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Bush Bankruptcy Bill Set for Passage •
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The Debt-Peonage Society
By Paul Krugman
The New York Times
Wednesday 09 March 2005
Today the Senate is expected to vote to limit debate on a bill that toughens
the existing bankruptcy law, probably ensuring the bill's passage. A solid bloc
of Republican senators, assisted by some Democrats, has already voted down a
series of amendments that would either have closed loopholes for the rich or
provided protection for some poor and middle-class families.
The bankruptcy bill was written by and for credit card companies, and the industry's
political muscle is the reason it seems unstoppable. But the bill also fits
into the broader context of what Jacob Hacker, a political scientist at Yale,
calls "risk privatization": a steady erosion of the protection the
government provides against personal misfortune, even as ordinary families face
ever-growing economic insecurity.
The bill would make it much harder for families in distress to write off their
debts and make a fresh start. Instead, many debtors would find themselves on
an endless treadmill of payments.
The credit card companies say this is needed because people have been abusing
the bankruptcy law, borrowing irresponsibly and walking away from debts. The
facts say otherwise.
A vast majority of personal bankruptcies in the United States are the result
of severe misfortune. One recent study found that more than half of bankruptcies
are the result of medical emergencies. The rest are overwhelmingly the result
either of job loss or of divorce.
To the extent that there is significant abuse of the system, it's concentrated
among the wealthy - including corporate executives found guilty of misleading
investors - who can exploit loopholes in the law to protect their wealth, no
matter how ill-gotten.
One increasingly popular loophole is the creation of an "asset protection
trust," which is worth doing only for the wealthy. Senator Charles Schumer
introduced an amendment that would have limited the exemption on such trusts,
but apparently it's O.K. to game the system if you're rich: 54 Republicans and
2 Democrats voted against the Schumer amendment.
Other amendments were aimed at protecting families and individuals who have
clearly been forced into bankruptcy by events, or who would face extreme hardship
in repaying debts. Ted Kennedy introduced an exemption for cases of medical
bankruptcy. Russ Feingold introduced an amendment protecting the homes of the
elderly. Dick Durbin asked for protection for armed services members and veterans.
All were rejected.
None of this should come as a surprise: it's all part of the pattern.
As Mr. Hacker and others have documented, over the past three decades the lives
of ordinary Americans have become steadily less secure, and their chances of
plunging from the middle class into acute poverty ever larger. Job stability
has declined; spells of unemployment, when they happen, last longer; fewer workers
receive health insurance from their employers; fewer workers have guaranteed
pensions.
Some of these changes are the result of a changing economy. But the underlying
economic trends have been reinforced by an ideologically driven effort to strip
away the protections the government used to provide. For example, long-term
unemployment has become much more common, but unemployment benefits expire sooner.
Health insurance coverage is declining, but new initiatives like health savings
accounts (introduced in the 2003 Medicare bill), rather than discouraging that
trend, further undermine the incentives of employers to provide coverage.
Above all, of course, at a time when ever-fewer workers can count on pensions
from their employers, the current administration wants to phase out Social Security.
The bankruptcy bill fits right into this picture. When everything else goes
wrong, Americans can still get a measure of relief by filing for bankruptcy
- and rising insecurity means that they are forced to do this more often than
in the past. But Congress is now poised to make bankruptcy law harsher, too.
Warren Buffett recently made headlines by saying America is more likely to
turn into a "sharecroppers' society" than an "ownership society."
But I think the right term is a "debt peonage" society - after the
system, prevalent in the post-Civil War South, in which debtors were forced
to work for their creditors. The bankruptcy bill won't get us back to those
bad old days all by itself, but it's a significant step in that direction.
And any senator who votes for the bill should be ashamed.
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Bankruptcy Bill Set for Passage; Victory for Bush
By Stephen Labaton
The New York Times
Wednesday 09 March 2005
Washington - The Senate assured final passage of the first major overhaul
of the nation's bankruptcy laws in 27 years on Tuesday, when it took two votes
that cleared the remaining political obstacles to a measure that the nation's
credit and retail industries have sought for years.
The bill would disqualify many families from taking advantage of the more generous
provisions of the current bankruptcy code that permit them to extinguish their
debts for a "fresh start." It would also impose significant new costs
on those seeking bankruptcy protection and give lenders and businesses new legal
tools for recovering debts.
The Senate on Tuesday first defeated an amendment that would have prevented
violent protesters at abortion clinics from using the bankruptcy laws to shield
themselves from judgments awarded in civil lawsuits. That amendment, which lost
by a vote of 53 to 46, had threatened to derail the legislation. The senators
then voted 69 to 31 to limit debate and cut off any effort to kill the legislation
by filibuster.
Final passage of the measure is now an inevitable formality.
House leaders have said they will quickly approve the legislation once the
Senate completes work on it as early as this week. President Bush has said he
intends to sign it. His predecessor, President Bill Clinton, killed the measure
in his final days in office in 2000 after it had been passed by Congress by
declining to sign it at the end of the legislative session, issuing a so-called
pocket veto.
The sponsors of the legislation say that it will have the effect of lowering
the costs of goods and services for all consumers by making it easier for companies
and issuers of credit to collect unpaid debts rather than passing those costs
on to everyone else. In the last 30 years, bankruptcy filings have steadily
increased, rising eightfold since Congress last rewrote the bankruptcy laws.
But critics said the measure was a thinly disguised gift to banks and credit
card companies, which, they contend, are largely responsible for the high rate
of bankruptcies because they heavily promote credit cards and loans that often
come with large and largely unseen fees for late payments. They said that the
measure would impose new obstacles on many middle-income families seeking desperately
needed protection from creditors, and that it would take far longer for those
families to start over after suffering serious illnesses, unemployment and other
calamities.
The votes on Tuesday were the second legislative victory in recent weeks both
for Mr. Bush and the Senate majority leader, Bill Frist, himself a possible
presidential contender in 2008. Mr. Frist nimbly moved both the bankruptcy bill
and another bill last month making it more difficult to bring class-action lawsuits
through the Senate.
In both cases, he unified the Republicans to beat back every effort by the
Democrats to water down or delay the measures. In both cases, he also reached
a deal with House leaders in which the Senate blocked any significant changes
to the measure in exchange for a commitment from the House that it would adopt
unaltered what the Senate approved.
The White House applauded the votes on Tuesday.
"The administration supports the passage of bankruptcy reform because
ultimately this will lead to more accessibility to credit for more Americans,
particularly lower-income workers," said Trent D. Duffy, a deputy White
House spokesman. "The fact that the Senate was able to set aside those
issues and move toward passage shows it's another bipartisan accomplishment.
Coupled with class actions, it shows we're off to a good start."
The sponsors of the bankruptcy legislation say it is a badly needed measure
to curb a growing number of abusive bankruptcy filings by individuals who ought
to be able to meet their obligations. Those cases, supporters of the measure
say, have added hundreds of dollars in annual costs to other consumers who wind
up having to pick up the unpaid debt.
"We are a compassionate nation but we should not be fools," said
Senator Orrin G. Hatch, a Utah Republican who has fought for the measure for
eight years. "We want to give our neighbors who get in over their heads
a chance to get out of their financial troubles. But for some it is a way to
avoid personal responsibility. There is something inherently unfair about denying
full restitution to creditors."
Supporters of the new law point to the rise of bankruptcy filings, from 200,000
in 1978 to 1.6 million last year, as evidence of abuses.
But critics of the measure say that the rise in such filings is not evidence
of unfair filings. Rather, they say, it is symptomatic of broader economic problems
- the growing distress in families plagued by high health care and education
costs. A recent study by bankruptcy and medical experts at Harvard University
found that more than half of the 1,771 personal bankruptcy filers in five federal
courts cited medical bills as a primary reason they filed.
The critics - including consumer groups, Democrats and more than 100 bankruptcy
law professors - say that the legislation's supporters have significantly exaggerated
the problem with the current bankruptcy laws. They say the legislation will
do far more damage than good by hitting middle-income families, women and the
elderly who have used bankruptcy protection in growing numbers to protect themselves.
"This bankruptcy bill is mean-spirited and unfair," said Senator
Edward M. Kennedy, Democrat of Massachusetts. "In anything like its present
form, it should and will be an embarrassment to anyone who votes for it. It's
a bonanza for the credit card companies, which made $30 billion in profits last
year, and a nightmare for the poorest of the poor and the weakest of the weak."
In a letter to Congress two weeks ago, 104 bankruptcy law professors predicted
that "the deepest hardship" would "be felt in the heartland,"
where the filing rates are highest - Utah, Tennessee, Georgia, Nevada, Indiana,
Alabama, Arkansas, Ohio, Mississippi and Idaho.
Critics also said the measure fails to do anything to curb abusive bankruptcy
practices by wealthy families, who can create special trusts to shelter their
assets, and by corrupt companies like Enron and WorldCom, which were able to
find favorable bankruptcy courts and deprive many of their employees and retired
employees of benefits. The Senate defeated a series of amendments proposed by
Democrats that sought to address those issues.
"The bill has a real bias," said Senator Charles E. Schumer, Democrat
of New York, whose proposal to close a loophole that permits wealthy people
to shelter assets through a special trust was defeated last week. "It deals
with abuses in bankruptcy by one group but not with another group."
The lobbying money for the legislation, which has come close to passage several
times in the eight years since it was introduced, has been lopsided.
The main lobbying forces for the bill - a coalition that included Visa, MasterCard,
the American Bankers Association, MBNA America, Capital One, Citicorp, the Ford
Motor Credit Company and the General Motors Acceptance Corporation - spent more
than $40 million in political fund-raising efforts and many millions more on
lobbying efforts since 1989, according to the Center for Responsive Politics,
a nonpartisan organization that studies the role of money in the political process.
By definition, the critics of the legislation had limited lobbying resources.
The foundation of the legislation is a provision that would limit access by
individuals to Chapter 7 of the bankruptcy code. It enables individuals to sharply
limit payments on their obligations and get a "fresh start."
The bill would instead impose a means test that would prompt many people to
file for bankruptcy protection under Chapter 13, which requires a repayment
plan. The means test would not be applied to debtors who earn less than the
median income in their state. Those who earn more than that and can pay at least
$6,000 over five years would have to seek protection under Chapter 13.
The median income for a family of four in 2003 was $65,093, ranging from $45,867
in New Mexico to $82,561 in Massachusetts, according to the United States Census
Bureau.
The bill would also increase the costs of bankruptcy by increasing the amount
of paperwork filed and force people in bankruptcy to pay for counseling about
the way they use credit. It would also make it more difficult for some people
to try to shelter their assets through the purchase of expensive homes in states
like Florida and Texas, which have homestead exemptions. To shelter more than
$125,000 in assets, homes must have been purchased at least three and a third
years before a bankruptcy filing.
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