Does bankruptcy reform impair existing contracts?

The bankruptcy reform bill is a hot topic. Oddly enough, this pro-big-business bill is being attacked by Republican bloggers like RedState, and defended, to some extent, by at least one centrist site, Centerfield.

I've been troubled in the past by prior bankruptcy reforms because they elevated credit card debt to the same level as things like child support payments. If some dad out there doesn't have enough money to pay both his Visa bill and his child support, I'd rather the bankruptcy court make him pay the child support first. Not only does this seem more humane, but if he doesn't make the child support payment, the taxpayers are more likely to be on the hook to spend tax money on the child for food or health care.

To be honest, I haven't learned enough about the bill to know exactly what it does, other than generally to require more bankruptcies with payment plans and allow fewer bankruptcies that completely obliterate the debts. (Note to media: I wish you would do more reporting on the substance of bills and much, much less on the politics and process of them).

But I wonder if there's an argument to be made, either from a legal perspective or merely a moral one, that bankruptcy reform which makes it harder to discharge debts is an unconstitutional impairment of contract?

This bill will apply to all debts currently in existence, as well as all debts incurred in the future. But both parties to existing debts entered into those contracts under current law. The lending companies knew the risks of default and impact of bankruptcies when they set the interest rate and other terms of the debt. The borrower agreed to incur the debt with knowledge of the current law. We must assume that both parties entered into these contracts might not have entered into the contract, or might have required different terms and conditions for those contracts, had different bankruptcy rules been in place at the time. In short, they may not have entered into those contracts with those terms if discharging a debt in bankruptcy was materially harder or easier than the law provided at the time the contract was formed.

This bill essentially revises the terms of the contracts for those debts, in favor of the lender. The lender set the interest rate at a level to allow it to recoup the expected losses to defaults and bankruptcies, plus make an adequate profit. This bill will reduce the amount of loss from bankruptcies, without affecting the interest rate charged on those loans. That is a significant windfall to the lenders.

And, we must assume that these borrowers entered into these debts with knowledge of the bankruptcy laws at the time. Had the borrowers known that the debts would become harder to discharge in bankruptcy, they may not have incurred that debt to begin with. A retroactive change in the terms of the debt agreement is fundamentally unfair to the parties.

Article I, Section 10 of the U.S. Constitution prohibits states from passing any ex post facto laws or any laws "impairing the obligation of contracts". Interestingly, this proscription is not included in section 9, which imposes similar restrictions against ex post facto laws and bills of attainder against Congress. I'm sure there must be case law on whether the prohibition has somehow been made applicable on Congress as well, through the 14th Amendment or similar process, but I haven't done the research yet. Perhaps the Federal government is at liberty to pass laws impairing contracts all it wants. And perhaps courts have or would find that the impact on existing obligations by bankruptcy law amendments is so indirect that the constitutional prohibition is not implacted.

But it seems unfair to change the terms of the agreement after the fact, to change the rules after the game has started. And in this case, the benefits are one-sided. The lender keeps the high interest rate it justified because of the risk of default and bankruptcy, but nevertheless has that risk reduced substantially. What benefit does the consumer get from this mid-game rule change?