What happens when the credit card industry writes congressional legislation?
According to the judges who have to enforce it, anarchy
In December, Alfonso Sosa, a house painter in Fredericksburg, Texas, fell behind
on the payments for the mobile home he shared with his wife Melba. The mortgage
holder moved to foreclose, and Sosa filed an emergency petition in federal court
for bankruptcy protection. But the Sosa family quickly ran afoul of the country’s
new bankruptcy law, which had gone into effect only six weeks before. One of
the many new provisions requires all debtors to take a simple, one-hour credit
counseling class before they file, but the Sosas had not known about the requirement.
Although Sosa had taken the class by the time they got back to court, U.S.
Bankruptcy Judge Frank R. Monroe quickly dismissed their case, leaving the Sosa
trailer open to foreclosure.
Monroe was furious, not with the Sosas, but with Congress for tying his hands.
“Can any rational human being make a cogent argument that this makes any
sense at all?” he wrote in his opinion. He even accused Congress of colluding
with the nation’s credit industry “to make more money off the backs
of consumers in this country.”
“It was very surprising that he came out swinging in that opinion,”
says David Aaron DeSoto, a bankruptcy attorney in Corpus Christi, Texas, who
occasionally practices in Monroe’s court. Soto says Monroe is known as
a calm, careful judge who writes moderate opinions. “My frustrations and
anxieties don’t matter much,” Soto says. “But Congress and
the country should be paying attention to the judges.”
Monroe is not alone. Across the country, federal bankruptcy judges have begun
to express frustration with the Bankruptcy and Abuse Prevention and Consumer
Protection Act of 2005.
“No judge is comfortable doing something they know is unjust,”
says U.S. Bankruptcy Judge Leif M. Clark, of San Antonio, Texas. However, judges
all over the country have had to dismiss cases similar to the Sosas, he says.
“I haven’t taken a survey,” he adds, but the critical reaction
from bankruptcy judges crosses political boundaries. “I’ve gotten
feedback from a wide variety and everyone says it’s badly done.”
“Unquestionably, this is the most poorly written piece of legislation
that I or anyone else has ever seen,” says U.S. Bankruptcy Judge Keith
M. Lundin, who has overseen cases in Tennessee since 1977. “No one has
ever seen a piece of garbage like this,” he adds. “There’s
going to be the most fantastic anarchy in bankruptcy courts for years.”
Many opponents of the new law hope that judicial frustration over how to interpret
its hundreds of sections will help fuel a backlash, and allow a future Congress
to knock out provisions, such as the credit counseling, that have made filing
for bankruptcy more onerous.
Others are skeptical.
“There is a need to do it,” says a House Democratic staff member,
“but a strong inertia comes into play when you have a bill this contentious
and complex.” After struggling over the bill for about eight years, with
the financial services industry spending millions in lobbying fees, members
of Congress are experiencing bankruptcy exhaustion, the staff member says. In
addition, “there is nothing the courts are saying now that the Congress
did not hear in committee.”
The law was the most comprehensive overhaul of the nation’s bankruptcy
law since the late ’70s. “That [overhaul] was analyzed line by line
on a bipartisan basis,” says Kenneth N. Klee, a law professor at the University
of California-Los Angeles and former head of the National Bankruptcy Conference,
an elite group of about 60 experts that has advised Congress for decades. “This
time, and I say this as a Republican, [Congress] paid a lot more heed to the
credit industry and other moneyed interests,” Klee says. “They ran
it by the people who paid $100 million in lobbying fees to get this through.”
Klee says that only about five people, including Todd J. Zywicki, a law professor
at George Mason University in Virginia, and several lobbyists, wrote the legislation.
A group that small can’t coherently revamp something as intricate as the
bankruptcy code, Klee says. Neither Zywicki, nor the office of Rep. F. James
Sensenbrenner (R-Wis.), the bill’s chief sponsor in the House, returned
calls seeking comment.
Hundreds of law professors and judges tried to weigh in, testifying before
Congress and signing letters denouncing the proposed reforms. But they were
no match for the coalition of credit card companies, auto lenders and home mortgage
providers who claimed that many Americans who filed for bankruptcy—a record
two million families in 2005—were abusing the system. The law easily passed
both chambers last April.
Most experts say that since so few people are filing under the new law, evaluating
the effect of the changes will be difficult for at least a year or two. According
to Lundquist Consulting Inc., a giant rush of about 500,000 debtors filed for
bankruptcy in the week before the new law became effective last October, but
less than 30,000 filed in the next month.
However, some numbers have come to light, and the law’s opponents are
having a tough time not saying, “We told you so.”
Throughout the legislative battle, creditors claimed that hundreds of thousands
of debtors were filing for Chapter 7 bankruptcies every year—which offers
them a fresh start by clearing most debts—even though they could afford
a Chapter 13 bankruptcy, which requires debtors to work out a payment plan with
their creditors. To help curtail the alleged abuse, families who earn more than
their state’s median income are subject to a complicated “means
test” designed to force many into Chapter 13 repayment plans.
But in February, the National Association of Consumer Bankruptcy Attorneys
published a survey called “Bankruptcy Reform’s Impact: Where Are
All The Deadbeats?” The association asked 10 leading credit-counseling
agencies to provide data on the debtors they had begun seeing in October, and
received a complete response from six. They found that less than five percent
of their 60,000 debtors had sufficient funds to pay off their debt even under
a Chapter 13. Nearly 80 percent had been driven to bankruptcy by medical illness,
divorce, the loss of a job, or another force beyond their control.
Although the prospects for revisiting the bankruptcy code are not bright, some
experts believe congressional inertia might be overcome if some of the biggest
supporters of the 2005 reform conclude it’s not creating a financial windfall.
For example, Jack Ayer, resident scholar at the nonpartisan American Bankruptcy
Institute, says, “When everything settles down the credit card companies
will be losing money on it.”
“It’s such a poorly thought out piece of legislation,” says
Henry E. Hildebrand, a U.S. bankruptcy trustee in Nashville, Tennessee. He currently
administers about 14,000 bankruptcies, deciding when and how much debtors need
to pay their creditors. “They put too many loopholes in there,”
he says. Under the old law, Hildebrand says he could force higher-income debtors
filing Chapter 13 bankruptcy to give up a vacation home or car. Now, however,
he says a debtor can claim that money used for car payments, even for a new
Mercedes, can’t be redirected to pay off other debts. Hildebrand claims
these new rules were inserted at the behest of auto and home lenders, who wanted
to ensure they got paid before the credit card issuers. “The new law is
good if you’ve got a lot of toys,” he adds.
For now, the Sosas and their three young children have hung onto their mobile
home. They filed their bankruptcy case again, this time with the help of James
Chapman, a bankruptcy attorney in Fredericksburg. The Sosas hope the house-painting
business picks up and they can forge an agreement in court to hold onto their
house and continue making payments. Chapman, however, says that the new law
has “made everything more difficult and more expensive.”
Chapman and other bankruptcy lawyers say they now have to collect their clients’
tax returns, several months’ worth of pay stubs and other documents just
to get them through the means test, and therefore, have to charge higher fees.
The Sosas have had to pay him an extra $1,000 to handle the case, Chapman estimates—money
that could have helped pay down the family’s debt.
The new law, he concludes, “has made life a lot more difficult
for people in America who are having hard times.”