Howard Karger: Throwing Consumers to the Wolves

Throwing Consumers to the Wolves
By Howard Karger
AlterNet

Frank Monroe is one pissed-off federal bankruptcy judge. Just before Christmas, Judge Monroe was forced to deny Guillermo Sosa, an Austin, Texas, house painter, and his wife, Melba Nelly Sosa, emergency bankruptcy protection to avoid foreclosure on their mobile home. While sympathetic to the Sosas, Judge Monroe's hands were tied by the new bankruptcy law. The so-called Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) required that the Sosas receive consumer credit counseling before filing for bankruptcy. Unaware of this stipulation, they had failed to do so, making them ineligible.

In his angry ruling [PDF], Monroe wrote that "the parties pushing the passage of the Act had their own agenda … to make more money off the backs of the consumers in this country. … To call BAPCPA a 'consumer protection' act is the grossest of misnomers."

The BAPCPA went into effect on Oct. 17, 2005. Banks and other lenders promised it would stop deadbeats from abusing the bankruptcy system, save billions, and lower interest rates for responsible borrowers. House Judiciary Committee Chairman James Sensenbrenner, R-Wis., predicted the bill would recoup "billions … in losses associated with profligate and abusive bankruptcy filings."

That did not happen. On the contrary, Bankrate data found that the average credit card interest rate actually rose 1 percent in the six months following the passage of the Bankruptcy Act.

Panicked debtors trying to beat the Oct. 17 deadline filed more than 2 million bankruptcy petitions in 2005, 32 percent more than in 2004. Some 500,000 people filed for bankruptcy in the two weeks alone before the Act took effect. This uptick in filings cost Bank of America $320 million, JP Morgan Chase predicted their credit card defaults would top $2.3 billion and Discover Card lost $180 million. On the other hand, credit card companies will undoubtedly make up this loss, and more, in the long run.

Who are the "deadbeats" Congress is trying to weed out?

Leslie Linfield of the Institute for Financial Literacy says, "Almost half [of bankruptcy filers] have incomes below $20,000 a year, and almost 40 percent indicate that their indebtedness is due to illness or injury." The other half may be workers pushed into an economic corner. A 2006 Federal Reserve study found that real median income dropped 6 percent from 2001 to 2004, while average family income fell by 2.3 percent. The gap between stagnant or declining wages and the rising cost of living is partly being made up by debt. For example, Americans who roll over credit card balances owe anywhere from $5,100 to $14,000, depending upon whose numbers are used. High debt levels are fueled by easy credit that helps lessen the pressures on business to increase wages.

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