Bankruptcy `reform' is responsibility of consumer

The Insider

Your Money

October 10, 2004|By BILL BARNHART

ONE victim of gridlock in Congress is the effort to "reform" the federal bankruptcy law.

Since the late 1990s, a coalition of lenders has pushed to make it harder for individuals to obtain a so-called fresh start through a Chapter 7 bankruptcy by discharging their debts.

Putting you into debt is a growth industry. The test of being creditworthy or not creditworthy no longer applies. Lenders sell debt to virtually anyone, with the price - interest rates and other terms - based on the probability of default.

Credit reporting, credit scoring and debt collection are big businesses. Recently, a new industry has emerged of aggressively marketed credit counseling agencies that claim to fight for debtors against lenders - for a fee.

Consumers are easy marks for all these businesses when they fail to police their financial behavior or just run out of luck.

Clark Howard, a syndicated radio talk show host and consumer advocate, told the Society of American Business Editors and Writers last week, "I'm not exactly upset if Congress passes a very tough bankruptcy statute. We do need to be slapped around in how we handle debt."

If old-time religion about borrowing were the goal of consumer debt legislation in Congress, it would be hard to argue with Howard. But critics say the goal on Capitol Hill is simply to boost the profits of every player in the game.

"Think of bankruptcy as a safety valve that prevents reckless lenders from getting too reckless [because] the debt will be liquidated in bankruptcy," said Travis Plunkett of the Consumer Federation of America. "If you erect more barriers to bankruptcy, it gives them freer rein to lend to that risky class of borrowers."

Lenders disagree:

"We think bankruptcy is an important law for people who are down on their luck and had some kind of a catastrophic problem," said Dennis O'Toole, head of government relations for HSBC-North America, formerly Household International.

"In the '90s, we saw a lot of people who were middle income who had some means to pay on their debt whom we thought were abusing the system," O'Toole said.

The key word is system. When you sign up for that unsolicited credit card, you are entering a system, just as if you were arrested for a crime. The odds are stacked against you. "There is no equivalent to the liability of a bartender in lending money," Howard said.

On the contrary, "the industry wants to get government protection. When they entice people to enter these risky transactions, they want the government to say they can't get out," said Joan Entmacher of the National Women's Law Center.

But after several near misses, the thrust behind the bankruptcy bill lenders want has waned. The complex bill, which oddly became bogged down in the fight over abortion, may be broken up in the new Congress.

"If we don't get it done in 2004, we're going to have to look at the election," O'Toole said. "After you've pushed for six or eight years, if you can't get the whole package done, is a sandwich better than no meal at all?"

Personal bankruptcy filings are down slightly this year. Consumer credit declined in the latest monthly report. The system may not get worse any time soon. But it won't get better until consumers think twice about entering it.

Bill Barnhart is a columnist for the Chicago Tribune, a Tribune Publishing newspaper. E-mail him at yourmoney@tribune.com.

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