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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    A VIEW FROM THE BENCH: Judge A. Jay Cristol, the colorful, outspoken chief U.S. bankruptcy judge in Miami sympathizes with the people who appear before him. "Day after day, we see decent, honest, hardworking people who have suffered one type or another of financial misfortune," says Cristol. "We also occasionally see the person trying to perpetrate a fraud. But in most instances the system deals with them. The problem is not in the evil debtors. It's in the stupidity of lending to people who are not creditworthy."

    Other Visa- and MasterCard-financed studies asserted that many whose debts are discharged in bankruptcy could actually pay some of their bills but don't. The Credit Research Center at Georgetown University estimated that 25% of the debtors who file in Chapter 7 could repay more than 30% of their nonhousing debt over five years. The study warned that the continuing rise in bankruptcy filings would increase the cost of credit. It concluded: "Our results imply that the bankruptcy system itself is contributing to these rising costs by offering the opportunity to wipe out debt with a single signature to many borrowers that have the ability to repay."

    Industry lobbyists promoted the themes. George Wallace, a lawyer representing the American Financial Services Association, contended that there is "growing statistical evidence that there's a significant group of American consumers who are using bankruptcy when they have some ability to pay. We have a system today that is broken, a system that provides a welfare benefit without a means testing."

    Members of Congress echoed the industry line. Declared Representative George Gekas, the Pennsylvania Republican who shepherded the legislation through the House (and who has collected $30,000 in political contributions since 1997 from bankers and credit-card companies): "In 1997 Americans filed an all-time record of 1.33 million consumer-bankruptcy petitions, which erased an estimated $40 billion in consumer debt. Those losses are passed on to [other] consumers, resulting in a hidden tax for every American household. The only reasonable explanation is that the stigma of bankruptcy is all but dead. It is simply too easy to file."

    Representative Bill McCollum, a Florida Republican who has received $225,000 from the lending industry, upped the ante: "Bankruptcy will cost consumers more than $50 billion in 1998 alone. That translates into more than $550 per household in higher costs for goods, services and credit."

    Senator Robert Torricelli of New Jersey, a strong advocate of the Senate bill and head of the Democratic Senatorial Campaign Committee, last year pocketed a $150,000 contribution from MBNA. "What every American needs to understand is that somebody is paying the price," says Torricelli. "I believe this is the equivalent of an invisible tax on the American family, estimated to cost each and every American family $400 a year."

    There is only one problem with all this rhetoric: it's not true. That's the finding of a TIME investigation based on interviews with those directly involved in the system--judges, lawyers, trustees, bankruptcy professors and the bankrupt themselves--along with an examination of court records across the country and an array of statistical evidence. While lenders do indeed lose money on those who fail to pay their bills, the U.S. Bankruptcy Court maintains no statistics on the types of debt written off--credit cards, medical, personal loans--or the total dollar amount discharged. But whatever that number may be, it misses the point: there is little more to be extracted from those in bankruptcy. Some people unquestionably use bankruptcy court to escape bills they could afford to pay, but their numbers are insignificant. The vast majority of bankruptcy filers have neither the income nor the assets to pay creditors. Most turn to bankruptcy as a last resort.

    To understand how much at odds with the real world the bankruptcy scene imagined by Congress and the lending industry is, spend a moment with the people who have a street-level view of the system. Steven Friedman, a bankruptcy judge in West Palm Beach, Fla., describes the people who pass through his courtroom as "average citizens who have worked hard to obtain a decent standard of living and, through unfortunate circumstances such as medical problems or financial or job loss, are down on their luck." He adds, "The instances of abuse, where people who file bankruptcy are attempting to defraud their creditors or to be dishonest, are very [few]."

    Says attorney Judith Swift, a former president of the bankruptcy bar in Dallas: "I keep a box of tissues in my office because people are mortified that they have to file bankruptcy. I've seen grown men break down. They take the financial crises as a sign of personal failure. A lot of people who come to my office have been holding down one full-time job and two piddly little part-time jobs, trying frantically not to have to file a bankruptcy. It's a very, very difficult decision for most people."

    It was for Maxean Bowen, a single mother raising an 11-year-old daughter. A social worker in the foster-care system in New York City, Bowen helped rehabilitate parents with substance-abuse problems. In 1998 she developed a painful condition in both feet that made it difficult for her to walk. Because her job required her to make house calls, she had to give it up and go on unemployment, hoping the condition would ease up. Her take-home pay dropped from about $1,600 a month to $800. To get by, she borrowed from relatives and started using credit cards to pay for food, clothing, utilities and rent. "I thought, 'As soon as I get back to work, I'll try to pay these off,'" she says.

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