Law, The Economy

I don’t know what it is about bankruptcy law. It seems really difficult to get any kind of traction on this issue. Most people understand that the credit card industry bought this legislation, and that the overwhelming majority of people in bankruptcy are in financial distress as a result of job loss, medical expense, divorce, or a combination of those causes,” but it just isn’t something that gets people worked up. I suppose the problem is that most Americans think it simply can’t happen to them. There has always been a strong tendency in American life to blame poverty on the poor themselves, and debt is something that seems particularly easy to blame on the victim.

Putting aside, for the moment, the fact that many people facing bankruptcy are going through major life crisis and would otherwise likely be able to pay off their debts, lets look at the welfare mothers” of the bankruptcy debate. By that I mean the stereotypical credit card delinquents who are being touted as the problem” (despite whatever the facts of the situation might be) — just as mythical welfare mothers” were used to promote welfare reform.” Do people who carry credit card debt know what they are getting into?

Like their supporters in Congress, credit card companies like to point out that consumers are not forced to sign up for credit cards—they sign contracts of their own free will. It is only fair, goes this argument, to hold consumers to the deals they make by forcing them to repay their debts.

This free contract” argument is seductive and dishonest. Why? Because while credit card companies insist that consumers meet their obligations,” they steadfastly refuse to tell us just what those obligations are.

Exhibit A: disclosure of information. For years, consumer groups and bankruptcy experts have asked credit card companies to help consumers understand what they’re getting into. For example, advocates have suggested adding a line on statements which reads If you make the minimum monthly payment on your balance, you will take X years and X months to pay off this bill and you will pay X dollars in interest.”

Creditors have this information—and it would cost them virtually nothing to reveal it—but they don’t want to tell. In fact, when California passed a law requiring such disclosure, creditors took the state to court and got the law overturned.

This disclosure is important because credit card rates can suddenly, and dramatically, change if you miss a single payment.

Beginning next month, Bank of America will charge its customers an interest rate of 29.49% if they miss two payments or go over the credit line twice in a twelve month period and it will raise the cash advance interest rate to 21.49%.

A lot of people don’t know that. They get a credit card which advertises low rates, and mistakenly think those rates will stay low no matter what. You don’t even need to miss a payment to have your contract change on you. Citibank just sent us a note (in small type) that they will now start charging a 3% surcharge on transactions in foreign currencies. I’ve long thought of a credit card as a convenient tool for travel, but I might just have to go back to using traveler’s checks like I did in the 80s!

In a related story, the Commercial Law League of America, whose bankruptcy division consists of about 1,200 bankruptcy lawyers and bankruptcy judges from nearly every state in the country” has come out against the legislation, largely because it reduces their power to negotiate settlements. However, this shouldn’t be thought of as a purely selfish move on their part. People who negotiate settlements are more likely to pay off their debts, as is made clearer in this L.A. Times article.

In interviewing bankruptcy judges whose names were suggested by proponents as well as opponents of the overhaul legislation,” the Times found that

The new legislation would bar courts from reducing the amount that many debtors would have to repay on their cars and other big-ticket items. It would also extend the length of time people would have to make repayments and impose repayment schedules that critics describe as so onerous that many debtors would fall behind.

The result, the judges said, would be the collapse of more repayment plans, forcing debtors out of bankruptcy court protection. Creditors then could try to force debtors to pay the full amount owed — not the reduced amount a judge had ordered — by moving to repossess their belongings or bringing legal actions. Many people would have to pay creditors far into the future, the critics said, and thus be unable to restart their economic lives, a long-held aim of bankruptcy.

The article also touches on an issue I raised earlier, namely that this bill isn’t just for the credit card companies, but is also for the auto manufacturers. It turns out that the new legislation means cars have to be paid back at their original purchase value, not their depreciated value at the time of repayment.

ELSEWHERE : Online efforts to stop the bill in congress, and a round up of other posts on the subject. And see this powerful article from the New York Times.

UPDATE: Another good article, as well as another advocacy organization. The article quotes the NY Times as to the major sponsors of the bill:

The main lobbying forces for the bill — a coalition that included Visa, MasterCard, the American Bankers Association, MBNA America, Capital One, Citicorp, the Ford Motor Credit Company and the General Motors Acceptance Corporation — spent more than $40 million in political fund-raising efforts and many millions more on lobbying efforts since 1989.

Just like I’ve been saying — this is much bigger than the credit card companies, and has a lot to do with America’s inability to actually manufacture anything. We are living in an economy based on usury.

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