Big Money & Politics/Who Gets Hurt? Soaked by Congress (Part 2)

May 15, 2000

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Congress is about to make life a lot tougher—and more expensive—for people like the Trapp family of Plantation, Fla. As if their life isn't hard enough already. Eight-year-old Annelise, the oldest of the three Trapp children, is a bright, spunky, dark-haired wisp who suffers from a degenerative muscular condition. She lives in a wheelchair or bed, is tied to a respirator at least eight hours a day, eats mostly through a tube and requires round-the-clock nursing care. Doctors have implanted steel rods in her back to stem the curvature of her spine.

Her parents, Charles and Lisa, are staring at a medical bill for $ 106,373 from Miami Children's Hospital. Then there are the credit-card debts. The $ 10,310 they owe Bank One. The $ 5,537 they owe Chase Manhattan Bank. The $ 8,222 they owe MBNA America. The $ 4,925 they owe on their Citibank Preferred Visa card. The $ 6,838 they owe on their Discover card. The $ 6,458 they owe on their MasterCard. "People don't understand, unless they have a medically needy child, these kinds of circumstances," says Charles Trapp, 42, a mail carrier.

Why would Congress add to the burdens of folks like the Trapps? The family has filed for bankruptcy, and Congress wants to make it a lot more difficult for other Americans to do the same, a change that would hit especially hard at women. And poor people. And the recently jobless. And the sick.

Under legislation Congress is expected to take up soon, families like the Trapps will be required to go through a series of means tests to justify their medical and other expenses. That will cost them: more money in legal bills, more days lost from work, more mental aggravation. Even worse, in the end they still might not qualify for bankruptcy assistance.

Most members of Congress believe in what they are doing. Senator Charles Grassley, an Iowa Republican, speaks for many of his colleagues when he says, "I hope this bill does make bankruptcy more embarrassing—and more difficult. In fact, I plead guilty that that is a motive behind our legislation."

The House passed its version of the bankruptcy bill last year. The Senate enacted its bill in February. Now members of both chambers are meeting in secret to iron out differences and put their finishing touches on what they call the Bankruptcy Reform Act, which has the ostensible goal of curbing abuses.

What is the real reason Congress is doing this? Because the legislation is just what banks, credit-card companies, debt consolidators and other financial-services businesses ordered. To get it, they retained high-powered Washington lobbyists, among them Haley Barbour, former chairman of the Republican National Committee, and Lloyd Bentsen, onetime Senator and Treasury Secretary. The price tag for lobbying: more than $ 5 million.

At the same time, the lending industry poured contributions into the coffers of the national committees of both political parties and into the campaigns of individual lawmakers whose support was crucial. Some of the giving was appropriately timed. A $ 200,000 contribution to the National Republican Senatorial Committee by MBNA Corp.—which is to credit cards what Pepsi is to soft drinks—was delivered on the day of an earlier House vote on the bankruptcy bill. It passed handily, 300 to 125. The price tag for political contributions: more than $ 20 million. Says a Capitol Hill staff member who worked on the bankruptcy legislation: "If this were NASCAR, the members would have to have the corporate logos of their sponsors sewn to their jackets."

The Bankruptcy Reform Act is typical of legislation that Congress writes for the benefit of special-interest groups that are hefty campaign contributors—at the expense of ordinary Americans who contribute nothing. The proposed legislation would treat a bankrupt man's credit-card debt the same as his obligation to pay child support, meaning that MasterCard and an unmarried mother would compete for the same limited pool of cash. And the law would create hurdles intended to discourage or prevent people from filing for bankruptcy protection.

If, for example, a bankruptcy filer was left with more than $ 1,200 a year (beyond his basic expenses) over five years, that would be considered an abuse. If a mother tapped an ATM to buy necessities such as food or prescription drugs six weeks before filing for bankruptcy, the withdrawal could be considered a fraudulent transaction. If a family planned to file for bankruptcy, it would first have to undergo credit counseling, in some cases at its own expense. If a child or some other member of the family received medical treatment within 90 days before the bankruptcy filing, the bills could never be written off, no matter how poor the family.

To get into bankruptcy court, a filer would have to produce a variety of financial documents, including statements of projected monthly income and expected pay raises over the next year, and tax returns for the previous three years. No one of these requirements may look particularly onerous. But taken together, these and other provisions would impose additional burdens and legal costs on individuals and families already struggling to survive. "It's a thousand paper cuts," says Elizabeth Warren, a Harvard Law School professor and bankruptcy specialist. "And some people will bleed to death from a thousand paper cuts."

That includes people like the Trapps, who, after years of meeting their bills, were finally engulfed in a sea of debt through circumstances beyond their control. In that, they fit the classic image of a family seeking help in bankruptcy court. Contrary to the popular view of bankruptcy filers as free spenders who vacation in the Caribbean and buy expensive jewelry on their credit cards, the vast majority turn to bankruptcy court only after one of three events: loss of job, divorce or extraordinary medical expenses—in short, the kind of misfortune that can befall anyone. For the Trapps, it was two out of three. Just as the family was consumed by medical bills, Lisa Trapp had to give up her job as a mail carrier to manage her daughter's care.

Current bankruptcy law allows most individuals and families to file under Chapter 7. Here, assets—if there are any—are pulled together by a trustee and sold off. The bankruptcy filer may be able to keep his home and a few personal possessions. Retirement accounts and pensions also cannot be touched. Proceeds from the asset sale are divided among creditors. Outstanding debts, such as credit-card or medical bills, are discharged, meaning they do not have to be paid. Again there are certain exceptions: most taxes, child support, alimony and student loans cannot be discharged. Other individuals and families—those who are deemed able to pay back a larger portion of their debt—may file under Chapter 13. Here, the debtor agrees to pay a percentage of his income every month for up to five years to a trustee, who distributes the money to creditors.

During the 1990s, there were two filings under Chapter 7 for every one under Chapter 13. But the overwhelming majority of Chapter 13 bankruptcy cases ended in failure, with the debtors unable to complete the payment plan because they had insufficient income.

Under the legislation before Congress, new means tests would force more borrowers into Chapter 13—leading to still more failures—and would eliminate bankruptcy as an option for others. For this second group, life will be especially bleak. Listen to their future as described by Brady Williamson, who teaches constitutional law at the University of Wisconsin in Madison and was chairman of the former National Bankruptcy Review Commission, appointed by Congress in 1995: "A family without access to the bankruptcy system is subject to garnishment proceedings, to multiple collection actions, to repossession of personal property and to mortgage foreclosure. There is virtually no way to save their home and, for the family that does not own a home, no way to ever qualify to buy one." The wage earner will be "faced with what is essentially a life term in debtor's prison."

How did this come about? The credit-card industry seized on a sharp increase in bankruptcy filings in 1996 and 1997 to mount an intensive lobbying campaign for legislation that would make it easier to collect from borrowers who file for bankruptcy. A sophisticated public-relations blitz created the image of a bankruptcy system rife with abuse and in need of reform. That campaign told of rich people walking away from their debts, courtesy of bankruptcy court. It told of responsible families who paid their bills being forced to pick up the costs of more affluent Americans and others who were bilking the system. And it warned that bankruptcy had lost its "stigma."

The industry bankrolled studies to back its claims. In February 1998 the WEFA Group, a Philadelphia-based economics consulting firm, released a report contending that personal bankruptcies cost each American household an average of $ 400 a year. Paid for by MasterCard International and Visa USA, the WEFA study put the overall cost to the economy at $ 44 billion in 1997. Said Mark Lauritano, a WEFA senior vice president: "Clearly, the American consumer is facing a significant burden as the result of bankruptcy, both through higher prices and increased interest rates." The dollar-cost claims—which were disingenuous at best—would become the most widely quoted statistics in the campaign that produced the legislation now before Congress.

To apply pressure on lawmakers, the industry ran a series of ads in newspapers calling for bankruptcy reform. "What Do Bankruptcies Cost American Families?" asked a typical ad in the Washington Post on June 4, 1998. The answer: "A month's worth of groceries." Sponsored by a consortium of credit-industry trade associations, the ad showed a shopping cart filled with groceries. "Today's record number of personal bankruptcies costs every American family $ 400 a year. Now Congress has an opportunity to enact bankruptcy reform that reduces this burden and is fair to everyone...while ensuring that people who can pay their debts do so."

Other Visa- and MasterCard-financed studies asserted that many whose debts are discharged in bankruptcy could actually pay some of their bills but don't. The Credit Research Center at Georgetown University estimated that 25% of the debtors who file in Chapter 7 could repay more than 30% of their nonhousing debt over five years. The study warned that the continuing rise in bankruptcy filings would increase the cost of credit. It concluded: "Our results imply that the bankruptcy system itself is contributing to these rising costs by offering the opportunity to wipe out debt with a single signature to many borrowers that have the ability to repay."

Industry lobbyists promoted the themes. George Wallace, a lawyer representing the American Financial Services Association, contended that there is "growing statistical evidence that there's a significant group of American consumers who are using bankruptcy when they have some ability to pay. We have a system today that is broken, a system that provides a welfare benefit without a means testing."

Members of Congress echoed the industry line. Declared Representative George Gekas, the Pennsylvania Republican who shepherded the legislation through the House (and who has collected $ 30,000 in political contributions since 1997 from bankers and credit-card companies): "In 1997 Americans filed an all-time record of 1.33 million consumer-bankruptcy petitions, which erased an estimated $ 40 billion in consumer debt. Those losses are passed on to [other] consumers, resulting in a hidden tax for every American household. The only reasonable explanation is that the stigma of bankruptcy is all but dead. It is simply too easy to file."

Representative Bill McCollum, a Florida Republican who has received $ 225,000 from the lending industry, upped the ante: "Bankruptcy will cost consumers more than $ 50 billion in 1998 alone. That translates into more than $ 550 per household in higher costs for goods, services and credit."

Senator Robert Torricelli of New Jersey, a strong advocate of the Senate bill and head of the Democratic Senatorial Campaign Committee, last year pocketed a $ 150,000 contribution from MBNA. "What every American needs to understand is that somebody is paying the price," says Torricelli. "I believe this is the equivalent of an invisible tax on the American family, estimated to cost each and every American family $ 400 a year."

There is only one problem with all this rhetoric: it's not true. That's the finding of a TIME investigation based on interviews with those directly involved in the system—judges, lawyers, trustees, bankruptcy professors and the bankrupt themselves—along with an examination of court records across the country and an array of statistical evidence. While lenders do indeed lose money on those who fail to pay their bills, the U.S. Bankruptcy Court maintains no statistics on the types of debt written off—credit cards, medical, personal loans—or the total dollar amount discharged. But whatever that number may be, it misses the point: there is little more to be extracted from those in bankruptcy. Some people unquestionably use bankruptcy court to escape bills they could afford to pay, but their numbers are insignificant. The vast majority of bankruptcy filers have neither the income nor the assets to pay creditors. Most turn to bankruptcy as a last resort.

To understand how much at odds with the real world the bankruptcy scene imagined by Congress and the lending industry is, spend a moment with the people who have a street-level view of the system. Steven Friedman, a bankruptcy judge in West Palm Beach, Fla., describes the people who pass through his courtroom as "average citizens who have worked hard to obtain a decent standard of living and, through unfortunate circumstances such as medical problems or financial or job loss, are down on their luck." He adds, "The instances of abuse, where people who file bankruptcy are attempting to defraud their creditors or to be dishonest, are very [few]."

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