Soaked By Congress

CHRIS USHER FOR TIME
LOSING THE HOME: After his wife's death from diabetes, Allen Smith faces losing his modest Delaware home. He fell behind on mortgage payments and other bills. Creditors will divide the proceeds from the sale of what little he has

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While Rose has done quite nicely from his investments, customers of Ace Cash Express and other payday lenders have not fared nearly so well. As you might expect, people who pay interest charges of 300% or more often end up in bankruptcy court. Says David Nixon, a lawyer in Fayetteville, Ark.: "The kinds of people who use payday loans are just barely getting by. They have jobs. They work hard. They try to pay their bills, but they come up short. Here's an easy way to get cash fast--at least it seems easy. But it's like getting on a treadmill. Once they get on it, it's impossible to get off."

Sometimes the people on the treadmill aren't those you might expect. In Greenwood, Ind., one of Ace's customers was Eva Rowings, 60, a retired high school Latin teacher. In 1995 Rowings began teaching part time at a reduced salary. "I tried to make ends meet," she says, "and I did pretty well for a couple of years, but then it all went downhill." She had four operations, including gall bladder surgery and orthoscopic procedures on both shoulders.

The debts piled up. She owed $5,800 in medical bills, $5,900 on credit cards and $8,100 in loans, plus other miscellaneous bills. Her debts matched her total annual income.

She began borrowing at two other payday-lending firms before turning to Ace, where she was "astonished at the number of senior citizens that were coming in each month." In a typical transaction, she borrowed $200 for 12 days and paid a $30 fee--an annual interest rate of 456%. If she missed a payment, she says, she would owe an additional $30. "By the end of the month," she says, "I would have no money." Finally, a distressed Rowings, who had always believed in paying her debts but was worn down by the endless dunning calls from bill collectors day and night, decided there was never going to be an end. She filed for bankruptcy. "It was humiliating," she says. "I wished I had never stopped teaching full time."

Another point should be noted. Rowings did not contribute to the election campaigns of candidates for Congress. Nor did Charles and Lisa Trapp. Nor Maxean Bowen. Their creditors, on the other hand, have contributed millions and millions of dollars to get the legislation they want--from thousands of small donations of less than $5,000 to hundreds of large ones ranging from $5,000 to more than a quarter-million dollars. Since 1997 credit-card companies and other lenders have given $2.2 million to the House and Senate Judiciary Committee members responsible for drafting the legislation, according to data compiled by the Center for Responsive Politics.

While the industry got much of what it wanted, Congress thus far has sidestepped an opportunity to enact a genuine reform and end one of the most blatant bankruptcy inequities--the homestead provision.

If you live in a $2 million home in Texas or Florida and file for bankruptcy, you are guaranteed you can keep your home. If you live in a $75,000 home in Pennsylvania or Delaware and file for bankruptcy, you may lose it. How is this possible? People who file for bankruptcy claim their exemptions under state law. In the case of the homestead law, the provision varies from state to state. Five states--Florida, Iowa, Kansas, South Dakota and Texas--have unlimited exemptions. Whether a residence is worth $10,000 or $10 million, it can't be touched by creditors. Five other states--Delaware, Maryland, New Jersey, Pennsylvania and Rhode Island--along with the District of Columbia, have no homestead provision, meaning a person can lose his home in bankruptcy. The value of the exemption in the remaining 40 states ranges from $2,500 in Arkansas to $200,000 in Minnesota.

Advocates of bankruptcy overhaul outside Congress have argued for years that federal law should be amended so that all Americans are treated alike, no matter where they live. But Congress doesn't see it that way. The reason? States' rights. Says Senator Sam Brownback, a Kansas Republican: "What is being attempted here is to take a right away from states that they've had for over a hundred years. It's contrary to states' rights."

Not exactly. The Constitution expressly gives Congress the power to establish "uniform laws on the subject of bankruptcies throughout the United States." Both the House and Senate bills contain homestead provisions. Neither deals with the basic unfairness of the exemption. The Senate bill would permit bankruptcy filers to retain up to $100,000 in equity in their home. Any amount over that would go to creditors. The House bill would allow homeowners to retain up to $250,000 in equity. But that cap would be meaningless, since any state could opt out of it under the bill. Key members of Congress are on record as saying there will be no bill that limits the exemption.

To understand how the current system works, how it would work under "reform"--most likely the same--and how it should work if Congress were crafting a law that treated all people equally, let's consider the story of two homeowners in bankruptcy. One is James Villa, a 42-year-old onetime stockbroker who lives in a $1.4 million home in Boca Raton, Fla. The other is Allen Smith, a 73-year-old retired autoworker with throat cancer who lives in a deteriorating $80,000 home in Wilmington, Del.