Of blood and stones

Uggabugga directs our attention to this Washington Post article, "Bankruptcy Bill Advances," in which Kathleen Day reports:

The Senate Judiciary Committee -- propelled by a unified Republican majority and with little public debate -- voted 12 to 5 [on Feb. 17] to approve legislation backed by the credit card industry and opposed by consumer groups that would make it harder for consumers to wipe out debt through bankruptcy.

The bill, which would be the most significant change in bankruptcy law in more than a quarter of a century if adopted, now goes to the full Senate. ...

Lobbyists for the credit card industry say the legislation is needed to close loopholes that make it too easy for people to wipe out their debts when they could repay some of them.

Consumer advocates say it would allow some rich debtors to continue to hide wealth through homeownership while bankruptcy relief would be denied to many people with low or moderate incomes who have fallen on hard times because of illness, job loss or divorce. They say credit card companies must share the blame for increased bankruptcies because they aggressively market products and inadequately disclose how interest rates and penalty fees mount up when consumers pay only minimum balances each month.

The bill, designed to impose new restrictions on consumer protections, is of course called "The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005." You can follow the progress of S. 256 here.

Debate on the bill is likely to begin next week and the full Senate is expected to pass the bill.

I expect this legislation to accomplish only half of what it claims. By that I mean that I'm confident it will succeed in hurting the people it is intended to hurt, but that it will fail to help the corporations it is intended to help.

The credit card industry is overextended. Somewhere along the line they got so giddy with their growth in revenue and share price that they forgot that not everybody constitutes a good credit risk. That's a rather important thing to remember when your business is making noncollateralized loans.

The bottom line is that after years of pre-approving anyone with a pulse and a P.O. box, the industry has finally sobered up and realized that they have extended billions of dollars in credit to people who haven't got the means to pay it back. These are loans that should never have been made.

Many of the recipients of these loans, unable to to pay even the accelerating fees and interest -- often 20 percent or more, have been filing for bankruptcy protection. The industry's response is this piece of legislation limiting the availability and extent of that protection.

This desperate response is understandable, but irrelevant. Senate bill 256 does not repeal the Law of Blood and Stones. An act of Congress cannot change the fact that these folks ain't got the money. If this bill becomes law, many consumers will no longer be able to claim the legal status of bankruptcy, but the reality that they are broke/busted/bled dry will remain unchanged.

The crisis facing the credit card industry has little to do with the alleged abuse of consumer bankruptcy. Their real problem is that an unsustainable chunk of the loans on their books are no good. Eventually, with or without this bill, that bubble is going to burst and some of the fastest-growing companies in the industry are going to learn firsthand about the importance of bankruptcy protections.

Comments

[Stephen]

The Asian financial crisis of the late 90's was caused by bad loans, in that case to corporations. There simply came a time when the corporations were unable to pay back their loans, causing many large banks to crumble and seriously damaging several different currencies.

I lived in South Korea for the last 18 months of the 90's, and one of the many ways in which the ROK President impressed me was how he dealt with the crisis. He pretty much brought in the heads of the various huge Korean conglomerates - Samsung, Hyundai, LG, etc. - and told them to suck it up, reduce salaries, restructure, do whatever it took for them to keep themselves viable without laying off all their workers or screwing any more banks or the government.

Thailand followed a similar course, and by the time I left Asia both South Korea and Thailand were crawling out of the abyss while others languished behind.

A huge financial crisis caused by overextended consumer credit companies, the huge federal deficit or the free-falling dollar doesn't necessarily scare me. The fact that we have a president who has gleefully participated in creating this situation and who would never do anything to make his corporate cronies unhappy is what scares me.

[Sandals]

Excellent post.

[Ericv]

Great post, but I think that there's more to this Bill That Never Dies than just helping credit card companies recover from bad loans. That fact is now , even with so many bankruptcies , this industry is quite profitable . The outrageous rates and fees charged by these companies more than cover for the bad loans. The deeper purpose of this law is to force the middle/working class to accept second class citizenship by crushing them under perpetual , lifetime debt. Think back 30 , 40 , 50 years . Were 30 year mortgages and 5 year car loans commonplace back then? To my experience no. It is often said that the SUV saved the US car industry but without the 5 year car loan how many middle class people could have afforded these monsters ? Similarly , the housing bubble probably would have popped a long time ago without the 30 year mortgage. The logical endpoint of this will be mortgages that will only be paid off by a special insurance policy that takes effect when the 'homeowner' dies and car loans that are paid off only when the car needs to be replaced. In other words , the concept of actually owning something major free and clear will become as quaint and outdated as the well paying American manufacturing job.

[lightning]

"Saint Peter, don't you call me cause I can't go -- I owe my soul to the company store"

[Scott]

Many of the recipients of these loans, unable to to pay even the accelerating fees and interest -- often 20 percent or more, have been filing for bankruptcy protection. The industry's response is this piece of legislation limiting the availability and extent of that protection.

If I'm off topic, say so and I'll drop it, but I'm curious. Should people have the same protection concerning their tax debts as they should concerning their credit card debts? Is a debt not a debt? You could argue that people voluntarily, and explicitly, acquired a given amount of credit card debt, but their tax 'debts' were assigned to them by the voters.

[Gus]

Hi, Fred & all,

As usual, a thoughtful post. It brings up a couple of ideas (ones I don't claim to have a lot of detailed knowledge about, and may therefore be wrong about, but here goes...):

1. Ericv notes the potential for "crushing, lifetime debt." Historically, haven't we seen that before? That's pretty much what caused a huge percentage of Europe to languish in the Dark Ages -- financial debt than became serfdom for generations. This may seem a little catastrophist, but I could easily see corporations trying to change the laws so that descendants become legally liable for their parents' debts, thus recreating feudalism with a slightly different face.

2. What Stephen talks about is also a major issue here in the States, but it's somewhat better hidden by the use of holding companies & other institutions of conglomeration. I'd love to see how much of the credit debt is actually in the hands of everyday folks vs. the hands of negligent or crooked corporations of the Enron mold. My suspicion is that corps hold a LOT more of it & are passing it off to us in the form of credit card rates, this anti-banckruptcy effort, and questionable stock market practices that make them look more valuable than they actually are...

[Ericv]

Scott.

Yes , people are not explicitly forced to take on credit card debt but then neither is MBNA or GE Capital forced to grant anybody credit. As I mentioned before , credit card companies already protect themselves from the risk of bad loans via high interest rates and fees. But now they want to turn around and deprive ordinary people of what is often often the only way out of an unmanageable crisis. I find it incredible how complacent the elites of America are that they think that they can push people to the wall like this and not expect some kind of violent backlash - especially in a country full of guns.

[Michael]

Consumer Protection Act of 2005

It's become a trivial exercise to point out the Orwellean language favored by this administration but I'll do it anyway.