For more than a decade, the financial-services industry and its supporters in Congress, mostly Republican, have been determined to change the nation's bankruptcy laws, hoping to make it more difficult for people in financial trouble to walk away from their debts simply by declaring bankruptcy. It's been an especially hot topic since the mid-'90s, when bankruptcy, transformed by the heat of the new economy, began to lose some of the shame and stigma that had once rendered it, like divorce, a matter to be discussed in whispers.
But things change.
Remember the unlimited productivity gains of the Internet economy and the repeal of the business cycle? Remember IPOs and Silicon Valley of the Everlasting Sun? During the go-go '90s -- when investment bankers were buying up equity in dots and coms, and when banks and credit-card companies were sending pre-approved credit-card solicitations to dogs and dead people -- bankruptcy became, for some, just another new financial instrument; something to keep in your hip pocket just in case. We were living large and we were living on credit, and it didn't take much for all that debt to come crashing down on a lot of pretty lives that were leveraged to the hilt.
Then the new economy became the old economy, but the old spending habits continued, and were encouraged. Even as debt and delinquency grew, consumers were urged to spend to keep the economy going, or to end the recession, or whatever. A full two-thirds of the U.S. economy is driven by consumer spending, we were reminded repeatedly. President Bush urged Americans to go out and spend their tax cuts to jump-start the economy and provide a soft landing from the recession.
But as the spending piled up, so did the debt. Americans were carrying about $250 billion in revolving credit-card debt in December 1990. In December 2004, that total had risen to $791 billion, and a strange thing happened: As consumer debt rose, so did the number of bankruptcy filings.
The burning question surrounding the debate now taking place on the Senate floor is how much of the escalation is abuse, and how much of it is the result of the vagaries of an economy trying to find its way back to reality?
There were just over 600,000 personal bankruptcy filings in 1990; last year there were almost 1.6 million. Supporters say the bankruptcy-reform bill is aimed at forcing “wealthier” bankrupts to meet more of their financial obligations before walking away or starting over.
But the real winners and losers stand just outside the bull's-eye. Opponents of the bill have pointed out how little the aggressive -- some say deceptive -- marketing tactics of the credit-card companies figure into the solutions being proposed. Dick Durbin, the second-ranking Democrat in the Senate, believes that the measure would hurt working people the most.
“This bill will radically alter America's bankruptcy laws, not for the better,” he said. “If it becomes law, millions of hard-working Americans who have been devastated financially, through no fault of their own, are going to end up in a new sort of debtor's prison from which they may never escape. We are not talking about people who go to the casino and get wild about their gambling and run their credit card or ATM card to the limit. We are not talking about people who go on a shopping spree for luxury cars. We are talking about ordinary people facing the ordinary demands of life who are swept away by debt they never anticipated. Sadly, this bill makes no distinction between the irresponsible who are in debt and those who have done everything humanly possible [to not] end up in debt.”
Supporters, meanwhile, believe that this bill is about fixing a broken system. Indeed, the legislation is called the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. “Bankruptcy has become so common that it has lost the stigma it had even a short generation ago,” Senate Majority Leader Bill Frist said this week as he opened the debate on the bill. “Today it is just another method for getting out of debt, a tool just to get out of debt. Some folks have even been known to plan their bankruptcy. They buy a house or they buy a car or furniture or whatever else they need and then file a bankruptcy form. They figure they can get the big-ticket items up front, and for everything else they will use cash.”
But if it passes -- and only long-shot players are betting against it now -- the real winners will be the credit-card companies, which will not have to charge off as many losses as they do now. And their profits, which are at already at record levels, will climb even higher. According to industry experts, credit-card issuers made more money in 2004 than at any time since 1988, when lower charge-offs and higher fees -- late, over the limit, and finance charges -- allowed the banks and other issuers to make upward of $30 billion.
There has been a bankruptcy bill on the floor of the Senate in every Congress since 1996. In 2000, a bill passed and was sent to the White House, where President Clinton killed it by doing nothing. In the years since, Democrats have come up with ingenuous ways to stymie the effort. There is still some hope on the part of opponents that Chuck Schumer will reintroduce an amendment to keep abortion opponents from declaring bankruptcy to rid themselves of court judgments against them. Passage of that amendment in 2002 killed the bill in the House, but the expanded GOP majority in the Senate may kill the Schumer amendment, and it seems that bankruptcy reform is likely on it way to a president who can't wait to sign it.
In the end, though, the bill does not address the real danger of an economy so dependent on credit.
Terence Samuel is the chief congressional correspondent for U.S. News & World Report. His column about politics appears each week in the Prospect's online edition.
