Credit Worthy

Silhouette of man over money, scales of justice and gavel. AP / CBS

This column was written by Todd Zywicki.
There are "special interests" on both sides of the bankruptcy bill.

Yesterday I wrote to defend a bankruptcy bill that has been unfairly maligned throughout the press and blogosphere. Today I'm concentrating on one specific attack: that the success of the bill shows that the credit-card industry and other creditors have bought the Congress. Keep in mind that almost three quarters of senators supported the bill-- all the Republicans and 40 percent of Democrats who voted. Have all of them sold out to a nefarious agenda?

A study by Princeton's Stephen Nunez and Howard Rosenthal, using votes on the bill in 2001, concluded that perhaps 15 of the 306 House members who voted for the legislation then may have been swayed by campaign contributions from the consumer-credit industry -- or about five percent of the House's 74-percent majority. Hardly enough to account for the consistent overwhelming support for the bill.

Support for the legislation is broad-based, including almost all Republicans and moderate Democrats. What is narrow is the opposition, which has come largely from two quarters. First, there are economic illiterates who believe that losses caused by bankruptcy fraud and abuse just come out of "banks' profits" and are not passed along to other consumers in the form of higher costs for goods and services. Second, the most well-organized opposition has come from bankruptcy lawyers and those congressmen most beholden to lawyers. Straddling both categories are the most hard-left members of the Democratic party.

The interest of bankruptcy lawyers in defeating reform is clear. Fewer bankruptcy filings obviously mean less money for lawyers. But lawyers take some less obvious hits in the legislation. Under the bill, alimony and child-support obligations go from being seventh to first on the list of priorities for debtors. Guess what's current priority number one? That's right, attorneys' fees -- which will now drop to second priority for payment.

In fact, the most vocal opponents of bankruptcy reform in the Senate last week reflect the influence of lawyers. Senator Charles Schumer, for instance, received over $2.5 million from lawyers during his last election. Senator Ted Kennedy, a vocal opponent of the legislation, received more money from lawyers than from any other group during his last campaign. Senator Dianne Feinstein also reports lawyers as one her largest contributors. And so on.

It's worth noting that the committees with jurisdiction over bankruptcy reform are the House and Senate's judiciary committees. Those committees are the traditional playground for lawyers, not bankers, which provides lawyers with a substantial leg up in lobbying efforts surrounding bankruptcy reform. (That is one reason why enactment of bipartisan bankruptcy reform legislation has taken eight years.) While the consumer credit industry certainly is a major player when it comes to lobbying, most of their contributions -- unsurprisingly -- are to members of the banking committees, which have jurisdiction over most regulations affecting the consumer credit industry.

A study by the American Bankruptcy Institute a few years ago, for instance, found that of the top 10 House recipients of consumer creditor PAC contributions, only one was even on the House Judiciary Committee. But he also served on the House Banking Committee, as did most of the others on the top-10 list. Similarly, most of the Senate's largest recipients of campaign contributions were on the Senate Banking Committee, rather than the Senate Judiciary Committee. As noted above, a more rigorous test by Nunez and Rosenthal also fails to find a strong relationship between campaign contributions and votes on the bill.

The real story here is that for once Washington recognizes what others do not -- that bankruptcy reform is an issue of personal and moral responsibility. The current system mocks hard-working Americans who live within their means and live up to their financial responsibilities. We try to teach our children financial responsibility; yet, seemingly every time we turn on the television we learn of a new celebrity like Mike Tyson who has filed bankruptcy after living an extravagant lifestyle. Part of Harry Truman's lore was his decision to voluntarily repay the debts of his haberdashery that failed in the wake of a recession. It took him 15 years to do so, but in the end he did it -- and was properly applauded for it. Today's bankruptcy landscape is populated by too many Mike Tysons and not enough Harry Trumans.

With the bankruptcy bill, Republicans and New Democrats are rebalancing the system by targeting the worst forms of fraud and abuse in the system, while leaving honest bankruptcy filers unaffected. The bill rewards old-fashioned values of thrift and personal responsibility and ends the shameful subsidization of upper-class profligacy by those who are forced to pick up the bill. It is a much-needed, and long-awaited reform, and it is about time for it to become law -- even if credit-card companies are among the beneficiaries.


Todd Zywicki is a professor of law at George Mason University. He has testified before the House and Senate judiciary committees on bankruptcy reform.


By Todd Zywicki
Reprinted with permission from National Review Online
  • Bootie Cosgrove-Mather

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