Double standard on bankruptcy

WITH ALL the corporate and accounting scandals, you may have noticed that Congress is also working on bankruptcy reform legislation. A bill nearly passed last week and will probably be approved when Congress returns in September.


However, this is precisely the wrong kind of reform. It is a measure long sought by the banking industry to make it easier to squeeze money from ordinary individuals who declare bankruptcy after facing personal hard times or being overwhelmed by debt.

Often these are individuals facing catastrophic illnesses or personal financial reverses. Sometimes they are people who ran up too much consumer debt, but in these buying binges the credit card companies are willing coconspirators. They foist credit cards on college kids with no visible means of support save parents. They encourage people to run up debts with multiple cards.

Why? In a low-interest-rate environment, lenders love those 20 percent, Mafia-style interest rates that many consumers foolishly pay, and creditors gladly take the occasional default as a cost of doing business. But in an economic downturn, the credit card companies fear real losses. Hence they want to get tough after the fact. Under the bill written by the financial services industry, consumers who went bankrupt, rather than having a clean slate, would still be liable for a portion of credit card and other debt.

Economists use the term ''moral hazard'' in describing a deal so sweet that it encourages the beneficiary to break the law or to sacrifice ordinary prudence. For example, if a landlord is allowed to insure his rundown building for three times its worth, there is a risk that he may be tempted to set it on fire. The credit card people like to say that easy bankruptcies create a moral hazard for consumers running up excessive debts. But the real moral hazard is the one perpetrated when purveyors of credit throw caution to the winds.

Weirdly, the only thing delaying the passage of this Scrooge legislation is an entirely extraneous controversy about abortion. One version of the bill includes an amendment making it impossible for anti-abortion thugs who damaged clinics or intimidated or harmed individuals to wriggle out of damage awards by declaring personal bankruptcy. The anti-abortion lobby considers this an outrage and has been blocking the bill.

Meanwhile, the corporate guys keep declaring bankruptcy at record rates and for record sums. Even the Archdiocese of Boston is threatening bankruptcy if too many Catholics sexually abused by priests collect settlements.

Does anyone notice a double standard here? The logic of a business bankruptcy is to allow an orderly process so that old debts can be settled at so many cents on the dollar and the viable parts of the business can be rescued. What is galling under the circumstances is that the law allows the same scoundrels who ran the business into the ground to stay in charge of it after fleecing workers, shareholders, and creditors.