Payback time

Although the House and Senate both have passed bankruptcy reform legislation making it tougher for borrowers to walk away from debt, the differences between the two versions are significant. Whether it is the best bill the banking industry could buy or much-needed relief for bill-paying Americans depends upon how those differences are reconciled and how well Congress follows through on the other side of the debt equation, lender reform.

Overwhelming, bipartisan votes in both chambers are proof that Congress bought the financial industry’s well-financed argument that a 70 percent increase in personal bankruptcy in the last 10 years could not be ignored (1.2 million filings last year), and that a system devised to protect people from unforeseen catastrophe was being abused, with honest consumers picking up the tab (roughly $50 billion last year). Both versions put the burden back on the debtor by making it much harder to file under Chapter 7, which wipes out credit card and other unsecured debt, and forces them into Chapter 13, which puts them on a rigid repayment plan for all debts.

The versions differ on several important points. The Senate would cap at $125,000 the home equity a filer can keep, a response to several highly publicized celebrity bankruptcies in which luxury homes were kept while creditors went unsatisfied. The House is much more generous, both in the amount of equity and the number of homes that can be shielded. The Senate allows a consumer to sue a lender if terms of the loan violate federal lending laws and allows a person filing for bankruptcy who is separated from a spouse to exclude the spouse’s income in the repayment arrangement. The House version contains no such consumer protections. The House does, however, want to protect 300 investors, including 20 millionaires, from paying a $15 million debt they owe to Lloyds of London; the Senate deleted the favor.

Overall, senators took a more balanced approach to the borrower/lender equation, but they fell down one important issue – the marketing of credit cards to teen-agers. Amendments to impose a $2,500 credit limit on cards issued to minors without a parent’s co-signature or without proof of adequate income by the minor, or even to require the card issuer to provide educational material about wise credit use all were defeated. The credit industry was staunchly opposed to any attempt at ending this most predatory of lending practices.

The only rational defense for that opposition is that the bill in question is strictly about bankruptcy law and is not the place to regulate the credit industry. That defense stands up only if Congress follows through with companion legislation that addresses such issues as the mass marketing of cards to young and low-income people who get stuck on a perpetual treadmill of making minimum payments at exorbitant interest rates, the illegibly small print on statements that describes repayment terms in inexplicable language, the unauthorized charges and credit-limit expansions, the irrational low-interest come-ons. If the explosion in bankruptcy filings was responsible for high consumer-debt interest rates, Congress should ensure that bankruptcy reform will lead to lower rates.

The credit card industry, including MBNA, lobbied heavily for this bill and it paid dearly to get what it wanted, pouring $37.7 million into 2000 election campaigns, nearly double its 1996 contributions. How Congress proceeds from here will determine whether the bankruptcy reform bill is payback or a down payment on broader reforms to come.