Of blood and stones

Uggabugga directs our attention to this Washington Post article, "Bankruptcy Bill Advances," in which Kathleen Day reports:

The Senate Judiciary Committee — propelled by a unified Republican majority and with little public debate — voted 12 to 5 [on Feb. 17] to approve legislation backed by the credit card industry and opposed by consumer groups that would make it harder for consumers to wipe out debt through bankruptcy.

The bill, which would be the most significant change in bankruptcy law in more than a quarter of a century if adopted, now goes to the full Senate. …

Lobbyists for the credit card industry say the legislation is needed to close loopholes that make it too easy for people to wipe out their debts when they could repay some of them.

Consumer advocates say it would allow some rich debtors to continue to hide wealth through homeownership while bankruptcy relief would be denied to many people with low or moderate incomes who have fallen on hard times because of illness, job loss or divorce. They say credit card companies must share the blame for increased bankruptcies because they aggressively market products and inadequately disclose how interest rates and penalty fees mount up when consumers pay only minimum balances each month.

The bill, designed to impose new restrictions on consumer protections, is of course called "The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005." You can follow the progress of S. 256 here.

Debate on the bill is likely to begin next week and the full Senate is expected to pass the bill.

I expect this legislation to accomplish only half of what it claims. By that I mean that I'm confident it will succeed in hurting the people it is intended to hurt, but that it will fail to help the corporations it is intended to help.

The credit card industry is overextended. Somewhere along the line they got so giddy with their growth in revenue and share price that they forgot that not everybody constitutes a good credit risk. That's a rather important thing to remember when your business is making noncollateralized loans.

The bottom line is that after years of pre-approving anyone with a pulse and a P.O. box, the industry has finally sobered up and realized that they have extended billions of dollars in credit to people who haven't got the means to pay it back. These are loans that should never have been made.

Many of the recipients of these loans, unable to to pay even the accelerating fees and interest — often 20 percent or more, have been filing for bankruptcy protection. The industry's response is this piece of legislation limiting the availability and extent of that protection.

This desperate response is understandable, but irrelevant. Senate bill 256 does not repeal the Law of Blood and Stones. An act of Congress cannot change the fact that these folks ain't got the money. If this bill becomes law, many consumers will no longer be able to claim the legal status of bankruptcy, but the reality that they are broke/busted/bled dry will remain unchanged.

The crisis facing the credit card industry has little to do with the alleged abuse of consumer bankruptcy. Their real problem is that an unsustainable chunk of the loans on their books are no good. Eventually, with or without this bill, that bubble is going to burst and some of the fastest-growing companies in the industry are going to learn firsthand about the importance of bankruptcy protections.