Bill gives industry too much credit

By ROBERT TRIGAUX, Times Business Columnist
Published April 15, 2005

Here's how the new bankruptcy legislation approved Thursday by Congress really should have been crafted.

In exchange for banks, credit card companies and retailers getting a tough law that will force more consumers to pay more of their debts in bankruptcy, lenders should have agreed to a cap on the insane volume of direct-mail credit card solicitations they dump on consumers.

Somehow, that idea was never considered. But it seems only fair. If President Bush signs another probusiness piece of legislation to plump credit card industry profits, then the card business should stop supersaturating American households swimming in debt.

Don't e-mail me arguing that "if people were more personally responsible they would not be overwhelmed with debt." I agree, to a point. But Congress ignored the facts that more people get into credit trouble because of lost jobs, huge medical bills and other hard-to-anticipate problems than do people who just can't stop spending at the mall.

A study conducted by doctors at Harvard Medical School and published in the February issue of Health Affairs found that half of bankruptcies, involving 700,000 American households and affecting more than 2-million people annually, are attributable to illness or medical debt.

It's really a two-way street. If consumers need to show more discipline, so do the providers of credit. That's why this biggest rewrite of the bankruptcy code in 25 years is so one-sided and flawed.

How fitting this matter should fall on April 15, our national deadline to pay taxes. A survey by the Cambridge Consumer Credit Index finds that 11 percent of Americans this year will borrow money on their credit cards to pay their tax bill. That's up from 3 percent who used credit cards in 2004.

The credit card industry's aggressive strategy over the past 20 years was to give everyone multiple credit cards. It's a big reason U.S. consumers became hooked on consumption and completely lost the ability to save.

Credit card solicitations have doubled to 5-billion a year. That's about 18 credit card solicitations for every man, woman and child in the United States. And the solicitations are getting bolder in pursuit of the vulnerable.

Seniors, including those who learned to shun debt in the Depression, are a rapidly expanding market for credit cards. The big lure? Paying for expensive prescription drugs on credit.

Minors younger than 18, with no incomes and no credit history, are targeted as an emerging market for the credit industry. College-age students, besieged with credit offers and high tuition bills, on average leave school (often without a job offer) with $18,900 in student loans and an average $3,262 in credit card debt.

The plastic barrage is impressive. At the end of 2004, Americans carried 657-million bank credit cards, 228-million debit cards and 550-million retail credit cards.

That means each household boasts 6.3 bank credit cards, 2.2 debit cards and 6.4 retail credit cards, according to CardData. In 1990, each household had 3.4 bank credit cards, 0.1 debit cards and 4.1 retail credit cards.

Look for 1.5-trillion payment cards in the United States by the end of this year.

When was the last time you applied for a credit card and were turned down? What the industry has created is a dependency on easy credit.

The parallel to drug addiction is not farfetched. Now hooked, more consumers can be squeezed for more money. Even in bankruptcy.

The new bankruptcy legislation is not all bad. It probably will catch some perennial deadbeats in its wide filters. But it will hurt many more consumers with legitimate need of bankruptcy protection along the way.

Professor Elizabeth Warren teaches bankruptcy law at Harvard Law School and has written extensively about the rising financial, social and political pressures undermining the U.S. middle class.

She points out that a million men and women each year turn to bankruptcy in the aftermath of a serious medical problem, even though 75 percent of them have health insurance.

She says a family with children is nearly three times more likely to file for bankruptcy than an individual or couple with no children.

She notes that more children live through their parents' bankruptcy than through their parents' divorce.

And Warren warns it is women who disproportionately will bear the brunt of higher costs, more restrictions and less protection from the legislation. Women are the largest demographic group in bankruptcy, outnumbering men by about 150,000 per year.

Rep. David Dreier, R-Calif., praised the legislation because it would allegedly save American families an average $400 a year in higher interest rates now charged to consumers to recoup losses from those who abuse bankruptcy proceedings.

That's laughable.

Sure, there might be some modest amount of money saved from fewer bankruptcies. But who really believes the kindhearted credit card industry will take those savings and, in place of higher profits, return it to consumers in the form of lower interest rates?