SHABAZZ: Bankruptcy's road less traveled

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By Ak'bar Shabazz

OP-ED:

National rules for bankruptcy were overhauled by federal legislation in 2005. The new law means that bankruptcy is no longer a guaranteed path to a fresh start and relief from heavy financial burdens. To declare bankruptcy, one must now meet more rigorous standards to prove one's inability to deal with debt and wipe one's slate clean. There are even stricter guidelines covering confirmed victims of identity theft.

This reform was widely recognized as a victory for banks, credit card companies and even vehicle manufacturers (who often finance what they sell) because it guaranteed lenders a far greater return because debtors were forced to leap a series of judicial hurdles before any debt is forgiven. Proponents of this bankruptcy reform wanted to make "deadbeat" borrowers accountable for bad financial decisions.

Critics said the legislation lacked protections for consumers and failed to address the initial causes of a person's money crisis. They argue the legislation only benefited financial institutions.

Amendments to limit interest rates and the terms of risky payment plans were offered, but they never made it into the final bill, signed into law by President Bush. What a difference a few years makes.

Congress recently approved a $700 billion taxpayer bailout for some of our nation's most prominent lenders. They incurred substantial losses and needed additional capital to stay afloat. Taxpayers essentially bought their debt in an effort to restore confidence to the financial system.

Bailing them out was supported by President Bush, Treasury Secretary Henry Paulson, House Speaker Nancy Pelosi and Wall Street investors scrambling to prevent their economic ruin.

Average Americans are less than pleased with the bailout. That's because, in all the rush, companies are not yet being asked to abide by nearly the same degree of accountability as households seeking bankruptcy protection. It's ironic that those who offered risky loans are the ones now seeking relief, and who don't want similar strings attached to their own rescue.

While consumers are at fault for signing loans they could not afford, these institutions also deserve blame for issuing them. If the government acted consistently, these companies would face the prospect of going out of businesses.

There's lots of blame to go around. Government officials had to know this crisis was coming, but little was done to prepare for it. The banks could expect it, but still made the loans. Borrowers never seemed to read the fine print or acknowledge their growing debts.

Another injustice is that smarter banks that did not provide risky loans must now compete with those that made bad decisions but are now about to be subsidized by the federal government. Despite operational deficiencies and questionable decisions, their existence is now supported by taxpayer dollars.

Since these companies have essentially been nationalized, the federal government -- with the powers it is acquiring by getting a stake in these businesses in the bailout -- is set to micromanage employee compensation, shareholder dividends and defining acceptable company expenses. Hugo Chavez anyone?

In the long history of American business, many companies have failed. When companies didn't make smart business decisions, they usually ended up in front of a bankruptcy judge -- just like many individuals who cannot properly manage their finances.

Now, Federal Reserve Chairman Ben Bernanke believes some companies are simply "too large to fail" so apparently they won't be subjected to the same processes and procedures as everyone else.

Our Constitution entitles people to equal protection under the law. The spirit of this notion is spoiled when a well-connected company receives unprecedented benefits over competitors and households in similar situations.

Large companies fail all the time. Let them. Don't bail them out and try to nationalize them. If a company cannot manage its finances, it should be subjected to the same procedures it promotes for its consumers. What's good for the goose is good for the gander.

That's the essence of the free market, which current policies are destroying. Bankruptcy isn't easy, but take heart that, from the ashes of a failed company, something new and quite likely better will emerge.

Ak'Bar A. Shabazz is a member of the national advisory council for the Project 21 black leadership network and president of Shabazz Enterprises.