My late parents, who came of age during the Great Depression, offered my sister and me a couple of simple rules about money: Never take on financial burdens you can't bear, and always pay your bills. Many years later, I still think they were right.
Supporters of the bankruptcy bill that goes before the Senate this week will make their case by appealing to those excellent values. Their claim is that all kinds of people are buying lots of stuff on credit and then using allegedly lenient bankruptcy laws to say, "Oops, sorry, I won't pay."
You could make a case for this bankruptcy bill if it were narrowly focused on those who truly abuse the system. Instead, the bill sweeps away protections for worthy and unworthy creditors alike. This will make it much tougher for those who fall on hard times to escape burdens they confront through little fault of their own.
Listen to Elizabeth Warren, a Harvard law professor and one of the most learned and powerful critics of the bill. Testifying before the Senate Judiciary Committee in early February, Warren argued that the proposal "assumes that everyone is in bankruptcy for the same reason -- too much unnecessary spending."
What does that mean in practice? "A family driven to bankruptcy by the increased costs of caring for an elderly parent with Alzheimer's disease is treated the same as someone who maxed out his credit cards at a casino," Warren said. "A person who had a heart attack is treated the same as someone who had a spending spree at the shopping mall. A mother who works two jobs and who cannot manage the prescription drugs needed for a child with diabetes is treated the same as someone who charged a bunch of credit cards with only a vague intent to repay."
Warren is the author of a study that ought to change our view of bankruptcy and -- if enough senators have the guts to stand up to the credit card lobby -- force a more-considered approach to the problem.
Warren and her colleagues surveyed Americans in bankruptcy courts and found that half said illness or medical bills drove them to bankruptcy. The "bigger surprise," as Warren has said, is that three-quarters of the medically bankrupt had health insurance. Which is to say that even those who have insurance are often not sufficiently covered to protect them from financial disaster.
Consider the double whammy that this Congress could end up imposing. At a moment when the president is proposing cuts in Medicaid and when many Americans are losing part or all of their health insurance coverage, citizens who fall into medical-financial hell are being told it will be much harder for them to win relief from bankruptcy judges.
Under the bill's key provision, those who make more than the median annual income in their state are much more likely to have to file for bankruptcy under Chapter 13 of the code. This tough section requires debtors to live up to a strict repayment plan. The current system makes it easier for debtors to go into Chapter 7 bankruptcy, which allows consumers to wipe their slate clean -- though only after forfeiting part of their assets. The bill's "means test" would give judges less discretion to distinguish between those who abuse the system and those who deserve its protection. And even for those below the median income level, it would raise legal costs and shrink safeguards.
Sen. Edward M. Kennedy (D-Mass.) is trying to rally Democrats against a bill that he says would make too many citizens "indebted servants to the credit card companies." He plans to propose a series of amendments that broaden relief for those facing bankruptcy primarily for medical reasons, as well as for men and women in military service.
He would also try to balance the bill with tougher provisions to fight corporate abuses of the bankruptcy laws. "Often, the very insiders whose misconduct brought the company down do very well in bankruptcy," Kennedy says. "The people who get hurt the worst are the employees, past and present." Some of whom, by the way, are forced into bankruptcy.
There is a great misunderstanding that the key fight in our politics is between friends and foes of capitalism. In fact, the battle is among supporters of capitalism who disagree over what rules should govern the market. Should the rules favor the wealthy and the connected, or should they give some protection to those who fall into distress and would like nothing more than a chance to rejoin the ownership society? If Democrats sell out on the bankruptcy bill, they will, alas, show which side they're on.