Wednesday, March 09, 2005

This Bankruptcy Proposal

Why do we need to change the federal laws* that cover bankruptcy? There are two theories about this: The first one says that Americans are addicted to their credit cards and other forms of reckless spending and that the current bankruptcy regulations allow all the crazy spenders to avoid paying for their feast. Instead, the extra costs are rolled into higher interest rates which are then paid by us prudent citizens. The second one says that while there may be some truth in the first theory, the real reason for the new proposal is that it will benefit the banks and credit card companies which have long fought (and paid) for just such a law. Finally they have the votes to get it through. The new proposal lets the lenders continue their practise of offering credit to people who shouldn't be offered any at the terms used but in a change from the past the debts thus incurred could not be skipped through bankruptcy by most debtors.

It is true that Americans are pretty indebted. The average household carries eight thousand dollars in credit card debt and a suprising number only pays the minimum allowable charges on their cards. One point four million couples or individuals declared personal bankruptcy last year, though at least some of them probably acted in anticipation of the changes now underway. Women and men appear about equally affected by bankruptcy.

It looks like the first theory is the correct one, doesn't it? Moral bankruptcy, some might even mutter. Time indeed to put a stop to all this frivolous consumption, and our caring government is doing just that.

But then we hear that a recent Harvard study which looked at data from five states in 2001 found the most common reason for bankruptcy filings to be serious medical problems. Other common reasons for bankruptcy were the loss of a job or a divorce. Suddenly our picture of the indebted changes from the frivolous shopper to something sadder and more serious. Maybe even something that could look a little bit like ourselves, especially when we learn that three quarters of those bankrupted by illness had health insurance. This could happen to me, we might whisper.

Let's not get too carried away. Some of the bankruptcies must be frivolous and it could be a good idea to rein those in. And the proposed bill applies a means test which exempts people with lower than median incomes in their state from the harsher requirements. Only those who can afford to pay something back will be expected to do so. Isn't personal responsibility a good idea for everyone? Why should some of us spend and spend when others work hard and save for the things they need?

Why indeed? But what about those who file bankruptcy because of high medical expenses? Surely the proposal will allow them some extra slack? Actually, no. An amendment proposing a homestead exemption of $150,000 in home equity for this group was defeated by the Republicans in the Senate. So was an amendment asking for extra consideration for those in the military who had to file bankruptcy because their military service caused their private businesses to fail, an amendment asking for extra consideration for those who file bankruptcy because of identity theft and an amendment asking for a homestead exemption for the elderly. All defeated by pretty much every single Republican in the Senate.

Because being prudent is the right thing to be. Personal responsibility is good for all of us. Except for the very rich: Another amendment which the Republicans also defeated would have gotten rid of the loopholes which allow for "asset protection trusts" in several states. Such trusts are expensive to create, so only available for the wealthy, but they will let you have a homestead exemption in a bankruptcy for your manor house or two.

The Republicans were not totally alone in rejecting all these amendments. Some Democrats also helped in this noble endeavor to get frivolous spending in this country under better control. But they all had trouble when it came to controlling the other side of the equation: the behavior of the lending institutions: An amendment proposing a ban on usury was resoundingly defeated. Now the credit card companies are free to charge interest rates of over thirty percent for certain kinds of debt. Usury, by the way, is explicitly banned in the Bible but this didn't make the Republican fundamentalist Senators change their vote.** Weighty moral matters, these credit concerns, when fundamentalists go against their Bible. The Senate also rejected an amendment which would have required credit card statements to show how long it would take to pay the debt back just with minimum payments and what the total interest payments would be. Such information is not necessary, the Republicans decided.

The evidence seems to be mounting for the second of the two theories: that credit card companies and banks have paid for this bill for several years and now expect delivery of the product, and studying the donation patterns of these companies lends more support for this argument. But the bill also fits into a wider pattern, one that Paul Krugman discussed in his recent column on the bankruptcy bill: "the "risk privatization", a steady erosion of the protection the government provides against personal misfortune, even as ordinary families face ever-growing economic insecurity."

Check for yourself: Lifelong employment? Gone. Employer-provided health insurance? Going. Unemployment benefits? Shortening. Length of average unemployment? Increasing.

Add to that these recent attacks against bankruptcy protection and Social Security, and the picture becomes clear. And ugly, especially for the middle classes who can no longer rely on staying middle class.
*You can get a summary of the proposals here. (Warning: very boringly written)

For a good summary of the criticisms, see Talking Points Memo and especially posts by Elizabeth Warren, one of the researchers of the bankruptcy study mentioned in my post.

**In you men accept bribes to shed blood; you take usury and excessive interest and make unjust gain from your neighbors by extortion...I will surely strike my hands together at the unjust gain you have made and at the blood you have shed in your midst.
Ezekiel 22:12-13