By Sharon Johnson
WeNews senior correspondent
Sunday, August 8, 2010
The new financial regulatory overhaul is designed to protect consumers, but a 2005 bankruptcy law that can be particularly impoverishing for divorced women has been left intact.
(WOMENSENEWS)--In July Congress gave final approval to the most ambitious overhaul of financial regulations in generations, including the establishment of an independent consumer bureau within the Federal Reserve System to protect borrowers against abuses in credit card, mortgage and other types of lending.
Advocates for women's financial security, however, say the new law does nothing to reform a 2005 bankruptcy law that has hurt single mothers and benefitted credit card companies by making it easier for their ex-husbands to avoid paying child support and alimony.
"Until 2005, bankruptcy wiped out credit card debts while leaving child support and alimony obligations intact," said Carey Ebert, president of the Washington-based National Association of Consumer Bankruptcy Attorneys, an organization of 4,500 lawyers. "This helped women because their ex-husbands had more funds available to fulfill their support obligations after bankruptcy."
Now the credit card debts can't be discharged, so women find themselves competing with Visa and MasterCard for a share of their ex-husbands' paychecks, Ebert said. Women don't have the sophisticated collection departments credit card companies do, so many divorced women and children go begging.
Elizabeth Warren, who is being proposed by some Democrats to head the new Bureau of Consumer Financial Protection, denounced the law in a Women's eNews commentary in December 2000, as well as nine years later in an article for the Huffington Post. Warren charged that bankruptcy exposes the economic vulnerability and insecurity of the middle class, especially women.
"Women with children are particularly vulnerable, both because of the economic challenges faced by single parent households and because bankruptcy gives credit card companies greater capital to compete with women in collecting past due debts," wrote Warren, a professor at Harvard Law School in Cambridge, Mass., in the 2009 Huffington Post article "When the credit industry controls the bankruptcy rules, women lose."
The Center for Responsive Politics, based in Washington, D.C., reports that the credit card companies contributed $7.5 million to the 2004 election, most of it to President George W. Bush and Republican Congressional candidates who backed the 2005 bankruptcy bill.
The law's most important provision establishes a means test to determine how much income debtors have available to pay creditors after they pay their basic living expenses.
People who earn more than the median income in their states and can pay their creditors at least $6,000 over five years are put in Chapter 13 bankruptcy rather than the traditional Chapter 7 category, which lets them out of all dischargeable debts. In 2008, median incomes ranged from $70,545 in Maryland to $37,790 in Mississippi.
People in Chapter 13 are required to pay a portion of their credit card, medical and other debts for three to five years.
In 2009, 28 percent of all individuals who filed for bankruptcy were given Chapter 13 repayment plans, rather than debt forgiveness.
About 1.6 million individuals are expected to file for bankruptcy in 2010, predicts Samuel J. Gerdano, executive director of the Alexandria, Va.-based American Bankruptcy Institute, a nonprofit organization that researches insolvency.
"With unemployment hovering around 10 percent and 45 percent of the unemployed out of work for six months or more, many low-income workers are exhausting their savings," he said. "People who no longer have the second jobs and overtime they need to make ends are falling behind in their bills."
Gerdano wasn't able to parse his prediction by gender, but studies indicate that divorced women are more likely than single women or married women to file for bankruptcy because they earn less, have fewer assets and are often responsible for supporting children.
The result is that divorced women are getting hit two ways by the law: by the new hurdles it places in the way of child support payments and by their own exposure to the provisions that make it harder to ever completely shed the debt load.
"The problem with Chapter 13 filings is that there is little meat on the bone of these people's budgets to sustain another setback," said Gerdano. "If they lose a job or get sick during the three to five years of the plan, they are in even worse shape financially because it is very difficult to convert a Chapter 13 bankruptcy into a Chapter 7 at that point."
The more stringent Chapter 13 category may be causing homeowners with subprime mortgages to walk away and let their homes go into foreclosure rather than filing for bankruptcy to protect them, notes the National Association of Consumer Bankruptcy Attorneys. The organization has lobbied Congress to allow bankruptcy judges to modify mortgages on a person's primary residence.
Women are almost twice as likely as men to hold subprime mortgages, which carry higher interest rates than traditional mortgages. Many of these women cannot afford to pay their mortgages after bankruptcy because the rates readjust every few months and add hundreds of additional dollars to their monthly payments.
"For many women, owning a home is critical for their retirement because they lack pensions and have little savings," said Ebert, also a partner in the Ebert law firm in Hurst, Texas.
Deborah Thorne, associate professor of sociology at Ohio University in Athens, conducted a 2007 study of bankruptcies with researchers at Harvard University in Cambridge, Mass.
It found that 62 percent of all bankruptcies in the United States were linked to medical bills. There were no gender-specific findings.
The 2005 bankruptcy law, representing the largest overhaul in the code in 27 years, was portrayed by supporters as a way to restore personal responsibility to the system by making it more difficult for compulsive shoppers, speculators and other unscrupulous individuals to escape their creditors.
"The law was based on an erroneous assumption," said Thorne. "Proponents like Sen. Charles Grassley (Republican of Iowa) believed that the number of personal bankruptcies had skyrocketed to 1.5 million in 2004 because individuals who had squandered their income on designer clothes, fancy cars and luxurious vacations were using bankruptcy to leave their creditors in the lurch. But that's not the case. People seek bankruptcy as a last resort because they have lost their financial footing through no fault of their own."
Thorne said other factors like the loss of a job or a family breakup played a part too.
"The vast majority of the 2,314 women and men in our study were middle class individuals who had college educations, owned homes and had taken all the right steps to ensure their financial futures," she said.
The stress of living with these debts and recovering from bankruptcy is excruciating, especially for women who typically manage the family finances, Thorne said.
She and her research team found that people who go through bankruptcy developed insomnia, battled headaches or lost their hair; others suffered heart attacks and strokes.
Thorne places little hope that the new financial regulations will do much to protect consumers from the perils of excessive debt that is hard for many to extinguish through bankruptcy proceedings.
"Unless America takes steps to create well-paying jobs with benefits and establishes programs to make education and housing more affordable," said Thorne, "tens of thousands of vulnerable people will have no choice but to incur crushing debts that lead to bankruptcy."
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Sharon Johnson is a New York-based freelance writer.
American Bankruptcy Institute:
National Association of Consumer Bankruptcy Attorneys:
Center for Responsible Politics: