Crashing the Credit Industry's Party

Mr. Lawless has come back from Washington. Yesterday, I was a witness at the Senate hearing on the first year's experience with the 2005 bankruptcy law. My written testimony is here. To get to Capitol Hill, I took the Metro to Union Station, and browsed the shops to kill a little time. As I walked out the front doors, it was a perfect duplicate of that scene from Mr. Smith Goes to Washington, the same spot where Jimmy Stewart stands in awe of the Capitol dome. That movie served as a metaphor for the rest of the afternoon.

Make no mistake about it. This hearing was a party for the credit-card industry. It was the industry's chance to crow about how great the 2005 bankruptcy law is working, at least while their congressional friends still control the committee hearings. Along with Hank Hildebrand, a chapter 13 trustee, and the Hon. Randall Newsome, chief bankruptcy judge for the U.S. Bankruptcy Court for the Northern District of California, I had been invited to testify by Senator Schumer's office. We were clearly crashing the party.

Defending the law were Todd Zywicki, a law professor at George Mason and a former official with the FTC; Steve Bartlett, president of the Financial Services Roundtable; and David Jones, president of the Association of Independent Consumer Credit Counseling Agencies. Cliff White, acting executive director of the Executive Office of U.S. Trustees (part of the Department of Justice), also had kind words about the statute. It struck me that all four defenders of the 2005 law were D.C. insiders with connections to either industry or the current administration. Their testimony rested on the same canards that we have heard constantly--there was abuse in the bankruptcy system, the new law was designed to address abuse, therefore the new law is good.

At one point in the hearing, I looked up at the bright lights and the television camera and wondered, "What am I doing here?" That hearing room was not my place. I am a scholar who gathers data, data from government records, from court files, from talking to people who file for bankruptcy. It dawned on me that was precisely why I was there and why Judge Newsome was there and why Hank Hildebrand was there. We were there in an attempt to inject some reality into the hearing, reality that is not penetrating inside the Beltway, and it is not surprising that message would come from three people from the great hinterlands.

The reality is that the middle class is in the same financial condition as they were when the bankruptcy law was passed. For example, credit card delinquency rates are 12% higher than they were just before the law went into effect. Home mortgage debt is almost 75% higher today than it was five years ago, and over 300,000 properties entered some stage of foreclosure in the third quarter of 2006, an increase of 43% compared to the same time one year ago. News stories on Wednesday announced that delinquency rates among subprime borrowers are increasing rapidly.

Yesterday morning, I was on CNBC with the media person from the Financial Services Roundtable. She suggested that the bankruptcy bill gave consumers "better choices, earlier choices, more choices." It was typical of the day, with persons asserting up was down. How can one claim that a bill limiting access to the bankruptcy courts gave a consumer more choices? Here is news for the apologists for the consumer credit industry--more consumer credit means more consumer bankruptcies. (Among the many papers showing the link is my forthcoming effort in the University of Illinois Law Review called "The Paradox of Consumer Credit" which is available on SSRN here.) By making it more difficult to file bankruptcy, the 2005 law leaves people with the middle class with the same crushing debt load it had before the legislation but now with nowhere to turn for relief. They will be paying interest and fees for years, much to the advantages of groups like the Financial Services Roundtable.

On a personal note, I want to thank Senator Schumer's office for inviting me to testify. It was an honor to be asked to address a Senate subcommittee. Also, despite our profound differences on the bankruptcy legislation, Senator Sessions was courteous and respectful, and I appreciated that very much. And, yes, the CNBC interviewer did call me "Stephen" at one point. This posting has been more of an overview of the hearing, and I actually have to get some work done now. In the next few days, I'll post some specifics including Senator Grassley's concerns about bankruptcy judges, some statistics from the U.S. Trustee and the credit counseling industry about means testing and credit counseling, and concerns that were expressed at the hearing about some of the official bankruptcy forms.

Comments

[Nathan Hines]

When I read this post on Bob Lawless testifying before the Senate Judiciary Subcommittee on Administrative Oversight and the Courts ... I went looking for video of the hearing on the Bankruptcy Act, and instead came across a last week’s “CFA Panel Discussion on Consumer Financial Services,” featuring the incoming Chair of the House Financial Services Committee, Barney Frank (D-MA)... Frank talks about the trade-offs that come with passing consumer protections at the federal level ...

[Mike Guttentag]

Your written testimony was a pleasure to read. I think many of us are glad you were there to give some perspective on the complexity of the issues surrounding consumer bankruptcy. As a side note, when I tried it, the CNBC link did not work.

[Bob Lawless]

Thanks for the kind words, Mike, and the heads up on the broken link. I fixed it, and it should be working.