Key Democratic lawmakers are pushing legislation that would block creditors charging high interest rates on credit cards from collecting from consumers in bankruptcy proceedings.
The proposal would change bankruptcy laws to dissolve claims for repayment of debt carrying interest over a certain level, now 18.5 percent. It could affect millions of dollars in claims made by credit card companies from consumers who have filed for bankruptcy protection.
"American consumers are relying more than ever on credit cards to make ends meet each month," Sen. Sheldon Whitehouse, D-R.I., a sponsor of the bill, said at a Senate Judiciary subcommittee hearing. "At the same time, banks losing money in mortgages and their other areas of business are attempting to squeeze more and more profit out of their credit card customers."
With the leverage of a bankruptcy threat and high-interest claims dissolved, Whitehouse said, "a customer struggling under a 30 percent penalty rate could negotiate for more reasonable terms."
Stringent legislation to change credit card practices has been put forward in recent years in the Democratic-controlled Congress. With a Democratic president in the White House, prospects for such measures and other consumer-friendly proposals have advanced.
Democrats are tapping into rising public anger over corporate excesses and the conduct of banks and other companies receiving billions of dollars in taxpayer money. A crescendo of outrage over millions in bonuses paid to employees by embattled insurance company American International Group spiraled into a House vote last week approving a bill to slap punishing taxes on big bonuses at all bailed-out companies.
The measure proposed by Whitehouse and Senate Majority Whip Dick Durbin of Illinois would amend the bankruptcy laws to sweep away claims for high-interest credit loans.
A 2005 bankruptcy law, pushed by banks and credit card companies in an eight-year lobbying campaign, required for the first time an income-based test for measuring a debtor's ability to repay obligations. That made it more difficult for people to wipe their debt slate clean in bankruptcy proceedings, as consumers with incomes above certain levels are now forced into debt repayment plans.
Legislation recently passed by the House also chips at the bankruptcy law, allowing debt-strapped homeowners to seek reduced monthly mortgage payments by filing for bankruptcy.
The required income test and other demands on consumers in bankruptcy "may have created substantial burdens on consumer debtors without the desired result — increased repayment of debt," Rosemary Gambardella, a federal bankruptcy judge in New Jersey, testified at the Senate hearing.
But Sen. Jeff Sessions of Alabama, the panel's senior Republican, said it would be wrong for lawmakers to use changes in the bankruptcy laws "to deal with interest rates we don't like."
The biggest credit card lenders include Discover Financial Services, Bank of America, Citigroup, JPMorgan Chase, Capital One Financial, American Express and HSBC Holdings.