Re: New bankruptcy law

[Bill Waller <waller@xxxxxxx>]

1.  Cliff is exactly correct.  The overwhelming majority of bankruptcies are
accounted for by divorce, job loss and illness.  No one seriously believes
the current reform will address these causes of bankruptcy.  However, these
consumers-the weakest in our economy--will be subject to debt peonage under
these reforms.
2. The extension of credit is based on a contract that assumes good will and
prudence on both parties to the contract.  Credit card companies buy lists
of consumers with particular characteristics to offer them credit.  These
characteristics represent different risk pools and based on these
characteristics differing interest rates are charged.  So the risk premium
for default is already built into the interest rate structure.  Consumers
may very well be borrowing unwisely from lenders who are acting
irresponsibly.  This alone does not constitute a public policy problem.
However the reforms may create one.  See 4 below.
3. Credit card and unsecured loans are the most profitable lending done in
the U.S. economy even in 1999 when default rates were at their highest.
They have since declined.
4. Making it more difficult for consumers to declare bankruptcy under
Chapter 7 will increase financial fragility, especially in an economic slow
down.  You cannot liquidate a consumer like a business.  The consumer must
continue consuming the very moment after bankruptcy.  If the bankrupt
consumer is forced into a Chapter 13 type payment plan for five years, then
the consumer will necessarily greatly contract their consumption for the
duration of the payment plan.  This legislation also creates an incentive
for the debt burdened consumer to wait until they are beyond recovery to
seek protection as the best way of having access to Chapter 7.
5. The history of Chapter 13 bankruptcy is one of failure.  A very large
number of plans under Chapter 13 fail and then consumers are forced into
Chapter 7.  There is nothing in the reforms to correct this flaw.
This is the most egregious piece of legislation I have ever encountered.  It
is literally the most powerful banks in the US buying legislation that will
injure the economically weakest citizens in our society.  Because the
numbers are small there is no political benefit to resisting this piece of
legislation for politicians.
I am revising an article entitled 'kicking them while they are down' on this
topic for the JEI.
Bill Waller