Forgiving Debtors Less
The House is expected to follow the Senate soon and pass a bill making it more difficult for Americans to avoid paying many of their debts by filing for bankruptcy. Reform is long overdue in fixing the legal means by which overdebted people can learn from their financial mistakes, repay what they can, and start a fresh life.
Unfortunately, if the credit-card industry had not tainted the process by pouring millions into the campaign coffers of many legislators, most parts of the bill might have been welcome. Indeed, consumers know the bankruptcy system is, well, broke.
Too many individuals use bankruptcy like a "get out of jail free" Monopoly card. Over the past decade, personal debt other than mortgages has doubled, as has the number of Americans filing for bankruptcy. At least $40 billion in debt is now forgiven annually. Those numbers clearly show consumers need better guidance in handling financial risk and in personal responsibility.
The bill wisely contains a means test that compares a consumer's income and expenses, and requires bankruptcy filers who can repay at least some of their debt to do so. It also forces them to take credit counseling before filing. Many debtors also won't be able to file more than once every two years, nor could they file after just buying a vehicle with a loan.
One piece of the legislation that needs close attention would take away much of the leeway now given judges in gauging an individual's circumstances. The bill makes little distinction between those who wantonly abuse credit and those forced into bankruptcy due to extraordinary circumstances, such as job loss or costly healthcare. Almost every debtor after bankruptcy will likely need to repay portions of their loans. That's proper in most cases, but it could also force many to live off of family, friends, or welfare. Congress needs to track how many are pushed into poverty and be ready to fix the law.
Not included in this bill is any government pressure on credit card lenders to stop taking on many customers who are obvious credit risks - especially many teens. Perhaps that's because financial institutions have given big bucks to help many members of Congress get elected - $29 million in the 2004 election cycle. At the least, those under 18 should not be subject to barrage mailings offering credit cards.
Congress didn't get it right in 1978 when it last tried to fix the bankruptcy laws, and it may not this time. When and how to help those in duress get a financial second chance is never easy. But then slipping out of one's debts shouldn't be either.