Re: New bankruptcy law

["Goncalo Fonseca" <fonseca@xxxxxxxxxxxxxxxxxx>]

The bankruptcy bill in Congress is more than a mere "handout" to creditors
and "unfair" to debtors.  It is an explicit breach of existing debt
contracts on the part of creditors.  The American public would never have
taken out as much debt as they did if they suspected that bankruptcy
protection rules were going to be changed midstream.

Bankruptcy protection is an integral part of any debt contract, just as much
as interest rates, collateral and payment schedules. When the contract is
written up, both creditor and debtor are both aware of the possibility of
default and bankruptcy and of the legal protection that applies in such
cases.  Furthermore, the probability of bankruptcy is (or should be)
computed and already accounted for in the interest rate anyway.

If credit card companies realize now that the bankruptcy rate was higher
than they had calculated, then it should not fall upon the debtors to pay
for that mistake. Furthermore, it is doubtful it was really a mistake to
begin with.  By pushing credit cards onto all and sundry, you're begging for
a rise in bankruptcy rates!  Creditors should have adjusted for this higher
risk by raising interest rates or cutting back their rate of credit
expansion.  Of course, in a competitive environment, no profit-minded
credit-card company wants to be the first to do either of these things.
Consequently the only profitable option left is to reduce bankruptcy rates
by convincing Congress to change bankruptcy laws.

Whatever difficulties the credit industry may be having due to a
misalignment of bankruptcy rates and interest rates is wholly due to the
actions (deliberate and otherwise) of creditors and not debtors.

As a coda, perhaps it is worthwhile reflecting on the historical factoid
that bankruptcy laws are in place largely because they were pushed for by
creditors, not debtors.  Before the English Bankruptcy Acts of 1706 and
1732,  if a borrower could not or simply refused to pay his debts,  the
creditor's only option was to (personally) send the debtor to prison until
he paid up or died.  But it was not the government's responsibility to
liquidate him. His personal estate was not confiscated -- and so the debtor
could actually still use his estates' revenues to set up a comfortable
prison life.  Whatever the case, the loss stayed with the creditor.  If he
tried to expropriate as much as one cow from the debtor's estate in
compensation, the creditor would find himself hung as a thief (at worst) or
involved in a blood feud (at best).

It was only after the Bankruptcy Acts, pushed by creditors, that government
got involved.  An individual creditor could now petition the Lord Chancellor
to start bankruptcy proceedings (he would also have to post a bond, to
discourage spurious claims).  If the government commission found the debtor
to be insolvent, then his personal property would be expropriated to satisfy
the creditors.  If the borrower cooperated fully with the investigations, he
would not be sent to prison and could keep up to 5% of his estate -- even if
the remaining 95% was not enough to cover his debts.

Somehow, in the interim, bankruptcy laws became regarded in the popular mind
as a "favor" that was granted by government to debtors, and "inimical" to
the interests of creditors.  They are not.  They are part of the terms on
the debt contract, a financial innovation invented and pushed for by
creditors.

Goncalo Fonseca


----- Original Message -----
From: "Clifford Poirot" <cpoirot@xxxxxxxxxxx>
To: <pkt@xxxxxxxxxxxxxxxx>
Sent: Tuesday, March 13, 2001 10:34 AM
Subject: Re: New bankruptcy law


> I've attached today's NYT article on this law. The article pretty much
> speaks for itself. It is a disgusting spectacle of credit card companies
> buying Congress and Congresspeople and Senators being entirely unwilling
to
> look at the merits of the issue. American credit card companies bombard
> consumers with advertisements and mass mailing promising them an increase
in
> their purchasing power (along with family happiness, romance and vacations
> to exotic locations).
>
> The price of borrowing money on your credit card: 12-18%.
> Buying a Congressional representative: Priceless.
>