Bankruptcy, "Anti-Terror" Laws Make Americans Captive Wards of Credit Industry
by Chesley Hicks
"Bankruptcy should always be a last resort in our legal system. If someone does not pay his or her debts, the rest of society ends up paying them. In recent years, too many people have abused the bankruptcy laws. They've walked away from debts even when they had the ability to repay them. This has made credit less affordable and less accessible, especially for low-income workers who already face financial obstacles."
If someone other than Dubya, who uttered these words upon signing the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, had said that, I might've thought, Yes, you must pay for what you buy. My mind might've switched away from our country's shrinking wild forests and shriveling civil liberties to images of absconded executives drinking mimosas in their Caribbean mansions after sinking a company and leaving behind employees without jobs, health care, and earned pensions. I might've thought of a deadbeat Dad on the lam with his new girlfriend in the sports car they bought and put in her name; or remembered the girl I knew in college who came from a wealthy family, spent her hearty cash allowance on drugs, and ran up credit card bills buying booze, clothes, and all the records I ever wanted before defaulting on her credit cards when her parents wouldn't pay the bills.
"The law will also allow us to clamp down on bankruptcy mills that make their money by advising abusers on how to game the system." Bush also said. Yeah, screw the slimy swindlers! I might say.
But this was Bush talking. So instead I assume that the would-be ire roused in the self-righteous, bill-paying part of me probably reflects what a portion of the rest of the country believes when they hear Bush decree.
The Republicans are masters at making you look with indictment over your shoulder to see if your neighbor might be getting over with your tax money or having ungodly sex in your country, while they go whole-hog with your money, land, and freedom. Though the Bush administration will blithely propound the most preposterous of subterfuges to keep you glaring in the wrong direction, there's usually some grain of truth in their ruse to give it enough traction to stand for as long as they need the public to look away from reality.
In reality, the new bankruptcy law might very well put the breaks on the deadbeat dad, and teach the profligate college student a hard lesson in fiscal responsibility. But the percentage of bankruptcy filers who got there through wanton indulgence is not representative. A study published in February by the Harvard Medical and Law Schools found that "Half of personal bankruptcies are predated by medical problems, even among the insured--75.7% had insurance at the onset of illness. Even middle class, insured families often fall prey to financial catastrophe when sick. In 2001, 1.458 million American families filed for bankruptcy." Anyone who is honestly interested in understanding the current dynamics of bankruptcy should look foremost at our volatile economy and a woefully imbalanced health care system.
"America is a nation of personal responsibility where people are expected to meet their obligations. We're also a nation of fairness and compassion where those who need it most are afforded a fresh start," Bush also said. Help the truly needy and keep everyone honest, I might've said... except:
As for those abusing the system, while Repubs are bearing down on low- and middle-income debtors, the mimosa-sucking executive can keep sucking because there's a nifty little loophole in the bill that allows the protection of substantial assets from creditors even after a bankruptcy filing. It's called the asset-trust provision, and according to a March 2 New York Times article, "For years, wealthy people looking to keep their money out of the reach of domestic creditors have set up [offshore asset protection trusts]. But since 1997, lawmakers in five states--Alaska, Delaware, Nevada, Rhode Island and Utah--have passed legislation exempting assets held domestically in such trusts from the federal bankruptcy code. People who want to establish one of these trusts do not have to reside in any of the five states; they need only set it up through an institution located there." The trusts cost thousands of dollars to establish and maintain, making them an option only for wealthy people, earning the asset-trust provision the title "millionaires loophole." Bush is sooo predictable.
With that in mind, go online and look over the list of amendments that were rejected during the Senate hearing that ultimately passed the new bankruptcy bill: amendments with names like "To exempt debtors whose financial problems were caused by failure to receive alimony or child support, or both, from means testing," or "To modify the bill to protect families." Reading the list of amendments clearly intended to make the bill more equitable but cynically rejected, you'll see that the "millionaire loophole" was no oversight. Read between the lines and you'll also see who really benefits from the new bill: the country's largely unregulated credit industry.
The supporters of the new bankruptcy bill, including credit behemoth MBNA, the sixth highest contributor to Bush's 2004 campaign, claim that by tightening bankruptcy laws, more money will be made available to a broad spectrum of people seeking credit and loans. While this might sound good in theory, the reality is that the credit industry is helping to create an underclass of people permanently stuck the debt cycle.
According to Business Daily Bulletin of May 15, citing data from the Federal Reserve, "A year ago, approximately 1.59 million people filed for personal bankruptcy, 700,000 more filings than a decade ago. Consumer debt also continues to rise, currently hovering at $2.12 trillion, 100 percent greater than a decade ago."
We live in a debt culture. Many Americans begin their young adult lives in debt, paying back school loans. Over the last decade, most of us have probably noticed the proliferation of credit card culture. Credit card companies offer feeless cards, free airline miles, student accounts that don't require a parental cosign, retail tie-ins, and zero-percent introduction rates. For the financially secure, this has been an opportunity to sometimes get something for nothing. For the growing numbers of financially insecure Americans, it's been a lure into debt indenture. For the credit companies it's been a windfall.
In 1996, the credit card industry made $1.7 billion dollars on late fees. In 2002, it made $7.3 billion. With the inclusion of other new fees: balance transfer fees, over-the-limit fees, cash advance fees, and foreign exchange fees, the number rises. In 1995 the industry made $8.3 billion in collected fees. In 2004 it made $24 billion.
Add to this the spoils collected via unchecked usury--that is, arbitrarily applying fees to any transaction, and inflating the fees every chance it gets--and you've got an industry that's so far in the black, it's benighted the entire system.
For those of you with cards, scrutinize the fine print. You'll find that payment periods have shrunk from 30 to 20 days; grace periods have been eliminated, and a single late payment will result in the raising of your rates to 18, 29, or 35 percent. Some reports say that creditors are sending bills closer to their due dates in order to increase the odds of the bills being paid late. Creditors can also arbitrarily raise the rates on your non-delinquent accounts if they find out you were late paying off another account owned by another creditor.
Despite laws, including 1971's Fair Credit Reporting Act (FCRA), which protect consumers from unfair and inaccurate collection of personal information to form credit profiles, or "scores," it is only within the last year that consumers have been allowed unfettered access to these reports (see www.annualcreditreport.com).
Still, information can be traded between credit card companies, insurance companies, landlords and other entities that handle your money. Even the recent privacy act (the Gramm-Leach-Bliley Act of 1999) hasn't been able to entirely lift the black veil. Insurance credit-evaluation policies, in particular, remain inscrutable. While the collection of credit data for risk-assessment is meant to provide for judicious lending that will ultimately supply more money to more people who will benefit from it, its flaws assist in keeping low- to mid-income people in debt. For instance, an employed mother who uses a credit card to get through a medical crisis, and misses or pays late one credit card bill, might find rates for other cards, with which she has not been late, rise due to those creditors having checked her updated credit score. If she subsequently should try to get her sixteen year-old son car insurance, she might find she is only offered high insurance rates, due to her now flawed record. So she's now not only paying off her original medical bills, she's now been sucked into a higher monthly overhead than she ever had. One that includes a credit card debt that exponentially grows, thereby insuring that she will owe more and more money every month. In this way, debtors become trapped.
For instance, with minimum (2%) monthly payments, a debt of $5000 with an 18 percent interest rate will take 46 years to pay off, having accrued $13, 931 in interest. Chances are, the mother, having missed a payment or two, will have even higher rates. But because she and her husband have jobs that place them at or above the median income level in their state, they are ineligible under the new law for chapter 7, or clean-slate bankruptcy. Instead, they have to file chapter 13, which requires, among many other things, that the mother take a course in debt management--at her expense. That mother is probably not going to get too excited about the free airline miles she's earned.
The implications of this scenario have raised red flags everywhere. On the one hand it is recognized as beating down regular Americans during a time of financial uncertainty. It also places a glaring spotlight--for those looking anyway--on the runaway power of consolidated credit agencies.
Some credit card companies, like Citigroup, now create their own internal credit reports. And as companies such as Citigroup and Chase own so many other companies that handle money across the culture spectrum, they're allowed access to more information than most consumers realize. With such groups acting as lenders, creditors, and insurers, one wonders how far off we are from finding our health insurance rates raised because there are too many liquor-store, steakhouse, or whitewater-rafting trip purchases on our bills. In a climate where companies are allowed to deny health insurance to--or even fire--employees who smoke, this doesn't seem so remote.
So my inner fiscal pragmatist and conceder to capitalism says: credit is a good that you don't have to purchase. I know people who don't use credit at all, ever. But these are people who either have a spouse who does use credit or have made the choice to not own anything for which they can't pay in full upfront--a tall order for most people just starting out, as the credit experts say that having no credit history is as bad as having bad credit history. It also assumes a certain degree of cultural detachment: no online tickets, show bookings, payments, or retail, etc. Should you choose to use only a debit card instead, you'll still be subject to the same kind of tracking and lack of credit history; and for folks seeking to buy a home or car or invest in beginning a new business--the embodiment of the American entrepreneurial spirit--buying with a loan or credit is usually the only option, and one upon which our economy relies. That someone drawing upon these resources should be setting themselves up for the extreme, fiscally fatal punishment allowed in the event they even lightly transgress is deeply insidious. That the government is going to such lengths to sanction and protect this voracious, totalitarian practice is cause for revolt.
And speaking of Senate bills: On May 10, the Senate passed legislation, subsequently signed into law by Dubya, called the Emergency Supplemental Appropriations Act for Defense, the Global War on Terror, and Tsunami Relief, 2005. It is, indeed, an emergency appropriations bill that approves funds for, among other items, the Iraq war and tsunami relief. However, rolled into this rushed-to-pass legislation was also the REAL ID Act of 2005, which seeks "to establish and rapidly implement regulations" for a national ID system, ostensibly, of course, to protect Americans from terrorists.
However, among the Act's stacks of flaws is the reality that there is little evidence to suggest harder-to-forge legal IDs would do anything to deter people already working outside law.
Proposals for the ID include using RFID tags--which can be read from several feet away--to store personal information on the card. Supporters say the REAL ID isn't a national ID card, because states can refuse to follow the law. Yet the ID law states that federal agencies must require the card--and federal agencies control air travel, post offices, banking and other daily life institutions.
It's tough to say what is more disturbing: the historically redolent implications of having to carry "papers" with you everywhere, all the time; or the fact that there was little debate over the bill before it slithered through the House and Senate. Though convincing arguments against the ID's efficacy abound, it could be the threat of common criminals that most thwart its implementation, as critics say such a digitized, info-packed ID will provide one-stop shopping for identity thieves. Of course the threat of identity-theft hasn't slowed the crush of credit hegemony.
So where is it going to end? Maybe here: During the recent Senate session, the Washington Post reported May 18 that both Dems and Repubs resoundingly agreed on one thing: "With startling unanimity, they agreed that without some combination of big tax increases and major cuts in Medicare, Social Security and most other spending, the country will fall victim to the huge debt and soaring interest rates that collapsed Argentina's economy and caused riots in its streets a few years ago." Of course reports say that the money lost in tax cuts for the rich could cover the amount needed to repair the deficit, but we don't tend to riot over that sort of thing here. We'll see.
In the meantime, I know that Chicken Little never helped anyone. There are numerous websites that will connect you to people and organizations offering detailed information on the bankruptcy law, the credit industry, and REAL ID. These measures will probably face challenge in the courts, where their final outcomes will be defined by attrition. So staying informed and active can only help.
Info on the credit industry:
Demos, a nonpartisan think-tank
Credit Card Nation, a Web-based financial literacy group
Detailed breakdowns of the bancruptcy law:
A CommonDreams article by David Swanson
Public Interest Research Group (PIRG) page on the law
PBS article on credit scores
Why the REAL ID won't work:
Security technologist and blogger Bruce Schneier
Special to WORLD WAR 4 REPORT, June 10, 2005
Reprinting permissible with attribution