After years of lobbying by the credit card industry, Congress is on the brink of passing a new bill that would make declaring bankruptcy a significantly tougher burden on individuals already at a low point in their lives.
If passed, the bill would increase the cost of filing, and make bankruptcy, a common last-ditch financial rescue, unavailable to many who may need it. The bill would also give credit card companies more power to appropriate the foreclosed houses and debt-stricken automobiles of those who have declared bankruptcy, and individuals would be forced to repay their creditors, both during and after bankruptcy, much more and much more quickly than they do presently. Bankruptcy, is a practical opportunity for a fresh start — a financial clean slate — not another roadblock for people already deep in a credit hole.
Jacob Hacker, a Yale political scientist, said it best when he described the bill as a form of “risk privatization — a steady erosion of the protection that the government provides against personal misfortune” despite the escalating economic uncertainties in today’s world. This bill represents an attack on the very principles this country built its riches on — entrepreneurial spirit and risk taking. By making life even harder on those who have declared bankruptcy, the bill’s inevitable effect would be to discourage financial risk-taking. To be sure, in a country where climbing out of debt is close to impossible, the next Bill Gates, whomever he may be, will think twice before dropping out of college and investing all his time and money on a startup company with the potential to revolutionize the world.
Credit companies have held that too many people have manipulated current bankruptcy procedures — borrowing and spending irresponsibly until they go broke and then declaring bankruptcy to wash away their debts. In reality, however, this argument holds little water. Bad luck and gross financial misfortune, not reckless spending, are culpable for the majority of the bankruptcy filings in the United States. A recent study has shown that more than 50 percent of bankruptcies are caused by medical emergencies, while job loss and divorce are the other two most widespread catalysts for bankruptcy.
Some Democrats have tried to soften the blow of the bill, calling for amendments that would exempt those who have had to declare bankruptcy for unforeseen reasons, or those who are already disadvantaged. Amendments were proposed to protect the homes of the elderly, exempt armed service members and veterans and shield people who have had to declare bankruptcy due to medical reasons. These amendments, though not in direct conflict with any of the credit card companies’ main concerns, have all been rejected.
It should be noted, however, that while the average Joe in financial trouble takes a thrashing from the bill, Republicans in Congress managed to give the once-wealthy some extra leeway. Numerous loopholes allow wealthy debtors to keep their assets safe even after declaring bankruptcy. One such loophole that is becoming increasingly popular is the “asset protection trust.” This provision allows the wealthy to protect their assets by keeping them in trusts offshore or in some states such as Utah. An amendment aimed at clogging up this loophole was defeated as well, mainly along party lines.
It is not difficult to understand the credit companies’ frustration at losing money when their clients declare bankruptcy, but the solution is not to pass a law making bankruptcy an even higher hurdle to overcome. The credit companies have only themselves to blame for specifically targeting students as young as high-school and for continuing to give clients more credit than they can match with collateral. Despite this, the industry is unwilling to take even the slightest steps to regulate itself. The industry has only its own business practices to blame for its losses.