Re: New bankruptcy law

["Goncalo Fonseca" <fonseca@xxxxxxxxxxxxxxxxxx>]

> Doesn't a contract require a meeting of the minds?  There may be
> a few incurring debt who do so fully aware of the bankruptcy
> laws, but I'll bet the number is trivial.  And those who do so
> with malice aforethought are hardly the ones deserving of the
> protection.
>

I am not convinced that the number is trivial.  I'll bet that if the penalty
for default was prison-unto-death (as it used to be), the scale of
indebtedness of US households would be much lower.  I believe the American
public is quite aware of bankruptcy.  They took these debts knowing they had
legal recourse if the ill winds blew.

I am not sure if we can devise a system differentiating between those with
"malice afterthought" and those "deserving" protection.  I presume credit
reporting agencies are discouragement for those planning to "get away with
it".

Most of the filings for bankruptcy are filed by people who had always had
the intent of paying these debts back, but were overwhelmed by bad luck or
circumstance.  In a nation with a broken social safety net, credit cards and
personal loans are often the only way keeping people from sliding into
poverty in times of trouble.

I read a recent paper arguing that, in fact, personal bankruptcy filings in
the US are far below what they could or should be.  I don't recall the
numbers exactly, but I seem to remember that the rate of personal bankruptcy
should have been four or five times as much as it actually is.

In this country, believe it or not, there is still a Puritanical veneer
attached to personal debt.  There is a very strong belief that debts should
be paid under all circumstances and people here go to enormous lengths to do
so, even when declaring bankruptcy was an perfectly legitimate option and
even when repayment was highly detrimental to personal and family welfare.
There is still a very strong stigma attached to declaring bankruptcy in the
US, a stigma that I find inexplicable in the context of the nature and
purpose of the bankruptcy laws, but one which I am willing to respect.

I believe the credit card companies did not respect that but abused it. They
pushed debt with one hand, and then preyed on this upstanding moral sense of
the American people to excuse the tightening of personal bankruptcy laws.
By claiming they were targeting the profligate and the malicious, their move
seemed reasonable. Much of the American public, wracked with guilt, accepted
their arguments.  The only feeble protest was that it was "unfair to the
poor".  It is not about the poor.  It is not even about class warfare.  It
is about the rights of citizens living in a nation of laws.

>
> If changes in the bankruptcy law is a breach of contract with
> debtors, how about increases in FICA taxes in 1983 or income
> taxes in 1993?

I could agree that changes in taxes are changes by the government in its own
"contract" with citizens -- but only if we can deem there is really a
"contract" to begin with (is there a "meeting of the minds" as you
suggest?).  We are born citizens of already-existing states and have little
choice about that, but we are not born indebted to MBNA America.

At any rate, the question is whether government should have the right to
alter the terms of existing contracts between private citizens.   In this
case, I admit there are some parallel cases, e.g. changes in minimum wage
laws and changes in labor rules, but these have their greatest impact in
guiding future contracts, not in altering existing ones.  The particular
problem in the bankruptcy case is that it stinks of moral hazard -- get
everyone hopelessly in your debt first, then change the terms of the debt
contract.

>
> I haven't seen the details of the proposed changes in the
> bankruptcy law.  But I do believe there is a need to correct a
> real problem in the US arising from our litigious society.  There
> are just too many lawyers, the highest per capita by far in the
> world.  Hungry as locusts, they now openly make pitches on TV to
> "help" people file for bankruptcy, at a fee of course.  That has
> greatly watered down the stigma of bankruptcy.  Those who are in
> over their heads from ignorance or misguidance deserve protection
> against impoverishment, but not in playing the game at expense of
> others.
>

I am not going to jump into a dissertation on the defense of lawyers or the
litigousness of American society.  In this particular case, America is
actually less litigous than it could and should be (I refer once again to
the figures on bankruptcy filings).

In contrast, corporate America has various layers of protection that
individual citizens could never hope to attain.  They have used the various
chapters of bankruptcy applying to them to the legal extent that they can.
They suffer no stigma and their defaults are as costly (if not more) to
others than the bankruptcy of private citizens -- and yet no one is yelling.

Goncalo