Post Date: October 24, 2005
The following op-ed by Professor Elizabeth Warren, Show me the money, appeared in The New York Times on October 24, 2005.
Is there celebration in the halls of Citibank this week? Is MBNA uncorking the Champagne while Ford Motor Credit serves cake? Eleven years ago, these and other creditors pushed hard to re-elect sympathetic members of Congress who would enact a tougher bankruptcy law. Last Monday, the law they lobbied for went into effect.
It was a long fight - President Bill Clinton vetoed one bill, anti-abortion forces derailed another - but in the end the credit industry succeeded in making it much harder for struggling families to ease their debt loads. The industry helped fend off efforts to soften the bankruptcy bill's impact on soldiers fighting overseas and on victims of natural disasters. It even turned thumbs down on an amendment to limit enforcement of debts that carried more than 100 percent interest.
But is the new bankruptcy law now set in stone? Is Congress that rigid, the financial industry that strong?
In a free-market economy, bankruptcy laws are written and rewritten as new economic problems bubble to the surface. Today, consumers and small businesses that have been swamped by debt are in the crosshairs. Tomorrow, insurance company failures, a collapse of the mortgage-lending market, or another outrageous story of a Wall Street executive who hung onto a fortune while seeking shelter in bankruptcy may excite Congressional attention.
Even as the new law goes into effect, there are six new bankruptcy bills pending in Congress, three of them responding to the recent hurricanes. Others are sure to follow: Several members of Congress have railed against the airlines' use of bankruptcy to write off their pension obligations, for example.
The first draft of the new bankruptcy law was written in the mid-1990's by lobbyists for the credit industry. As they explain, they then "shopped" the bill to friends in Congress who advanced it. "It is rare to find such clear evidence of the effects of money" in Washington politics, Howard Rosenthal, a Princeton economist, and co-author Stephen Nunez wrote in 2002 of the progress of the bankruptcy amendments.
But though the lobbyists, public relations gurus and consumer lenders can change the laws, that won't change the underlying economic reality - or pay the bills.
Academic research shows that about half the families in bankruptcy filings have serious medical problems. Two-thirds of those who file have lost a job or a small business. Twenty percent have just suffered a family breakup - a husband who disappeared, a wife who died, a family separated by long distances.
Many have sustained multiple hits: illness and a layoff, divorce and business failure. Because of the hurricanes, in the next few years, bankruptcies in Louisiana and Mississippi are likely to grow at a rate that is about 50 percent faster than in the rest of the country.
And when the crisis passes - when debtors get back to work or sweep the muck out of their homes - they will still face a mountain of bills and a ferocious onslaught by collection agencies. If those in such straits can't find a way to get current on their debts quickly, they'll face foreclosure on their homes, repossession of the cars they need to get to work and morning-to-night debt collection calls.
Punishing debtors this way won't put money in creditors' pockets. Creditors who planned to reap windfalls from this new law may be sorely disappointed as they discover that their lobbyists promised more than they can deliver. And if the bankruptcy system becomes unworkable for both debtors and creditors, pressure will build for change.
Sometime soon, politicians will realize that those who find themselves in bankruptcy are solidly middle-class people who have been to college, married and bought houses. This year, about 300,000 will be small-business owners who want a chance to try again. Married couples with children will be about twice as likely to file as those with no children, and single parents will be about four times more likely than those with no dependents at home. Families caring for elderly relatives are also at special risk.
These are hard-working people who have been laid low by forces far beyond their control. They are the constituents of the politicians who took the credit industry's side over theirs.
The new bankruptcy laws will surely squeeze some people harder, and they may well improve short-term corporate profits. But those laws won't solve the underlying problems of unemployment, inadequate health insurance or failing small businesses. They won't stop hurricanes or floods. And because those problems aren't going away any time soon, the need to restore common sense to the bankruptcy system will not go away either.
The industry should enjoy its cake and Champagne today. It won't last forever.
Elizabeth Warren, a professor at Harvard Law School, is the co-author of "The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke."