Money Talks

With the recent bankruptcy reform about to be signed into law, without so much as a harsh second glance from Congress, Americans need to take a moment and ask themselves who's really running this country.

If there ever were an example of corporations buying their way into politician's ears, this is it. This is legislation that, on its face, is designed to tighten the screws on the poor and destitute in order to put more money in the pockets of the rich. It's the Robin Hood mentality in reverse and no one is denying it.

The problem isn't that real bankruptcy reform isn't needed, it is. Many people go through bankruptcy when they make well over $100,000 a year (often times over a million) and use it to discharge debts under chapter seven laws when they could, with changes in lifestyle, probably repay most of their debts. That's a scam of the worst kind, it hurts all honest people, and something does need to be done.

Instead, the issue with the recent legislation is that it's obstructionist. If the only purpose of the reform were to prevent the rich from turning to the system to eliminate debt to protect their lifestyle, I would be all ears. However, much of the reform is going to affect the poor, the working class saddled with medical bills and others unduly burdened.

Many bullet points of the legislation, such as the tests required to see if you quality for chapter seven (where debts are erased), threats of fines against lawyers who provide false information and forced credit counseling for all going into bankruptcy, sound like great ideas, but will only serve double the cost of the average bankruptcy, making it harder for the poor to obtain.

Right now, most bankruptcy clients can barely scrape together the $1,000 or so needed to file (attorney fees plus court costs). If that number doubles, it's possible only those who don't need bankruptcy will be able to afford the protection. Furthermore, trustees, lawyers and even judges are worried about the extra burden placed on them by this new legislation. The legal system simply isn't ready for this level of fact-checking and many are worried that the system, barely limping along now, will grind to a halt.

All of this, however, suits credit card companies nicely. They pushed forth this legislation and used their extensive resources to keep it bouncing around Washington's court for eight years, until a Republican-controlled Congress was available to make it happen.

In their minds, the credit card companies are the innocent victims here in dire need of protection. After all, every time someone discharges their debts under chapter seven bankruptcy, they lose thousands of dollars. Unfortunately, when they're crying for help from the government, they leave out the fact that they, over the past quarter century, have largely caused the recent bankruptcy crisis and that they could change the role bankruptcy plays in our society with simple reforms on their end.

The Wolf Who Cried Sheep

Credit cards, originally, were a sign of wealth. How many you had and what kind you had told people how much you had in the bank. Women would joke about checking out a guy’s wallet for credit cards to see how wealthy he was. For a long time, credit cards were difficult to get and only the wealthiest could afford them. This made perfect sense considering that credit cards are, fundamentally, unsecured loans

Somewhere along the way, credit card companies realized that there was money to be made by targeting everyday consumers. To cover the added risk, credit card companies raised interest rates, now over 20% in many cases, and saddled those who pay their bills with additional debts to cover those who didn't.

As wide-spread credit card use became more profitable, competition between companies became cutthroat. They began targeting younger and younger consumers, even showing up at college campuses on the first day of class to catch the new freshmen before someone else did. These days, no sooner do you turn eighteen than credit card offers start pouring in through the mail, phone and everywhere else.

Worse still, these offers are hardly what one would call honest. They come with low initial interest rates that balloon out of control after six months or a year. These “submarine charges” lay and wait below the surface, relying on unsuspecting card holders to either fail to read the fine print or lose track of time in order to torpedo them high debt.

In no other industry, save possibly auto sales and mortgages (both debt-generating fields), are such tactics even tolerated. Currently the cell phone industry is being taken to the rack by the government for hiding charges in its fine print, cable companies got the same treatment years ago. However, credit card companies use deceptive marketing and fine print to surprise consumers and are only met with hushed silence from our lawmakers.

They have, with their own practices, created an environment ripe for bankruptcy. Furthermore, whether they like to admit it or not, they did all of this underneath the current bankruptcy system and they've made a mint doing it. The credit card industry is now a multi-trillion dollar industry and it's done it all with full knowledge that, at just about any time, a debtor can absolve his debts using bankruptcy.

They might not like the current system, but they've worked under it for 25 years and done almost nothing to fix the problem. Much like the anti-smoking campaign paid for by the cigarette companies, under government order, the “responsible credit” campaign by the credit card companies ring hollow and empty. Behind closed doors, they encourage people to maintain high balances, even calling those who pay off their cards monthly “deadbeats”. They want you to max out your credit cards the same way big tobacco secretly wants your son or daughter hooked on cigarettes by the time they're thirteen.

In the end, their whole business model, like that of tobacco companies, relies on people engaging in behavior that is inherently bad for them, the exact kind of behavior that leads people into bankruptcy court.

You First

The need for bankruptcy reform is obvious. When millionaires can make debts disappear simply because they don't want to undergo a lifestyle change, there's a clear problem. But with the majority of bankruptcies involving credit cards, in one way or another, it makes sense to reform the industry that encourages the behavior first or at least at the same time.

To continue the cigarette company analogy, it would be like mandating harsher punishments for children who start smoking without first asking the cigarette companies to change their marketing strategy. Everyone in the bankruptcy equation, creditors and debtors, have a responsibility to behave in an appropriate manner and neither side has been doing their jobs.

As such, if credit card companies want bankruptcy reform so badly, they should agree to reforms of their own as well. Among those reforms should include:

1. Ending deceptive marketing practices – The practice of introductory interest rates should be eliminated. Also, unfair increases in interest rate, usually without any notification, should be done away with. At the very least, the real interest rate and the real terms of the card should be listed alongside the introductory one, not in the fine print.
   
2. Ceasing the Targeting of College Students – Right now, college students are a prime target for credit card companies. Ads in college papers, booths set up on campuses and sponsored events all entice college students (often with “free” gifts), many of whom have never had any real education in dealing with credit, to get credit cards and use them, often times, ruining their credit for the rest of their lives.
   
3. Setting Higher Standards – Right now, almost anyone can get a card. Pretty much anyone over the age of eighteen can find someone, somewhere, willing to give them a credit card. If standards were applied to ensure that people not already overburdened by debt couldn't take on more, fewer bankruptcies would occur. This would make it so that responsible credit card companies wouldn't take losses from bankruptcies irresponsible ones caused.
   
4. Promote Responsible Credit – As advertisers spending millions to shape the image of their product, credit card companies have the ability to shape how people use the product. If they were to promote responsible usage, much like alcohol companies do now, they might be able to change attitudes. Combine that with an information campaign designed to teach laymen about credit and credit cards, they can go a long way to reshaping how most people use credit cards and helping people avoid bankruptcies.
   
5. Work with Debtors in Trouble – The viciousness of the credit card industry is well known and documented. Payments just hours late are slammed with huge charges, people who fall behind due to lost jobs or medical bills are threatened by collection agencies and have their credit ruined to the point that bankruptcy is a relief, not a credit burden. If credit card companies, all of them, not just some, reigned in their tactics a bit and worked with willing debtors, without damaging their credit, many bankruptcies could be avoided.

The beautiful thing about all of these steps is that they can all be taken without government intervention. All that's required is an industry-wide effort toward responsibility.

Unfortunately though, the credit card industry has proved that it's not capable of responsible behavior and, when their behavior gets them in the smallest amount of trouble, they turn to their pals in Congress to tighten the screws on those they have been taking advantage of.

Because all this bankruptcy reform is going to do is make it so that only the rich can afford the attorneys who can find the loopholes in order to eliminate debt. That leaves the poor to borrow or scrape together the money to attempt one at all. No one but the credit card companies win and that is precisely who this law is for.

So, who really is running this country? The answer is surprisingly clear.