By Catherine Hubbard, CCH Washington Staff Writer, and John L. Duoba, Business Owner's Toolkit Staff Writer

The bankruptcy reform bill currently before Congress would make it harder for middle-income Americans and small businesses to get a fresh start in bankruptcy, according to a report by the Consumer Federation of America (CFA). Moreover, under the proposed measure, the number of people who fail in Chapter 13 bankruptcy would increase, said the federation in a report released on August 15, 2002.

The bill "focuses almost entirely on debtors, not on lenders. It makes it harder for families to wipe away debts, but does nothing to curb aggressive lending," said Travis Plunkett, legislative director of the federation at recent press briefing. "Credit card companies have had a role in encouraging debt," he said.

Meanwhile, small businesses are indeed using credit cards more than ever to borrow money. Micro-loans of less than $100,000 are up about 10 percent over last year's figures, according to a Small Business Administration study, but the number of these loans backed by credit cards has risen over 35 percent to $10.7 billion in 2001.

"You've seen this effort to promote these small-business credit cards in the last three to four years," said Charles Ou, senior economist at the Small Business Administration's Office of Advocacy, which published its annual micro-loan study in mid-August.

This lending trend combined with the all-time record high number of U.S. personal bankruptcy filings during the last 12 months does not bode well for Main Street. Still, Congress is moving forward with its stricter reform efforts.

The House of Representatives and Senate agreed to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2002 Conference Report (HR 333) before adjourning for the August recess. The chambers are expected to consider the bill after returning in September. An amendment to the bill relating to the ability of abortion protestors to discharge judgments against them in bankruptcy is the final sticking point preventing immediate passage by the full Congress. Lawmakers claim that an overhaul of the nation's bankruptcy laws is needed to curb abuses by debtors.

However, nearly all bankruptcies are triggered by the loss of a job, high medical bills or divorce, CFA's Plunkett said. And the reform bill eliminates the ability of bankruptcy judges to make decisions that take into account individual family needs for expenses like transportation, food and rent. It also would not allow judges to waive income restrictions for people who are blameless for their financial problems, such as those who have experienced a medical emergency or a terrorist attack, he said.

In addition, the parts of the bankruptcy code most often cited as prime targets of abuse--particularly the homestead exemption in some states that allows an unlimited opportunity to shield wealth in a bankruptcy proceeding--would be only modestly reformed by the new bill. It is likely that these types of abuses will continue.

On the other hand, the bill would not require card issuers to provide adequate information to their customers about the cost of carrying credit, Plunkett said, noting that the bill requires issuers to provide only very general information about the cost of paying off balances at the minimum payment rate. "This information is too vague to help spur consumers to pay off their balances more quickly and avoid bankruptcy," he said.

According to the report, in the twelve-month period ending March 31, 2002, credit card issuers have mailed 5 billion solicitations--nearly 50 per U.S. household. Meanwhile, consumers are increasingly rejecting these solicitations. "The huge increase in industry mail solicitations despite a falling consumer response rate suggests that credit cards are highly profitable," said Plunkett. "In a normal business, declining consumer demand would result in curtailed product marketing," he added.

Bankcard profits are more than 50 percent higher than in 1997, largely driven by the increasing "interest rate gap" between credit card interest rates and the benchmark rate set by the Federal Reserve, said Plunkett. The Federal Reserve last year cut interest rates by 4.75 percent, but creditors cut their rates by only 1.35 points on average, he noted.

For more information on the current rules of bankruptcy and how they interact with a comprehensive asset protection plan for your small business, visit our new chapter of the "SOHO Guidebook"--Protecting Your Assets. It now appears that new, more stricter rules for debtors will be part of bankruptcy reform, and you may want to consider what it could mean to you and your business if you're currently experiencing dire circumstances.

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