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Overview

In the past five years, credit card companies and the banking industry have gone on a shopping spree—shopping for millions of American consumers to hook on credit cards. Mail solicitations, telemarketing and advertising have all exploded—targeted especially at low and moderate-income households who are most likely to carry big balances from month to month, incurring the exorbitant interest rates and fees that make this business so profitable.(1) At the same time, card issuers have also raced to extend card-holders an eye-popping $1.6 trillion in unused bank card limits—nearly three times what they were willing to extend just five years ago.(2) Consumer debt has ballooned. According to data provided by the Federal Reserve Bulletin, outstanding consumer credit levels have jumped from $396 billion at the end of 1996, to approximately $452 billion in October 1997.(3)

While the economy has boomed in recent years, not everyone is sharing in the gains. Personal income levels have stayed flat for a majority of Americans, and with the rise in indebtedness, personal bankruptcy filings have soared. According to data released by the Administrative Office of the U.S. Courts, 1.35 million Americans filed for bankruptcy in 1997, nineteen percent more than in 1996,(4) and thirty percent more than in 1991, when the country was still in the throes of an economic recession.(5)

Money owed on credit cards is an enormous chunk of this debt. Consumer Federation of America (CFA) recently estimated that some 55 to 60 million households carry a credit card debt of $7-$8,000 from month to month.(6) At interest rates ranging from 15 to 20 percent, big money is being made.

We all know from the torrent of offers for pre-approved cards in our own mailboxes how aggressively credit card companies market their plastic. More than two billion credit card solicitations were sent out in 1997. Some 30 million were sent out every month in 1997 by MBNA, one of the largest credit card issuers, not to mention six million phone solicitations.(7) "One of the tricks in the credit card business is that people have an inherent guilt with spending. What you want is to have people feel good about their purchases," Jonathon Cranin, of McCann-Erikson Worldwide advertising, told The New York Times in October, commenting on a new MasterCard ad campaign.(8) Minimum payment options, teaser rates that go up at the end of six months, cash advance machines in casinos, and credit limits that go up the more a consumer spends, suck people into a revolving cycle where interest is paid on a big balance.

While it is the middle class that is most encumbered with credit card debt, low-income families also bear a serious burden. More than 25 percent of households with less than $10,000 of annual income carry credit card debt, and nearly 42 percent of households with an income between $10,000 and $25,000 do.(9) "By extending too much credit to Americans who will have the most difficulty paying it back, banks are forgetting the basic principles of banking, " David A. Wyss, Ph.D., research director and financial economist for DRI/McGraw-Hill, told an industry conference in March 1997.(10)

Though credit card companies seem willing to issue a card to anything that moves, they're complaining to Congress about how much money they lose in bankruptcy court.(11) Having helped created the problem of increased consumer indebtedness by irresponsibly pushing credit cards on consumers, the credit card industry now wants government to help them make good on their loans. "To a large extent, the bankruptcy 'problem' is nothing but a 'bad loan' problem. It could be fixed if lenders were more closely attentive to underwriting," Gary Klein, a staff attorney for The National Consumer Law Center, told the Senate Banking Committee earlier this year. "For the most part, the lending community has chosen not to take this step. The present interest rate environment has taught lenders that substantial profits can be made from extending credit to risky borrowers, such as college students."(12)

Cashing in on years of hefty campaign contributions to members of Congress, the industry is pulling for legislation that would restrict the ability of bankrupts to get a fresh start. And no representative is more at their beck and call than Rep. Bill McCollum.

Who's on the Leash?

Rep. Bill McCollum (R-Fla.)

Rep. Bill McCollum introduced H.R. 2500, the Responsible Borrower Protection Act, on September 18, 1997. The bill, which has already gathered 170 cosponsors, reads like a veritable wish-list for the industry. It would tip the system to make it easier for credit card companies to recover debt, while doing nothing to crack down on the irresponsible practice of extending easy credit in the first place. (Note: McCollum's proposal was timed as a preemptive strike against the National Bankruptcy Review Commission, which released its recommendations a month later, on October 20. The industry was unhappy with preliminary reports of the Commission's findings.)

A major provision of McCollum's bill would prohibit many individuals from filing for bankruptcy under Chapter 7. This is the traditional form of bankruptcy, under which an individual's assets may be liquidated and the proceeds divided among creditors. The debtors then get what's known as a "fresh start" -- this provides a second chance to people to get back on top of their financial situation. Legal liability to pay unsecured debts is canceled with exceptions to protect debts such as taxes, child support, and money owed because of misconduct by the debtor. These debts are never forgiven and must be paid in full. Credit card companies dislike Chapter 7 because they're among the last in line to get paid. As holders of "general unsecured" debt, they are compensated only after those owed "secured" debt, such as car loans.(13)

Rep. McCollum's bill would force more individuals to file under a different section of the bankruptcy code -- Chapter 13. Under Chapter 13 the debtor must propose a payment plan of three to five years during which he or she makes regular payments to creditors. McCollum's bill also makes Chapter 13 more friendly to credit card companies. For example, it would create a new formula that mandates a certain amount of the debtor's monthly net income be paid specifically to holders of unsecured debt,(14) even if it is at the expense of home mortgage payments, child support, and auto loans.(15)

New litigation costs would be imposed on all debtors together with an opportunity for creditors to raise issues, which can only be raised now by bankruptcy court officials. The cost of bankruptcy would inevitably go up, hurting those at the bottom of the financial barrel.(16) The bill also adds new administrative and financial burdens to the bankruptcy court, leading the Consumer Federation of America to say the bill "seeks to turn the bankruptcy system into a high-priced debt collection agency for the credit card industry." In addition, it would do nothing to hold creditors accountable for irresponsible lending, for example, by restraining their ability to extend consumers unlimited credit lines, requiring credit card companies to notify card holders and allow them to cancel before they increase credit rates, or capping the interest rate credit card companies can charge.

Some people undoubtedly do "game" the system, as the credit industry claims, filing for bankruptcy to avoid responsibility for bad decisions. But the industry's proposal, say consumer advocates, is a rigid, one-size-fits-all solution that would punish many who have simply hit hard times. "People are filing for bankruptcy for the same reasons they did 15 years ago," Mary Rouleau, legislative director for Consumer Federation of America said in a recent interview. "They get divorced. They have a medical crisis.... Most families now depend on two incomes to get by. One person loses their job or gets downsized -- that family is thrown into crisis and often they do carry a lot of credit card debt."(17)

Testifying before Congress last spring, Professor Ian Domowitz of Northwestern University's Economics Department reported that uninsured medical debt makes someone more likely to declare bankruptcy. He also noted that "[C]redit card use is very highly correlated with, if not a causal determinant of, consumer bankruptcy." According to a recent study funded by the credit card industry, in 1996 two-thirds of all bankrupts filed under Chapter 7. On average, they earned a paltry $19,620, just slightly above the federal poverty level. On their credit cards alone, they owed an average of $19,066.(18)

Who's Backing McCollum's Bill?

The lead group backing the provisions of the McCollum bill is an ad-hoc coalition, the Bankruptcy Issues Council. Though the group won't release a complete membership list, a July 1997 press release lists the American Bankers Association, America's Community Bankers, the American Financial Services Association, the Consumer Bankers Association, the Credit Union National Association, the Independent Bankers Association of America, the National Retail Federation, MasterCard International and Visa USA. Through these trade associations, the entire national banking industry is well represented. In addition, the American Financial Services Association, a trade association that specifically serves the credit industry, has members such as Household Finance, American Express, J.C. Penney Co., Ford Motor Credit Co., and Chrysler Financial Corp. (The AFSA also refused to release a complete membership list.)(19)

The AFSA spent $700,000 lobbying during the first half of 1997 alone (20) and the credit industry has been busy hiring influential lobbyists to help plead its case. The Bankruptcy Issues Council has former Treasury Secretary Lloyd M. Bentsen of Verner, Lipfert, Bernhard, McPherson and Hand and former RNC Chairman Haley Barbour of Griffith & Rogers signed up. Powell-Tate is handling publicity for the group. The AFSA has hired Timmons and Company.(21) The groups have also arranged "fly-ins" of CEOs to lobby on the Hill and are running advertisements in Capitol Hill newspapers such as The Hill. This is the kind of powerful "help" only money can buy.

Why is McCollum pushing so hard for this legislation? According to data collected by the Center for Responsive Politics, McCollum has received a total of $373,857 from January 1991 to June 1997 in PAC and individual contributions of $200 and above from the banking and credit card industry. (This includes $14,250 to his leadership PAC, Countdown to Majority, in the 1994 election cycle.) The industry's contributions to McCollum's campaign chests more than doubled in the 1996 cycle, after the Republicans took over Congress. McCollum ranks in the top two percent among his House colleagues in contributions from the banking and credit industry over this time period. Overall, he and co-sponsors of H.R. 2500 have received more than $11.1 million in PAC and individual contributions from the banking and credit industry from January 1991 to June 1997.

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1 "The Consumer Impacts of Expanding Credit Card Debt," by Steven Brobeck, Consumer Federation of America, Feb. 1997.

2 News Releases from Veribanc, June 20, 1997 and Sept. 16, 1997.

3 "Expanding Credit Card Debt: The Role of Creditors and the Impact on Consumers," by Steven Brobeck, Consumer Federation of America, Dec. 16, 1997.

4 "Short Cuts," Newsday, Feb. 28, 1998, P. A25.

5 "Potent Forces Brace for Battle on Bankruptcy Law Overhaul," by David Hosansky. Congressional Quarterly, Oct. 18, 1997, pp. 2534- 2538.

6 "Expanding Credit Card Debt," by Steven Brobeck.

7 Testimony of Gary Klein of the National Consumer Law Center in front of the Senate Subcommittee on Financial Institutions and Regulatory Relief, Feb. 11, 1998, citing "Banks Marketing Blitz Yields Rash of Defaults," Wall Street Journal, Sept. 25, 1996, P. B1 and "A Banking Powerhouse of Cards," New York Times, October 22, 1997, P. C1.

8 "Advertising," New York Times, Oct. 22, 1997, p. D8.

9 1995 Fed Survey of Consumer Finances as reported in Federal Reserve Bulletin, Jan. 1997, p. 19.

10 "Credit Card Debt Reaches All Time High Among Lower-Income Americans," Los Angeles Times, March 24, 1997.

11 "Potent Forces Brace for Battle on Bankruptcy Law Overhaul," by David Hosansky.

12 Testimony of Gary Klein, Feb. 11, 1998.

13 Technically, it is only the true value of the car that's considered "secured." If a car is worth less than the outstanding loan, only the amount of its worth is considered "secured" debt. The rest of the money owed is considered "unsecured" debt. See "An Analysis of H.R. 2500 and S. 1301: Proposed Consumer Bankruptcy Reform Legislation," written by Hon. Eugene R. Wedoff, United States Bankruptcy Court, Northern District of Illinois, prepared for the American Bankruptcy Institute, Jan. 16, 1998.

14 ibid.

15 Interview with Gary Klein of the National Consumer Law Center, conducted on Feb. 20, 1998.

16 ibid.

17 "Take It Personally," CNNfn, January 16, 1998. Transcript #97011602FN-108.

18 "Personal Bankruptcy: A Report on Petitioners' Ability-to-Pay," by John M. Barron, Ph.D. of Purdue University and Michael E. Staten, Ph.D. of Georgetown University, Oct. 6, 1997.

19 "Reopening Chapter 7," by Bill McAllister, Washington Post, Jan 1, 1998, p. A23.

20 "Money In Politics Alert," prepared by Jennifer Schecter for the Center for Responsive Politics, Volume 4, Issue 1, Jan. 9, 1998.

21 "Reopening Chapter 7," by Bill McAllister.

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