LEXIS-NEXIS® Academic Universe-Document

LEXIS-NEXIS® Academic

July 2, 2000 Sunday, FINAL / ALL

SECTION: BUSINESS; Pg. 1E

LENGTH: 2391 words

HEADLINE: BANKRUPTCY;
REVISIONS TO CONTROVERSIAL LAW WOULD MAKE RELIEF FROM DEBT HARDER

BYLINE: By TERESA DIXON MURRAY; PLAIN DEALER REPORTER

BODY:
One day it's a young man with $40,000 in credit card debt and only a $24,000 income.

Another day, it's a mother of three who has been struggling financially since her divorce two years ago. In still another recent session in U.S. Bankruptcy Court in Cleveland, a couple earning $27,600 a year tries to explain why they owe $130,000 to 89 creditors.

The same couple had declared bankruptcy and wiped out their debts once before, in 1989.

These four people are among the growing ranks of debtors turning to the nation's bankruptcy system when they find their finances desperately tangled. Over the past 10 years, bankruptcies nationwide doubled from 679,461 to 1.32 million, with $40 billion in debt forgiven in 1999 alone.

In the last seven years - the amount of time that must pass between filings - roughly one in 30 adults in Greater Cleveland, and one in 25 across the nation, declared bankruptcy.

Last year in Greater Cleveland, 26,297 people filed for bankruptcy. An estimated 8 percent were so-called "serial filers," like the couple with 89 creditors.

Just about everyone familiar with the system agrees those numbers are too high, mainly because the process as it now stands allows debtors, with little consequence, to simply swear an oath that they can't pay their bills.

This is likely to change, however, as Congress is considering the first changes to the U.S. Bankruptcy Code since Jimmy Carter was president.

Currently under consideration are separate bills in the House and the Senate that would radically shift the laws from favoring consumers to favoring creditors by making it harder for people to wipe the slate clean.

Here are the major changes:

Debtors would be required to pass a "means test" to prove hardship. Currently, little documentation is required.

Bill collectors, such as those representing payday lenders, will be able to call your boss all day and you all night. Under existing law, no bill collector is allowed to call your home after 10 p.m. or discuss your debt with anyone but you. They must stop calling you at work if you ask.

Home exemptions ranging from $100,000 to $250,000 would be allowed, though states could set their own ceilings if the debtor has lived in the home for two years.

"Car-stripping," which allows debtors to pay a lender the book value of a car instead of the amount owed, would be prohibited. Instead, debtors would have to repay car loans and other secured debt in full before credit cards are paid.

Credit card companies would have to provide a generic example on monthly statements of how much time it would take to pay off a balance making only minimum payments. They also would have to provide a toll-free number for consumers to get specific payoff calculations for their own accounts. No such disclosure is currently required.

"This is the first major rewrite in a generation. This is significant legislation," said Sam Gerdano, executive director of the American Bankruptcy Institute, an independent research organization in Alexandria, Va.

Too much credit

But the reform bill, which currently is stalled in Congress, swirls in controversy.

Critics argue the reform bill doesn't address one of the biggest causes of the bankruptcy crisis: Americans can get too much credit too easily. Unemployed people, children and even dogs are routinely offered credit lines of $50,000 or more.

Supporters say the reform doesn't go far enough, largely because wealthy filers can keep their multimillion-dollar homes, and because the law would give priority to repaying car loans before credit cards.

One powerful critic, Sen. Paul Wellstone of Minnesota, used arcane rules to stall the bill in the upper house, protesting the lack of controls on "reckless lending" by credit card companies.

Even observers in the middle, such as the National Association of Bankruptcy Trustees, blame skyrocketing bankruptcies largely on creditors' relaxed standards.

"People are just using credit cards too much when they shouldn't have them," said 40-year bankruptcy Trustee Saul Eisen, the nation's longest-serving, who sees more than 500 filers a year in Cleveland. "It's very rare that you get a bankruptcy petition with just one credit card. It's always several."

Bankruptcies escalated after two events in 1978: The code was revised to allow debtors to keep houses and cars, and the Supreme Court deregulated credit card interest rates. By 1982, most states had relaxed or repealed their interest rate caps, making it more profitable than ever for credit card companies to solicit customers all across the country, particularly lower-income people who are charged higher rates.

"These companies have dug lower and lower to bring on more customers," says Maureen Thompson, spokeswoman for the National Association of Consumer Bankruptcy Attorneys in Washington, D.C. "The truth is that high-risk lending is high-profit lending."

Meanwhile, "pre-approved credit" mailings grew from 1 billion nationally in 1991 to 3 billion in 1997. The typical household received 41 pre-approved credit offers that year, adding up to an average of $243,000 in potential credit card debt per household. It's likely that few households took on that much debt, but outstanding credit card debt nationwide doubled from 1993 to 1997, to $422 billion.

Despite that increase, William Binzel, vice president for public affairs for MasterCard International, said it's ridiculous to blame creditors when consumers can't manage their money.

"Should a consumer apply for every credit card offer they get? No, no more than they should run out for a hamburger and fries every time they hear a fast-food ad," Binzel said. "If creditors are responsible for bankruptcies, then restaurants are responsible for obesity."

Catherine Pulley of the American Bankers Association said credit card advertisements and mailings are welcomed by most consumers, and restricting them "would hurt the majority of Americans who like having a choice."

Beyond those broad objections, bankruptcy experts say the bill fails to address several specific concerns.

The 'means test'

Under this provision, Chapter 7 protection - where debt is wiped out - would be refused if the trustee determines a filer can afford to pay either 25 percent of her unsecured debts or up to $250 a month over five years. Instead, she'll have to file under Chapter 13, which requires debtors to pay off a portion of their bills - often 30 percent to 50 percent. The house and car are generally protected.

Critics say this will catch an insignificant number of debtors. Only 3.5 percent of filers have any ability to repay debts, according to the American Bankruptcy Institute.

Still, Pulley said, that number represents 10 percent of debts that are written off. "That's $4 billion, and that's a big chunk of the American economy," she said.

Cleveland lawyer Alan Hochheiser, who represents national creditors including Ford Motor Credit in Detroit for Weltman, Weinberg & Reis, says the test would be difficult to enforce. Monthly expense guidelines, approved by the Internal Revenue Service, put caps on items such as rent and a car payment.

"What if a family of four says it costs them $600 a month for groceries and they're told, No, you can get by on $500?'" Hochheiser asked. "People will be expected to prove their expenses. Who has 12 months' worth of grocery receipts lying around?"

Hochheiser said both trustees and creditors will find the process a waste of time - even among Chapter 13 filers, two-thirds fail to finish their repayment plans. "Creditors are going to say, This isn't worth it. How can we justify spending all of these hundreds of dollars in attorney fees to get only $500, if we get paid at all?'"

Bankruptcy filers whose incomes are below the national median - about $54,000 for a family of four - are supposed to be exempt from the means test. But Elizabeth Warren, a professor at Harvard Law School who specializes in bankruptcy and consumer debt issues, noted the exemption is not automatic and said the filer could still be required to prove hardship.

Consumer advocates say the law will make the whole process more time-exhausting and cost already-strapped consumers even more in attorney fees. In the Cleveland area, legal fees typically run between $500 to $700 for Chapter 7 and about $1,000 for Chapter 13.

"We're going to create a group of people who can't afford to go bankrupt," Warren said. "They're going to have to keep fighting off bill collectors for the rest of their lives."

Home exemption

This provision generally would allow debtors to keep their homes, although Congress is still debating a home value cap ranging from $100,000 to $250,000. However, the bill would allow states to revert to their own ceiling.

Five states - Texas, Florida, Iowa, Kansas and South Dakota - have no cap. That means a person could go bankrupt and erase all debt but keep his paid-off, $2 million home as long as he has lived there for two years. Ohio has a $5,000 cap.

Advocates of this provision, such as Sen. Kay Bailey Hutchison, Republican of Texas, say the exemptions are needed to prevent farmers and ranchers from losing their livelihoods.

But Thompson of the bankruptcy attorneys group said lawmakers' main goal should be to curb abuse. President Clinton has threatened to veto the bill mainly because of this provision.

No 'car-stripping'

Current bankruptcy law generally allows a debtor to keep a car he owes money on if he pays the bank the current book value of the car. So someone could owe $15,000 on a 1997 car, but pay only the $5,000 that it's worth.

Auto lenders such as GMAC and Ford Motor Credit successfully lobbied for a provision requiring bankruptcy filers to pay secured debts in full before paying credit card companies.

According to the National Association of Chapter Thirteen Trustees, the auto provision would push about 20 percent of Chapter 13 filers into Chapter 7, meaning credit card companies would collect nothing.

As a result, many credit card companies are only reluctant supporters of pending reform. American Express spokesman Mike O'Neill said the company favors repayment of debts, but said the new bill "has not been one of the big items we've been pushing for."

Disclosure by creditors

A compromise, for now, will require credit card companies to include an example of total debt payoff over time - for example, it would take 34 years to pay off a $2,500 balance with minimum payments - and offer a toll-free number that consumers can call for exact calculations.

Consumer advocates want the bill to force full disclosure on monthly statements, rather than just an example, so that consumers don't take on so much debt in the first place. This would be similar to Truth-in-Lending Statements required for mortgages.

Pulley of the American Bankers Association said it would be expensive to require creditors to calculate individualized information every month.

"The issue isn't a bigger font type or an 800 number. It's making sure consumers are educated that a credit card is a loan," she said. "There is already so much information out there on financial literacy, from the Internet, banks, libraries ... Companies shouldn't have to print it on statements every month."

Binzel said fewer than 5 percent of consumers make just minimum payments. The nonprofit American Consumer Counseling in Boston puts the figure at 25 percent of all people, and half of credit card customers.

Calls from bill collectors

This provision would tweak the two-decade-old Fair Debt Collection Act to exempt bill collectors from this law if they are collecting on a bounced check.

"Now they'll be able to call your boss and try to get you fired," said Warren of Harvard. "They could call your neighbors, and call you at midnight. You shouldn't be allowed to talk about personal matters with someone's boss and try to get them in trouble because their check bounced. These are basic rules of fair play."

The provision was pushed largely by the payday loan industry, which lends money against a person's next paycheck. The customer writes a check in advance, but it won't be deposited until the next payday. The loans carry interest rates equivalent to 400 percent a year in Ohio.

This provision could be used by anyone receiving a bad check, such as a grocery store, as long as the matter is turned over to a collection agency.

Financial counseling

This is about the only aspect of the Bankruptcy Reform bill that everyone agrees with. The provision would require people to consult with a credit counseling service, such as the nonprofit Consumer Credit Counseling of Northeast Ohio, before they could declare bankruptcy.

The aim is to help consumers develop a monthly budget, look at their spending habits and help determine whether their debts can be repaid so bankruptcy can be avoided. Ongoing education would be required even if bankruptcy is filed.

Donna Neylon of Cleveland says financial counseling is what kept her from declaring bankruptcy in 1997. The 26-year-old racked up $8,000 in debts after she grew accustomed to charging restaurant tabs, movie tickets and doctor's visits. Soon she had trouble making the minimum payments with her $11-an-hour job as a social worker.

"It's so easy when you want something, these companies give you these cards and say, Here, have this and pay for it later,'" said Neylon, who said the sessions with Consumer Credit Counseling in Cleveland helped her stick to a budget that included repaying her bills. The last of her debts will be repaid this month.

The House passed a version of bankruptcy reform last summer; the Senate passed another in February. Now, the bill is stalled in political wrangling over bizarre, barely relevant disputes such as whether debtors should be forgiven judgments if they caused damage during an abortion clinic protest.

Passage of the bill just might wait till the next congressional session. Only two dozen days of work remain before Congress adjourns for fall election campaigning. In that time, a dozen major appropriations bills must be passed to keep the government running past Sept. 30.

"We worked on it last year; we worked on it this year. If we have to, we'll work on it next year," said Pulley, of the bankers association. "Bankruptcy is a very big issue."

GRAPHIC: PLAIN DEALER PIE CHARTS GRAPHIC; PLAIN DEALER LINE CHART GRAPHIC; PHOTO BY: JAMES A. ROSS / PLAIN DEALER PHOTOGRAPHER; Donna Neylon, asocial worker at University Hospitals in Cleveland, was heavily in debt a few years ago because of $8,000 in credit card debt and medical bills. She was on the verge of filing for bankruptcy when she sought credit counseling. The last of her debts will be repaid this month.

LOAD-DATE: July 3, 2000