Oppose the Anti-Consumer Bankruptcy Bill

Updated 25 April 2005

On 20 April 2005, the President signed the unfair, anti-consumer bankruptcy bill, S 256, as Public Law 109-8. PIRG's statements and other materials opposing the bill are below.

Information from the state PIRGs about lawsuits and regulatory actions over irresponsible credit card company practices

Urge your Representatives to oppose the Bankruptcy Bill, S. 256. It's already passed the Senate. It's unfair to consumers because it doesn't rein in unfair credit card company practices. Find your Senator's home page and contact info. Call Senate switchboard (202-224-3121), or send fax or e-mail. Senators are not accepting printed mail since 9/11. Sample letter here.

Index to this page:

The bankruptcy bill:

In the 107th Congress (2001-2002) final passage of the one-sided anti-consumer bankruptcy bill (HR 333) was stymied at the end of the session. Confusion among its proponents, as well as a push by the credit card industry to eliminate all state rights to enact credit reporting laws (see PIRG FACT Act archive) caused it to be delayed through the 108th Congress, but now the industry is gearing up for another push. Now, bankruptcy proponents have announced they seek swift passage in 2005 of virtually the same unfair legislation. S. 256 (Grassley-R-IA, Carper-D-DE) has already passed the Senate floor. The key vote was on ending debate, and we lost 69-31 (consumer vote NO). More info on the Senate floor battle here. Language opposed by pro-life protestors, which helped kill the bill in 2001-2002, has been removed.

The unfair bill has been opposed by every consumer group and many unions, minority and womens' rights organizations.

The bill is supported by a coalition of powerful financial interests, led by credit card banks including. MBNA, Capital One, Citibank, Providian and other credit card companies. The draconian bankruptcy bill is designed to rip the bankruptcy safety net out from under responsible working families at the behest of irresponsible credit card companies. Question: In 2000, did President Bush receive his largest contributions from Halliburton, Lockheed, Exxon Mobil or some other oil company or defense contractor? Actually, his largest contributor was Maryland Bank, National Association. Hunh? Oh, you may know them as MBNA-- they changed their name years ago and moved to Delaware, because Congress allows credit card companies to operate nationwide from states with the worst consumer protections. Find out more about the "Secret History of the Credit Card" from Frontline. More on credit card irrresponsibility at PIRG's truthaboutcredit.org. The budgets of American families have been hit hard in recent years by massive layoffs, outsourcing of jobs, corporate scandals and ravaged pensions. Passage of the bankruptcy bill would make it harder for families hit by financial misfortune to get back on track. It would benefit the very profitable credit card industry at the expense of the modest-income families who represent the great majority of those who declare bankruptcy. Bankruptcies are driven by economic difficulties. The timing of this bill couldn’t be worse. Ninety percent of all bankruptcies are triggered by the loss of a job, high medical bills or divorce. The economic recession has taken its toll on many families. Long-term unemployment continues to be a problem and the number of Americans without health insurance is at its highest level ever and growing. As a new study by the nation's leading expert on bankruptcy, Professor Elizabeth Warren, and one of its leading experts on universal health care, Professor Steffie Woolhandler, MD and their colleagues points out, high co-pays, deductibles and non-covered services are causing even consumers who have health insurance to rack up massive health care costs on their credit cards, leading to involuntary bankruptcy. See their study at the new website GetSickGo Broke.org. For years, the late Paul Wellstone (MN) single-handledly held off final passage of the unfair bankruptcy bill. The last time the bill was considered on the Senate floor, it passed 82-16 (Consumer vote = NAY). We can only hope that Senators like Hillary Clinton (NY), who strongly opposed the bill as First Lady because of its harsh treatment of single mothers but voted for it when she became a Senator, and Patty Murray (WA) and Barbara Mikulski (MD) and many others, will change their votes and fight alongside Dick Durbin (IL), Ted Kennedy (MA), Chris Dodd (CT) and others who will try to kill the bill on the Senate floor. Some Senators claim they support the bill on behalf of their credit unions, and to promote personal responsibility, not as a favor to the irresponsible credit card companies. Well, they should look a little harder at the implications of this manifestly unfair piece of legislation that primarily benefits the credit card companies while punishing working families, without doing anything about unfair credit card practices.

Unfortunately, member-owned credit unions also support the bill. In most other cases, credit unions make the right choice to offer their members better deals than banks. Credit union support of the unfair bankruptcy bill, which will dramatically hurt their members, is evidence that credit union management has completely lost touch with with the original goals of the cooperative credit union movement.

While little to no evidence exists that consumers are abusing the bankruptcy system, evidence is mounting against irresponsible credit card companies. Credit card banks are being sued for deceptive practices by consumers. Credit card companies are paying civil penalties and being ordered by government regulators to pay restitution to their victims for duping consumers. Credit card companies and their parent companies are also being sued for securities fraud. See PIRG's Lawsuits And Regulatory Orders Against Credit Card Companies page for more information. In the fall of 2004, Minnesota Attorney General Mike Hatch sued Capital One for violating his state's consumer laws by making untrue promises that fixed rates were really "fixed."

Why, so soon after passing a corporate responsibility law (see PIRG's Enron Watchdog page for details) is Congress helping the credit card companies, despite their irresponsible acts?

One big reason: MONEY. Bank, credit union and finance company donations to Congress in support of this bill have been massive. The financial sector is the largest contributor, overall, to political campaign. One of the largest credit card banks, MBNA, was President Bush's leading corporate contributor in 2000. In 2004, MBNA gave over $1.5 million to all candidates, according to the Center for Responsive Politics, leading all firms in its category. Since 1990, commercial banks alone have made political contributions totaling over $150 million to Congress, the parties and Presidential candidates.

Background: The bankruptcy bill was pushed by the credit card industry so that they could recover more unpaid credit card debts. At its core, its two goals, designed to help the credit card industry, are to put more people in harsh repayment plans and make them owe more, especially to credit card companies:

The Problems With The Bill:

There's no evidence of bankruptcy abuse. Bankruptcies have gone up, but so have credit card debt and credit card profits over the years. Independent studies, such as those of Harvard Law School professor Elizabeth Warren, show that the 90% or more of bankruptcies are still filed by people who get sick, get laid off, or get divorced, not by abusers. The industry can only document that 3% of filers may be abusers, yet the bill would harm all debtors. Warren's newest study, released in Februrary 2005, and done with colleagues at Harvard Medical School, shows that more than half of 2001 bankruptcy filers filed due to high medical debts.

The bill has a millionaire loophole: The bill will hurt these hard-working Americans, but it includes a provision to protect millionaire deadbeats, who would be allowed to keep their mansions in bankruptcy. Current law in a few states, notably Texas and Florida, allows this. The proposed bill expands the millionaire mansion loophole nationwide. Oh, Congress does say that if you are convicted of securities law violations, you cannot use the loophole. Very few people are ever convicted of securities law fraud. Back to Top

We agree that people who can afford to pay their debts should be required to pay them off: That's what the old law required. The new law says people who cannot afford to pay off their debts should go into repayment plans anyway. The new law imposes an overly harsh means test-- it completely eliminates the ability of judges and magistrates to review a debtor's unique circumstances. Contrast the millionaire's loophole with a provision of the bill that presumes that a struggling family spending more than $500 on credit card purchases in the three months prior to a bankruptcy (about $42 a week) is guilty of "fraud."

Or the bill’s irrational new expense limits, which would make it harder for a family to declare chapter 7 bankruptcy if they spend one dime on public transportation and also own a car. (What if both parents commute to their jobs-- one by car, the other by subway?) Or a provision that would not allow a bankruptcy judge to take into account whether a debtor is blameless for his or her financial problems -- because of high medical bills, for example -- when deciding whether the person can declare chapter 7 bankruptcy. (Only victims of terrorism can receive this consideration.) Or a revision to current law that would allow landlords to evict tenants who have declared bankruptcy, even if the tenant is caught up on back rent and making current payments. Or the excessive and expensive new "red tape" lower income debtors must cut through at their own expense in order to file for bankruptcy and fend of challenges from creditors. Back to Top

The bill will make it harder for modest-income Americans to get financial relief in chapter 7 and increase the likelihood that they will lose their homes and cars in chapter 13 restructuring plans. The means test to determine which debtors can file chapter 7 bankruptcy (instead of chapter 13) is arbitrary and inflexible. It is based on IRS standards not drafted for bankruptcy purposes that do not take into account individual family needs for expenses like transportation, food and rent. It disfavors renters and individuals who rely on public transportation and unduly benefits higher income individuals with more property and debts. Moreover, the bill’s “cramdown” provision will make it much harder for families to use chapter 13 to save their homes and cars.

Women Would be Among the Hardest Hit. Women represent the single largest group in bankruptcy, with households headed by women accounting for about 40 percent of all bankruptcies today. By creating new types of "nondischargeable" credit card debts, the bill puts banks in competition with women trying to collect child support from a former spouse after bankruptcy. This is why more than 20 national women's organizations have opposed the legislation. Supporters' of the bill assert that it "puts child support first" by making the payment of child support a top priority when distributing debtor assets in chapter 7 cases. This claim is highly misleading, since more than 90 percent of all chapter 7 debtors have no assets to distribute. But these debtors will have to pay back more money in credit card debts after clearing bankruptcy, leaving less money for child support and alimony.

Worst, the bill lets the credit card companies get away with cheating and tricking their customers: The bill does nothing to rein in the unfair credit card marketing and interest calculation practices that have led to increased credit card debt that's put a burden on working families. Evidence of abuse by credit card companies is growing. Many of the nation's biggest credit card companies have recently paid court-ordered settlements or government-ordered civil penalties for duping their customers. The alleged practices include "down-selling"--a bait-and-switch where a favorable offer becomes a high-priced sub-prime account, imposing late fees on consumers who paid on time, knowingly allowing customers to exceed credit limits, and illegally hiking interest rates. Back to Top

In 2002, consumer groups gained hope when the bank regulators began to take note of their most egregious practices, in a proposed guidance from the four leading bank regulators -- the Federal Reserve Board, the Office of the Comptroller of the Currency (OCC), the Office of Thrift Supervision and the FDIC. It documented that many credit card companies are making loans to consumers already in debt trouble. The agencies had uncovered a pattern of inappropriate practices that both placed the banking system at risk and over-extended credit to consumers, for example: "some institutions have granted additional cards to borrowers already experiencing payment problems on existing cards."

It documented that some credit card companies charge monthly minimum payments that are so low consumers end up owing more than they did before (negative amortization) instead of ever paying off their credit cards. Unfortunately, the final version of that guidance used mushier language. More recently, however, in September 2004, OCC, not usually known as the consumer's friend, issued an advisory letter telling its banks that certain "practices may entail unfair or deceptive acts or practices and may expose a bank to compliance and reputation risks." OCC regulates all the credit card companies organized as national banks, which means most of the biggest except Capital One.

Even the Office of the Comptroller of the Currency (OCC), the once obscure chief national bank regulator not usually known as a consumer champion, has taking notice of unfair credit card company practices. See PIRG's OCCWatch pages for more information about its actions eliminating stronger state consumer laws.

The OCC has imposed civil penalties or restitution orders against three credit card companies, Providian, Marin and Metris, for unfair consumer practices and shut down a fourth, NextCard, for unsound lending practices. OCC Comptroller John Hawke said of the once high-flying Providian, ordering to pay $300 million in restitution, "Providian engaged in a variety of unfair and deceptive practices that enriched the bank while harming literally hundreds of thousands of its customers." See PIRG's Lawsuits And Regulatory Orders Against Credit Card Companies page for more information. Repeat: "enriched the bank while harming literally hundreds of thousands of its customers."

Consumer groups have long argued unsuccessfully that the bankruptcy bill should include a provision to require banks to disclose to each consumer the number of months and years it would take to pay off their balance if they only make the requested minimum monthly payment.

For more information about unfair credit card company practices, see this PIRG page.

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EXAMPLE: If you owe $1000 at an 18% APR% and make the minimum payment, it would take you 73 months to pay off that card and accumulated interest. The new guidance criticizes banks for offering some risky consumers minimum payment terms that result in "negative amortization," meaning the minimum requested payment is so low that your debt keeps getting bigger, not smaller. You would ride a perpetual debt treadmill. See PIRG's TruthAboutCredit.org website for more information about how you can deflate your credit card interest rate and more information about credit card tricks. Back to Top

Making matters worse, many large credit card banks or their affiliated holding companies are facing increased scrutiny over irresponsible accounting practices. See PIRG's Enronwatchdog page. Some, including Citigroup and JP Morgan Chase, have been investigated for their involvement in the Enron fiasco itself. See PIRG's Lawsuits And Regulatory Orders Against Credit Card Companies page for more information.

Congress shouldn't cut the bankruptcy safety net when consuemrs are hurt by corporate layoffs, pension fund fiascos, and skyrocketing mdical debt: It's puzzling that Congress, despite a depressed economy, would make things worse for consumers by eliminating the bankruptcy safety net, especially when many victims may be laid-off employees of companies that cooked the books or may be consumers who ran up large credit card debts because they were deceived by their irresponsible credit card company, or as Warren et al point out, their problem was a lack of comprehensive health care. Do these unfortunate consumers belong in debtor's prison for the next five years? Back to Top

Links:

NOTE: Many of these materials are from the 2001-2002 campaign against the bill, but the arguments remain valid in 2005.

Letter and release opposing new bill, HR 975, from 34 leading groups (March 2003)
Letter from 27 groups opposing bankruptcy bill (23 Aug 02)
Consumer Federation of America Bankruptcy Documents (Thanks to CFA for some of the detail above)
Consumers Union Bankruptcy Documents
UAW Bankruptcy Alert to members
More Credit Card Tricks and What You Can Do To Deflate Your Rate: PIRG's Truth About Credit Page
Complain to the OCC (Chief National Bank Regulator) About Your Credit Card Company
PIRG Testimony to House Financial Services Committee, 1 Nov 01, Unfair Credit Card Practices
State PIRG Lawsuits And Regulatory Orders Against Credit Card Companies Page
State PIRG Corporate Accountability and Enron Watchdog Pages