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2005-10-04

Bankruptcy After Katrina: Who Wins, Who Loses?

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President Bush’s bankruptcy bill, passed by Congress in April, is taking effect later this month. Four congressmembers are now calling for victims of hurricane Katrina to be exempt from certain provisions of the law. We speak with the Consumer Federation of America. [includes rush transcript]

We now look at another economic policy that has an especially severe affect on Hurricane Katrina survivors. The Bankruptcy Abuse Prevention and Consumer Protection Act was passed in April and goes into affect on October 17th. Critics of the bill charge that it was crafted by lobbyists for the credit card industry and that credit companies stand to reap several billion dollars in profit from the law. Meanwhile the bill makes it harder and more expensive for people to seek bankruptcy protection and it give lenders and businesses new legal tools for recovering debts.

Four congressmembers led by Democratic Representative John Conyers of Michgan are calling for victims of Katrina to be exempt from certain provisions of the law. Conyers said that, "In today’s lagging economy, far too many hardworking Americans are living paycheck to paycheck, just barely getting by. In that tenuous financial condition, many families are only one tragedy away from being devastated by debt. Many of the families who have now lost their homes, livelihoods, and personal possessions will soon be contacted by credit collection agencies demanding the next minimum payment on a credit card."

Transcript

This is a rush transcript. Copy may not be in its final form.

AMY GOODMAN: I wanted to expand this discussion about who benefits in this country around the issue also of bankruptcy. The Bankruptcy Abuse Prevention and Consumer Protection Act was passed in April and goes into effect on October 17th. Critics of the bill charge it was crafted by lobbyists for the credit card industry and that credit companies stand to reap several billion dollars in profit from the law.

Meanwhile, the bill makes it harder and more expensive for people to seek bankruptcy protection. It gives lenders and businesses new legal tools for recovering debts. Four Congressmembers, led by Democrat John Conyers of Michigan, are calling for victims of Katrina to be exempt from certain provisions of the law. Conyers says, quote, "In today’s lagging economy, far too many hard-working Americans are living paycheck to paycheck, just barely getting by. In that tenuous financial condition, many families are only one tragedy away from being devastated by debt. Many of the families who have now lost their homes, livelihoods and personal possessions will soon be contacted by credit collection agencies demanding the next minimum payment on a credit card."

We’re also joined in Washington, D.C., by Travis Plunkett, the Legislative Director of Consumer Federation of America. Can you talk about this?

TRAVIS PLUNKETT: The concern is that Katrina victims are going to be kept from a safety net program that has existed for many years. I mean, that’s what bankruptcy is. This new law that takes effect on October 17, as you said, erects a number of new barriers. Several of them are going to handcuff bankruptcy judges in considering the cause of bankruptcy. We have many Americans who file bankruptcy for legitimate reasons, mostly because they’re hit by unforeseen emergencies. The natural disaster, the Katrina situation, is just an example of how people who are doing things right, who are paying their bills, are hit by unforeseen emergencies and end up in bankruptcy.

The problem with this new law is that judges won’t have the discretion to ease these people’s paths through the bankruptcy process. The new law will require them to pay more for bankruptcy. It will require them to pay that money up front. It will require them to meet a number of new paperwork burdens and legal burdens, and all of those factors are going to keep these people from bankruptcy.

Let me mention that we’re not so concerned about the next few months, because Katrina victims are just trying to deal with coping with day-to-day life. What the research shows is that after a natural disaster, bankruptcies don’t peak for three years. So we’re concerned about what happens next year or the year after, not necessarily in the next few months, although I should mention there were some people on the brink of bankruptcy who have had difficulty getting into court before this new law takes effect.

AMY GOODMAN: Dan Mitchell of the Heritage Foundation, your response to Travis Plunkett?

DAN MITCHELL: Well, I’m a tax person, not a bankruptcy person, but I do know that the basic economics of bankruptcy are that if you make it too easy to declare bankruptcy, you wind up encouraging lenders, credit card companies and others, banks, to take a very dim view of extending credit to low-income people. So there’s a balance here. I mean, bankruptcy law is part of our system. It enables people to get a second chance in life.

But you want to make sure that there aren’t a lot of people abusing it, because who pays the price for that? The people who pay the price for that are low-income people, because they’re, in effect, tarnished by the irresponsible behavior of a few. And so, where we strike that balance, I’ll be the first to admit, that’s not my area of expertise, but I know that credit card companies don’t exist as charities. They want to make their rate of return, just like everyone else wants to make a rate of return. And if you have a lot of people declaring bankruptcy, and if the government makes it too easy to do that, then what’s going to happen, the rest of the people, including low-income people who are being responsible with their finances, are going to be paying higher interest rates, they’re going to find it more difficult to get credit. So where we draw the line, again, I’m not the person to answer that question, but we have to keep in mind that it is a balancing act.

AMY GOODMAN: Well, Travis Plunkett, what about that?

TRAVIS PLUNKETT: Yeah, well, Dan is right. It is a balance, and the concern with this law is that the balance now has been tilted too far in the direction of creditors. One of the major reasons why bankruptcies have increased so sharply since 1990 is that there has been a lending boom. Now, that boom has benefited some families. It has given them access to credit that they wouldn’t have gotten before, but it has also led to abusive and reckless lending by credit card lenders and mortgage lenders, in particular, who have targeted the most vulnerable.

And what this new law does is the opposite of what Dan is talking about. By making it so difficult to wipe away debt for people who have been targeted by abusive lenders, it’s going to encourage the bottom feeders in the lending industry. So the balance now has gone too far in the other direction.

AMY GOODMAN: I want to thank you all for joining us, Travis Plunkett, Legislative Director of Consumer Federation of America; Dan Mitchell of the Heritage Foundation; and David Harris, Children’s Research and Education Institute.

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