Bill targets credit debt Congress set to approve legislation limiting bankruptcy declarations; Alarming increase in filings; Measure's critics say it punishes consumers but lets lenders off hook

THE BALTIMORE SUN

WASHINGTON -- Alarmed by a striking rise in bankruptcies, Congress is set to approve legislation that would strengthen creditors' hands with deadbeats and prevent borrowers from walking away from their debts.

The House bankruptcy bill -- the toughest re-write of the nation's credit laws in two decades -- could be approved early this week, with Senate action expected to follow.

"What we're talking about here is an issue of personal responsibility," said George Wallace, a bankruptcy attorney lobbying for the credit industry, who noted that unless Congress acts, debt-free consumers will continue to pick up the tab. "Those people who pay their bills now have to foot the bill."

But consumer groups are decrying Congress' haste, complaining that neither the House nor the Senate is holding the credit card industry responsible for a problem largely of its own making.

"Usually in the market place, if a business takes a risk, they have to accept that something bad may happen," said Leif Clark, a U.S. bankruptcy judge in San Antonio, Texas. "Here, you have credit card companies taking risks, and instead of absorbing costs of those risks, they're going to Congress to change the laws."

At stake are the lives of people caught in the middle of a liberalized credit market that has made it easy to run up vicious debts and a bankruptcy system that makes it tantalizingly simple to leave those debts behind.

Nicholl Russell's divorce tore her apart, emotionally and financially. Her debts surged to $55,000, and the undertow of credit card interest was sweeping her away. Yet the South Dakota waitress' two children needed clothing. Their medical bills were piling up. So, six years ago, Russell visited a Sioux Falls bankruptcy attorney, who asked her to tote up what she owed on a yellow legal pad, pay his fee and go home. Weeks later, a letter arrived with news that seemed to come from a fairy godmother: Her debts were absolved.

But the banks, retailers and credit-card companies that are left saddled with these debts say too many Americans seek the easy way out of their money troubles, and they have persuaded Congress to take away the magic wand.

"I never saw the inside of a courtroom. I never spoke to a judge," Russell told a House subcommittee last March. "No one ever asked me for a tax return or a pay stub."

Booming economy no help

Russell was one of 971,516 individuals and businesses that filed for bankruptcy in 1992 -- a 300 percent increase from 1980. Last year, bankruptcy filings surged to 1.4 million, despite a booming economy that is supposed to be lifting people out of debt.

"One-point-four million new bankruptcies -- one filing for every 70 households -- those are both records," said Samuel Gerdano, executive director of the American Bankruptcy Institute, a nonpartisan research group. "In an otherwise healthy economy, how can both of these be happening?"

Both the House and the Senate have drafted legislation to give creditors more power to wrest payment from debtors. Both bills have bipartisan momentum.

Opponents of the measures say they are too punitive, placing all the responsibility for surging debt on consumers and none on the credit industry. Deregulation of credit and cutthroat competition among card companies have prompted banks to offer piles of plastic to people who likely could not have gotten a credit card a decade ago.

They point to automated teller machines at casinos, the practice of boosting credit limits for card holders already in debt, and introductory interest rates that can triple for customers who don't read the fine print. "What's changed is the way credit-card companies issue their credit cards," Clark said. "There's much, much, much more competition, more issuers. It's simply exploded. And with that competition, there's increasing competition to get cards into the hands of people that maybe shouldn't have them."

The credit industry says the rising tide of bankruptcies is the result of increases in mortgage costs, aggressive attorneys promoting bankruptcy as a viable financial planning tool and a fading stigma attached to loan defaults.

As evidence, they offer the tale of Toni Braxton, the singer whose two albums have earned $170 million, who owns a baby grand piano, a Porsche and a Lexus, and who filed for Chapter 7 bankruptcy last January, telling a reporter after the filing, "I'm gonna go out and enjoy myself."

By the credit industry's reckoning, every American consumer pays $400 a year in higher interest rates and consumer prices because of loan defaults that totaled $40 billion in red ink last year.

"The biggest thing about this bill is not the number of people impacted but the message it will send," Rep. Bill McCollum, a Florida Republican spearheading bankruptcy reform, said of the House version. That message is clear: Pay your debts.

New standards

Both the House and Senate bills would set new standards designed to push debtors away from Chapter 7 bankruptcy, which allows the bankrupt to wipe their slates clean. Instead, they would probably have to use the more restrictive Chapter 13 bankruptcy, which forces filers to pay most of their debts within five years.

The House bill would forbid people earning at least the median national income -- $51,518 for a family of four -- to walk away from their debts. The Senate bill would give more discretion to judges to force some repayment.

Powering the bankruptcy-reform movement is a credit industry watching default rates shoot skyward. In Maryland last year, nearly 32,000 households filed for bankruptcy -- one in 58, the ninth-highest rate in the country, according to the American Bankruptcy Institute. That was a 31.4 percent leap from the figure in 1996, when filings totaled 24,347.

The industry has plowed millions of dollars into lobbying, campaign contributions and advertising, hiring lobbyist luminaries such as former Treasury Secretary and Democratic Texas Sen. Lloyd Bentsen. The American Financial Services Association in February helped organize fund raisers for McCollum, charging guests $1,000.

Campaign contributions

Members of the industry's National Consumer Bankruptcy Coalition have distributed $1.6 million in contributions to federal candidates in the 1997-1998 election cycle. MasterCard International made no contributions in 1995, the last non-election year. Last year, the company distributed $28,750. Visa USA's political giving jumped from $5,750 in 1995, the last non-election year, to $48,550 last year.

Industry opponents insist that Congress should add "balance" to the bills by toughening bankruptcy rules for debtors and holding creditors accountable. They propose limits on marketing and mandatory increases in minimum monthly payments because very low minimum payments allow debt to accumulate rapidly.

"In many ways, the appropriate analogy is the cigarette industry," said Gary Klein, lawyer and bankruptcy specialist with the National Consumer Law Center in Boston. "The credit card companies profit from encouraging people to engage in unhealthy behavior."

Pub Date: 6/07/98

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