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June 26, 2000
Dear Senator:
Despite the lack of opportunity for all interested parties to review the
substance of the "negotiated" bankruptcy bill, the credit card industry and its
supporters are pushing to bring the bill up for a vote as early as this week.
What we do know about the bill from press reports strongly suggests that this
legislation will not resemble in any way and is, in fact, much harsher than the
version of the legislation that passed the Senate earlier this year.
At the outset, we want to make clear that we do not oppose bankruptcy reform.
What we do oppose is unfair and unbalanced bankruptcy reform. Throughout the
course of this debate, we, as well as many bankruptcy experts, have suggested
ways to balance accountability between working families in debt and creditors
whose solicitation and lending practices contribute to the number of
bankruptcies. That work clearly is not reflected in the bill Congress will
consider. Many of those skeptical of the lending behavior and anti-consumer
practices of the credit card industry are also skeptical of legislation that
this industry helped draft.
For the reasons listed below, we urge you to oppose the bankruptcy
reform bill and any attempt to attach the bill to another piece of legislation
already in conference.
· The bankruptcy bill will harm families. Supporters of the legislation can't have it both ways. On one hand they justify the need for reform with charges that there is wholesale abuse of the system. Yet, whenever a specific debtor is identified as someone who may be adversely affected by the new system, the proponents argue that the legislation won't affect them. So exactly who will the bill affect, if not the middle class debtors who have fallen on financially difficult times due to medical expenses, the loss of a job or a failed marriage?
Consider the Trapp family. Charles and Lisa Trapp were forced into bankruptcy because of their young daughter, Annelise's medical problems. Credit card lobbyists claim that the Trapp family would not be affected by the legislation. Yet, the reality is that the Trapp family's income would be too high to survive the means test. This is because the bill mandates averaging their previous six months' income to determine their eligibility for Chapter 7. Moreover, their allowable expenses under the IRS guidelines would be so low that they would have to fight a "presumption of abuse." In other words, according to the guidelines established by H.R. 833 and S. 625, the Trapp family would be deemed to be abusing the bankruptcy system. If challenged, the responsibility would be on them to prove that their filing was legitimate. The bill would also give creditors a number of new methods for coercing ill-advised reaffirmation agreements. If the Trapps amass more medical debts that they cannot pay, the legislation would bar them from seeking refuge in a Chapter 13 filing for a long time. Many of these provisions would increase their fees and make it harder for them to afford an attorney.
If the bill truly did not affect the nearly half million families each year who declare bankruptcy because of medical expenses, or those who go bankrupt because of divorce, job loss, or those who simply can't make ends meet through no fault of their own, then many opponents of the legislation would rethink their opposition to the bill.
· The credit card disclosure provision is worthless. The so-called "massive new consumer protections" in the bill actually provide consumers with virtually no protections or useful information. The credit industry should be able to provide consumers with better information than merely a general statement that it will cost more and take longer to pay off a balance at the minimum rate. Such a disclosure is a poor substitute for telling consumers the plain truth right on the billing statement about exactly how long it will take to pay off their balances at the minimum rate and how much it will cost them in interest and fees. Even worse, taxpayers will end up footing the bill for a toll-free number that consumers will have to call to get limited information, because so-called "small" banks, with assets less than $250 million, complained that it was too burdensome to answer their own customers questions on a toll-free line. It seems that consumers across the country can afford to set up their own low-cost "800" numbers, but their banks cannot. Not surprisingly, many of the same institutions that are complaining about telling their customers how much their credit really costs somehow manage to collect, use and sell personal data about those same customers.
· Nothing in the legislation requires that any savings be passed on to consumers if the bill passes. One of the most repeated arguments in favor of the legislation is that bankruptcy costs each American family somewhere between $400 and $500 per year. The clear implication: if the legislation passes, each American family will have an additional $400 to $500 in their wallet due to reduced costs associated with bankruptcy. It is time for Congress to call the credit industry's bluff. One way to ensure that consumers actually benefit from the legislation would be to mandate that every dollar in savings be passed onto consumers in the way of credit card interest rate reductions or direct rebates. The truth is that no consumer should expect to see any real benefit if the legislation passes or a $500 rebate.
· Congress has been misled about the need for radical bankruptcy reform. Every major argument used to support the need for bankruptcy legislation has been refuted. Most observers would agree that the driving force behind the legislation was a seemingly inexplicable rise in bankruptcies during a time of economic prosperity. However, recent studies have found that the number of bankruptcies has plummeted over the last two years by more than 15 percent and are now lower than when reform legislation was first introduced. Supporters of the legislation also claimed that as many as 25 percent of those debtors filing for bankruptcy are able to repay their debts. Those studies, funded by the credit industry, have been discredited by the GAO and CBO. An independent study found that just 3.6 percent of debtors actually could afford to repay.
· Congress should help families rather than rewarding an industry that has a history of abusing consumers. Why are supporters of this legislation so intent on rewarding an industry that has a track record of reckless lending and anti-consumer practices, including deceptively changing terms, hiding fees, raising rates, shortening grace periods, and tacking on draconian penalties? Take the case of Providian Bank, one of the largest credit card banks in the country that was just settled last week by the state of Connecticut, and is about to settle in California. Those states charged that Providian misled customers about rates and fees, changed rates without notice, and delayed posting payments to accounts to generate late fees. Providian simply refused to tell consumers what rate they would pay on transferred credit card balances. According to press reports, part of the settlement included an agreement by Providian to comply with existing laws. Why does it take the threat of legal action to get a credit card company to agree to obey the law? The $300 million Providian paid to settle fraud charges of questionable payment and marketing practices topped the $265 million Sears Roebuck agreed to pay three years ago for coercing improper reaffirmation agreements from customers who had declared bankruptcy. Nothing in the bill addresses these anti-consumer practices. Congress should look at reigning in abusive tactics and predatory schemes, rather than giving the credit industry a free ride.
· Supporters of radical bankruptcy reform have attempted to marginalize opponents by labeling through name-calling. During a floor statement on the legislation, Senator Grassley referred to those opposed to the bankruptcy bill as "fringe radicals." That group of "fringe radicals" includes the Leadership Conference on Civil Rights, many religious organizations, the National Women's Law Center, Consumers Union, and the Consumer Federation of America. The AARP opposes some of the provisions in the bill. The group also includes unions, like the AFL-CIO. The New York Times, the Los Angeles Times, the Washington Post, the Boston Globe and many newspapers from around the country have also opposed the current bankruptcy legislation, as well as columnists such as David Broder and Jane Bryant Quinn. In addition, bankruptcy experts, including law professors, scholars, and judges have all expressed serious concerns about the proposed changes to the bankruptcy code. Finally, the bipartisan Bankruptcy Review Commission that Congress itself created concluded that radical changes to the bankruptcy laws of this country were not needed. Again, most of the organizations opposed to this bankruptcy bill would not be opposed to a more balanced and fair reform effort.
· Don't get duped by the fine print. Taking a cue from the credit card industry, the drafters buried important provisions in the fine print of this massive bill. For example, one provision that was slipped in would have allowed creditors to raid retirement savings, while another would have given a communications company special treatment in the re-sale of FCC spectrum licenses. Once these provisions were discovered and subjected to the disinfectant of sunshine, the proponents have had to make significant changes. But, no sooner is one loophole closed than another opens. We now learn about a proposed change that would gut the Fair Debt Collection Practices Act by allowing debt collectors to harass some consumers, invade their privacy, make false or deceptive representations and effectively prevent these consumers from getting legal help to fight such abusive collection tactics. There is nothing in current law that prevents the collection of a valid debt; it merely prohibits abusive collection practices. What else is in the bill the American public and members of Congress don't know about? Lawmakers should cast a wary eye on this bill once it is made available and undertake a thorough review to ensure that the bill does what its proponents say it does.
· The bill intentionally preserves one of the major bankruptcy abuses that higher-income debtors use to exploit the system. The bill will still allow affluent debtors to shield their assets in multimillion-dollar homes in some states. Lower and moderate-income debtors, on the other hand, will find it harder to get a financial fresh start. It is ironic that some proponents of the legislation who talk mightily about cracking down on abuse nonetheless refuse to close the "homestead exemption," the loophole that allows higher-income debtors to shield their assets from creditors. Indeed, the states that allow an unlimited homestead, like Florida and Texas, are widely considered to be havens for wealthy debtors seeking to escape their creditors. The "dead beats" portrayed in advertisements placed by the proponents of the bill (those ads showing supposed bankruptcy filers on the beach or in yachts) are perhaps more representative of those able to avoid their debts by using the homestead exemption -- and not an accurate example of the majority of those filing for bankruptcy because of medical expenses, divorce, job loss, or because they were a victim of a predatory loan.
· The bill would increase litigation and cost taxpayers more to operate the system. By allowing creditors to bring a string of motions against families already in bankruptcy, the bill will lead to higher litigation costs for those in financial crisis, as well as increased burden on the bankruptcy system and taxpayers who pay for the system. Creditors who churn out legal motions will do so on the backs of families who cannot afford increased attorney's fees.
Given the dramatic drop in the bankruptcy rate, it is time to look at whether
additional bankruptcy restrictions are still necessary. If so, it is absolutely
essential that Congress consider more targeted legislation that will not hurt
those who have suffered a genuine financial misfortune and need a fresh start.
Instead of one-sided bankruptcy reform, Congress could really help consumers by
passing protections on privacy, predatory lending, and health
care.
Sincerely,
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Frank Torres |
Travis Plunkett |
