Procedure for credit card debt elimination

Washington report

Burkett Van Kirk

Washington Legislative Counsel

As of April 30, 1997

CLLA Testifies on Bankruptcy

Frederick Luper, Co-chair of the B&I Section's Legislative Committee and Past President of the Commercial Law League, testified on behalf of the CLLA on April 30, 1997, on the bankruptcy amendments bills currently pending before the House of Representatives. HR 120, introduced by Rep. Conyers (D-MI), and HR 764, introduced by Rep. Hyde (R-IL), was the subject of a hearing before the Commercial and Administrative Law Subcommittee of the House Judiciary Committee.

The League's position paper supported the elimination of the $4 million cap on the definition of single asset real estate cases and opposed substantive proposals that would eliminate the residency requirement to be appointed panel trustee. Additionally, the CLLA went on record as supporting due process requirements to protect trustees against removal from the panel or the refusal to assign cases to panel trustees as well as in the decision-making process relative to expenses that may be reimbursed to Chapter 13 standing trustees. These latter provisions are not currently included in either HR 120 or HR 764. However, similar proposals were a part of S.1559, the Bankruptcy Technical Amendments Bill that failed to gain approval in the 104th Congress.

This was the third hearing during the month of April on bankruptcy issues. The first was held on April 11 before the Senate Judiciary Committee's Subcommittee on Administrative Oversight and the Courts; the second was held before the instant committee on April 16, 1997, and focused on bankruptcy generally.

FDCPA

On March 13, 1997, Rep. Spencer Bachus (R-AL) introduced HR 1059 entitled the Credit Cost Reduction Act. It has 25 sponsors in the House. The bill would:

Exempt from the FDCPA communications involving legal proceedings

Permit collection activity during the validation period

Limit damages to the total recovery in any series of class actions arising out of the same violations by the same debt collector

Provide for Rule 68 of the Federal Rules of Civil Procedure to apply in actions involving the FDCPA, having the effect that attorney fees are included under the definition of costs

Allow the court to consider actual damages awarded when determining the amount of liability

This bill is the result of the efforts of a group called the Credit Cost Reduction Coalition consisting of the American Collectors Association, the Associate Credit Bureaus, NARCA, the US Foreclosure Network, SALLIE MAE, and the CLLA. Other groups interested in credit and collections are expected to become a part of the Coalition shortly.

April 11 Consumer Bankruptcy Hearing Details

Called by Sen. Charles Grassley (R-IA), the focus of the April 11 hearing was on consumer bankruptcy and was intended to examine reasons for the explosion in filings in that area. Probably more interesting than who testified, or what was said, was the fact that no one from the credit card granting banks chose to appear. In looking at the responsibility of credit card issuers for at least some of the blame of the increase in debt load of consumers, Sen. Dick Durbin (D-IL) noted that 2.4 billion preapproved solicitations for credit cards were sent by card issuers even though there are only 78 million credit-worthy households in the United States. Sen. Grassley was disturbed about that group's lack of willingness to participate and was equally upset with consumers, generally stating that perhaps the increase in bankruptcy filings is indicative of the moral decline in America.

Two research projects were presented to the Subcommittee, each focusing on different aspects of the consumer bankruptcy equation. Michael E. Staten, Ph.D., director of the Credit Research Center at Purdue University, presented the results of his study (funded in part by a grant from Visa and MasterCard); the study showed that nearly 25% of all Chapter 7 debtors had the capacity to repay over one-third of their non-housing debt over a 60-month repayment period. Ian Domowitz of Northwestern University reported his research found that uninsured medical debt is the most frequent economic situation that appears in the consumer bankruptcy cases he studied. His recommendation was that health care reform would cure more bankruptcy problems than bankruptcy reform.

An economist from the Congressional Budget Office, Kim Kowalewski, disputed the common notion that bankruptcies should increase in a recession and that since the economy is currently doing well, bankruptcies should not be on the rise. Relying on historical data, he noted that during expansions in the economy, consumers are more likely to increase their debt load and thus create a scenario in which repayment might become problematic.

Other witnesses discussed the concept of ability to repay debts versus the opportunities available under the bankruptcy code to receive a total discharge of those debts. The concept of a "needs-based" bankruptcy system was mentioned by Sen. Durbin. Some concern was raised by D. Jean Ryan, an attorney from Miami, Florida, who regularly represents debtors in bankruptcy. She felt that additional judicial resources would be necessary to determine whether a debtor had the potential to repay rather than under the current system, in which the debtor has the right to make that choice. Additional cost to the system and the debtor would result if one's needs were an issue as a threshold matter in bankruptcy cases.

Gerald P. Wixted, education director for Consumer Credit Counseling Services in Philadelphia, indicated that the early warning signs that a consumer is possibly heading for bankruptcy include the following:

installment debt payments take 15%-20% of disposable income;

the individual is unable to save any money;

only the minimum monthly payment is being made on outstanding accounts;

one credit card is being used to pay for another's monthly payments.