Bankrupcy Reform

The Problem 

While the financial news has been bleak as of late, our economic problems aren’t new. The truth is that things have been getting worse for the poor and middle class for quite awhile, even as they have improved for corporations and the very rich.  

The tax burden has been shifting from corporations to individual taxpayers for six decades. As recently reported by the Economic Policy Institute:

Over the past 60 years, the U.S. tax code has dramatically shifted away from corporate taxes and toward taxes on individuals, especially through the payroll tax, the financing backbone of Social Security and Medicare. In the 1950s, the corporate income tax brought in, on average, one of every four dollars in federal tax revenues. By the 2000s, however, it raised just one of every 10 tax dollars.[i] 

Corporate taxes dropped from 25% of tax dollars to only 10%. How was the difference made up?

The shrinking share of corporate taxes was made up by an increase in payroll taxes to fund social insurance and retirement programs. Excise and other taxes – such as fuel taxes, phone taxes, etc. – shrank as well over the last 60 years, while the individual federal income tax rose slightly, from an average of 43% of total federal revenue in the 1950s to 46% in the 2000s.[ii] 

At the same time, income inequality has been increasing in America. In Iowa during the last 20 years, the growth in income equality ranks 19^th in the nation. The richest 5% of families in Iowa have average incomes 9.6 times as large as the poorest 20% of families.” And “the richest 20% of families have average incomes 2.3 times as large as the middle 20% of families” (up from 1.9 in the late 1980s).[iii]

When middle-income families have been squeezed too hard, one historical remedy has been bankruptcy whereby someone can discharge their debts (as in Chapter 7), sometimes paying a percentage of their debts over a fixed repayment period (Chapter 13).  

But during the Bush Administration, which has placed greater value on corporate interests than people’s interests, bankruptcy law has been a target of Republican lawmakers.  

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2004 (S.1920) required debtors who were able to pay back $10,000 or 25% of their debts over five years to file under Chapter 13. This was in lieu of discharging their debts under Chapter 7, and it restricted a debtor to a total exemption of $125,000 in home equity for residences bought within 40 months of a bankruptcy filing. Republicans voted unanimously for the bill and were joined by Congressman Boswell, though a majority of House Democrats voted against the bill (01/28/04).  

The next year, Republicans went further with the 2005 Bankruptcy Act (S.256), which was even more hostile to the middle class. (It is important to note that these bankruptcy ‘reforms’ were targeted at alleged abuses by individuals, and not at business bankruptcies.) 

Retired bankruptcy judges, consumer advocates, legal scholars, and others severely criticized the bill, but they couldn’t match the influence of credit card companies, which spent more than $100 million lobbying for the bill’s passage. Some called it “MBNA’s bankruptcy bill,” reflecting that it was first drafted by a credit card company lobbyist and that MBNA was the largest contributor to George W. Bush’s presidential campaign. One commentator at the time even said that the bill read “like a credit industry wish list [that] does nothing to prevent bankruptcy abuse or protect consumers.”[iv] Nevertheless, Congressman Boswell again joined the Republicans to pass the bill, even though 63% of his fellow House Democrats voted against it (04/14/05).  

Congressman Boswell continues to defend his vote, saying on Iowa Press: “I think if people sign a promissory note they're going to pay, sign your name you're going to pay and you have the ability to pay you should. I don't think it should be a financial management tool.”[v]

But that misstates the issue. The 2005 “reform” didn’t target those who could pay, which were probably no more than 3%. It tied the hands of bankruptcy judges so that they could not consider an individual’s circumstances. Instead, the law was changed to say that persons earning at least the median income in their area could not file for bankruptcy. Now a judge could no longer distinguish between someone who might be trying to abuse the process from someone whose finances had been devastated by, e.g., medical problems, divorce, and job loss – the common causes of virtually all personal bankruptcies.

After the passage of the 2005 bill, Harvard law professor and bankruptcy expert Elizabeth Warren asked, “How could any democratically elected body support a bill that denies millions of Americans their constitutional rights in order to protect the profits of a few companies?”[vi]

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The needs of struggling middle-class families have largely fallen on deaf ears in Congress because of big money from corporate interests.
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But she shouldn’t have been surprised. What should we expect from politicians such as Congressman Boswell who are funded largely by corporate PACs? FEC records show that 74% of contributions to the Boswell campaign last year came from PACs, the majority of which were corporate PACs. The bottom line is, through campaign contributions and cozy relationships with lobbyists, too many members of Congress are tied too closely to powerful interest groups, thus assuring that any attempts at bankruptcy “reform” benefit those interests, not the people.

In a recent campaign mailing, Congressman Boswell described himself as “a champion for the middle class.” This followed a press release touting a grade of “A” (90%) he received from the Drum Major Institute (DMI) for his 2007 votes on middle-class issues. He doesn’t mention the three previous grades he received from the DMI – 67% in 2003, 71% in 2004, and 50% in 2005, giving him an overall average of 69.5%. That’s not leadership on middle-class issues – that’s mediocrity.

The Solutions

I’ve never taken a dime from PACs or lobbyists, which is why voters can count on me to represent people instead of well-heeled special interests. As your congressman,  

• I will sponsor legislation reforming bankruptcy law to help consumers who are struggling with debt, not credit card companies trying to maximize profits.
• I will cosponsor H.R. 3609, the Emergency Home Ownership and Mortgage Equity Protection Act of 2007, legislation to reform bankruptcy law to help prevent thousands of Americans from losing their homes. It was introduced last year and has 82 cosponsors, including Iowa Congressman Loebsack. Congressman Boswell hasn’t signed on.
• I will work for legislation to end predatory lending practices.
• I will cosponsor H.R. 5244, the Credit Cardholders’ Bill of Rights Act of 2008, which establishes fair and transparent practices relating to the extension of credit. It was introduced in the House in February and has over 100 cosponsors, including Iowa Congressman Braley. Congressman Boswell hasn’t signed on.

Throughout my lifetime in politics and community activism, I have worked to give a voice to the voiceless. The needs of struggling middle-class families have largely fallen on deaf ears in Congress because of big money from corporate interests. As your Congressman, I will listen to your voice and make it heard in Washington.