The Good, The Bad, and The Ambivalent Candidate

On April 7th, James Surowiecki wrote his the New Yorker article Going for Broke:

In recent months, a lot of people have been handed financial get-out-of-jail-free cards. C.E.O.s who presided over billions in losses have walked away with tens of millions in compensation. The Federal Reserve has showered cheap money on banks and brokerages. Even Bear Stearns caught a break when, last week, J. P. Morgan agreed to quintuple the price it will pay to take over the firm. But there’s one group for whom forgiveness has not been forthcoming: ordinary consumers struggling with piles of credit-card debt. For them, escaping the burden of their bad decisions and their bad luck has become much harder.

That’s because of a law that Congress passed in 2005 which has made it more difficult for people to write off their debts. Filing for bankruptcy has become much more expensive. More important, while lower-income people can still declare Chapter 7, which takes away your assets but then discharges your debts, most middle- and higher-income people now have to declare Chapter 13. That means they have to pay their creditors monthly for five years before they’re free.

The bankruptcy law he is referring to was the 109th Congress’s S. 256 Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. It was one of the most partisan bills to make it into law under the Republican majority before the Democratic party won back a majority in 2006. This bill was the result of much lobbying by the banking and credit industries.

The 2005 bankruptcy bill was opposed by a wide variety of groups, including consumer advocates, legal scholars, retired bankruptcy judges, and the editorial pages of many national and regional newspapers. While criticisms of the bill were wide ranging, the central objections of its opponents focused on the bill’s sponsors’ contention that bankruptcy fraud was widespread, the strict means test that would force more debtors to file under Chapter 13 (under which a percentage of debts must be paid over a period of 3-5 years) as opposed to Chapter 7 (under which debts are paid only out of existing assets), the additional penalties and responsibilities the bill placed on debtors, and the bill’s many provisions favorable to credit card companies. Opponents of the bill regularly pointed out that the credit card industry spent more than $100 million lobbying for the bill over the course of eight years.

Opponents of the bill argued that claims of bankruptcy abuse and fraud were wildly overblown, and that the vast majority of bankruptcies were related to medical expenses and job losses. Their arguments were supported by an in-depth study by Harvard University medical and legal scholars, which found that more than half of bankruptcies were attributable to unpaid medical bills.

This bankruptcy bill was actually first drafted in 1997 and introduced in 1998. The House of Representatives approved a version titled the “Bankruptcy Reform Act of 1999″ and the Senate approved a slightly different version in 2000. After the differences in the bills were reconciled, Congress passed the “Bankruptcy Reform Act of 2000″. President Clinton, however, employed what is known as a “pocket veto” by waiting for the congressional session to adjourn without signing the bill, a legislative maneuver tantamount to a veto.

In the years since 2000, the bill was introduced in each Congress, but was repeatedly shelved due to threats of a filibuster from its opponents and because of disagreements over various amendments.

The increase in Republican majorities in both the Senate and House after the 2004 Federal elections breathed new life into the bill, which was introduced in its current form by Republican Senator Chuck Grassley of Iowa. The bill was supported by President George W. Bush. Tom DeLay also championed the controversial legislation in the House.

“I’ve never seen a bill that was so one-sided,” said Consumer Federation of America chair (and former Ohio senator) Howard Metzenbaum, at the time. “The cries, claims and concerns of vulnerable Americans who have suffered a financial emergency have been drowned out by the political might of the credit card industry.”

The new law adds a number of new requirements for bankruptcy filers that attempt to make the filing process more difficult and costly. These additional requirements include:

• Mandatory credit counseling and debtor education. All potential bankruptcy filers must now undergo credit counseling via an “approved nonprofit budget and credit counseling agency” prior to filing for bankruptcy. Chapter 13, Chapter 7, and Chapter 11 filers must also complete a course in “personal financial management” after filing the bankruptcy.
• Additional filing requirements and fees. The new law increases the amount of paperwork involved in filing and raises the filing fees for debtors earning over 150 percent of the federal poverty level.
• Increased attorney liability and costs. Attorneys representing bankruptcy filers are now required to conduct an investigation of their clients’ filings and can be held personally liable for inaccuracies. Most bankruptcy attorneys predicted that this will result in increased attorneys fees and will make attorneys less likely to take on some cases. In addition, bankruptcy filings are now subject to audit in a manner similar to tax returns.
• Fewer automatic protections for filers. The new law eliminates some of the protections bankruptcy filers previously had, such as stopping or delaying evictions, avoiding driver’s license suspensions, and delaying child support proceedings.
• Increased compliance requirements for small businesses. The new law increases the bureaucratic compliance obligations and shortens the deadline for Chapter 11 reorganizations involving small businesses, a series of new requirements not applicable to larger businesses.
• Increased amount of debt repayment under Chapter 13. The new law made several changes that effectively increased the amount of debt that Chapter 13 filers will have to repay. In addition, the “super discharge” provision, which allows filers to discharge many of their debts under Chapter 13 in return for agreeing to a payment plan, is significantly curtailed under the new law.
• Increased length of time between discharges. The new law increases the length of time from six to eight years between which a filer can receive a Chapter 7 discharge after a prior Chapter 7 case.

You may be wondering what this all has to do with the current election campaign. With three candidates left in the news – the presumptive nominee for the Republicans, Senator John McCain, and the two remaining Democratic party candidates, Senators Clinton and Obama – its a pleasure to get a glimpse of their behavior in the Senate on bills that came up while all three were holding their Senate seats.

The voting on this bill is one such glimpse. As more and more voters report that finances and the economy are gaining in importance in terms of their selection criteria for our next president, I think its worth taking a look at how the candidates handled this bill that, by all metrics, made it more difficult for consumers to get out from under debt and get their lives back on track while nailing down protections that the credit card companies have wanted for years.

Over all, 74 Senators voted in favor of the bill’s passage while 25 Senators voted against it. Those 74 Senators who voted for passage included every single Republican Senator. Every one of the 25 Senators who voted against the bill were Democrats. As any American school child knows, 74 + 25 = 99 while there are supposed to be 100 Senators voting.

Senator McCain was one of those Republicans voting in lock step to pass this bill. Senator Obama was one of that 25% of the Senate that voted against the bill. And that missing vote? That was Senator Clinton not voting. This bill affects Americans from the boardroom to the poor house yet Senator Clinton skipped the vote entirely.

In this case, sitting out the vote paid off – literally.

As Mother Jones reported in July of 2007:

All told, in 2006, financial and credit card companies gave $7 million in campaign contributions, and banks $25 million, to candidates of both parties, according to the Center for Responsive Politics. Leading the pack, with $378,000, was Hillary Clinton.

It will be very interesting to see if Pennsylvania voters are paying enough attention to see which candidate is really voting in their best interest.

A complete roll call of the final Senate vote for passage of the bill is included below the cut.

Alphabetical by Senator Name