HINOJOSA: Welcome to the program. Today we're talking to Elizabeth Warren, a leading expert on bankruptcy, debt and the middle class. She's a professor at Harvard Law School and co-author of the book, All You're Worth: The Lifetime Money Plan. Welcome back to Now Elizabeth.
WARREN: Thank you.
HINOJOSA: So most people, I mean even—even educated, well educated people think if you end up in bankruptcy it's 'cause you don't know how to manage your money. And you're basically saying, "That's the conventional wisdom and you're all wrong."
WARREN: Not only are you all wrong I wish you were all right—because if that were the case then we could say two things—"Let's have a little education. Let's help people," you know, "and then they'll manage their money better and we can solve this problem of families going bankrupt." And secondly—and if we don't solve it you know it's their own fault anyway. But we have a much more serious problem in the United States.
We have families going bankrupt and—and here' the part that's scarier. Some economist estimate that for every family that goes bankrupt there are about 15 more who are in the same amount of financial trouble and would profit from bankruptcy but just haven't filed. So bankruptcy is not—by itself, the on/off switch of good news/bad news. What it is an indicator of how much trouble Americans are having right now with debt and—and tryin' to manage their lives on a day-to-day basis.
HINOJOSA: Tell us about the report. Where you basically said is something quite surprising for a lot of people, which is that if you end up with a medical crisis and even if you have insurance these are the people who are ending up in bankruptcy?
WARREN: Yeah. We were just—frankly I have to tell ya knocked over by your own research. You know this is—this is one of those classics that you go into research thinking you're find something over here and in fact you find something over there. Half of all the families who file for bankruptcy are there in the aftermath of a serious medical problem.
Sometimes it's the mom. Sometimes it's the dad. Sometimes it's an accident. Sometimes it's illness. Sometimes it's the children, one of the children. Sometimes it's a grandparent. But medical problems are pushing about half of all the families that file for bankruptcy—right down the tubes.
HINOJOSA: So when you hear that do you have a solution Elizabeth?
WARREN: Well you know this is a tough one because what people need to understand about the medical problem of financial problem connection is that it's really not just one punch. It's a series of punches. About 3/4 of the families who ended up in bankruptcy in the aftermath of a serious medical problem had health insurance at the onset of the illness or accident that ultimately bankrupted them.
So it—it—what we have to do is we have to stop thinking of, "Oh if I've got insurance I know I'm fully protected and if I don't have insurance you know then I'm the one who's at risk." There's no doubt about it. It is not good not to have health insurance that leaves the family very vulnerable. But even families with health insurance are quite vulnerable to a severe economic reversal if somebody in the family gets sick.
HINOJOSA: Elizabeth Warren you have gotten push-back from the health insurance companies. They come back at you and they say, "You are exaggerating." You're saying that there are all of these medical bankruptcies and you're putting the fear into people when we the medical insurance companies are say—know that that's not gonna happen.
WARREN: That's right. They're saying 'there there.' If people will just pay their health insurance premiums, "Everything will be fine and we'll keep writing those health insurance contracts and putting lots of fine print in them and you don't need to read them dear. Because the industry is going to take care of you."
And I'm just here today to say that I study these families who file for bankruptcy and most of them truly believe that because they had health insurance nothing was going to go wrong for them. Or at least that isn't what was going to go wrong for them. They were stunned to discover that once they got sick their health insurance could be cancelled for some of them. They were stunned to discover that—if they lost their jobs—that the carry-over health insurance, COBRA—would cost them more than they were getting in their unemployment checks. They were stunned to discover that even if they had insurance and even if they continue to be insured that their insurance didn't cover substantial portions of the bills from their illnesses and accident.
HINOJOSA: But you're also sayin' that the health insurance companies are essentially taking us for a ride and you're also saying that the credit card industry is taking all of the American middle class primarily for a huge ride. I mean you—you really—you—you love to point fingers at these people.
WARREN: Well you know the truth is it's not that I love to point fingers. I didn't wanna—I didn't start out wanting to point fingers at these people. I started out studying the crash and burns, the—the families—the people who are very middle class. This is what you need to understand about this group that I'm studying.
People who went to college, people who got married, who bought homes, who had kids, who had decent jobs.
In other words sort of a, you know, play by the rules, heart of middle class America. And who either lost their jobs, got sick or had a family break-up and ended up in the financial trash heap. Those are the studied—Those are the families I've been studying. And what it's lead me to is a—a recognition that health insurance doesn't provide the kind of protection that we all thought it did and at the same time to say that the credit card industry is feasting off middle class families.
HINOJOSA: I mean you say that that word feasting.
WARREN: It—well—let's—let's do talk about the credit card offers for just a minute here. Did you know that the credit card companies sent out six billion pre-approved credit card offers to American families, billion with a B, last year. And that's just the mailing.
So Elizabeth you know that right now the average American household owes about 9,200 of debt on their credit card. So when you go into these big stores, you know—Best Buy and all—all of those stores, Macy's. Wherever you g—people are buying so they're—I mean you're not saying that there isn't any irresponsible consumption going on here. I mean there's some responsibility.
WARREN: Oh heavens, yes. There's no doubt about it. There's plenty of—There's plenty of blame to spread around here. You know we can spread it on thick with a knife here. There are lots of families who—who make irresponsible purchases. There are also a lot of families who have debt on credit cards because they use those credit cards to pay for medical bills.
We have a new study out that's just shown this about 40 percent of the families carrying debt are carrying medical debt on 'em. There are a lotta families who are using credit cards when they get laid off from work and they use 'em to groceries. There are a lot of families who have any other kind of just sorta small financial stumble and who suddenly find themselves paying 29 percent interest and $59 late fees and $49 over-limit fees and get in a hole they can't get out of.
And my view on that is that credit card companies have basically changed their pricing model. They send out credit cards to everybody and they make a modest profit off every time any of us use our card. It's called the merchant fee that they get for that.
But they then load up the credit card contract with as many tricks and traps as possible so that if somebody just stumbles slightly or just has a little, you know, degrading in their credit rating they swoop in on those people and drive up the interest rates and drive up the fees and get them caught in a kind of credit card hell from which some of them will never be able to escape. And I'm just gonna tell ya.
I just think that's—I think that's wrong. I think our regulators should not have permitted it. You—you can't buy a toaster in America today that has a—a one in ten chance of bursting into flames but you can get a credit card that has the financial effect of having a one in ten chance of bursting into flames. We deserve better protection than that.
HINOJOSA: I do wanna read you this headline which—sounds pretty incredible. It's from—Dec—December 7th, 2006 from the Dow Jones News Wires. And it says, "One of the architects of the legislation had overhauled the federal bankruptcy code last year, wants the Chief Justice of the United States to consider muzzling bankruptcy judges who have been denouncing the new bankruptcy law." So it sounds a little confusing but essentially we have a senator telling a Supreme Court justice he has to tell bankruptcy judges on a local level to be quiet because they're critical of this new bankruptcy law?
WARREN: Yes. Is that staggering? And what's happened is that the bankruptcy judges who are faithfully trying to implement this law are just finding chaos. They're f—They're being forced by law to hurt good people and they're being forced by law to let charlatans get away with some really pretty awful things.
And they've said so frankly in fairly moderate tones in their opinions. They've said things like—we can't discern what Congress had in mind here. This law makes no sense. This law is creating chaos in my courts and the response of at least one senator has been to tell the chief justice to make them shut up. I just think that's shocking.
HINOJOSA: There's a—a—a story that I—I wanna share with our listeners that you actually shared when you were on Now—on our TV program and it was—it's about—a fascinating story about Hillary Clinton. You said that when the credit card companies were pushing for legislation—this is back when—to—to tighten the bankruptcy laws, and this is when—President Clinton was in—in office you were summoned by Hel—Hillary Clinton to discuss this legislation. And you sat down with her in this back room and you filter in on what this new bankruptcy law was gonna mean.
And she at that moment said, "Oh my God. We have to stop this law. It's not gonna happen." It gets passed in Congress and Bill Clinton, because of Hillary's conversation with you more or less, vetoes that bill. Now we fast forward to Senator Hillary Clinton, bankruptcy law comes for a vote and she votes for it?
HINOJOSA: So fill us in here. What happened?
WARREN: Well it's a reminder that when we talk about something like bankruptcy there's a very powerful industry, the consumer lending industry that makes a lot of political contributions and all those contributions get made only on the side of doing the things that are good for the lenders, not good for the debtors. There are no equivalent political action committees for people about to go bankrupt or people in financial trouble or people who—who—who crashed and burned financially last year.
HINOJOSA: Really? There are none? There are no lobbying groups at all for—
WARREN: No. Those people don't have any money. They're left with—with folks like me with a few academics and an occasional bankruptcy lawyer who handles some consumer cases. We're really kinda the only ones who talk about this in Washington and—and we don't have money to make political donations.
So it was one thing for Mrs. Clinton to be First Lady and not running for office and tell President Clinton what she felt about this bill. And then very different for Senator Clinton who had to get political contributions and run her—her campaign—she voted differently. Now I wanna be fair in this story.
Mrs. Clinton, in a much more secure position—as Senator a couple of years later—when the bill came up once again—Senator Clinton was not there—the day of the vote. It was the day that President Clinton, you may remember, had heart surgery. But she issued a very strong press release condemning the bill and I assume if she had been there that she would have voted against it. I—I tell my story not to try to thump Senator Clinton but the story is important because it's a reminder of how money talks in Washington. And as another senator, Senator Russ Feingold once said—the bankruptcy bill should be the poster child for campaign finance refor—if it hadn't been for big contributions in Washington that bankruptcy bill never would've gotten off the ground.
HINOJOSA: I don't know Elizabeth. I have this mean when you—when you put forth all of your studies that you know that the regular working people, the middle class—is basically getting crunched by this big business mentality of you know banks and credit card companies and you feel like—you know there's just—if you get into any debt it's gonna be hard to get out of this. But I wanna ask you because you are so highly critical on an institutional level of how these—these problems continue to exist what's the light at the end of the tunnel?
WARREN: Well I will say—there's a breath of fresh air when you go to Washington right now. Senator Dodd had hearing last week in which—he had credit card companies and folks like me come in and testify and people on both sides of the aisle were asking the credit card companies some pretty tough questions and listening to some pretty—amazing statistics about what's going on. This week Senator Dodd had yet another hearing—for the Banking Committee bringing in the predatory lenders and asking them questions—and listening to more.
Now look—you know there hadn't been a stampede to change the law yet and—and it'll be awhile before anyone proposes any serious legislation. But I should be clear here at least now they're asking the right questions. Ul—Ultimately there are a whole lot more votes in the middle class than there are in the—in the handful of high powered lenders. And—And that's where my hope lies. That's why I keep talking about this.
HINOJOSA: And we're glad that you helped us and on a hopeful note.
WARREN: Thank you.
HINOJOSA: Thanks for joining us Elizabeth Warren.
WARREN: Always a pleasure.
HINOJOSA: Elizabeth Warren is a professor at Harvard Law School and co-author of the book, All You're Worth: The Lifetime Money Plan. Thanks again Elizabeth.
WARREN: Thank you.