New York, NY / Washington, DC — Today, Demos: A Network for Ideas & Action, a national economic policy research organization, urges Congress to recognize the fragility of our debt-driven consumer economy when considering the bankruptcy "reform" bill (S. 256/H.R. 685) that has been passed by the Senate and is now under consideration in the House of Representatives. Short of opposing this dangerous legislation, the House should at least include amendments that will protect our nation's families from the most deleterious provisions.
American families are not suffering from "irresponsible consumerism," as Senate sponsor Chuck Grassley claims, but from the effects of a stagnant economy and fraying social supports. Faced with declining real wages, job insecurity, long-term unemployment, and rising costs, American families have turned to increasingly available — and expensive — credit in order to make ends meet. The resulting rise in bankruptcies is an inevitable outcome for households struggling to keep up while the lending industry charges outrageous fees, high interest rates and capricious penalties. American families would be well-served if Congress addressed the widespread economic insecurity facing households, rather than close the door on this option of last resort.
"This is the last chance to help avert disaster for millions of families on the edge of bankruptcy," says Tamara Draut, Director of the Economic Opportunity Program at Demos. "To make this bill reflect the needs and concerns of families in severe economic distress, House members must demand that the household-protection amendments that were rejected by the Senate be included before the bill goes to a vote."
Key amendments the House must adopt:
* Protect servicemembers and veterans from means testing in bankruptcy, to disallow certain claims by lenders charging usurious interest rates to servicemembers, and to allow servicemembers to exempt property based on the law of the State of their premilitary residence.
* Provide a homestead floor for the elderly, the fastest-growing group in the bankruptcy courts.
* Exempt debtors whose financial problems were caused by serious medical problems from means testing.
* Limit the exemption for asset protection trusts, the "millionaire's loophole."
* Limit the amount of interest that can be charged on any extension of credit to 30 percent.
* Discourage predatory lending practices.
* Amend the Fair Labor Standards Act of 1938 to provide for an increase in the Federal minimum wage.
* Protect employees and retirees from corporate practices that deprive them of their earnings and retirement savings when a business files for bankruptcy.
"Our research tells a story that's no surprise to the millions of families struggling with credit card debt. Families are borrowing to make ends meet, and they're one missed paycheck away from collapse," says Draut. "The Congress members of both parties who are embracing these punitive measures for working families are dangerously out of touch with the grim economic realities faced by ordinary families."
The proposed changes in H.R. 685, as proposed, would allow lenders to pursue more debtors, even after bankruptcy has ruined their credit. Years of research show that people filing for bankruptcy due to credit card debt do so as a last resort, having already paid creditors thousands in penalty interest and fees, on top of the repaid principal. Bankruptcy protection provides these families — the majority of whom have suffered job loss, divorce, and, increasingly, a medical catastrophe - their only hope of regaining financial security.
"The tragedy is that this bill rewards a $30 billion industry for egregious behavior, and could have repercussions for every cardholder," says Draut.
With interest rates rising and the threat of bankruptcy defused, credit card companies are likely to escalate the abusive tactics that have buoyed them to record profits in recent years. Real consumer bankruptcy reform would curb the practices that force people to file, which include $35 penalty fees, 29 percent interest rate hikes, and the odious new "universal default" clause that can multiply consumers' entire debt loads because of activity on a single account.
Demos' Borrowing to Make Ends Meet research series offers journalists and policymakers a well-rounded analysis of the real debt crisis facing Americans-information that is missing from the credit industry-fueled debate going on in Washington.
Key findings from the Borrowing to Make Ends Meet Series include:
* Credit card debt has risen across the board over the past decade — but the most for senior citizens, squeezed middle-income families, and minimum-wage earners. (Borrowing to Make Ends Meet: The Growth of Credit Card Debt in the '90s)
* Credit industry deregulation has played a major part in the rise of bankruptcies. (Credit Card Industry Practices: In Brief)
* Older Americans are the fastest-growing age group in the bankruptcy courts, having seen a 149 percent increase in average credit card debt between 1989 and 2001. (Retiring in the Red: The Growth of Debt Among Older Americans)
* Young families are starting out in the red. They are servicing five-digit student loan bills and mounting credit card debts when they should be starting businesses, families, nest eggs, and households. (Generation Broke: The Growth of Debt Among Young Americans)
* In order to pay credit card and other bills, families extracted $458 billion in equity during the 2001-2004 refinancing boom. As interest rates rise, and/or housing values drop, millions of families could find themselves in crisis. (A House of Cards: Refinancing the American Dream)
Members of Congress owe the American people a real inquiry into the factors driving the debt crisis in America. Any debate about bankruptcy "reform" that ignores the structural economic issues facing families is short-sighted, dangerous to family economic security, and does nothing to address the long-term health of our economy.
Resources are available at www.demos-usa.org/debt.
Demos: A Network for Ideas and Action is a national, nonpartisan public policy organization based in New York. www.demos-usa.org