T.J. Newton
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Corporate & Financial Reform .
Banks & Bankruptcy: Torturing America's Consumers
T.J. Newton

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 should really be called the Bankruptcy Prevention and Bank Protection Act of 2005. The Act does very little to protect consumers, and it does a whole lot to protect banks. The Act also mandates the growth of a private consumer debt industry intended to replace democratic control over banks, and forces consumers to give up their ability to stand up to the bank in court. Perhaps worst of all, this Act denies consumers their right to make a "fresh start," and tacks on all kinds of stipulations to make bankruptcy especially difficult for the poorest Americans who have fallen on hard times.

In an ideal world, far removed from the everyday reality of the working consumer, the Act attempts to sweeten the position of banks that are "tired of all the whining" from consumers who claim they were abused by the financial industry. Sure, in an ideal world, we're all tired of whining. But in the real world, it is the banks that are doing the whining, and the American consumer who is the real victim of a corrupt and abusive system designed to deceive the consumer at every level of participation in the economy. In the meantime, the financial industry seems to have received only a wrist-slap for ripping off consumers (think "accounting scandals") while the American people are having their only protection against this corrupt and abusive enterprise stripped away.

Of course, not all banks are evil, and a few banks go to great lengths to help consumers who fall on hard times. But more often than not, most banks hide information from consumers, rip them off at every turn, and declare war on anyone who falls on hard times or loses their job. Not to mention the aggressive and deceptive marketing campaigns that trick consumers into taking on more debt than they can afford. Walk into any department store or across any American college campus and you'll feel firsthand the immense pressure to take on more debt. Maybe you can resist, but many people can't, and it's not their fault.

Bankruptcy is one of the best protective measures consumers have against an industry that employs such deceptive and aggressive marketing campaigns, but even if you somehow manage to avoid all of the marketing, you're still up against an industry that refuses to allow you to even try to pay off your debts. Why should people give up even a fraction of their bankruptcy protection in such an environment?

Bankruptcy was intended to protect consumers against an industry known for fraud and deception by giving those consumers a "fresh start."

The fresh start of an honest debtor is a fundamental aim of bankruptcy. [...] Consumer bankruptcy law ...emphasizes protection of the individual by creating a "fresh start," consisting of relief from most debts incurred prior to the bankruptcy, and enabling the consumer to reconstruct an economic future unburdened by a failed past. [...] [C]onsumer bankruptcy policy remains primarily concerned with giving consumers an economic fresh start (OCAL 55-56).

The current Act attempts to reduce this protection in favor of banks who engage in all kinds of aggressive and deceptive tactics that shape the current (and past) financial environment. The latest example of the corruption that currently exists in the financial industry is the growth of private consumer credit counseling services, which have lately been masquerading as kind and generous non-profit organizations. However, they are just another bank scam in disguise. Parts of Section 106, as well as other sections of the bill, encourage the growth of this scam by frightening consumers away from bankruptcy and pushing them into a credit counseling service.

The scam works like this... You start to approach the limit on your credit card, and the bank, smelling your desperation, raises your interest rate. One of the nation's largest credit card companies suggested that interest rates should be raised in this situation because the consumer is expected to transfer balances to a card with a lower rate or enter credit counseling. The bank knows whether you can get a lower rate somewhere else, because they are authorized to check your credit whenever they want. So, if you can't get a lower rate, they attempt to force you to contact a credit counseling service, which may have ties to various banks. Once you contact a credit counseling service, they charge you a fee to "get your rate lowered," which means the bank lowers it back down after you pay the fee to a credit counseling service. You - the consumer - have done nothing wrong. You can pay your bills on time and still get hit by this.

The government wants to write this scam into law on behalf of banks. They don't care at all about protecting the consumer. The sections of the bill that encourage private credit counseling over democratically controlled debt resolution rip people off by selling democracy to credit agencies that benefit from the misery of American consumers victimized by their banks. The effect is that the bank gains the power to govern the lives of consumers. But politicians should not sell democracy to the banks, even when large amounts of money are involved. From the looks of this Act, banks are teaming up with credit counseling services to scam people out of their right to stand up to the corrupt and abusive financial industry in court.

Another powerful example of corruption in the financial industry is the inability of many consumers to pay off their outstanding balances. In such an environment, why should consumers give up even a fraction of their bankruptcy protection? Especially considering the fact that many companies are filing bankruptcy right and left. Why do they deserve a break while consumers get the shaft? In the current business environment, S 256 is simply un-American.

To really understand how consumers are being simultaneously ripped-off while being forced into bankruptcy, the average middle-class consumer earning the mean average income in their state need only ask themselves one question: Have you ever tried to pay more than your minimum balance? The whole process is really a lot more complicated than most people believe or are willing to believe, and the scams currently in place to prevent consumers from paying off their debts demonstrate the extent to which the financial environment, and not the individual consumer, are responsible for the kind of overwhelming debt that forces people into bankruptcy.

Consider how difficult it is for most people to pay down their credit card, mortgage, or other loan. If your minimum payment is $20.00, and you decide to try and pay off your debt by sending the bank $40.00, in most cases you are actually worse off. Many consumers don't understand why, and even those who do understand are unable to pay off their balances when they can afford to do so. The reason most people can't pay off their debts has to do with PRINCIPAL and INTEREST.

When you send in your $20.00 minimum payment, some of it goes toward the amount you owe: PRINCIPAL. The rest of it goes into the pockets of the bank: INTEREST. Depending on the type of loan, the amount that goes toward principal or interest can be different for each payment, even though the payment is always $20.00. But no matter how your minimum payment is applied, if you pay a little extra, you probably intend to reduce the amount you owe: the PRINCIPAL. When you pay down your PRINCIPAL, your payments can sometimes be reduced, and the amount applied toward INTEREST can be changed. If you intend to reduce your "debt," then you want to pay down your PRINCIPAL.

But banks have a trick. If you send in $40.00, in most cases your minimum payment of $20.00 is applied as usual, but the extra $20.00 you sent in doesn't usually pay down your debt (the PRINCIPAL). Different banks have different ways of tricking you. Some banks "ask" if you want to apply your "overpayment" (the extra $20) toward "future payments," but the question is often deceptively worded - people simply don't understand what "future payment" means when it is explained by a self-interested bank. But what it means is that you are paying the INTEREST on your NEXT payment instead of paying off the PRINCIPAL, which is the amount you owe the bank. That doesn't help you. If you don't indicate what you want (like most people) the bank usually takes the profit as INTEREST.

To make matters worse, the bank may tell you that you can "skip a payment" if you overpay, or they may even mail you your next statement on a later date. If the bank mailed you your next statement on a later date, or if you didn't initially intend to skip a payment and think it's some kind of "bonus" for paying early, you've been tricked. You didn't even have the OPTION of correcting the way the overpayment was applied, especially if your statement came in on a later date. The wording is often confusing, which works to the banks' advantage. Some banks even try to hide your option to payoff your PRINCIPAL. They may bury in your agreement a provision requiring you to send in a letter with each overpayment in order to have the extra $20.00 put towards the amount you actually owe (the PRINCIPAL). That's nothing but a deceptive rip-off. Is it any wonder why people go bankrupt?

If you think that all of this is fine and dandy, and that bank scams are just a part of the way "capitalism" works, you're not alone. Bankruptcy laws were created to give consumers a way out of the endless scams and rip-offs perpetrated by financial institutions. The "overpayment scam" is actually pretty old, but there are innumerable scams that are dirtier and more underhanded (and newer), yet still allowed by our government. There can be no doubt that such allowances have been granted to financial institutions with the understanding that consumers have bankruptcy protection when things get too shady. But the banks sing a different tune. They want to blame it all on the consumer.

"There has to be some onus on the cardholder, some responsibility to manage their finances" (Nessa Feddis, American Bankers Association qtd. WP, p. A10 col. 1, 03/06/2005).

It is troubling that there is concern about people abusing bankruptcy protection when financial institutions are abusing consumers. Consumers are not "ripping off" the banks - it is the other way around. But that hasn't stopped banks from trying to force consumers into believing the banks are innocent.

Portions of Title I make several references to consumer education, including a requirement that consumers filing for bankruptcy complete a course about personal finance, even though the course does not seem to include information about the rip-offs and scams carried out by financial institutions. In fact, some of the education described in Title I is mandated by credit card companies. Section 222 goes so far as to teach America's children the warped values of the credit card companies. But an unpaid debt in an environment of rip-offs and scandals is not entirely the fault of the consumer.

Parts of the bill, including Sections 102 and 442, attempt to force consumers into a plan that allows creditors to go on torturing them for 5 years instead of allowing a "fresh start." If a consumer is forced into a repayment plan, Section 318 allows banks to torture some consumers for 5 years instead of 3. And Portions of Title III attempt to exempt certain types of loans from certain protections, even if the bank has tricked and abused the consumer. Section 720 adds to the legal hoops the consumer must jump through by throwing out certain cases involving financial mistakes not related to bankruptcy, such as filing a late income tax return. Such tactics target the forgetful and uninformed consumer who forgets to send in the right papers before declaring that the bank has crushed their financial lives.

There are other provisions that offer no explanation of their intended consequence. While our elected leaders have the benefit of "real-world" language explaining the various provisions of the bill, the consumer is left uninformed. Such hiding of information is part of the everyday practice of our government, and it exists throughout this and every other legislative document.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 is un-American. It sells our democracy to the banks, blames consumers for the scams carried out by financial institutions, significantly reduces Americans' most basic protections against an industry with a legacy of rip-offs and deception, and turns a blind eye to the scandals carried out by the very institutions whining that they are tired of people whining. This kind of abuse of the American consumer must be stopped. Americans who work their entire lives only to be ripped off by a bank and an approving and well greased government should have more, not less protection from the economic fundamentalism and aggressive marketing used by banks. S 256 is a rip-off and a scam, and should be thrown out.

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OCAL: Hall, Kermit L., ed. (2002). The Oxford Companion to American law. New York: Oxford University Press.

WP: Washington Post. Newspaper. Mar. 6, 2005. Washington, DC.

Selected works cited

Hall, Kermit L., ed. (2002). The Oxford Companion to American law. New York: Oxford University Press.

United States (2003). Cong. House of Representatives. Bankruptcy Abuse and Consumer Protection Act of 2003. 108th Congress, H.R. 975. Washington: http://thomas.loc.gov.

--- (2005). Cong. Senate. Bankruptcy Abuse and Consumer Protection Act of 2005. 109th Congress, S. 256. Washington: http://thomas.loc.gov.

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