For once, Teddy Kennedy got it almost right. Referring to the country’s draconian new bankruptcy code, enacted last year under the cynically titled “Abuse Prevention and Consumer Protection Act,” Kennedy called it “an attempt by the credit card industry to “squeeze an extra few dollars a month out of Americans who are down on their luck.” Kennedy has captured the spirit of the bill, but not its diabolical intent. For in fact, creditors seek not merely to squeeze a few bucks out of the poor schmuck who got in over his head, but to keep squeezing more or less forever, if that’s what it takes to recoup the lion’s share of a delinquent loan. Indeed, the law as revised makes it so difficult for the beleaguered debtor to wipe the slate clean that it would have been more accurate to have called it the Creditor Protection Act.

Ironically, although the bill divided liberals and conservatives, their argument was not over whether the little guy should be protected from predatory lenders, but whether picketers who disrupted abortion clinics should be allowed to escape civil penalties by declaring bankruptcy. Clinton and the Democrats bottled up the legislation for eight years, but it sailed through under Bush, arguably the most pro-Big Business president since Reagan.

Wave of Bankruptcies

In the months before the new law was enacted, and as we might have expected, there was a wave of bankruptcy filings by people trying to get in under the wire. As a result, lenders weathered more than their share of abuse, at least for a while. This was on top of heavy Chapter 7 filings following the dot-com crash a few years earlier. No surprise here. Because it was relatively easy for deadbeats to walk away from their debts, many did.

We wouldn’t argue that reckless borrowers deserve the protection of the courts or a mere slap on the wrist for living wildly beyond their means on borrowed cash. But what about those who borrowed, not for shopping sprees and Caribbean cruises, but to meet monthly bills that continued to pile up?  This question is not rhetorical, since its implications are about to be tested by the most severe economic bust since 1973-74. Since the housing boom ended more than a year ago, real estate prices have begun to fall with alarming speed. Suppose they continue to fall, leaving millions  or even tens of millions of homeowners underwater on their mortgages? Under the circumstances, many households would likely find themselves in essentially the same financial boat as the deadbeat, unable to meet monthly expenses and unable to borrow.

Torch Mob

This prospect evidently has not occurred to the Wall Street Journal’s blithe op-ed  team, which notes that so far, “the predicted doom [associated with the bankruptcy bill] has not arrived.” Is there a dim echo of Prof.. Irving Fisher here?  The Journal sees the revised bankruptcy law as a “modest reform at best.” Maybe in good times, it would have been. But we see it as a noose around the neck of a vast number of homeowners. Americans will understand the financially deadly implications of the revised code as recession tightens its grip on the economy in 2007. We predict that the bill eventually will be rescinded and that the American public will call for the heads of those who lobbied hardest for its passage. Perhaps with a torch mob at their door, the Journal’s editors by then will have changed their tune.