The priorities for bankruptcy settlements should be changed.

Great Debates
1

Today’s news story is just the latest outrage. People injured because of defective GM products may lose all standing in bankruptcy court even though others with identical injuries were compensated. Why? Because they are now “unsecured creditors”. Behind suppliers, behind unsecured cash loans, and all behind secured loans.

In earlier bankruptcies you see the same sort of thing on a smaller scale. When Levitz furniture went bankrupt people who had pre-paid for furniture found it would not be delivered. They lost the money outright as unsecured. But they were offered a chance to buy their furniture again with their money going to the secured lenders.

When airlines restructure ticket holders routinely loose their payments and the value of any bonus miles.

What’s wrong in all these cases is that the secured lenders, the unsecured cash lenders, and the suppliers all had access to the companies’ financial information and credit rating. They knowingly decided to take a risk. The poor customers had no such chance. They were cheated by companies that knew they might not deliver but sold tickets, furniture, and cars anyway, because what the hell, what can a customer do about it.

2

You can make the argument that unsecured lenders and suppliers should be on an equal level with customers, but the whole point of giving someone a secured loan is to make sure you don’t face that risk if the debtor goes bankrupt.

3

Unsecured credit card companies have been moved up in the line the time it changed a couple of years ago. Because they like to bankroll senate campaigns for both parties, generally supporting both sides in every contested election. Must be nice to be able to buy friends.