Journalism
Big Money & Politics/Who Gets Hurt? Soaked by Congress (Part 2)
Says attorney Judith Swift, a former president of the bankruptcy bar in Dallas: "I keep a box of tissues in my office because people are mortified that they have to file bankruptcy. I've seen grown men break down. They take the financial crises as a sign of personal failure. A lot of people who come to my office have been holding down one full-time job and two piddly little part-time jobs, trying frantically not to have to file a bankruptcy. It's a very, very difficult decision for most people."
It was for Maxean Bowen, a single mother raising an 11-year-old daughter. A social worker in the foster-care system in New York City, Bowen helped rehabilitate parents with substance-abuse problems. In 1998 she developed a painful condition in both feet that made it difficult for her to walk. Because her job required her to make house calls, she had to give it up and go on unemployment, hoping the condition would ease up. Her take-home pay dropped from about $ 1,600 a month to $ 800. To get by, she borrowed from relatives and started using credit cards to pay for food, clothing, utilities and rent. "I thought, 'As soon as I get back to work, I'll try to pay these off,'" she says.
By 1999, when she got a job interviewing families in an office, she owed thousands of dollars to the credit-card companies—much of it in late fees. That's when the threatening calls and letters surged. "They would call me on the job," she says. "That was very embarrassing. They call you early in the morning. They call you late at night. Sometimes I get calls at 10 o'clock at night. And they are very nasty." To placate them, she sent $ 200 to $ 300 on occasion. "But when the bill came the next month, it seemed like it went higher," she says. "I was going crazy."
A co-worker suggested bankruptcy, and Bowen filed a petition in U.S. Bankruptcy Court in New York. She still gets calls demanding payment. At least now, she says, she knows her creditors can't attach her salary, no matter how ugly the conversation turns.
Bowen's discovery that she was treading water despite her partial payments—and that the outstanding balance never went down—is not unusual. A government study showed that by the time individuals and families seek bankruptcy protection, more than 20% of income before taxes is going toward paying interest and fees on their unsecured debt.
This helps underscore why the notion that debtors in bankruptcy court are sitting on many billions of dollars that they could turn over to their creditors is a figment of the imagination of lenders and lawmakers. Consider:
—A study of 1,955 Chapter 7 bankruptcy filers in 1997-98 by the Executive Office for U.S. Trustees, which monitors the bankruptcy system, concluded that "by the time they filed, they had little if any capacity to repay. In fact, most will have to increase income or reduce expenses to remain solvent after bankruptcy."
—The same study projected that the total amount that unsecured creditors, like credit-card companies, might be expected to collect from all Chapter 7 filers added up to "less than $ 1 billion annually."
—A study by two law professors at Creighton University, funded by the nonpartisan American Bankruptcy Institute, found that only 3.6% of Chapter 7 debtors would be able to pay more. "The vast majority belong in that chapter," the study stressed. "They have too little income after necessary expenses to repay unsecured debt. It is vital, therefore, that no undue burdens be thrust on that needy majority in order to flush out a small minority of abusers." The amount that might be collected: less than $ 1 billion.
—Congress's own investigative arm, the General Accounting Office, criticized two studies financed by the credit-card industry that purported to show that a substantial number of debtors could pay more. Questioning their assumptions, data and sampling procedures, the GAO said that "neither report provides reliable answers to the questions of how many debtors could make some repayment and how much debt they could repay."
As all of this suggests, there is little money to be squeezed out of those in bankruptcy, especially since trustees already collect about $ 4 billion from debtors each year, a sum that includes proceeds from liquidated assets. Even if they could find an additional $ 1 billion, the economic and emotional costs of doing so would far outweigh the return. To put it in perspective, the estimated $ 1 billion that might be collected would amount to two-tenths of 1 percentage point of outstanding revolving credit. If trustees were able to scare up another $ 4 billion—as the industry claims but few in the bankruptcy system believe possible—it would still amount to less than seven-tenths of 1 percentage point of revolving credit.
To further undercut claims by the lending industry that it needs get-tough legislation, 82 professors at 66 law schools, from Harvard to UCLA, last September signed a letter itemizing the consequences the proposed bankruptcy legislation would have on those in need of financial relief. It was sent to every U.S. Senator.
What would motivate a sizable majority of Congress to support such legislation? Money. Lots of it. In addition to the $ 5 million the lending industry spent on lobbyists who worked exclusively on pushing the bankruptcy bill through Congress, it shelled out $ 50 million that went to firms that lobbied on bankruptcy and other issues.
To be sure, some lawmakers who voted for the bill believe bankruptcy is out of control, that many filers just want to walk away from debts they can afford to pay. Some were angered by the procession of Hollywood entertainers and other wealthy prominent citizens who used the system in the 1990s. Some were annoyed by lawyers who advertised bankruptcy as an easy solution for overextended consumers. And some were troubled by what they saw as a decline in values. "We have had a general lack of shame or personal responsibility that used to be associated with paying bills or not paying bills and the filing of bankruptcy," said Senator Grassley, who has collected more than $ 100,000 in campaign contributions from credit-card companies and other lenders since 1997.
While the bill contains some genuine reforms, on balance the harm that it would do far outweighs the good. At the same time Congress has written legislation to make life more burdensome for low- and middle-income filers, it has declined to put any curbs on practices of the financial industry that are leading many individuals deeper and deeper into debt. Beverly Fox, a bankruptcy lawyer in Plantation, told TIME: "[You] have a family with an annual gross combined income of $ 35,000. I see they owe Citibank $ 10,700. At the time Citibank gave them that credit limit, which is almost 33% of their annual gross income, Citibank looked at their credit report, or should have, and could see that they already owed three or four other credit cards $ 3,000, to $ 4,000, to $ 5,000. They were already $ 15,000 in debt, and the banks continued to raise [the family's] credit limits because they are making the minimum payments. Once a family is over 30% debt-to-income ratio, it should stop using unsecured credit. But people don't know that. They think that because they've been approved for this higher credit limit, they can manage it." Because many people pay only the minimum amount due or a few dollars more, Fox says, they think everything is fine. But the balance on the cards "continues to grow, more as a result of the interest than the use of the cards."
Consumer advocates urged Congress to include in the legislation a provision requiring credit-card companies to spell out on each monthly statement the number of years it would take a cardholder to pay off the debt by making minimum payments, and how much that would cost overall. But that proposal went nowhere because it was opposed by the credit-card industry. The Senate version of the bill requires companies to include on monthly statements a toll-free number that cardholders can call to find out how long it would take them to pay off their loan.
Congress also turned back an amendment by Senator Paul Wellstone, a Minnesota Democrat, who proposed that lenders who charged more than 100% annual interest should be barred from collecting their debts in bankruptcy court. One-hundred percent interest? Actually, that's the bargain-basement rate. In some cases, interest rates run upwards of 1,000%.
Welcome to the world of payday lending, where annual interest rates would make Mob loan sharks of an earlier era blush in embarrassment. The business flourishes in working-class neighborhoods, where people run out of money before their next payday. The lender may charge up to $ 40 for a $ 200 loan to be repaid in two weeks. That's an annual interest rate of 521%. In exchange for the advance, the lender requires the borrower to write a check for $ 240, dated to coincide with his next paycheck. When the two weeks are up, the borrower may repay the loan or roll it over into a new one, further increasing the interest charges. If the borrower fails to do either, the lender cashes the postdated check. If it bounces, the lender sues and in some states collects up to three times the value of the check, plus interest.
An Illinois study found the average annual interest rate for such services in that state was 533%. One customer was charged 2,007%.
Senator Orrin Hatch, a Utah Republican who has championed the bankruptcy legislation, defended payday loans. Said Hatch: "These lenders provide a vital service to the poorest borrowers. With this check-cashing service, borrowers can get the emergency cash they need without telling the boss they need a cash advance or giving up their televisions and furniture."
The burgeoning payday-loan industry includes publicly owned companies. Ace Cash Express, Inc., of Irving, Texas, operates more than 900 stores in 28 states and the District of Columbia where it cashes checks, sells lottery tickets and provides money-transfer and bill-paying services. At a third of its stores, Ace offers payday loans. Its stock is traded on the NASDAQ.
For a fee of $ 30, Ace will advance cash for a $ 200 check for two weeks. That works out to an annual rate of 391%. Income from the company's lending operations jumped from 7% of its total revenue in 1997 to 12% in 1999.
The company's largest stockholder is Edward ("Rusty") Rose III of Dallas. Rose owns 11% of Ace's outstanding stock, according to documents filed with the U.S. Securities and Exchange Commission. Rose is the millionaire Dallas investor who helped George W. Bush turn a $ 600,000 investment in the Texas Rangers baseball team into $ 15 million—a 2,400% profit. Rose is one of the Bush Pioneers, the elite group of fund raisers who each promised to raise $ 100,000 for the Texas Governor's presidential race.
While Rose has done quite nicely from his investments, customers of Ace Cash Express and other payday lenders have not fared nearly so well. As you might expect, people who pay interest charges of 300% or more often end up in bankruptcy court. Says David Nixon, a lawyer in Fayetteville, Ark.: "The kinds of people who use payday loans are just barely getting by. They have jobs. They work hard. They try to pay their bills, but they come up short. Here's an easy way to get cash fast—at least it seems easy. But it's like getting on a treadmill. Once they get on it, it's impossible to get off."
Sometimes the people on the treadmill aren't those you might expect. In Greenwood, Ind., one of Ace's customers was Eva Rowings, 60, a retired high school Latin teacher. In 1995 Rowings began teaching part time at a reduced salary. "I tried to make ends meet," she says, "and I did pretty well for a couple of years, but then it all went downhill." She had four operations, including gall bladder surgery and orthoscopic procedures on both shoulders.
The debts piled up. She owed $ 5,800 in medical bills, $ 5,900 on credit cards and $ 8,100 in loans, plus other miscellaneous bills. Her debts matched her total annual income.
She began borrowing at two other payday-lending firms before turning to Ace, where she was "astonished at the number of senior citizens that were coming in each month." In a typical transaction, she borrowed $ 200 for 12 days and paid a $ 30 fee—an annual interest rate of 456%. If she missed a payment, she says, she would owe an additional $ 30. "By the end of the month," she says, "I would have no money." Finally, a distressed Rowings, who had always believed in paying her debts but was worn down by the endless dunning calls from bill collectors day and night, decided there was never going to be an end. She filed for bankruptcy. "It was humiliating," she says. "I wished I had never stopped teaching full time."
Another point should be noted. Rowings did not contribute to the election campaigns of candidates for Congress. Nor did Charles and Lisa Trapp. Nor Maxean Bowen. Their creditors, on the other hand, have contributed millions and millions of dollars to get the legislation they want—from thousands of small donations of less than $ 5,000 to hundreds of large ones ranging from $ 5,000 to more than a quarter-million dollars. Since 1997 credit-card companies and other lenders have given $ 2.2 million to the House and Senate Judiciary Committee members responsible for drafting the legislation, according to data compiled by the Center for Responsive Politics.
While the industry got much of what it wanted, Congress thus far has sidestepped an opportunity to enact a genuine reform and end one of the most blatant bankruptcy inequities—the homestead provision.
If you live in a $ 2 million home in Texas or Florida and file for bankruptcy, you are guaranteed you can keep your home. If you live in a $ 75,000 home in Pennsylvania or Delaware and file for bankruptcy, you may lose it. How is this possible? People who file for bankruptcy claim their exemptions under state law. In the case of the homestead law, the provision varies from state to state. Five states—Florida, Iowa, Kansas, South Dakota and Texas—have unlimited exemptions. Whether a residence is worth $ 10,000 or $ 10 million, it can't be touched by creditors. Five other states—Delaware, Maryland, New Jersey, Pennsylvania and Rhode Island—along with the District of Columbia, have no homestead provision, meaning a person can lose his home in bankruptcy. The value of the exemption in the remaining 40 states ranges from $ 2,500 in Arkansas to $ 200,000 in Minnesota.