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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To create a level playing field for everyone, Congress would need to enact a flat exemption that covers all assets--from home to pension. Otherwise there is the kind of inequity described by A. Jay Cristol, the chief U.S. bankruptcy judge in Miami:

"Let's assume you have two very decent, honest people and one of them has a million-dollar home and one of them has a million dollars in cash and they go into bankruptcy. The one with the million-dollar home keeps a million bucks and the one with the million dollars in cash gives all but a thousand dollars in cash to the trustee."

The same scenario applies to retirement accounts. The wealthy investor who puts $1 million into a retirement plan gets to keep the money. The middle-income family with $10,000 in a savings account loses it.

The simple solution: Establish one exemption that covers all assets, from homesteads to pensions. Says Judge Cristol: "Why not just say you can have as a fresh start $55,000 or $100,000, or whatever the legislature decides is the right amount, and it doesn't make a difference if it's equity in your home or whether it's cash in the bank. That's what you get to keep. And that would be fairer and simpler, and the poorest people would be treated the same as the wealthiest people. But as it is now, the worse off you are, the worse you're treated."

Lenders and lawmakers maintain that the bankruptcy laws need to be toughened to reverse the sharp growth in filings during the 1990s. While bankruptcy cases did indeed rise through 1998, they fell in 1999. But what Congress and credit-card companies neglected to say was that the increase was largely attributable to one group--women with modest or low incomes. For this group, reform is going to be especially bad.

Although courts do not keep data on the number of men, women and couples who file for bankruptcy, academic studies have developed estimates. Research conducted by Elizabeth Warren, a Harvard law professor, and Teresa Sullivan, dean of graduate studies at the University of Texas, shows the pattern. From 1981 to 1999, bankruptcy filings by women shot up 838%--four times as fast as for all others--jumping from 53,000 to 497,000. In contrast, filings by husbands and wives rose just 138%, from 178,000 to 423,000. Once a small minority in bankruptcy court, women now comprise the largest single bloc--39% of all personal-bankruptcy cases--more than men or couples.

Despite all the glowing economic indicators that point up--stock-market indexes, employment, corporate profits--the income gap continues to widen, and those most often found toward the bottom are women. Even women in jobs that pay solid middle-class wages find themselves in financial trouble and must seek bankruptcy protection when they are overwhelmed by debt following a breakup or a divorce.

Women such as Lucy Garcia. The 26-year-old mother of two boys, ages 9 and 6, Garcia is a payroll coordinator at the Sheraton New York, one of midtown Manhattan's largest hotels. Assigned to the food-and-beverage department, she helps compute wages, overtime payments and other payroll items for the department's 800 employees. And she balances the department's checkbook.

But in her personal life, balancing finances hasn't been easy since Garcia and her sons' father separated more than a year ago. Family finances had always been tight, and with just one paycheck, Garcia found herself using credit cards to buy the basics. "Sometimes when you don't have money and you need to buy things for your kids, like food and stuff like that, you use the credit card because it's so easy," she says.

After payroll deductions for taxes and Social Security, she had about $1,850 a month to pay her bills. After her rent of $580, a car loan of $400 and an insurance premium of $200, she was left with $670 a month to feed and clothe the boys and herself and pay for her utilities, child care, other miscellaneous expenses--and her credit-card bills.

To bring the ballooning debt under control, she stopped using credit cards and made nominal payments on her accounts. "I thought if I sent them something, $10 or $20, they would leave me alone," she says. But she only fell further behind. Even in months when she didn't use the credit cards, the amount she owed rose because of late-payment penalties and interest charges. Before long, she needed to pay at least $300 a month just to stay even.