USA: Mom vs. Mastercard

WASHINGTON -- Charles and Lisa Trapp worked hard, played hard and loved their kids. Theirs was an average middle-class family, until the night in 1992 when their oldest child, Annelise, stopped breathing. Though the Trapps successfully resuscitated her, they later learned their four year old child had a rare form of muscular dystrophy, and her muscles were so weak she needed a respirator to breath.

As employees for the United States Postal Service, the Trapps had good health insurance. "But when you have a chronically ill child such as Annelise, even the relatively small portion of her medical expenses that we are responsible for adds up to a considerable amount of debt," said Charles Trapp in testimony before the House Judiciary Committee in February. Trapp, who declared bankruptcy last year, came to Washington to oppose the new bankruptcy reform bill lawmakers are pushing through Congress. Votes are expected on the bill in both the House and Senate this week.

Bankruptcy laws were originally established to give people like the Trapps an opportunity to overcome financial misfortunes with a "fresh start." But credit card companies, banks and other lending institutions -- some of President George W. Bush's and Congress's strongest campaign contributors -- say people are abusing the system.

These powerful interests have lobbied hard over the last few years to overhaul bankruptcy laws and make it harder for people to get debt relief. Former President Bill Clinton vetoed a similar bill last year. Now, with control of the White House, Republicans are trying to ram a bankruptcy bill through Congress, a bill that could be the first that Bush signs into law. The bill would make declaring bankruptcy more difficult, more bureaucratic and more expensive.

Children of divorced parents will be among those hit hardest, say the bill's opponents, including women's groups, child advocates and consumer groups. Currently, alimony and child support payments are given priority, often coming directly out of the debtor's paycheck first, with any remaining income going to pay commercial debts. The proposed legislation would not allow credit card debts to be erased, and so custodial parents (in most cases women) and their children would have to compete with credit card companies to get their payment. For example, if a divorced father who has declared bankruptcy were forced to first pay credit card debts, he would be less able to meet his child support obligations.

The American Academy of Matrimonial Lawyers (AAML), an association of the nation's top divorce and matrimonial attorneys, in a letter to Congress recently, called the bill "extremely harmful to women and children."

"This is the banking industry, probably with Congress, deciding that they are not going to support children. This is not the people deciding that they are not going to support their children," said Charles Shainberg, AAML's president.

The bill's proponents argue the opposite. "The current bill has stronger sanctions for paying child support," said Joe Rubin, director of Congressional Public Affairs at the United States Chamber of Commerce, which actively backs the bill.

But Shainberg said such claims are moot. If a person in bankruptcy is forced to pay his or her credit card debts, it will be harder for that person to follow-through on paying child support.

"The issue is, where there is a limited amount of money to take from the bankrupt, the child support amount will now be reduced because money will go to the credit card company," he said.

Credit card lending is more than twice as profitable as any other lending in America, according to Elizabeth Warren, a Harvard law professor and co-author of The Fragile Middle Class: Americans in Debt (Yale Press 2001). "And yet they've gone to Congress to say, 'Give us a law to squeeze American families even more,'" Warren said.

"This bill is a give-away to credit card companies who are already making record profits. No one would be considering this bill if it were not for the political contributions that the banks have made," she said.

Commercial banks and finance and credit companies have thrown their political weight behind bankruptcy reform. They've been among the most generous of political contributors in recent years, making some $30 million in contributions during the 1999-2000 election cycle, according to the non-partisan Center for Responsive Politics. This total includes both "hard" money contributions directly to candidates from individual donors and political action committees (PACs), and "soft" money gifts, the unregulated mega-contributions that go to political parties.

George W. Bush received more contributions from commercial banks than any other political candidate, and five times more than Al Gore, according to the Center for Responsive Politics.

MBNA America Bank gave more than any other finance or credit company, and was Bush's largest contributor. Overall, MNBA gave $3.1 million in "soft" and "hard" money, 84 percent of the total to the Republicans. American Express gave approximately $775,000 (53 percent to Republicans), and MasterCard gave some $90,000, mostly to Republicans.

Members of Congress on the banking and judiciary committees, who have the most influence over the bankruptcy bill, hauled in $4 million in "hard money" contributions from the industry. MBNA executives gave $400,000 in "hard" money to Senate Judiciary Committee members, topping the list.

Senate Judiciary Committee member Charles Grassley (R-Iowa), who introduced the bill, received more than $80,000, and fellow committee member Senator Jeff Session (R-Ala.), a strong backer of the bill, received more than $170,000.

Financial sector executives were the top "hard" money contributors to House Judiciary Committee member George Gekas' (R-Penn.), donating some $35,000 to his campaign account, according to the Center for Responsive Politics. Gekas introduced the bankruptcy bill in the House.

None of the companies would provide TomPaine.com with an explanation for their donations. "All our campaign activity is a matter of public record," a MasterCard spokeswoman said. MasterCard's membership of 20,000 financial institutions, including MBNA, Citicorp and Chase, reported more than $3 billion in losses due to bankruptcy filings in 1999.

More than a million families filed for bankruptcy last year. Though the numbers have declined slightly in the last two years, they had more than quadrupled from 1980 to 1998. If the economy continues to falter, and lay-offs increase, experts predict more people will seek bankruptcy relief. That, according to the industry, is why they need bankruptcy reform.

Bruce Josten, executive vice president of the United States Chamber of Commerce, testified before the House Judiciary Committee, and pointed to the peak 1.4 million bankruptcy filings of 1998. "This figure becomes even more alarming when you consider that a substantial factor driving this incredible rise in bankruptcies is not the need to get out from crushing debt, but a desire to abuse the system and walk away from your debts," Josten said.

Josten and other bill supporters say the system is rampant with irresponsible people -- including wealthy ones -- who just want the "easy way out." But according to the American Bankruptcy Institute, a member-funded, non-partisan research group made up of attorneys, bankers, judges and other bankruptcy professionals, only 3.6 percent of those who file for bankruptcy may have been able to pay some of their debt.

The U.S. Chamber of Commerce said this bill is aimed only at making the wealthy pay their creditors.

Studies show that the vast majority of those who file bankruptcy are middle-class folks who have fallen on hard times. They are single women raising children, older Americans overwhelmed by medical costs, people who have lost their jobs, small business owners, or families divided by divorce.

Divorced women raising children and trying to collect child support are five times more likely to end up in bankruptcy, according Elizabeth Warren. African-Americans and Hispanic-American homeowners are more than five times more likely to file bankruptcy than white homeowners, who are more likely to have retirement plans, stock portfolios, other real estate investments, or other assets.

Warren predicted that if middle-class families are not able to discharge their short-term debt in bankruptcy, more and more people will be forced to run from their debts by leaving the workforce, exiting the legal economy for the underground one.

"The creditors have created an illusion of people lying on the beach somewhere declaring bankruptcy. There are some people who do that, and we should go after those people. But 97 percent of the cases are valid," said Travis Plunkett, legislative director of the Consumer Federation of America, an association that focuses on consumer education and advocacy, and is a major opponent of the bankruptcy bill.

In fact, those who file bankruptcy do not "walk away" from their debts. Under Chapter 7 of the bankruptcy law, a family is freed from short-term, high-interest debts, like credit card debts, enabling them to concentrate on pressing debts like their home, car, child support, educational loans and back taxes. Under Chapter 13, debtors volunteer to pay portions of their debt over a three to five year period. In short, even with the current law, most families leave bankruptcy court still heavily burdened by debt. If the current bill becomes law, many of these families would not have bankruptcy as an option. The bill disqualifies from bankruptcy relief anyone who could make $6,000 in payments to creditors over the next five years. Though the number people who could pay that amount is relatively small, according to Elizabeth Warren, the real problem with the bill is the 300 other pages of provisions which will affect everybody.

When the Trapps filed for bankruptcy, they owed $124,000 in medical bills not covered by their health insurance, and some $60,000 in credit card bills which they had run-up trying to pay for everyday expenses like car repairs, groceries and over-the-counter drugs. The mortgage on their house was $109,000, and they owed $26,000 on their van, which they needed to transport Annelise in her wheelchair.

Under the bankruptcy bill being pushed by the credit card companies, they would not have qualified for Chapter 7 because of their dual income, although Lisa Trapp had quit her job two months before they filed to stay home and oversee their sick daughter's care.

With the new bill, the Trapps would have had to seek credit card counseling, where an instructor would advise them on budgeting and money management. Creditors would also have the right to object to their filing for bankruptcy. The Trapps might then have had to hire a lawyer to defend themselves against the objection, incurring legal fees. If their credit card debts had not been discharged, the Trapps would have run the risk of losing their home and vehicle.

Consumer advocates and other opponents of the bill say the credit card companies are a big part of the problem. While the companies complain of losses from bankruptcy, they are pushing people to spend more money on credit. "The millions of credit card solicitations made to American consumers the past few years have contributed to the rise in consumer debt and bankruptcies," Senator Patrick Leahy (D-Vt.), a member of the Senate Judiciary Committee and opponent of the bill, said in a recent hearing on bankruptcy reform.

Consumer advocates also say dubious credit card practices -- such as low introductory rates which later shoot up, high late fees that cause credit card bills to pile up, and targeting of those with no credit history (like college students) or bad credit history (the recently bankrupt) -- share a part of the blame.

"Creditors are peddling credit recklessly to people who are on shaky financial grounds," said Plunkett of the Consumer Federation of America. "When they give credit to people who have no income, like a college student, those people [later] declare bankruptcy."

He said though credit card companies are the reason many have debt troubles, the proposed bill focuses almost solely on the debtor. Opponents say credit card companies need to reform their deceptive marketing practices and, among other changes, have a visible disclosure on monthly statements informing members how long it will take to pay the debt off if they pay only the minimum amount. Many people don't realize that if they only pay the minimum, their debt multiplies.

Opponents of the bill wonder why the companies and Congress are acting so quickly. "I continue to be puzzled by the false urgency for this bill," Senator Paul Wellstone (D-Minn.) wrote in a recent letter to Republican Senate leader, Trent Lott (R-Miss.). "As bankruptcy rates fell steadily in the past two years, the rhetoric about the 'crisis' in filings became even more shrill."

Edmund Mierzwinski, of the U.S. Public Interest Research Group, said campaign largess is the reason for the rush. "Filthy, disgusting piles of soft money from credit card banks have influenced Congress into passing a one-sided bill," he said. "Our view is that Congress should be reigning them in, instead of punishing the small consumer."

• 106 Money & Politics