The National Bankruptcy Review Commission plans to vote Thursday on a proposal to make it even harder for lenders to recover bad credit card debts.
Lenders blasted the plan, which surfaced late last week.
"This is a disastrous proposal," said Philip S. Corwin, a lobbyist at Federal Legislative Associates who represents the American Bankers Association. "Its adoption would turn the bankruptcy code into a new welfare system that would transfer wealth from people who pay their loans to those who do not."
The review commission was chartered by Congress and must recommend changes to the bankruptcy code by Oct. 20.
At this week's meeting in Detroit, commission members will vote on a package of recommendations relating to consumer bankruptcies in such areas as home equity, car loans, secured loans of less than $500, and mortgages.
The credit industry is upset with the entire package but is especially fuming over the credit card provisions.
"At some point, personal responsibility has got to enter the picture," said Lamar Smith, Visa U.S.A. Inc.'s senior vice president for government relations. "Some of this stuff is like blaming obesity on too much food in the grocery store."
Under current law, lenders can recover charges made within 90 days of a bankruptcy filing. The commission's proposal would require a lender to clear several regulatory hurdles before collecting.
First, it must annually review the debtor's credit report and verify his income. Second, the company must prove to a judge that it had no way of knowing the consumer was in financial trouble. Finally, it must show that it did not exacerbate the consumer's problems by increasing credit limits.
Mr. Corwin called the proposed system absurd: "You are going to have every debtor saying, 'The lender should have stopped me before I charged again."'
Collecting the income data would be expensive and difficult because it is not included in credit reports, Mr. Smith said. He also questioned its value, noting that lenders already use sophisticated models to determine credit quality.
But Norma Hayes, president of the National Association of Consumer Bankruptcy Attorneys, said creditors have no right to complain.
"Credit card lenders are making so much money that they should take their losses very quietly and hope that their interest rates are not going to be regulated by Congress," she said.
The commission's proposal also would change the law for gambling debts, which currently cannot be discharged.
The proposal would let consumers dodge cash advances from credit cards taken within half a mile of a gambling operation, even if the money was spent at the casino.
"The location of automated teller machines on or near the premises of gambling operations presents temptations to credit abuse that should not be supported by the Bankruptcy Code," the commission said in its memo.
Ms. Hayes applauded this provision, saying lenders put ATMs in casinos to push consumers deeper into debt.
Mr. Corwin said the proposal proves the commission is biased against lenders. "They are putting all the responsibility on the creditor and no responsibility on the borrower," he said. "That is an incorrect underlying philosophy that will prevent this Congress from approving the recommendations."
Industry officials view these credit card provisions as part of a larger reform effort gone awry. Instead of producing recommendations to reduce bankruptcy filings, the commission is proposing to make it easier even for consumers with substantial incomes to discharge all their debts.
Lenders had urged commission members to adopt a "needs based" bankruptcy code, which would require consumers with high incomes to repay some of their debts.
