Bill targets credit debt Congress set to approve legislation limiting bankruptcy declarations

Alarming increase in filings

Measure's critics say it punishes consumers but lets lenders off hook

June 07, 1998|By Jonathan Weisman | Jonathan Weisman,SUN NATIONAL STAFF

WASHINGTON -- Alarmed by a striking rise in bankruptcies, Congress is set to approve legislation that would strengthen creditors' hands with deadbeats and prevent borrowers from walking away from their debts.

The House bankruptcy bill -- the toughest re-write of the nation's credit laws in two decades -- could be approved early this week, with Senate action expected to follow.

"What we're talking about here is an issue of personal responsibility," said George Wallace, a bankruptcy attorney lobbying for the credit industry, who noted that unless Congress acts, debt-free consumers will continue to pick up the tab. "Those people who pay their bills now have to foot the bill."

But consumer groups are decrying Congress' haste, complaining that neither the House nor the Senate is holding the credit card industry responsible for a problem largely of its own making.

"Usually in the market place, if a business takes a risk, they have to accept that something bad may happen," said Leif Clark, a U.S. bankruptcy judge in San Antonio, Texas. "Here, you have credit card companies taking risks, and instead of absorbing costs of those risks, they're going to Congress to change the laws."

At stake are the lives of people caught in the middle of a liberalized credit market that has made it easy to run up vicious debts and a bankruptcy system that makes it tantalizingly simple to leave those debts behind.

Nicholl Russell's divorce tore her apart, emotionally and financially. Her debts surged to $55,000, and the undertow of credit card interest was sweeping her away. Yet the South Dakota waitress' two children needed clothing. Their medical bills were piling up. So, six years ago, Russell visited a Sioux Falls bankruptcy attorney, who asked her to tote up what she owed on a yellow legal pad, pay his fee and go home. Weeks later, a letter arrived with news that seemed to come from a fairy godmother: Her debts were absolved.

But the banks, retailers and credit-card companies that are left saddled with these debts say too many Americans seek the easy way out of their money troubles, and they have persuaded Congress to take away the magic wand.

"I never saw the inside of a courtroom. I never spoke to a judge," Russell told a House subcommittee last March. "No one ever asked me for a tax return or a pay stub."

Booming economy no help

Russell was one of 971,516 individuals and businesses that filed for bankruptcy in 1992 -- a 300 percent increase from 1980. Last year, bankruptcy filings surged to 1.4 million, despite a booming economy that is supposed to be lifting people out of debt.

"One-point-four million new bankruptcies -- one filing for every 70 households -- those are both records," said Samuel Gerdano, executive director of the American Bankruptcy Institute, a nonpartisan research group. "In an otherwise healthy economy, how can both of these be happening?"

Both the House and the Senate have drafted legislation to give creditors more power to wrest payment from debtors. Both bills have bipartisan momentum.

Opponents of the measures say they are too punitive, placing all the responsibility for surging debt on consumers and none on the credit industry. Deregulation of credit and cutthroat competition among card companies have prompted banks to offer piles of plastic to people who likely could not have gotten a credit card a decade ago.

They point to automated teller machines at casinos, the practice of boosting credit limits for card holders already in debt, and introductory interest rates that can triple for customers who don't read the fine print. "What's changed is the way credit-card companies issue their credit cards," Clark said. "There's much, much, much more competition, more issuers. It's simply exploded. And with that competition, there's increasing competition to get cards into the hands of people that maybe shouldn't have them."

The credit industry says the rising tide of bankruptcies is the result of increases in mortgage costs, aggressive attorneys promoting bankruptcy as a viable financial planning tool and a fading stigma attached to loan defaults.

As evidence, they offer the tale of Toni Braxton, the singer whose two albums have earned $170 million, who owns a baby grand piano, a Porsche and a Lexus, and who filed for Chapter 7 bankruptcy last January, telling a reporter after the filing, "I'm gonna go out and enjoy myself."

By the credit industry's reckoning, every American consumer pays $400 a year in higher interest rates and consumer prices because of loan defaults that totaled $40 billion in red ink last year.

"The biggest thing about this bill is not the number of people impacted but the message it will send," Rep. Bill McCollum, a Florida Republican spearheading bankruptcy reform, said of the House version. That message is clear: Pay your debts.

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