The Two-Income Trap (24 page)

In order to achieve the real dream of “credit democratization,” it is time to recognize, once and for all, that families are
not
better off getting credit at double, triple, or even ten times the market rate. If a family does not have the income to qualify for a loan at a reasonable rate,
then they should not get that loan
. It does no one any favors to impose a modern-day debtor’s prison on hard-working families. They would be better off renting an apartment and putting whatever extra money they have into savings accounts rather than paying double the market rate for a mortgage. If the private market cannot meet the needs of all communities, then it may be necessary for the government to step in to provide alternative sources of credit.
⁸⁷
The point worth emphasizing is that overpriced credit is no solution. Getting robbed to buy a home or to get a cash advance is still getting robbed, and it should be illegal.

If America’s crippling addiction to debt could be shaken off with a simple regulatory change, what are the politicians doing about it? The answer, quite simply, is nothing.

As the number of mortgage foreclosures skyrockets, as credit card debt soars, as the lines at the bankruptcy courthouse stretch out into the street and around the block, all we hear from Washington is the sound of silence. There has been no serious progress on any proposal to rein in predatory lending: no measure to control credit card fees, no proposal to ban creditors from trying to collect from a dead person’s brothers and sisters, and certainly no bill to bring back meaningful limits on interest rates. The national political parties have found time to take positions on the speed of the Internet, ergonomic standards in the workplace, and regional restrictions on dairy products,
but they have claimed no position on the financial issues that profoundly affect millions of middle-class families.
⁸⁸

There is, however, one notable exception to all that inaction. Congress has paid attention to one troubling statistic—the rapidly growing number of families filing for bankruptcy. High interest rates and aggressive marketing of complicated debt products echo through the bankruptcy statistics, as record numbers of families seek refuge in the bankruptcy courts after getting in over their heads with too much easy credit at exorbitant interest rates.
⁸⁹
In 1994, Congress created a bipartisan commission to study the issue. The group’s charter was relatively straightforward: to investigate why so many families were in trouble and to develop recommendations to improve the situation. I [Elizabeth] was named senior adviser to the National Bankruptcy Review Commission.

Three years later, the commission delivered its report to Congress. The 1,100-page document detailed why so many families were in trouble (job losses, medical problems, and divorce) and identified certain lending practices that put families at particular risk. More important, it reaffirmed that the bankruptcy laws were, for the most part, working as Congress had originally intended: to offer families a fresh start in the wake of financial and personal disaster. It concluded with recommendations for modest legislative changes that were designed to curb abuses by both borrowers and lenders.
⁹⁰

But the Congressional bankruptcy commission was not to have the final world. While the commission was busy gathering facts, holding hearings, and analyzing current practices, another group also went to work, advancing a very different perspective. The “National Consumer Bankruptcy Coalition” (NCBC), the clever moniker of the banking industry lobby, was pushing its own agenda.
⁹¹
The major banks had hit on a new strategy to reduce their bankruptcy losses. Rather than stop lending to families in financial trouble (as Elizabeth had counseled Citibank), they had a simpler and more profitable solution—restrict the rights of consumers to file for bankruptcy.

If fewer people could turn to bankruptcy for relief, more families would be subject to collection efforts from banks—and every other
creditor—forever. Those families might never pay off their bills in full, but they would continue to rack up the interest and penalties, and at least a few would make some small payment every month, effectively becoming lifelong profit wells for their creditors. For the rest—those who simply could not come up with the money, no matter how hard they were squeezed—the lenders might eventually write off some of those loans voluntarily. (Although one wouldn’t guess it from all the fiery rhetoric, bankruptcy filings account for just a fraction of lending industry losses; in the large majority of cases, the bank simply gets tired of trying to collect.
⁹²
) But if a family were not permitted to file for bankruptcy, it would be the lender, not the family in trouble, that would decide when the collection calls should stop.
⁹³

And so the banking lobby drafted a new bankruptcy law. To get all the lenders on board, the coalition added changes that would give better deals for car lenders, mortgage lenders, education loan servicers, landlords, credit unions—in short, better deals for everyone except families in trouble. The credit industry moved fast, persuading two friendly congressmen to introduce their bill in September 1997, a month before the official Bankruptcy Commission was scheduled to release its report.
⁹⁴
From then on, all eyes were on what Hillary Clinton would eventually dub “that awful bill.”

The “awful bill” was long and complex, couched in virtually unreadable prose.
⁹⁵
But to a trained bankruptcy lawyer, the intent was unmistakable: to undercut virtually every protection in the bankruptcy laws. Under the proposed legislation, child support payments would no longer take precedence over all credit card debt. As a result, more single mothers would be forced to compete with professional collection agents when they needed money from their bankrupt ex-husbands. Homeowners who had fallen behind on their mortgages would be prevented from catching up on past-due house payments until they had also paid off their credit card debts, increasing the likelihood of foreclosure. Families would no longer be able to free themselves from certain unsecured debts, so they would be required
to make payments (plus penalties, late fees, and interest) on some of those bills for the rest of their natural lives—even if those payments took up 100 percent of their paychecks.

To win over legislators, credit industry executives lobbied extensively and donated more than $60 million in political contributions.
⁹⁶
This was followed by a public relations strategy that would make any spin doctor proud. Instead of telling the public that the bankruptcy reform bill would improve profits for credit card companies and giant banks (not exactly the most sympathetic group), the NCBC and its supporters in Congress announced that the bill would help the American family. To quote Democratic Representative Rick Boucher: “The typical American family pays a hidden tax of $550 each year because of . . . bankruptcies of mere convenience.”
⁹⁷
The implied promise, repeated so often that it has become an article of faith, was that changing the laws would put $550 a year in the pocket of every bill-paying American family.
⁹⁸

Well that certainly
sounds
good; after all, who wouldn’t want some extra cash? But there are a few serious problems with this claim. First, the figure is a gross exaggeration. According to the NCBC, the same banking lobby group that generated the $550 promise, only 100,000 of the 1.5 million families who file for bankruptcy each year could afford to repay some of their debts. In other words, under the proposed bill, those 100,000 bankrupt families would be expected to generate $550 for every household in America, since the other 1.4 million are already tapped out.
⁹⁹
So we did the math. Suppose the laws were changed, and those 100,000 families could no longer seek protection from the bankruptcy courts, and they were forced to repay as much as they possibly could. In order to return an amount that added up to $550 for every household in America, each one of those bankrupt families would have to repay more than $550,000 in a single year! In our sample of more than 2,000 bankrupt families, not one even
owed
$550,000, let alone earned enough money to repay that amount. But even if a magic fairy somehow gave all the bankrupt families every dollar they needed to repay their debts in full, what
makes anyone think the banks would pass that money on to consumers? Recall that the credit card industry got a $10 billion windfall from falling interest rates in 2001 that they did not pass on to their customers. Why would this supposed $550 per family be any different?

Nevertheless, the combination of intense lobbying and a good cover story had its intended effect. Despite President Clinton’s veto, the bankruptcy bill was reintroduced in the next session of Congress. This time, even Senator Hillary Clinton bowed to big business. She had been in office two months when she had her chance to vote on what she had called that “awful bill.” Sure, the official Bankruptcy Commission had better credentials than the banking lobby. Yes, her husband had actually appointed the Chairman of the Commission and two of the commissioners. And she clearly understood that families in trouble would be hit hardest by the proposed changes. But the Bankruptcy Commission did not make campaign contributions or have its own lobbyists, and neither do families in financial trouble. Senator Clinton had taken $140,000 in campaign contributions from the banking industry, and she proved willing to overcome her “strong reservations about whether this bill is both balanced and responsible”
¹⁰⁰
and voted in favor of “that awful bill.”

We could stop here. We could join the chorus of those who routinely bemoan the political clout of a few big businesses, and we could make the obligatory plea for effective campaign finance reform (which somehow never quite takes hold in a meaningful way, despite the clamor). But if we stopped now, we would be missing the best part of the story—the part that shows that although the banking industry may be powerful, it isn’t the only voice that gets heard in Washington.

The cards were certainly stacked in favor of passing the banking industry’s version of the bankruptcy bill in 2002. So who stopped the “awful bill” from becoming law? The answer may surprise the reader; it certainly surprised the credit industry and the congressional power
brokers. An unlikely group of citizens organized without any help from big business, and they made sure Congress paid attention. Who were these citizens? Women.

What prompted them to organize was not the financial issues in the pro-creditor bankruptcy bill, which were numerous. Nor was it concern over single mothers or women homeowners, who would have been hit particularly hard if the bill had become law. No, the issue that riled up the women’s groups was abortion.

What does bankruptcy have to do with abortion? In Washington, a great deal. Over the past several years, pro-choice groups had scored significant court victories against a few prominent abortion clinic protesters by obtaining money judgments against them, only to see those victories turn to dust when the protesters declared bankruptcy and discharged their debts.
¹⁰¹
In a strange twist of politics, the credit industry’s version of the bankruptcy bill had been supported by Senator Charles Schumer, of New York, who had garnered strong support among women’s groups for his pro-choice politics. Ever responsive to his constituents, Senator Schumer inserted a provision into the bankruptcy bill that would make it more difficult for abortion clinic protesters to discharge judgments entered against them if they were sued for their protest activities, much in the same way drunk drivers and embezzlers cannot use bankruptcy to discharge judgments against themselves. Eager to appeal to women voters, the Senate had accepted the amendment in 2001. But in 2002, when the bankruptcy bill went back to the House with the abortion amendment in it, a coalition of right-to-life representatives refused to go along. They brought the bill to a standstill.

Desperate to get the bill passed, the banking lobby went back to the Senate, pressuring Senator Schumer to remove the controversial abortion provision. The industry ran attack ads against him in his home state, demanding that he support the bankruptcy bill—and claiming that he was costing every American family $550 a year.
¹⁰²
(The attack on Senator Schumer was particularly ironic, since he had received more campaign contributions from the credit industry than
any other Senator, just nosing out fellow New Yorker Hillary Clinton.
¹⁰³
) But by this point, the pro-choice women’s groups were also mobilized, and they held firm, supporting Senator Schumer and threatening to withhold support from any elected official who moved to take the provision out of the bankruptcy bill. In one of those rare defining moments, Senator Schumer had to choose between big business and pro-choice women, both of whom had supported his campaign. He chose women, and the amendment remained in the bill.

Ultimately, two strange bedfellows—a small group of socially conservative Republicans and a handful of progressive Democrats—gathered enough momentum to defeat the bankruptcy bill against the best-financed lobbying campaign of the 107th Congress.

The real victors on that strange day were the grassroots groups that successfully flexed their muscles against the most well-funded lobbying group in America, showing the world that even the credit industry can be defeated
if
key groups can be rallied against them. What was the key to action? It was not simply a matter of putting forth the facts. Congress had already impaneled a Bankruptcy Commission to write 1,100 pages of facts, which few even bothered to read. No, the real key was to match up the politics of financial distress with the interests of the rest of the country. The right-to-life organizations put a face on those who would be affected by the Schumer Amendment, showcasing stories of elderly grandmothers and churchgoing families who protest abortion as a matter of conscience. The pro-choice organizations put their own face on the issue, spotlighting violent abortion protesters who had found a loophole that let them get away with breaking the law.