LEXIS-NEXIS® Congressional Universe-Document
LEXIS-NEXIS® Congressional
Copyright 1999
Federal News Service, Inc.
Federal News Service
MARCH 11, 1999, THURSDAY
SECTION: IN THE NEWS
LENGTH: 6377 words
HEADLINE: PREPARED STATEMENT OF
GARY KLEIN
SENIOR ATTORNEY
NATIONAL CONSUMER LAW CENTER
BEFORE THE
HOUSE JUDICIARY COMMITTEE
COMMERCIAL AND ADMINISTRATIVE LAW SUBCOMMITTEE
AND THE
SENATE JUDICIARY COMMITTEE
ADMINISTRATIVE OVERSIGHT AND THE COURTS SUBCOMMITTEE
SUBJECT - BALANCING THE BANKRUPTCY LAWS:
HIGH RATE CREDIT CARD LENDING LEADS TO
HIGH BANKRUPTCY FILING RATES
BODY:
BALANCING THE
BANKRUPTCY LAWS
INTRODUCTION
Mr. Chairmen and members of the Joint Committee, on behalf of our low- income
clients, the National Consumer Law Center(1) thanks you for inviting us to
testify today regarding consumer
bankruptcies and their impact on the banking system.
There is a great deal of misinformation circulating about the increase in
bankruptcy filings and purported abuses in the system. The reality is that more debtors
use the
bankruptcy system because more debtors are having serious financial problems. American
families increasingly face foreclosure, repossession, utility shut-off, wage
garnishment and extensive collection activity on unsecured credit card debt. In
short, more American families are using the
bankruptcy system, because more American families are having trouble paying their debts.
My testimony will focus on four questions:
Why more filings?
Does the lending industry share responsibility for consumer financial hardship
and the increase in
bankruptcy filings?
Are substantial costs of
bankruptcy passed on to non-bankrupt consumers?
Are the amendments captured last year in the Conference Report (H.R. 3150) and
reintroduced this year as H.R. 833 fair and balanced?
I. WHAT HAS CAUSED THE INCREASE IN FILINGS?
The fact that more
bankruptcies are being filed is not evidence, in itself, that debtors are abusing the
system. The reality is that more cases are filed, because more American
families are faced with crushing debt. There is much more consumer credit
outstanding than ever before. With the additional extension of credit, comes
additional risk. (See the Case Study in the Appendix for a typical example of
an American family forced to file
bankruptcy because of the convergence of consumer
debt, job loss and divorce.)
The increase in
bankruptcy filings is an unfortunate consequence of several significant structural
changes in the American economy. These changes have combined to create a rise
not only in
bankruptcy, but also in foreclosures,(2) repossessions, utility disconnections(3), credit
card defaults(4) and visits to consumer credit counseling agencies.(5)
Nevertheless banks continue to record profits, fueled in large part by credit
card income.(6)
These are the factors which have contributed to the increase in filings:
Downsizing, economic dislocation, income disruptions, and underemployment.
Families are increasingly impacted by instability in employment income,
particularly at the lower end of the wage spectrum.(7) Although unemployment
remains low, many workers file
bankruptcy after being forced to shift to lower paying jobs.
A surprising statistic, based on data compiled by Visa and MasterCard, is that
no more than 29% of
bankruptcies are caused by overspending. The balance of filings are caused by other life
events over which consumers have little or no control.(8)
Rising debt to income ratios. More families have more debt. Part of the reason
for this is that the lending community has aggressively marketed credit card
debt,(9) because it profits from the very high interest rates. Another factor
is the unprecedented increase in the cost of education and the corresponding
increase in student loan debt.(10) One family in six below $25,000 in annual
income, spends more than 40% of its income on debt service.(11)
Reliance on two wage earners to make ends meet. This change in a fundamental
condition of the economy means that
every family has double the risk. With two wage earners vulnerable to income
instability, any change for either one creates enormous pressure on the family
budget. Child-bearing and time off to raise children mean that a family which
was getting by on two incomes is forced to rely on only one.
Rising divorce rates. A corollary of the latter factor is that when a family
splits up, the pressure of running a household with less total income is
impossible.
Bankruptcy debtors are disproportionately single parents.(12)
Uninsured medical debt. At a time when a two day stay in the hospital to
deliver a baby can cost as much as $20,000, the uninsured have virtually no
options to manage medical debts.(13)
Bankruptcy has played an increasing role as the only way out.(14)
Aggressive Creditor Collection Action. Wage garnishments, debt collection by
aggressive telephone calling, and pursuit of legal remedies push many families
into
bankruptcy.(15) Few debtors can afford to pay an attorney to defend against a debt
collection or wage garnishment action even when they have valid legal
defenses.(16) Many
bankruptcy filers report that their attempts at non-bankruptcy payment arrangements were rebuffed.
Deregulation. As rates and terms of credit have been deregulated, an increasing
number of American families have gotten credit on bad terms.(17) High rate home
equity loans, credit card interest rates exceeding 18%, and consumer fraud tied
to credit are frequent contributing causes of
bankruptcy.(18) As some borrowers are increasingly pushed into
"sub-prime" loans at high rates, the
bankruptcy system is
at the fulcrum of a
"chicken and egg" problem. Are high risks justifying high rates, or are the high rates causing
defaults which generate risk?(19)
More Credit Means More
Bankruptcy. The clearest correlation of
bankruptcy cause and effect is between the increase in the amount of credit outstanding
and the number of filings. The number of
bankruptcies and the total amount of consumer debt in our society have moved upward
together in lockstep.(20) It is not surprising that as more Americans borrow
more money, more families have financial troubles.
II. DOES THE LENDING INDUSTRY SHARE RESPONSIBILITY FOR CONSUMER FINANCIAL
HARDSHIP AND THE INCREASE IN
BANKRUPTCY FILINGS? The reasons for the increase in
bankruptcy filings are complex. Although banks and other lenders are correct in pointing
out that they are not entirely to blame, it is disingenuous of them to assert
that they should not bear some responsibility,
at least to the extent of their own conduct.
Credit solicitations and other forms of marketing are designed to encourage
consumers to rely on credit. Much of the marketing is done to people who once
would have been considered unacceptably high risk. Due to high interest rates,
the lending community has discovered that it profits when people get in over
their heads so that they cannot pay their balance in full each month.(21) This
generates remarkable profits for banks. However, it also makes consumers
vulnerable even to small life problems which can put them over the edge.
Every American family has a budget which represents a fixed pie. The 55 to 60
million households that carry a credit card balance from month-to-month have an
average balance of $7,000 and pay more than $1,000 per year in interest and
fees.(22) And, of course, the
families that wind up in
bankruptcy are almost always on the high side of average in their debt-load and the low
side of average in income.(23)
Are consumers at fault for using the credit which is marketed to them? Of
course not. Millions of American families are not irresponsible. They are
simply using the credit offered to them for the purposes for which it is
offered. Families don't go out and borrow $7,000 on a credit card all at once.
They make small purchases over a period of time, and make the minimum payments
which the lender requests. Few consumers understand that making only the
minimum payments means that their balance will grow and payments will take an
ever larger piece out of their monthly budget (at 18% interest or higher) for
debt service.(24)
Congress should not enact legislation which
undermines effective
bankruptcy relief for struggling families. Some
reform is necessary, but that
reform should be balanced and should help consumers avoid the credit problems which
contribute to
bankruptcy.
We do not advocate that creditors make less credit available to low and
moderate income consumers, but rather that consumers have the tools and
information they need to use credit wisely. Appropriate consumer protections
designed to reinforce the lending community's obligation to employ responsible
credit practices include:
enhanced disclosure to consumers about the consequences of making minimum
payments,(25) enhanced disclosures concerning teaser rates of interest,(26)
protections against unilateral interest rate increases which are unrelated to a
change in the lender's cost of funds,(27)
prohibition of unilateral credit limit increases,(28)
prohibition of security interests based in credit card agreements,(29)
protection against
so called
"cashed check loans,"(30)
prohibition of credit card cash advance machines in casinos,(31)
prohibition against making credit cards available to persons such as students
who have no present ability to make more than nominal payments,(32) and
reregulation of interest rates.(33)
If lenders choose to resist legislation to address these problems for
consumers, they ought not be heard to complain about the
bankruptcies which are the inevitable result. Industry consultants estimate that credit
card companies could cut their
bankruptcy losses by more than 50% if they would institute minimal credit screening.(34)
III. ARE SUBSTANTIAL COSTS OF
BANKRUPTCY PASSED ON TO NON-BANKRUPT CONSUMERS?
A. Is the system failing to recapture money which debtors can afford to pay?
Nobody likes to be owed a debt which is not paid back. Yet our society has a
system of debt
forgiveness which has roots in the Bible.(35) Forgiveness and a fresh start
have always been a part of that system.(36)
A family's ability to repay its debts is limited by its income. Data shows that
Americans in
bankruptcy are far poorer than their non- bankrupt counterparts. The median after-tax
income of a family in chapter 7
bankruptcy is under $20,000, or approximately half the national median.(37)
The credit industry has focused substantial resources on attempting to show
that despite this relative poverty, there are many families who are obtaining a
bankruptcy fresh start even though they can afford to pay. Based on this assumption, they
would set up a system in which some debtors are forced into payment plans.
However, if such plans are not entered voluntarily by the debtor, they have
little chance of success, absent extensive and impracticable coercive
mechanisms.
For this reason, forced participation in payment plans has consistently been
rejected by Congress and the two most recent government-sponsored commissions
which have studied
bankruptcy.(38)
Apart from this procedural difficulty, there is no empirical evidence which
shows that debtors can afford to pay. In 1989, Professors Sullivan, Warren and
Westbrook published the results of an evaluation of a substantial statistical
database and concluded:
The overwhelming majority of Chapter 7 debtors --90% by any measure-- could not
pay their debts in Chapter 13 and maintain even the barest standard of living.
... A new
bankruptcy regime that invested more time to find and to investigate the potential
can-pay debtors would prompt only a small amount of new repayment. This is the
classic case in which a policy maker asks if the game is worth the candle.(39)
The creditor industry's own
study released last year,(40) purporting to show the opposite, has been
severely criticized by the General Accounting Office.(41) Once the credit
industry study's results are adjusted to take account of the GAO critique, it
shows that only about 5% of debts could be repaid by debtors -- if they undergo
five year repayment plans.(42) This means that the creditor's own study
ultimately shows that
bankruptcy debtors can afford to pay about a penny on the dollar per year. That result
was supported recently by a study funded by the American
Bankruptcy Institute showing that only 3% of chapter 7 debtors can afford to pay back
their debts in a hypothetical chapter 13 plan.(43)
Outside
bankruptcy, no reasonable creditor would spend more than a penny to collect a penny.
Proposals to
require five year payment plans for many more debtors have a heavy price tag,
including costs of administration and monitoring, costs to resolve disputes
about capacity to repay, and costs of collecting and distributing payments.
Either the taxpayer would have to fund these costs, or if they are debtor
funded, they will reduce the receipts available to creditors in a repayment
plan. If taxpayer funded, every American would be helping banks and other
creditors collect their one cent per dollar per year. If debtor funded, the one
cent per dollar per year repayment capacity of debtors is even further reduced.
Finally, requiring five year repayment plans would have enormous social and
human costs. People use the
bankruptcy system for many legitimate reasons. If navigating the system is made more
difficult, and if a meaningful fresh start is denied when some
cases inevitably fail,(44) more debtors would be left with the burden of
unmanageable debts.(45) Loss of homes, repossessions, wage garnishments,
utility shut-off and family stress associated with unmanageable debts would be
the inevitable result. While these social and human costs of denying chapter 7
relief to debtors may be difficult to quantify, they nevertheless remain an
important part of the relevant equation.
B. Are losses associated with
bankruptcy being passed on to other better off consumers in the form of higher interest
rates? The banking industry has claimed that it is losing 40 billion dollars
each year to the
bankruptcy system and that it is passing those costs on to consumers at the rate of $400
per family.(46) These numbers are ridiculous. Families may be discharging debt
in
bankruptcy, but the creditor's own study, discussed above, shows that these are not
debts which consumers can afford to pay.
In reality, the lending community is scapegoating the
bankruptcy system for losses associated with bad loans.
The vast majority of debts which are discharged in
bankruptcy would have been written off if no
bankruptcy had intervened. The only impact of
bankruptcy is that it gives debtors a legally enforceable fresh start -- the same second
chance which has been guaranteed since Biblical times.
Equally important, there is no evidence that lenders would reduce rates on
unsecured consumer lending if they could avoid
bankruptcy losses. Between 1980 and 1992, the federal funds rate at which banks borrow
fell from 13.4% to 3.5%. Nevertheless, credit card interest rates actually
rose.(47) How likely is it that other types of savings, if any could be
realized, would be passed on to consumers rather than investors?
To a large extent, the
bankruptcy
"problem" is nothing but
a
"bad loan" problem. It could be fixed if lenders were more closely attentive to
underwriting. For the most part, the lending community has chosen not to take
this step. The present interest rate environment has taught lenders that
substantial profits can be made from extending credit to risky borrowers, such
as college students. However, in exchange, the banking community must accept
that it is reaching some borrowers who cannot afford to pay.
IV. ARE THE AMENDMENTS CAPTURED LAST YEAR IN THE CONFERENCE REPORT (H.R. 3150)
AND REINTRODUCED THIS YEAR AS H.R. 833 FAIR AND BALANCED?
The
bankruptcy system established in 1978 has been remarkably efficient. It provides critical
relief to financially troubled American families at a low cost to taxpayers.
Over the years, many open issues under the
bankruptcy law have been resolved by court decisions and carefully crafted
Congressional amendments.
To the extent the increase in the number of
bankruptcies suggests that there are problems in the consumer lending system,
responsibility for fixing those problems must be shared between consumers and
lenders. Congressional
reform, if any, should be balanced and narrowly targeted at abuses by both debtors and
creditors.
It would be a mistake to enact
reforms without addressing reckless lender conduct which pushes people into
bankruptcy. Offering additional credit, for example, to families already struggling to pay
their debts hurts not only borrowers, but also the borrowers' honest creditors
if the new credit pushes the family over the edge. Similarly, failure by one
creditor to seriously consider payment arrangements outside
bankruptcy for families facing hardship may lead to a
bankruptcy filing which affects all creditors.
To the extent there has been a focus on debtor misconduct, the
burden of proof remains on the credit industry. To date it has not been met.
Simply saying that more people are using the system, is not proof that people
are misusing the system.
Some observers ignore the fact that the present system already has a variety of
protections which are designed to effectively root out abuses by debtors. These
include: Rule 9011,(48) objections to discharge,(49) complaints to determine
dischargeability,(50) good faith requirements,(51) Rule 2004 examinations,(52)
creditors' meetings,(53) dismissals for substantial abuse,(54) and criminal
sanctions.(55) Indeed, it is unclear why the creditor community does not
believe that the small number of cases where significant repayment appears
possible are not resolvable under the
"substantial abuse" test of 11 U.S.C. ' 707(b).(56) Perhaps additional tightening of this
provision would make it work
better.
An additional set of balanced
reforms may be appropriate as long as they do no harm to the majority of honest
debtors who urgently need help. Provisions should be narrowly targeted to
address debtors who truly are abusing the system without affecting lower income
debtors who would be hurt by having to litigate additional issues. Creditors
should not be allowed to obtain leverage by forcing new litigation on consumers
who cannot afford to pay the costs of defending.
Appropriate
reforms should also create incentives for debtors to use a repayment plan option in
bankruptcy in order to repay their debts. Significant actions could be taken to make the
costs of those plans more manageable and to enhance outcomes for debtors who
complete plans.(57) Provisions in H.R. 833 which limit stripdown related to
automobiles and personal property and which require debtors
in chapter 13 to litigate many new dischargeability issues will undermine
chapter 13 rather than reinforce it.
Finally, the system should penalize dishonest creditors. These include
creditors whose actions push people into
bankruptcy and those who take advantage of debtors after they file by coercing
inappropriate reaffirmation agreements.
Honest and careful creditors should always be paid before abusive debt
collectors, lenders that encourage gambling in casinos, predatory second
mortgage lenders, and lenders who are unreasonable in refusing to accept non-bankruptcy payment plans. Lenders whose actions violate the
bankruptcy laws should be subjected to meaningful and straightforward penalties.
CONCLUSION
The lending community should not be allowed to scapegoat the
bankruptcy system for lending decisions which result in bad debt. The right to
participate in the
bankruptcy system should require honesty not just on the part of
debtors, but also by creditors. No legislative action should ignore the
significant hardships of the millions of American families who are overwhelmed
by debt.
Appendix
Case Study
Mrs. M is a 39-year old mother of three children, two of whom are living at
home. Her financial problems started in 1994 when her husband lost his job in
construction. Since that time, he has been underemployed; his earnings have
declined from an average of $52,000 annually between 1990 and 1993 to an
average of $26,000 between 1994 and 1997. Starting in 1994, the family's
primary income has been $30,000 which Mrs. M earns as an administrative
assistant at an insurance company. Mr. and Mrs. M have struggled successfully
to maintain payments on a home they bought in 1987 since their financial
problems began in 1994.
Mr. and Mrs. M have also had
significant credit card bills since the late 1980's. Despite their financial
problems, they avoided default on those debts by making minimum payments
between 1994 and 1997. However, the total amount of their credit card debts
increased from about $11,000 in 1994 to about $29,000 in 1997, largely due to
the accumulation of interest at an average annual rate of 17.5%.
In 1997, Mrs. M's financial problems worsened, because Mr. M moved out of the
family home. An additional strain was created because Mrs. M attempted to
provide financial help to her oldest daughter who began her first year of
college. In family counseling, Mr. and Mrs. M acknowledged that their marriage
was breaking up largely because of the constant pressure of financial problems
and Mr. M's continuing inability to find steady work.
Mrs. M
attempted to make payment arrangements with her credit card lenders so that she
could focus on her mortgage obligation. She was told that no payment
arrangements were possible and that she should
"borrow money to pay off the debts." Mrs. M went to consumer credit counseling where she was advised that her
budget did not support any payments on credit cards. She was advised to
consider chapter 7
bankruptcy in order to eliminate the credit card debts so that she could maintain her
payments on the mortgage.
In September 1997, Mrs. M obtained advice from a
bankruptcy lawyer and reluctantly filed
bankruptcy. She will discharge approximately $35,000 in unsecured debts. She will reaffirm
and continue to make payments on her mortgage and car loan -- totaling $1,320
monthly.
1. 0 The National Consumer Law Center is a nonprofit organization specializing
in consumer credit issues on behalf of
low-income people. We work with thousands of legal services, government and
private attorneys around the country, representing low-income and elderly
individuals who request our assistance with the analysis of credit
transactions. The National Consumer Law Center also serves as an advocate for
low-income consumers on consumer lending and
bankruptcy. NCLC publishes materials for lawyers and consumers, including the nationally
acclaimed book Surviving Debt: A Guide for Consumers. NCLC has trained lawyers
and counselors nationwide on consumer protection issues relevant to low-income
consumers.
My experience includes 14 years as an attorney representing clients in
bankruptcy, as an advocate for consumers on
bankruptcy issues, as a teacher and trainer of other lawyers, and as an author of books
on
bankruptcy and consumer debt. My work also focuses
on helping homeowners with financial problems avoid foreclosure. The
bankruptcy system has always provided an important means to that end.
2. 0 Foreclosures have more than tripled since 1980. There were approximately
half a million foreclosures in 1998.
3. 0 See National Consumer Law Center,
"The Energy Affordabilty Crisis of Older Americans" p. 23 (August, 1995).
4. 0 Ausubel,
"Credit Card Defaults, Credit Card Profits and
Bankruptcy", 71 Am. Bankr. L.J. 250 (1997); See Consumer Federation of America,
"Recent Trends in Credit Card Marketing and Indebtedness" (Report issued July, 1998) at p. 1.
5. 0 The number of consumers who have visited consumer credit counseling for
help in the last 20 years has increased at a faster rate than
bankruptcy filings. More than two million
families sought such help in 1998.
6. 0 Commercial banks earned 14.8 billion in the third quarter of 1997, the
third consecutive quarter of record profits and the 19th consecutive quarter
involving profits of more than 10 billion. See Ausubel, Credit Card Defaults,
Credit Card Profits and
Bankruptcy, 71 Am. Bankr. L.J. 250 (1997) for a discussion of the role of credit card
profits in the current boom in banking.
7. 0 Even MasterCard recognizes this trend. In its recent report on debt and
bankruptcy, its economist states:
"Stagnation in real wages during the last 20 years and the growing disparity in
income and wealth, ... have almost certainly contributed to the rise in
personal
bankruptcies. Declines in income caused by job loss make it more difficult for those
affected to service previously accumulated debt." Chimerine,
"Americans in Debt: The Reality", p.24 (MasterCard International 1997).
8. Id. at p. 25. And even the 29% figure is acknowledged to overstate spending
problems as a contributing cause of
bankruptcy. Id. 9. 0 More than three billion credit card solicitations were sent out in
1997 and 1998.Consumer Federation of America,
"Recent Trends in Credit Card Marketing and Indebtedness" (Report issued July, 1998) at Table 2 (citing industry sources). See Hays,
"Banks Marketing Blitz Yields Rash of Defaults" Wall Street Journal, p. B1 (September 25, 1996). MBNA, one of the largest
issuers, claims 30 million credit card solicitations each month in 1997
together with 6 million phone solicitations. Hansell,
"A Banking Powerhouse of Cards", N.Y. Times, p. C1 (October 22, 1997).
10. 0 See Chacon,
"Debt Burden Soaring for U.S. Students" Boston Globe, p. 1 (October 23, 1997). According to the Nellie Mae study on
which the article is based, an average student's debt increased from $8,200 in
1991 to $18,800 in 1997.
11. 0
"Family Finances in the United States: Recent Evidence from the Survey of
Consumer Finances" Federal Reserve Bulletin, p. 1, 21 at Table 14 (January, 1997). Overall, the
rate is one family in nine.
12. 0 See Sullivan, Warren, and Westbrook, As We Forgive Our Debtors, pp.
147-165 (Oxford University Press, 1989).
13. 0 See Hildebrandt and Thomas,
"The Rising Cost of Medical Care and Its Effect on Inflation", Federal Reserve
Bank of Kansas City, Econ. Rev. p. 47 (Sept./Oct. 1991).
14. 0 Domowitz
& Sartrain, Determinants of the Consumer
Bankruptcy Decision, p. 25 (1997).
15. 0 See Dugas,
"Special Report: Going Broke, Wage Garnishments a Key Factor" USA Today, p. 1A (June 10, 1997); Hansell,
"We Like You. We Care About You. Now Pay Up. Debt Collecting Gets a Perky Face
and Longer Arms", NY Times, F.1 (Jan. 26, 1997).
16. 0 Forrester,
"Constructing a New Theoretical Framework for Home Improvement Financing," 75 Ore. L.Rev. 1095 (Winter 1996); Sterling
& Shrag,
"Default Judgments Against Consumers: Has the System Failed?" 67 Denv. U. L. R. 357, 384 (1990).
17. 0 See, e.g, Adding Insult to Injury:
Credit on the Fringe, Hearing before the Subcommittee on Consumer Credit and
Insurance of the House Committee on Banking, 103rd Cong., 1st Sess. (1993).
Rehm, In a First, FDIC Warns Banks About Dangers of Sub-Prime Lending, 162 Am.
Banker 2 (May 13, 1997).
18. 0 See Forrester,
"Mortgaging the American Dream: A Critical Evaluation of the Federal
Government's Promotion of Home Equity Financing" 69 Tul. L. Rev. 373 (1994).
19. Home mortgage loans with high loan-to-value ratios, particularly so-called
125% loans, are the major component of the recent surge in home equity lending,
both in the prime and subprime markets. Recent growth in the volume of 125%
loans has been unprecedented: 1995--$1 billion; 1996--$4 billion; 1997--$10
billion; 1998--an estimated $20 billion. Although such loans are at least
partially secured by the debtors' homes and can result in the loss of the home,
they carry interest rates much closer to those of credit cards, in the 13-15%
range. See
"A 125% Solution to Card Debt Stirs Worry," Wall Street Journal, Nov. 17, 1997
20. 0 Three neutral academic studies show this remarkable correlation. Ausubel,
Credit Card Defaults, Credit Card Profits and
Bankruptcy, 71 Am. Bankr. L.J. 250 (1997); Bhandari
& Weiss, The Increasing
Bankruptcy Filing Rate: An Historical Analysis, 67 Am. Bankr. L.J. 1 (1993); Statement of
Kim Kowalewski, Chief, Financial and General Macroeconomic Analysis Unit,
Congressional Budget Office, before the Subcommittee on Administrative
Oversight and the Courts,
Committee on the Judiciary, United States Courts, (April 11, 1997). These
studies stand is sharp contrast to credit industry funded studies which purport
to show otherwise.
21. 0 Borrowers who maintain balances pay interest at rates which typically
range from 14.5 to 19.8%.
22. See Consumer Federation of America,
"Recent Trends in Credit Card Marketing and Indebtedness" (Report issued July, 1998) at p. 1.
23. Research shows that the median after-tax income of debtors is under $20,000
annually. Id. $1,000 in annual debt service expenses can thus be a very
meaningful proportion of a debtor's income.
24. Industry analysts estimate that, using a typical minimum monthly payment
rate on a credit card, it would take 34 years to pay off a $2,500
loan, and total payments would exceed 300% of the original principal. George M.
Salem and Aaron C. Clark, GKM Banking Industry Report, Bank Credit Cards: Loan
Loss Risks are Growing, p. 25 (June 11, 1996). Credit card statements, unlike
mortgage loans and car loans, do not disclose the amortization rates or the
total interest that will be paid if the cardholder makes only the minimum
monthly payment See 11 U.S.C. ' 1637. A provision which would require new Truth
in Lending disclosures on these issues was included in the bill passed by the
Senate (' 209), but deleted from the Conference Report.
25. 0 Minimum payments on many credit cards will not amortize the loan, thus
sucking people in over their heads. If minimum payment terms are offered which
won't amortize the debt in
two years, consumers should be told, in clear and conspicuous language, what
they need to pay, if they make no further charges, in order to pay off the loan
over a two year period.
26. 0 Low initial rates are designed to encourage consumers to use credit in
the first months after credit is granted. Many consumers do not understand what
the permanent rate will be or the impact of the rate change on a large unpaid
balance.
27. 0 Some lenders raise rates arbitrarily after consumer balances reach a
certain level. Interest rate changes should be tied to an actual change in the
interest rate environment so that consumers are not caught unawares. See,
Hershey,
"Sales of Credit Card Accounts Are Hurting Many Consumers," NY Times, March 2, 1999, p.A1 (documenting the
effect of unilateral interest rate changes.
"
28. 0 When a lender extends a consumer's credit limit unilaterally, in some
cases after a consumer is already struggling with the existing balance, the
message is that the lender believes that the consumer can afford to take on
more credit. Consumers would not be hurt by having to ask for more credit,
rather than having it offered unilaterally. Such a request should trigger at
least minimal underwriting requirements.
29. 0 These hidden security interests in items of property which have no resale
value to the creditor provide inappropriate leverage to lenders in the
collection process even though there is no potential that the lender could make
money in the event of repossession.
30. 0 Consumers receive checks from several major lenders in the mail for as
much as $5,000. Not everyone understands that cashing these checks can
lead to acceptance of high rate credit terms. In addition, providing
preapproved credit through cashed checks eliminates the cooling off period
which more common credit application processes provide.
31. 0 With credit card cash advance machines prevalent in casinos, is it
surprising that some gamblers get overextended on credit and file
bankruptcy based on those credit card debts?
32. 0 Offering credit aggressively to college students who cannot afford to pay
off their debts until they join the work force some years later is prevalent
because interest mounts until the debt is paid. By lending aggressively to
college students, at a time in life when money is scarce, our society runs the
risk of saddling people early in life with an unmanageable problem which will
later preclude more
important uses of credit such as purchase of a home and car. See US PIRG,
"The Campus Credit Card Trap: Results of a PIRG Survey of College Student" (September 1998).
33. 0 Competition in the market has not worked to keep rates at reasonable
levels. On a procedural level, the Supreme Court has held that credit card
lenders can rely on the law in the state where they are incorporated in setting
the interest rate and many of the other terms of credit for consumers
nationwide. This has led to a
"race to the bottom". States deregulate in order to create the best possible environment to
encourage a credit card company to locate there in order to export terms of
credit across the country. This helps certain states create jobs. However, it
means that those other states that do want to regulate for the benefit of their
citizens
can no longer do so. Either states should be freed to create and enforce
meaningful regulations or the federal government should step in with consumer
protections.
34. George M. Salem and Aaron C. Clark, GKM Banking Industry Report, Bank
Credit Cards: Loan Loss Risks are Growing, p. 25 (June 11, 1996).
35. 0 Deuteronomy 15:1-2 ("At the end of every seven years thou shalt make a release. And this is the
manner of the release: every creditor shall release that which he has lent unto
his neighbor and his brother, because the Lord's release hath been proclaimed".) 0
36. 0 Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934). See Gross, Failure and
Forgiveness, ch. 6 (Yale University Press 1997).
37. 0 Consumer Federation of America,
"Recent Trends in Credit Card Marketing and Indebtedness" (Report
issued July, 1998) at p. 1; Warren,
"The
Bankruptcy Crisis" 73 Ind. L. J. 1081, 1102-1103 (Fall 1998); Sullivan, Warren and Westbrook,
"Consumer Debtors Ten Years Later: A Financial Comparison of Consumer Bankrupts
1981-1991", 68 Am Bankr. L. J. p. 121, 128 (1994).
38. 0 See Report of the Commission on the
Bankruptcy Laws of the United States, Part I at 159 (1973); H.R. Rep. No. 595, 95th
Cong., 1st. Sess. 120-121 (1977); Report of the National
Bankruptcy Review Commission, Vol. 1, at pp. 89-91 (October 20, 1997).
39. 0 Teresa A. Sullivan, Elizabeth Warren, and Jay Lawrence Westbrook, As We
Forgive Our Debtors, pp. 205-206 (Oxford University Press, 1989). This seminal
book and the empirical work which underlies it remains the single most
authoritative published source for studying
bankruptcy demographics. It has been updated more recently in an article by the same
authors which concludes that debtors are now even poorer and less able to pay
their debts than they were when the initial study was done.
"Consumer Debtors Ten Years Later: A Financial Comparison of Consumer Bankrupts
1981-1991", 68 Am Bankr. L. J. 121 (1994).
40. 0 Barron and Staten,
"Personal
Bankruptcy: A Report on Petitioners' Ability to Pay", Monograph 33, Georgetown U. Credit Research Center (1997). This report is
reprinted as Appendix G-2.b to the National
Bankruptcy Review Commission Report.
41. 0 GAO Report, Personal
Bankruptcy, The Credit Research Center Report on Debtors' Ability to Pay, GAO/GGD-98-47, p. 6 (Feb, 9, 1998) The GAO concluded that the study's
"fundamental assumptions were not validated". In addition, the GAO review concluded that the credit industry's study:
failed to assess the accuracy of the data collected; failed to account for
major expenses which
bankruptcy debtors have after filing including payments on non-housing secured debt and
reaffirmed or non-discharged non-priority debts; failed to evaluate potential
differences among the sites chosen for the study; and failed to use
statistically valid research techniques.
42. 0 Warren,
"The
Bankruptcy Crisis" 73 Ind. L. J. 1081 (Fall 1998); Klein,
"Means Tested
Bankruptcy: What Would it Mean?" 28 U. Mem. L. Rev. 711 (Spring, 1998).
43. Culhane and White,
"Means Testing for Chapter 7 Debtors: Repayment Capacity
Untapped?" (American
Bankruptcy Institute, 1998).
44. 0 67% of repayment plan cases fail under current law. There is every reason
to think that if economically marginal debtors are forced into involuntary
repayment plans, the failure rate would be higher.
45. 0 See D. Caplovitz, Consumers In Trouble: A Story of Debtors in Default pp.
280-285 (Free Press, 1974).
46. The unpublished credit industry-funded report which served as the basis for
this claim has also been criticized by the GAO for lack of analytical rigor.
GAO/GGD-98-116R
"The Financial Costs of Personal
Bankruptcy" Letter from Associate Director Richard Stana to the Honorable Martin T. Meehan.
47. 0 Medoff and Harless, The Indebted Society, at pp. 12-13 (Little, Brown
& Co. 1996).
48. 0 Fed. R. Bankr. P. 9011.
49. 0 See
11 U.S.C. ' 727.
50. 0 See 11 U.S.C. ' 523(a).
51. 0 See, e.g., In re Barrett, 964 F.2d 588 (6th Cir. 1992) (finding that
debtor's second chapter 13 filing, when he had insufficient income to support
plan, was in bad faith but that third chapter 13 case, after circumstances had
changed was not in bad faith); In re Love, 957 F.2d 1350 (7th Cir. 1992).
52. 0 Fed. R. Bankr. P. 2004. It is hard to see why creditors concerned about
abuses can't utilize the examination process to uncover them. If it is not
financially feasible for a creditor to pursue an examination, why should
taxpayers instead bear that burden for the creditor's benefit.
53. 0 11 U.S.C. ' 341. Fed. R. Bankr. P. 2003.
54. 0 11 U.S.C. ' 707(b).
55. 0 18 U.S.C. '' 151-157.
Bankruptcy fraud is punishable by fine and imprisonment for up to five years. 18 U.S.C. '
157.
56. 0 That is the provision which Congress added to the Code in 1984 and which
has functioned to root out debtors who can afford to pay their creditors. See,
e.g., In re Kelly, 841 B.R. 908 (9th Cir. 1988); In re Krohn, 886 F.3rd 123
(6th Cir. 1989) (substantial abuse found where debtors could pay back their
debts with
"good, old fashioned belt tightening").
57. 0 For example, efforts should be made to provide improved credit reporting
for people who complete chapter 13 payment plans. In addition, the discharge
available in chapter 13 should be as broad as possible in order to serve as
incentive to choose that chapter. Costs can be lowered by encouraging secured
lenders to accept modifications to their mortgages in exchange for more
favorable treatment.
END
LOAD-DATE: March 12, 1999