A Fighting Chance

the cap on interest rates was effectively eliminated: Usury regulation underwent a dramatic change in 1978, following the Supreme Court’s decision in Marquette National Bank v. First of Omaha Service Corp. In that case, the Court ruled on which state’s usury law would apply when a bank in one state lent money to a customer in another state: the law of the lender’s home state or that of the borrower’s home state. The Court held that the lender’s home state law applied, which enabled banks to impose the maximum interest rate from one state on all borrowers, regardless of the interest rate cap in the borrowers’ home states. The decision prompted a “competitive wave of deregulation,” as states competed for banks to relocate to their states by removing any interest rate caps. See “A Short History of Financial Deregulation.” Not only did the decision effectively eviscerate usury regulation, but it also placed small banks at a huge relative disadvantage to large banks, as the large banks were much better positioned to exploit this work-around of state usury laws.

to people who were a lot less likely to repay all those loans: Starting in the 1980s, deregulation of the credit industry unleashed a wave of new credit card practices, causing credit card fees and interest rates to rise throughout the 1980s, 1990s, and 2000s. For a more detailed discussion of this period, see As We Forgive Our Debtors, 178–91. We documented the fall of traditional safe banking during the 1990s, which had relatively declined in profitability, and the rise in preapproved credit cards, interest rates (up to 18 percent during this period), retail cards, solicitation of debtors, and subprime lending. See The Fragile Middle Class, Chapter 4; The Two-Income Trap, 126–32. Also over the course of this period, credit card companies increasingly targeted low-income borrowers as well as young people, African Americans, and Latinos for some of the most abusive loans. Companies realized they could make enormous profits on the backs of delinquent cardholders and those who could only afford to pay the low minimum amount due each month, even after the defaults and bankruptcies were subtracted. See The Fragile Middle Class, Chapter 4; The Two-Income Trap, 129 & n.18. One study found that more than 75 percent of credit card profits came from people who made low minimum monthly payments, as credit card companies increasingly targeted this group with late fees and adjustable interest rates. See The Two-Income Trap, 139.

and can’t afford to take on more high-interest debt: In The Two-Income Trap we note that business consulting firms would give banks essentially the same advice. For example, in 1997 Fair, Isaac & Co. launched a bankruptcy prediction program that it claimed “could eliminate 54 percent of bankruptcy losses by screening potential nonpayers from the bottom 10 percent of credit card holders” (233. n.55).

cute little pooch who had just been offered a credit card: There was a significant rise in aggressive advertising of preapproved credit cards and solicitation of debtors during the 1980s, 1990s, and early 2000s. As marketing tactics targeted the poor, Americans with incomes below the poverty level doubled their credit card usage during the 1990s. Over this same period, young people were increasingly offered credit cards without having to get parental approval or having to show credit history or annual income. These offers came in droves, as credit card companies solicited people on campus, using free T-shirts and key chains with university logos, and sent mailers with preapproved credit card applications. In 1997 alone, more than three billion preapproved credit card offers were sent to people. See The Fragile Middle Class, Chapter 4. This number rose to five billion in 2001, which translated to more than $350,000 of credit offered to each family. The Two-Income Trap, 129–30 & n.19.

academic circles, and snagged a national prize: As We Forgive Our Debtors won the 1990 Silver Gavel Award. It was also a finalist for the Distinguished Scholarly Publication Award of the American Sociological Association.

twenty-four hours a day, seven days a week: In 1995, the number of families filing for bankruptcy was 874,642. In 1996, the number of filings rose to 1,125,006. To translate these numbers so they reflect the number of people rather than families, we multiplied the number of filings by 1.4 because about 40 percent of those filing for bankruptcy in the 1990s were married and both adults were filing in a single petition. Thus, on average a person entered bankruptcy every 26 seconds (using the 1995 figure) and every 20 seconds (using the 1996 figure).

2 | The Bankruptcy Wars

completing its review and then deliver a report to Congress: The National Bankruptcy Review Commission (NBRC) was established as an independent commission on October 6, 1995, under the Bankruptcy Reform Act of 1994. Members included: Chairman: Initially Congressman Mike Synar, Oklahoma, later replaced by Brady C. Williamson, Esq., Wisconsin; Vice Chair: Hon. Robert E. Ginsberg, US Bankruptcy Judge, Illinois; Jay Alix, CPA, Michigan; M. Caldwell Butler, Esq., former Member of Congress, Virginia; Babette A. Ceccotti, Esq., New York; John A. Gose, Esq., Washington; Jeffery J. Hartley, Esq., Alabama; Hon. Edith Hollan Jones, US Circuit Judge, Fifth Circuit, Texas; and James I. Shepard, Esq., California.