This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
$1 buys you full access to ALL of TheStreet's Subscription Services! Learn More

Bankruptcy Bill Nears Passage -- Again

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 MBNA (KRB), Citigroup (C) and Bank One (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.

Stocks Jump

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.

Small Minority

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 Capital One (COF), 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.

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,812.05 -2.89 -0.02%
S&P 500 2,070.37 +3.34 0.16%
NASDAQ 4,779.9060 +21.6540 0.46%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs