Forest Hills bankruptcy attorney Kevin Ribakove said it’s nearly the same story every time.

“My clients are typically an individual or a couple who live month to month. Maybe they have $5,000 or $10,000 in savings,” he explained. “Over time they incur credit card debt, but they manage every month to pay off the minimum.

“Then there’s a layoff or a death in the family and all of a sudden they are in serious trouble. They take cash advances from one credit card to pay the other and then,” he paused, “they end up in my office.”

In the last 10 years, a sharp rise in credit card debt—over 50 percent by some estimates—has accompanied a rise in bankruptcy filings—a 125 percent increase. In the wake of such statistics, sweeping changes to the nation’s bankruptcy laws are set to take effect this fall. The new regulations will make it harder for American families to make a fresh start by declaring Chapter 7 bankruptcy and dissolving their debt.

Credit card companies—in addition to nearly all the major banking and real estate lobbies—have been pushing for new regulations like these for the past eight years. They argue that rising rates of bankruptcy filings and consumer debt necessitate stricter rules for paying back debt.

Consumer groups, on the other hand, have lambasted the legislation, calling it a giveaway to business interests at the expense of middle-class families, often hurt by job losses, divorce or medical crisis.

What Will The New Regulations Do?

The bill, dubbed, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, will force filers making more than the state median income—in the case of individuals in New York, about $40,000 a year—into Chapter 13 bankruptcy, which mandates repayment of some or all debts. Prior to this change, all filers could chose Chapter 7 bankruptcy, which wipes the financial slate clean.

The bill passed both houses of Congress early this year, and President George Bush signed it into law on April 20th. Its supporters, including the American Bankers Association, who have spent millions lobbying for its passage, say that frivolous spenders are taking advantage of the current generous bankruptcy system at the expense of honest consumers. The ABA estimates that unpaid debt due to bankruptcy claims is responsible for $400 in yearly costs passed on to each American household.

Queens Congressman Gregory Meeks of Jamaica, one of two Queens Democrats who voted for the legislation (the other is Congressman Joseph Crowley), agreed that the new income ceilings make the system fairer for everyone. Filing for Chapter 13, Meeks continued, is a more financially responsible choice since banks look more kindly upon those who have repaid at least some of their debts, as opposed to those in Chapter 7 who have not.

Is It Worth The Cost?

Many experts wonder if the new regulations aren’t akin to undergoing brain surgery for a headache. According to the nonpartisan research organization, the American Bankruptcy Institute, less than 3 percent of the million-plus people who file for bankruptcy per year do so fraudulently. “It’s a very small number,” said attorney and professor Jeff Morris, the institute’s resident scholar.

Ribakove said his experience confirms this. Of the 200 bankruptcy filings he prepares each year, he turns away maybe 10 or 15 because they are fraudulent. “It’s much less frequent than the banks would have Congress believe,” he said.

A recent study out of Harvard Law School found that half of all bankruptcy declarations are the result of medical costs—either a sudden illness or a chronic condition. The next two leading causes are job loss and divorce. Many of those propelled into financial desperation by medical problems have health insurance, but it was either not enough or the coverage lapsed, in an ironic twist, for medical reasons.

In one case cited by the study, a debtor underwent two surgeries, both covered by his insurance, but he was unable to return to his strenuous job due to his illness. He found a new job, but the employer’s insurance refused to cover him because of his preexisting condition.

Will It Stop Fraud?

Both consumer organizations and industry representatives agree that the vast majority of Chapter 7 filers fall below the means test—their state’s median income—and will not be forced into Chapter 13. “The system will remain sympathetic to individuals who, because of a divorce, job loss, serious illness or another life-altering event, have been forced into bankruptcy,” the ABA argued.

But other bankruptcy experts like Morris worry that while pushing a few filers into Chapter 13, the new legislation will make declaring bankruptcy too expensive and cumbersome for those with serious financial problems.

“A lot of people say it’s death by a thousand cuts,” he explained. Far greater amounts of paperwork will need to be filed in order to prove income and expenses, increasing lawyers’ fees. Fewer lawyers will want to take on pro bono work for poor clients. The law forces more assets to be shifted into the “non-dischargeable” category in both Chapters 7 and 13. And the credit-counseling requirement will cost money.

Ribakove, like other bankruptcy attorneys, is waiting to see how judges will interpret the new law when it takes effect, but doesn’t doubt that the entire process will be significantly more expensive. He wouldn’t be surprised if the law causes fewer people to file for bankruptcy altogether—perhaps a paper win for the banking industry, but a potential disaster for those who try to live under the financial radar in order to evade debt collectors.

Even in cases of fraud, some are dubious that the new regulations will stop those who are intent on fooling the system. “People who want to cheat love rules,” Morris said. It gives them an exact framework with which to manipulate the system. In addition, loopholes in the form of asset protection trusts available in five states could shield the assets of wealthy people declaring bankruptcy.

Is There A Credit Card Connection?

Experts and industry insiders differ on how the rise of consumer debt and bankruptcy relate to one another. Consumer groups say the connection is clear: more revolving debt, at higher interest rates has many American families “living on the edge.” It takes just one financial mishap to leave them so far in debt that they must declare bankruptcy.

The ABA, on the other hand, says over-dependence on credit cards is “a symptom, and not the cause, of a dire financial situation.” They point to the Harvard study’s findings that medical crisis, divorce and job loss are the real causes. “During these tough times, credit cards are often the life raft that keeps people afloat.”

In a world with what the economists call symmetric information, it might be easier to blame consumers for taking on debt that they can’t handle. But industry deregulation that has accumulated steadily since 1978, has had the effect of making it nearly impossible for consumers to keep track of interest rates.

Before 1978, 37 states capped interest rates and credit card fees that could be charged to their residents. The 1978 court case, Marquette v. First Omaha Service Corporation, invalidated these laws. Creditors’ interest rates were now only regulated by the state in which the company was headquartered.

Naturally, banks flocked to states that had high caps on their interest rates, like South Dakota and Delaware, that welcome industry and the jobs they provided. More states followed suit, and state usury laws are now extinct or irrelevant.

In 1966, Smiley v. Citibank effectively did the same for late fees, which are now double what they were then. But more confounding for consumers is that interest rates, on the debt they already have, more than doubles after a payment is late. And this applies not only to payments to that credit card company, but other bills as well.

That is how a consumer who signs up for a 9.9 percent annual percentage rate card, ends up with a 25 or 35 percent APR card.

Harvard Law Professor Elizabeth Warren, who co-authored the study on the causes of bankruptcy, sees the way in which credit card companies changed interest rates as akin to a classic bait and switch operation.

“Nobody signs contracts to buy things that say, ‘I’m going to pay you $1,200 for the big-screen TV unless you decide, in another month or two months, that it should really be $3,600 or $4,200 or $4,800’,” Warren said on Frontline last September. “But that’s precisely how credit card contracts are written today…I don’t know any merchant in America who can change the price after you’ve bought the item except a credit card company.”

It is these consumers, those who are late on payments, and keep paying monthly minimums with upwards of 20 percent interest rates, who are the credit card industry’s favorite consumers. They are the reason credit card company profits have skyrocketed, even in the face of the rising number of bankruptcy filings.

Warren argues that looking at the recent changes in bankruptcy regulation that have filers paying back more or all of their accumulated credit card debt coupled with the industry’s less than honest business practices, exposes their only motivation, profit at all costs.

“The (credit card) companies want to reform the bankruptcy laws because it’s a way to further increase the profits. It’s a way to cut off the last exit door for middle-class families in financial trouble.”

Credit card companies passed on questions about their practices to the ABA. The organization’s spokesperson, Tracey Mills, said that the nature of the high-risk loan business makes this pricing structure effective. This way, higher risk people—those who pay bills late—pay more for their loans, and lower risk people do not.

How Did The New Law Pass?

Industry lobbyists have been working toward stricter rules for debt dissolution for the past eight years. In 2000, a bill was passed by both houses of Congress, but was not signed by President Clinton before his term ended, resulting in a pocket veto.

With so much controversy, how did the bill get through a Congress that is bitterly divided with bipartisan support? Some critics like Bertha Lewis, executive director of New York ACORN, say it’s all about the money, the lobbying and contributions from all manner of financial, real estate and business interests.

“They should be ashamed of themselves,” Lewis said of Crowley and Meeks who voted for the bill’s passage. She sees it as a clear victory for moneyed interests over the interests of individual voters.

Crowley, a member of the Financial Services Committee, was instrumental in getting Democrats to sign onto the legislation. According to “The Hill,” a nonpartisan weekly paper covering Congress, in April Crowley took “a page out of GOP K Street’s playbook,” by summoning Democratic lobbyists to his office and then dispatching them to visit other Democrats who might vote for the bill.

The bill passed with support from both sides of the aisle, although there was not a single Republican among the 150 Congressional dissenters. Senator Chuck Schumer and Representatives Gary Ackerman, Carolyn Maloney and Anthony Weiner voted against it. Senator Hillary Clinton abstained.

Crowley’s spokesperson, Jennifer Psaki, said charges he was acting in response to lobbying dollars from the finance industry were “absolutely false.”

“He’s supported bankruptcy reform for years,” Psaki said. “This isn’t something that he’s jumped on the bandwagon.” Crowley declined repeated interview requests, noting he’d like to move on to other issues.

According to the Center for Responsive Politics, the ABA contributed $10,000 to Crowley’s 2004 campaign. Steven Weiss, the center’s communications director, noted the entire finance industry, from the credit card industry to auto loan providers, were in support of this bill. “There was virtually no opposition from business interests.”

Both Crowley and Meeks flatly deny that contributions or lobbying efforts had an effect on their votes. But they both admitted that the bill was not perfect.

“It could be more horrible than it is,” Meeks said, noting that even the means testing was not in the original bill. “Under this administration and under this Congress, we must compromise and soften the blow.” Without such compromises his constituents would be utterly shut out from the process, he said.

Consumer groups are calling for Congress to regulate credit card practices, especially the way in which they change interest rates and disclose them. Meeks said he would be thrilled to work on such a bill, but with Republican majorities in both houses of Congress and in the White House, the passage of such a bill was impossible.

Such reform is not one of Crowley’s priorities.