Friday, September 01, 2006

Going For Broke

Going For Broke
Elizabeth Warren discusses how ordinary families wind up bankrupt and why new legislation could be hurting those at risk.
By Karen Springen

Aug. 31, 2006 - Last year, the number of personal bankruptcies ballooned to two million as people rushed to beat last deadline for a new law that made it harder and more expensive for consumers to declare themselves broke. The increase was followed by a slump, with the Administrative Office of the U.S. Courts reporting this week that personal bankruptcies for the year ending June 30 fell to 1.45 million—the lowest level in five years.

Does that mean Americans are in better financial shape? Not quite, according to bankruptcy expert Elizabeth Warren, a professor of law at Harvard University and co-author (with her daughter) of "The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke" (Basic Books; September 2003) and "All Your Worth: The Ultimate Lifetime Money Plan" (Free Press; March 2005.) NEWSWEEK's Karen Springen spoke with Warren about why she thinks the current legislation helps lenders at the expense of ordinary Americans and how the nation can get out of a debilitating cycle of debt. Excerpts:

NEWSWEEK: In 2005, you testified in Congress against the new bankruptcy law. Why do you think it passed anyway?
Elizabeth Warren: This is one of those times when the imbalance in lobbying [power] could not have been more grotesque. I had people in Congress tell me that they had two and three and four [credit industry] lobbyists come by to see them every single day for months on end. There was no one to lobby for families in financial trouble ... It's just not fair.

Many indebted Americans get stuck in a bottomless pit of late fees and increased interest rates. What happens now that their bankruptcy options are reduced and it costs so much more [about $299, plus a $50 mandatory financial counseling fee as well as legal fees] to file?
Many will go bankrupt anyway. This bill was about driving up the costs of filing for bankruptcy and delaying that filing, so that people would make payments for another three to six months before they went to see a lawyer. Many of them will still apply for bankruptcy. The only people who will be denied access to bankruptcy will be the very poorest, who can't pay the increased filing fees or hire a lawyer. For the overwhelming majority of families who file for bankruptcy, there is no other option. They owe on average more than two years' income. They can't make interest payments on what they owe. The only options other than bankruptcy are going into the underground economy or knocking over [a] 7-11 [store].

How does the new bill change the filing process?
No one can file for bankruptcy without seeing a credit counselor, which delays the process. The paperwork has been increased, which drives up the attorneys' fees. Attorneys are required to make certain certifications, which increase the likelihood of litigation, and further push up the costs. More debt survives bankruptcy. And the list goes on. The bottom line is that the bankruptcy courthouse is still open, but the steps to the front door are steeper.

Some in the credit industry have blamed bankruptcies on overconsumption.
I wish they were right. If that were the problem, then the solution would be obvious: don't buy so many Game Boys and $200 sneakers. The problem is that's not what's wrong with families. Ninety percent of the families who file for bankruptcy do so following a job loss, a medical problem or a family torn apart by death or divorce.

So is the stereotype of debtors with too many big-screen TVs false?
It's right up there with the welfare mom who drives a Cadillac. A great story but not true.

It's commonly thought that people simply don't pay most medical debt, that they default and the hospital covers it.
The data show that more than half of the families who file for bankruptcy do so in the aftermath of a serious medical problem. And three quarters of those people have health insurance at the onset of the illness or accident that ultimately landed them in bankruptcy. Sometimes it's hospital bills, but more often, it's about co-pay, deductibles, uncovered treatments, drugs, rehab, supplies, all the things that aren't covered by insurance. So part of the answer is that the financial impact of a serious medical problem goes beyond hospital bills. Lost jobs, drugs, physicians, rehab, health supplies. It's expensive to get sick in America today—too expensive for the average family.

Health insurance companies say your figure—that medical bankruptcies contribute to more than half of all bankruptcies—is too high.
The insurance companies want us to believe that the private health insurance industry works and that everyone who is paying huge premiums monthly is safe. Our data shows that it's simply not true.

According to your research, three quarters of the people whose medical debt contributed to their bankruptcies had health insurance. What are the implications of that finding?
If our finding had been that every person in bankruptcy following a medical problem had no health insurance, then the industry would have had a very different response—we need to help more people get health insurance. Let's get the state to subsidize health insurance. Let's use this study to frighten families into paying even more for insurance. When the study showed that even those with health insurance were at terrible risk for financial collapse, the health insurance industry went crazy.

Medical bankruptcies are a modern phenomenon, right? Why didn't we see them at the turn of the century, let alone very often a generation ago?
At the turn of the century, people didn't live as long. And when they got sick, medicine couldn't do much for them. The bad news was that they died. The good financial news was that they didn't go broke. Today we've just reversed it. A person may recover physically from a serious illness, but her family may never recover financially. I have a friend whose child was hit on the head in a soccer game and lost consciousness for a few seconds. They took the little boy to the emergency room, where he spent the day and released him at the end of the day with the diagnosis that he had a bump on his head. The bill was $20,000 ... What would they have done if they hadn't had health insurance? It's not simply people with leukemia and heart transplants who run up large medical bills. It's appendectomies and blown-out knees that can leave a family financially devastated.

What's the solution to the medical bankruptcy problem?
The problem of medical bankruptcies is a symptom of a much larger problem in how we pay for healthcare in America. The solution is to reform healthcare financing. We must reform our healthcare payment system. If we don't, millions more families, hardworking, play-by-the-rules people, will end up in complete financial collapse.

Bankruptcy is meant to give people a fresh start. Is that possible for people such as the elderly with huge, ongoing medical debts and little opportunity to get a good job?
No. Bankruptcy only deals with the past. So it works particularly well for people who have bright job prospects in the future and whose problems are far behind them. For the elderly, who face ongoing difficulties paying for medical treatment, bankruptcy is some help to deal with past debts, but it won't give any future services. And they'll be limited in how often they can file. Many are living in such an economically fragile state that it takes very little to tip the financial boat over. One of the women in our study explained that she had to quit her job in a fast-food restaurant because her high blood pressure was making her feet swell, and her doctor said she couldn't stand up for the two-hour stretches required at the register. Once she quit her job, she couldn't afford her blood pressure medicine. She was caught in the classic Catch 22.

Today most college students take out loans. What will be the long-term effects of so much student debt?
Today's young people are graduating from college with debts that they will work for 10 to 20 years to pay off. Dead-flat broke looks like a real step up that they may never accomplish because they already owe so much. They have forfeited any financial security before they have even begun their financial lives.

What about mortgage debt?
Tapping into your home equity or taking risky variable-rate mortgages is borrowing more money and telling your lender they can come and get your house. When these creative lending [deals] come due, more than a million Americans will lose their homes, and millions more will be stretched to the breaking point. Never before in America have we had so many homes built so near the financial cliff. The home used to be a financial steadying point. When all else [failed], at least you had the security that your mortgage payment didn't go up and you built up financial equity in your house.

What can Americans do to stay out of debt?
It's about learning about the new rules of money. Debt is something that happens when the rest of your spending is not in balance. Any debt other than mortgage debt is a symptom that something's wrong with a family's budget. People don't realize how heavy debt is, how much it weighs. It is 50 pounds on your back.

Do you have any credit cards?
I'm what the credit industry refers to as a "deadbeat." I use my credit card and pay it off each month. They hate folks like me. I smile every time I use that credit card.