A Fighting Chance (48 page)

extraordinarily high interest rates, a practice known as usury:
The regulation of usury has been around since the ancient Egyptians and has a varied and deep religious heritage. See Gardner Wilkinson,
The Manners and Customs of the Ancient Egyptians
(2013), 50 (noting that the Egyptian legislature had condemned usury on the theory that “the safety of the country might be endangered through the avarice of a few interested individuals”); see also Diane Ellis, “The Effect of Consumer Interest Rate Deregulation on Credit Card Volumes, Charge-offs, and the Personal Bankruptcy Rates,” FDIC: Bank Trends, March 1998 (noting that Plato had critiqued usury on the grounds that it fostered inequality and discord among citizens of the state). The Bible, including both the Old Testament and New Testament, contains thirty-five verses on usury, many of which liken usury to “extortion” and “unjust gain.” See King James Bible Online. Islamic law forbids usury, gambling, and excessive risk. Shafiel A. Karim,
The Islamic Moral Economy: A Study of Islamic Money and Financial Instruments
(2010), 4. Practitioners of Hinduism and Buddhism have issued similar injunctions against usury, believing it to be incompatible with a right livelihood. See Wayne A. M. Visser and Alistair McIntosh, “A Short Review of the Historical Critique of Usury,”
Accounting, Business & Financial History
8 (July 1998): 2. Talmudic law also prohibits both borrowing and lending on interest in certain circumstances. See Louis Jacobs, “Usury and Moneylending in Judaism,”
My Jewish Learning
.

entrusted to the banks by their customers:
In response to the Great Depression, Congress fundamentally changed bank regulation by passing the Glass-Steagall Act. The Glass-Steagall Act protected consumers and guarded against excessive risk by separating commercial banking, such as checking accounts and savings accounts, from investment banking, which included speculative trading on stocks. Congress also established deposit insurance, limited interest rates, and prevented traditional commercial banks from engaging too much in risky non-bank activities like the securities or insurance business. In addition, Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934, which created the Securities and Exchange Commission to increase oversight of securities markets and enforce new regulations on trading and mandatory disclosures, to protect against fraud. In the 1930s, Congress also created an agency to regulate futures markets (today known as the Commodity Futures Trading Commission) as well as an agency to regulate credit unions (today known as the National Credit Union Administration). At the state level, many states had usury laws, or interest rate ceilings, which served as a meaningful constraint on the credit industry. See Matthew Sherman, “A Short History of Financial Deregulation in the United States,” Center for Economic and Policy Research, July 2009.

the cap on interest rates was effectively eliminated:
Usury regulation underwent a dramatic change in 1978, following the Supreme Court’s decision in
Marquette National Bank v. First of Omaha Service Corp
. In that case, the Court ruled on which state’s usury law would apply when a bank in one state lent money to a customer in another state: the law of the lender’s home state or that of the borrower’s home state. The Court held that the lender’s home state law applied, which enabled banks to impose the maximum interest rate from one state on all borrowers, regardless of the interest rate cap in the borrowers’ home states. The decision prompted a “competitive wave of deregulation,” as states competed for banks to relocate to their states by removing any interest rate caps. See “A Short History of Financial Deregulation.” Not only did the decision effectively eviscerate usury regulation, but it also placed small banks at a huge relative disadvantage to large banks, as the large banks were much better positioned to exploit this work-around of state usury laws.

to people who were a lot less likely to repay all those loans:
Starting in the 1980s, deregulation of the credit industry unleashed a wave of new credit card practices, causing credit card fees and interest rates to rise throughout the 1980s, 1990s, and 2000s. For a more detailed discussion of this period, see
As We Forgive Our Debtors
, 178–91. We documented the fall of traditional safe banking during the 1990s, which had relatively declined in profitability, and the rise in preapproved credit cards, interest rates (up to 18 percent during this period), retail cards, solicitation of debtors, and subprime lending. See
The Fragile Middle Class
, Chapter 4;
The Two-Income Trap
, 126–32. Also over the course of this period, credit card companies increasingly targeted low-income borrowers as well as young people, African Americans, and Latinos for some of the most abusive loans. Companies realized they could make enormous profits on the backs of delinquent cardholders and those who could only afford to pay the low minimum amount due each month, even after the defaults and bankruptcies were subtracted. See
The Fragile Middle Class
, Chapter 4;
The Two-Income Trap
, 129 & n.18. One study found that more than 75 percent of credit card profits came from people who made low minimum monthly payments, as credit card companies increasingly targeted this group with late fees and adjustable interest rates. See
The Two-Income Trap
, 139.

and can’t afford to take on more high-interest debt:
In
The Two-Income Trap
we note that business consulting firms would give banks essentially the same advice. For example, in 1997 Fair, Isaac & Co. launched a bankruptcy prediction program that it claimed “could eliminate 54 percent of bankruptcy losses by screening potential nonpayers from the bottom 10 percent of credit card holders” (233. n.55).

cute little pooch who had just been offered a credit card:
There was a significant rise in aggressive advertising of preapproved credit cards and solicitation of debtors during the 1980s, 1990s, and early 2000s. As marketing tactics targeted the poor, Americans with incomes below the poverty level doubled their credit card usage during the 1990s. Over this same period, young people were increasingly offered credit cards without having to get parental approval or having to show credit history or annual income. These offers came in droves, as credit card companies solicited people on campus, using free T-shirts and key chains with university logos, and sent mailers with preapproved credit card applications. In 1997 alone, more than three billion preapproved credit card offers were sent to people. See
The Fragile Middle Class
, Chapter 4. This number rose to five billion in 2001, which translated to more than $350,000 of credit offered to each family.
The Two-Income Trap
, 129–30 & n.19.

academic circles, and snagged a national prize:
As We Forgive Our Debtors
won the 1990 Silver Gavel Award. It was also a finalist for the Distinguished Scholarly Publication Award of the American Sociological Association.

twenty-four hours a day, seven days a week:
In 1995, the number of families filing for bankruptcy was 874,642. In 1996, the number of filings rose to 1,125,006. To translate these numbers so they reflect the number of people rather than families, we multiplied the number of filings by 1.4 because about 40 percent of those filing for bankruptcy in the 1990s were married and both adults were filing in a single petition. Thus, on average a person entered bankruptcy every 26 seconds (using the 1995 figure) and every 20 seconds (using the 1996 figure).

2 | The Bankruptcy Wars

completing its review and then deliver a report to Congress:
The National Bankruptcy Review Commission (NBRC) was established as an independent commission on October 6, 1995, under the Bankruptcy Reform Act of 1994. Members included: Chairman: Initially Congressman Mike Synar, Oklahoma, later replaced by Brady C. Williamson, Esq., Wisconsin; Vice Chair: Hon. Robert E. Ginsberg, US Bankruptcy Judge, Illinois; Jay Alix, CPA, Michigan; M. Caldwell Butler, Esq., former Member of Congress, Virginia; Babette A. Ceccotti, Esq., New York; John A. Gose, Esq., Washington; Jeffery J. Hartley, Esq., Alabama; Hon. Edith Hollan Jones, US Circuit Judge, Fifth Circuit, Texas; and James I. Shepard, Esq., California.

According to Judge Ginsberg, “The charge to the commission was to (1) investigate and study issues and problems relating to the bankruptcy code; (2) evaluate the advisability of proposals and current arguments with respect to such issues and problems; (3) prepare and submit a report; and (4) solicit divergent views of all parties concerned with the operation of the bankruptcy system.” “Interview with Bankruptcy Judge Robert E. Ginsberg, Acting Chair of the National Bankruptcy Review Commission,”
Third Branch News
, February 1996.

pack of small children and a pile of bills:
In all our bankruptcy studies, we adhered to strict confidentiality protocol to protect the identities of participants. See note, “
Five part-time jobs
.…” For more linkages between domestic violence and financial distress, see, for example, Angela Littwin, “Coerced Debt: The Role of Consumer Credit in Domestic Violence.”
California Law Review
100 (2012): 1–74. Similarly, in our research we interviewed a bankruptcy trustee who said: “I’m in the abuse-prevention business. Every time I help a family get straightened out financially, I figure I saved someone a beating.”
The Two-Income Trap
, 12.

a bankruptcy case he had won in the United States Supreme Court:
In
Farrey v. Sanderfoot
, Brady Williamson represented the winning plaintiff, holding that the debtor could not use the homestead exemption provision of the Bankruptcy Code to avoid a valid obligation to a former spouse as stipulated in their divorce decree. See
Farrey v. Sanderfoot
, 500 US 291 (1991).

northern or southern, black or white, male or female:
While there are some demographic differences between people in bankruptcy and the general population, for the most part the differences are modest, and people in bankruptcy are generally representative in terms of race, gender, and age. For more about the race of people who file for bankruptcy, see Elizabeth Warren, “The Economics of Race: When Making It to the Middle Is Not Enough,”
Washington & Lee Law Review
61 (Symposium Issue 2004): 177. For gender and bankruptcy, see Elizabeth Warren, “What Is a Women’s Issue? Bankruptcy, Commercial Law and Other Gender-Neutral Topics,”
Harvard Women’s Law Journal
25 (2002): 19 (Twenty-fifth Anniversary Issue); see also Teresa Sullivan and Elizabeth Warren, “More Women in Bankruptcy,”
American Bankruptcy Institute
(July 30, 1999). For age and bankruptcy, see Deborah Thorne and Elizabeth Warren, “Bankruptcy’s Aging Population,”
Harvard Law & Policy Review
3 (Winter 2009); see also Teresa Sullivan, Deborah Thorne, and Elizabeth Warren, “Young, Old and In Between: Who Files for Bankruptcy?,”
Norton Bankruptcy Law Advisor
1 (September 2001). For an overall discussion of the demographics of people in bankruptcy, see also
The Fragile Middle Class,
36–59.

proves to be the darkest secret of their entire lives:
For more discussion of stigma and shame often associated with bankruptcy, see note,
“
great defeat
.”

best-organized, best-funded lobbies in America:
See, for example, the Center for Responsive Politics, which documents the dramatic rise in campaign contributions from finance and credit companies, from 1990 through the 2000s. They also found that by 1998 the Finance/Insurance/Real Estate industry was the number one industry in terms of resources spent on lobbying. See Michael Bechel, “Finance and Credit Companies Lobby Lawmakers as Congress Moves to Aggressively Regulate Them,”
OpenSecretsBlog
(November 19, 2009). See also “Lobbying-Analysis” at
OpenSecrets.org
.

economic failure as akin to moral failure:
“A Problem That Can Be Solved” subsection of Chapter 6, Judge Edith H. Jones and Todd J. Zywicki, “It’s Time for Means-Testing,”
Brigham Young University Law Review
(1999): 177–249. For more on Judge Jones’s point of view, see: “The escalation in filings has revealed many little facts, the cumulative proof that in case after case, bankruptcy’s powerful debt-relief tools are often misused.… At one time personal shame and social stigma would have bedeviled people filing bankruptcy, and their credit rating would have been ruined.” Edith H. Jones, Foreword, “The Bankruptcy Galaxy,”
South Carolina Law Review
50 (1999): 269, 271; “I would like to inject the moral issue here because I do think that it is a very important matter of personal integrity and honor not to take on obligations beyond one’s means and if one has been caught in a bind to make every effort to pay them back.… My moral upbringing suggests to me that what is good to me as a moral person has to be applied to everybody across the board as the standard.” Also, “One thing that has become very plain to us in these hearings is that a lot of people who file bankruptcy over-indulged.” Edith Jones et al., “Panel Discussion, Consumer Bankruptcy,”
Fordham Law Review
67 (1999): 1315, 1347, 1353.