Its about Time: Campaign Finance Reform Provides a Stage for the Truth about Bankruptcy Reform

Web posted and Copyright © May 22, 2000, American Bankruptcy Institute.

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After reading the recent Time magazine article "Soaked by Congress" my response can be summed up in three words: It's about time!

For more than two years, bill-sponsor Representative Gekas and literally hundreds of newspaper and magazine articles have passed demonstrably false information as if it were fact—bankruptcy costs every American family $400, 40%/30%/17% of debtors could repay their debts, $40 billion dollars of consumer debt is discharged in bankruptcy, etc. So long as it furthered the bankruptcy reform cause, no one took to the pulpit to correct the record. But, when the mainstream media finally prints something that questions bankruptcy reform, it's curious how quickly its proponents started preaching the gospel of journalistic purity and truth in reporting.

Despite the duplicity, I'll readily concede that the Time article has its flaws. The legal analysis was sketchy in places. There was some suggestion without complete substantiation. It was lopsided. And, I think we can all agree that an institution of higher learning would never publish the article. Even so, the article was the most honest and informative publication I have seen to date. Donald L. Barlett and James B. Steele deserve commendation for uncovering the truth about bankruptcy reform.

The authors' most obvious accomplishment was taking an extremely complex issue and making it accessible to the average reader. While much of the public debate about bankruptcy reform has been accessible — everyone can understand something as simple as a bankruptcy tax, even if it is a fabrication—this is the only time I can recall that a publication has tackled the big bankruptcy reform picture. And, in so doing, Barlette and Steele revealed a surprisingly strong grasp on the true mechanics of bankruptcy reform. Granted, they did not explain the mechanics of the law in the article, but, then again, none of the proponents of the legislation have done that either, so it is hardly a fault worth mentioning.

It is worth noting, however, that the Time article finally put a face on the average person who files bankruptcy. The only faces we have seen so far are the blatant abusers of the bankruptcy system. While we all know they exist, those of us in the trenches also know they are so rare enough to make the endangered species list if they were animals. Although it is not a comfortable reality, Time revealed that most people who file bankruptcy are just average folks who ran out of luck. The picture of Allen Smith (the Delaware debtor who lost his modest home because he fell behind on mortgage payments due to medical problems) spoke volumes about the profound hopelessness that is shared by the vast majority of people who file bankruptcy. Regardless how or why people get into debt, the human misery associated with financial distress should not be ignored as we search for economic solutions.

Don't get me wrong. I'm not a bleeding heart advocate for debtors. I don't earn my living representing them. To the contrary, my career has been devoted to collecting from debtors. I did it for many years as a creditor's lawyer and I do it now as a chapter 13 trustee. My job is to collect as much money from debtors as the law allows and to fight abuse. I take those dictates seriously and I am frustrated that Congress has not made a serious attempt to sharpen the tools of my trade.

In my frustration, I am pleased that Time revealed the monstrous gap between the ostensible goal of curbing bankruptcy abuse and the real life effect of the proposed bankruptcy legislation. Even though more than 96% of all chapter 7 filers will remain eligible for a discharge if bankruptcy reform becomes law, 100% of all chapter 7 filers will be subjected to the means-test and other administrative burdens. The economic and emotional toll this legislation will exact is enormous, while its results will be negligible. Such inefficiency is hardly worth writing home about, but it is worth writing in a Time article.

The ineffectiveness of the proposed legislation is also worthy of exploration. To the extent that means testing catches any abusers, Time correctly discloses that it will not necessarily result in increased collections for creditors. While bankruptcy trustees currently collect about $4 billion annually (money that probably would not have been collected outside of bankruptcy), there is little evidence that anything will change under the new legislation. In fact, Time failed to mention that VISA projects no change in the rate of consumer bankruptcy filings if bankruptcy reform becomes law. Even though bankruptcy reform is supposed to chase people into chapter 13, VISA projects that it will actually decrease chapter 13's, increase chapter 7's, and leave the total rate of consumer filings unchanged. As it happens, the National Association of Chapter Thirteen Trustees has been saying that for years.

Even so, the very prospect of increased collections is a factor. If the most optimistic projections are achieved, it will be a drop in the bucket of our nation's total revolving credit. But, even a single drop of profit is worth pursuing if the price is right. In this case a couple million dollars spent on spin-doctors, lobbyists and strategically timed campaign contributions, was a reasonable wager. While I'm not ready to jump on the campaign finance reform bandwagon nor do I think bankruptcy reform is the center of the lending industry's universe, it is foolish to ignore the role that money and spin play in the legislative process these days. And, in this particular debate, the role has been significant.

While Time generously found that most members of Congress believe in what they are doing, it appropriately profiled some of the duplicity that keeps popping up. On the one hand, solutions seem clear when the subject is allowing average Americans to walk away from their debts if they can afford to repay a couple thousand dollars. Yet, solutions are elusive if the subject is allowing the rich to shelter millions in homesteads and/or pension assets. The politicians are quick to pass judgment on consumers who incur too much debt, but slow to impose disclosures requirements on the businesses that extend the debt. Senator Grassley readily admits that he wants it to be harder and more embarrassing for the poor to file bankruptcy. Yet, Orrin Hatch thinks we need payday lenders so that the poor won't face the embarrassment of asking the boss for a cash advance. It is difficult to reconcile these inconsistencies without following the money.

In the final analysis, the things we know for sure are more important than the things we suspect. Regardless what truly motivates Congress in its rush for bankruptcy reform, it is telling that a couple of mainstream media journalists did some in-the-trenches research and concluded that "[w]hile the bill contains some genuine reforms, on balance the harm that it would do far outweighs the good." For two years now that same message has fallen on deaf ears when delivered by lawyers (both creditor and debtor), trustees, judges, and professors. But, hearing it from a magazine of general circulation has upped the ante for those who rely on public opinion for their livelihood. So, the only thing that remains to be seen is whether Congress will give Time Magazine the chance to say, "I told you so."

Response(s):

You will always be a creditor's advocate. As a chapter 13 trustee you should think also that your career is not only to prevent injustices and collect as much as you can as you always do. If that is the way you see your position as trustee you can make a lot better going back to represent creditors. That is exactly what your clients will expect from you!

As trustee you should be more balance oriented. You can also try to help in the rehabilitation process of debtors. Otherwise you may be contributing to more refilings, which won' help anyone.

Sorry to see you so frustrate, I understand your feelings.

2. From Kelli, 23 May 2000

Outrageous! A trustee thinks that an article that fabricated provisions and misrepresented the bill in its entirety was the "most honest and informative" thing she has read on the subject

The "legal anaylsis" was sketchy? Try misconstruced in order to scare average Americans about bankruptcy reform and compel them to vote for campaign finance reform this fall.

The article puts a "face on the average person who files for bankruptcy" but it fails to mention that these "average people" will not be denied the relief they need or even be forced to file under a different chapter to obtain the relief, a fact this trustee even acknowledges by admitting that 96% of filers won't be affected.

The bankruptcy bill is not perfect but it is much better now than a year ago. Embracing yellow journalism and outright dishonesty in an effort to stall or kill the bill is pathetic from anyone, but especially a trustee. The ABI had the right approach when Sam Gerdano suggested those with problems attempt constructive changes by contacting Congress and letting them know about the problems and suggest changes. That approach has worked to level out the bill in many areas. The Time article should have received an F in any University research and writing class and any law student who submitted a paper with such misrepresentations, even for politically correct reasons, should likewise be denied a diploma.

3. From Robert Crawfis, 24 May 2000

The trustee is right. The bankruptcy reform bill is being whipped by big contributions from the credit industry. Only a lousy One Per Cent of credit card debt is discharged in bankruptcy, and the industry is making absolute record profits. It is highly profitable to send out millions of unsolicited credit cards to marginally credit-worthy borrowers and then charge them 21 per cent and more for their credit. It is morally wrong to spend millions lobbying Congress for a bill that will have the result of insulting and hounding down-on-their-luck Americans who need a fresh start. It is civilized for a country to have a good, fair bankruptcy law and that's why the founding fathers put it in the Constitution. The USA got rid of debtors' prisons. Senator Grassley, the biggest moron in Congress, apparently would like to see millions of good Americans in an equivalent situation: no way out.

4. From Jose R. Carrion, 24 May 2000

Ms. Kerns wrote: "My job (as Chapter 13 Trustee) is to collect as much money from debtors as the law allows and to fight abuse." I agree.

No body can forget that the reason of the bankruptcy law is to facilitate the orderly collection from a debtor when financial distress does not allow him to pay everyone as contracted. Hence enforcing the bankruptcy law requires that each debtor pays what he should and every creditor should collect what he is entitled to. Tilting the balance to one side or the other will fail to attain the idea behind the law, its purpose. The idea that as a debtor attroney I should make sure that my client pays as little as posible, is not consistent with the purpose of the law, nor is the creditors' attorney that collect more that it had the right to collect. Each is looking at their side of their clients, not the bankruptcy law purpose. The job of a Chapter 13 Trustee is to prevent that either of them abuse of the process against the purpose of fairnes and justice of the bankruptcy law.

The problem with the new reform is that it will tilt the balance against debtors, and even against unsecured creditors. The social function of the bankruptcy law to bring order and fairnes in the collection process is not present in the reform.

The abuse of some debtors of the process has created frustrated creditors ready to invest money to destroy the bankruptcy system so that they could collect by all means, at all cost. The bad business judgment to give away money to people that never had the need or the ability to pay it back, is blamed in the debtors instead of the gready lenders. No bankruptcy reform will make a bad loan, a good one.

The reform represent an atempt by the Credit Industry Power to improve their profits. Their actions are so desperate that they do not care that some of them will be worst, instead of better, with the reform. Is like a quest to punish all debtors for their misbehavior, at all cost, regarless of the consecuences to the society and the economy. Even regarless of the fact that it will make no difference to their profits.

It is ironic that precisely the same forces which puch today the reform are the same forces that previously created the inequity that made necessary the bankruptcy law in the first place.

I agree with Ms Kern 100%. Keep the good work.