Rewriting bankruptcy laws – at what cost?
Posted on Sun, Mar. 06, 2005
fortwayne.com
WASHINGTON – Yeah, yeah; I know. It’s the principle of the thing.
You don’t eat out more than once a month because your budget can’t afford it. Your kids aren’t packing for spring break at Disney World because you don’t use credit for luxuries. You shop at Kmart, not Marshall Field’s. So why should other people get to skip out on their credit card debts?
They shouldn’t. Not if they’re hooked on spending sprees, racking up thousands of dollars in pointy-toed stiletto shoes, Martini dinners and first-class flights to Las Vegas. Those folks should pay their bills, and when they try to use bankruptcy as a Get Out of Debt Free card, someone really should jerk their chains.
Thus, the Senate is about to move into a second week of debate on rewriting the nation’s bankruptcy laws. Our righteous indignation aside, this is an unwise use of time. The cure is far more costly than the problem.
•The number of people who try to game the bankruptcy system is remarkably small.
“The evidence that people are abusing the bankruptcy system in significant numbers is not there,” said Tom Allington, a bankruptcy expert and professor at Indiana University law school. A nationwide study estimated it at no more than 10 percent, and perhaps as small as 2 percent.
In fact, the vast majority of people who wind up in bankruptcy got there because they lost their jobs or were walloped by a medical calamity.
Researchers at Harvard studied bankruptcies nationwide and found that half of people at the end of their financial ropes are on the skids because of crushing medical debts. A wife gets breast cancer; the household income is cut in half while the hospital bills mount. Or a child gets leukemia. Or a car crash spares your life but puts you in the hospital for two weeks and rehab for longer.
•People who have the resources to pay back some of their creditors don’t get to evade their financial obligations under the current system. Bankruptcy judges are empowered to force a debtor into Chapter 13 bankruptcy, which requires some debt repayment, even if he or she files under Chapter 7, which, when granted, erases the debts.
The bill the Senate is working on would remove the judgment of the bankruptcy court and replace it with a formula. If someone’s income in the past six months was above the state’s median (about $65,000 for a family of four in Indiana), Chapter 13’s repayment plan would be required.
The best estimates are that the income test would force less than 4 percent of current filers from Chapter 7 (all debts are erased) into Chapter 13.
But to determine whether someone met the income test would require additional meetings with an attorney, increasing the cost to the person filing bankruptcy. It would delay the process, which means people who try their darndest to pay their bills and wait until foreclosure is imminent before they got to a lawyer would probably lose their homes. It also adds to the cost of the operation of the bankruptcy court.
And all that for what? Fewer than 65,000 people – 4 percent of the number who filed for bankruptcy last year.
“It’s not right for people who engage in irresponsible behavior to impose their bad decisions and the cost of that on other people who behave more responsibly,” said Sen. Evan Bayh, who voted for an almost identical bill four years ago.
That’s the principle of the thing. But principles can be ridiculously costly.
Rewriting the bankruptcy laws to affect 65,000 people is like using an Uzi to squash a house spider. Look at it this way: 4 percent of the adult population of Indiana comes to about two per county. If two Allen County motorists regularly ran red lights, would it make sense for local taxpayers to hire a police officer to sit at each stoplight to nab them?
People shouldn’t break traffic laws, and ignoring red lights can cause harm to other motorists. But at some point, we decide that the cost to taxpayers of forcing everyone to stop at all red lights is too high.
And then there’s the matter of fairness. It’s not fair to make creditors (specifically, credit card companies) pay for others’ stupid choices. But there’s a hierarchy of unfairness.
Bayh thinks it’s unfair to apply the income test to members of the National Guard who have to leave their comfortably paid civilian jobs and take military pay – sometimes a cut of 75 percent – while still paying their mortgages, parochial school tuition, their own school loans and the rest of their family’s bills.
And he didn’t mean old people who get socked with medical bills should be subject to the income test. Or even young families struggling with hospital bills. He wasn’t referring to caregivers of severely ill or old people. And he didn’t mean victims of identity theft. (Democrats tried to exempt all these categories of people from the income-level test. They failed. Bayh voted for the exceptions; Sen. Richard Lugar did not.)
Perhaps the income-level test, if it becomes law, will catch a few of those (at most) 160,000 jerks who spend wildly with the intention of filing for bankruptcy or who try to get Chapter 7 forgiveness even when they can pay back something. But at what cost?
For the credit card industry, that’s irrelevant. They’ve been pushing this bill for years, all the while moaning that deadbeat spenders are costing them plenty – and forcing up prices for other consumers.
But while bankruptcies nationwide have doubled in the past decade (and Indiana’s have gone up 250 percent), credit card companies have hardly suffered. A Harvard Law School bankruptcy expert said that since 1997, bankruptcy filings have increased 17 percent; credit card profits have increased 163 percent.
What principle is involved with that?
As I said, Bayh voted for this legislation four years ago. It didn’t become law because the House and Senate couldn’t work out their differences. Last week Bayh would not say how he’ll vote this time around. Given that the legislation hasn’t really changed, vagueness is a big clue that a lawmaker has cracked the door to reconsideration. (Lugar was for it in 2001 and continues to support the revisions.)
Bayh should throw open that door and walk through it. |
