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The essence of the new bankruptcy “reform” law that was signed this spring is best captured by a scene, a saying, and a scripture.
The scene—from the television show Seinfeld—features one character telling another character to remember that “it’s not a lie if you believe it.” The president and the members of Congress who supported this new law told themselves that people file for bankruptcy because they are irresponsible and make too many extravagant purchases. These politicians convinced themselves that those irresponsible people could repay their bills but chose not to. They convinced themselves that the increased bankruptcy filing rate imposed a $400 “bankruptcy tax” on every honest American family that paid its bills. They stuck to their beliefs even though empirical data showed that most people who file for bankruptcy do so because of skyrocketing health-care costs, the loss of an income source, or divorce-related debts. They kept believing the lie despite studies that proved that the $400 tax simply did not exist. Elected officials convinced themselves that the over-consumption myth, as described in Warren and Tyagi’s essay, is true.
The saying is the term “perpetratin’”—imitating or pretending to be something that you aren’t. In numerous ways, the new bankruptcy law “perpetrates.” It pretends that mandatory credit counseling is benign and will help individuals avoid irresponsible spending, even though testimony presented during recent congressional hearings disclosed that numerous credit-counseling companies charge excessive fees for debt management plans, give little or no counseling or education, and promise results that they fail to deliver. Credit counseling is perpetratin’ as something that will help individuals even though evidence suggests that debtors often end up worse off financially after “counseling.”
The new bankruptcy law pretends that it is morally just and designed to force individuals to be more fiscally responsible. Warren and Tyagi’s essay shows, though, that vote-buying in Congress by the financial-services industry turned this law into a morally corrupt one that was passed to protect the interests of consumer lenders. The politicians pretend that the bill will help individuals, when in fact it was passed to help consumer lenders avoid internalizing the costs of their own irresponsible lending practices.
People of color have probably been the most frequent victims of this perpetratin’ law. Even before the new changes, bankruptcy laws were racially biased, because they primarily benefited married couples who had wealth (especially retirement income) and who financially supported only legal dependents. Census and other empirical data show that minorities generally have lower marriage rates; that there is a significant gap between average white household net worth and the net worth of most minority households; and that minorities are significantly more likely to provide support to non-legal dependents than are whites. The new law not only perpetuates the benefit gap, but widens it by providing a subsidy to parents who choose to send their children to private schools—the recipients of which will, again, be predominantly white.
The scripture is from Hebrews 11:1, in which faith is described as “the substance of things hoped for, the evidence of things not seen.” The politicians who supported this new law had faith that the higher bankruptcy filing rate could be attributed solely to irresponsible spending. So strong was their faith that they were not willing to even consider that unexpected job losses, or medical catastrophes, or just plain bad luck may have pushed a significant number of individuals into bankruptcy court. And any faith that individuals may have placed in politicians, or in the new law itself, proved to be unwarranted. They may have hoped that the law would make it harder for creditors to engage in deceptive or predatory lending practices, but it doesn’t do that. They may have hoped that the law would make it easier for them to keep their homes, rather than lose them because of imprudent home-equity borrowing or risky mortgage products, but it doesn’t do that either.
The new bankruptcy law’s assault on the middle class may show leaders of progressive rights-based organizations (including the NAACP, the National Council of La Raza, the National Urban League, the National Women’s Law Center, unions, and others) that they need to change their political agenda. These groups should develop and aggressively pursue strategies that will help close the racial wealth gap and eliminate deceptive consumer lending practices that target racial minorities. Traditional civil-rights issues, such as ensuring equal opportunity in the workplace and schools, should, of course, remain a fixed part of their agendas. However, with luck—and a little faith, perhaps—this perpetratin’ law may make economic empowerment the cornerstone of a new civil-rights agenda.
A focus on consumer practices can help identify areas in which public policy can provide incentives for families, neighborhoods, school districts, and states to ensure quality education in every neighborhood rather than reward consumption practices that worsen inequality. Whether in education, housing, lending, or health, a real agenda for change simply cannot afford anything less than a serious look at consumer culture.
If families are making more money than ever and are still in financial trouble, surely the critics are right: Americans are overborrowing. But the data tell a different story.
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