Banks are overlending and the majority of consumers are guilty of living beyond their means, how can the situation improve?

The answer lies in recalibrating this balance, says author Robert Manning. "Banks are loaning more money than people can possibly repay -- and need to reign back some of this lending. Consumers are borrowing more money than they can repay. They need to be held accountable to recognizing when they are borrowing more than they can really afford." Manning says instead of the problem being being on the consumer side or on the banking side, we need to be at both of these groups to better balance how much money is borrowed and lent.

On paper, recalibrating the balance sounds good, but actually instituting change in this area has proven nearly impossible. A handful of failed reform efforts over the last decade have tried to deal with both sides of the issue, from instituting a national usury cap to curb industry excess, to the industry's efforts to revamp the bankruptcy code to limit consumer abuse.

New York State Assemblyman Peter Rivera (D-Bronx) and U.S. Rep. Bernard Sanders (I-Vt.), the ranking member of the Subcommittee on Financial Institutions and Consumer Credit, have each introduced bills in the last year to curb the practice of "universal default."

The latest bankruptcy reform effort, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2003 (H.R. 975) essentially says that many debtors would no longer be eligible to file under Chapter 7, which includes the ability to discharge unsecured credit card debt, and would instead be directed to file under Chapter 13 (wherein debtors attempt to pay back as much as possible over the course of three years). The bill is currently idling in the Senate after passing in the House early last year, but many expect it to be addressed again when Congress reconvenes in 2005. President Bush, a supporter of bankruptcy reform, will likely sign the bill if it passes.

This legislation poses serious implications for families who have turned to credit cards during times of financial hardship. Harvard University's Elizabeth Warren says about one-third of families in bankruptcy owe an entire year's salary on their credit cards. "The problem is that once someone stumbles, interest rates and late fees stack up faster than a family can pay. Lose your job, get sick, get a divorce, it doesn't matter. The debt has to be paid. That's why credit card debt makes families so vulnerable. People may manage just fine in good times, but if any problem arises, the debts will eat them alive."

At the end of last year, one in every 67 households in America had filed for bankruptcy, according to Lundquist Consulting. Despite the alarming numbers, data released in early November shows that personal bankruptcies are about 3.5 percent lower from the same period last year. This decrease represents the second drop in consumer bankruptcy filings since 2000. Yet this has not hampered the industry's efforts to go after those who they say are bilking the system.

Historically, Americans have had two options for bankruptcy explains Professor Linn LoPucki, a leading scholar on bankruptcy at the UCLA Law School. Chapter 7 is the surrender of all debtors' nonexempt property and the discharge of all dischargeable debt, excluding most taxes and student loans. Debtors who file for Chapter 13 try to pay back as much as possible over three years.

LoPucki says the reason the banking industry has continually lobbied for legislation requiring consumers to file under Chapter 13 is very simple. "The consumer credit industry is seeking to get more money from debtors who they feel are able to pay back more but don't," he says. [View detailed procedural diagrams for Chapter 7 and Chapter 13 bankruptcies designed by Professor LoPucki.]

The American Bankers Association's Edward Yingling, whose organization has actively supported back-to-back Congressional bankruptcy reform legislation efforts since 1997 concedes that while 95 percent of people who are in bankruptcy are legitimate, "3 to 5 percent" and maybe higher are committing fraud or abusing the system.

Consumer advocates dispute these numbers and say that by cracking down on the few abusers of the system, the families who actually need bankruptcy relief will find it increasingly hard to get it. Bankruptcy trustees and bankruptcy attorneys say fraud is rare and that most filers have few or no assets left when they file.

Yingling says the industry has every right to recoup funds from those who are able, rather than charge off this debt.

"Why should we not have reform [for] that 5 percent who are committing fraud, or who can afford to pay something, and aren't -- why shouldn't we have reform that takes care of that," asks Yingling. "Why shouldn't we have reform that says if you're a rich person -- and these are real cases -- and you know you're going to declare bankruptcy, and you move to Florida and build a $5 million mansion, and under current law in Florida and the United States, that $5 million mansion cannot be touched in bankruptcy."

But consumer advocates say reform needs to occur before consumers end up in front of a judge. "The issuers need to be more responsible," says Stephen Brobeck, executive director of the Consumer Federation of America. "Most of these problems would disappear if issuers would be more prudent in extending credit. If they raised the minimum monthly payment back to 4 to 5 percent, I believe the bankruptcy rates would fall dramatically over time, just from that one change."

Others have tried to stave off problems before they occur. Sen. Chris Dodd (D-Conn.) has twice authored legislation in the Senate (including an amendment to bankruptcy reform legislation) that would mandate that credit card issuers granting credit to those 21 and under would have to require the person have verifiable means of income, a co-signer and/or proof of attending a financial literacy course. For Dodd, these are "very simple, common-sense suggestions," which he says were vehemently opposed by the industry.

"The problem is that credit card companies want to have it both ways," says Dodd. "On one hand, they want unfettered access to new customers, irrespective of whether these new customers are financially literate, or have the ability to repay the debts they incur. At the same time, they want to be protected when they overextend credit to these very same customers."

The only way to strike a balance, Dodd says, is to enact "common sense" protections that can empower consumers but still hold people accountable for any abuses when it comes to paying what they owe. But that can only happen if the credit card industry jettisons their "my way or the highway" approach to these issues, and seeks to address these issues in a thoughtful and comprehensive way.

Consumer advocates say there are obstacles inherent in challenging the industry. "It is hard for Congress to get behind any legislation that puts limits on credit card companies," says Harvard's Elizabeth Warren. "After all, the financial services industry is one of the biggest contributors in Washington." But she says change can come through the regulatory agencies and through Congress. "Congress can keep up the pressure, states are getting more active, and even the current banking regulator has indicated concern over banking practices," she says. "If enough people complain loudly enough, change is possible."

In the end, Kim Hodges, the single mother from North Carolina who found herself in debilitating debt, didn't chose to go the bankruptcy route and is following up on her commitment to pay it all back. "In a way, all of this debt has made me grounded," she says. "It's been a good lesson. I now have a respectful relationship with money."