Debate Question: Would it be ethical to modify bankruptcy laws so that these laws no longer allow anyone to file for bankruptcy and still keep his/her home?
Bankruptcy bill: Too many holes?
By Jeff Gelles
Sat, Apr. 27, 2002
Has bankruptcy really lost its stigma? Or are other factors more to blame for the dramatic rise in bankruptcies since the early 1990s, to well over a million personal bankruptcies a year?
That's the fundamental question Congress has faced as it has wrangled for years over a finance-industry proposal to rewrite U.S. bankruptcy laws for the first time in a generation - a bill apparently near approval by a House-Senate conference committee.
You're excused if you've forgotten what it's all about. Though separate versions have passed the House and Senate several times, the bankruptcy overhaul has been on a back burner since last spring.
Now it's back, so it's time for a quick refresher course.
Lenders say bankruptcy is simply too easy - that people aren't ashamed anymore and are walking away from debts they can afford to pay. The answer, lenders say, is a crackdown on debtors, especially those with above-median incomes, who will be pushed into repayment plans if they file.
Accomplish that, they say, and the cost of credit will drop for everybody because when bankrupts get their debts discharged, somebody else has to pay.
An economic safety valve
The bill's opponents, a coalition of consumer advocates, academics, organized labor, and women's groups, say the argument that bankruptcy has simply lost its stigma is hogwash.
Bankruptcy, they said, is one of the economy's main safety valves. If it's rising, they argue, we should look for other explanations. And they found one without even breaking a sweat: the massive rise in easy credit, much of it flowing to people who, if they needed money in the past, had little choice but the neighborhood pawnbroker or Larry the Loan Shark.
Ironically, the biggest thing fueling all this easy money is something known as "risk-based pricing."
What's risk-based pricing? It's the idea of tying the price of credit - the interest rate and fees you pay - to the risk the lender runs that you won't pay back what you owe.
Risk-based pricing has kept the credit-card industry profitable even as defaults and bankruptcies have risen. It's also why some people say they're stuck on an endless treadmill, paying debt at penalty rates that can exceed 30 percent. Once, that was called usury.
It has also fueled the mind-boggling five billion credit-card offers that were mailed out last year in the United States, up from 3.5 billion the year before. Now, even people who've already declared bankruptcy get credit offers.
To opponents of the bankruptcy bill, lenders want to have their cake and eat it, too: to use high rates, over-the-limit fees, and other tactics to make money even on the riskiest borrowers, and then to get back whatever they can when some people fall over the edge.
What wealthy debtors can do
Not that they believe the system is never abused.
The biggest loophole, in their minds? The unlimited "homestead exemptions" in a few states that allow wealthy debtors to put millions of dollars in untouchable home equity before filing.
On Tuesday, the conference committee came up with a supposed compromise on that issue - and compromised away the Senate bill's absolute cap of $125,000 per debtor, or $250,000 per couple, for the amount of home equity that can be shielded in bankruptcy.
In its place is something closer to a House provision designed to prevent people from moving to, say, Florida or Texas just to take advantage of their liberal bankruptcy rules. In this version of the bill, as long as you don't move too soon before you file, or haven't violated securities laws (read: Enron executives), your mansion is safe from the debt collectors.
There's nothing in this bill that would prevent O.J. Simpson from eventually filing bankruptcy and keeping his Florida home, even without paying civil damages owed to his late wife's family. No wonder he moved to the Sunshine State.
Says Elizabeth Warren, a Harvard law professor who traces 90 percent of bankruptcies to major setbacks such as illness, job loss, divorce:
"This bill is a loophole playground."
Last modified: Wed Sep 13 14:57:24 EDT 2000