WASHINGTON – A six-line bill introduced by Maryland’s two senators opens a pandora’s box of questions on debt, consumer spending and bankruptcy.
The bill sounds simple enough. Drafted by Democratic Sens. Paul Sarbanes and Barbara Mikulski, it asks for authorization for two additional bankruptcy judges for Maryland.
Supporters say the two new judges are needed to help manage the explosion of bankruptcy filings in the last few years.
But creating the positions would not answer the larger question of why so many people are filing.
Economists say the state’s economy has something to do with it. They say Maryland is not enjoying the same growth as other states, in large part because of federal downsizing.
Financial critics say it’s a cultural thing: bankruptcy is more socially acceptable and void of the stigmas that once encouraged people to explore other options.
And consumer groups say that banks are responsible because they are pushing high-interest credit cards onto people who cannot afford them.
Records show the number of bankruptcy filings in Maryland has climbed from 13,633 in 1991 to more than 22,000 in 1996. Close to 40 percent were individuals.
Maryland’s four bankruptcy judges – Chief Judge Paul Mannes and Judges Duncan Kier, James Schneider and Steve Derby – each took on 2,230 hours of casework in 1996, compared to a national average of 1,272 hours.
This means Maryland judges are doing 75 percent more work than the average. The state ranks in the top three of the 91 federal bankruptcy districts for case hours.
“I have more than 60 files waiting for me to reach them. I’ll get another 30 today,” Kier said. “The backlog delays justice” for both creditors wanting their money and debtors trying to protect their interests, he said.
Last year, a bill that would have provided additional judges for many regions, including Maryland, was introduced late in the session and never reached the floor for a vote.
The Sarbanes-Mikulski bill will likely be folded together with other requests for judgeships. David Sellers, a spokesman for the Federal Judicial Center, estimates the new judges and their staffs would cost about $1 million a year. A hearing date on the bill has not yet been scheduled.
Individuals file for one of two types of protection.
Chapter 7, which damages a person’s credit record for seven years, gives debtors protection from creditors in exchange for their assets. The assets are turned over to a trustee of the Justice Department, who liquidates them to pay back creditors.
Because bankruptcy entitles people to a fresh start, some assets are protected, including equity in property. Maryland’s rule on this, called the “homestead exemption,” is particularly unforgiving because it allows only a $5,500 exemption, compared to the federal guideline of $15,000.
Chapter 13 allows debtors to reorganize their debt on a pay- back schedule agreed to by creditors.
Diana Culp Bork, a writer and former Justice Department attorney, said in a recent Wall Street Journal article that financial distress and over-extension of credit is not a new phenomenon for Americans. “What’s new is a resort to bankruptcy as the first response,” she wrote.
She argues that the cultural stigma that once prevented people from considering bankruptcy is gone, and judges are at fault for being too lenient. “The discharge of debt is almost guaranteed,” she wrote.
Mannes and Kier said the enormous caseload prevents Maryland’s bankruptcy judges from giving the necessary time to review all cases.
“We schedule like an airline, setting more matters than we have time to hear,” Mannes told the Senate Judiciary Committee during a December 1995 hearing.
But Kier disagrees with Bork’s cultural analysis: “It is clearly still embarrassing for people in my courtroom” to file for bankruptcy, he said.
Kier said many individual cases in Maryland’s courts are filed by people living beyond their means who are then hit by an emergency.
“The way people buy goods and services has changed in the last 20 years,” Kier said. “Before, people paid for their goods with income already earned. Today, they are paying for goods with income that will be received.”
Margot Saunders, managing attorney for the National Consumer Law Center, concurred. She said credit card debt is overpriced and enormously profitable to banks. “It’s more profitable for banks to take losses resulting from bankruptcy by charging higher fees and interest rates.”
At the same, banks continue to encourage credit use by issuing credit to people who cannot afford it, she said.
Gary Klein, a bankruptcy expert with the law center, said federal deregulation of banks during the 1980s removed interest rate ceilings that had, until that time, kept rates to roughly 18 percent. Now, while banks borrow from federal reserve at rates between 3 percent and 5 percent, they charge interest on credit cards anywhere from 15 percent to more than 20 percent. Because credit cards are so profitable, “Issuers use techniques to sell people credit until they get sucked into minimum payments that don’t even cover the interest accruing on their debt,” Klein said. -30-