Wednesday, September 06, 2006

How Middle Class Families Go Bankrupt

NEWSWEEK: In 2005, you testified in Congress against the new bankruptcy law. Why do you think it passed anyway?
Elizabeth Warren: This is one of those times when the imbalance in lobbying [power] could not have been more grotesque. I had people in Congress tell me that they had two and three and four [credit industry] lobbyists come by to see them every single day for months on end. There was no one to lobby for families in financial trouble ... It's just not fair.

Elizabeth Warren
Elizabeth Warren

Many indebted Americans get stuck in a bottomless pit of late fees and increased interest rates. What happens now that their bankruptcy options are reduced and it costs so much more [about $299, plus a $50 mandatory financial counseling fee as well as legal fees] to file?
Many will go bankrupt anyway. This bill was about driving up the costs of filing for bankruptcy and delaying that filing, so that people would make payments for another three to six months before they went to see a lawyer. Many of them will still apply for bankruptcy. The only people who will be denied access to bankruptcy will be the very poorest, who can't pay the increased filing fees or hire a lawyer. For the overwhelming majority of families who file for bankruptcy, there is no other option. They owe on average more than two years' income. They can't make interest payments on what they owe. The only options other than bankruptcy are going into the underground economy or knocking over [a] 7-Eleven [store].
[ . . . ]
Some in the credit industry have blamed bankruptcies on overconsumption.
I wish they were right. If that were the problem, then the solution would be obvious: don't buy so many Game Boys and $200 sneakers. The problem is that's not what's wrong with families. Ninety percent of the families who file for bankruptcy do so following a job loss, a medical problem or a family torn apart by death or divorce.

So is the stereotype of debtors with too many big-screen TVs false?
It's right up there with the welfare mom who drives a Cadillac. A great story but not true.
[ . . . ]
According to your research, three quarters of the people whose medical debt contributed to their bankruptcies had health insurance. What are the implications of that finding?
If our finding had been that every person in bankruptcy following a medical problem had no health insurance, then the industry would have had a very different response—we need to help more people get health insurance. Let's get the state to subsidize health insurance. Let's use this study to frighten families into paying even more for insurance. When the study showed that even those with health insurance were at terrible risk for financial collapse, the health insurance industry went crazy.
[ . . . ]
What's the solution to the medical bankruptcy problem?
The problem of medical bankruptcies is a symptom of a much larger problem in how we pay for healthcare in America. The solution is to reform healthcare financing. We must reform our healthcare payment system. If we don't, millions more families, hardworking, play-by-the-rules people, will end up in complete financial collapse.
[ . . . ]
What about mortgage debt?
Tapping into your home equity or taking risky variable-rate mortgages is borrowing more money and telling your lender they can come and get your house. When these creative lending [deals] come due, more than a million Americans will lose their homes, and millions more will be stretched to the breaking point. Never before in America have we had so many homes built so near the financial cliff. The home used to be a financial steadying point. When all else [failed], at least you had the security that your mortgage payment didn't go up and you built up financial equity in your house.


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