Calvin Coolidge once famously proclaimed that the business of America is business. Were he alive today, he might suggest that America's business is spending. Amidst a troubled economy, our media routinely celebrate the consumer, whose willingness to go on spending is credited with keeping the economy from serious collapse. Yet this celebration of the consumer is wrapped in irony. That same consumer who is continually urged to spend is both increasingly burdened by debt and threatened with ever more dire consequences when that debt gets out of hand. Hidden amid all the talk about corporate crime is a bankruptcy "reform" bill likely soon to be enacted by Congress and signed by the president that will aid and abet financial institutions in their continuing efforts to dupe consumers. This legislation is ill-timed and hypocritical. It will impose harsh sanctions on many whose pursuit of the officially sanctioned American dream has been derailed by forces beyond their control.
Escalating debt and personal bankruptcy have become major social problems. Watch television for a few hours and count how many ads you see for debt counseling services. In the last decade, some 15 million Americans sought some form of protection from creditors. Most individuals file under Chapter 7 of the Bankruptcy Code, which allows families to shield a home and car from seizure by creditors. The new bankruptcy "reform" will impose income and asset tests that make it much harder for even modest middle and working class families to seek this relief.
The credit card industry and its Congressional allies argue that stiffer sanctions are necessary because many middle class American consumers have become more profligate and irresponsible. These deadbeats are a drag on the industry's profits and force up the cost of borrowing for all of us. Yet as Bruce Shapiro points out in Salon.com, " that argument is belied by the credit industry's own aggressive marketing. Even while complaining of consumer irresponsibility, credit card companies are marketing their Visas and MasterCards and Discovers ever more aggressively, extending consumer credit to unheard-of heights, and returning with unprecedented profits.
According to the Consumer Federation of America, in the third quarter of 2000 alone, credit companies mailed out 2.5 billion solicitations, extended 13% more credit than a year earlier and enjoyed profits at a five-year high."
One can of course find examples of utterly irresponsible borrowing and shameful efforts to evade the bill collectors. Nonetheless, it is useful to keep two considerations in mind here. Even when a consumer is able to file successfully under Chapter 7, he or she is hardly home free. Secured debts must still be paid, and worse still, one's credit rating is badly damaged. It becomes much harder to obtain future mortgage loans or credit cards. In a society where a credit card is a virtual passport to routine economic life, damage to a credit rating is by itself a substantial penalty. All Chapter 7 does is protect working and middle class consumers against immediate impoverishment.
Studies of current bankruptcy filings suggest that job loss, inordinate health care expenses, or divorce triggers almost 90% of personal bankruptcies. Conservatives, like Paul O'Neill, argue that the responsible working class family should save for such contingencies and must accept the consequences when they don't. Yet stagnation in working class incomes over most of the last decade, the increasingly tenuous nature of the job market, and escalating health insurance costs make such prudent behavior ever more difficult. With these larger economic trends only likely to become worse in the next year, this bankruptcy bill is especially ill timed.
Worse still, this legislation is hypocritical. Large corporations, some of which have been guilty of reckless acquisitions and shoddy and deceptive business practices, will continue to receive the protection of Chapter 8. In many cases, managements will be preserved intact even as workers and suppliers are forced to retrench.
More fundamentally, if every American consumer were to act in the prudential, even ascetic manner critics of bankruptcy suggest they should, our economic system would collapse. High levels of savings won't be converted into new business investments unless business is confident consumers will continually expand their desires. All of the incentives of our media, workplaces, and financial industry push us to spend to our limits.
Bankruptcy "reform" is contemporary corporate business as usual. An industry that has profited from decades of aggressive and deceptive ads and profligate offers now asks government to help collect its debts. It wants to be shielded from the consequences of its own reckless behavior just as our economy starts to slide. If our market society is going to continually rely on ever more incentives to spend our way to happiness and prosperity, the least ordinary consumers deserve is the minimal safety net the old bankruptcy law provided.
John Buell lives in Maine. Email: email@example.com.