Monday, December 29, 1997

Bankruptcy: We need to restrain creditors

By HOWARD M. METZENBAUM

and MARY ROULEAU

For Scripps Howard News Service

Congress is under considerable pressure to reform the nation's bankruptcy laws to make it more difficult or impossible for honest debtors to get the "fresh start" historically offered by Chapter 7.

This intense lobbying campaign by the credit industry is nothing more than an attempt to turn the bankruptcy court into an expensive collection agency for its record-high debt -- debt accumulated as the result of aggressive and irresponsible credit practices.

Creditors seek a legal solution to the problems they themselves created, but bankruptcy law is not the problem. According to the National Bankruptcy Conference -- a self-funded conference of bankruptcy lawyers, judges and scholars -- personal bankruptcy filings have doubled since 1980, even though the law has made it less attractive for persons to file. In fact, empirical studies consistently show changes in bankruptcy law do not affect the number of petitions.

While showing recent signs of slowing, there have been a record number of personal bankruptcies filed over the past two years. The question is: Why? The main reason: Credit card companies' aggressive marketing tactics and credit extension.

Most people who file for Chapter 7 relief are of modest means -- their mean net income is just under $20,000. They are usually pushed into bankruptcy by a disruptive life event like divorce (especially for women), medical crisis, job loss or reduction in salary. Plus, the average Chapter 7 filer has credit card debts alone of more than $17,000.

This credit card debt load is a shocking but relatively recent phenomenon. Credit card debt doubled over the past five years due, in large measure, to the aggressive and irresponsible marketing practices of credit card companies.

Credit cards were a highly profitable line-of-business for financial institutions, and they were given out to many people who normally would have been considered poor risks. There is now approximately $450 billion of revolving debt carrying interest and charges.

But credit card profits have now fallen off, causing pressure on debt collection. According to recent reports, Sears, Roebuck stock tumbled nearly 11 percent after it warned future earnings could be hurt by losses on its credit card business.

So the creditors have launched an expensive legislative and PR campaign to convince Congress that bankruptcy laws are broken and people who could pay off their debts are abusing Chapter 7. The creditors sponsored a report that showed a relatively small percentage of debtors could pay a relatively small percentage of their debts. But this study has been severely criticized over its methodology.

We can't legislate against job loss and medical crisis, but we can do something about credit card practices. The Consumer Federation of America has called on the industry to limit credit lines to 20 percent of annual income in most cases. The credit industry knows how to limit credit but has been so anxious to run up balances that it shares the high debt load responsibility.

We have endorsed a bill introduced by Rep. Joe Kennedy (D-Mass.) that targets abuses such as inadequate disclosure of "teaser" (introductory) interest rates and penalizing cardholders for paying off monthly balances in full. This type of approach is the proper legislative solution to the current debt crisis.

Former Senator Metzenbaum, chairman of the Consumer Federation of America, was a longtime member of the Senate Judiciary Committee. Rouleau is CFA's legislative director.