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

(4 of 9)

STEVE WEWERKA FOR TIME

DIVORCE: Divorced after 18 years, Martha Pouliot moved into a mobile home in Minnesota with her two sons. An office administrator, she couldn't pay the bills. In March she filed for bankruptcy, $16,000 in debt

By 1999, when she got a job interviewing families in an office, she owed thousands of dollars to the credit-card companies--much of it in late fees. That's when the threatening calls and letters surged. "They would call me on the job," she says. "That was very embarrassing. They call you early in the morning. They call you late at night. Sometimes I get calls at 10 o'clock at night. And they are very nasty." To placate them, she sent $200 to $300 on occasion. "But when the bill came the next month, it seemed like it went higher," she says. "I was going crazy."

A co-worker suggested bankruptcy, and Bowen filed a petition in U.S. Bankruptcy Court in New York. She still gets calls demanding payment. At least now, she says, she knows her creditors can't attach her salary, no matter how ugly the conversation turns.

Bowen's discovery that she was treading water despite her partial payments--and that the outstanding balance never went down--is not unusual. A government study showed that by the time individuals and families seek bankruptcy protection, more than 20% of income before taxes is going toward paying interest and fees on their unsecured debt.

This helps underscore why the notion that debtors in bankruptcy court are sitting on many billions of dollars that they could turn over to their creditors is a figment of the imagination of lenders and lawmakers. Consider:

- A study of 1,955 Chapter 7 bankruptcy filers in 1997-98 by the Executive Office for U.S. Trustees, which monitors the bankruptcy system, concluded that "by the time they filed, they had little if any capacity to repay. In fact, most will have to increase income or reduce expenses to remain solvent after bankruptcy."

- The same study projected that the total amount that unsecured creditors, like credit-card companies, might be expected to collect from all Chapter 7 filers added up to "less than $1 billion annually."

- A study by two law professors at Creighton University, funded by the nonpartisan American Bankruptcy Institute, found that only 3.6% of Chapter 7 debtors would be able to pay more. "The vast majority belong in that chapter," the study stressed. "They have too little income after necessary expenses to repay unsecured debt. It is vital, therefore, that no undue burdens be thrust on that needy majority in order to flush out a small minority of abusers." The amount that might be collected: less than $1 billion.

- Congress's own investigative arm, the General Accounting Office, criticized two studies financed by the credit-card industry that purported to show that a substantial number of debtors could pay more. Questioning their assumptions, data and sampling procedures, the GAO said that "neither report provides reliable answers to the questions of how many debtors could make some repayment and how much debt they could repay."

As all of this suggests, there is little money to be squeezed out of those in bankruptcy, especially since trustees already collect about $4 billion from debtors each year, a sum that includes proceeds from liquidated assets. Even if they could find an additional $1 billion, the economic and emotional costs of doing so would far outweigh the return. To put it in perspective, the estimated $1 billion that might be collected would amount to two-tenths of 1 percentage point of outstanding revolving credit. If trustees were able to scare up another $4 billion--as the industry claims but few in the bankruptcy system believe possible--it would still amount to less than seven-tenths of 1 percentage point of revolving credit.

To further undercut claims by the lending industry that it needs get-tough legislation, 82 professors at 66 law schools, from Harvard to UCLA, last September signed a letter itemizing the consequences the proposed bankruptcy legislation would have on those in need of financial relief. It was sent to every U.S. Senator.

What would motivate a sizable majority of Congress to support such legislation? Money. Lots of it. In addition to the $5 million the lending industry spent on lobbyists who worked exclusively on pushing the bankruptcy bill through Congress, it shelled out $50 million that went to firms that lobbied on bankruptcy and other issues.

To be sure, some lawmakers who voted for the bill believe bankruptcy is out of control, that many filers just want to walk away from debts they can afford to pay. Some were angered by the procession of Hollywood entertainers and other wealthy prominent citizens who used the system in the 1990s. Some were annoyed by lawyers who advertised bankruptcy as an easy solution for overextended consumers. And some were troubled by what they saw as a decline in values. "We have had a general lack of shame or personal responsibility that used to be associated with paying bills or not paying bills and the filing of bankruptcy," said Senator Grassley, who has collected more than $100,000 in campaign contributions from credit-card companies and other lenders since 1997.