Bankruptcy `reforms' are a lopsided measure

Monday, March 7, 2005 11:07 AM CST

Every 30 seconds, someone in the United States files for bankruptcy.

No doubt it's such statistics that are fueling the drive of Senate Republicans to end the run of scofflaws who run up their charge cards at the mall or the gambling casino and then walk away from their debts by filing for personal bankruptcy.

Such was the tenor of the debate this past week in the Senate as it gets set to pass a new bankruptcy law that would impose a means test forcing many people to file for bankruptcy protection under Chapter 13, which requires a repayment plan.

Debtors who earn more than the median income in their state and can pay at least $6,000 over five years would not be eligible to file under the old Chapter 7 laws which allow them to shield some assets and walk away from their debts. In Wisconsin, the median income for a family of four was a little more than $65,000 last year.

Wisconsinites are pretty long on work ethic and that includes the notion that you pay your bills if you are able, so we don't expect to hear much of a hue and cry as the Senate whips through the bill early this week and sends it over to the House for final passage and on to President George W. Bush who will doubtlessly sign it in short order.

But there are some bothersome things about this legislation - both for what it includes and for what it does not.

For starters, the bill gives the court little discretion to differentiate between irresponsible people who max out their credit with gambling or spending binges and those who stumble financially through no fault of their own because they were devastated by medical bills.

The sentence at the top of this editorial is not about all bankruptcy filings, it's only for those that are triggered by money problems linked to serious health problems. According to a recent Harvard University study, half of all people who file bankruptcy said their woes were caused by medical bills or health problems. More to the point, three quarters of those had health insurance when their problems started. In many cases they escalated from illness to lost jobs to lost insurance to unpaid bills - and then to court. They are not the high-flying big spenders, but are in many cases solid citizens who get flattened by a domino of debt. Many Americans are but a half step and a hospital bed away from such situations and they would be dealt with more harshly under the proposed law.

The bill is objectionable as well for what it does not do. While it holds middle class Americans to a stiffer standard, it ignores bankruptcy abuses by companies and the wealthy.

One amendment that was rejected this past week would have put a $125,000 cap on asset protection trusts that are becoming increasingly popular for business executives and physicians to isolate their money and prevent it from being used to pay their debts. In the past eight years five states have adopted such policies - bottom feeding states like Delaware - simply for the benefits of the money management and trustee fees.

Similarly, the Senate rejected an amendment by Sen. Russ Feingold, D-Wis., to provide greater protection of the home equity of the elderly; another to curb abuses by corporate executives who get millions in compensation just before their companies file for bankruptcy; and another to cap credit card interest rate charges at 30 percent annually. All went down to defeat.

The legislation is a plum for the credit card industry and banks, which have contributed heavily to Republican causes and which have pushed for this legislation for almost a decade. By some estimates they stand to gain $5 billion with its passage.

But there is little equity in it. The bill ignores $5 million deadbeats and instead focuses on those with modest incomes who are thrust into financial distress that, many times, are the result of health calamities.

It is a bankrupt bill indeed, and the Senate will shame itself with its passage. Its message to middle class Americans is - you had better stay healthy.

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