Bankruptcy Woes

I guess this is what was meant by ‘compassionate conservatism’:

When Congress agreed this spring to tighten the bankruptcy laws and crack down on consumers who took on debt irresponsibly, no one had the victims of Hurricane Katrina in mind.

But four weeks after New Orleans flooded and tens of thousands of other residents of the Gulf Coast also lost their homes and livelihoods, a stricter new personal bankruptcy law scheduled to take effect on Oct. 17 is likely to deliver another blow to those dislocated by the storm.

The law was intended to keep individuals from taking on debts they had no intention of paying off. But many once-solvent Katrina victims are likely to be caught up in the net intended to catch deadbeats.

Right after Hurricane Katrina struck, several lawmakers – mostly Democrats but including some Senate Republicans – suggested that storm victims along the Gulf Coast should get relief from the new law’s stricter provisions, which are intended to screen filers by income and make those with higher incomes repay their debts over several years. Under the old law, which remains in effect until mid-October, many more filers can have their debts canceled quickly in federal bankruptcy courts.

But House Republicans, who fought off a proposed amendment that would have made bankruptcy filings easier for victims of natural disasters, said there was no reason to carve out a broad exemption just because of the storm.

Yeah. No reason at all. Other than the fact that their houses and places of employment are STILL underwater, they have no jobs, are living in shelters and friends and relatives houses, and probably running up credit card debt rather than paying it down.

Democrats are going to use every tragedy and every opportunity to advance their agenda, and the key to being a sane governing party is to oppose them when it makes no sense, or to agree with them when it does. In this case, it would seem to me (and you can use the comments to convince me otherwise), it does make sense to carve out an exemption for people who got hammered by a natural disaster. Means test it. Make them provide proof. But provide them an opportunity to remain protected.

And while we are at it, if you have not already done so, make sure you read Josh Trevino’s excellent piece from earlier this year on the Bankruptcy Bill called “Breach of Faith”:

The bankruptcy bill before the Congress is bad law, bad practice, and an example of bad faith with the common people whom elected officials presumably serve. When it passes — and it will — it will be thanks purely to the Republican Party…

The people affected by this bill are almost exclusively the desperate and the stupid. While we ought to have little problem allowing the latter their fate, having been amongst the former, I believe compassion demands something more for them than a simple tightening of the screws. But then, compassion appears to have no place amongst the Republicans pushing this wretched law:

Republicans also defeated an amendment that would have permitted seniors entering bankruptcy to protect $75,000 of the value of their homes, as well as one that would have exempted from the means test family members forced into bankruptcy by the need to care for a sick relative.

And the GOP rebuffed an effort by Sen. Daniel K. Akaka (D-Hawaii) to force credit card companies to disclose to their clients how long it would take to pay off their balances if they made only the minimum payments.

This is on us, folks. This is on the Republican Party. It’s going to hurt a lot of people; it is a pure giveaway to business sectors that need no state help; and it makes us look like the corporate toadies we apparently are. Shame.

Trevino nailed that one (less than six months from when he wrote it, some of his fears are realized), and he didn’t even need a crystal ball.

49 replies
  1. 1
    Brad R. says:

    Democrats are going to use every tragedy and every opportunity to advance their agenda, and the key to being a sane governing party is to oppose them when it makes no sense, or to agree with them when it does.

    You make “advancing their agenda” sound so insidious. When the agenda involves loosening new bankruptcy restrictions to help hurricane victims, I see no harm in pushing it.

  2. 2
    John Cole says:

    You make “advancing their agenda” sound so insidious.

    That was not my intent.

    We have two parties, and each uses every opportunity to advance their agenda (whatever that may be). What I meant was, it is only natural that Democrats will use this to advance theirs, and it makes sense to oppose only the bad suggestions. This is not one of them, as far as I can tell.

  3. 3
    Shygetz says:

    Thank you John Cole and Josh Trevino. Although I am still embarassed by the Dems who voted for this piece of crap bill, it’s nice to know that there are still conservatives out there who don’t believe in a dog-eat-dog society.

  4. 4
    Another Jeff says:

    Other than the fact that their houses and places of employment are STILL underwater, they have no jobs, are living in shelters and friends and relatives houses, and probably running up credit card debt rather than paying it down.

    this is actually another area where that dispute you brought up last week between private insurers and the Federal Flood Insurance Program is going to come into play.

    Most HO policies with private insurers have a coverage called “Additional Living Expense”, which means that if you aren’t able to live in your home for a period of time due to a covered loss, the insurance company will pay for your additional living expenses up to a certain amount for, usually, up to a year.

    But, the important factor there is “due to a covered loss”. If the loss is deemed to be flood, and flood isn’t covered by your primary Homeowners policy, you’ll get nada.

    I’ll have to double-check, but I don’t think most flood policies offer that coverage.

  5. 5
    Gratefulcub says:

    As if we didn’t know by now, Bush’s compassionate conservatism is neither compassionate or conservative.

  6. 6
    John S. says:

    As if we didn’t know by now, Bush’s compassionate conservatism is neither compassionate or conservative.

    Sounds like a topic from an episode of Coffee Talk.

    The peanut is neither a pea nor a nut.

    Discuss.

  7. 7
    r4d20 says:

    From the linked article: “The record number of bankruptcies in America is not the fault of consumers so much as it’s the fault of credit companies willing to extend credit to pretty much anyone, independent of their means or station. ”

    This is what drives me nuts about this bill. The last decade has seen a boon in irresponsible lending. Now that they are facing the consequences of their actions they want to change the law. Its total crap.

  8. 8
    Krista says:

    Un-frickin’-believable. Like John says, they have no homes, no employers, and yet, they’re being lumped into the same category as someone who racked up too much credit card debt from evenings out and an addiction to Jimmy Choos.

    I used to work for a credit card company, and I used to work for one of the credit bureaus, and some of the situations would break your heart. Yeah, there are some truly irresponsible people out there. But many, many others have just been hit by terrible luck, or just have no clue how to handle money. I think it was Defense Guy who brought it up in another thread, that money management and basic budgeting should be taught in high school. So many people out there don’t know the basics of how their credit report works. And so many ads have made bankruptcy seem like a quick and easy option, but then these people find out that they’re financially screwed for the next better part of a decade.

    I just think it’s shameful that the house Republicans did this — they obviously have absolutely no clue what it’s like to do without. Frankly, I think that all politicians should have to live for three months on poverty-level wages, just to teach them some empathy.

  9. 9
    John S. says:

    I just think it’s shameful that the house Republicans did this—they obviously have absolutely no clue what it’s like to do without.

    Was there ever really any doubt that all politicians are woefully out of step with their constituents?

    But take heart, they’ve decide to forego the $3100 cost of living increase in salary they were due to recieve this year so they can save the government some money. It’s gonna hurt them a lot, though, and many will no longer be able to stock Perrier…they will have to resort to Evian.

  10. 10
    NYCmoderate says:

    I’d also like to point out, tho it is not relevant to victims of natural disasters, that amendments to exempt military families–particularly Guard and Reserve families suffering from loss of income due to active service, and any military personnel swamped by medical expenses–were similarly rebuffed. As were amendments to exempt (or apply different rules to, I can’t remember) anyone filing bankruptcy due to medical crisis.

    I absolutely think that people who get credit cards just to run up debt, then file for bankruptcy so they don’t have to pay it off should be held responsible. But people who are filing for legitimate reasons not of their own making, whether natural disasters, military service, or a medical crisis, should not be treated as if they were just profligate spenders trying to game the system.

    Furthermore, the credit card companies claimed that interest rates and fees are high b/c of all the fraud they incur. Yet in the same way they wouldn’t accept the minor burden imposed by Sen. Akaka’s amendment, they similarly will not cap interest rates (even at 30%!!) or fees (which continue to go up, often several times a year).

    And oh yeah, they also wouldn’t offer any additional protection for victims of identity theft (I’m talking here about more than a mere lost/stolen card) even though carelessness on the part of the credit card companies and banks has been particularly egregious of late.

  11. 11
    Another Jeff says:

    From the linked article: “The record number of bankruptcies in America is not the fault of consumers so much as it’s the fault of credit companies willing to extend credit to pretty much anyone, independent of their means or station. ”

    This is what drives me nuts about this bill. The last decade has seen a boon in irresponsible lending. Now that they are facing the consequences of their actions they want to change the law. Its total crap.

    You know, there actually was a time when i did think it was the fault of the consumers, and while i still think SOME of them share in the blame, I’m starting to drift over to the “The CC companies brought this on themselves” camp.

    When my fiance and I first started dating, her brother was seeing some girl that epitimized high-maintenance. To keep her happy, her brother ran up major freakin CC debt buying her all sorts of shit from Prada and Tiffanys.

    Finally, the guy got some balls and broke it off with her, but not before he was majorly in debt and his once stellar credit was shot.

    Now, my point isn’t that he was a victim. He was a just a guy lacking in balls who let some skank manipulate him. Isn’t the first guy, won’t be the last.

    My point is, her brother borrowed some money from his parents, some money from my fiance and I, and paid off all his debts, rather than file bankruptcy.

    HOWEVER, he was telling me that with two different credit card companies, about a month after he finally paid all this shit off, they sent him new cards (granted, with a low limit) telling him now that he’s clear, they were sending him these cards to rebuild his credit.

    That blew my mind. I mean, at that point he REALLY, REALLY did need to rebuild it, but he was a guy who was over 90 days late on his payments a couple times and the second he’s paid off, they’re sending him new cards.

    It would be like AA saying “Congratulations on one year of sobriety. Here’s a nice bottle of Stoli since we know you can handle it now”.

  12. 12
    Mr Furious says:

    “…no one had the victims of Hurricane Katrina in mind…”

    Bullshit. Perhaps they didn’t know what the name of the hurricane would be, but plenty of people had exactly this kind of scenario in mind with this odious piece of corporate shit legislation. Natural disasters and a whole host of other unfortunate situations beyond the contol of people in financial straits are now meaningless, and those folks are shit out of luck.

    Of all the crap to come down the pike in the last five years, this Bankruptcy “Reform” is, to me, the most personally offensive.

  13. 13
    Krista says:

    amendments to exempt military families—particularly Guard and Reserve families suffering from loss of income due to active service, and any military personnel swamped by medical expenses—were similarly rebuffed.

    “Support our troops” ….indeed.

    Yeah, credit card companies are vultures. My first year of university, right in the student union building, were several booths set up by the cc companies, offering cards to students. And we all know how prudent and responsible most 19-year olds are when away from home for the first time. It doesn’t help that the actual payment structure, and legalities of them, are so incredibly complicated that there’s no way in hell that the average consumer will understand them. I worked for a bank, and tried explaining it to my stepdad, who’s a Chartered Accountant, and we both ended up confused.

  14. 14
    Marcos says:

    Don’t worry John, the Democrats are too fucking weak and stupid to capitalize on the FACT that Republicans are screwing the poor and middle class. In fact, a bunch of Democrats went along with this filthy bill, so their moral argument is weakened. Too bad there is no viable third party to vote for.

  15. 15
    Mike says:

    “Means test it.”

    That’s a key component of your argument in my opinion (which I generally agree with by the way). You have to look at it on a case by case basis.
    Here’s an example of what I’m talking about. When Ophelia hit here a few weeks ago (I live in SE North Carolina), I was talking to my son’s girlfriend who works for State Farm Insurance. She told me that the DAY BEFORE the hurricane hit, there were people calling trying to get Home Owner’s insurance. Mind you, NOT Flood Insurance (different thing), but basic homeowner’s insurance. These weren’t poor people calling necessarily either, these were in many cases people that lived in in $1M homes near the beach, but had decided before the hurricane that they didn’t want to pay for insurance. Also note that just a few weeks before the local paper had ran a series of stories about how though expensive, Federal Flood Insurance is acutally quite a bargain. So the question is, if these folks lost everything (and this can apply to businesses as well), should they be immune to bankruptcy laws? I say no, but once again, it depends on their circumstances.

  16. 16
    J. Michael Neal says:

    Means test it. Make them provide proof. But provide them an opportunity to remain protected.

    This, of course, is the other problem. Most of the proof that these people could offer has gone the same way as their house.

  17. 17
    =0= says:

    The peanut is neither a pea nor a nut.

    I prefer, “White chocolate is neither.”

  18. 18
    Shygetz says:

    Mike–what if they didn’t lose everything, but they can’t work (since their job is now underwater) and so can’t pay off their debts on time. Are these people getting what they deserve?

  19. 19
    SeesThroughIt says:

    Frankly, I think that all politicians should have to live for three months on poverty-level wages, just to teach them some empathy.

    Well, I wouldn’t restrict that to just politicians, but it’d be a good start. Imagine if Bush had actually suffered some adversity in his life instead of being a spoiled brat every step of the way. He might have a fucking clue about life today if he had.

  20. 20
    DougJ says:

    It’s bankruptcy reform. Reform. Are you all opposed to reform? You’re probably opposed to tort reform, clean skies, healthy forests, and Iraq freedom as well.

  21. 21
    Mike says:

    “Shygetz Says:
    Mike—what if they didn’t lose everything, but they can’t work (since their job is now underwater) and so can’t pay off their debts on time. Are these people getting what they deserve?”

    Very good point. I think in that case, they should be given great leeway wouldn’t you think? Again, it has to be case by case. I just don’t think the government should be in the business of protecting those that through sheer stupidity, gross incompetence or greed lose their shirts. BUT, if they’ve done everything that made sense to do (had insurance, etc.) and yet through no fault of their own they still lost everything, then certainly they should be protected from default.

  22. 22
    John S. says:

    It’s bankruptcy reform. Reform. Are you all opposed to reform? You’re probably opposed to tort reform, clean skies, healthy forests, and Iraq freedom as well.

    All hail the era of Orwellian titled government programs and ideologies!

    I think the best instance is still the term ‘Pro-Life’, because if you aren’t Pro-Life, then you must be Pro-Death!

  23. 23
    Tim F says:

    I think in that case, they should be given great leeway wouldn’t you think?

    You would, but then you’d be a Democrat. All of the sensible amendments promoted by Democrats and shot down unanimously by Republicans should play nicely in 2006.

  24. 24
    Brian says:

    http://ownedbycats.blogspot.co.....-ptui.html

    From Balloon Juice, we find that the Republicans have decided that little things like a category 4 hurricane,…

  25. 25
    Another Jeff says:

    All of the sensible amendments promoted by Democrats and shot down unanimously by Republicans should play nicely in 2006

    This IS a winning issue for the Democrats, but they have so little common sense, they’ll probably run Biden (D-MBNA) in 2008 and totally lose the issue.

  26. 26
    Defense Guy says:

    Of all the crap to come down the pike in the last five years, this Bankruptcy “Reform” is, to me, the most personally offensive.

    I’d put it at number 2 or 3. The top of my list is the Kelo decision, followed by a tie between this one and the McCain-Feingold abomination on free speech.

    If we had a country that was serious about the protections of both creditor and borrower, we would teach financial lessons in elementary and high school. That we don’t just tells me that we are allowing people to act stupid intentionally and allowing companies to take advantage of them. It seems that if this is the current course, then the company should not get an extra layer of protection on their risk.

    I am all for the creditor-borrower relationship and have no problem that the creditor profits from this exchange, even profits well. I am against the idea of unleashing these companies on an undereducated youth.

  27. 27
    Mike says:

    “Tim F Says:
    I think in that case, they should be given great leeway wouldn’t you think?
    You would, but then you’d be a Democrat. All of the sensible amendments promoted by Democrats and shot down unanimously by Republicans should play nicely in 2006.”

    IF this was all there was to it, then maybe I would be a Democrat, and when the Democrats have sensibly moved to the middle, I’ve voted for them. But when they start taking the Kos Krowd seriously, that when I totally turn them off.

  28. 28
    DougJ says:

    I’m afraid this all this is pretty minor stuff in the grand scheme of things. For me, the main issue is how the White House has staffed so much of its bureaucracy with Brownie. That and the play-to-pay Abramovich-DeLay-Rove-Norquist stuff.

  29. 29
    Mr Furious says:

    Kelo’s different, it wasn’t legislation. An abomination to be sure, but that’s a separate list.

    This “Reform” bill was the one most clearly going to have dramatic and devastating impact on the people who could least afford it, all to benefit an industry that least deserves the help.

    As far as the Dems and Biden, here is the conclusion to the rant at my place:

    And If Joe Fucking Biden thinks I will ever vote for him after pushing that Bill, he’s got another thing coming. And that goes double for Debbie Stabenow here in Michigan. She is dead to me. I hope everyone who’s name is on the “yea” list goes down over this. They deserve nothing less.

  30. 30
    KC says:

    I’m concerned about “proof.” If your home has been flooded out and you’ve got none your financial stuff left, how long will it take to get proof of your financial condition. To me, in that situation, it sounds like your proof is yourself–screwed. I mean, until you start getting a paycheck, start paying some bills, start getting some bank statements, and start getting all your credit card information, all you’ve got is proof that you’ve been flooded out and jobless.

  31. 31
    jg says:

    I think it was Defense Guy who brought it up in another thread, that money management and basic budgeting should be taught in high school.

    Maybe I’m just jaded having been schooled in the Boston Public School system but teaching it wouldn’t matter IMO. If kids don’t want to learn it you can’t make them. Only parents can do that and most don’t. ‘Why do I need to know this?’ is a common question, and its rhetorical.

    People are free to ‘opt out’ of an education. A lot do and then they get older and develop opinions. I missed out on a lot of education because parents didn’t tell their kids to shut the fuck up and do what the teacher tells you to. Why you have to learn this is irrelevant because your going to learn it anyway (thats the talking to I got, worked pretty good too).

  32. 32
    Defense Guy says:

    Kelo’s different, it wasn’t legislation. An abomination to be sure, but that’s a separate list.

    Good call. I was thinking overall effect instead of just legislation. So that would put this reform bill at #2 on the anti-hit parade.

    jg

    I know what your saying regarding the ‘opt out’ that some will take. I would have, as I did not try very hard before attending college. However, some will and others will have the seed planted for potential later use. I think it’s better to offer the information with optimism than to cynically deny it because it might not be used.

  33. 33
    TallDave says:

    Nah, this article, like most MYT fact-light pieces, is full of crap.

    Look, all the law says is that if you make $100K/yr, and you have 400K in debt, you can probably pay it back instead of screwing your creditors and walking away debt-free.

    That’s the bar: can you pay back what you owe.

    Can you still renegotiate? Absolutely. You just can’t wipe it out *IF* you have the means to pay it back.

  34. 34
    JoeTx says:

    Were is all the legislation against Corporations raiding pension funds and screwing investors when they are mismanaged or run into the ground due to shear greed? That is one of the major areas of “reform” I’d like to see, but we’ll never see that. Not until there is some sort of “common man” lobbying group formed with tons of money from the grass roots. So much for “representative” government!

  35. 35
    rayabacus says:

    As a former banker (15 yrs) I have had this discussion many times over. 98% of the people that go into debt (for any reason) are honest, well meaning individuals that have every intention of honoring that debt and repaying it. What normally prevents them from doing so is a change of circumstances (loss of income, medical expenses, etc.) since the time that they incurred the debt. The other 2% are just out to beat the system and have no intention of repaying.

    Two problems: 1.) Credit grantors have relied more recently on credit scoring systems (dumber loan officers), thus granting credit to marginal credit risks. Any slight change in the “economic bubble” puts many of these people over the edge financially and they fall behind. Once behind they find it almost impossible to catch up.

    2.) Most all bankruptcy and fraud laws are necessitated by the 2% of dishonest people, yet invariably trap a large portion of the marginal 98%.

    I don’t have a lot of answers. There is tremendous competition for consumer credit dollars. “Get ’em on the books, and worry about collecting later.” I really think that there should be a hybrid bankruptcy plan that encompasses part of Chaper 13 (Wage Earner’s) and Chapter 7 (Straight Bankruptcy) that would allow a debtor to discharge a portion of the total debt and set up a repayment of the remaining portion. At present there is no such animal.

  36. 36
    Hector says:

    While I commend Trevino for coming down against the
    bankruptcy bill, I must say it’s funny the way he describes
    his position. You see, when other people are poor, it’s
    because they’re “stupid.” When Trevino was poor, it’s
    because he was “desperate.”

    And of course the Republican position of disdain for the
    stupid is the proper one, it’s just totally tragic that at
    the same time they have to dump all over the desperate.

  37. 37
    Rome Again says:

    r4d20 said:

    “This is what drives me nuts about this bill. The last decade has seen a boon in irresponsible lending. Now that they are facing the consequences of their actions they want to change the law. Its total crap.”

    True r4d20, as a matter of fact, my husband decided to file for bankruptcy a few months ago (I was not on the bankruptcy, didn’t want to be, and my name wasn’t on any of the accounts he filed, so I decided I didn’t want any part of it personally). Would you believe that after 6 credit card companies realized that they would no longer have my husband paying their salary every month, these very same companies started sending offers to me? What part of “we don’t have enough money to cover our bills” did they not understand? I guess they figured that since my name wasn’t on the accounts meant when the bill came due I never chipped in to help him pay it? Geez!

    By the way John Cole, I decided your blog is still the most interesting and I’ve still been lurking sometimes. Might as well face up and admit that I didn’t trash the link to your site.

  38. 38
    Fledermaus says:

    98% of the people that go into debt (for any reason) are honest, well meaning individuals that have every intention of honoring that debt and repaying it.

    rayabacus makes a good point. One of the biggest problems is when you miss one payment (on anything) all of your CC intrest rates can jump at least 20%. If you were just getting by before this can be the straw that breaks the camel’s back. Not to mention they’ll find any excuse to tack on a fee here and a fee there. Basically the CC M.O. is to get people to carry a balance and wait for their chance to pounce.

    Also there is the problem that their agreements violate the basic tenants of contract law, when one party can change the terms whenever it wants, that’s not a contract. You know it really says something about this Congress when there is not one person willing to defend this bill (not saying that no one would support some curbs on bankruptcy, but everyone seems to agree that this bill is reprehensible)

  39. 39
    Rome Again says:

    Mr. Furious said:

    “And If Joe Fucking Biden thinks I will ever vote for him after pushing that Bill, he’s got another thing coming.”

    I totally concur and I will not vote for them either, but Mr. Furious, you have to realize, Joe Biden is beholden to MBNA because they’re the largest employer in Delaware. I grew up there, the banks own the place. DuPont used to own Delaware, but the banks are the new lords of the land now.

  40. 40
    Fledermaus says:

    Joe Biden is beholden to MBNA

    Actually, Bank of America got Biden in the merger with MBNA, so everyone update, it is now Biden (D-BoA)

  41. 41
    Rome Again says:

    “Actually, Bank of America got Biden in the merger with MBNA, so everyone update, it is now Biden (D-BoA)”

    Well, I was not aware of the merger, and I’m no longer in Delaware. MBNA started in Delaware when I was a teenager. They built a fortress like structure in my hometown on land which was formerly a grocery store (part of the building that housed the grocery store became a section of the fortress). I used to think it looked sort of the way I would envision Fort Knox, only with green paint.

    Regarding B of A, it sounds like it’s time for me to get a new bank (I’ve been considering it for some time now though).

  42. 42
    Rome Again says:

    “Also there is the problem that their agreements violate the basic tenants of contract law, when one party can change the terms whenever it wants, that’s not a contract.”

    Good point!

  43. 43
    DougJ says:

    I really think that there should be a hybrid bankruptcy plan that encompasses part of Chaper 13 (Wage Earner’s) and Chapter 7 (Straight Bankruptcy) that would allow a debtor to discharge a portion of the total debt and set up a repayment of the remaining portion. At present there is no such animal.

    Interesting post. Why do you think there is no such animal? I’ve always had the same feeling about this issue (though I don’t have enough background to comment intelligently).

    Is the “abacus” part of “rayabacus” a reference to being a banker, you know, adding figures and so on?

  44. 44
    Don says:

    I’m not opposed to reform but I like it to actually involve, you know, REFORM. The bankrupcy bill fails to fix the insane housing exemption limits beyond a pissant time limit. You can still shield your 50M Florida mansion, you just have to have purchased it far enough in advance. It applies a means test that does nothing to look at future earning potential. It’s crappily written beyond being a sop to the credit card companies.

    Really, the only reform that was needed was for the companies to quit lending to people who had no business borrowing such crazy amounts. They all take on the risks with their eyes wide open and they certainly don’t suffer from it, they just roll the losses into fees for others.

    Look more notably at what isn’t in the changes: any protection or protection for consumers, stupid or not. Credit card interest rates are completely unregulated at the federal level and I am not personally aware of any states that limit the rates. Fees are similarly unregulated and you’ll note that the greatest profitability in CC lending these days is those fees.

    What is limited in most states is judgement interest amounts, and it shows very clearly in the behavior of credit card companies on people who start to circle the drain. Someone in default starts getting hit with missed payment fees and overlimit fees that can far surpass their interest rate… at least till they are pushed to the 25-29% in-default rate, a rate that surpasses average stock market index by 14 to 19% even before you look at those fees.

    A credit card company who has been defaulted on could pursue judgement very quickly, but if they did so they’d often be limited to charging that lower judgement rate. So instead they push and push and push till a default of a few grand can approach ten thousand. Once that’s done they can pursue judgement before the statute expires and they can either sit on it or when the consumer goes bankrupt (if they still can) they claim a MUCH larger loss.

    A serious effort at ‘reform’ would have included provisions for consumers before chapter 13 that allowed people to make payments without a 10 year stigma. Also, as a civil filing, bankrupcy is something that you can find out about someone FOREVER but you’re limited to only holding against them for 10 years. Where’s the additional teeth against people who discriminate unjustly? Nowhere in the ‘reform.’ Congress could have reduced the time period for Ch13 to encourage people to use it rather than Ch7 but that also is nowhere in the ‘reform.’

  45. 45
    Don says:

    One of the biggest problems is when you miss one payment (on anything) all of your CC intrest rates can jump at least 20%. If you were just getting by before this can be the straw that breaks the camel’s back.

    Fieder, this is called “the universal default clause” and it’s been a huuuuge boon to the CC companies in recent years. It is, as I mention above, part of the CC strategy to quickly inflate a balance when someone is starting to have problems. It’s a win-win for them since there’s no downside to artificially inflating the balance of someone who might go bankrupt in the near future.

    The person in default will recover or not. They might do so if they end up with one of the credit counciling services which are largely bankrolled by CC company contributions and who encourage people to pay off debt no matter how unmanageable. The CC company will negotiate a lower or zero percent interest rate for that person in recovery but when you’ve preloaded the loan with fees and 29% you can afford to let them avoid interest for a while.

    Or maybe they’ll never pay and they’ll sell the debt to a junk debt buyer for pennies on the dollar. Double the number of dollars on the loan and you double those pennies. Or double the claimed loss when they go bankrupt.

    Sure, you’ll drive some people into bankruptcy unnecessarily but those are the eggs you break to make your tasty omlette.

  46. 46
    rayabacus says:

    Interesting post. Why do you think there is no such animal? I’ve always had the same feeling about this issue (though I don’t have enough background to comment intelligently).

    Is the “abacus” part of “rayabacus” a reference to being a banker, you know, adding figures and so on?

    I don’t think there is any incentive to birth this hybrid. So many unsecured creditors try to have debtors “reaffirm” their debt by offering additional funds after the bankruptcy is discharged. If this was illegal to do then the debtor would be forced to determine which debts he wanted to pay (probably secured creditors) and they would be paid out per the Ch 13 (wage earner’s) over a set period of time at a post bankruptcy interest rate. The bankruptcy laws have been and still are a total mess.

    The “abacus” is the name of my manufacturing company that I founded. I used that name when I started so I would be first in the yellow pages, back when that kind of advertising was effective.

  47. 47
    rayabacus says:

    “[…]that allowed people to make payments without a 10 year stigma.”

    Unless it has changed recently, I believe it is seven years that it is kept in file. The Fair Credit Reporting Act requires that it be purged after that time. Or, I could be wrong and it is 9 years. I know that you are restricted from filing bankruptcy (Ch 7) to once every 7 years. No restrictions on Ch 13 (Wage Earner’s).

    Also someone said something about the Homestead Exemption in Florida in regards to the 50 million dollar mansions. That is a State of Florida exemption and has nothing to do with the Federal Bankruptcy Law. A lot of high rollers cash out in other states and move to Fla & put all of their assets into a home. After establishing residence, six months, they file bankruptcy. All of their assets are then protected in their primary residence. Most states have some type of “Homestead Exemption” but Fla is by far the most generous.

  48. 48
    Beej says:

    Just a few comments on one of the worst bills to come out of Congress in a long, long time:

    First and foremost, states are allowed to opt out of the federal exemptions, and a majority of the states have done that. Believe me, most of the states that have opted out do not allow you to keep your million-dollar mansion unless you reaffirm the mortgage and keep on paying it. In my state, the Homestead Exemption is $12,500. A far cry from $1 million!

    Second, Chapter 13, like every other Chapter of the Bankruptcy Code except Chapter 7, requires the debtor to submit a plan for “adjustment of debt”. This plan has to cover all three of the Code’s classifications of debts: unsecured priority claims, secured claims, and unsecured claims. Unsecured priority claims are basically nondischargeable. They include such things as income taxes, alimony, and child support. These claims have to be paid whether you are filing under Chapter 7 or Chapter 13.

    With most plans (except a Chapter 11 for a corporation) the majority of secured claims will be satisfied by allowing the creditor holding the security interest to take the collateral that secures the claim. That big-screen TV that you’re still making payments on will go back to the seller unless you reaffirm the debt and continue to make payments.

    The unsecured claim category is where the credit card companies fit, and under Chapter 7 they usually get bupkus. But unsecured claims also include things like hospital and nursing home bills, and I have seen some statistics which say that the majority of people who file Chapter 7 do so because of a catastophic illness, not just because they ran up their credit cards at Saks or Prada. I wish I remembered where I saw those stats, but unfortunately, I don’t. So, sorry, no link. Having found myself in the latter situation just a couple of years ago, despite really good health insurance, I can offer first-hand testimony on just what kind of havoc it wreaks with your credit. We didn’t have to file Bankruptcy, but our retirement accounts are pretty well tapped out.

    But I digress. A Chapter 13 plan is premised on the idea that the debtor tallies up all necessary living expenses down to the penny. Whatever is left over is termed “discretionary income” and that is the amount which has to be paid on outstanding debt, usually the unsecured variety. Not all of the unsecured debt is always going to get paid off. Under the old Code, the plan would usually run for 3 years unless the Court extended it to 5. It is my understanding that under the new law, all plans will run for 5 years.

    This is all oversimplified, of course, but those are the basics. I don’t know what the “means test” amount of “discretionary income” is in the new law, but I saw one new broadcast which said that if you can pay even $100 per month on the plan, you have to file Chapter 13. If true, this is absolutely draconian!!

    Incidentally, one of my college students works for a bank, and she recently recounted the information she was given at a company seminar. It seems that her bank will now offer credit cards to those who have declared Bankruptcy only 6 months after the filing!! To help them repair their credit, of course!

    Yes, indeedy, those credit card companies really need this federal bailout.

  49. 49
    Beej says:

    Just found some info which says that if your income falls above your state’s median income and you can pay $6000 over 5 years, $100 per month, then you have to file a Chapter 13 rather than a Chapter 7. Somewhat less horrendous than if there were no income floor, but still a really nasty piece of work.

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