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Bankruptcy bill bites

Have you heard about the new version of the bipartisan bankruptcy bill making its way through Congress? It’s a horrible bill for workers, a perfect opportunity for Democrats to stand up for the common man, but many Dems are standing with their GOP cohorts as they get ready to throw a meaty bone to the already fat credit card industry.

In the eight years since they began pressing for the tough bankruptcy bill being debated in the Senate, America's big credit card companies have effectively inoculated themselves from many of the problems that sparked their call for the measure.

By charging customers different interest rates depending on how likely they are to repay their debts and by adding substantial fees for an array of items such as late payments and foreign currency transactions, the major card companies have managed to keep their profits rising steadily even as personal bankruptcies have soared, industry figures show.

As a result, while they continue to press for legislation that would make it harder for individuals to declare bankruptcy, the companies have found ways to make money even on cardholders who eventually go broke.

At the same time, under the companies' new systems, many cardholders — especially low-income users — have ended up on a financial treadmill, required to make ever-larger monthly payments to keep their credit card balances from rising and to avoid insolvency.

"Most of the credit cards that end up in bankruptcy proceedings have already made a profit for the companies that issued them," said Robert R. Weed, a Virginia bankruptcy lawyer and onetime aide to former Republican House Speaker Newt Gingrich.

"That's because people are paying so many fees that they've already paid more than was originally borrowed," he said.

In addition, some experts say, the changes proposed in the Senate bill would fundamentally alter long-standing American legal policy on debt. Under bankruptcy laws as they have existed for more than a century, creditors can seize almost all of a bankrupt debtor's assets, but they cannot lay claim to future earnings.

The proposed law, by preventing many debtors from seeking bankruptcy protection, would compel financially insolvent borrowers to continue trying to pay off the old debts almost indefinitely.

"Until now, the principle in this country has been that people's future human capital is their own," said David A. Moss, an economic historian at Harvard University. "If a person gets on a financial treadmill, they can declare bankruptcy and have what can't be paid discharged. But that would change with this bill."

Debate about the bill continued Thursday, with the Republican-controlled Senate refusing to limit consumer interest rates to 30%. The vote was a bipartisan 74 to 24 to kill a proposed amendment by Sen. Mark Dayton (D-Minn.). Senate passage of the bill is expected next week.
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Credit card companies have come in for harsh criticism in recent years for their penalty fees and the "risk-based pricing" under which they charge customers different interest rates depending on their credit histories and their likelihood of paying.

Consumer advocates have accused firms of not adequately disclosing such controversial practices as universal default, when a company can jack up a cardholder's annual percentage rate, often to more than 30%, based on the cardholder's performance with another creditor, not the card company.

Regulators and law enforcement officials have accused companies of deceptive practices. In 2000, the U.S. Office of the Comptroller of the Currency and the San Francisco district attorney's office ordered Providian to pay $300 million in restitution after customers complained that the company didn't credit their payments on time and then imposed late fees.

A stream of court cases involving credit card companies has produced public outrage in various parts of the country.

In Cleveland, a municipal court judge tossed out a case that Discover Bank brought against one of its cardholders after examining the woman's credit card bill.

According to court papers, Ruth M. Owens, a 53-year-old disabled woman, paid the company $3,492 over six years on a $1,963 debt only to find that late fees and finance charges had more than doubled the size of her remaining balance to $5,564.

When the firm took her to court to collect, she wrote the judge a note saying, "I would like to inform you that I have no money to make payments. I am on Social Security Disability…. If my situation was different I would pay. I just don't have it. I'm sorry."

Judge Robert Triozzi ruled that Owens didn't have to pay, saying she had "clearly been the victim of [Discover's] unreasonable, unconscionable and unjust business practices."

Efforts to reach Owens were unsuccessful. A spokeswoman for Discover said she could not comment on the case.

Analysts said that lost in the uproar over particular practices and cases is the fact that the credit card industry has almost completely remade itself in the years since it began pushing for passage of the bankruptcy bill — a makeover that has left some analysts wondering why the industry needs the changes in bankruptcy law.

"The idea that companies are losing their shirts on bankruptcies is a lot of bull," said Robert B. McKinley, chief executive of CardWeb.com, a Frederick, Md., consulting group that tracks the credit card industry. "With these rates and fees, the card industry is a gravy train right now."