Broke? Why You May Want to Head to Bankruptcy Court Now

  • Share
  • Read Later

Has your credit card made you broke? Better declare bankruptcy now

Been victimized by an overly tempting credit card offer? Charge your way through some lean years and need a way out? Or just fallen on hard times? Three words: Chapter 7 bankruptcy. But you'd better hurry — an overhaul of bankruptcy law is through the Senate and on its way to the waiting pen of George W. Bush.

Three of four of the 1.3 million folks who filed for bankruptcy in 2000 filed under Chapter 7, which allowed them to erase most of their unsecured debts, namely credit card balances. When Bush signs the finished bill — which he will, when the Senate and House are finished reconciling the two near-identical versions — only those who fall below a certain income threshold, or are unemployed, will be able to do so, and then only after they fill out a stack of forms. The rest will have to settle for Chapter 13, which in most states allows a debtor to keep his house but forces some repayment of unsecured debts under a court-approved plan.

A big boost from Bush

Bill Clinton vetoed a similar bill last year, saying it was too tough on debtors; Bush is all for it — the way he figures it, the present situation is too tough on creditors.

Cynics might figure that view has been shaped by big donors like credit card giant MBNA, which along with its employees donated $1.3 million to the Bush campaign. Its president, Charles Cawley, was a Bush "pioneer" fund-raiser who, along with his wife, gave $5,000 to help fund Bush's Florida recount fight. Heck, Cawley even chipped in the maximum $100,000 for the new president's inaugural bash.

It was a good investment — industry analysts say the bill could save banks billions in profits over the next decade. And banking industry lobbyists say that bankruptcies drive up the cost of borrowing for other, paying consumers by $400 to $500 a year. The politics-friendly target of the legislation is the equivalent of the insurance cheat — the wealthy broke.

"All of us end up paying for those who abuse our system," Sen. Orrin Hatch declared Tuesday. "People with high incomes can run up massive debts, and then use bankruptcy to get out of honoring them."

Critics cite "predatory practices"

And then there's the moral component, which they were just talking about on "The Sopranos" (suffice it to say the scene involved a gambling butcher, his pinky finger and a meat cleaver): Honor your debts. Critics of the bill contend that often, credit card companies' "predatory lending practices" lure unsuspecting borrowers into debts they can't afford — and therefore the credit card companies should take the lumps with the risk.

To that end, Senate Democrats on Wednesday proposed a series of amendments designed to soften the bill, including several proposals making it harder for minors to obtain credit cards without their parents' signature. All were defeated, and the bill — which still enjoys wide bipartisan support in both houses — was headed for passage by day's end.

But proponents maintain that those in seriously dire straits will still be able to get the relief they need, and as for folks with merely uncomfortable balances, Bush has a tax cut he'd like to sell you. Other than that, well, you borrowed it — you pay it back.

The bill is the first major overhaul of bankruptcy law in 20 years, and certainly seems timely. Personal bankruptcies reached a record 1.4 million in 1998 (up more than 300 percent since 1980) before declining to 1.3 million in 1999 and 1.2 million last year.

That number may be about to go down a lot further.