I think Bank of America (NYSE: BAC ) likes me. Each month, it sends me three blank checks along with a cover letter enticing me to splurge on whatever I desire. In June, the bank urged me to take a dream vacation. In April, it suggested that I use one of the checks to pay my taxes. All I have to do is write the check, and the charge will go straight to my credit card. Those guys are cool.
As of today, however, I'd better be careful, since the Orwellian-sounding "Bankruptcy Abuse Prevention and Consumer Protection Act of 2005" is now law. Six months ago, the credit card lobby, consisting of MBNA (NYSE: KRB ) , Capital One (NYSE: COF ) , Citicorp (NYSE: C ) , Visa, and MasterCard, teamed up with august statesmen such as Sen. Joe Biden, D-Del., and Rep. Tom DeLay, R-Texas, to prevent the average American from abusing the generous privileges being offered by my friends at Bank of America and the other credit card companies. Fortunately for proponents of the law, the irony of the U.S. Congress lecturing anyone on the subject of indebtedness did not prevent its passage.
This law reeks of hypocrisy to me. And no, this isn't political, given that the bill was a bipartisan smackdown of the average American. It seems to me that lower-income individuals are being held to a much higher standard than our largest companies are. Under a corporate bankruptcy, a company like Delta can avoid numerous obligations like health or pension benefits in order to remain in business. But a "fresh start" for ordinary citizens was not deemed worthy. Not even the victims of hurricanes Katrina and Rita will be given any special treatment under the new law. Maybe former presidents George H.W. Bush and Bill Clinton can be rolled out for a fundraiser or two in a couple of years to help some of the hurricane victims meet their Chapter 13 obligations.
The double standard here is glaring. Recently, rising jet fuel prices nudged Delta and Northwest into declaring bankruptcy. Rising energy prices in addition to rising health-care costs are placing many Americans in equally difficult positions. Why are we more unforgiving of individuals than we are of corporations?
Essentially, the law will make it harder for individuals to file for a Chapter 7 bankruptcy, which allows you to liquidate your assets to pay off some of your debts. Any remaining debts above the amount of your assets are then canceled. The credit card companies often fail to collect from their customers under this form of bankruptcy, so obviously, they wanted to reform the system.
As of today, more people will be required to file a Chapter 13 bankruptcy, which will require individuals to enter into a payment arrangement lasting from three to five years in order to repay their debts. Last year, 1.1 million people filed for Chapter 7 bankruptcies, while approximately 450,000 filed for Chapter 13.
Luckily for the likes of Delta, Northwest, and, dare we say, GM (NYSE: GM ) , Chapter 11 bankruptcies, which apply to corporations, were left untouched by the reform. My colleague Tom Taulli offers more detail on the new law in another article today.
Why did Congress think this law was necessary? Are Americans more likely to become deadbeats today? Or is cheap and easy credit more available than ever before? If the answer to the last question is true, why don't the credit card companies restrict their lending policies?
Throughout history, social commentators have categorized the poor as either "deserving" or "undeserving." The "deserving" were always the humble yeomen who weren't able to make ends meet. The "undeserving" were the deadbeats -- the type of people who would use credit cards to fund an ostentatious lifestyle. How many of our fellow citizens do you think actually fall into the latter category? Not as many as the credit card companies think, in my opinion. And if you listen to the members of Congress rhapsodize about the wisdom of the ordinary American voter, you would think they would agree. Apparently not.
In fact, the evidence suggests that most people in debt are not "undeserving." As Dayana Yochim reported last week, "Seven out of 10 low- and middle-income households surveyed reported using credit as a survival safety net." Many debtors report using their credit cards for medical emergencies or to tide them over during a stint of unemployment. Unfortunately, personal debt can grow quite quickly, making it difficult for some individuals to meet their basic obligations. Sort of like the way rising jet fuel can make ordinary business operations difficult for a struggling airline.
But the credit card industry and their allies in Congress don't want to hear any excuses. How should ordinary citizens respond to such hypocrisy? I have a modest proposal: Cut up at least one of your credit cards today. It will be the wisest personal-finance choice that you will ever make.
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John Reevesdoes not own shares of any of the companies mentioned.