The New Bancruptcy Law

[IzzyR]

From the NY Times

For many of the more than one million Americans whose financial troubles are expected to force them into bankruptcy next year, the bill would end their ability to use the bankruptcy system to wipe out credit-card bills and other loans that are not secured by homes or other assets.

Instead, they would be forced to pay off some or all of those debts under a court-supervised plan, even if that puts the payment of old credit- card bills in competition with the payment of current child support, alimony and other court-ordered expenditures.

The bill’s critics say that credit- card companies and other lenders are themselves largely to blame for the explosion in bankruptcy — specifically, that their mass solicitations for high-interest credit cards and other loans have encouraged irresponsible spending that has landed borrowers in bankruptcy court.

I don’t understand the position of the bill’s critics. The fact that they say are undoubtedly true. The credit card companies do tempt people into taking out more debt than they should. But people have a responsibility to make the right decisions themselves. This idea that people can avoid the consequences of their own actions based on the fact that “he told me to do it” is another example of the lessening of the emphasis on personal responsibility that is taking place in our society. Furthermore, not everyone who loses out when someone declares bankruptcy is a “predatory lender”. I don’t think current bankruptcy makes a distinction in this regard. It seems like this argument is, to some extent, a variation of the tried and true “they’re all just a bunch of greedy rich guys” liberal line.

Two other provisions are opposed by Republicans

Republicans are expected to try to strip the compromise bill of at least two amendments inserted in the Senate version by Democrats: the $125,000 limit on home equity that can be shielded from creditors and a provision that would force people involved in violence against abortion clinics to pay legal judgments resulting from the violence, even if they file for bankruptcy.

The first provision is completely valid, and it is outrageous that the Republicans have opposed it. The rationale for allowing someone to keep their home is so as not to deprive them of a basic necessity; there’s no reason to let them live the life of luxury on someone else’s money. The second I’m unsure of.

Support for the overhaul was largely bipartisan, with 36 Democrats joining 47 Republicans in the evenly divided Senate to vote for it. President Bill Clinton vetoed similar legislation in his final weeks in office, describing it as too harsh on consumers.

The bill’s quick resurrection after Mr. Bush’s inauguration was seen as evidence of the generous campaign contributions made to each party by the credit industry. It also reflected the growing power of lobbyists in a government in which the White House and Congress are run by business-friendly Republicans

I don’t know if this assessment is fair. Whereas it is no doubt true that business interests pushed hard for this bill (as detailed in the article) there may be some principle involved here as well. (Note that at least 70% of the Democrats voted in favor - not to say that they didn’t get some contributions as well, but it is unlikely IMHO that campaign contributions alone could buy such overwhelming bipartisan support).

[friedo]

What you said.

–friedo

[Patty_O_Furniture]

What friedo said.

But- not everybody who files for bankruptcy does so because they burried themselves in debt. Many choose it only as a last resort after being laid off from work. Manageable credit card bills can become seriously unmanageable if you no longer have a job.

This is why I thought the $125K limit was a good idea and didn’t know that repubs wanted to eliminate even that much of a cushion. Hiss-boo.

[bashere]

This is why I thought the $125K limit was a good idea and didn’t know that repubs wanted to eliminate even that much of a cushion. Hiss-boo.

Err, the keyword is “limit”. The democrates want to place a limit, the republicans want to allow an unlimited home deduction. To quote the times article:

The amendment — which was fiercely opposed by lawmakers from Florida and Texas, where a house of any value can be exempted — would place a $125,000 limit on the value of a home that could be shielded.

The idea is to prevent high-income debtors from hiding assets in the house.

I’m against this one. In much the same way that people should be responsible enough to manage their debt, businesses should be responsible in making loans. Credit card companies now get a HUGE break in costs.

At the very least, this should only apply to debt incurred after the bill gets enacted. Otherwise, there is just too much of an ex post facto feel to it.

[redtail23]

DISCLAIMER: I haven’t really been following the debate on this so I qualify as fairly damn ignorant here ;), but a few things pop to mind.
Does this new legislation apply to corporate bankruptcies, or just personal? I’m under the impression it only applies to individuals. If so, then it is wrong. Why should legal fictions (i.e., corporations) have better protection than individuals?

Does this protection extend to all unsecured loans, or just those owned by corporations? If someone has declared bankruptcy and I hold an unsecured promissory note from them, do I get equal protection under the law, or do I get screwed because I’m not Citicorp? I ask because I know that, for example, banks and other “official” lenders have protection available if property on which they hold liens is seized under drug laws - but individuals (including such things as mechanic’s liens) get diddlysquat. If this is set up the way it sounds from your post, again, why should corporations get better protection than individuals?

And if we’re just going to say that no debts can be written off under bankruptcy, then why bother with having bankruptcy laws at all?

Not to mention the child-support thing. Ain’t no way, no how, that a corporation should get paid before child support gets paid. Depriving children so that some corp can make its quarterly profit is just flat wrong. The kids didn’t screw up; their parents did.

Originally posted by IzzyR
**This idea that people can avoid the consequences of their own actions **

So it’s OK for credit card companies to avoid the consequences of their own actions? These companies provide unsecured credit. No one forces them to do so. They run credit checks, verify income, so on and et cetera. No one forces them to hand out cards. They set their own rules (with a few exceptions governed by Federal law), their own interest rates, their own payment requirements, etc. etc. etc. No one forces them to do any of those things. If they are having a problem with defaults, perhaps they should take “responsibility to make the right decisions themselves”?

Case in point: Credit card companies hand out cards like candy at the uni here. They set up booths and give away goodies (ranging from Tshirts to electronicware) if you fill out an application. They are generally much less than forthcoming about the realities of how credit cards work, despite the fact that they are dealing with kids just barely old enough (if that) to legally obtain their own cards. In fact, there’s currently quite a ruckus going on because they pay kickbacks to the university for the privilege.

A kid going to school here a couple of years ago got a few cards. Didn’t tell his parents, got in over his head, and didn’t know what to do. Evidently he didn’t understand credit laws any better than he did credit cards. He committed suicide because he couldn’t see any hope for his future due to the mountain of debt.

Anecdotal, yes. His fault? Yeah, and his parents for not teaching him any better. But many if not most credit card companies do act like “predatory lenders” in many situations. Why should they be rewarded for that behaviour?

Originally posted by Attrayant
**But- not everybody who files for bankruptcy does so because they burried themselves in debt. Many choose it only as a last resort after being laid off from work. Manageable credit card bills can become seriously unmanageable if you no longer have a job. **

Or if you have uncovered medical bills, or if your spouse=primary-income-source dies, or if you’re off work from an injury or illness, or …

I agree - many, many people choose bankruptcy only as a last resort, having exhausted all other options. They should get screwed because some people are lazy, irresponsible gits?

[Zumba_The_Cat]

*Originally posted by IzzyR *
Two other provisions are opposed by Republicans

Republicans are expected to try to strip the compromise bill of at least two amendments inserted in the Senate version by Democrats: the $125,000 limit on home equity that can be shielded from creditors and a provision that would force people involved in violence against abortion clinics to pay legal judgments resulting from the violence, even if they file for bankruptcy.

The first provision is completely valid, and it is outrageous that the Republicans have opposed it. The rationale for allowing someone to keep their home is so as not to deprive them of a basic necessity; there’s no reason to let them live the life of luxury on someone else’s money. The second I’m unsure of.

(Bolding Mine)

That provision sounds so bizarre to me that I hope they throw it out.

I don’t believe that anyone should commit violence against an abortion clinic. But, what is so special about that particular kind of violence? Why can you get out of other legal judgements and not that one? It just doesn’t make any sense to me.

If you forced to pay judgements for committing violence against abortion clinics then you should be forced to pay judgements for other violent acts. If you can declare bankruptcy and avoid the judgement that I don’t see why abortion clinics are special.

[doreen]

The first provision is completely valid, and it is outrageous that the Republicans have opposed it. The rationale for allowing someone to keep their home is so as not to deprive them of a basic necessity; there’s no reason to let them live the life of luxury on someone else’s money.

The only problem I have with the $125,000 limit is that in some places (like here in Queens, NY), the basic necessity house is over the limit (Remember Archie Bunker’s house? Try to find it for under $170,000) ,while I’m sure $125,000 gets you a mansion in other places.

[tracer]

IzzyR wrote:

[QUOTE]
From the NY Times

they would be forced to pay off some or all of those debts under a court-supervised plan, even if that puts the payment of old credit- card bills in competition with the payment of current child support, alimony and other court-ordered expenditures.

If the person doesn’t have sufficient assets to pay off the debts under the court-supervised plan, what happens to him? Will he go to jail? If so, this sounds ominously like the “debtors prisons” that the Bankruptcy laws were originally crafted to eliminate.

Two other provisions are opposed by Republicans

Republicans are expected to try to strip the compromise bill of at least two amendments inserted in the Senate version by Democrats: the $125,000 limit on home equity that can be shielded from creditors [ … ]

The first provision is completely valid, and it is outrageous that the Republicans have opposed it. The rationale for allowing someone to keep their home is so as not to deprive them of a basic necessity; there’s no reason to let them live the life of luxury on someone else’s money.

The wording of the sentence in the NY Times article is ambiguous. It could mean that the Republicans are opposed to shielding any home equity from creditors, but it could also mean that the Democrats wanted to limit the amount of home equity that could be shielded from creditors to $125,000 while the Republicans wanted no limit to the amount of equity that could be shielded.

[labdude]

A large percent of bankruptcy filings result from medical bills. (33% IIRC) This means that you (izzy) could easily find yourself on the wrong end of this law. And if you think your health insurance will protect you must have not tried to file any claims lately. One of my coworkers is still trying to get his insurance to pay bills resulting from the birth of his child over 2 years ago.

Also, is the 125,000 indexed to infation because entry level housing is not much below that here.

Imagine this–You get cancer, can’t work, the bills pile up, you declare bankruptcy, then the sheriff come the evict you from your house so the creditors can have it.

[Brian_Bunnyhurt]

Redtail wrote:

So it’s OK for credit card companies to avoid the consequences of their own actions? These companies provide unsecured credit. No one forces them to do so. They run credit checks, verify income, so on and et cetera. No one forces them to hand out cards. They set their own rules (with a few exceptions governed by Federal law), their own interest rates, their own payment requirements, etc. etc. etc. No one forces them to do any of those things. If they are having a problem with defaults, perhaps they should take “responsibility to make the right decisions themselves”?

I agree and note that the revolving credit industry sometimes bets on the wrong horse as the cost of doing business. That is their investment choice. If I lose money on a stock, do I get to liquidate the company for it?

Often this bankruptcy is not the fault of the borrower, but due to unseen disasters, but morality is so tempting to legislate in a religious society (it makes lawmakers feel powerful when they defy logic). Bottom line: Society should not protect and enshrine a parasitical program using a morality argument. Something must be in place to discourage lenders from soliciting their services to anyone who wants money–we have all seen credit cards advertised that way.

This is what got bankers and citizens into trouble during the depression. If we protect their predatory nature, we should regulate who is able to be exempt to scare bankers off them as a preventive measure. Which begs the question, why should anyone get revolving credit if they can already afford it? It is a luxury, and if we protect a credit card company’s investment, for what reasons do we do this? Are innocent people, spouses and children, going to suffer for this idea?

This legislation seems to contradict the idea that the FDIC insures deposits. Why are bankers so protected in their business? Why aren’t homes likewise insured against loss of jobs by the FDIC? (Because bankers will foreclose the house at a profit?).

[barker]

Originally posted by Brian Bunnyhurt *
**
I agree and note that the revolving credit industry sometimes bets on the wrong horse as the cost of doing business. That is their investment choice. If I lose money on a stock, do I get to liquidate the company for it?*

Did the company sign any statement to the effect that they were responsible for the investment and would pay you back in full? Stock represents ownership not debt. If you were a bondholder you would be able to participate in the liquidation of the company upon their default.

**Often this bankruptcy is not the fault of the borrower, but due to unseen disasters, but morality is so tempting to legislate in a religious society (it makes lawmakers feel powerful when they defy logic). Bottom line: Society should not protect and enshrine a parasitical program using a morality argument.

**
What does paying money back that you borrowed from someone have to do with religion or morality?

**This is what got bankers and citizens into trouble during the depression.

**
I would like you to come up with some cites for this statement. With the exception of margin debt, excess credit to consumers had very little to do with the depression of the 1930’s.

**This legislation seems to contradict the idea that the FDIC insures deposits. Why are bankers so protected in their business?

**
FDIC insurance does not protect banks. It protects the depositers of the banks. The insurance does allow banks to attract funds at a lower capital costs than would otherwise be possible.

**Why aren’t homes likewise insured against loss of jobs by the FDIC? (Because bankers will foreclose the house at a profit?). **

I have been involved with the banking business for many years. In all the years I have never seen a bank make a profit on a foreclosure. Can it happen? I am sure it has. But that would be very rare.

I do oppose the new bankruptcy bill. I thought some reform was needed but this proposal goes way to far. Priority should be given to child support and other family obligations. The income level for debt forgivness should be raised to 200% of median income. I believe that bankruptcy judges should have more lattitude in designing repayment arrangements.

[Brian_Bunnyhurt]

You are saying that banks and citizens were not in trouble when a depression hit and they had outstanding loans?

Also, who initiates the request for revolving credit? Does it matter? Then this would be a moral distinction that places all the responsibility on the “sucker.” What prevents insurance companies from producing odd interpretations of the fine print and not paying? (government agencies).

Also, when people declare bankruptcy for medical reasons, this is a morality issue that they lose their house or car, because only morality can trump ethics in our society. In other words, it would be more wrong if they didn’t pay (under morality) than if they lost everything.

What about other cultures? Is America just primed for these lending parasites due to their political clout?

This is why personal responsibility is a Republican catchword. It allows exploitation under the “rules of the game” clause. Using the logic of exploitation, anything can be justified.

[Measure_for_Measure]

*Originally posted by barker *
I do oppose the new bankruptcy bill. I thought some reform was needed but this proposal goes way too far. Priority should be given to child support and other family obligations. The income level for debt forgivness should be raised to 200% of median income. I believe that bankruptcy judges should have more lattitude in designing repayment arrangements.

Please continue, and give a good cite, if you know of one: I have yet to see a good discussion of this issue.

On the credit card issue, my take is that the companies were being overly-aggressive in extending credit, and they want the Feds to solve their problems for them by changing the rules of the game.

I suspect that current changes in the law will cause them to redouble their marketing efforts, leading to pressures for further tightening of bankruptsy standards sometime in the future. Just as there is an insurance cycle, I suspect that we may see a credit card issuers cycle. This assumes that more funds are not put into law enforcement to curb so-called “Preditory Lending Practices”.

Izzy: Nothwithstanding the above, I believe your concern for personal responsibility is well-grounded. Nonetheless, I am not aware of any country/time-period where there was such easy or casual access to consumer credit (via credit cards) than in the US during the 1990s. (Nope, can’t provide a cite, sorry.) And “back in the good old days” there were way more restrictions on financial transactions. (This I can back up.)

I do believe it is unfortunate that borrowing is aggressively promoted (via credit card offers), getting-rich -quick is aggressively promoted (via online trading ads), but paying off your debt and organizing a financial plan gets short shrift. Ah well, what can you do? (other than perhaps paying an online visit to The Motley Fool )

[andros]

Anecdotal, yes. His fault? Yeah, and his parents for not teaching him any better. But many if not most credit card companies do act like “predatory lenders” in many situations. Why should they be rewarded for that behaviour?

:shrug: So it should be my responsibility to subsidize the stupid? You acknowlege it’s the kid’s fault. They shouldn’t be rewarded perhaps, but regardless of whether or not it’s ethical to prey on the ignorant, the lenders shouldn’t be punished either.

[barker]

Brian,

I wasn’t in disagreement with the direction of your comments, I just felt that there were a few misconceptions in your arguement.

Once the depression hit banks and individuals had all kinds of proplems with loans. Almost all of this was secured debt. It was not excess borrowing, it was the rapid rate of asset deflation that caused the Banks’ problems. Unsecured debt as we know it today was almost non-existent. If you had unsecured debt it was to the corner grocery store or other local merchants. Credt cards did not come into use until the 1950’s (Amex/Diners Club)and were not widespread untill the 70’s (introduction of magnetic strips).
Banks had much geater losses due to corporate debt and investment banking activity. This resulted in the separation of Banking/Investment/Insurance industries (which has now been done away with.

Also, who initiates the request for revolving credit? Does it matter? Then this would be a moral distinction that places all the responsibility on the “sucker.” What prevents insurance companies from producing odd interpretations of the fine print and not paying? (government agencies).

I don’t see how who initiates the request for credit has any bearing on the “moral collectivity” of a debt. If the creditor issues debt in a dishonest or illegal manner, the consumer does have recourse. Fair lending law and civil actions have been brought against many lenders for unfair and misleading lending practices.

Also, when people declare bankruptcy for medical reasons, this is a morality issue that they lose their house or car, because only morality can trump ethics in our society. In other words, it would be more wrong if they didn’t pay (under morality) than if they lost everything.

I agree with you 100% that some type of consideration should be given to medical bankruptcies. Again, I believe that the reform bill as passed is flawed in many ways. The counter arguement is why should the banking community bear the costs of our society’s inability to provide adequate medical coverage to the members of that society.

This is why personal responsibility is a Republican catchword. It allows exploitation under the “rules of the game” clause. Using the logic of exploitation, anything can be justified.

I think you might want to take a look at the Democratic Senators that voted on this bill.

[barker]

flowbark

Not in my office now so I can’t give you specific cites for some of the items. The complete text of the bill is linked through this site: www.abiworld.org/ I’m sure that there will be some good summaries available on the Web as the weekend progresses. I could not find any at this time.
The major issues that I have with bankruptcy law as it currently exists deals with the number of high income people who abused the system. Granted that only 4% of bankruptcies were considered “abusive” by a survey of bankruptcy judges and trustees, the dollar amount of debt dismissed was much higher.

From my own experiences I’ve seen high income ($200,000 per year plus) professionals proceed through bankruptcy and have debts completely wiped out through Chapter 7 proceedings. These are the cases that should have been addressed in forcing the cases through a Chapter 13 reorganization.

The proposed reform, as I understand it, is that if your income is at the median or higher in your particular state, than you must enter a repayment plan for at least 25% of your debts. This does not offer much relief to someone at the median level that may have significant family or other obligations.

I also disagree with giving unsecured creditors, such as credit card companies, the same priority of payment as someone that may have to collect child support payments.
There are some good things in the reform. Mandatory credit counseling is a good idea. It would be much better to offer some level of financial planning and responsibility in high school. I don’t see that happening soon.

I agree that alot of credit card companies are irresponsible in the way they solicit credit. I think you are correct in seeing this run through cycles.

[Measure_for_Measure]

I agree with you 100% that some type of consideration should be given to medical bankruptcies… The counter arguement is why should the banking community bear the costs of our society’s inability to provide adequate medical coverage to the members of that society.

I can address that counter-argument. Specialists in the credit-card business can make an estimate of the expected default rate, given existing institutions. As long as they know ahead of time that a predictable share of their clients will default because of medical bills, they can price that into the product. Indeed, given a competitive credit-card issuing industry, it will be the customers who effectively cross-subsidize each other.

Changing the rules of the game midstream, though, should allow existing credit card issuers to capture some windfall profits, as default rates decline and recoveries increase. I would expect that those windfall profits would be eroded over time, as issuers compete against each other, either on the basis of price or by pouring money into promotions and sales.

Barker: I’m curious, should unsecured debt have the lowest seniority? The highest? Or doesn’t it matter, provided the creditor knows the conditions attached to the loan ahead of time?

[Measure_for_Measure]

Great link, Barker: Thanks.

It is indeed a concern when bankruptcies rise 75% from 1990 to 2000, given that the economy in the latter year was quite strong. Still, apparently 2/3 of those filing for bankrupts experience a significant spell of unemployment before their filings.

Judging from your cross-post, we appear to be in rough agreement: the bill has some sensible reforms mixed in with some poor policy.

I speculate that the Republicans may be inclined to rush business-friendly legislation through Congress, before fading health forces certain elderly Senators (Helms, Thurman) into retirement. Perhaps the GOP will have some constituency concerns when small business owners in trouble find that a single creditor can now block a reorganization. The resulting liquidation won’t make their employees too happy either.

[barker]

Secured debt such as mortgages and auto loans have priority to the level of the specific collateral that is pledged to that debt. If the debt exceeds the value of the asset pledged, that excess debt becomes unsecured.

After secured debt is out of the way, all types of preferences can be applied to the unsecured debt.
Not in any particular order
Taxes
Student Loans
Child Support
Judgements
Unsecured Loans
Bills and other stuff.

Unsecured loans are generally going to have the lowest priority. Lenders know this and price the product accordingly.

[Spoke]

Here’s the problem with this legislation, boiled down:[ul][li]The Banks extended credit under one set of rules.[/li][li]They did so knowing what the rules were.[/li][li]Now they want to change the reules in the middle of the game.[/li][li]They are using campaign contributions to buy the clout necessary to allow them to pull this stunt off.[/ul][/li]
I do not see how this series of events can be morally justified.

If the banks want to restrict the access of credit card holders to the Bankruptcy courts, then I think an appropriate quid pro quo would be a federal cap on interest rates.