As some may know, in 2005 the bankruptcy code was rewritten by banking industry lobbyists without the advice of any bankruptcy lawyers from either the creditor or debtor side of the aisle. Consequently, some of the results of the new law that congress adopted are irrational and not conducive to the underlying policy of bankruptcy, which is to allow a debtor to pay back what he or she can afford and get a fresh start in life free of the debt he or she cannot afford to pay. One of the aberrant result is that as the national average wage decreases, it becomes harder for a debtor to qualify for Chapter 7 bankruptcy.
We often find that bank charges and fees are contributing factors to some debtors’ inability to get control of their debt. It always seems a bit unfair that the same institutions that complain about the effect of the bankruptcy law and that orchestrate efforts to put bankruptcy beyond the reach of people are the organizations whose conduct and business practices make it necessary for people to seek bankruptcy protection. My dad told me often I could not have my cake and eat it too. Apparently the banking industry and their friends in congress don’t abide by such common wisdom. I imagine it has something to do with the recent bank bailouts, the banks’ immediate return to stellar profitability and the crazy unbalanced national budget; but hey, I am just a small time bankruptcy lawyer trying to help normal hard-working people get back on their feet.
The major banks, especially those federally chartered, have long been known for their ability to find new and innovative ways to charge fees to their customers. No longer do banks make their money by lending to credit worthy borrowers and charging a reasonable rate of interest, or by charging a reasonable fee for maintaining a savings or checking account. That way of doing business just does not make enough money for the big institutions; they could not justify the multimillion dollar salaries they pay their management if all they did was provide reliable, reasonably priced service to their customers. A very interesting aspect of these innovative fee enhancing practices, was recently considered by the Ninth Circuit Court of Appeal arising out of a case filed in California against Wells Fargo Bank. The case was Veronica Gutierrez v. Wells Fargo Bank and the court handed down its ruling just recently on December 26, 2012. It seems in this case Ms. Gutierrez believed that Wells Fargo’s practice of posting debit card purchases to an account in the order of the highest charge or largest purchase first to the lowest last rather than in reverse or even in the order in which the charges were actually incurred was an unfair business practice designed for the sole purpose of increasing overdraft charges on her account. It seemed to be a reasonable argument; posting the debit card charges using the highest first clearly results in diminishing the balance of the account faster so that multiple small charges that may have been made earlier, result in multiple overdraft fees where posting the large charge last or when it was actually incurred might result in the imposition of fewer overdrafts. From the bank’s perspective, what better way to boost overdraft fees? From the customer’s perspective, what better reason to leave the bank and find a place that treats customers fairly?
The federal district Court agreed with Ms. Gutierrez and found that Wells Fargo’s practice was unfair and unreasonable under California law regulating business practices, particularly unfair business practices. It issued an injunction directing the bank to stop doing that to its customers and ordered Wells Fargo to pay $203,000 million in restitution. It seems that between 2005 and 2007 Wells Fargo collected some 1.4 billion in overdraft fees from customers. The District Court found that ““the bank’s dominant, indeed sole, motive” for choosing high-to-low posting “was to maximize the number of overdrafts and squeeze as much as possible out of what it called its ‘ODRI customers’(overdraft/returned item).”” The district court also found that Wells Fargo had “affirmatively reinforced the expectation that transactions were covered in the sequence [the purchases were] made while obfuscating its contrary practice of posting transactions in high-to-low order to maximize the number of overdrafts assessed on customers.”(This background is drawn from the district court’s Findings of Fact and Conclusions of Law After Bench Trial).
The Ninth Circuit Court of Appeal, one level below the U. S. Supreme Court, while not condoning the practice, found that Wells Fargo’s activity was legal under federal law and not subject to the California Law that the District Court applied. Then Ninth Circuit said that although the District Court found that Wells Fargo broke California law, it did not matter! Wells Fargo could not be held accountable to California residents under California law because it was a Federally Chartered Bank and thus only Federal law applies! Federal law allows Wells Fargo to do pretty much whatever it wants as far as how it posts its accounts. That’s how it goes when you have a good lobby and a lot of money to influence votes. If I recall correctly, Wells Fargo got its start in California and a large portion of its customers are Californians, which means that a large slice of its $1.4 billion in overdraft fees probably came from the state.
What should be interesting to us as consumers and normal working people is that large banks and credit card lenders were pretty much given free rein when it came to rewriting the bankruptcy laws, especially those laws related to Chapter 7 and Chapter 13, the law that consumers rely on the most. These same big lending institutions are the ones that came up with the insane lending policies, both in the issuance of credit cards and mortgages, which have thrown many of those same consumers into unmanageable debt. Add to it the ability to manipulate how overdraft fees are charged and It seems to me, that the way things work in the banking industry just are not right, at least not for the little guy paying the bills. To me it seems similar giving the tobacco companies the freedom to sell whatever they want, and then allowing them to write laws to make it more and more difficult to get treatment for the cancer their products cause.
The purpose of the bankruptcy law is to allow people to pay what they can, get relief from having to pay what they cannot afford, get a fresh start and become productive contributing citizens again. It seems that the people who should be making the decisions about what is reasonable and appropriate in connection with Chapter 7 bankruptcy and Chapter 13 bankruptcy should be our elected representatives, not the people who have created the problem and have a vested interest in not having it solved. The way things stand today, it is much too much like having the fox guard the hen-house.
Stephen C. Hinze is a bankruptcy attorney and federally designated debt relief agent under federal law. He helps consumers navigate through financial hardship, including filing for bankruptcy if necessary. He serves North San Diego County and Southern Riverside and Orange Counties, including, but not limited to the communities of Carlsbad, Encinitas, Lucadia, Oceanside, Vista, San Marcos, Escondido, Rancho Bernardo, Fallbrook, Rainbow, Temecula, Murrieta, San Clemente, Mission Viejo, and San Juan Capistrano. He may be contacted by telephone at (760) 330-9472, e-mail at firstname.lastname@example.org or visit him on the web at www.schinzelaw.com.