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If You Ain't Broke, Congress Has Fixed It

"There is always the question of, does the money follow the votes or do the votes follow the money," said Larry Noble, executive director of the Center for Responsive Politics. "I think what this type of correlation shows is that the [financial industry were] putting money behind people it thought would support them and put money behind people they were trying to sway."

The Democrats who voted for the measure insist that they sought to improve an imperfect measure by placing protections for honest consumers. In fact, some Democrats who voted in favor of the bill received less money in the current two-year election cycle than in previous cycles. Delaware Sen. Joseph Biden, a Democrat whom the banking industry regularly supports, wrote a letter to the Los Angeles Times on March 12 explaining his decision to support the bill.

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"At the outset, I refused to support bankruptcy reform until fundamental changes were made," Biden wrote. "I fought to establish a 'safe harbor' for those below their state's median income. I also insisted on a provision requiring lenders to post a clear warning about the dangers of making minimum monthly payments, one of the worst debt traps for consumers.

"This bill establishes unprecedented protections for child support and alimony, making bankruptcy part of the enforcement system for women and children, who now will be at the head of the line, in front of every other creditor. Is this bill perfect? No. But over several congresses it has earned the kind of bipartisan consensus only balanced legislation can achieve."

Campaign finance reform advocates and critics of the bankruptcy bill suggest that financial services companies paid for the support of a bill that will benefit them. The critics say this is why Congress has not sought to crack down on the credit card lending practices that have contributed to the problem.

"The elephant in the room is their own lending practices," said Travis Plunkett, legislative director of the Consumer Federation of America. There is a lot of research between the correlation of the amount of debt and likelihood of ending up in bankruptcy."

Consumer debt is six times as high today as it was 20 years ago and Plunkett says the credit card companies should share some of blame with the debtors.

"There is personal responsibility there, but we've also got to point the finger at lenders as well," he said. "Especially the credit card companies have become very very reckless with the kind of loans they extend. And then they're shocked when people end up in bankruptcy court."

In other words, even as the finance and credit card companies cry hardship over the scofflaws that use bankruptcy as a way to extend, they're laughing all the way to the bank. American Banker magazine reported in January that although "loan growth was weak, declining credit losses and cost savings from technology allowed credit card issuers to squeeze more profit out of what they had in 2004." The industry publication reported that the return on assets at credit card businesses rose to its highest level since 1988.

Lenders expect the bill will help them avoid billions of dollars in losses annually, helping to increase profits further. Todd Zywicki, a visiting professor of law at the Georgetown University Law Center and noted authority on consumer credit and bankruptcy, testified before the Senate Judiciary Committee in February that the "bill's reforms will vindicate the rule of law and reduce abuse. By targeting high-income bankrupts with substantial repayment capacity, it is estimated that means-testing will recover roughly $3 billion of the $40 billion discharged in bankruptcy every year."

"This is an example of the way Washington functions under the present campaign finance system that applies to congressional races," said Fred Wertheimer, president of the campaign finance watchdog group Democracy 21. "You have, on one side, interest groups with very large economic stakes that have invested large amounts of campaign money over the years in helping to elect members of Congress and lobby members of Congress.

"On the other side you have general interest that are not organized and do not have the access and influence that comes from lots of campaign contributions. So you wind up with a sort of laser-beam focus on one side and a much more diluted general interest on the other side."

The U.S. Chamber of Commerce, the umbrella business organization that includes the finance and credit card industries and took a lead in lobbying for the measure, insists that the measure is a good, pro-consumer piece of legislation that will ultimately benefit the many responsible people who use credit cards.

The bill "will protect responsible borrowers from paying for bankruptcy abuse by providing a fair needs-based system that would only affect that small percentage of bankruptcy filers who abuse the system, but still have the means to repay a significant portion of their debt," the chamber's Bruce Josten said in a letter he sent to senators. "The bill also allows for a bankruptcy judge to consider any special circumstances such as high medical bills or divorce, the leading causes of bankruptcy, to ensure that every debtor is treated fairly."

Few people doubt that there are people who seek to abuse the system, but 90 percent of bankruptcies are the result of serious hardships, such as medical catastrophe, divorce or job loss, according to the Consumer Federation.

A study by the Harvard law and medical schools found that as many as 54.5 percent of all bankruptcies are caused at least in part by serious illness or medical debts.

Opponents of the bill argue that even though the measure does include some special accommodations for folks who find themselves in dire straights because of problems such as high medical bills, it is still bad for poor people overall. Among other things, the Consumer Federation says, the bill establishes an "inflexible formula to determine if an individual debtor will be presumed ineligible for Chapter 7 relief. A debtor whose Chapter 7 case is challenged due to these assumptions will have to litigate the issue -- an expense many debtors cannot afford. The court is not allowed to waive the means test even if the debtor is seeking bankruptcy relief because of some terrible circumstance beyond his or her control." (We've posted the group's complete case against the bill here.)

But until a viable, well-funded lobby for broke people comes to Washington, don't expect Congress to do much to crack down on the financial and credit card industries in the same way it has their customers.

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