It seems a bill that would make it more difficult for consumers to avoid paying off credit card debts by filing for personal bankruptcy has more lives than a B-movie monster.
In a rush to wrap up its legislative business before the summer break, lawmakers on Capitol Hill seem poised finally to enact a bankruptcy reform bill that has come close to becoming law on at least four other occasions. And if approved, the bill would be a big victory for the credit card and banking industries, which have given millions of dollars in campaign contributions to both political parties over the past few years.
In theory, the proposal would mean more revenue for big credit card issuers such as
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(ONE), because it would force some individuals filing for bankruptcy to continue paying off a portion of their credit card debts. Bankruptcy judges would employ a "means test" to determine whether an individual has the financial resources to pay back up to 25% of his debts -- or between $10,000 and $15,000 -- over a five-year period.
That's an important change from the current law, which permits individuals to essentially erase all their unsecured debts, which typically include things like credit card debts, utility bills and some auto loans.
Indeed, news that congressional negotiators had reached a tentative agreement late Thursday on a bankruptcy bill helped prop up shares of MBNA, the nation's biggest credit card company, which rose 68 cents, or 4.19%, to $16.90. The Wilmington, Del.-based company has been one of the most forceful corporate lobbyists for the bankruptcy proposal and was a big contributor to the 2000 presidential campaign of President Bush, who has supported the reform measure in the past.
But despite the aggressive lobbying by financial-services firms like MBNA, many industry experts say the bankruptcy reform bill won't be as big a boon to the income statements of credit-card lenders as some investors may think.
"We're making no changes in our estimates," said Fox-Pitt Kelton financial-services analyst Reilly Tierney.
Tierney says card companies such as MBNA are not likely to see more than a 5%-10% reduction in the dollar value of the credit-card debts they write off each year due to personal bankruptcy filings. And while that's not an insignificant number, he says no credit card company is likely to experience a revenue bonanza from the changes in the bankruptcy law.
Indeed, a study last year by the American Bankruptcy Institute found that only 3% of personal bankruptcy filers would probably qualify under the means test and be required to continue making partial payments on their unsecured debts.
And in the short term, the enactment of the bankruptcy bill could actually mean a rise in personal bankruptcy filings, which would mean even less money filling the coffers of consumer-lending firms. That's what happened last year when it appeared lawmakers were close to approving a similar bankruptcy reform bill. And the rush by cash-strapped consumers to the courthouse is likely to occur again, because the new law probably won't take effect for at least 180 days after its adoption.
"I think it will create a short-term blip in bankruptcy filings," said G. Ray Warner, a scholar-in-residence at the American Bankruptcy Institute and professor at the University of Missouri School of Law. "In light of the recent layoffs and economic problems, if this bill does pass, it would be an opportune time to file for bankruptcy."
The push for the bankruptcy bill comes at time when personal bankruptcy filings in the U.S. continue to set a record. Last year more than 1.4 million people filed for bankruptcy, an all-time high. And bankruptcy filings this year are keeping pace with last year's totals.
Some say the real reason credit card companies have been pushing for the reform bill is not so much economics but a desire to send a message to consumers that bankruptcy should not be seen as an easy way out of one's debts.
But consumer advocates counter that card companies, particularly ones that cater to the so-called subprime market, like
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, have created their own problems by extending credit to too many people.
"It seems awfully heavy-handed towards the consumer," says David Lackey, president of Weiss Ratings, a financial-services research firm.