Sunday, March 06, 2005

Bankruptcy Reform Gets Some Attention

Now that there's a little room to breathe regarding Social Security reform, some of the other pieces of the Republican legislative agenda are starting to get a little attention. Not a moment too soon, if you ask me.

Anyway, Kevin Drum is painting the big picture for us with respect to bankruptcy reform. First, he takes a look at the process of its construction. The whole thing is worth reading, but two items really stand out.
  • Loopholes. What loopholes have been left in the bill? Answer: the bill does nothing to address the growing use of "asset protection trusts," used by rich people to shield income from bankruptcy proceedings, or to rein in the unlimited use of the homestead exemption, which allows them to shield multimillion dollar homes from bankruptcy courts.
Also…
  • Medical bankruptcy…The bill does nothing to address this. Since medical emergencies certainly aren't an abuse of the system, wouldn't any honest bill aimed at abuse pay special attention to the recent and growing epidemic of families that declare bankruptcy due to medical emergencies?
Reform advocates keep insisting that their real goal is curbing abuse by making sure that those who have the ability to pay their debts do so. In actuality, they are preserving protections that benefit their wealthy constituency and putting the squeeze on those declaring bankruptcy for what is arguably the most legitimate reason possible. So, how exactly is this reducing abuse?

Next, Kevin takes a look at the profits generated by credit card companies through the use of penalties and late fees. Whether it's the fundamental unfairness of "universal default"…
...that penalty rate of 30-40% can be imposed for missing a single payment — in fact, it can be imposed for missing a single payment on a different account, like your telephone bill — but a card spokesman said this was perfectly reasonable because it was "clearly disclosed on account applications." Something tells me that their idea of "clearly disclosed" is a wee bit different from most people's.
...or the attempts to escape the consequences of these policies…
They actively seek out customers who are likely to miss payments and end up in a penalty fee spiral, and they make a fortune from them. In a normally functioning market there's at least a small incentive to limit loans to these high-risk customers, namely the possibility that they might go bankrupt, and the bankruptcy bill before Congress is a brazen attempt to remove even that small but annoying incentive to act responsibly.
...it's impossible to view this bill as anything other than a bold attempt to screw consumers.

This last point, the attempt to absolve the credit card companies of the risks associated with the credit they are irresponsibly distributing, is something I spoke about a couple of weeks ago.
In truth, it doesn't matter how people are entering bankruptcy. The point is that the credit card industry has always been aware of that risk. If they didn't want to pay for the negative consequences of that risk, then they shouldn't have been loaning money to such high risk clients. If they're being hurt (which they are not) it is due to their own imprudent business practices. It isn't our job to clean up their mess.
Clearly, this bill is nothing more than a political payout to generous Republican campaign contributors. Any serious case for reform wouldn't be answered by the legislation we see before us. If legislators were truly interested in reducing bankruptcy, some of the reforms would be aimed at curbing the predatory practices of the credit card industry. Instead, we're being told that bankruptcy is solely the responsibility villainous consumers who are capriciously fleecing the pockets of an innocent and noble set of multinational corporations. If that sounds absurd, well, that's because it is.

I understand the political necessity of responding to one's constituency. But it sure would be nice if Republicans could do that without literally screwing the most vulnerable among us. I mean, is that so much to ask?
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