March 8, 2005

THERE'S BROKE AND THEN THERE'S BROKE (via Glenn Dryfoos)

GOP Bankruptcy Reforms Close to Becoming Law (Mary Curtius, March 8, 2005, LA Times)

An overhaul of bankruptcy law that is a key goal of the Republican agenda moved significantly closer to becoming law today when the Senate defeated an abortion-related amendment to the bill and limited debate on it.

The votes paved the way for the measure to pass the Senate later this week. The House GOP leadership has promised to act quickly on the bill if the Senate approves it without significant amendment, as now appears likely.

The measure, a longtime priority for banks and credit card companies, would force more people to pay back some of their debts if they file for bankruptcy. Proponents say it would force more Americans to be financially responsible; critics say it fails to protect those who have been wiped out by crushing medical bills or other unforeseen calamities and leaves loopholes for the wealthy.

Even after their victories today, Senate Republicans noted that similar legislation had passed the chamber on three previous occasions, but failed to become law. Still, they expressed confidence that this time the bill would be enacted.


Brother Dryfoos writes:
I don't think you've posted anything on the bankruptcy bill. I don't like it.

Despite what the banking/credit card lobby would have us believe, there's not a lot of fraud and abuse in the bankruptcy system. Is there some? Absolutely...but there's never been a system of any kind invented by man that someone didn't scheme around. (We have tax cheats, but we still have a tax code that basically relies on voluntary reporting and paying.)

The fact is that something like 50% of all people who file for Chapter 7 have either lost their job or suffered a serious medical situation in the preceding months. My own almost 15 year experience in this area confirms what the statistics say, that for the most part, chapter 7 (which is really the only section being overhauled) is used by "honest debtors" in need of a fresh start.

As for tortfeasors, defrauders, embezzlers, etc., their debts are already not dischargeable in bankruptcy (although the burden is on the creditor to prove that the debt was obtained by fraud, intentional tort, etc.).

The bill reinforces the image of the GOP as being in the pocket of big business (here, the banks) and not being concerned with the little guy. Credit card companies engage in sophisticated calculus...they set their interest rates knowing full well that some % of those people to whom they blindly mail credit cards won't pay...I don't feel any sympathy for them when they don't get repaid exactly as they had planned all along. Forcing everyone into mandatory repayment plans not only creates the specter of involuntary servitude, but may have the perverse effect of incentivizing people not to work. "Hey, if I have to give 50% of my paycheck to Mastercard anyway, I may as well take a less demanding/lower paid job or find a job that will pay me off the books."


I generally agree that part of the genius of the American system is that folks can simply declare bankruptcy and start anew, without their lives being ruined as they were in the Old World and still are in other countries. However, there are to aspects of the bill that recommend, first like the rest of the President's neoconomic agenda it seeks to encourage investment over consumption, so is synergistic, and second it introduces a means test, which bothth seems to make sense as policy in this specific regard and must become a regular feature of all our government does, Bankruptcy Bill Moves Closer to U.S. Senate Passage (Bloomberg, 3/08/05)
The Senate bill would impose a means test on consumers filing for personal bankruptcy, preventing some with incomes above their state's median from canceling debts altogether. These consumers would be required to file under Chapter 13 of the bankruptcy law, which requires repayment of some debt.

After deducting allowable expenses such as medical bills, a debtor would be forced to file under Chapter 13 if income is sufficient to pay a lump sum of $10,000.

Debtors also would be disqualified from discharging debts under Chapter 7 if they could pay 25 percent of what they owed over five years or $6,000 in monthly payments.

Republicans argue that 7 to 10 percent of the almost 1.6 million Americans who file for bankruptcy each year would be disqualified from canceling all their debts. Personal bankruptcy filings have jumped from fewer than 300,000 in 1980, according to the Administrative Office of U.S. Courts.

A 1998 study by Visa International Inc. said about 11 percent of those who filed for Chapter 7 would be disqualified under the proposed new means test.

Posted by Orrin Judd at March 8, 2005 6:42 PM
Comments

Did Visa's study mention that the profit on the credit card business has gone up by about 120% over the last 10 years?

Posted by: Foos at March 8, 2005 6:46 PM

Orrin makes some valid points, especially about means testing. But my time in that business -- I was a practicing bankruptcy lawyer for almost 15 years) just tells me that this is a cruel piece of legislation. (And most of my bankruptcy lawyer friends, even those that represent lenders, and a long-time bankruptcy judge, agree with me.)

Posted by: Foos at March 8, 2005 7:02 PM

How could it not in a deflationary environment where lending rates rise with the Feds delusions?

Posted by: oj at March 8, 2005 7:04 PM

I tend to agree with Foos. Bankruptcy judges already have the power, and in this district, at least, have used it, to throw out truly abusive cases. If the number of cases that will be forced into Chapter 13 will be as small as the stastics OJ cites estimate, why has the industry poured so much money into getting this legislation passed?

I don't have real dog in this fight, and the changes might not be as harsh as some predict; however,there are abuses on the lender side, too,and the bill does nothing to limit those. An amendment limiting creditors to a 30% APR was rejected. Here in TN, we have paycheck advance and car title loan outfits charging far more than that.

Posted by: Dan at March 8, 2005 7:17 PM

I only know 2 people who have declared bankruptcy. Both, knowing ahead of time their intentions to file, maxed-out their credit cards before making their claim. The didn't buy things they needed, they just wanted to get a bunch of cool stuff for free. On this matter, my heart goes with Brother Dryfoos, but my head leads me elswhere.

Posted by: Pat H at March 8, 2005 7:28 PM

Burt Reynolds declared bankruptcy, Trump, etc.

Sorry, they can still live high on the hog.

Depends on the case, sell the house.

Posted by: Sandy P at March 8, 2005 8:17 PM

I heard Chuck Grassley say that general Sental support for this bill is about 80-20, give or take whatever amendments.

If at least 20 Democrats support it, it can't be too bad for the little guy.

Any bankruptcy reform should go hand-in-hand with strict interest-rate limits for non-sophosticated (i.e., consumer) lending transactions. That limit ought to be no higher than 22 percent. Or, if you like, prime plus 15 percent. I'm surprise no Democrats have pushed this angle...

Posted by: Seven Machos at March 8, 2005 10:42 PM

I spent a number of years doing high level legal work for the credit card industry, including some pioneering work on banking law. I have a professional knowledge of the credit card and consumer lending businesses and how they work.

Believe me, they do not leave any thing on the table. They squeeze their customers just as hard as they can to get every nickel of money out of them that they can. The Credit Card companies have been borrowing money at close to zero interest rates for the past few years. Ever wonder why your APR is 19.8%. The Credit Card companies spend enormous resources figuring out who their customers are, how much they will spend, how many of them are going to default, and every other term of their business. They are quite happy to solicit every man, woman, child, dog and inanimate object in the country to acquire one of their credit cards. And they are not doing that because they are stupid, but because they believe they can price their product to make money on that basis.

What possible use is this bill to them? If they took nothing from any bankruptcy unless they could affirmatively prove deliberate fraud, it would make no difference to them. they would still price their product to make money and very few deadbeats would have to post collateral before obtaining a credit card. Let us leave the onus on the lenders to do proper underwriting before issuing credit. They have more resources at hand than borrowers, so why let them off the hook for poor business practices?

Furthermore, an irresponsible consumer will still be punished with the eventual, yet assured, loss of credit, and an irresponsible lender, will be punished with the loss of capital. Both parties have sufficient economic incentives for a smoothly operating credit market. What problem does this bill solve? If this bill passes, the benefits, if any, will flow to the bottom line of the credit card companies and will not touch any consumers.

Lastly, I note the claim of the Bill's supporters that it only negatively impacts high-income people as a bit of unintended irony. I wonder how many of the Bill's proponents rebutted their congressional opponents claims that the President's tax bills favored the rich by labeling those claims as class warfare rhetoric? Should they then turn around and use that same rhetoric to pass the Bankruptcy Bill?

Finally, I think we need to remember that the subject of debtor-creditor relations is not one where should recur only to our reason for ethical answers. We often criticize those who think they can by exercise of unaided reason invent morality. Let us then read scripture for guidance on this subject.

Ex 22:
26 If ever you take your neighbor's garment in pledge, you shall restore it to him before the sun goes down;
27 for that is his only covering, it is his mantle for his body; in what else shall he sleep? And if he cries to Me, I will hear, for I am compassionate.

Dt24:
10 "When you make your neighbor a loan of any sort, you shall not go into his house to seize his pledge.
11 You shall stand outside, and the man to whom you make the loan shall bring the pledge out to you.
12 And if he is a poor man, you shall not sleep in his pledge;
13 when the sun goes down, you shall return the pledge to him that he may sleep in his cloak and bless you;
and it shall be righteousness to you before the LORD your God.

Christians would add:

Mt 6:
12 And forgive us our debts, As we also have forgiven our debtors;

The notion of allowing the debtor relief with lenity is not therefor merely an example of American Ingenuity, it is an example of American Piety, and one we should not forget.

Posted by: Robert Schwartz at March 9, 2005 1:07 AM

What makes me crazy is the way credit cards get handed out to dopey college kids as if they were candy bars. The kids, who are completely untrained in the ways of consumer credit and basic responsibility, then run up huge debts and are stuck with them. These bankruptcy revisions merely serve to validate that kind of predatory lending.

Interest rates are determined by a balance of risk versus reward. The higher the risk, the greater the reward. This revision merely preserves the reward for the credit card companies while eliminating the risk. That is hardly in the national economic interest.

Posted by: Bart at March 9, 2005 6:41 AM

That was great, Robert. I remember developing a strong pro-bankrupt perspective a few years ago when I walked into a bank and saw a poster of a beaitiful trendy couple with the words "Get the Loan You Deserve." underneath.

Posted by: Peter B at March 9, 2005 7:03 AM

I've done a lot of bankruptcy work over the years, mostly for banks. I too think this is a cruel and punitive law of little benefit to creditors.

Posted by: jdkelly at March 9, 2005 9:56 AM

Proponents say it would force more Americans to be financially responsible

If more Americans were financially responsible, the credit card business would be ruined.

Posted by: Robert Duquette at March 9, 2005 3:12 PM
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