U.S. Bankruptcy Bill’s March of Triumph

Great Debates
41

Hence my caveat.

As for job loss, once I had “cleaned up my act,” I got married, bought a house, and incurred new bills, but we intentionally scheduled these purchase/debts to be at a level that was able to be paid back with only one job. (wife’s, the lower salary). Obviously strange things happen, and there does need to be some reasonable decisions made as to what is and is not discharged, but it’s gone too far in all of the extremes.

I’ll say again, if you’re declaring bankrupcy due to circumstances that you had CONTROL of, then you should not be discharged from those debts. Bankrupt should be a last resort, and even then, you should be responsible for that which you had control of.

42

Let’s take a step back and look at the bigger picture.

Why is bankruptcy permitted at all, if our chief concerns are that people “act responsibly” and “pay their debts?”

Bankruptcy is allowed because it benefits our economy, ultimately, to encourage people to take financial risks. Let’s say I’m contemplating leaving the security of my job to start a small business. I’m much more likely to do that if I know, in the back of my mind, that I have some protection should my business fail. I can declare bankruptcy and get a new start.

However, if I look at the bankruptcy laws and see that maybe I won’t have that option, maybe I’ll be saddled with debt for years to come, then maybe it doesn’t look like such a good idea to take that risk. Perhaps I might have been the next Bill Gates, but instead I decide to play it safe and stick with my nice 9-to5 job.

Aside from encouraging risk, bankruptcy laws benefit our economy by giving bright entrepreneurs more than one shot at making it. This is important. If you look at business history in the US, you’ll find many of our greatest businessmen failed in their first ventures and then, having learned from their mistakes, achieved success on the second or third attempt. Now if, after those first ventures failed, they had been unable to escape their debts, they might never have tried those second and third ventures that wound up being their greatest successes.

I’m no economist, but it seems to me that bankruptcy laws also serve to stimulate the economy. Our economy thrives on consumer spending. (Witness Bush encouraging people to spend their tax refunds.) A person saddled with debt can’t spend. Bankruptcy law allows consumers to escape their debts (once every 7 years, IIRC) and spend again. If a significant portion of our population finds itself saddled with Chapter 13 payments, will this be a damper on spending and growth?

43

Thank you. I am wondering if this law forcasts a crash in the US economy. Is that tinfoil, or does it have merit?

Point - The bk laws in Europe are more stringent, but they also discourage risk ventures. Of course, individuals are more protected via health care and unemployment safety nets.

Another point - if ‘personal responsibility’ is an issue, we really need to rethink the protections afforded to corporations, that enable them to avoid responsibility. IMO, this is key to the the argument here.

44

As I interpret this study, medical bills are a factor in half of all bankruptcies.

However, money is fungible. As such, it’s not really possible to cleanly divide people in ‘responsible’ and ‘irresponsible’ groups.

If you’ve been spending beyond your means on frivolous stuff, a medical bill is more likely to break you than if you live cheaply.

But if the bills are big enough, they can wipe out even frugal, solvent people.

FTR, I have always lived well below my means. I save a lot of my income. I never pay credit card interest. And the only debt I have is my mortgage, which I’m paying off well ahead of schedule. As such, I could handle a pretty substantial medical emergency. However, if I got hit with something like Christopher Reeve did, I’d be toast.

45

Well, it’s a lot more complex than that, which is why I have a little bit of sympathy for Congress in this matter even though I think in the end they erred. A brief summary of what I know:

Foreign asset protection trusts. These guys I know a fair amount about, having tried to get at one or two in my career. Under the current law (and continuing into the new law), judges have the legal authority to order the trust broken if s/he believes that the defendant has a reasonable ability to get assets back out of one. And of course the judge is going to believe that the debtor has the ability to get assets back out of a trust, because otherwise he wouldn’t have put them in there in the first place. But. But sometimes the judge doesn’t have the legal ability to form that belief, as the trust documents themselves are in crappy little places like the Cook Islands. Even if you can convince the judge to get over that hurdle, which you usually can, in order for the judge to order the US Trustee to go after the trust s/he usually wants some basis to believe that there’s a reasonable chance that the assets will be recovered. And there’s oftentimes not a basis to believe that, as you can’t even get trustees to accept process in those places, judges won’t enter orders for you there, etc. So what you get is that the judge rules that the trust isn’t valid but the creditors don’t get the money anyway.

As a practical matter, nothing Congress could have done would have changed any of that, and trying to do so might have ended up screwing up what little cooperation the US does get from these places on matters like money laundering and whatnot. I still wish they had at least made it clear that they want judges to try to persue the matter or allow creditors to do so on their own nickle under the Courts’ aegis (which is what usually happens if someone ends up chasing these things), but I have some sympathy for not wanting to pass a bill with almost exactly zero practical effect.

As an aside, these things aren’t used by a rich guy who happened to get hit with a medical bill even bigger than his wallet – they’re mad expensive to set up and difficult to administer. No, these things tend to be used by super scumbags and shadowy billionaires who go bankrupt strategically, often to avoid the massive civil judgements which follow them wherever they go. The kinds of guys who, to a Congressman, are more of a liability on a donor list than their donation would be worth. Marc Rich kinds of guys. No one likes them, not even Republican congressmen :wink: , so it’s not a matter of protecting them. In fact, the parties which are most often successful in actually getting assets out of one of these things are those parties more concerned with making a point than about making money. Specifically, regulators.

Domestic asset protection trusts. I’m just learning about these and happily have no direct experience with them. So far, I don’t much like them. Here, states (four of them I think) have set up laws similar to the ones overseas with a pretty cynical eye toward generating lawyer fees and trust taxes in those states. Now with these Congress has a slightly bigger problem and they have an opportunity to shirk responsibility for the problem at least for now. Congress is required to set bankruptcy law; it’s one of their specific legislative responsibilities under the constitution. However, historically they’ve preferred to leave the definition of assets which may be excluded from those bankruptcies to the states and the courts have agreed. That’s how you get the homestead protection laws in Florida and Texas, for example. What makes these things different is that the debtor doesn’t have to actually live in the state where the trust is domiciled to benefit from it (at least theoretically – keep reading). If a guy lives in Florida and files there the creditors might be frustrated by that .49 acre, $20 MM unmortgaged house, but the Congress is happy because everyone knows the rules and Congress got to defer to the states[sup]1[/sup]. These things are different.

However. However, there’s not a ton of case law on domestic asset protection trusts. Some people believe that, at least for cross-state bankruptcies, the full faith and credit clause and the public interest in successfully completing bankruptcies will cause the trusts not to hold. If that’s the case, Congress is happy again. Individual states can set their own asset exclusion laws, as Congress intends, and debtors are not able to escape bankruptcy simply by sending their assets across a state line – they have to physically follow the assets to benefit from them. So, again, I don’t like where they came out on this, but I can have some sympathy if they needed the votes of the congressmen where these trusts are legal to get over the hump as long as subsequent case law doesn’t allow debtors to spirit assets out of the estate simply by dumping them in Delaware.
[sup]1[/sup]: A further aside. You and others have expressed the thought that bankruptcy reform would be better if tied to reform of predatory lending laws. This is another matter which Congress has historically preferred to leave mostly to the states. There may come a time (or a time may already have come) where cross-state marketing and the liquidity of capital requires Congress to take tighter control of lending laws, but the states sure aren’t convinced that time has come – a lending-law package of the kind necessary to address your concerns would be met with howls of outrage from the states, and not just the ones with Republican governors, attorneys general or legislatures.

46

And just to be clear, the constution explicitly gives Congress the authority to ensure there are uniform bankruptcy laws throughout the US. I doubt that many people know that. It’s NOT something the states can push back on.

47

Does this mean that certain states are no longer considered havens for those filing bk? (in terms of homestead exemptions in particular, but any other info appreciated)

48

cheesesteak, don’t be to disheartened by this debate, even though every one else in here just seems to be coming down as a broken record.

I came into this thread not knowing much about the bill but thinking that it was a pretty bad idea, but I think that you’ve made a pretty reasonable argument in support of it, and it has frankly changed my opinions on the matter.

49

No. As I mentioned above, Congress has always been deferential to the states in defining which assets may be exempted from bankruptcy (for the curious, in very basic terms the states define what is out of reach of “creditors” outside of bankruptcy and bankruptcy law essentially ratifies the decisions of those states when a person files by allowing a filer to choose between a federal-law laundry list and the state list – it’s actually pretty complicated federalism stuff when it comes down to it and it relies on the good will of a ton of judges who could, if they wanted to, really mess things up, but a not-unreasonable balance has been achieved). Indeed, in the bill under discussion here Congress has passed up an opportunity to legislate against an emerging area of “havens” which a few states have recently claimed to have created – the domestic asset protection trust.

50

manhattan: * Domestic asset protection trusts. I’m just learning about these and happily have no direct experience with them. So far, I don’t much like them. Here, states (four of them I think) have set up laws similar to the ones overseas with a pretty cynical eye toward generating lawyer fees and trust taxes in those states. *

Five, according to the article I quoted in post #28—AK, DE, NV, RI, UT.

manhattan: Some people believe that, at least for cross-state bankruptcies, the full faith and credit clause and the public interest in successfully completing bankruptcies will cause the trusts not to hold. If that’s the case, Congress is happy again. Individual states can set their own asset exclusion laws, as Congress intends, and debtors are not able to escape bankruptcy simply by sending their assets across a state line – they have to physically follow the assets to benefit from them.

I see what you’re saying. I’m not very happy to have Congress just ducking this issue and hoping that the judiciary will end up pulling their chestnuts out of the fire for them, but I do recognize that practical politics often requires this.

manhattan: There may come a time (or a time may already have come) where cross-state marketing and the liquidity of capital requires Congress to take tighter control of lending laws, but the states sure aren’t convinced that time has come – a lending-law package of the kind necessary to address your concerns would be met with howls of outrage from the states, and not just the ones with Republican governors, attorneys general or legislatures.

I know—lending laws (like incorporation regulations, corporate taxes, etc.) are one of the areas where state legislatures can jockey for advantage in offering what Molly Ivins refers to as “a healthy bidness climate”. I.e., they all want to be attractive to cross-state investment. I’m not convinced that the resulting jumble of fifty different sets of legal business practices always produces the most efficient outcomes, but I do recognize that a lot of states are attached to this form of interstate competition. On the other hand, if individuals really start getting reamed by the practices that states permit in order to lure more business, I think that’s a reasonable point for Congress to step in and set national standards to make things a little more fair and a little less predatory.

Again, my biggest objection to the current bill is the imbalance of its approach. At present, credit companies are making higher profits than ever before, while individuals are carrying more debt than ever before.

So what does the Republican-controlled Congress do to solve the bankruptcy problem? It passes a law to make it harder for individuals to get out of debt (specifically rejecting amendments to except hardship cases like medical bankruptcy), without placing any restrictions on what the credit companies can do to encourage borrowers to get into debt.

In other words, the burden of reducing bankruptcy losses is being placed on those who are already suffering the most, while the benefits are going to those who are already benefiting the most, and causing most of the problem in the first place. I cannot help thinking that this is kind of a raw deal.

51

This is the essence of my problem with the law, too, but I’m also not quite so generous toward Congress as Manhattan is. As always seems to be the case when Congress is pulling a fast one on their constituents, they’ve got an armload of gobbledegook and excuses and whatnot about “It’s the state’s responsibility” and “we had to do that for political reasons.” I prefer to judge a bill by its real effect, not by the latticework of excuses, lies and prevarications that they typically have on hand whenever someone points out that they’re doing something stupid, cruel and/or wasteful. It’s very obvious who will benefit from this bill – the banks and the credit card companies, and who’ll be hurt by it – ordinary middle class folks. And SOMEHOW, for various reasons, the wealthy have kinda been left out of the laws. Well, imagine that.

Hey but the idiots voted for the Republicans, and although both Repubs and Dems will get screwed, it’ll be great fun to mock the hell out of bankrupt Republican voters as they suffer under the onerous laws they helped bring about.

52

Just a clarification: All the quoted remarks in EC’s post above are mine, although EC inadvertently included my attribution to manhattan (which I had actually used for some other quoted remarks that were actually made by manhattan.)

53

I like the bill because it means lower interest rates and credit card fees for people who are more responsible with their money. I am bothered by people spending carelessly and then putting the burden on others to clean up their mess.

54

Why do you assume this? Why do you think credit card banks will lower their rates rather than reap the windfall this bill provides? Why will they do anything any differently? Why won’t they simply continue to offer low introductory rates and then jack them up to the sky at the first opportunity?

55

I guess we don’t know what will happen, but this bill will definitely mean cost savings for the credit card companies which will likely spread to their customers. I would think competition amongst the credit card companies would demand it.

56

I’ll bet you also believe that caps on malpractice awards will cause insurance premiums to go down as well. Did that happen in states that adopted caps on awards?

57

The credit card banks have been reaping huge profits in the past 15 years. So why hasn’t competition resulted in lower interest rates (and correspondingly lower profit margins) before now? Why will this bill make reduction in interest rates any more likely? Isn’t it just as likely that the banks will have an unspoken agreement to reap the windfall collectively?

58

Cite on the profitability of credit card industry.:

So where are the savings we should be expecting as a result of competition?

59

You really believe that? Say, how’d you like to trade your car for some magic beans?

60

Agreed that that point is debatable, but there lets look at some of the other good things to come out of this bill. The change in the Homestead Act for example. You now have to live in a state for 3 years before declaring banruptcy, so no more moving to Florida at the last minute.