By Sarah Borchersen-Keto, CCH Washington Staff Writer

When Congress reformed federal bankruptcy laws in 2005, among the legislation's stated goals were to get debtors to pay back more of what they owed and to get credit card issuers to better educate card holders about the cost of credit.

So far, the jury is still out on the law's effectiveness, but initial returns aren't showing promise, based on two recent reports.

The primary impact of the 2005 Bankruptcy Reform Act appears to be more paperwork and higher expenses for cash-strapped consumers, according to a survey released October 4, 2006, by the National Association of Consumer Bankruptcy Attorneys (NACBA), a group that opposed the bankruptcy reform initiative.

More than two-thirds of those surveyed said that their bankruptcy filings were up in the third quarter of 2006, compared to the first half of the year. Almost three out of five bankruptcy attorneys now expect filings to reach their pre-reform levels by or before the law's second anniversary in 2007.

Henry Sommer, president of NACBA, noted that changes made to the bankruptcy law "were premised on the faulty assumption, promoted by the credit card industry, that there was massive abuse going on by thousands and thousands of people who could pay their debts." However, the means test of the new bill has revealed that virtually none of the people filing Chapter 7 cases are able to pay more, Sommer said.

"Bankruptcy is still very much available and still very much needed, even though consumers now have to pay more and go through more paperwork to get the required help," according to Sommer.

In a conference call with reporters, NACBA Officer Ike Shulman said that in practice the new changes have proven to be "a nearly total bust" in terms of what the proponents of the new law had forecast. He added that the only good news is that "the law is so flawed and has been interpreted in such a way that some of the dire consequences many of us feared fortunately have not come to pass."

The survey also showed that:

• Fewer than a third of bankruptcy attorneys are seeing an increase in forced Chapter 13 repayment filings
• More than three out of five bankruptcy attorneys report a jump in consumer inquiries about bankruptcy
• In the vast majority of cases, consumers are forced into bankruptcy by major and unforeseen expenses

Meanwhile, a year-long study by the Government Accountability Office (GAO) has found that the largest credit card issuers are failing to clearly disclose to customers key information about their cards, including facts about late payments and interest rates.

Disclosures from the largest issuers, according to the GAO, were often written well above the eighth-grade level, at which about half of U.S. adults read. "The disclosures buried important information in text, failed to group and label related material, and used small typefaces," the GAO said. It noted that interviews with cardholders showed that many failed to understand key information, such as what they would be charged for late payments and what actions would cause issuers to raise rates.

The GAO said the Federal Reserve has started to obtain consumer input on the issue, and its staff recognizes the challenge of designing disclosures that include all key information in a clear manner.

Other findings of the GAO report include:

• U.S. consumers now have about 690 million credit cards and the amount charged on them between 1980 and 2005 has grown from about $69 billion to over $1.8 trillion
• The average penalty in 2005 for a late payment was $34, a 115 percent increase from 1995. The highest late fee was $39 per occurrence
• Some fees are not disclosed at all in the materials provided to cardholders
• One-third of the credit card issuers studied by GAO use a billing method that charges interest on credit card debt already repaid by the consumer

Sen. Carl Levin (D-Mich.), ranking member of the Permanent Subcommittee on Investigations, who had requested the GAO report, said the study "shines a needed spotlight on excessive credit card fees, unfair interest rates, and inadequate disclosure practices that ought to be stopped."

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