A couple I know declared bankruptcy some time ago. They are both uber-conservative, Ayn Rand fans kind of people.
I got to thinking that there are a lot of similarities between the end results of a bankruptcy and going on welfare – in both situations other people end up paying for your lifestyle – in the case of welfare through taxes and in the case of bankruptcy through higher credit card rates, etc.
So is there really that big a difference between the two? When I see the woman who declared bankruptcy and she starts riffing on how unfair it is that some people can sit around living off welfare, can I look her in the eye and tell her she’s in effect one of those people?
Well, it’s a social “safety net” that takes from one group of people (creditors) and gives it (or at least forgiveness of debts) to the debtor. It spares us the evils of debt slavery, poor-houses, debtors’ prisons, and the other “free market” solutions of the old and evil era that Dickens wrote so colorfully about.
On the bad side, it might encourage people to make bad choices. Some people, seeing bankruptcy coming, deliberately max out their credit cards. This is hard to defend.
On the plus side, it encourages risk-taking in starting small businesses. People feel the ability to borrow money to open a business, knowing that failure will not be prohibitively unpleasant.
So, yeah, it’s “Welfare.” It’s socialism. It’s un-Objectivist. It takes from others.
And…it’s rather a good thing. The alternatives have been tried, and they stank.
Not really. There are a few essential differences. First, the extension of credit by the lender (and, indeed, paying higher interest rates by other consumers) is voluntary and based on gains from trade. The lender lends because it believes it can distinguish good credit risks from bad and by and large make money from the enterprise. Other borrowers agree to pay their quoted rates because they value earlier consumption over later consumption. Neither of these gains from trade are present in the tax-and-transfer system. You pay taxes to stay out of jail. The end.
Of course you could have the above without a bankruptcy system. In fact, the US has a relatively friendly bankruptcy system; my understanding is the debtor-creditor law in the EU is much more loath to cancel debts than ours.
But bankruptcy law, even here in the US, operates for the benefit of creditors. Namely, bankruptcy creates a system that allows creditors to be less vigilant about the solvency of their borrowers. An overwhelmed debtor seeking bankruptcy relief initiates a process that alerts all his creditors and the Bankruptcy Court then accumulates their claims for an orderly distribution of the debtor’s estate (as the claimant’s asset pool is known in bankruptcy).
Without this, creditors who want to make sure that their insolvent borrowers make even partial payment to them (and all creditors want this), would need to monitor their borrower’s condition and be prepared to swoop in with a suit on the debt. Priority of civil judgments follows a first-in-time rule.
Thus, in brief, the bankruptcy code minimizes the monitoring costs associated with lending people money.
I don’t think it’s accurate to consider personal bankruptcy a form of welfare. The financial services industry sets its rates and policies based on the knowledge that bankruptcies can happen.
Welfare is simply the government giving free money to people that they have taken from the taxpayers by force. Bankruptcy, on the other hand, means that someone loses money because they voluntarily took a risk by loaning you money, knowing that you might declare bankruptcy.
The bank sets the interest rate that you pay on your credit card / mortgage / auto loan / etc. based on their judgement of how likely you are to declare bankruptcy and leave them holding the bag. Statistically, they set their rates so that they will make a profit even if the expected fraction of people do declare bankruptcy. People who the banks judge more likely to declare bankruptcy pay higher rates.
Someone with good credit can borrow money from the bank at pretty close to the bank’s own cost. Someone with bad credit might pay an extra 5 or 10% in interest.
Obviously, once you’ve declared bankruptcy, you will be paying ridiculous interest for the next few years, if anyone will even given you any sort of loan at all.
Kimmy_Gibbler and Absolute hit the nail on the head, IMO.
Quite frankly I see few similarities beyond “lack of financial means to sustain ones’ self”…
To me welfare in itself is a support network by which those who temporarily [hopefully] cannot support themselves. Bankruptcy is typically more a result of poor decisions, or sometimes, fateful misfortune. It’s also a last-ditch ‘way out’ for those who find themselves buried under debt, whereas welfare is more of a slush fund that people can draw on in times of need.
OK, in one sense I don’t really pay for my credit cards, since my husband and I pay the balance in full every month.
But still – the credit card companies want to make a profit. Since writing off money owed them eats into their profits, they need to make that up somehow. Certainly they make up for a lot of it by raising their rates. But they also get revenues from the amount that merchants pay them. And the merchants need to make their profits and so they make up for that cost by raising their profits.
I buy from merchants who accept credit cards, and it’s damned hard to live in this country without doing so.
So, yes – in a very real sense credit cards are something that everyone pays for.
I would answer “Yes” to the OP back before the bankruptcy laws were reformed. The system used to be very easy to exploit. There were people who would declare bankruptcy and keep their assets and just lose the debts. You could rack up tens of thousands in debt and go bankrupt over and over while still accumulating assets that you could just exclude from the bankruptcy.
Now it’s harder to abuse, as you still have to pay people back according to what the courts decide. You can’t keep assets above a certain level. For instance, if you have a house with very little equity you will most likely be allowed to keep it. But if you have 200K in equity, you’d be expected to tap into that if you owe 100K in credit cards that you are trying to dump with the bankruptcy.
The current system isn’t welfare at all, but a proper role of the courts.
Y’all are confusing “not paying your debts” with bankruptcy.
It’s the not paying your debts part that makes you a bum. Bankruptcy merely distributes your remaining assets to your creditors.
If she borrowed intending to keep it rather than pay it back, that makes her a thief. If she meant to pay it back, but couldn’t, she’s merely a bum.
A thief is clearly the worst of the lot, but whether being a deadbeat is worse than welfare is a closer call. Personally I wouldn’t judge either one too harshly, so long as they were doing the best they could.
But someone who’s a deadbeat beating up on welfare moms… Well, that person’s just a hypocrite.
Most of this is wrong. Particularly the part about forcing the repayment. There is now a means test filed by every debtor, but it rarely pushes people in a 13 that wouldn’t have been the before.
Also, what assets you can keep are completely dependent on the property exemptions available to you, either by your state or the Federal exemptions. Here in Indiana, you can keep about $8k in personal assets, then equity becomes available. Before reform, it was more like $4k, so it used to be harder to exploit it.
Also, it went from bankruptcy every six years to every eight years. Not a tremendous change at all.
I wouldn’t say it’s “welfare” so much as a “get out of jail free” card. And it is abused - a lot of people go on about high medical debt, but in my district, in the 15 years I’ve worked in it, it’s mostly 30 or 40 somethings who racked up the credit card like irresponsible idiots.
Sounds like you’re trying demonize people who have had to declare bankruptcy or collect welfare. There are so many scenarios that can lead to it, such has major medical catastrophes, death of a spouse, loss of a job, etc. Until you have been in that boat you’ll never understand it and will have nothing but contempt for those who have had to. Of course there are those that do take advantage it for personal gain, but…
I also see wide spread corruption by banks, Wall Street, major corporations, politicians who are protected by a faltering legal system. So should we throw rocks at the individuals who have filed for bankruptcy or collect welfare while big wigs who have “stolen” billions and have put our futures at risk go unpunished?
I don’t know if your remarks are directed at me, or not.
I see that there is an important role for welfare, and an important role for bankruptcy. I have great sympathy for people who run into trouble because of medical bills or being unable to find work for months after losing a job.
But that wasn’t the case for the woman I posted about. She got divorced several months after the bankruptcy (which I’m sure contributed to the breakup of the marriage, but the breakup was mostly due to infidelity). Her husband was a mortgage broker, and when the mortgage market was ha-cha-cha they lived very well indeed.
An example – they consider themselves to be Foodies and ate out several times a week. No “let’s just order a pizza and relax in front of TV” – they went to nice restaurants. Dinner was always accompanied by a bottle of wine, and they are oenophiles, so that bottle was never cheap. They stopped going to one restaurant when they got mad that the owner never came to their table to schmooze with them and they were (by their own admission) spending $100-$200 every time they ate there, and they ate there at least once a week.
For her 40th birthday (certainly a cause for celebration) in addition to the trip she took to Europe with her sister, they went to Charlie Trotter’s for dinner. At the Kitchen Table. With the wine flight. Dinner, the husband bragged, cost $1,000.
Then the bottom fell out of the mortgage market. He apparently believed the official line he was feeding his customers since they owed $100,000 more for their house than they paid for it (which was also coincidentally $100,000 more than it sold for in a short sale).
If they had lived more frugally during the ha-cha-cha years and saved some of the money they were earning, they could have weathered their financial storm.
I’ve lost contact with him since the divorce, but although she complains sometimes about being poor, she went out and bought herself the new iPhone a week or two after it was released because she “deserved a treat”. She didn’t like the washer and dryer that came with the townhouse she’s renting, so she put them in the garage and bought new ones. Etc., etc.
But welfare recipients are to her a bunch of leeches, living off the hard work of people like her.
I kind of agree with Linus K. Bankruptcy isn’t welfare but it takes a special kind of hypocrisy to be a deadbeat and criticize others for taking welfare.
To all the folks who think that the creditor was taking their own risk when they extend credit, I assume you would not place very much of the blame for the mortgage default portion of the mortgage default crisis at the feet of the borrowers, right?
Since the whole thing was FUBAR, I think the situations are not comparable. I blame (in order):
Clinton / Franks for setting up the system that just begged to be abused.
The banks for not screaming that this was all going to end in tears, and used complicated financial instruments to hide the fact that they had no idea what they were doing.
Realtors who did know what they were doing, knew it was wrong, but did it anyway.
And of course, the Buyers, who had to know that there ain’t no such thing as a free lunch
I am also a bit sore at Bush for not pushing harder. He actually did try to roll it back, but probably could have tried harder.
Well, one good thing: I always wondered what a real estate bubble looked like. Now I know.