Posted on 03/08/2005 2:54:18 PM PST by Torie
The Debt-Peonage Society
By PAUL KRUGMAN
Published: March 8, 2005
Today the Senate is expected to vote to limit debate on a bill that toughens the existing bankruptcy law, probably ensuring the bill's passage. A solid bloc of Republican senators, assisted by some Democrats, has already voted down a series of amendments that would either have closed loopholes for the rich or provided protection for some poor and middle-class families.
The bankruptcy bill was written by and for credit card companies, and the industry's political muscle is the reason it seems unstoppable. But the bill also fits into the broader context of what Jacob Hacker, a political scientist at Yale, calls "risk privatization": a steady erosion of the protection the government provides against personal misfortune, even as ordinary families face ever-growing economic insecurity.
The bill would make it much harder for families in distress to write off their debts and make a fresh start. Instead, many debtors would find themselves on an endless treadmill of payments.
The credit card companies say this is needed because people have been abusing the bankruptcy law, borrowing irresponsibly and walking away from debts. The facts say otherwise.
A vast majority of personal bankruptcies in the United States are the result of severe misfortune. One recent study found that more than half of bankruptcies are the result of medical emergencies. The rest are overwhelmingly the result either of job loss or of divorce.
To the extent that there is significant abuse of the system, it's concentrated among the wealthy - including corporate executives found guilty of misleading investors - who can exploit loopholes in the law to protect their wealth, no matter how ill-gotten.
One increasingly popular loophole is the creation of an "asset protection trust," which is worth doing only for the wealthy. Senator Charles Schumer introduced an amendment that would have limited the exemption on such trusts, but apparently it's O.K. to game the system if you're rich: 54 Republicans and 2 Democrats voted against the Schumer amendment.
Other amendments were aimed at protecting families and individuals who have clearly been forced into bankruptcy by events, or who would face extreme hardship in repaying debts. Ted Kennedy introduced an exemption for cases of medical bankruptcy. Russ Feingold introduced an amendment protecting the homes of the elderly. Dick Durbin asked for protection for armed services members and veterans. All were rejected.
None of this should come as a surprise: it's all part of the pattern.
As Mr. Hacker and others have documented, over the past three decades the lives of ordinary Americans have become steadily less secure, and their chances of plunging from the middle class into acute poverty ever larger. Job stability has declined; spells of unemployment, when they happen, last longer; fewer workers receive health insurance from their employers; fewer workers have guaranteed pensions.
Some of these changes are the result of a changing economy. But the underlying economic trends have been reinforced by an ideologically driven effort to strip away the protections the government used to provide. For example, long-term unemployment has become much more common, but unemployment benefits expire sooner. Health insurance coverage is declining, but new initiatives like health savings accounts (introduced in the 2003 Medicare bill), rather than discouraging that trend, further undermine the incentives of employers to provide coverage.
Above all, of course, at a time when ever-fewer workers can count on pensions from their employers, the current administration wants to phase out Social Security.
The bankruptcy bill fits right into this picture. When everything else goes wrong, Americans can still get a measure of relief by filing for bankruptcy - and rising insecurity means that they are forced to do this more often than in the past. But Congress is now poised to make bankruptcy law harsher, too.
Warren Buffett recently made headlines by saying America is more likely to turn into a "sharecroppers' society" than an "ownership society." But I think the right term is a "debt peonage" society - after the system, prevalent in the post-Civil War South, in which debtors were forced to work for their creditors. The bankruptcy bill won't get us back to those bad old days all by itself, but it's a significant step in that direction.
And any senator who votes for the bill should be ashamed.
Rhode Island is a beautiful state. I have some friends who used to live there. They got tired of the taxes and started looking for alternatives. They moved last year to North Carolina - the Research Triangle area. Their new house is nicer and it cost less than one half their RI house. The overall cost of living is less than one half. The daffodils are blooming in their front yard right now. Their old house is still covered with snow.
and yet everyone misses the point. It is not saying that people can't file bankruptcy. ONLY that they will be FORCED to work for the minimum of three years to pay into the trustee administering a Ch 13 plan vs a straight liquidation Ch 7.
The question which we should be asking is whether a person can be FORCED into a 7 vs a 13. There is every incentive to UNDERwork in order to qualify for a 7 and stay out of 13.
Apparently this reform does nothing to alter the individual state choices regarding expemptions. Thus FL will still keep its generous homestead exemption and debtors of other states will still loose their homes.
Should the federal government be turning into bill collectors?
I guess that makes the credit card companies pretty "stupid" for lending money to people who have almost no hope of repaying it.
Fortunately, the credit card companies are rich as well as stupid, so they can afford to buy a few Senators on both sides of the aisle.
I'm a collection attorney and I'm against this bill. A few thoughts:
1. Most of the bankruptcies I run into seem to have to do with medical problems. Either they lost their jobs because of illness or injury or the debt they're running from is a large medical bill. So, the impression that most folks filing bankruptcies are people who bought big screen TVs and didn't work hard enough isn't usually accurate.
2. A lot of the credit card debt is more or less "made up". I certainly have sympathy with regard to those accounts where the credit card company paid out good money for purchased products and received nothing in return. But, in many instances, the debtor has paid more than the principal amount. Aside from the principal and some "reasonable" rate of interest, I have no sympathy for the credit card company getting stiffed on compounded excessive interest, late fees, collection costs, etc. I don't handle a lot of credit card debt, but when I do, I feel slightly embarassed to ask for a judgment amount that is triple the amount of the original principal. If credit card companies are including this money in their statistics as money they are "losing," I just have a hard time viewing that debt as being as legitimate as money the company actually paid out of pocket.
3. This will hurt small business and, in my opinion, make the next recession a lot tougher to get out of. Even where small businesses are run as corporations, the owner is frequently asked to enter into personal guarantees if the corporation defaults on the debt. The next time a recession hits, a lot of these small entrepreneurs --the backbone of our fiscal health, in my opinion -- will go under. Whatever you may think of the morality of having more solvent companies take a hit when these smaller companies go bankrupty, allowing the small businessman to wash himself clean of debt allows new business to get started faster when the economy starts turning around and allows the economy to recover more quickly.
4. I also spend a lot of collection time working for insurance companies pursuing uninsured motorists who caused damage to folks insured by the insurance companies. (The insurance company of the person not at fault had to pay out because the at-fault driver was uninsured.) I see a silver lining in this bill that uninsured drivers won't be able to get off the hook as easily. That's a case where someone consciously takes a risk and intentionally drives without insurance and causes real damage to someone that causes out of pocket payment. I have no problem driving the uninsured motorist into the dirt for his or her poor decision making.
Yep. I have to tell you, I am personally so angry about this blatant act of greed and corruption, I will have a hard time voting for anyone, Republican or Democrat, who supports this legislation.
1. DoktorLaw has already noted that some 'credit card debt' is far, far in excess of the original principal borrowed. To that I'd add that the interest rates on unsecured credit are based on actuarial projections as to how much of it will turn out to be 'bad debt'. In other words, credit companies already set their interest rates sufficiently high that they can afford to lend money to large numbers of people they know will be unable to pay it back. Sure, the borrowers assume some risk when they borrow, but the lenders assume some risk when they lend too -- and they've already taken their projected losses into account in setting their rates.
2. For those sterling souls who think 'just because I signed it, I'm obliged to stick to the terms no matter how egregious they are' -- (consumer) contract law hasn't worked that way for well over a century. If there are surprise hidden terms down in the small print on page umpty-twelve, a court can very easily refuse to enforce them. In fact a court can easily refuse to enforce 'unconscionable' terms even if all the parties knew about them at the time of signing. I'm not aware of any 'conservative' principle that says every contract, no matter how unfavorable it is to one party, deserves to be enforced just as it stands merely because it was 'voluntary'.
> I usually disagree with Krugman, and sometimes find him disingenuous and tendentious, but I agree with each and every word he wrote in this Op Ed piece. <
Ditto (except replace "usually" with "almost always").
I almost never agree with Krugman. This time he is right.
My wife works for a credit company. There are some people that do open credit accounts and then just walk away. However, the above sentence is the norm in the industry. Most people fall into the cycle of debt because of severe misfortune.
The GOP deserves to lose seats over this payoff to campaign contributors.
Individuals are responsible for their own actions. NO ONE is forced to use a credit card.
So if you set a plate of hot steaming food next to a starving man and tell him to leave it alone, he's solely responsible if he steals it?
Better yet (i.e., somewhat more analogously to consumer-credit practices), if you offer to sell a plate of hot steaming food to a starving man for $1000 and he takes you up on it, are you entitled to collect that money just because you didn't 'force' him to buy it at that price?
I feel bad for folks who go into debt due to unforeseen medical expenses, but divorce or job loss? Divorce is preventable, and new jobs can be found.
Comparing a person applying for a credit card to a starving man is laughable.
Comparing a person applying for a credit card to a starving man is laughable.
You have an odd sense of humor, then, but that's not really the point. The point is, how far will some of you carry the principle that each person is solely responsible for his own behavior?
Bankrupcies will still go on, we lawyers will not be able to charge more because people will have to go into Ch 13 instead of Ch 7.
Cha Ching. (regretable but true sarcasm)
I remember when a certain talk show host used to say drug addiction and divorce was preventable :)
If it were really true they would eliminate ALL exemptions and allow social security checks to be attachable.
Why do some states protect 100% of retirement money but 0% of a single homestead property?
We are going to have a BUMPER crop of the quack asset protection schemes (scams) in the comming months.
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