CHAPTER 15
Consumer Protection
Chapter Goals
The consumer protection materials can be approached in a straightforward fashion. The many cases and
readings should provide ample material for discussion. The authors’ have made no attempt here at an
in-depth treatment of any of the topics. An overview of the rather arcane law of truth in lending,
bankruptcy, etc., should meet most students’ general needs. Chapter 15 is essentially a compendium of
many related, but not fully integrated topics. As a result, the instructor may wish to tie the chapter together
more closely and give it a bit of narrative theme by raising with the students the larger philosophical and
economic issues of the wisdom of government intervention to protect consumers against both willful
wrongs and the misfortunes of the market.
Chapter Learning Objectives
After completing this chapter, students will be able to:
1. Identify some consumer protections offered under common law.
2. Describe “lemon laws” as an example of state consumer regulation.
3. Explain the purpose, roles, and power of the federal consumer protection agencies including the
Consumer Financial Protection Bureau (CFPB), the Federal Trade Commission (FTC), the
Consumer Product Safety Commission (CPSC), and the Food and Drug Administration (FDA).
4. Identify the circumstances in which the Truth in Lending Act (TILA) applies to a consumer loan.
5. Identify protections offered under the Fair Credit Reporting Act (FCRA).
6. Describe the protections offered by the Fair Credit Billing Act (FCBA).
7. Recognize the purpose of the Electronic Fund Transfer Act (EFT).
8. Explain the purpose of the Equal Credit Opportunity Act (ECOA).
9. Identify debt collection practices forbidden by the Fair Debt Collection Practices Act (FDCPA).
10. Explain the purpose and effect of filing a Chapter 7 liquidation or “straight” bankruptcy.
Chapter Outline
I. Introduction
Doubtless the government and lawsuits should not always protect us from our own foolishness, but costly
consumer fraud and other forms of consumer abuse (invasion of privacy, dangerous products, identity
theft, false advertising, and so on) are not unusual in people’s consumption-driven lives. Historically,
people relied on the market to address those problems; but in recent decades legislatures, courts, and
administrative agencies have developed laws and rulings to protect them where the market arguably has
failed.
Part One—Law Consumer Protection
A. Fraud and Innocent Misrepresentation
If the market is to operate efficiently, the buyer must be able to rely on the truth of the seller’s product
claims. A victim of fraud is entitled to rescind the contract in question and to seek damages, including,
in cases of malice, a punitive recovery. Although fraud arises in countless situations and is difficult to
define, the legal community has generally adopted the following elements, each of which must be
proved:
Misrepresentation of a material fact
The misrepresentation was intentional
The injured party justifiably relied on the misrepresentation
Injuries resulted
In identifying a fraudulent expression, the law distinguishes between statements of objective, verifiable
facts and simple expressions of opinion. The latter ordinarily are not fraudulent even if erroneous.
Thus normal sales puffing is fully lawful, and consumers are expected to exercise good judgment in
responding to such claims. Fraud can involve false conduct as well as false expressions. A variation
on the general theme of fraud is innocent misrepresentation, which differs from fraud only in that the
falsehood was unintentional. The wrongdoer believed the statement or conduct in question to be true,
but he or she was mistaken.
Practicing Ethics: Watery Beer?
Several class-action lawsuits were filed against Anheuser-Busch (AB) in 2013 claiming the brewing
giant had intentionally watered down some of its beer products during the brewing process.
Did Apple Deceive Laptop Buyers
Vitt, an Apple iBook G4 laptop purchaser, sued Apple, claiming that advertising words including
“mobile,” “durable,” “rugged,” “reliable,” and “high value” allegedly constituted a misrepresentation of
the durability, portability, and quality of the laptop. Vitt’s laptop failed soon after the expiration of its
one-year warranty. Vitt argued that it should be expected to last for “at least a couple of years.”
Legal Briefcase: Tietsworth v. Harley-Davidson 677 N.W.2d 233 (Wis. S.Ct. 2004)
B. Unconscionable Contracts
The doctrine of unconscionability emerged from court decisions where jurists concluded that some
contracts are so unfair or oppressive as to demand intervention. Unconscionability can take either or
both of two forms:
Procedural unconscionability is where the bargaining power of the parties was so unequal that
the agreement was not freely entered.
Substantive unconscionability is where a contract in question was so manifestly one-sided,
oppressive, or unfair as to “shock the conscience of the court.”
Part II—The Consumer and Government Regulation of Business
I. State Laws
States have enacted comprehensive consumer protection statues. States also have specific statutes
addressing such problems as door-to-door sales, debtor protection, and telemarketing fraud.
Payday Loans
When Jeffrey Smith of Phoenix needed money quickly to pay a medical bill, he took out a string of payday
loans (short-term, high-interest loans to be paid back with the borrower’s next pay check) and fell into a
downward spiral that found him calling in sick to work to give himself time to drive all over the city taking
out new loans to cover those coming due. The result was bankruptcy along with thoughts of suicide by his
despondent wife. Annual interest rates on those loans were as high as 459 percent.
Lemon Laws
New car purchases are covered by warranty laws; in addition, all 50 states have some form
of law designed to provide recourse for consumers whose new vehicles turn out to be defective
such that they cannot be repaired after a reasonable effort. Lemon laws differ significantly from
state to state, but they often cover new cars for one to two years or up to 24,000 miles after
purchase.
Legal Briefcase: Paul Sipe v. Workhorse Custom Chassis, 572 F.3d 525 (8th Cir. 2009)
II. Federal Laws and Consumer Protection Agencies
Much of the federal government’s authority to protect consumers rests with some powerful agencies
including a new one approved in 2010 when Congress and President Obama concluded that our financial
markets had failed in some important respects.
A. Consumer Financial Protection Bureau
Congress and President Obama approved the creation of the Consumer Financial Protection Bureau
(CFPB) as a direct response to the financial calamity of recent years. The new agency, authorized by
the 2010 Dodd–Frank Wall Street Reform and Consumer Protection Act, is charged with writing and
enforcing rules covering consumer financial products and services including mortgages, credit cards,
payday loans, loan servicing, check cashing, debt collection, and others. Another important element of
the Bureau’s charge is to provide financial education, thereby promoting Americans’ financial literacy.
B. The Federal Trade Commission (FTC)
The FTC was created in 1914 to prevent “unfair methods of competition and unfair or deceptive acts or
practices in and affecting commerce.” The FTC operates as a miniature government with powerful
quasi-legislative (rule-making) and quasi-judicial (adjudication) roles.
Rule Making
The FTC’s primary legislative direction is in to issuing trade regulation rules to enforce the intent of
broadly drawn congressional legislation. That is, the rules specify particular acts or practices that
the commission deems deceptive. The FTC’s quasi-legislative (rule-making) power is extensive.
The Federal Trade Commission’s Do Not Call Registry forbids telemarketers, with certain
exceptions, from placing calls to the more than 200 million Americans who have added their phone
numbers to the Federal Trade Commission’s list. The rules, among other things, require those
offering endorsements on new media sites (blogs, Twitter, Facebook, etc.) to disclose any
connection they have (including in most cases, receiving cash or gifts) in exchange for their
testimonials.
Adjudication
The FTC may investigate suspect trade practices. At that point the FTC may drop the proceeding,
settle the matter, or issue a formal complaint. Where a formal complaint is issued, the matter
proceeds essentially as a trial conducted before an administrative law judge. The FTC has no
authority to impose criminal sanctions.
C. Federal Trade Commission—Fraud and Deception
Unfair and deceptive practices, including those in advertising, are forbidden under section 5 of the
Federal Trade Commission Act. The FTC test for deception requires that the claim is (1) false or likely
to mislead the reasonable consumer and (2) material to the consumer’s decision making. Deception
can take many forms, for example, testimonials by celebrities who either does not use the product or
does not have meaningful expertise. Product quality claims are an area of particular dispute.
Quality Claims
Under the FTC’s ad substantiation program, advertisers are engaging in unfair and deceptive
practices if they make product claims without some reasonable foundation for those claims.
Skechers, for example, agreed to pay $50 million in 2012 to settle FTC and state charges that it
misled the public by making unsupported claims that its toning sneakers allow buyers to, among
other things, “Shape Up While You Walk” and “Get in Shape without Setting Foot in a Gym.”
According to the FTC, a Skechers’ ad said that its fitness claims were backed by a chiropractor
study. An FTC survey found that nearly 11 percent of American adults were victims of fraud in 2011.
Weight-loss products and prize promotions were the most common types of fraudulent products.
D. Federal Trade Commission—Consumer Privacy
According to the federal Justice Department, credit card data theft grew 50 percent from 2005 to 2010.
Millions of stolen card numbers are for sale at a price of perhaps $10 to $50 each, and a no-limit
American Express card issued to a consumer with a high credit rating might sell for hundreds of
dollars. A 2013 federal government study found that 1 in 14 Americans age 16 and older were either
targets of identity theft or actually experienced identity theft. The resulting financial losses for 2012
totaled nearly $25 billion.
Privacy Law
The Federal Trade Commission’s authority to stop unfair methods of competition along with unfair
and deceptive acts and practices gives the agency considerable power in policing consumer
privacy breaches. The FTC also enforces the privacy provisions in a number of other federal laws,
including those addressing the use of consumer credit reports, children’s online privacy, identity
theft, personal health information, personal financial information, and others.
E. The Consumer Product Safety Commission (CPSC)
The Consumer Product Safety Commission (CPSC) is the federal agency charged with protecting
against “unreasonable risks of injury and death” from consumer products. Congress and President
Obama in 2011 the Consumer Product Safety Improvement Act in situations where risk to human
health does not exist.
Cribs
After more than 30 infant and toddler deaths and millions of recalls in the past decade, the CPSC
unanimously voted to ban, effective June 28, 2011, the manufacture, sale, and resale (including
yard sales) of the traditional drop-side baby crib that has cradled millions. The new standard
requires fixed sides.
Reducing Risk
The CPSC, created in 1972, is responsible for reducing risks in using consumer products such as
toys, lawn mowers, washing machines, bicycles, fireworks, pools, portable heaters, and household
chemicals. The CPSC promulgates mandatory consumer product safety, performance, and labeling
standards.
To enforce its policies and decisions, the CPSC holds both compliance and enforcement powers.
Manufacturers must certify before distribution that products meet federal safety standards.
Manufacturing sites may be inspected, and specific product safety testing procedures can be
mandated. Businesses other than retailers are required to keep product safety records.
Where voluntary negotiations fail, the commission may proceed with an adjudicative hearing before
an administrative law judge or members of the commission. That decision may be appealed to the
full commission and thereafter to the federal court of appeals.
F. The Food and Drug Administration
Tobacco
The Food and Drug Administration announced in 2013 that it had begun exercising its authority
over tobacco; power conferred by Congress and President Obama in 2009. For the first time, the
FDA can keep tobacco products off the market if they pose public health risks beyond comparable
products already on the market. Prior to the 2009 legislation, the FDA could not regulate tobacco, a
process that was left to the limited authority of the states.
Drug Safety
The FDA monitors much of America’s health landscape with responsibility for assuring the safety,
effectiveness, and security of food, drugs (prescription and over-the-counter), medical devices,
cosmetics, tobacco products, and more. Perhaps the biggest FDA duty is to decide when drugs
should be approved for marketing. Companies must subject a new drug to laboratory, animal, and
eventually human testing before the FDA will consider approval.
Food Safety
In 2013, the FDA has announced a preliminary determination that artificial trans fats are not safe in
foods. In recent years, food safety has climbed the list of FDA worries following a series of massive
food poisoning scares. The 2011 Food Safety and Modernization Act gave the FDA greatly
expanded food safety power. With about one in six Americans suffering from eating contaminated
food each year, the FDA has proposed new rules to implement the 2011 Act.
Trust the Market or Strengthen the FDA?
The FDA is one of the most criticized divisions of the federal government. The drug approval
process has been the subject of particularly fierce criticism. New drug approvals (39) in 2012
reached their highest level in 15 years despite tightened safety standards following several drug
scandals—Vioxx in particular.
Plan B
At this writing in 2013, the FDA is considering several new consumer rules including protection for
children and adolescents from added caffeine in products such as Cracker Jack and a warning
against tanning bed use for those under 18. The most controversial decision, however, has to do
with the morning-after birth control pill, popularly known as Plan B. In early 2013, a federal judge
ordered the FDA to make Plan B available without prescription to girls and women of all ages.
Part III—Debtor/Creditor Law
I. Credit Regulations
A. Dodd-Frank Wall Street Reform and Consumer Protection Act
In addition to creating the Consumer Finance Protection Bureau (CFPB), the 2010 Dodd-Frank bill
provides increased legislative oversight of the nation’s financial processes. Broadly, the bill’s consumer
protection provisions move away from the old system that mandated disclosure to consumers of
critical financial information (e.g., interest rates) to a more prescriptive regime that requires lenders to
affirmatively protect borrowers.
B. Truth in Lending Act (TILA)
Consumers often do not understand the full cost of buying on credit. The TILA is designed primarily to
assure full disclosure of credit terms. Having been designed for consumer protection, the TILA does
not cover all loans. The following standards determine the TILA’s applicability:
The debtor must be a “natural person” rather than an organization.
The creditor must be regularly engaged in extending credit and must be the person to whom the
debt is initially payable.
The purpose of the credit must be “primarily for personal, family or household purposes” not
exceeding $25,000, but “consumer real property transactions” are covered by the act.
The credit must be subject to finance a charge or payable in more than four installments.
The TILA and Regulation Z interpreting the act were designed both to protect consumers from credit
abuse and to assist them in becoming more informed about credit terms and costs so they could
engage in comparison shopping. The heart of the act is the required conspicuous disclosure of the
amount financed, the finance charge (the actual dollar sum to be paid for credit), the annual
percentage rate (APR—the total cost of the credit expressed at an annual rate), and the number of
payments. The TILA covers consumer loans generally, including credit cards and auto purchases. TILA
amendments in the Dodd-Frank bill give extensive, new attention to residential mortgages, a
recognition of the ongoing subprime mortgage crisis and its destructive impact on the entire American
economy.
Legal Briefcase: Barrer v. Chase Bank USA 566 F.3d 883 (9th Cir. 2009)
C. Credit and Charge Cards
College students are burying themselves in debt. As of 2013, student loan debt (about $1 trillion)
exceeded the total amount owed by all Americans on their credit cards. Student credit card use, on the
other hand, declined to 35 percent in 2012 from 42 percent in 2010. That decline apparently was
partially attributable to the 2009 federal Credit Card Accountability, Responsibility and Disclosure Act
(CARD Act). Among other things, CARD forbids lenders from issuing credit cards to those under age
21 without a parent as cosigner or without proof the applicant can make payments. While federal rules
have significantly curbed campus credit card marketing, about 900 colleges maintain card partnerships
with banks, and other commercial relationships are common.
TILA Protections
The TILA provides that credit cards cannot be issued to a customer unless requested. Cardholder
liability for unauthorized use (lost or stolen) cannot exceed $50, and the cardholder bears no
liability after notifying the issuer of missing card.
CARD
The aforementioned CARD Act of 2009 provides extensive additional protection for credit card
holders. Some of the key provisions:
Credit card companies are barred from increasing the annual percentage rate on existing
account balances except when the cardholder’s minimum payment is 60 days overdue.
Issuers cannot charge interest on bills paid on time.
Without specific agreement by the consumer, banks cannot accept charges where doing so
puts creditors over their limits.
Interest rates, with some exceptions, cannot be raised in the first year.
Beyond the CARD Act, other recent federal credit card rule changes have provided additional
consumer shelter. Those rules cap fees for late payments, banish penalties for inactive accounts,
and allow merchants to set a $10 minimum for credit card purchases.
Success?
Skepticism is often the response to new rules, but the early evidence suggests that the federal
government’s credit card measures have been good for consumers. A 2011 Pew study found that
penalty fees have dropped, overlimit fees (for charges beyond the credit limit) are now rare, and
annual fees have not proliferated as some critics expected.
A Win for Consumers
Debit card interchange fees (the charges paid by merchants to banks for providing debit processing
services) had reached an average of 44¢ per transaction prior to the passage of the 2010
Dodd–Frank Act. By contrast, the median variable cost of each transaction was estimated at 7¢.
Following a battle by armies of lobbyists, Congress approved new rules allowing the Federal
Reserve (The Fed) to cap the interchange fees. The Fed in 2011 settled on a maximum charge of
21¢ per transaction with some additional small fees and a cap exemption for smaller banks.
Following six months of transactions under the new rules, the Fed found that banks subject to the
cap saw a 45 percent drop in their average fees—down to 24¢—whereas fees at smaller banks
with an exemption stayed steady at about 43¢.
Credit Cards Good for the World?
By 2025 or so, Chinese residents are expected to expand their credit card holdings from 331 million
at the end of 2012 million to 1.1 billion and thereby pass the United States (536 million cards) as
the world’s biggest credit card market by number of cards. Credit cards are becoming a
commonplace shopping tool in the developing world. As a result, those consumers are joining
Americans and other Westerners in struggling to repay their credit card debt.
D. Consumer Credit Reports
A favorable credit rating is a vital feature of consumer life, and having reliable credit information is
essential to efficient business practice. Thus, the three national credit information giants, Equifax,
Experian, and TransUnion, as well as local credit bureaus, provide retailers, employers, insurance
companies, and others with consumers’ detailed credit histories. From those credit histories, a credit
score is computed and sold to lenders. The federal Fair Credit Reporting Act (FCRA) affords
consumers the following credit reporting protections, among others:
Anyone using information from a credit reporting to take “adverse action” against one must
notify one and one where it secured the information.
At one’s request, a CRA must give one the information in one’s file and a list of all those who
have recently sought information about one.
If one claims that one’s credit file contains inaccurate information, the CRA must investigate that
complaint and give a written report.
All inaccurate information must be corrected or removed from the file, usually within 30 days.
The FCRA provides useful consumer protection, but serious weaknesses remain. The Federal Trade
Commission released a 2013 study showing that 20 percent of consumers have a material error on at
least one of their credit reports.
E. Fair Credit Billing Act
The Fair Credit Billing Act (FCBA) provides a mechanism to deal with billing errors that accompany
credit card and certain other “open-end” credit transactions. A cardholder who receives an erroneous
bill must complain in writing to the creditor within 60 days of the time the bill was mailed. The creditor
must acknowledge receipt of the complaint within 30 days. Then, within two billing cycles but not more
than 90 days, the creditor must issue a response either by correcting the account or by forwarding a
written statement to the consumer explaining why the bill is accurate.
II. Electronic Fund Transfers
The Electronic Funds Transfer Act (EFTA) provides remedies for the lost or stolen cards, billing errors,
and other such problems involving ATMs, point-of-sale machines, electronic deposits, and the like. The
Dodd–Frank Act amended the EFT to impose limits on debit card interchange fees.
III. Equal Credit Opportunity
The Equal Credit Opportunity Act is designed to combat bias in lending. Credit must be extended to all
creditworthy applicants regardless of sex, marital status, age, race, color, religion, national origin, good
faith exercise of rights under the Consumer Credit Protection Act, and receipt of public assistance (like
food stamps). It was primarily a response to anger over differing treatment of women and men in the
financial marketplace.
Legal Briefcase: Lucas Rosa v. Park West Bank & Trust Co. 214 F.3d 213 (1st Cir. 2000)
Practicing Ethics: Government-Mandated Diversity?
The 2010 Dodd–Frank Act includes a provision creating Offices of Minority and Women Inclusion at
various government agencies (Treasury Department, Securities and Exchange Commission, the
Consumer Financial Protection Bureau, and so on) charged with regulating the banking industry. Those
offices are monitoring racial and gender diversity at the government agencies themselves as well as
private law firms, accounting firms, investment banks, and others contracting and subcontracting with the
agencies.
IV. Debtor Protection
Wages can be garnished. Debts pile up on one another. Then the debt collection process continues the
nightmare. Furthermore, collectors reportedly call at all hours of the night, spewing obscenities, contacting
family members or employers and falsely threatening property seizures or imprisonment. Perhaps not
surprisingly, the big banks—so broadly criticized for their roles in the financial meltdown—are likewise
accused of involvement in unlawful debt-collection practices.
Debt Collection Law
The federal Fair Debt Collection Practices Act (FDPCA) is designed to shield debtors from unfair
debt collection tactics by debt collection agencies and attorneys who routinely operate as debt
collectors. FDCPA does not extend to creditors who are themselves trying to recover money owed
to them. The FDCPA protects consumers by forbidding, among others, the following
practices:
Use of obscene language.
Contact with third parties for purposes other than locating the debtor.
Use of or threats to use physical force.
The Federal Trade Commission and the Consumer Financial Protection Bureau jointly enforce the
FDCPA. The CFPB also has supervisory authority over the largest debt collectors—about 175
firms. Under that authority, the CFPB provides a consumer complaint–dispute resolution process
and determines whether debt collectors have harassed or deceived consumers along with assuring
that debt collectors provide accurate information and fully disclose who they are and how much the
consumer owes.
Legal Briefcase: Williams v. OSI Educational Services 505 F.3d 675 (7th Cir. 2007)
Forcelosure Fraud?
The mortgage industry, already buried in bad loans and worse publicity, faced another scandal in
2010 when the news emerged that some or perhaps many banks and individuals had not followed
proper legal procedures in pursuing foreclosure orders against borrowers (commonly, the situation
in which a homeowner fails to make mortgage payments and loses the home). Broadly, the scandal
involved allegations that lenders bent rules to speed up the foreclosure process. Sloppy record
keeping and outright errors apparently were routine. In a process now called “robo-signing,” bank
employees sometimes signed thousands of foreclosure affidavits in a single day, clearly never
carefully examining them as expected.
Part IV—Bankruptcy
Fresh Start?
Bankruptcy law was specifically designed to provide a fresh start for those whose financial
problems were insurmountable. As bankruptcy filings skyrocketed, however, we downsized the
fresh start by reforming federal bankruptcy law in 2005 to force more bankrupt parties to repay their
creditors. Following the reform, bankruptcies did fall somewhat in 2006 to 618,000, then rose to a
recession-era high of 1.6 million in 2010 before falling back in 2012 to about 1.2 million.
A. Bankruptcy Rules
Bankruptcy in the United States is governed exclusively by federal law; the states do not have the
constitutional authority to enact bankruptcy legislation, but they do set their own rules within the limits
provided by Congress. Three forms of bankruptcy action are important to:
Liquidation (Chapter 7 of the Bankruptcy Act), is used by both individuals and
businesses.
Reorganization (Chapter 11), used by both individuals and businesses, keeps creditors
from the debtor’s assets while the debtor, under the supervision of the court, works out a
financial reorganization plan and continues to pay creditors.
Adjustment of debts of an individual with regular income (Chapter 13), in which individuals
with limited debts are protected from creditors while paying their debts in installments.
Liquidation
A Chapter 7 liquidation petition can be voluntarily filed in federal court by the debtor, or creditors
can seek an involuntary bankruptcy judgment. A Chapter 7 liquidation is commonly called a
“straight” bankruptcy. In a voluntary action, the debtor files a petition with the appropriate federal
court. The court then has jurisdiction to proceed with the liquidation, and the petition becomes the
order for relief. The debtor need not be insolvent to seek bankruptcy.
After the order for relief, voluntary and involuntary actions proceed in a similar manner. Creditors
are restrained from reaching the debtor’s assets. An interim bankruptcy trustee is appointed by the
court. The creditors then hold a meeting, and a permanent trustee is elected. The trustee collects
the property, converts the property into money, protects the interests of the debtor and creditors,
may manage the debtor’s business and ultimately distributes the estate proceeds to the creditors.
The debtor’s nonexempt property is then divided among the creditors according to the priorities
prescribed by statute.
Reorganization
Under Chapter 11, the debtor may voluntarily seek reorganization, or the creditors may petition for
an involuntary action. When a reorganization petition is filed with the court and relief is ordered, one
or more committees of creditors are appointed to participate in bankruptcy procedures. Typically in
the case of a business, the debtor continues operations, although the court may appoint a trustee
to replace the debtor if required because of dishonesty, fraud, or extreme mismanagement.
GM Bankruptcy/Bailout
General Motors, in 2009, was forced to enter Chapter 11 bankruptcy as part of a federal
government-directed, prepackaged bailout of the failing firm. GM had gone from being one of the
most prominent corporations in the world to a sprawling, dysfunctional failure. GM reported $82.29
billion in assets and $172.81 billion in debts. The federal government put $49.5 billion into the
bailout and took a 60 percent equity stake in the new General Motors, although the company
retained control of its day-to-day affairs.
Adjustment of Debts
Chapter 13 allows, individuals can seek the protection of the court. Chapter 13 permits only
voluntary bankruptcies and is restricted to those with steady incomes and somewhat limited debts.
Creditors are restrained from reaching the debtor’s assets. If creditors’ interests are sufficiently
satisfied by the plan, the court may confirm it and appoint a trustee to oversee the plan. The debtor
may then have three to five years to make the necessary payments.
Bankruptcy Critique
In an effort to benefit all by reducing unjustified and sometimes fraudulent bankruptcy filings, the
federal Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 has forced many
debtors to seek bankruptcy through the challenging Chapter 13 process rather than the more
forgiving Chapter 7. During the recession, homeowners behind on their house payments often
found mortgage foreclosure more attractive than bankruptcy. Thus, many borrowers simply walked
away from their “underwater” homes, leaving lenders with mountains of troubled properties.
Practicing Ethics: Bankruptcy—Who Is to Blame?
Commenting on the 2005 bankruptcy reform law, Todd Zywicki, a George Mason University law professor,
said, “This is a matter of morality and personal responsibility.” Consumer advocates, on the other hand,
say the bankruptcy problem lies with the “enablers”—the credit card companies and mortgage lenders
who encourage deeper and deeper indebtedness. Consumer advocates argue the bankruptcy problem
lies with the “enablers”—credit card companies who encourage deeper and deeper debt.