Bring lenders, not borrowers, to heel
CONGRESS WILL soon debate legislation that will limit bankruptcy options for many Americans. If passed, people facing bankruptcy could find their financial situations worsen by no fault of their own.
Certain events typically lead someone to file bankruptcy: a job loss, divorce, or health issue. Each, in varying degrees, can adversely affect the income of a household. The Harvard Law and Medical Schools study released in the journal Health Affairs this week found that half of all bankruptcies are caused by medical-related bills and most of the affected are middle class and insured.
Washington does not spend a lot of time talking about these cases.
Instead, expect to hear about people who rack up mountains of credit card debt that they have no chance of ever paying in their lifetimes. You will hear of trips abroad, expensive TVs, and houses full of unpaid furniture. What you will not hear are the true stories of the too many people who use their credit cards for food, prescriptions, medical expenses, and their kids' clothes.
Ultimately, the bankruptcy reform legislation would push debt-burdened individuals into payment plans -- for up to five years. A lot can happen in five years, like a divorce, a health problem, or job loss. Congress will also likely consider limiting the homestead exemption -- the amount of equity that a homeowner can shield from creditors -- which will render the recently increased Massachusetts homestead exemption of $500,000 meaningless.
What's missing in this new legislation? Any change to the current practice of lending money to just about anyone. These days, there is little difference between some credit card companies and a loan shark. Of course, credit card companies do not break legs, they just increase the percentage rate if a payment is late, add a late fee, add an overlimit fee, and some even charge an annual fee for the privilege of getting more fees. There are many people trying to get out of debt, but they are being thwarted by the perfectly legal fees and interest being levied against them.
The credit card industry is spending millions trying to convince Congress that the average American in debt is an irresponsible buffoon with an entitlement complex. Debtors cannot afford lobbyists. Before we let Congress shut the bankruptcy court doors on thousands of Americans, consider where you would be if your household lost a wage earner and then call your member of Congress.
The problem is not with the bankruptcy process. Our leaders need to know that it does not take much for an unexpected and uncontrolled event to lead someone to the doors of the bankruptcy court.
Perhaps more important, our leaders need to spend more time asking themselves what makes these financial difficulties so possible and so probable. Hopefully, honest answers will lead to more meaningful reform for people struggling with debt.
William J. McLeod is a bankruptcy attorney in Boston and a member of the National Association of Consumer Bankruptcy Attorneys.