Consumer lenders had every reason to think 2001 would be the turning point in their long-running struggle against debt dodgers.

With a Republican president firmly on their side, the industry watched with glee as both the House of Representatives and the Senate passed bills in March 2001 that would have made it more difficult, and in some cases impossible, for borrowers to file for personal bankruptcy protection. Legislators even set the day to reconcile their differences and submit a bill for the president's signature.

The day was Sept. 12, and needless to say, bankruptcy reform suddenly was among the last things Congress or the president was ready to address. Since then, neither Republicans nor Democrats have set a new date for a conference, leading observers on both sides of the debate to conclude that, once again, bankruptcy reform is dead.

It's not just that cracking down on debtors is a lower priority in a nation consumed by the war against terrorism. Reform has become decidedly unpopular as the U.S. economy has fallen into recession, exposing the vulnerability of debt-strapped consumers in a critical election year. Nearly 1.5 million people filed for personal bankruptcy in 2001.

"In an economic recession, the bill starts to look punitive," said Travis Plunkett, the legislative director of Consumer Federation of America, a consumer lobby group opposing the bill.

Even backers seem skeptical. The American Banking Association, which represents the interests of banks and credit card companies, has been pushing for some form of reform since 1996, spending significant sums to ensure its passage. But now spokeswoman Catherine Pulley says, "I'm not going to place bets on whether it will pass. Congress shifted priorities after Sept. 11. But anything can happen."

Probably nothing will.

On Oct. 11,

Federal Reserve

Chairman Alan Greenspan and Treasury Secretary Paul O'Neill urged Congress to pass some kind of bankruptcy reform. "Further delays would unnecessarily place the financial systems at greater risk," they wrote in a joint letter. But the missive failed to ignite support.

'There's almost a national conspiracy of people who buy credit cards and then max them out and then file for bankruptcy.'

A Nov. 14 meeting among politicians also couldn't produce a bill for the president to sign into law. Both supporters and detractors of the current bill agree that it likely won't become law by Oct. 4, 2002, when the legislative session adjourns.

House Judiciary Committee Chairman Rep. James Sensenbrenner (R., Wis.), who heads the conference committee attempting to produce a single bill, has yet to announce the date of the next meeting.

Already, opposition is mounting among Democrats, with Rep. Jerrold Nadler (D., N.Y.) and Sen. Paul Wellstone (D., Minn.) urging colleagues to reconsider their views on the bill in the wake of the economic downturn.

"You'll not see anyone say, 'No, absolutely not, this thing shouldn't pass.' Not a majority anyway. But privately, they'll acknowledge they're skeptical," Plunkett says.

In an election year plagued by a lingering recession, politicians don't want to be associated with helping affluent credit card companies.

Yet credit card companies and other lenders end up paying for the vacations and luxury items of people who file for bankruptcy and simply walk away scot-free.

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"There's almost a national conspiracy of people who buy credit cards and then max them out and then file for bankruptcy," says Harlan Platt, professor of finance at Northeastern University in Boston. Indeed, the banking association estimates that 10% of all bankruptcy filings are fraudulent, costing banks between $3 billion and $4 billion a year.

Even though the filings dipped in 2000 and 1999, consumer groups expect the number to come in between 1.4 million and 1.5 million for 2001, challenging the record of 1.44 million in 1998. According to data from the American Bankruptcy Institute, which addresses bankruptcy issues in the U.S., the number of bankruptcy filings has quadrupled since 1980. And an increasing number of these filings are from individuals. Last year, individuals accounted for 97% of the total bankruptcy filings, compared with 82% in 1982.

If the economy continues to struggle, the number of bankruptcies for 2001 likely will be higher. And so will the losses. As it was in 1998, when a record number of bankruptcies caused record losses, the ABA expects the industry to face record losses in 2001, with consequences for ordinary citizens, not just banks.

"The American family pays an average of $400 more a year in terms of goods and services due to bankruptcies," says Pulley, the ABA spokeswoman.

The main reason people file for bankruptcy protection is job loss, followed by medical bills and divorce. According to consumer groups, the average bankruptcy filer makes around $20,000 a year, but that's not to say it's not an attractive option for more affluent people.

Michelle White, professor of economics at the University of California, San Diego, has found that 17% of American households would benefit from filing for bankruptcy. "You shouldn't do away with bankruptcy," White adds, "but we also need reform."

In essence, the reform makes it more expensive and difficult to file for bankruptcy while at the same time making it easier for creditors to seize assets. "One of the reasons bankruptcies have increased is a lack of a stigma in filing," said Andy Caine, president-elect of the ABI.

Under the bill, filers would face far greater scrutiny from the court system. For example, they would be questioned under oath about the spending habits that led them to bankruptcy court. And bankruptcy seekers would need to earn below the median annual income of their states to even be eligible for protection. According to 1999 U.S. Census Bureau data, which are the most recent available, the median annual income for a four-person family in New Mexico is $44,947, whereas in Connecticut it is $75,505.

The legislation also would limit the ways collection agencies allow consumers to repay debt. "The whole concept is to make people who can afford to pay their creditors to require them to do so," Caine says.

Economic Concerns

Some in the industry suggest that the politicians don't want to pass the bill because they believe it would hurt the economic rebound.

"At a time when Congress has been unable to agree on a stimulus package," Plunkett says, "it would be bad politics for Congress to pass this bill."

But other experts disagree on whether a bankruptcy reform law actually would harm the recovery process.

Some argue that bankruptcy allows people to escape debt and continue spending, boosting the economy in the near term. In other words, a large number of people dropping out of the economy because they couldn't get bankruptcy protection would disastrously impact the economy.

"Japan has antiquated bankruptcy laws and millions are hopelessly in debt. Every penny goes to servicing debt. That's why their economy remains moribund," says Leon D. Bayer, bankruptcy lawyer. "This law would make us like them, preventing America from bouncing back from recessionary times."

But others argue that the economic recovery has nothing to do with reforming bankruptcy law. "If a person is in bad shape, it doesn't matter: He's not helping in the recovery anyway," says Dhawan.

Uncontrolled debt also could cripple economic health in the long run. According to information recently released from the Federal Reserve Bank, U.S. consumer credit rose by $19.9 billion in November, thanks in part to 0% car loans from automakers, the biggest jump since the Fed began tracking debt in 1943.

As household debt, delinquencies and bankruptcies all increase, and lenders lose money on loans and face earnings shortfalls. To compensate, banks increase interest rates for middle- and upper class bill-paying customers. Credit for everybody becomes more expensive. Ultimately, lenders could go out of business.

Even if the House and Senate bills do expire this year, the issue of bankruptcy reform likely won't disappear. As Leon Bayer, whose law firm, Bayer, Wishman & Leotta, Los Angeles, handles 600 personal bankruptcy cases a year, notes: "As long as credit card companies are willing to dole out millions in campaign contributions, we will continue to see legislation."