The new 'Chapter 13'

Saturday, July 30, 2005

Editorial:

The new 'Chapter 13'

Thirteen is the number we seem to loathe. Most athletes will not wear it. And based on the buttons in elevators, most hotels are built "without" 13th floors.

Nevertheless, it is a number that will become increasingly familiar to Maine consumers this fall. That is when the biggest overhaul in a generation of the nation's bankruptcy laws takes effect. It is a change that will require many of the consumers seeking relief from creditors to register under a chapter by that number in the revised bankruptcy code.

Whether the change is one that will condemn or console depends on whom you ask. Before we collect some opinions on the subject, a bit of background might be in order:

Despite the recent attention being given to Chapter 13, it is part of our credit-relief system that has been around since the late 1930s. Before that, consumers had only an all-or-nothing option for seeking protection from creditors. This was "straight" bankruptcy, meaning that nearly all of one's debts not secured by mortgages or taxing authorities could be wiped out by the bankruptcy process.

The 20th century's most Democratic Congress, one that saw the GOP outnumbered 4-to-1 after being elected at the same time as FDR's landslide re-election in l936, opened up a new avenue for consumers. This was the Chandler Act, which ushered in a 13th chapter to America's bankruptcy system. The basic premise of this most unluckily numbered element was to permit wage earners to get some relief from the pressure of debt without enduring the stigma of a full-fledged bankruptcy, sort of a halfway house approach. In it consumers for the first time could have the option of paying off a percentage of their obligations over time -- usually three years -- thus keeping more of their credit intact than they would had they gone through straight bankruptcy.

With the passage two months ago of a law that will soon force -- rather than simply encourage -- some consumers to call upon this method, Chapter 13 is now being regarded as a means of hurting rather than helping some consumers -- almost a form of involuntary servitude -- in the eyes of critics of the new measure.

This is because many of the more than 4,000 Mainers who file for bankruptcy each year will be precluded from doing so unless they file under Chapter 13 first. Whether the new Chapter 13 will assist or injure the rights of those it was originally designed to nurture, the new rules have rekindled as much debate on the future of consumerism as any event in years.

Has the deck really been stacked, and what else should alert policy-makers consider in the future? On these and other pressing consumer issues, I knew the person I want to see. His name is Gerald Cope, the man who for nearly 50 years has witnessed how Mainers handle their pocketbooks when they are in financial trouble. Born to a lower-middle-class Portland family in the Depression, he went on to graduate from Harvard Law School before coming back to Maine in 1957. He was then a protégé to longtime bankruptcy referee Richard Poulos, and then spent more than 20 years as trustee or guardian of the Chapter 13 program here. For the past 25 years, he has been one of the more active practicing lawyers in the state's bankruptcy courts.

Though Cope is a strong partisan of the Chapter 13 idea, he does not favor making it mandatory and believes that the bankruptcy system might be "devastated by the reforms in the bankruptcy code that will literally force people into Chapter 13." Most creditor attorneys do not share this view, pointing to the fact that the only bankruptcy candidates required to go Chapter 13 will be those who have had incomes above $37,000 a year.

That said, there is still a lot else going on that also concerns many, including Cope. Among the changes he feels are necessary are laws that would stop some lenders from extending additional credit -- providing more money -- to customers who are already way over their heads in debt.

A second proposal Cope advocates is anti-flipping laws. These would limit the number of times some lenders could renew, turn over or "flip" high-interest loans so rates would be lowered over time as a means to encourage repayment. In the late 1960s, Cope was the key player in a brain trust that put such a law on the books, the so-called 36-month law. (Cope was so effective that a key Senate committee chairman sought to banish Cope from the Statehouse.) The desire to placate one of the state's fastest-growing employers, MBNA, led to its repeal in 1996.

Finally, Cope believes that policy-makers should support limiting credit-card debt to a percentage of a person's income. Along with that, Cope feels that there should be laws against sudden increases in interest rates. Creditors should not be "in a position arbitrarily to have you take a credit card and offer you an interest rate of 7.99 percent and then because, you are maybe 10 days late, suddenly your interest rate has increased to 24.99 percent."

One problem confronting Cope's proposals is the emergence of the global economy. It is no longer possible for Maine to be the leader it was in the consumer-regulation field because so much of what both businesses and their customers do transcend state lines. The credit-card companies and mail-order catalogues that made state-by-state regulation challenging have now been joined by Internet giants, multinational banks and other behemoths that have rendered it impossible.

It is unclear whether anyone can do anything about the concerns Cope raises, but one thing is certain: The new Chapter 13 takes effect this October, just in time for Halloween. We will then know better whose trick and whose treat it will become.

Paul H. Mills is a Farmington lawyer who writes regularly on Maine history and the state's political scene. He can be reached at pmills@midmaine.com.