Enzi, attorneys spar over possible effects

By TOM MORTON

Star-Tribune staff writer

Meet the Claneys, Buddy and Brenda: Young in the late 1990s, married with young children, working two jobs, a middle-class house, middle-class vehicles, middle-class toys, and some credit card debt.

But their middle child changed all that with one stunt in 2000.

"He played Superman," Buddy said.

The son jumped down a flight of stairs and nearly bit off his tongue.

Buddy had started a new job, but the health insurance benefit had not taken effect.

The medical bills climbed to about $20,000, and then pushed the family over the edge of bankruptcy.

"It wasn't one of our proudest moments, but it was nothing we could do (anything about)," Buddy said.

Their experience mirrors about 80 percent of those who file, usually under Chapter 7 otherwise known as debt liquidation, said Casper bankruptcy lawyer Phil Willoughby.

About half of that group must file because of direct medical expenses, while the rest have lived on credit to pay medical bills and basic expenses, Willoughby said.

But the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 - Senate 256 - being debated in the Senate with White House support will devastate the average family in circumstances such as this because it would limit their ability to discharge their debts, he said. The Senate probably will vote on the entire bill this week.

Wyoming Sen. Mike Enzi is one of 11 sponsors of the nearly 500-page bill, and disagrees with the critics.

"The bill, as written, will protect those filers who are in legitimate need of help and there is a place for the protection that bankruptcy offers for some people, but there are also people out there who can pay, but abuse the system and use it to skirt their creditors," Enzi said in a statement. "We all pay for this in the form of higher interest rates and fees."

Wyoming Bankers Association Executive Director Dave Johnson agrees, saying that the law needs changing because of the escalation and size of bankruptcies in recent years.

"The funds the banks loan out belong to other people called depositors," Johnson said.

People in Wyoming have integrity and try to pay their debts, he said.

But others use and abuse bankruptcy as a means of financial management to discharge credit card debts, Johnson said. "When they're done, they have assets, take trips and start life at a higher plateau."

The Senate, he added, has rightfully turned aside a number of amendments proposed by Democrats.

For examples, Democrats unsuccessfully proposed allowing older people filing for bankruptcy to get special homestead exemptions, and requiring credit card bills to state the length of time consumers would need to pay off debts by making only the minimum monthly payments and the subsequent total interest charges.

The amendments don't belong in the bill, Enzi said.

"For the past eight years we've worked on the language in this legislation to get an evenhanded bill," Enzi said. "There are a wide variety of stakeholders who would like to alter the bill to make it that much better for them, but this would tip the scale away from another stakeholder."

Downhill run

The Claneys themselves had three or four cards, and admit that they wanted to keep up with their neighbors, they said.

But they don't consider themselves "frivolous spenders," either, Buddy said.

Yet their son's injuries, coupled with their existing debts, began to snowball. They were even still paying off the loan they obtained when he was born.

Expenses exceeded income.

Creditors, with a few exceptions such as their doctor, weren't interested in talking to them about working out lower payments. They just wanted their money immediately.

"If they would have helped us, they would have been paid off," he said.

His overtime to try to stay financially afloat and her virtual single-motherhood frayed their marriage, they said.

And the pestering, incessant calls from creditors drove them crazy, she said. "We didn't even answer the phone."

Buddy saw this before with his parents, who had a drilling seismography. They were flattened during the 1980s energy bust, and filed for bankruptcy, he said.

He vowed he would never file because of what he saw happen to his family, and because of a deep-seated belief that he should pay people he owes.

But that principle collapsed along with their principal.

After talking with a credit counselor and a few meetings with lawyers, they reluctantly changed their minds, he said. "I wouldn't wish it on my worst enemy."

Specifically, they filed under Chapter 7 of the Bankruptcy Code to liquidate their assets and get a "fresh start," they said, mocking a bad cliche often used to explain this drastic action.

"You're not starting over," Buddy said. "You're starting in the hole."

They lost their vehicles, their life insurance policy, and their 2,400-square-foot home, they said.

The family of five now lives in a 900-square-foot house near Beverly and A streets.

Buddy and Brenda, now 33 and 32 respectively, credit their new-found faith in God for getting them through, they said. "Our whole state of mind is different," she said.

Bankruptcy reform, the Claneys said, should set up agencies in the states so people in their position could get advice, mediate disputes with creditors, and avoid bankruptcy. "Don't penalize us, help us," he said.

Wyoming banks try to work with people such as the Claneys, Johnson said. "Your heart goes out to those people who've had large reversals because of medical problems beyond their control," he said.

Means test

That won't happen as much if S. 256 passes in its present form, Willoughby said.

The law will require those considering filing to take a "means test" to determine whether their income, based on regional averages, is high enough so they can pay off some of those debts, he said.

If the filer's income falls below that, he or she would be allowed to file under Chapter 7, Willoughby said.

Above that would require the person to file under Chapter 13, he explained.

In Wyoming, that would mean a family of four with a yearly household income of $24,000 would be put under the authority of a bankruptcy trustee, who would have the ability to tell the family what it should pay and even what it could spend on food and medicine, Willoughby said.

S. 256 also will require bankruptcy lawyers to certify the accuracy of the information in the bankruptcy paperwork, he said.

That extra work will persuade many lawyers to get out of the business, and the remaining lawyers would be able to double or triple their fees, further discouraging people from seeking bankruptcy relief, Willoughby said.

That undermines the original concept of the bankruptcy program to put all parties in one forum where a federal bankruptcy judge can fairly distribute assets from the debtor to the creditors, said Elaine Welle, a professor of bankruptcy law at the University of Wyoming College of Law.

Without that central program, state collection laws would hold sway such that individual debt collectors could seize a debtor's assets and deprive other creditors, Welle said.

She and 89 other bankruptcy and commercial law professors from across the nation and political spectrum signed a Feb. 16 letter to Sens. Arlen Specter, R-Penn., and Patrick Leahy, D-Vt., - chairman and co-chairman of the Senate Judiciary Committee - urging them to oppose S. 256.

While they praise aspects of the bill such as the provisions to protect consumers from predatory lending, they believe that other parts of it, especially the means test, outweigh any good, they wrote.

"I'm not necessarily against a means test, but (against) the cost that it would impose," Welle said.

Those costs would include more time in courts, more time spent with the bankruptcy trustee, and more time with the attorneys, she said.

A bankruptcy judge already has the authority to deny a debtor access to Chapter 7 to prevent abuse, according to the letter.

The creditors, who would be receiving the benefits of some repayment, may suffer as well because many Chapter 13 bankruptcies are not successful, Welle said.

The Claneys, whose debts were discharged about three-and-a-half years ago, would have yet another year to discharge their debts under Chapter 13, and they wonder if they would have been able to make it, they said.

As it is, they're doing their best to rebuild their shattered credit rating that will mention their bankruptcy for another three-and-a-half years.

Meanwhile, they still get letters from credit card companies telling them that they're approved for credit, which annoys them immensely, they said.

Symptoms

Critics of S. 256 say that it's inconsistent to require responsibility on the part of debtors, without doing anything to curb the marketing on easy credit in the form of applications by mail or on line.

For example, Willoughby remembered one of his clients who received a card - not just an application for a card, but a card itself - with a $5,000 line of credit on the day she appeared for her hearing in bankruptcy court.

But S. 256, Enzi said in its defense during a recent visit to Wyoming, does not hold credit card companies to that same standard because people may need what they have to offer.

It does propose rules for how credit card companies can market to minors, but not to adults, Enzi said.

"For the adults, they have to learn what the situation is and how to handle it," he said. "Anything you do in the regular credit card area is probably cutting some people out of some of the capability that they need and use responsibly."

But some people, Willoughby said, simply do not know how to manage easy credit, which was not a factor during the creation of bankruptcy law more than a century ago.

Welle likened the flood of credit offerings to giving away crack cocaine.

"Who should be taking the responsibility for extending credit to people?" she asked.

Besides easy credit, Welle said a recent study by Elizabeth Warren of the Harvard Law School noted that job loss, medical expenses, divorce or a combination of those factors drove the rise in bankruptcies to about 1.6 million households in 2004.

"Maybe we do need reform, but is this the best possible way?" she said.

Buddy Claney wonders if there could be a middle version of chapters 7 and 13 that would promote personal responsibility, allow for creditors to receive payment, and yet not have so much federal intrusion into the process.

He, too, agrees that bankruptcy is a symptom of larger problems. "Instead of looking at bankruptcy, they should look at medical (costs)," he said.

Reporter Tom Morton can be reached at (307) 266-0592, or at Tom.Morton@casperstartribune.net.