Moral Bankruptcy Prevails

Moral Bankruptcy Prevails

by cuzondu@faireconomy.org">Chaka Uzondu
November 23, 2005

Call it debt slavery or debt peonage: whatever your preference, it has been reinstated.

On October 17, the Bankruptcy Abuse Prevention and Consumer Protection Act went into effect. This new law makes it harder for families suffering from economic hardships to write off their debt. It is the latest example of compassionate conservatism. As wealth and income inequality grows, compassion is reserved only for the extremely wealthy and for corporations.

Of course, the new bankruptcy law is sold to us as something good. According to the credit card, retail, and banking industries, key players in writing this new law, the changes will help control irresponsible spending.

Yes, some people do live beyond their means and incur considerable debt. However, we all know that the vast majority of consumer debt is not because of reckless spending. Most people are going into debt to pay for rising medical, housing, and childcare costs. A recent study by Harvard contends that medical bills account for more than 40% of bankruptcy cases. Job loss or divorce accounts for much of the other cases.

It does not help matters that the wages of the average worker can buy less today than in 1970. With wealth and income inequality growing, it seems likely that the major reason people are going into debt and filing for bankruptcy is because they have no other options.

The credit card, retail, and banking industries also claim that the new law will help lower costs for all consumers. But how exactly does this new law lower costs for all consumers? It does not reduce the high rates and exorbitant late fees that consumers are charged. High late fees are what crippled many people who used credit cards to meet life's challenges. According to Demos, a pro-democracy think tank, in 1995 fees charged by the credit card industry generated $8.3 billion in revenue. In 2004, revenue generated by all fees netted the credit card industry approximately $24 billion, almost three times more. Yet the corporate lobbyists claim the new law will lower costs for consumers. The new law does not curtail irresponsible lending, but it does make it much harder for many people to use bankruptcy protection as a way to get a new start on their lives.

What is the significance of this new law for racial wealth inequality? In 2004, African-Americans held 10 cents and Latinos held 3 cents for every dollar of white wealth. This wealth gap is directly related to the difference in homeownership across racial groups. According to the 2004 Current Population Survey, 49.1% of African descended people and 48.1% of Latinos own their homes, compared to 76% of whites. We know that homeownership remains key for wealth accumulation and financial security in US society. Therefore, examining the likely impact of this law on homeownership may be informative.

Presently, African-Americans and Latinos are disproportionately represented in bankruptcy court. Studies demonstrate that persistent mortgage discrimination, predatory lending, and redlining are key factors that affect these groups. Because the new law makes it harder to save homes, it is likely that African-Americans and Latinos will suffer increasing levels of home loss. For example, if someone lost their job, went into debt, and failed to make their mortgage payments, they would no longer be able to protect more than $125,000 of equity in their home using the bankruptcy law unless they had owned their home for over 40 months. Because the new law makes filing for bankruptcy more difficult, it also makes it easier for creditors to repossess some people's homes in order to receive payments. As a result, the large gap in home ownership between whites and people of other races is likely to increase. Further, because this new law is likely to diminish the capacity of some people of color to preserve this important asset, it also undermines the development of racial wealth equality overall.

The new law may also exacerbate racial wealth inequality in another way. Recent research by the Center for Responsible Lending demonstrates that predatory lending is a serious problem facing African American and Latino communities. They found that African-Americans were 3.7 times more likely to receive a higher-cost [sub-prime] loan than white borrowers, with similar income. These communities are also more likely to have a higher concentration of pay day lenders in their neighborhoods and to receive predatory loans from financial institutions. Predatory lending-lending practices that exploit lack of access to credit, utilize deceptive marketing, and consumer ignorance-strip wealth from people of color. Pay day lending-a practice of providing cash advances at extremely high rates-is another form of wealth stripping. Since the new bankruptcy law does not curb these practices, it leaves people of color at the mercy of predators. Further, it may encourage predatory lenders to practice more irresponsible lending. After all, "bad credit" is what keeps them in business. They make more profits from people who can't afford to pay than from those who do.

In sum, with both wealth inequality in general and racial wealth inequality in particular on the rise, the majority of people of color are likely to incur higher levels of debt. This is all the more likely since they continue to face systemic and persistent discrimination in housing mortgage lending, the higher levels of unemployment, lower wages, and bear the brunt of regressive taxes. In this context the new bankruptcy law can only be understood as another barrier to economic justice and racial economic justice more specifically. No surprise that it brings back horrifying memories of debt slavery.

After the U.S. Civil War, emancipated African-Americans and some poor whites felt the burden of debt slavery, or debt peonage. At that time, former slave owners used credit as a way to continue and further exploit the labor of poor people, especially African-Americans. Essentially, creditors provided tenant farmers (often emancipated Africans) with their necessary seeds and supplies. However, if the tenant farmer was unable to make payments they were required to continue working on the landlord's (former slave owners) land until they could pay off the entire debt. Because they had no legal protections and were often compelled to purchase all supplies from the landlord, the tenant farmers became effectively trapped. In this system, landlords could charge high interest rates and raise the price of supplies to keep tenant farmers/share croppers in debt and in a form of bondage similar to slavery. Indebtedness became a way to redistribute wealth from working people to the plantation owners. This system became known as debt peonage or debt slavery. Perhaps, we should call the new bankruptcy law the "debt peonage law"?

If not before, now all is clear. Instead of reducing it, this new law is likely to exacerbate the racial wealth gap. Further, the handling of the Hurricane Katrina disaster, the lowering of wages in New Orleans with the suspension of the Davis Bacon Act (a decision that has since be reversed under popular pressure), and now this new anti-people "debt peonage law" demonstrate that in high places-moral bankruptcy prevails.

Chaka A. K. Uzondu is an Education Coordinator at United for a Fair Economy.

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