Fairness in bankruptcy

LAST YEAR 1.4 million individuals or couples sought to get out from under their debts by declaring personal bankruptcy. Congress is currently considering legislation to tighten eligibility for declaring bankruptcy, but it should pass no law without focusing on the true abusers of the system.

ADVERTISEMENT

The bill before Congress sets a means test for the most permissive of the available bankruptcy provisions but does nothing to crack down on the credit card industry's practice of luring low-income consumers into taking on many high-interest credit cards. The average American household now carries $8,000 in credit card debt. The bill also would let wealthy bankruptcy filers protect wealth in the form of asset protection trusts and the mansions that states like Texas and Florida exempt under homestead laws.

A recent study reveals the true face of American bankruptcy. Most of the people who use it are not the spendthrifts or scam artists portrayed by supporters of the bill but working people beset by sudden reversals of fortune, often involving high medical expenses. The study, by researchers from Harvard Medical School and Harvard Law School, extrapolated data from 2001 based on filings in five states. It concluded that between 46.2 percent and 54.5 percent of all filings could be traced back to serious medical problems. In many cases, the illness or injury forced a family breadwinner to stop work. In other cases, it was the cost of care that overwhelmed families.

One surprising finding was that three-quarters of those bankrupted by illness had health insurance when the illness first struck. Many lost it after the illness forced them to stop working. In other cases, the health insurance policies' copayments, deductibles, and uncovered services left the families with medication and treatment costs that were beyond their means. The Senate yesterday rejected a bid to allow a homestead exemption of $150,000 in home equity for those facing bankruptcy because of medical problems.

Senator Edward Kennedy, who is leading the fight against the bill, is also concerned about its effect on members of the armed services. In 2003, 16,000 service men and women filed for bankruptcy -- many of them members of the Reserves or National Guard who had to stop running personal businesses when they were called up. On Tuesday, the Senate rejected a broad amendment to protect servicemen and women and adopted a weaker one.

Bankruptcy is intended to be a way for individuals or families that run into bad luck to get a fresh start. The lopsided bill backed by the credit card companies and other businesses undermines that right and should not be passed without strong provisions protecting members of the military services and those facing legitimate medical or other problems. The bill should also eliminate loopholes for the rich. Moreover, any bankruptcy ''reform" bill that does not limit the credit card industry's freedom to peddle cards to people with bad credit is itself bankrupt.