying off big contributors.
"Credit-card firms and banks give generously to the reelection campaigns of members of Congress.
The bill has greater significance than whether debtors will have more difficulty discharging their obligations in bankruptcy court. It could also impact the sturdiness of the economic expansion. That's because more and more Americans are up to their eyeballs in debt and interest rates are rising. If the cost of servicing debt soars, consumers carrying big credit-card balances and other debts may stop spending as much, dampening economic growth.
Retail sales in June were possibly a warning. They dropped 1.1 percent, the biggest decline since February 2003.
"The US economy relies primarily on consumer spending, but rising levels of household debt can put a heavy burden on families," states Samuel Gerdano, executive director of the American Bankruptcy Institute (ABI). "When families sustain an unexpected financial setback on top of this burden, they often resort to bankruptcy as a way out.
"Recent statistics are "troubling," says Travis Plunkett, legislative director of the Consumer Federation of America. Among them:
• Personal bankruptcies peaked in 2003 with a record 1.6 million cases filed - a rate of 185 an hour. That annual total is nearly double the 812,898 filings in 1993.
• Household debt stood at $8.9 trillion last year, a record high relative to disposable income, that is, income after taxes.
• Credit-card defaults rose more than 55 percent in the past four years.
• Home mortgage foreclosures are up 45 percent in the same time span.
Mortgage foreclosures, Warren says, not only may force a family into homelessness, but can hurt home values on the entire street.
Proponents of the tougher bankruptcy measures say too many people are gaming the system, engaging in a spending splurge, going bankrupt to clear their debts, and then repeating the process. Debtors capable of repaying their debts can often "walk away from their financial obligations," complains the American Bankers Association.
Warren counters that more than 90 percent of bankruptcies arise from job loss, onerous medical bills not covered by health insurance, and divorce.
Present bankruptcy law already includes a provision allowing courts not to discharge debts if the debtor is abusing the system, notes Judge Roger Whelan, a resident scholar at the ABI, a research group with a membership of more than 10,000 bankruptcy professionals. ABI research indicates that abusers are fewer than 3 percent of individuals filing for full bankruptcy, while creditor institutions say they amount to 10 to 15 percent, adds Mr. Gerdano.
In 2003, credit-card companies racked up about $30.2 billion in profits, according to CardTrak, a consumer group tracking bank credit cards. That's up from $20.5 billion in 2000 and $6.4 billion in 1990.
"We have witnessed a monumental transfer of wealth from middle class families to institutional lenders in the past four years," says Warren. "Consumers are going down."
"Since 2000, credit-card fees are up more than 100 percent. Americans also have had to deal with other rising costs over that period, including housing (up 17 percent), child care (18 percent), and health insurance (40 percent). Families can't survive these changes over the long run," says Warren.
In addition, median family income has fallen 2.8 percent since 2000. US workers can expect modest pay increases of 3.3 percent this year and 3.5 percent next year, barely more than inflation, according to a new survey by Mercer Human Resource Consulting. Nonetheless, most economists see today's economic expansion as self-sustaining.
In past years, the 400-page bankruptcy bill has failed to pass because of an amendment by Sen. Charles Schumer (D) of New York. The provision would prevent abortion opponents who harass doctors or staff at clinics providing abortions from using the bankruptcy process to escape court-imposed fines or damages resulting from their violent actions. Earlier this year, the bill passed the House without the Schumer amendment. But it has not been put on the Senate agenda. Judge Whelan sees "one chance in a million" of it passing this year with the Senate facing an election, issues over Iraq, and the need to pass appropriation bills.
One positive feature of this bill is that it provides a host of new bankruptcy judges. "Justice delayed is justice denied," says Whelan. Today's sitting judges can't keep up with the bankruptcy boom, he says.
Ruling in Newport news case may expand credit protection Federal Appeals Court rules Credit Card Companies must must investigate a consumer complaint about inaccurate credit files.
Associated Press - A federal appeals court, perhaps for the first time, has addressed the issue of how rigorously a credit card company must investigate a consumer complaint about inaccurate credit files. Consumers could have an easier time disputing information on their credit reports as a result.
The case, brought before the 4th U.S. Circuit Court of Appeals in Richmond by Newport News resident Linda Kay Johnson, clarifies a part of the Fair Credit Reporting Act that says credit issuers must investigate complaints. Until now, "investigate" could have meant a cursory records check. The court's decision demands more in-depth investigations when consumers ask for them. "This is very far-reaching," said Evan Hendricks, publisher of Privacy Times, a newsletter that tracks fair credit reporting and freedom of information news. "It's the first time they've said the law has plain meaning."
For Johnson, who owns Hair Raisers hair salon in Newport News, the ruling ended a three-year ordeal that began when a representative from bank and credit-card issuer MBNA Corp. telephoned her. The representative demanded Johnson pay a MasterCard balance because Johnson's husband had filed for bankruptcy and was removed from the account. Her husband's debt was $17,000.
It was the first time Johnson had heard of either the credit card or her husband's bankruptcy.
Johnson contends her husband applied for the card before the couple married in 1991. MBNA, based in Delaware, argued Johnson co-owned the card with her husband. The company said, however, it could not produce records from when the account was opened in 1987 because such documents are only kept five years.
"I never used it," Johnson said. "Never saw it."
After divorcing her husband, Johnson found she could qualify only for high interest rates on a home loan because MBNA had reported her to the three major credit reporting bureaus. Essentially, said Johnson's attorney, Leonard Bennett of Newport News, the company was using unfavorable credit information to pressure Johnson into paying.
"They disable your borrowing," Bennett said. "Which in many ways is worse than being sued."
A jury last year awarded Johnson $90,300 in damages. MBNA appealed.
An MBNA spokesman and a Richmond attorney who represented the company did not return phone messages left by the Daily Press.
MBNA argued fair credit laws require creditors only to briefly review their records when faced with a complaint.
By law, the appellate judges wrote, if a creditor cannot verify disputed information, credit agencies are to delete the item or modify it after further investigation. A jury, the judges wrote, "could reasonably conclude that if the MBNA agents had investigated the matter further and determined that MBNA no longer had the application, they could have at least informed the credit reporting agencies" that MBNA couldn't verify Johnson was responsible for the account.
Johnson hopes to refinance her home loan, on which she pays 13.99 percent interest because of her damaged credit scores.
"My credit was perfect - pristine," Johnson said. "If you know your rights, you fight for your rights and you will win."
Kicking the Middle Class When It's Down by Elizabeth Warren
With consumer debt higher than ever, many thousands of middle class families face financial disaster. Home mortgage foreclosures, car repossessions, and credit card defaults are all at record levels. Last year alone, 9 million families entered credit counseling in an effort to straighten out their finances, and 1.6 million just gave up and filed for bankruptcy. Congress's response? The House of Representatives decided it was time to try once more to push a bankruptcy bill that credit industry lobbyists have been peddling since 1997, a bill designed to boost profits for consumer lenders by making it tougher for troubled families to get any relief in bankruptcy.
The bankruptcy bill is more than 400 pages of virtually impenetrable text, with literally hundreds of changes to an already-complex statute. A well-financed lobbying effort has reduced it to a tasty sound bite: People should repay their debts if they can. The problem, of course, is that the sound bite deliberately obscures the reality. The biggest problem is not people who can repay, it is people who are desperately trying to repay and who can't make it - families filing bankruptcy to try to make up mortgage payments and past-due car payments but who don't have steady enough incomes to make even a minimal repayment plan and keep groceries on the table. But the proposed bankruptcy bill would impose more than a hundred new constraints on all families - whether they are trying to repay or not - increasing costs, decreasing protection, and leaving creditors with more leverage than ever to squeeze a few dollars more out of all these families.
If this bill passed, who would pay the price? First, families with children. Today, people with children at home are nearly three times more likely to file for bankruptcy. Married couples are in trouble, and those trying to raise a child alone are in even more trouble. A single woman raising a child is nearly four times more likely to file for bankruptcy than a single woman alone. Divorced dads are having a hard time too, heading into bankruptcy at much higher rates than their single friends without children.
Among older Americans, the most likely filers are those who cannot pay for prescription drugs or meet other medical costs. Older Americans are also more likely to have been the victims of fraud and unscrupulous lenders who are trying to trick them out of their homes. For a growing number of seniors, bankruptcy is their last hope.
If American families were simply on a spending spree, perhaps the fact that millions are in trouble with debt should be treated as little more than their just desserts. But the data are irrefutable: families are in financial trouble for the most basic reasons. Among those who have filed for bankruptcy, two-thirds have suffered a job loss - that means last year alone 1.1 million families walked into the bankruptcy courts after mom or dad (or both) was laid off, downsized, or otherwise put out of work.
Lack of health insurance is also taking its toll. About 800,000 of the families in bankruptcy have had serious medical problems - a husband who had a heart attack, a wife with breast cancer, an elderly parent who needs long-term care, or a child with leukemia. About 160,000 people filed for bankruptcy after the family broke apart, a condition that fell disproportionately on women trying to raise their children. Altogether, more than 90 percent of the families fell into one or more of these three categories - job loss, medical problems or family break up. The remaining families were beset by a variety of other problems and circumstances - including crime, natural disaster, and a call up to military service. In short, families are heading to bankruptcy when their incomes and debts get badly out of balance following a serious economic disruption.
Real abuses, however, escape attention in this legislation. Despite all the provisions to make personal bankruptcy more difficult, the amendments were carefully tailored to preserve loopholes for corporate executives because they have "business debts" instead of "consumer debts." Similarly, provisions to protect multimillion dollar homes in Texas, Florida, and other states remain virtually intact. Special exemptions for the rich remain because they rarely owe credit card debt, while the bill zeroes in on ordinary, wage-earning families.
This bill treats bankruptcy as something debtors alone create; creditors are treated as innocent victims. Last year, the credit industry mailed five billion credit card solicitations, but the bill imposes not a single new constraint on the credit industry. Instead, the House has embraced a bill that is widely described as "a creditor's wish list" to help companies increase the odds of collecting from even the most financially troubled families.
What gives this bill renewed momentum at a time when tens of millions of families are out of work and have no health insurance? The financial services industry has pressed a well-funded lobbying effort, giving more money in Washington than almost any other interest group. The Washington Post reports that credit issuers even offered a sweetheart loan deal for an influential Congressman. And the money has paid off. Princeton researchers concluded that voting "strongly reflects campaign contributions" by the coalition of creditors supporting the bill. Executives from credit card giant MBNA were the single largest contributors to George Bush's presidential campaign, and he too has announced his unwavering support for the bill.
In a brazen abuse of the language, the bill has been named a "reform" act. Its supporters claim that it will help women, support families, and cut abuse. In fact, this bill is designed to do just one thing: Squeeze middle class families a little harder to increase the profits for already-profitable consumer lenders.
Elizabeth Warren is the Leo Gottlieb Professor of Law at Harvard Law School. She specializes in commercial law and bankruptcy and is the author of several books, studies and articles on the subject. Warren is currently vice president of the American Law Institute.
Statement
on the Credit Counseling Hearing Held by The Subcommittee on Oversight
of the Committee on Ways and Means ROCKVILLE, Md., Nov 20, 2003 /PRNewswire via COMTEX/ -- The following
is a statement by Steve Rhode, president and co-founder of Myvesta: "The
current discussions regarding the credit counseling industry are ignoring
an important aspect. Credit counseling agencies are limited in providing
comprehensive solutions to their clients because of rigid creditor policies
and new state regulations that force reliance on those creditors for
funding. The limited funding restricts the depth of help counseling
agencies can provide.
"Because
credit card companies are the primary funding source for counseling
programs, they exert inappropriate control over the industry. Credit
card companies dictate the way all credit counseling organizations function.
They have silently forced the counseling agencies to perform like paid
collection agents. Some even offer collection bounties for certain types
of payments. Counseling agencies, in an effort to maintain funding and
provide assistance, have been left with no choice other than to comply
with the wishes of credit card companies collection departments.
"This
leaves credit counseling with no power to negotiate on behalf of their
clients. Credit card companies also dictate interest and payment reductions.
It is a take it or leave it situation that often leaves consumers facing
bankruptcy as their only option.
"Credit
card companies have gained this control because the current system does
not require any funding or cooperation from other major creditors. For
instance, mortgage companies, student loan lenders and auto lenders
provide little assistance, yet those are often the largest debts that
consumers owe.
"State
lawmakers are adding fuel to the creditors' power machine by mandating
that counseling organizations rely primarily on the credit card companies
for funding. Counseling agencies are scrambling to follow creditors'
ever-changing policies to the letter so they can continue to qualify
for funding and remain in existence. This sad alliance leaves consumers'
without unbiased advocates.
"If
the goal is to provide real help to consumers in financial trouble,
now is the time to have healthy discussions about creating a better
system. Consumers deserve a financial safety net that gives them unbiased,
comprehensive assistance. Logically, that system should allow organizations
to receive funding from an independent source or from the clients themselves.
That way there would be no question whose interests the agencies represent.
That type of system would provide meaningful help to consumers, while
helping to reduce the number of bankruptcy filings."
Myvesta(SM)
is dedicated to helping people create healthy financial lives. The organization
provides a wide range of materials to inspire and inform people so that
they can break down their barriers to financial and personal success.
For more information visit Myvesta.org online.
SOURCE Myvesta
November
14, 2003 FOR
IMMEDIATE RELEASE: Friday, November 14, 2003CONTACT: Jennifer Palmieri, (919) 788-7477EDWARDS
STATEMENT ON BANKRUPTCY FILINGS REACHING HISTORIC HIGH Senator John
Edwards (D-NC) today released the following statement on a new
"We
face a quiet crisis in America. Middle class families stand on the
"We
have seen a historic change in the last generation. A generation ago,
"We
need a president who sees the crisis and will act to stop it. First,
AmeriDebt says it will layoff most workers
BALTIMORE - Credit-counseling service AmeriDebt, accused of defrauding consumers and falsely portraying itself as a nonprofit, announced it will lay off most of its workers and stop seeking new customers because of recent "negative publicity." Last month, Missouri sued AmeriDebt, accusing the company of defrauding indebted consumers of millions of dollars. In February, Illinois filed a similar suit against the company.
Earlier this month, the Internal Revenue Service and the Federal Trade Commission announced they would investigate nonprofit credit counseling services to make sure they serve consumers and qualify for their tax-exempt status. No specific firms were named.
AmeriDebt announced that as of Nov. 1 it will "cease outreach to new consumer clients in order to focus on serving the counseling and educational needs of its existing clients."
AmeriDebt counsel Zynda Sellers said Friday the Germantown-based company was "in the process of releasing most of its current employees," but she declined to say how many of its approximately 50 workers would be laid off.
"It's going to be very significant," Sellers said. "AmeriDebt is not happy about this. It's very unfortunate."
She said the company was also stopping all advertising.
Sellers declined to answer specific questions about the decision to stop seeking new customers, but she said in the statement: "For better or for worse, our ability to serve new consumer clients has been compromised by the negative publicity surrounding our organization. As a result, we believe that the only right thing to do at this point is to focus on the American debtors we already serve."
On its Web site, AmeriDebt said it has worked with 400,000 people - with more than 90,000 clients as of July.
Travis Plunkett, legislative director for the Consumer Federation of America, an advocacy group, advised AmeriDebt clients to consider their options, including whether to look for another credit counselor.
"The big question from the consumer's point of view is, 'Has AmeriDebt made a promise they can't keep - to adequately assist their existing clients?" Plunkett said. "It's legitimate for consumers to wonder if (AmeriDebt has) the financial resources and the staff to continue to help them."
Melissa Merz, a spokeswoman for Illinois Attorney General Lisa Madigan, said Friday that AmeriDebt's decision meant the lawsuits by Illinois and Missouri, and the IRS and FTC announcement, have had "a sobering effect on some of AmeriDebt's practices."
"While it appears AmeriDebt is moving toward providing meaningful credit counseling, Illinois will continue its work to ensure that consumers trying to catch up on their bills are not led further down a road of debt," Merz said in a statement.
AmeriDebt said in the statement that it "hopes the current spate of inquiries into the operations of nationally operating credit counseling agencies will result in uniform pro-consumer reforms at the federal level."
Annually, an estimated 9 million Americans contact a credit-counseling agency - often the last resort for consumers before filing bankruptcy.
ON THE NET
AmeriDebt: http://www.AmeriDebt.org
Consumer Federation of America: http://www.consumerfed.org
State of Missouri Sues Credit-Counseling AmeriDebt
Attorney General Jay Nixon said Maryland-based AmeriDebt secretly functions as a profit-driven company in which "credit counselors" or "debt professionals" - untrained in such roles - act more as commission-collecting peddlers of fee-based debt-management plans.
"Unfortunately, with its high, hidden fees and lack of any significant credit counseling, AmeriDebt has served more as an anchor than a life preserver for many consumers," Nixon said in announcing the lawsuit, filed in St. Louis Circuit Court.
Nixon wants a judge to void any contracts between Missourians and the defendants, and order restitution to consumers of money not forwarded to creditors. Nixon also seeks up to $1,000 in fines for each violation of Missouri consumer-protection laws.
AmeriDebt said it may respond publicly to the lawsuit later Thursday.
When sued for similar reasons in February in Illinois, AmeriDebt said it "has worked hard to cooperate fully with state and local regulations, to ensure that the credit counseling help we provide reaches those who need it."
On its Web site, AmeriDebt casts itself as "the friend of consumers in crisis," having worked with 400,000 people - with more than 90,000 clients still on the books as of July. The company says it has a "99.75 percent satisfaction rate based on the ratio of complaints to current consumer clients," and that under its "zero-tolerance policy when it comes to consumer complaints" any gripes are resolved in the client's favor.
While claiming to be "reinventing consumer credit counseling," AmeriDebt says "we turn away fewer consumers than other credit-counseling organizations do."
Nixon's lawsuit came five months after two consumer organizations released a report suggesting that credit-counseling agencies often give indebted consumers bad advice, charge excessive fees and engage in deceptive practices.
The growing business of credit counseling has seen an increase in abusive practices and outright scams, said the report by Consumer Federation of America and the National Consumer Law Center. Many counseling agencies trade on their non-profit status to gouge consumers, the consumer advocates maintained.
Counseling agencies have argued they act responsibly and provide a valuable service to consumers. Because of shrinking funding in recent years from creditors - mainly big banks that issue credit cards - many agencies belonging to the National Foundation for Credit Counseling have had to begin charging consumers nominal fees, the group has said.
An estimated 9 million Americans have some contact with an agency yearly, and they often are the last resort for consumers before a bankruptcy filing.
In addition to AmeriDebt, Nixon's lawsuit names Debticated Inc., which also claims to be nonprofit; for-profit Debtworks Inc., Ballenger Group Inc., Ballenger Group Holdings Inc., and Infinity Resources Inc.; and owners Andris Pukke and brother Eriks Pukke. The Pukkes and their companies are based in Germantown, Md.
Though AmeriDebt "aggressively" advertises it charges no upfront fee to consumers, Nixon alleged, the company downplays or hides that a consumer's first monthly payment - often 3 percent of his or her total debt, on average $327 - goes to AmeriDebt and the Pukkes' for-profit companies. Such payments - to AmeriDebt, "voluntary contributions" - exacerbate the consumer's debt because the money doesn't go to creditors, Nixon said.
AmeriDebt also charges consumers fees of up to $70 per month over the life of the consumer's debt-management plan, which generally last three to five years, Nixon said. Most of those fees also are secretly transferred to the Pukkes' for-profit companies, Nixon said.
Nixon also said AmeriDebt falsely claims it will "negotiate" with a consumer's creditors to get the best terms and lowest interest rate. Creditors dictate to AmeriDebt, in advance of the consumer contact, what interest rates and terms will be given to consumers, Nixon said.
October
6, 2003 Bill to Allow Private Tax Debt Collections
Approved by Senate Finance Committee. On October
1, the Senate Finance Committee approved by a vote of 19-2 a bill, S.1637,
an international tax bill, entitled the Jumpstart Our Business Strength
Act, that includes language that would allow the IRS to hire private
companies for the collection of outstanding tax liabilities, with the
companies entitled to up to 25 percent of the amounts they collect.
According
to a description of the collection provision, all taxpayer protections
that are applicable to the IRS also would apply to the contractors.
The contractors would be prohibited from collections directly from taxpayers,
meaning that all payments would be processed by IRS employees.
While no
job losses are expected at IRS based on the amendment, Colleen M. Kelley,
president of the National Treasury Employees Union, which represents
some 97,000 IRS employees, said that proponents of the provision are
ignoring plentiful evidence that private tax debt collection has not
worked in the past.
Commercial Law
League of America, 150 N. Michigan Ave., Suite 600, Chicago, IL 60601 Phone:
312-781-2000, Fax: 312-781-2010, E-Mail: clla@clla.org
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