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Bankrate readers weigh in on bankruptcy

My criticism of the bankruptcy reform bill struck a nerve. Many Bankrate readers wrote in to counter my perspective with their own points of view. Some opined that there ought to be a law to stop abusive consumer behavior, and that spendthrifts should be accountable for the debts they rack up rather than getting off scot-free.

It's true that filing for bankruptcy protection should be a last-resort measure for those who suffer financial setbacks due to circumstances beyond their control, such as illness, job loss, divorce, etc. Without question, bankruptcy should not be an easy way to abandon responsibility for wildly extravagant consumer behavior.

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While abuse exists, the evidence is more anecdotal than scientific.

One scientific study released in 2001, titled "Illness and injury as contributors to bankruptcy," revealed that 50 percent of those surveyed who had filed for bankruptcy had a medical basis for doing so. During the two years leading up to bankruptcy, about 40 percent of these folks lost phone service, about the same number opted not to get prescriptions filled, roughly half missed an important doctor or dental visit and one-fifth went hungry because of their dire financial situations.

Should folks suffering such hardships be denied a Chapter 7 bankruptcy and undergo a stringent means test originally designed for tax cheats?

Bankruptcies caused by unaffordable medical costs will undoubtedly increase going forward, as more employers are cutting back on retiree health insurance for their workers, according to a new study from the nonpartisan Employee Benefit Research Institute.

Let's look to our political leadership as exemplars of how to manage money. In recent years, federal tax cuts were enacted on a wide scale, benefiting most Americans and businesses. This, of course, meant decreased tax revenues (less income for the government to spend). Meanwhile, spending programs have increased, resulting in a ballooning deficit.

Our lawmakers aren't able to maintain fiscal balance for our country. Shouldn't we hold them to the same standards that they are setting up for consumers?

The Senate vote on the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was 74 to 25 in favor of its passage. The House of Representatives passed it on April 14.

Why are lawmakers so gung-ho about passing this law now, after eight years of lobbying by the credit card industry? One astute Bankrate reader sent me an analysis showing the correlation between Congressional voting patterns of consumer-finance bills and campaign contributions received in recent elections. I couldn't verify the results of that particular analysis because of the methodology used, but I did go to its source of information,, the Web site of the Center for Responsive Politics, and found some interesting statistics.

  • The largest campaign contributions from "finance/credit companies" during the 2004 election cycle were made to George W. Bush ($644,475) and John Kerry ($173,366). Sen. Kerry voted against passage of the bill; President Bush is expected to sign it into law.
  • Not every senator who voted in favor of the bankruptcy bill received a political contribution from the finance/credit industry. And a few who voted against it received considerable monies from the industry. But here's how it breaks down: Those casting "yea" votes received $13,000 on average vs. $7,380 for the nays. (I threw out the amount contributed to Sen. Kerry, because as candidate for president, he received more than twice that of any other senator.)

Do you suppose these campaign contributions swayed our lawmakers' points of view on the subject?

OK, I'll stop railing about gross inequities in our system. It's time to give Bankrate readers a chance to express their opinions (some letters edited for length). These letters were originally posted on March 30, 2005:

Dear Boomer Bucks,
I have to disagree with several of the comments made in your article on the new bankruptcy bill. Why shouldn't these people have to repay their debts? I pay mine and have done so for the last 31 years (since I was 12 years old). I think the only time bankruptcy should even be an option is in the case of huge medical expenses. Every single person I know with credit card debt has it because they are living beyond their means, "high on the hog," as some would say. I think people like me are actually penalized because we spend less than we make and plan ahead. The only point in your article I would agree with is that of the "universal default clauses" being abusive. People need to take some responsibility for their actions and be held accountable for their debts. -- N.S.

Dear Boomer Bucks,
I couldn't disagree more with your March 23 article concerning the new bankruptcy law. There are a huge number of people who have used bankruptcy as a "get out of debt free card" to erase their debts and it needs to stop. I agree that there are people out there who need the protection, but why should people who have the means to repay at least part of their debts (see "means test") not be forced to do so? While I would agree that it is perhaps too easy to get credit these days, is anyone holding a gun to someone's head to get the credit? How about exercising a bit of restraint?

Also, having a bankruptcy on your credit report does not seem to be the credit-killer that it is cracked up to be. I know of a couple who declared bankruptcy in 2002 due to their belief that the debts they had racked up would simply take too long to pay off, and they wanted to buy a house. Under the advice of a bankruptcy lawyer, the wife quit her job to get their gross income down and then they filed for bankruptcy. They had one vehicle they no longer wanted (a Mitsubishi they had purchased under a "zero down/no payments for a year" deal, which they drove for 15 months without making a single payment). So they let that one get repossessed, but continued making payments on the other vehicle they wanted to keep.

Not a single creditor showed up at the bankruptcy hearing, so they were able to keep all the possessions they owed money on. Less than a year later they were able to purchase a home with a subprime lender and just recently refinanced into a 30-year fixed at 5.5 percent. They also have not had any trouble procuring additional credit cards and vehicle loans since the bankruptcy.

Do these people, and those like them, need bankruptcy protection? We need to stop subsidizing peoples' bad choices and make them take some personal responsibility for their debts. These changes to the law are long overdue.
-- T.K.

-- Updated: April 14, 2005




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