ATMs include the overdraft line of credit on-screen as part of the available funds. ATM users aren’t notified that they’re withdrawing more than they have until the bill arrives later.

Annualized interest rates on the cash lent to cover bounced checks and withdrawals can reach 1520%. That is not a typo. And thanks to a loophole in the federal Truth in Lending law, banks never have to reveal the actual interest rates

Customers automatically get “protection” whether they want it or not, and must specifically request to be taken out.

Consultants hyped bounce protection to banks as a way to compete with payday lenders – barely legal loan sharks that prey on our cash-strapped troops (among others).

A highly recommended read. If you like horror stories.

Did I hear an attorney lie to Congress?

I watched the hearings today. I missed the first hour due to time constraints, but I did catch most of it.

MBNAs Honorable Louis Freeh, Senior Vice Chairman and General Counsel has specifically and clearly denied that MBNA uses Universal Default yet there is this complaint on the Consumer Affairs website. Did he lie to Congress or is the Consumer Affairs website reporting wildly off base? Is there a penalty for perjury when testifying before Congress?

We don't know if he's a reader, but we feel that it can be inferred that Representative James Sensenbrenner (R-Wis), Chairman of the House Judiciary Committee, would ask credit card companies:

"Now that the risk of consumers failing to pay back their debts has been reduced, will this reduction in risk be returned to consumers in the form of lower interest rates?"

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One reader has a three-part question along the same lines as Rep. Sensenbrenner:

1) "Now that Uncle Sam has transferred your risk to consumers, how much savings will you pass on to consumers, in the form of lower rates and fees?" (this one was the most common question from our readers)

2) "How much will go straight to your shareholders?"

3) "How much went to Joe Biden?"

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Reader SJ asks:

"If the practices by the Credit Card industry are not predatory, why am I - who went to court for a bankruptcy in April of this year - receiving offers for credit cards when my bankruptcy has not even been fully discharged yet?"

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Reader LP asks:

"Why has the gap between interest rates at which banks borrow money and the interest rates they charge credit card customers remained so large over the years?"

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Reader DR asks:

"Do you feel that you have gotten your money's worth from Congress in the passage of the recent bankruptcy bill, and are you pissed it took so long?"

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Reader KM asks:

"Why are banks allowed to apply your payments in order of interest rate, such that credit card loan-types with the highest rate are paid off last regardless of when it was borrowed?"

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Reader DN asks:

"Would you (the credit card companies) be willing under any circumstances short of legislation to ever place information on statements about how long it would take consumers to pay off their debts making only the minimum payments?"

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Reader JA asks:

"Why are you taking advantage of teenagers in high school and college and then suing their parents when they can’t pay, without first asking for their cosigning on the account? Isn’t this dishonest? "

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One observer asks credit card companies:

"How do you justify hitting consumers struggling to pay their balances with $35 late fees and 30% “penalty” interest rates that might force them over the financial brink into bankruptcy? If the goal is to protect the company’s financial commitment, why not just cut off their credit and help keep them solvent?"

On Tuesday the Senate Banking Committee will be holding hearings about disclosure and marketing in the credit card industry. They have some real live witnesses: VPs from Capitol One and CitiCards, and the acting director of the Office of the Controller of the Currency—the head of the agency partly responsible for regulating national credit cards.

These people are supposed to be there to answer hard questions. So how about asking some? Give us some questions, and we’ll post them. There will be some good consumer advocacy folks testifying, and Senators Akaka and Feinstein are also planning to testify. We think some of the questions you want to pose just might get asked. And if they get asked, we can talk about the answers.

This is your chance. What do you want to know?

Let’s start with bonds. “Bond” is just a fancy name for a debt that a corporation owes its creditors, the bond holders. As TPM readers know, a debt is just a promise now to pay later. (Pensions are promises now to pay later, too, and we know where those are headed.)

Through bankruptcy, the federal government offers both corporations and real people a chance to break these promises with relatively few consequences, although the government is trying its darndest to take back the offer when it comes to real people. Just ask Enron’s employees, whose pensions full of Enron bonds disappeared in bankruptcy without even a puff of smoke, about bonds never being “whittled down.”

But what about stocks? Stocks are a stake in the company – a chance to actually own a part of Google or, dare we say, Citibank. That’s gotta count for something, right?

Not so fast. Corporations that offer stocks can liquidate or reorganize under the bankruptcy code too. When that happens, stockholders have it even worse than bondholders.

The downside of owning something is, if you’re in debt, your creditors can foreclose on what you own. So when a corporation has debts it can’t pay and files for bankruptcy relief, the creditors have the right to take what the stockholders “own” - their shares. When asbestos maker Johns-Manville filed for Chapter 11 to deal with lawsuits by workers it injured and killed, for instance, all its stockholders suddenly found themselves sitting on a worthless pile of certificates.

So much for stocks and bonds as “property.”

Of course, “Will” Wilkinson is technically correct. Stocks and bonds cannot be “bargained away” by future Congresses — but they don’t need to be. The laws are already in place for every one of those promises to disappear in a puff of smoke. Compared to the alternative (depending entirely on a system in which stock and bond holders lost billions of dollars worth of “property” in over a million companies over the past 10 years) promises by a publicly accountable Congress seem like a pretty safe bet.

But the bankruptcy bill started in the Senate, and only the House can impose new taxes. So the House added section 6042 to (of all things) the Emergency Supplemental Appropriations Act For Defense, The Global War on Terror, and Tsunami Relief, so that Congress could initiate this new tax. The day after I posted my note, the House and Senate Conference on that bill met and raised the Chapter 7 filing fee again by another $20—to $220. We hear that it will pass this week or next.

Why extract $225 million over five years in general tax revenue from people who are already broke? Are they kicking debtors just because they can? Or is this just another play at the margins—a way to keep the poorest, most desperate families from declaring bankruptcy? Is this one more move to keep bankruptcy available only for the well-to-do?

We know most people go numb over numbers. But this is wrong, and hiding it behind decimal places won’t make it right. Where are the no-new-taxes folks? Where are the help-struggling-families advocates? Let’s gear up again and let our senators and representatives know that this “fix” is whipping families that have already been beaten unconscious.

You: I'd like a bar of soap, please.
Cashier: Sure. That'll be ten dollars.
You: Ten dollars for a bar of soap?
Cashier: It's very good soap.
You: Yes, but --
Cashier: Besides, you can afford it, can't you?
You: Sure, I can afford it today. But what happens when my cell phone bill comes in tomorrow and I find out my daughter's run four hours over our minutes?
Cashier: Oh, don't worry. It sounds pricey, but if it turns out you can't afford it, just give back the soap and we'll write it off.
You: Wait, you'll really do that?
Cashier: We promise. We have to. It's the law.

This is the the conversation every cardholder has with Visa. Credit's pricey. Sometimes it's so pricey you find out later you can't afford it. A million and a half families found this out last year.

To make up for it, Visa promises to forgive the debt if you're stuck with unexpected bills. True, bankruptcy laws force them to make this promise. But it's part of the deal from the start.

So what if, after the deal is done and you're giving Visa your money, they tear up the contract and rewrite the terms in their favor? You're stuck paying a high price for something worth a lot less.

In law school, we call that "breach of contract." Most people call it welching on a deal, not meeting your end of the bargain, or just plain breaking your promise.

It turns out that all the Hill debate about bankruptcy as promise-breaking wasn't far off. They just fingered the wrong suspect. Debtors weren't the ones breaking their promises. Debt forgiveness was part of the deal from the get-go.

The real promise-breakers were creditors, whose welching (leaving a hundred million families stuck paying the old, high prices for new, harsh terms) is now known as the Bankruptcy Bill of 2005.

This “No New Taxes” routine (with a little “No Old Taxes, Either” tacked on) has one glaring exception: A big tax increase on folks who are broke. The Bankruptcy Bill President Bush signed into law last week raised the fees on every family that files from $155 to $200.

What, you thought no one below median income would suffer? The new taxes, like almost every other provision in the bill, apply to everyone—no matter how low their income.

The (public) reason was to pay for 28 new judgeships created by the bill, but the numbers are a little off. The government estimates the five-year cost of the new judges at $25 million, but the government puts the five-year net revenues (from the fee increase alone) at about $150 million.

So will the fee be lowered? Of course not. That money will go where taxes usually go -- straight to the general revenue coffers – fresh from the hides of people in desperate financial trouble.

Congress has kicked these families when they are down by passing a harsh new bankruptcy bill, and then kicked them again with a tax to fatten general revenues. Get sick? Lose your job? Trying to save your house? Boy, have we got a tax for you.

That means each American family spends almost $300 on surprise fees every year, on average. Many pay nothing, of course, but that also means that millions pay even more.

"Protection" fees (super short-term loans to cover checks before they bounce) are some of the biggest and the worst. Banks let you choose at the time if you want to pay $1 and use another bank's ATM. But the bank never told college student Chris Keeley that his $230 worth of Christmas presents would cost him $447.

That's because the $217 in (unrequested) "overdraft protection" never showed up on his receipt -- until the bill appeared right after Christmas. Only after the gifts were unwrapped did Chris's bank let him know he had accidentally taken out a "loan" at 1130% annual interest.

Banks used to profit when they lent responsibly and kept deposits safe. Now they profit by springing fees on depositors that put their savings at risk.

Some people will say, Chris should have read the fine print. Sure. (I'm a lawyer-to-be, what else can I say?) But his real mistake was much bigger. He trusted his bank, assuming they wouldn’t gouge him the minute they got the chance. Nowadays, that’s a high-cost assumption.

As Robert Reich points out in American Prospect, there’s a double standard in bankruptcy law. While the recent bankruptcy bill makes it harder for regular citizens to declare bankruptcy, corporate bankruptcy law continues to allow large businesses to operate while sloughing off their obligations to employees and shareholders.

Corporations can declare bankruptcy and gain protection from creditors whether the underlying reason was a genuine catastrophe or sheer mismanagement. Under the new law, even consumers who face crushing debts because of genuine uncontrollable catastrophe (like a medical emergency) are denied the benefits of brankruptcy.

In the first quarter of this year, consumer spending represented 71% of TOTAL US economic output (GDP). Individual citizens drive the US economy, and what’s good for consumers IS good for America. Citizens who face severe financial constraints because they have a medical catastrophe should have at least the same breathing room offered to corporations.

Individual citizens should be entitled to the same protections as large corporations.

James Weingarten is a new member of the team and fellow law student. A formal introduction to the newest members of our blog team is forthcoming. -MN

Once upon a time, when both morals and money were harder, bankruptcy was bad. Wastrels used to be bailed out by their better-off relations in order to save the family name from the stigma. But in these days of looking-glass economics, bankruptcy is growing more and more fashionable as a way to settle one's debts and land some more credit.

The story, "Making Bankruptcy Pay," appeared on February 22. The year: 1963.

Bankruptcy opponents have been recycling this "once upon a time" line for the past 42 years (and then some). But it looks like our morals still had a long way to fall since '63. Check out law professor Todd Zywicki's Congressional testimony in February of 2005:

Regrettably, the personal shame and social stigma that once restrained opportunistic bankruptcy filings has declined substantially in recent years.

They can't both be right, can they? Maybe values repeatedly drop, then sermons like Time's and Todd's repeatedly restore them. That would mean morals were in a tail spin through the '50s, and hit rock bottom by early '63 -- just ahead of the Beatles' socially corrosive hit "I Want To Hold Your Hand."

Or maybe morals have been in decline since the stone age. Consider this Congressional testimony:

Dishonest people make it a practice to go into debt to these merchants for the necessaries of life and then seek the bankruptcy courts to get relief from the payment of such debts. We ought to go back to the old-fashioned primitive doctrine that requires the payment of all honest debts. . . . Let us go back to honest and fundamental principles.

Yes, as this 1910 Congressman nicely observed, recent moral downturns must be to blame for all these opportunistic bankruptcies. We would all be better off if we returned to a primitive age of honest and fundamental principles.

Now, if you'll excuse me, I have to finish my hunting and gathering.

[thanks to David A. Moss, Gibbs A. Johnson, The Rise of Consumer Bankruptcy: Evolution, Revolution, or Both?]

Jon Lackow is a new member of the team and fellow law student. A formal introduction to the newest members of our blog team is forthcoming. -MN

Under the new law, Americans who have the ability to pay will be required to pay back at least a portion of their debts. Those who fall behind their state's median income will not be required to pay back their debts.

The President's comment is simply not true. Let me count just some of the ways:

1) Under current law, everyone pays back taxes, child support, alimony and student loans, and if they want to keep the house or the car, they have to pay those loans too. This bill expands the list of non-dischargeable debts for EVERYONE, regardless of income, and it expands the amounts that they have to pay for cars and other assets. To say that people leave bankruptcy and "don't have to pay back their debts" is just plain wrong.

2) The means test will require EVERYONE who files bankruptcy--regardless of income--to file new forms, detailed budgets, tax returns and new affidavits. If the person cannot afford the higher lawyers' fees to manage this new work or if the person trips over one of the requirements, then she is tossed out of bankruptcy--regardless of whether she is above or below median income. In some places, the means test bites above-median and below-median debtors differently, but it bites everyone.

3) The dozens and dozens of other provisions in the bill that are aimed at consumers have no income test. They apply to everyone, regardless of income.

4) The millionaires’ loopholes remain open. To say that those with above-median income will pay something is true only for the common folk. The millionaires can still slide through.

This bill has always suffered from a truth-in-advertising problem. The proponents say the bill does one thing, while the reality is very different. Evidently that problem persists even as the President describes what he is signing.

What's the correct answer? Neither. The poll is predicated on the hackneyed premise that the average American bankruptcy filer is a spendthrift whose unchecked pursuit of luxury goods is the root cause of her bankruptcy. If that were true, bankruptcy reform would be easy. But it isn’t true. The research has been overwhelming. About 90% of those who file for bankruptcy do so after a job loss, a serious medical problem or a family break up. How about a poll on that?

• “Will the new bankruptcy laws help Americans keep their jobs?”
• “Will a change in bankruptcy law cause more people to stay away from the emergency room when they feel chest pains?”
• “Will the new bankruptcy laws cause more husbands and wives to stay together - or, better yet, cause fewer spouses to die?”

Part of the reason the fight against this bill has been an uphill battle is the widespread but false presumption that Americans go bankrupt because they purchase bigger televisions, bigger cars and bigger homes. Even though that assertion bears no relationship to the empirical evidence, the bill’s proponents asserted it as if it were unquestioned truth - and some of the media parroted the view, no questions asked (see the poll).

Whether you identify as a progressive, a moderate or a (compassionate?) conservative, it’s important to get the facts right. The fact is that for every hypothetical spendthrift or abuser the new law reigns in, it will adversely impact scores of real, hard-working, middle class folks who are down on their luck and desperate to get on with their lives.

I should be depressed, but I’m not.

Eight years ago the proponents said it was a speeding train that could not be stopped. It was written by a lobbyist and shopped to a friendly Congressman. The financial services industry was giving big money, and there was no one in the way to stop it. We slowed it down. In the meantime, more than 12 million families got some relief when they were overwhelmed with debts following job losses, illnesses, or family break ups. With all the money on just one side in the debate, that’s pretty amazing. Even now, the bill that came from the Senate to the House had a few small adjustments that will help keep the door open for more families in desperate trouble. Not bad.

But the part that makes me feel better is that this time around we finally got the message out. Even after the horse race was over and it was clear the bill would pass, the press continued to write about the bankruptcy bill—and the stories weren’t pretty. The politicians who thought this would be a free vote discovered they were wrong. The middle class is beginning to rumble, and those rumbles will change things.

I’m also glad to see the old conservative-liberal dichotomy break down over bankruptcy. Both conservative and liberal bloggers exposed the rotten foundations of this bill, particularly the imperfect credit markets and the influence of money on politics. Could alliances shift over economic issues aimed at middle class families?

Finally, it ain’t over. The rumors are already all over Washington that a “technical amendments” bill will be passed during the 180 days before the bankruptcy law becomes effective. Several new stand-alone bankruptcy amendments are already in the hopper in the Senate and House, including a bill to sew up the millionaires’ loophole and a bill to stop corporate forum shopping in bankruptcy.

And it ain’t over in a bigger sense either. The point of this whole conversation is that bankruptcy isn’t an isolated issue. Bankruptcy is about job losses and health care finance; it is about credit card practices and predatory lending. Bankruptcy is just one way to measure the financial health of the middle class.

Josh has asked us to hang around, and particularly to continue talking about the shifting economic scene for the middle class. We think maybe there will be something to blog about even after the President has signed the bill.