WASHINGTON — In the eight years since they began pressing for the tough bankruptcy bill being debated in the Senate, America's big credit card companies have effectively inoculated themselves from many of the problems that sparked their call for the measure.
By charging customers different interest rates depending on how likely they are to repay their debts and by adding substantial fees for an array of items such as late payments and foreign currency transactions, the major card companies have managed to keep their profits rising steadily even as personal bankruptcies have soared, industry figures show.
As a result, while they continue to press for legislation that would make it harder for individuals to declare bankruptcy, the companies have found ways to make money even on cardholders who eventually go broke.
At the same time, under the companies' new systems, many cardholders -- especially low-income users -- have ended up on a financial treadmill, required to make ever-larger monthly payments to keep their credit card balances from rising and to avoid insolvency.
"Most of the credit cards that end up in bankruptcy proceedings have already made a profit for the companies that issued them," said Robert R. Weed, a Virginia bankruptcy lawyer and onetime aide to former Republican House Speaker Newt Gingrich.
"That's because people are paying so many fees that they've already paid more than was originally borrowed," he said.
In addition, some experts say, the changes proposed in the Senate bill would fundamentally alter long-standing American legal policy on debt. Under bankruptcy laws as they have existed for more than a century, creditors can seize almost all of a bankrupt debtor's assets, but they cannot lay claim to future earnings.
The proposed law, by preventing many debtors from seeking bankruptcy protection, would compel financially insolvent borrowers to continue trying to pay off the old debts almost indefinitely.
"Until now, the principle in this country has been that people's future human capital is their own," said David A. Moss, an economic historian at Harvard University. "If a person gets on a financial treadmill, they can declare bankruptcy and have what can't be paid discharged. But that would change with this bill."
Debate about the bill continued Thursday, with the Republican-controlled Senate refusing to limit consumer interest rates to 30%. The vote was a bipartisan 74 to 24 to kill a proposed amendment by Sen. Mark Dayton (D-Minn.). Senate passage of the bill is expected next week.
The House has not taken up the issue this year, although it passed a version of the bill last year, as did the Senate. Attempts to reconcile the two bills failed.
Industry officials have sought to minimize the role of credit card companies in pushing for bankruptcy legislation since 1998. They have argued that the bill introduced last month by Republican Senate Finance Committee Chairman Charles E. Grassley of Iowa and supported by President Bush would affect about 5% of the roughly 1.6 million Americans who file for bankruptcy each year.
They have portrayed the measure's principal target as high-income individuals who are abusing the law to escape their debts.
"The bottom line is that there are people out there who are able to pay their bills who are not paying," said Tracey Mills, a spokeswoman for the American Bankers Assn., which represents most of the major credit card companies.
But consumer advocates, many academics and some judges and court officials argue that the bill would sharply reduce the number of Americans able to file for bankruptcy, even in instances where doing so would buy them time to repay their debts.
The critics argue that people unable to file would be at the mercy of increasingly aggressive efforts by lenders -- especially credit card companies -- to raise fees and boost collections.
People like Josephine McCarthy, for instance, a 71-year-old secretary at the Salem Baptist Church, less than a mile from where the Senate bill is being debating.
According to papers in her recent bankruptcy, McCarthy discovered at about the time of her husband's death in 2003 that the couple had a $4,888 balance on a Providian Financial Corp. Visa card and another $2,020 balance on a Providian Mastercard.
Over the two years from 2002 until early 2004, when she filed for bankruptcy, McCarthy charged an additional $218 on the first card and made more than $3,000 in payments, the court papers show. But instead of her balance going down, finance charges -- at what the bankruptcy judge termed a "whopping" 29.99% rate, together with late fees, over-limit fees and phone payments fees -- pushed what she owed up to more than $5,350.
In the case of the second card, the papers show that McCarthy charged an extra $203 and made more than $2,000 in payments, but again fees and finance charges pushed the balance up.
McCarthy refused to comment on the case. A spokesman for Providian could not be reached last night.