Wednesday, April 20, 2005

Bankruptcy Bill Open-Thread

So it occurs to me that I don’t understand the Bankruptcy Bill at all. I am sure that it is a bad Bill because many people who’s political views I respect have said so, but I have no ammo whatsoever in defending that position. I was talking to my friend last night, and he made a good point. If you borrow 3000 dollars from someone, then why shouldn’t you have to pay it back? Is there something that I don’t understand here?

Now, I am against the Bill, but I would like to hear more details about it, so that I have more ammo the next time around. Consider this the Bankruptcy Bill Open-Thread.

(Update, By Dan: The Bill has been signed into law by the President. Thank you Congresswoman Schwartz, for turning your back on all of us.)

4 Comments:

At 4:53 PM, Blogger DanielUA said...

Chuck,

Don't believe the hype. People do not go into bankruptcy because they bought a really expensive TV, or went on a vacation they could not afford or anything else like that. This is about single moms who lose their jobs, and fall behind on their bills, or families that fall behind when there is a medical emergency, etc. (And of course, the profits of MBNA and the like are in the billions. They are obviously doing ok.)

Check out what Elizabeth Warren, Harvard Law Prof, and probably the best source out there on the middle class squeeze (and author of The Two Income Trap) says, from the TPM Bankruptcy Blog:

I’ve been doing research on families in financial trouble for more than twenty years to learn how many people were abusing the bankruptcy system. My colleagues and I did a really extensive analysis and learned that families turn to bankruptcy not because they want to find a way not to pay, but because they are desperate. More disturbing, we released a study earlier this year that revealed that over half of bankruptcies are in the aftermath of medical emergencies.

....

The bill is more than 500 pages long, all in highly technical language. But the overall thrust is pretty clear:

• Make debtors pay more to creditors, both in bankruptcy and after bankruptcy, so that a bankruptcy filing will leave a family with more credit card debt, higher car loans, more owed to their banks and to payday lenders.

• Make it more expensive to file for bankruptcy by driving up lawyers’ fees with new paperwork, new affidavits, and new liability for lawyers, so that the people in the most trouble can’t afford to file.

• Make more hurdles and traps, with deadlines that a judge cannot waive even if someone has a heart attack or an ex-husband who won’t give up a copy of the tax returns, so that more people will get pushed out of bankruptcy with no discharge.

• Make it harder to repay debts in Chapter 13 by increasing the payments necessary to confirm in a repayment plan, so that more people will be pushed out of bankruptcy without ever getting a discharge of debt.

There are people who abuse the system, but this bill lets them off. Millionaires will still be welcome to use the unlimited homestead exemption. And if they don’t want to buy a home there, they can just tuck their millions of dollars into a trust, a “millionaire’s loophole” that lets them keep everything—if they can afford a smart, high-priced lawyer.


There is more, far more. I will put something more up about it soon, maybe as soon as tomorrow. But, generally, it is thought to be one of the most cruel consumer bills passed in recent history, because it takes it toll on those who have hit hard times, with zero provisions for things like, families hit by medical emergencies, soliders overseas, with finances falling apart at home, parents losing a job, etc.

 
At 1:37 AM, Blogger Charles said...

Thanks Dan. I had a question. Does bankruptcy absolve you of any debts, or just the interest portion? Meaning, if I owe 5000, and 1000 of that was fees and interest, will filling Chapter 7 absolve me of only the 1000 dollar portion or more? If it is more, then isn't that a little screwy? Meaning, if I am a company that loans you money, then shouldn't I at least get the principle back that I loaned you?

I never doubted that most people go into bankruptcy because they are in a bind. It has more to do with normal expenses than it does buying luxury items. I think that either Krugman or the author you cited said that people spend a lot of money just to live in the good school district, and that is a big part of the problem. Although I do think that a little financial education would go a long way here. Although, I think that the dent in bankruptcies would be small but noticeable, because people would be prepared for that loss of job.

 
At 12:19 PM, Blogger ACM said...

well, another thing to keep in mind is the obligation of the lender to evaluate borrowers. for example, when I wanted a mortgage, the bank wanted to know about my income, assets, and everything else -- i.e., they were appraising my ability to repay the principal (and everything else). however, many credit card companies will give cards to folks that they *know* are poor risks, such that their chances of ever paying down their balances is poor -- this benefits the companies, because they make more from carried balances anyway, but it kills the people who pile up ever higher debt. similarly, more than half the mortgages in CA right now are interest-only, which means that people are buying beyond their means (and not even building up equity in their homes). the banks and other lenders have to bear some of the responsibility if they give people credit beyond their likely ability to repsy, or enable people to get into situations where it's completely predictable that they'll collapse in a short time (the example I saw involved principal coming into the payments in 3 years, when the borrower still wouldn't be able to pay the higher rate). all of that is without even considering the fact that people living at (but within) the limits of their means can lose everything when a single health or other problem appears.

bankruptcy is a structured way to protect the consumer from a hungry circle of creditors whose combined desires exceed that person's imaginable assets. it's not a cost-free option (even without the load of social stigma, it means you can't get any kind of other loans or credit for a long time), but it gives you a chance to rebuild at some level, while all the creditors get only a % of what they were owed (their incentive to make better loans). everybody loses to some degree, but nobody is buried forever.

here's a question: if bankruptcy is such a terrible thing, why did rich people need to be exempted from the new provisions? (the bill allowed the very wealthy to hide their assets in ways that aren't available to the poor and elderly, who can lose even thier homes now.)

blah blah. more fodder.

 
At 3:33 PM, Blogger Charles said...

ACM: Thanks man. That puts it in perspective. Do you study this stuff for your job?

 

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