Tighter Bankruptcy Law Favored

[RPankn]

Bills Making It Harder to Erase Debt Set to Clear Congress

By Kathleen Day
Washington Post Staff Writer
Friday, February 11, 2005; Page A05

Republican leaders in Congress began clearing the way yesterday for swift passage of legislation backed by the credit card industry and opposed by consumer groups that would make it harder for consumers to wipe out debt through bankruptcy.

Congress has tried repeatedly in recent years to pass similar legislation in what would be the most significant change in bankruptcy law in more than a quarter of a century. Twice in the last seven years, bankruptcy bills have passed both the House and Senate, only to face ultimate defeat. In one case, President Bill Clinton refused to sign the legislation, saying it was unfair to consumers. In 2002, House Republicans initially backed the bill but then voted it down after an amendment was attached that sought to prevent individuals from using bankruptcy to shield them from fines imposed for illegal antiabortion protests.

Now two nearly identical bills have been introduced in Congress in the last week that are essentially the same as what House and Senate negotiators worked out in the last Congress, but lacking the controversial abortion amendment. The absence of the amendment, plus the Republican leadership's decision to begin deliberation now, early in the legislative cycle, has industry officials and lawmakers hoping a bill can become law within weeks.

"The timing of bringing it up now, that's a critical difference," said Edward L. Yingling of the American Bankers Association. The Republican majority in Congress has had the votes to overcome opposition but until now lacked time to combat the procedural delays opponents have used to stall the legislation, he said.

Lobbyists for the credit card industry say the legislation is needed to close loopholes that make it too easy for people to wipe out their debts when they could repay some of them.

Consumer advocates say it would allow some rich debtors to continue to hide wealth through homeownership while bankruptcy relief would be denied to many people with low or moderate incomes who have fallen on hard times because of illness, job loss or divorce. They say credit card companies must share the blame for increased bankruptcies because they aggressively market products and inadequately disclose how interest rates and penalty fees mount up. For example, eliminating a $1,000 credit card balance paid off at a rate of 2 percent a month and carrying an interest rate of 17 percent would take 88 months, or more than seven years.

"Our overall concern is that this isn't a balanced bill," said Travis Plunkett, spokesman for the Consumer Federation of America, a nonprofit consumer research and advocacy group. "There isn't a single curb on abusive lending practices by credit card companies in these bills."

He said he finds the industry's claim it needs bankruptcy reform puzzling because credit card issuers "continue to offer credit to Americans in record amounts" and have reported, as a group, one of their most profitable years in more than a decade.

Jeff Tassey, a lead lobbyist for the financial industry, said the companies he represents know health-care costs and divorce contribute to many bankruptcies, but he disputes they are driving factors. If medical costs were to blame, bankruptcy rates would not fluctuate so wildly around the country, he said.

Under current law, individuals filing under Chapter 7 can wipe out their debts if they agree to give up most of their assets, excluding in most cases their house and other essentials. They do not have to prove insolvency, but a court can deny them bankruptcy status if a judge thinks the law is being abused.

The American Bankruptcy Institute, a nonpartisan research and education organization, says about 3 percent of people who file under Chapter 7 could afford to repay a portion of their debt under a court-supervised plan if they filed under Chapter 13, which requires some payment. Lobbyists for the credit card industry say the figure is closer to 10 percent.

Under the proposed law, those filing for bankruptcy would have to undergo a two-step test outlined in a formula that permits judges little leeway. It would force an estimated 30,000 to 100,000 people a year who now seek protection under Chapter 7 to instead make some repayment under Chapter 13.

The legislation would make it harder for, but would not eliminate the ability of, wealthy people to hide assets during bankruptcy by buying expensive houses in states such as Texas or Florida, which currently provide broad exemptions for homes.

And it would require more disclosure by lenders about the pitfalls of paying minimum balances, though far short of what consumer groups and Democrats had pushed for.

Lenders would have to provide toll-free telephone numbers where consumers could get more information about how long it would take to pay off a bill by making minimum monthly payments. They also would have to include printed information in monthly bills warning customers of extra costs incurred by paying minimum charges. The credit card industry killed efforts to force companies to disclose exactly how much extra interest consumers would pay.

"This legislation eliminates some of the opportunities for abuse that exist under the current system," Sen. Charles E. Grassley (R-Iowa), the chief champion of the bill, said yesterday during Judiciary Committee hearings.

Chairman Arlen Specter (R-Pa.) said the committee will vote on the bill next week. It will then go to the full Senate for a vote.

House Judiciary Committee Chairman F. James Sensenbrenner Jr. (R-Wis.) introduced a similar bill yesterday. He has said he will wait for the Senate to act before proceeding. President Bush has said he will sign the legislation.


www.washingtonpost.com/wp-dyn/articles/A15399-2005Feb10.html?sub=AR

[Moses]

washingtonpost.com

Sick and Broke

By Elizabeth Warren

Wednesday, February 9, 2005; Page A23


Nobody's safe. That's the warning from the first large-scale study of medical bankruptcy.

Health insurance? That didn't protect 1 million Americans who were financially ruined by illness or medical bills last year.

A comfortable middle-class lifestyle? Good education? Decent job? No safeguards there. Most of the medically bankrupt were middle-class homeowners who had been to college and had responsible jobs -- until illness struck.

As part of a research study at Harvard University, our researchers interviewed 1,771 Americans in bankruptcy courts across the country. To our surprise, half said that illness or medical bills drove them to bankruptcy. So each year, 2 million Americans -- those who file and their dependents -- face the double disaster of illness and bankruptcy.

But the bigger surprise was that three-quarters of the medically bankrupt had health insurance.

How did illness bankrupt middle-class Americans with health insurance? For some, high co-payments, deductibles, exclusions from coverage and other loopholes left them holding the bag for thousands of dollars in out-of-pocket costs when serious illness struck. But even families with Cadillac coverage were often bankrupted by medical problems.

Too sick to work, they suddenly lost their jobs. With the jobs went most of their income and their health insurance -- a quarter of all employers cancel coverage the day you leave work because of a disabling illness; another quarter do so in less than a year. Many of the medically bankrupt qualified for some disability payments (eventually), and had the right under the COBRA law to continue their health coverage -- if they paid for it themselves. But how many families can afford a $1,000 monthly premium for coverage under COBRA, especially after the breadwinner has lost his or her job?

Often, the medical bills arrived just as the insurance and the paycheck disappeared.

Bankrupt families lost more than just assets. One out of five went without food. A third had their utilities shut off, and nearly two-thirds skipped needed doctor or dentist visits. These families struggled to stay out of bankruptcy. They arrived at the bankruptcy courthouse exhausted and emotionally spent, brought low by a health care system that could offer physical cures but that left them financially devastated.

Many in Congress have a response to the problem of the growing number of medical bankruptcies: make it harder for families to file bankruptcy regardless of the reason for their financial troubles. Bankruptcy legislation -- widely known as the credit industry wish list -- has been introduced yet again to increase costs and decrease protection for every family that turns to the bankruptcy system for help. With the dramatic rise in medical bankruptcies now documented, this tired approach would be no different than a congressional demand to close hospitals in response to a flu epidemic. Making bankruptcy harder puts the fallout from a broken health care system back on families, leaving them with no escape.

The problem is not in the bankruptcy laws. The problem is in the health care finance system and in chronic debates about reforming it. The Harvard study shows:

• Health insurance isn't an on-off switch, giving full protection to everyone who has it. There is real coverage and there is faux coverage. Policies that can be canceled when you need them most are often useless. So is bare-bones coverage like the Utah Medicaid program pioneered by new Health and Human Services Secretary Mike Leavitt; it pays for primary care visits but not specialists or hospital care. We need to talk about quality, durable coverage, not just about how to get more names listed on nearly-useless insurance policies.

• The link between jobs and health insurance is strained beyond the breaking point. A harsh fact of life in America is that illness leads to job loss, and that can mean a double kick when people lose their insurance. Promising them high-priced coverage through COBRA is meaningless if they can't afford to pay. Comprehensive health insurance is the only real solution, not just for the poor but for middle-class Americans as well.

Without better coverage, millions more Americans will be hit by medical bankruptcy over the next decade. It will not be limited to the poorly educated, the barely employed or the uninsured. The people financially devastated by a serious illness are at the heart of the middle class.

Every 30 seconds in the United States, someone files for bankruptcy in the aftermath of a serious health problem. Time is running out. A broken health care system is bankrupting families across this country.

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The writer is a law professor at Harvard University.