Soaked By Congress


    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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    That includes people like the Trapps, who, after years of meeting their bills, were finally engulfed in a sea of debt through circumstances beyond their control. In that, they fit the classic image of a family seeking help in bankruptcy court. Contrary to the popular view of bankruptcy filers as free spenders who vacation in the Caribbean and buy expensive jewelry on their credit cards, the vast majority turn to bankruptcy court only after one of three events: loss of job, divorce or extraordinary medical expenses--in short, the kind of misfortune that can befall anyone. For the Trapps, it was two out of three. Just as the family was consumed by medical bills, Lisa Trapp had to give up her job as a mail carrier to manage her daughter's care.

    Current bankruptcy law allows most individuals and families to file under Chapter 7. Here, assets--if there are any--are pulled together by a trustee and sold off. The bankruptcy filer may be able to keep his home and a few personal possessions. Retirement accounts and pensions also cannot be touched. Proceeds from the asset sale are divided among creditors. Outstanding debts, such as credit-card or medical bills, are discharged, meaning they do not have to be paid. Again there are certain exceptions: most taxes, child support, alimony and student loans cannot be discharged. Other individuals and families--those who are deemed able to pay back a larger portion of their debt--may file under Chapter 13. Here, the debtor agrees to pay a percentage of his income every month for up to five years to a trustee, who distributes the money to creditors.

    During the 1990s, there were two filings under Chapter 7 for every one under Chapter 13. But the overwhelming majority of Chapter 13 bankruptcy cases ended in failure, with the debtors unable to complete the payment plan because they had insufficient income.

    Under the legislation before Congress, new means tests would force more borrowers into Chapter 13--leading to still more failures--and would eliminate bankruptcy as an option for others. For this second group, life will be especially bleak. Listen to their future as described by Brady Williamson, who teaches constitutional law at the University of Wisconsin in Madison and was chairman of the former National Bankruptcy Review Commission, appointed by Congress in 1995: "A family without access to the bankruptcy system is subject to garnishment proceedings, to multiple collection actions, to repossession of personal property and to mortgage foreclosure. There is virtually no way to save their home and, for the family that does not own a home, no way to ever qualify to buy one." The wage earner will be "faced with what is essentially a life term in debtor's prison."

    How did this come about? The credit-card industry seized on a sharp increase in bankruptcy filings in 1996 and 1997 to mount an intensive lobbying campaign for legislation that would make it easier to collect from borrowers who file for bankruptcy. A sophisticated public-relations blitz created the image of a bankruptcy system rife with abuse and in need of reform. That campaign told of rich people walking away from their debts, courtesy of bankruptcy court. It told of responsible families who paid their bills being forced to pick up the costs of more affluent Americans and others who were bilking the system. And it warned that bankruptcy had lost its "stigma."

    The industry bankrolled studies to back its claims. In February 1998 the WEFA Group, a Philadelphia-based economics consulting firm, released a report contending that personal bankruptcies cost each American household an average of $400 a year. Paid for by MasterCard International and Visa USA, the WEFA study put the overall cost to the economy at $44 billion in 1997. Said Mark Lauritano, a WEFA senior vice president: "Clearly, the American consumer is facing a significant burden as the result of bankruptcy, both through higher prices and increased interest rates." The dollar-cost claims--which were disingenuous at best--would become the most widely quoted statistics in the campaign that produced the legislation now before Congress.

    To apply pressure on lawmakers, the industry ran a series of ads in newspapers calling for bankruptcy reform. "What Do Bankruptcies Cost American Families?" asked a typical ad in the Washington Post on June 4, 1998. The answer: "A month's worth of groceries." Sponsored by a consortium of credit-industry trade associations, the ad showed a shopping cart filled with groceries. "Today's record number of personal bankruptcies costs every American family $400 a year. Now Congress has an opportunity to enact bankruptcy reform that reduces this burden and is fair to everyone... while ensuring that people who can pay their debts do so."

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