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The Bankruptcy System

by Ralph Nader

Dissident Voice

March 31, 2003

 

If you are facing financial difficulties and heading toward bankruptcy, it is all so much nicer to be a corporate executive than just an ordinary hard working citizen. And if the financial lobbyists and their friends in Congress have their way this year, the disparity between the kid glove treatment of corporate bankruptcy and tough bankruptcy for beleaguered consumers will grow by mammoth proportions.

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Under legislation already passed by the House of Representatives earlier this month, hard pressed consumers in bankruptcy will face a draconian means test that will leave them in a virtual debtors prison for years.

 

Gone will be the concept of a second chance for consumers who fall into impossible debt situations because of illness, loss of job or divorce.

 

While rushing to meet the demands of daily lobbying by credit card companies, banks, finance companies and predatory lenders for a scorched earth policy against consumers in bankruptcy, Congress is leaving in place bankruptcy laws which provide corporations and their executives with a soft landing in the event of financial troubles.

 

Unlike the punitive penalties which Congress wants to impose on consumers, a corporation can use Chapter 11 of the Bankruptcy Code to "reorganize" its business and try to become profitable again.

 

Management continues to run the business and is only required to seek approval from the bankruptcy courts for "significant" decisions of the corporation. Chapter 11 provides a process for rehabilitating the company's faltering business-in effect providing the "second chance" that Congress is now trying to strip from the bankruptcy process for consumers.

 

A recent article in the Wall Street Journal illustrated just how well corporate executives make out in a bankruptcy. Twelve executives of Pacific Gas and Electric Corporation of California, including its chairman and chief executive officer-Robert Glynn, Jr.-- are expected to receive $34 million in bonuses this year despite the fact that the company is deep in bankruptcy proceedings and lost $2.2 billion in the fourth quarter of 2002.

 

Contrast this corporate executive bonanza in bankruptcy with the pending consumer bankruptcy legislation with its tough means test and provisions which endangers child support payments, increases the likelihood of evictions and foreclosures, loss of automobiles needed for work and leaves bankruptcy judges with little discretion to provide relief even in the most extreme family hardship cases.

 

The pending consumer bankruptcy legislation is truly a war on women who represent the largest group in bankruptcy and on African-American and Latino homeowners who are 500 percent more likely than white homeowners to find themselves in bankruptcy. Senior citizens are now the fastest growing group in bankruptcy.

 

While the human misery certain to flow from the legislation will be a tragedy for many families, one of the worst effects may be the encouragement of reckless, abusive and predatory practices by lenders.

 

With the bankruptcy courts serving as virtual bill collectors and with most of the consumer protections stripped from the process, lenders will find it worth engaging in unfair and unscrupulous practices. So what if the borrower is forced into bankruptcy? Under the pending law, the predators know that the bankruptcy courts will be required to turn the screws on the borrowers and collect for the lenders.

 

Consumer groups pled repeatedly for the Congress to clean up the credit industry and stop the deceptive practices, excessive fees and outright fraud before considering an overhaul of the bankruptcy laws. There is no question that the abusive tactics of lenders are the root cause of many of the consumer bankruptcies in recent years. Instead of cracking down on the lenders, Congress seems determined to reward them with a grossly unfair and punitive bankruptcy law.

 

While the proponents of the lenders' bankruptcy bill have filled the Congressional Record with stories of real or imagined abuses of bankruptcy by consumers, they have remained silent about the ease with which many corporations glide through bankruptcy and emerge as viable companies with bloated executive salaries intact. We don't see any consumers in bankruptcy waving multi million dollar bonuses like the top executives at PG&E.

 

Consumers aren't seeking these corporate-style handouts. All they are asking for is a fair chance to straighten out their finances and to regain a toehold as productive citizens. Historically, the bankruptcy system was constructed on the idea of a second chance for hard pressed families caught in impossible debt situations, almost always because of unforeseen difficulties stemming from health problems, loss of jobs and divorce. If corporations get a second chance to reorganize, what is the rationale for depriving consumers and their families of a fresh start? In coming weeks, the U. S. Senate will have an opportunity to stop the rush to shred consumer bankruptcy protections. Millions of campaign dollars have poured into the Senate and the House from the credit merchants over the last three Congresses.

 

Preserving a fair bankruptcy system and saving protections sorely needed by consumers may seem difficult in the face of the power and the money of banks, credit card companies, finance companies and predatory lenders.

 

But it can be done if enough citizens will let their Senators know that they don't want the bankruptcy system converted into a glorified collection agency working for the avaricious merchants of consumer debt.

 

Ralph Nader is Americaís leading consumer advocate. He is the founder of numerous public interest groups including Public Citizen, and has twice run for President as a Green Party candidate. His latest book is Crashing the Party: How to Tell the Truth and Still Run for President (St. Martinís Press, 2002)

 

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