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Bankruptcy Reform

Megan McArdle on bankruptcy reform:

I'm against the bankruptcy reform not because I think that one side or the other is getting shafted, but because I think that easy bankruptcy is one of the great unrecognized strengths of the American economic system. Easy bankruptcy is what frees people to be entrepreneurs, to take risks without fearing that one wrong move will destroy them forever.

I understand that bankruptcy reformers think that they can target the deadbeats without touching the merely excessively daring, but I'm not so sure. And while the abuses of the system may be morally outrageous, I don't see that they're particularly damaging. Capital One and its ilk seem to be getting along pretty well without our help. I'd be happy to leave it that way.

Kevin Drum gets to the crux of the dichotomy:
Credit card companies want the ability to make risky loans, but they also want federal protection that protects them from bearing the risk that goes along with making those loans. That's a pretty cushy setup, as long as you can buy yourself enough politicians to make it happen. Apparently they can.
Considering the profit banks and credit card companies make from exorbitant late fees and interest rates I'd wager that they'd think twice about supporting bankruptcy reform if it included strict usury limits. If you were to cap rates for non-secured credit at prime + 5% and late fees at 1%, or $25 as a part of the bankruptcy reform bill low income consumers would probably be the big winners. Of course that isn't happening...

Update: Glenn Reynolds has a bunch of links to various takes on the legislation. The only real groundswell for reform seems to be coming from the moneyed interests that lobby Congress.


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Comments (26)

You can't tell me credit ca... (Below threshold)
crapbuffer:

You can't tell me credit cards are not profitable when I get between 2 and 6 "pre-approved" credit card offers every week. The printing and mailing costs alone must be staggering, but apparently are worth it to them.

Credit card companies send ... (Below threshold)
John S.:

Credit card companies send out some 6 billion unsolicited credit card offers each year and now they're whining that they're picking up a few deadbeats? Screw them.

remember "The business of A... (Below threshold)
patrick:

remember "The business of America is business" not the little people. Why should people who get sick and then get cancelled by their insurance get a break.

Considering the profit b... (Below threshold)

Considering the profit banks and credit card companies make from exorbitant late fees and interest rates...

My mother had $7,000 in credit card debt when she passed away three years ago. The card issuers apparently absorbed the loss without so much as a twitch. So while my brother and I were relieved that we didn't end up having to settle it up ourselves, we were left wondering just how much of a margin these outfits must be able to carry that lets them apparently do this on a more or less routine basis.

Anyway, to everyone whose credit card spending helped make it possible, thank you! Don't you feel all warm and fuzzy inside?

You don't?

Come to think of it, neither do I.

Over the last ten years I h... (Below threshold)
NeilS:

Over the last ten years I have received enough to credit card applications to build a small mountain. I have sympathy for those who go bankrupt because of medical emergencies, divorce or because they are fighting in Iraq. I don't have much sympathy for those who mismanage and even pilfer companies because of stupidity and greed. And yet this is who Congress decides to protect. If Congress was really serious about bankruptcy reform they would get rid of the loophole that allows very wealthy individuals to hide their assets.

I'm not here to defend the ... (Below threshold)

I'm not here to defend the credit card companies. However, we have reached a point in society where there is no shame for anything. Buying something and not paying for it is called stealing. If you declare bankruptcy you are in the strictest sense of the word a thief.

Table-pounding free markete... (Below threshold)
Tom Maguire:

Table-pounding free marketeers (hmm, sometimes I am one) will point out that strict bankruptcy laws make credit *more* available, and will wonder why others think that is a bad thing.

I guess the answer is some sort of paternalistic concern that folks will make bad choices (or be marketed into making bad choices), or have bad luck.

When people go bankrupt it'... (Below threshold)
Meezer:

When people go bankrupt it's not just the "big crdit card companies" that lose out. It's also the local dry cleaner, the local HVAC guy who came out at 10:00 at night to fix the furnace, and many other small businesses. Maybe big companies can eat all those losses but small ones can't.

'Considering the profit ban... (Below threshold)
Jack Tanner:

'Considering the profit banks and credit card companies make from exorbitant late fees and interest rates I'd wager that they'd think twice about supporting bankruptcy reform if it included strict usury limits.'

Usury? exorbitant late fees and interest rates?

Sorry but if someone is willing to extend you 5 - 10 k of credit based on your signature with little or no collateral how can you call their interest rates usury? Easy credit is a boon to the economy in that it greatly increases buying power. The problem is that people sign credit agreements and turn around and blame their failure to live up to the agreement on the other party. Nobodies forcing you to pay 18% interest. Don't blame other people. The real problem is with people who buy with no intention of repaying who force the rest of us to pay higher interest to cover their bad debts.

I'm in the middle of my Mex... (Below threshold)
bullwinkle:

I'm in the middle of my Mexico half of my vacation year, I spend winters here. The other six months of vacation are usually spent in Texas, the first 2 months after I get back are mostly spent sorting through thousands of pieces of mail, most of which are unsolicited credit card offers. I got over 4,000 in 2001 and haven't bothered to count since. I could reverse my vacations and keep warm by burning the things. I'm curious though, how many more offers would I be getting if I actually had a job instead of spending the last seven years on vacation?

Personally, I'm looking for... (Below threshold)
s9:

Personally, I'm looking forward to seeing what America will be like when working class people can no longer escape into Chapter 7 when they run out of credit.

Sure, your husband may have had a terrible accident and your current net worth went well into the red paying for his medical attention, but the good news is that your future earned income will always be available for paying off your debts.

America will be a much better place once the vast majority of working class people are in the labor force primarily to pay off their indenture. It was such a messy place when the peasants had the luxury of choosing how long to work beyond the minimum necessary to support their own consumption.

I don't know what I think a... (Below threshold)
Cousin Dave:

I don't know what I think about this. I look at the anti-reform position and observe that this position seems to be based on two primary arguments:

* That unsolicited card offers compel people to engage in a pattern of behavior that they would not otherwise engage in, namely out-of-control charging. The libertarian in me cringes at this; follow this argument to its logical conclusion and you end up at the leftist "people are sheep" position.
* That credit card companies are somehow making enough money on $25 late fees to offset five- and six-figure writeoffs. I could be wrong, but to me, this math just doesn't work.

On the other hand, a libertarian position would also say:
* If credit card companies aren't smart enough to figure out who is abusing their credit and cut them off before they can spend themselves into bankruptcy, then they deserve what they get.

This would work, if it weren't for our lawsuit culture. We all know good and darn well that the moment that a credit card company cuts anyone off because they think that person is overspending, dozens of lawyers will be at the Madison Co., Illinois courthouse within minutes bearing class-action suits with hundreds of thousands of names listed.

My worst fear is this: future "reform" efforts wind up with federal regulation over who can have a credit card, with arbitrary standards and privileged classes of people and everything that comes with it. That would kill consumer credit.

That's why I find myself mostly favoring the current bill. If anyone has a better idea, I'd like to hear it. And no, I'm not being sarcastic.

s9.Yep. America will... (Below threshold)
Meezer:

s9.
Yep. America will be a much better place when good ole' Mr. Wilson goes bankrupt *himself* because of his good ole' customers who won't pay their bills. Small businesses are 80% of the total business in this country. Lets by all means kill Peter to let Paul off the hook.

Disclaimer: I am a small bu... (Below threshold)
Meezer:

Disclaimer: I am a small business person in a small town. It's really fun to stand in line at the grocery while someone who owes you big money buys a bunch of steaks. I'd like some once in a while, myself, but I can't afford it.

Meezer writes: Ye... (Below threshold)
s9:

Meezer writes: Yep. America will be a much better place when good ole' Mr. Wilson goes bankrupt *himself* because of his good ole' customers who won't pay their bills. Small businesses are 80% of the total business in this country. Lets by all means kill Peter to let Paul off the hook.

I am so there with you! Of course, Mr. Wilson won't be going into Chapter 7 either— so we'll be getting a share of his future earnings to pay back his debt too.

The future is so bright, we all ought to be wearing shades! Don't any of you see the upside here? By letting bankers and other creditors off the hook for making bad loans to Mr. Wilson and his deadbeat low-life "customers," we will all enjoy the benefits of the lower interest rates the banks will be able to charge because they won't be carrying as much risk as before! We will all be safe and secure in the knowledge that as long as Mr. Wilson can continue to work, he will always be able to repay his debts.

Why is everyone looking at me like that?

I honestly think if credit ... (Below threshold)
Just Me:

I honestly think if credit card companies were more interested in handing out their cards more carefully than trying to make lots more money, things would be better.

I don't have huge sympathy for the idiots who get the cards and then run up thousands of dollars in debt (I had a friend from college who without a job most of the time managed to run up about 30k in debt on credit cards-I can't help but wonder why companies kept giving her cards, they had access to her credit report).

But I also think the companies make it way too easy to get cards. I imagine CC companies have killed so many trees soliciting me that ELF and Green Peace should be constantly picketing them.

Just Me writes: I... (Below threshold)
s9:

Just Me writes: I honestly think if credit card companies were more interested in handing out their cards more carefully than trying to make lots more money, things would be better.

WRONG! We will all be better off when our creditors have even fewer reasons to be concerned about the risks of lending to the financially incompetent. The problem with Chapter 7 bankruptcy is that it allows borrowers to take out unsecured loans with the "credit card" accounts, then default on them without creditors having any claim on their future wage earnings. Because creditors have to carry all that risk, they have to charge very heavy interest rates.

But, now that this glorious bankruptcy reform bill is about to become law, we will see that borrowers will never be able to escape their debts as long as they are still able to sell their labor in the market. This will lower the risks for creditors, because they will now be making loans to consumers that are secured by their future wages. Interest rates on credit cards will drop, and we will all enjoy more access to capital than we did before.

Why all the long faces? I would think you guys would all be stoked about this reform!

Some people can do sarcasm.... (Below threshold)

Some people can do sarcasm. Some people can't.

McGehee writes: S... (Below threshold)
s9:

McGehee writes: Some people can do sarcasm. Some people can't.

Some people can recognize the distinction between irony and mere sarcasm.

To JustMe: I think you real... (Below threshold)
Cousin Dave:

To JustMe: I think you really hit the nail on the head; if credit card companies were a bit more careful about the risks they incur, then we wouldn't be having this discussion. So why is this happening, then? Well, I'm not totally letting the credit card outfits off the hook. But I will point out that the carpet-bombing marketing tactics are pretty much the only option they have given current court rulings and regulation. If they try to target their offers towards only the better-risk customers, the minute that someone can't get a card that they want, the card company will be accused of "redlining" and then here come the class-action suits. The credit card companies make loans to bad-risk customers because, legally, they can't refuse to. So to that extent, the government was a factor in creating the problem.

I would agree that the current bill isn't really the answer. The answer is for the government to fix the problem it created, and give lenders more latitude in who they choose to do business with. If that is done, then most likely further action won't be necessary. Having a credit card isn't a right. I couldn't get one when I was in college, and right after college all I could get was a partially-secured card with a $500 limit, at 22% interest. I survived.

S9, some people do irony we... (Below threshold)

S9, some people do irony well enough that the difference is obvious.

You obviously don't.

There is another angle that... (Below threshold)

There is another angle that I touched on; this makes it so credit cards companies wouldn't have to worry as much about to who they give credit. Thus devaluing people like me who have spotless credit in the marketplace. People like me used to reap a reward for keeping their credit record clean, now I'm no better or worse off then a guy with a spotty job, spotty credit and who makes bad financial decisions.

There is nothing in this bill that is any good.

Rick DeMent writes: ... (Below threshold)
s9:

Rick DeMent writes: ...this makes it so credit cards companies wouldn't have to worry as much about to who they give credit. Thus devaluing people like me who have spotless credit in the marketplace.

That's the irony (which McGehee is failing to grasp above, not because I don't do irony very well, but because he doesn't grasp the irony very well).

You see, you were overvalued all along. The thing is that prior to this bankruptcy bill, unsecured credit was truly unsecured. You could run up your credit cards and escape into Chapter 7 without your creditors having any recourse. With this new law, borrowers with spotty credit records will be able to secure their loans by borrowing against their future income, and creditors will have some assurance that borrowers can be coerced to repay. That assurance is a kind of security that borrowers have until now not been able to put up as collateral.

People like you, who were able to keep their credit scores high, were "reaping a reward" for nothing more than presenting a profile to your creditors of a person whose income will probably remain available for servicing an unsecured loan. You were getting money for nothing.

Thank God we closed that fscking loophole. Now, your future income is just as good a security as the fsckup down the street. If you can work for $5.15/hr, you can get a loan. Isn't capitalism wonderful?

Here's something that nobod... (Below threshold)
Josh:

Here's something that nobody on this thread has touched upon: medical bills.

I only have $1k in unsecured debt and make in the $40-$60k range. What happens if I'm in the hospital and, because my insurance is so crappy, incur $350k worth of hospital bills? The hospital, doctors, drug companies, etc. will all demand payment now and eventually, because I don't happen to have $350k lying around, I will be sued and judgements rendered. I may be subjected to a form of slavery as I'm forced to pay $1k per month for *30 years* because I'm unable to discharge this debt via bankruptcy, as I make too much. This wouldn't be due to irresponsible spending, it would be due to a health problem that I had no control over.

I suppose in that sitation I'd have to loose my job and then work at McDonalds so I could indeed file under Chapter 7 and discharge everything. But then I'd loose my car, possibly my home, any posessions worth anything.

It is an error to assume that everyone who files bankruptcy is doing so to discharge irrisponsible credit card debt; in fact, a recent survey said that more than half of all bankruptcies were for medical reasons.

--Josh

For those of you wondering ... (Below threshold)
Dave:

For those of you wondering if the credit card industry is profitable check out investor info at citigroup.com and look at quarterly earnings, every quarter, every year. I work for a large bank that issues credit cards and we don't need any help with bankruptcy laws. In reality our bankcard loss rates are actually far lower than our goals (as to maximize profits you need to take more risk-hence loss rates can be too low). Also this extra profit will never be seen by ordinary people or workers-that is reserved for Saudi Princes that have $10 Billion stakes in the company and executives receiving tens of millions in stock options while common workers will recieve a 4% raise in a generous year, with of course above average job performance. Basically some loopholes need to be closed, but catering to the credit card industry at the expense of families makes me sick.

How much more money do the ... (Below threshold)
Disgusted:

How much more money do the bastards need? The lend to deadbeats because it is profitable and while bankruptcies have been up, their profits have soared during the same period. So WTF are they whining about? To slap this punitive BULLSHIT law on the American people when we've been through one of the worse recessions EVER and medical costs are through the roof is cruel and sick. Every senator that voted for this bill should be flogged. Of course it will sail through a Republican dominated house, all those bastards care about is serving the business interests. The sweet irony to me is that the DUMB, yes I said DUMB red-staters who voted for Bush will bear the brunt of this law. Sweet. Very sweet indeed. I bet they won't care so much about what Adam and Steve are doing now.




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