The Problem with Using Bankruptcy as a Tool in the Campaign Finance Reform Crusade

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

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It is a shame that Time Magazine has chosen to use an important issue such as bankruptcy reform as a pawn in its larger agenda of advancing the case for campaign finance reform. See Donald L. Barlett and James B. Steele, "Soaked by Congress" (May 15, 2000). By subordinating bankruptcy reform to this larger agenda, Time has apparently decided that it is appropriate to obscure important facts, engage in shoddy research, and draw dubious conclusions from its fact collecting. In fact, it appears that the authors have simply invented some fictitious provisions of the bill to advance their agenda. While bankruptcy law and bankruptcy reform may seem trivial compared to "important" issues such as campaign finance reform, for the millions of debtors, creditors, and consumers affected daily by the bankruptcy system, the issue hardly seems trivial. This must be counted as a lost opportunity to inform the public about an important issue that is often overlooked in the major media.

This brief commentary will not attempt a point-by-point critique of the article. Nor is this the time to rehash all the substantive arguments for and against bankruptcy reform generally. I will simply point out some of the major biases, obfuscations, and factual errors in the article. These are simply some of the more egregious examples of the lesser biases and errors that run throughout the article.

1. A subheading on the article indicates that this is "Second in a series of Investigative Reports on campaign finance." As this subheading promises, this article is an advocacy article in favor of campaign finance reform, not a dispassionate piece of news reportage on the issue of bankruptcy reform. The thesis is that campaign finance reform is necessary, and bankruptcy reform is offered as evidence to support the case. As an advocacy piece, rather than reportage, the authors apparently feel free to take liberties to shade facts, obscure contradictions, omit adverse evidence, and ignore nuance if necessary to make their point. Mischaracterizing bankruptcy reform is simply a means to advance the larger end of achieving campaign finance reform. It is disappointing that a respected newsmagazine such as Time would so blatantly sell out its journalistic integrity to advance a particular political agenda. It is even more disappointing that Time magazine would be so willing to use an issue as important as bankruptcy reform, one that directly and indirectly touches the lives of every American, as a pawn to further this agenda.

2. It's not even clear the article proves the point the authors seek to make, namely that the bill is the result of financial influence wielded by credit card companies. The article has two basic parts. The first part criticizes the means-testing and anti-fraud provisions of the bill as being too harsh. The second part criticizes the inability to come up with sensible limitations on homestead exemptions as being too lenient. Obviously these points are internally contradictory. To the extent that large homestead exemptions enable individuals to protect assets from creditors, unsecured creditors such as credit card issuers would clearly be in favor of limiting those exemptions. The fact that they have not been able to do so creates a clear contradiction between the first part of the article and the second part. The authors simply finesse this contradiction in one transition paragraph buried in the middle of the article. They also ignore a host of other provisions in the bill that run counter to the interests of credit card companies, such as the anti-stripdown provisions for secured creditors and heightened protections for child and spousal support.

Indeed, the article is almost humorously contradictory—the bill goes too far to prevent abuse, yet it doesn't go far enough to prevent abuse. It is, of course, a legitimate criticism of Congress if they don't close the homestead exemption loophole, and a criticism that I would heartily endorse. But it doesn't seem very logical to criticize Congress for going too far yet not far enough. More fundamentally, no explanation is provided for why unsecured creditors have suffered defeats on so many important issues. Ditto for Judge Cristol's observation on exemptions — when Senator Grassley offered to put pensions on the block there was a huge uproar. It seems like the principled position would be to favor elimination of all abuses by high-income and fraudulent debtors, and not just pick and choose among different abuses.

3. It makes no mention of the polls consistently showing 70% approval for some type of bankruptcy reform. It doesn't mention the overwhelming sizes of the bipartisan majorities supporting the bill in both houses. It doesn't mention the bipartisan level of support for the bill, implying that it is a Republican plot. It doesn't mention the members of the Congressional Black Caucus and other liberals who voted in support of the bill (or are they tools of the consumer credit industry also?). Widespread popular support and bipartisan political support does not prove anything about the merits of the bill generally or about specific details in the bill. What it does suggest, however, is that support for bankruptcy reform is not just manufactured by lobbyist money and backroom deals. Instead, it suggests that there is good-faith support for the bill among many people who are concerned (rightly or wrongly) about the current state of the bankruptcy system. If the article were not so concerned about advancing the campaign finance reform agenda then it perhaps it could have engaged in a more enlightening discussion of the bill's substance.

4. The central thesis of the article is that votes on the bankruptcy reform bill were bought with large financial contributions. The facts presented by Time magazine simply do not support this conclusion. Time implies that contributions by the consumer credit industry must have been made on the basis of influencing the bankruptcy reform bill. This implication is not justified. Bankruptcy reform is an important issue and bankruptcy reform is at the center of the universe for bankruptcy professionals. But perspective is needed. It is doubtful that bankruptcy reform holds center-stage for the banking industry. Recent years have brought a series of gigantically important legislative disputes on various issues of banking legislation. During the past year, for instance, Congress passed the Glass-Stegall repeal act, the most fundamental change in the American banking system since the New Deal. Congress has also been locked in ongoing debates over the Community Reinvestment Act. While bankruptcy is important, a realistic view of the world suggests that these other issues of banking regulation dwarf it.

The banking industry has been very active on Capitol Hill. But it would be myopic to believe that this is animated solely, or even primarily, by the bankruptcy reform legislation. Indeed, as a recent study by ABI observes, the real money has been flowing to members of the respective House and Senate Banking Committees that control these other piece of legislation, not the Judiciary Committees that control bankruptcy reform. Thus, ABI finds only a loose correlation between financial contributions and support for the bankruptcy reform bill. According to ABI, of the top 10 House recipients of consumer credit contributions, only one (Rep. Bill McCollum, R-FL) even serves on the House Judiciary Committee — and he also serves on the House Banking Committee. The top 10 list in the House also includes 5 Democrats. Of Democrats, the largest recipient was Rep. John Lafalce (D-NY), who received $94,522 from consumer creditor groups. Yet he voted against H.R. 833 and has been an outspoken critic of the bankruptcy reform bill. ABI found a similar absence of cause and effect in the Senate. In short, if the consumer credit industry thought that it was buying votes on the bankruptcy bill, then it should demand a refund.

5. Why the article moves from advocating campaign finance reform to critiquing bankruptcy reform things simply get embarrassing for the authors. Does the article even understand the most basic elements of the legislation? Leaving aside difficult nuances and complications in the legislation, the authors seem to be clueless about such basic provisions as how the means-test would operate or the rules governing nondischargeability. The article is riven with ambiguities, errors, and confusions that indicate that the authors are not even familiar with the central provisions of the legislation. Indeed, it appears that they actually invented some provisions so as to advance their case. Again the point here is not whether the bill is good or bad; the point is that the article simply does not understand the bill as written.

First, they lack a basic understanding of the bill. Although their discussion of the bill is vague and difficult to follow, as far as I can tell, they seem to believe that means-testing will prohibit people from filing bankruptcy completely, not just forcing them to go chapter 13. For instance, they quote one lawyer who implies that means-testing would prohibit discharge. Nor do they ever explain the actual means-testing provisions, most notably the requirement that income exceed the national (or regional) median or that they can pay the specified percentage of their bills. Nor do they discuss the formula for determining the budgeted amount of expenditures to be deducted for purposes of applying the means-test. It is impossible to tell whether any of those discussed in the article would actually be prohibited from filing chapter 7 as a result of means-testing. Inferring from the information given, it appears that all them would be unaffected by the means-testing provisions of the bills, either because they lack sufficient income or repayment ability, or because they would be eligible under the undue hardship exception. The authors never discuss the actual means-testing formula, suggesting that they are unaware that it even exists. Similarly, they fail to mention that nondischargeability of credit card debts still only applies to purchases for "luxury" goods. Opinions differ about the wisdom and costs of applying these provisions. But it is unconscionable to imply that they would actually apply and prohibit discharge to those to whom they simply would not affect.

Ironically, it appears that the only person described in the story who would be substantively affected by the terms of the current bill would be James Villa, who is currently using Florida's unlimited homestead exemption to shield assets from his creditors. Such eve of bankruptcy relocations would be prohibited even under the current homestead regulations in the bills.

Similar omissions and half-truths characterize their discussion of child support payments and the like. The article discusses divorce but makes no mention of the provisions for child support, alimony, and property settlements that are actually in the bill. Some have argued that these provisions don't go far enough, others have argued that some of them go too far. What is unarguable is that they do in fact exist and are relevant to the debate.

Second, it appears that they actually invented some provisions of the bill that don't even exist. Most amazing is the statement that medical expenses incurred in the 90-day period before bankruptcy "could never be written off, no matter how poor the family." This provision does not exist.

6. It is easy to demagogue credit card companies and so-called payday lenders. It is more difficult to consider whether individuals will really be made better off by being driven to alternative forms of credit, such as pawn shops, rent-to-owns, retail store credit, or loan sharks. Even if it is concluded that there should be regulation of these lending practices, the article provides no explanation as to why these difficult issues should be jammed into the bankruptcy reform debate, rather than being investigated on their own independent merits.

7. The authors believe that isolated anecdotes from "those directly involved in the system" (page 70) are better evidence of what is really happening than actual financial studies. It doesn't appear that they interviewed any creditor's lawyers in this comprehensive "research." Congressional testimony and my personal conversations with creditors' lawyers portray a very different picture than that presented in the article. This isn't to say either side's perceptions are right or wrong. It is simply to observe that different sides have different perspectives and that such interviews are unlikely to produce "truth" or "falsity." Indeed, the unreliability of such personal testimonials is exactly why there have been numerous attempts to quantify the data rather than relying on these subjective opinions.

Overall, this article is an unfortunate missed opportunity to generate informed reportage and public discussion on an issue of public importance that is too often ignored by the major media. It is advocacy reportage of the worst kind, using an important issue like bankruptcy reform to advance the reporters' and the magazine's agenda for campaign finance reform. Important issues such bankruptcy reform should not be hijacked by inside-the-beltway squabbles over campaign finance reform.

Bankruptcy reform is a serious issue. There are arguments both for and against it. But these debates should be resolved on the substantive merits of the legislation, and not held hostage to other agendas that lead to mischaracterization and obfuscation.

Response(s):

The so called "contradictions" in the bankruptcy bill aren't very confusing. Provisions that help rich debtors who make campaign contributions themselves to counter credit card company interests, despite the fact that the practices are clearly abusive, like the unlimited homestead exemptions and provisions in the means test that exclude from a debtor's ability to pay such necessities as private school tutition for the debtor's children when free public education is universally available, and secured debt payments for a debtor's mortgaged to the hilt $500,000 residence and $30,000 BMW, are treated gingerly. Provisions that ban practices that are at best marginally abusive, but affect people who typically can't afford to make campaign contributions, such as non-dischargability of modest cash advances taken out a couple months before bankruptcy even if used for necessities, permitting the continuation of evictions of tenants who start paying their rent on time once they have filed for bankruptcy, and bans on cram downs of several year old car loans, are cracked down on ruthlessly. Efforts to disfavor the debts of abusive lenders who do make campaign contributions, like "time required to make payment in full disclosures," limitations on payday loans and car title loans that have 300% APRs and collection rights far beyond those available to ordinary unsecured consumer lenders, and limitations on creditors engaged in unfair debt collection practices are ignored or watered down. Mr. Hatch would even have legitimatized the use of abusive collection pratices to collect bad checks. Certainly, there is nothing wrong with tightening loopholes in the system that allow people with a true ability to pay to do so. But, the point is that the abuses of those who are better off (be they creditors or debtors) are treated lightly, while the marginal and not particularly costly abuses of the poor are hit hard.

2. From J. Michael Deasy, 23 May 2000

Professor Zywicki's commentary on the Time magazine article is fair on several points, including statements without supporting evidence, inconsistencies and pursuit of agendas other than bankruptcy reform. However, doesn't much of his critique also apply to the authors of the two bills, Congress? Using his words, would it be fair to describe Congressional action on bankruptcy reform as follows:

1. "[Committee hearings and reports were] not a dispassionate [investigation] on the issue of bankruptcy reform."

2. "[Congressmen and Senators] apparently feel free to take liberties to shade facts, obscure contradictions, omit adverse evidence, and ignore nuance, if necessary to make their point. Mischaracterizing bankruptcy reform is simply a means to advance [an unstated agenda]."

3. "Indeed, the [bill] is almost humorously contradictory."

4. "Widespread popular support and bipartisan political support does not prove anything about the merits of the bill generally or about specific details in the bill." [no editing necessary here.]

5. "Does the [average congressman or senator] even understand the most basic elements of the legislation? Leaving aside difficult nuances and complications in the legislation, the [average congressman and senator] seem to be clueless about such basic provisions as how the means-test would operate or the rules governing nondischargeability. The [bill] is riven with ambiguities, errors, and confusions that indicate that [congressmen and senators] are not even familiar with the central provisions of the legislation."

This bill was drafted, amended and, to date, shawdow conferenced without inviting or truly considering input from conflicting constituencies. Do either of the committee reports contain adequate evidence of either a crisis that is costing consumers more than is reasonable to live in a risk taking capitalistic economy or that the proposed solutions will save consumers money in lower interest rates or prices from merchants?

The Time article may not be a model of scholarly journalism, but it appears no less carefully researched or disingenuous than much of what has occurred in Congress.

3. From Roger I. Brent, 23 May 2000

The Time article says the course of the bankruptcy legislation has been influenced by large monetary contributions to politicians. This is as surpising as seeing the sun rise at dawn. The bankruptcy legislation is reckless and a national disgrace. It will destroy people instead of giving them the chance to start over. This legislation is about doing business, not about balancing the bankruptcy system or fairness.

4. From Peter Califano, 23 May 2000

Thank you for some clear-headed thinking and comments on this important issue.

The Time article was a laughable partisan attack on the proposed bankruptcy reform under the guise of objective journalism. Wow! No one here is saying that individuals that need debt relief should not get it (I see them in the pro bono debtor work that I do here in San Francisco). This is not a Newt Gingrich-inspired plot (read these words slowly....."veto-proof bipartisan bill"). And the need for reform was not dreamed up by MasterCard and Visa (hello --- consumer bankruptcy filings are lingering at record levels and the hopes of reorganizing under Chapter 11 happens almost as often as hitting a Randy Johnson fastball --- slim and almost none).

Seriously. Its okay to make those who can enter into repayment plans to do so. Its also okay to streamline Chapter 11 so maybe we get more reorganized debtors. And its really okay to have a bankruptcy system that is workable and fair to debtors and creditors. Prof. Zywicki's article reminds us of the bigger picture -- good job.

5. From Andrew Oh-Willeke, 24 May 2000

The Time article does have inaccuracies regarding specific provisions of the bill (they aren't lawyers), but does get the gist of the problem. The so called internal contradictions alleged are easily explained. Provisions which attack clear abuses by debtors who can afford to make campaign contributions to counter credit industry lobbies are softened, as in, for example, an opt out homestead exemption limit and provisions in the means test which consider expenses such a private school tuition, and all secured debt payments on a home and car even if that home is a $500,000 heavily mortgaged estate and the car is a $50,000 Mercedes, to be necessary. Provisions which crack down on pratices that are marginal abuses, if they are abuses at all, of debtors who typically can't afford to make campaign contributions like the non-dischargability of cash advances taken out two months before a bankruptcy to purchase necessities, a ban on cram downs of several year old car loans, and permitting landlords to continue the evictions of tenants who pay post-petition rent, are ruthlessly insisted upon. And provisions which would restrain creditors who exploit debtors who can't make campaign contributions, such as creditors who violate the fair debt collection practices act, payday and title loan creditors who charge 300% APRs and use enforcement mechanism not available to ordinary unsecured lenders (such as collection without court process and threats of criminal penalties and bounced check fees), are shot down. Mr. Hatch would even legalize the use of abusive collection practices to collect bad checks! I don't disagree that people who have the ability to pay a significant and administratively worthwhile part of the debts out of income and assets should ahve to do so, or for that matter, that fraudulent luxury purchases made on the eve of bankruptcy should be non-dischargable, but undue credit industry influence has turned the bill into one that is off target.

6. From Ellen Berkowitz, 24 May 2000

The Time article validated my perceptions of the progress and intent of bankrupty reform in Congress--a process that so clearly illustrates the corruption of our political system that it is frightening. I am someone recently medically disabled and I will be forced to declare bankruptcy very soon. My disability income is less than half what I was earning prior to becoming disabled, and my expenses were based on my prior income. I do have extraordinary medical expenses, but the process of determining which of these fit the "means-testing" criteria will be cumbersome and no doubt very expensive in terms of legal assistance. My reduced income still exceeds the national median and may exceed the regional median (I am not clear which standard is to be used), but I will need every extra cent I have to ensure any kind of quality of life or preparation for medical emergency in the future. Nevertheless, it appears I will be forced to undergo means testing, declare Chapter 13, and make some sort of payments to creditors in spite of my greatly reduced and very precarious financial circumstances. I do not believe the means testing provision will be fair to me or others in reduced circumstances beyond their control. I believe the "reform" has been relentlessly crafted to reflect and promote the interests of big business and the wealthy in this country, as opposed to the concerns and genuine interests of the common citizen and consumer. This is no surprise considering the agenda of the Republicans in Congress. I am deeply disappointed in this legislation and the lack of a public outcry or astute press coverage of it. Congratulations to Time for enlightening us as to what is really going on with this legislation.

7. From Eric D. Wolf, 25 May 2000

The proposed Bankruptcy Reform Act of 2000 is but another example of legislation sponsored by special interest groups. If the Congress is really bent on reducing the number of bankruptcy cases, then this could be easily accomplished - in a one stroke - by striking the state "opt-out" provision from the federal exemptions. Debtors would be reluctant to rush into bankruptcy if they risked loss of their nonexempt property in order to discharge their debts. Mandating a uniform exemption scheme would also have the salutary effect of discouraging abuses of the system, while preserving bankrukptcy relief for those who really need it; and, at the same time, encouraging the voluntary repayment of debts rather than through some coersive means testing formula.

Unhappily, such a simple, straight-forward approach to the problem is not likely to be considered - even by the proponents of the so-called "reform" legislation, who have received the largest contributions from the special interest lobbyists. Indeed, under the proposed new law - other than Iowa farmers - only the most affluent debtors will be able to afford to file bankruptcy!

8. From Caterina Pryde, 27 May 2000

I do not find anything even vaguely humerous about this article. I believe you have grossly missed the important reality of the situation: many people, especially single mothers and those struck down by illnesses, are in dire need of bankruptcy assistance, and the proposed reforms would hurt or eliminate their ability to use those laws. Laws that were intended to help them. There is nothing harder than knowing you have become ill, that you cannot make the next mortgage payment, that there is nothing left in the bank for next month. Not many things are as shameful as having to ask your mother for money to buy food, to pay the phone bill so that recruiters and companies can still contact you, in hopes that you can gain a position. Not many things are as wearying, as time-consuming, or as debilitating than daily fights with creditors and their representatives, who badger and hassle, plotting impossible ideas of miracle money, and demanding and threatening. To be goaded even after a proposed agreement has been reached. To be quickly followed up with another call from another representative of the same company, and repeat the same process, because the first agent didn't have all the proper authorities, because the second agent "just needed a few more pieces of information" when the call is really simply an attempt to get you to pay more. To sit in shock as the credit card company that so solicitously garnered your attention, that you faithfully paid well for years, raises your interest rate 4 times within 6 months, so that your interest, monthly accumulation on that card alone, is higher than any other bill but your mortgage. And to add insult, they also charge you overlimit fees and late fees, even though you are making multiple payments, and then charge you interest on those! To watch your mortgage company install "force=place" insurance on your house when there is a 2 day gap between your switching policies. So your mortgage goes up $400 p/m. Because, after all, they can't be sure you'll ever have insurance again, and they charge you for not just the current year's insurance, but NEXT year's as well!

The reality is, if you are not very EXTREMELY well-insured, if you are not well-cushioned, and if you are suddenly caught in difficult circumstances- such as a divorce, a major illness, unemployment- and frequently those circumstances combine so a person suffers from more than one concurrently, you are likely to be in a terrible situation. There are ways to improve it. National health insurance would stop some of this. National laws on the credit card companies, on collections, and enforcement of existing laws would help.

But making it more difficult for people in trouble to file bankruptcy would not. A very few, simple touchstones can easily determine who is in need of help, and who is cheating. Credit companies do not need assistance by the law; most of them get into the situation by raising interest rates when people run into difficulties by such enormous percentages that what was once the minimum payment is now 1/4 or 1/5 of the minimum payment. They also refuse to give cards to people who have no other credit cards, and then give cards to people with several, carrying existing debt. Most patrons would be happy to continue making regular payments and pay their debt in full if the credit companies 1) did not suddenly raise their interest by staggering rates (One example, ARIA, will raise a platinum member from 2.9 to 12.9 upon the 1st payment that is 30 days late, and to 22.9 if the payer is 30 days late within the next 12 months. The first date counts from the date of the invoice, before it has even been mailed. How fast is your mail service?) and 2) would grant short term dispensations during periods of illness, setback, and/or unemployment or perhaps a period of "good faith" payments that were below minimum, but consistent and on time.

There are a few good companies out there. But they are quite few and far between. Tightening bankruptcy laws will only encourage the rapacious companies to capture more people into poor situations.

9. From Dana Wilkinson, 31 May 2000

The Time article was generally no more misleading or shaded than any discussion of complex bankruptcy issues in the popular media. Do we not all cringe when we read some newspaper article that grossly over-simplifies some provision or notion about bankruptcy? Frankly, a full, detailed explanation of the bankruptcy bill would put 99.9% of the population in a coma.

The article was also clear on the bipartisan nature of the support for the bill, which cannot be ignored. That support is inexplicable unless viewed in conjuction with the lobbying efforts and political contributions of the credit industry. It seems to me that bipartisan support proves the contention that campaign contributions are affecting votes. Where are the voices that, on other issues more in the public's consciousness, are the defenders of the poor, the ill, or the average citizen? Why would there be such overwhelming support for a bill that has such negative effect on ordinary people, unless that support is motivated by something other than an analysis of what is good for those people. Of course, not everyone who receives a contribution will toe the line, and, of course, many of those who support the bill truly believe in its provisions. However, many more are relying on the misleading and self-serving "research" provided by the credit industry, and counting on the ignorance of the average voter about these very issues.

The importance of the Time article is not whether it is up to our standards of bankruptcy knowledge, or scholarly research. The importance of the article is its potential to educate the public about an issue that has been largely overlooked by the media and the public, but which stands to negatively impact a large portion of the public. Only the light of public attention can negate influence peddling, and keep our elected representatives on the proper course--enacting laws that benefit the majority of people and protect the interests of the minority.

10. From Alan Wenokur, 11 Jul 2000

Here's another reason why credit card companies do not deserve bankruptcy "reform": In two recent cases where I represent the Chapter 7 trustee and assets were recovered, I have had to obtain a second claims bar date because most of the creditors--largely credit card companies--did not bother to file proofs of claim the first time around. In one other case, after unsuccessfully beseeching credit card companies to file claims, I wound up filing claims on behalf of those creditors under Rule 3004 to avoid returning money to the debtors.

I would love to know how much credit card companies lose out on for failure to file claims in asset cases.