Bankruptcy in the Blogosphere

[A hearty welcome to arrivals from the NRO Corner. Ponnuru fans may also be interested in my opinions regarding his scrap with Professor Tribe or, to turn to a more intellectual topic, Social Security reform.]

Like Gail Heriot at the Right Coast, I haven’t read the bankruptcy bill that just passed the Senate, nor do I pretend to expertise in that field. When I took a bankruptcy course in law school, the 1898 Act was still the law of the land, and my professional involvement has been limited to an occasional matter involving the status of PBGC claims against sponsors of terminated pension plans. About consumer bankruptcy I (thankfully) know little and have never had any motive to learn.

Therefore, I was quite content to regard revising the rules for personal bankruptcy as a task to be left to my elected representatives. One reason why we have a republic rather than a democracy is to spare citizens the burden of acquainting themselves with every nook and cranny of public policy. My attention to bankruptcy reform was limited to noting that almost every Republican in Congress supported it and almost every opponent was a far-left Democrat. That lineup doesn’t always prove that a proposed measure would be good law, but it’s definitely the way to bet.

Now I see that a number of right-of-center bloggers are raising last minute objections, e. g., Instapundit, JustOneMinute (somewhat ambivalently) and Asymmetrical Information. Should I reconsider? Have corporate lobbyists pulled a fast one and foisted a dreadful bill on naive conservatives?

That isn’t an impossibility, but, before I consider agreeing, I’d like to see a reason to oppose the bill. The attacks on it reduce to four arguments, three of which are variations on a single theme:

1. Companies that issue credit cards are evil.

2. The reform bill’s success is due to corporate lobbying (by those evil credit card issuers).

3. The pending reforms will allow the evil credit card issuers to squeeze more money out of the low income people whom they entice into accepting easy credit – and, by the way, those people’s inability to pay their plastic debts is caused by illness or similar misfortune, not by irresponsibility.

4. Making it harder to wipe out debts in bankruptcy will discourage entrepreneurs.

I’m not impressed. Here, briefly, is why not:

1. No one is compelled to accept credit cards or to run up debts that he can’t repay. If it is “evil” to provide credit to essentially the entire wage-earning population, that is a consensual evil to which self-styled libertarians shouldn’t object. Moreover, it’s doubtful that Mastercard and Visa issuers are comparable in social undesirability to the juice racketeers who used to be the main source of credit for the lower class. Those guys’ interest rates ran to 50 percent a week, and collateral was the borrower’s kneecaps.

The alternative to the present system is not one in which kindly philanthropists make loans never expecting to be paid back. It is the restriction of legitimate credit to a small segment of the population, while the rest are forced to live on a cash-and-carry basis or turn to shady lenders.

2. As Todd Zywicki, who really is an expert on bankruptcy law, points out, lobbyists don’t speak with a single voice.

There are interest groups on all sides, most notably bankruptcy lawyers and other professionals, who have lobbied hard against the bill. Why? Because fewer bankruptcy filings means less money in lawyers’ pockets. Unsurprisingly, the most vocal opponents of reform in the Senate are also among the largest recipients of contributions by lawyers. . . .

Another problem with the argument is that the relevant committee with jurisdiction over bankruptcy reform is the Judiciary Committee in the House and Senate. Why does this matter? First, because the Judiciary Committee is the traditional playground for lawyers, not bankers, which as David Skeel has noted, provides lawyers with a substantial leg up in lobbying efforts surrounding bankruptcy reform, and which is one reason why enactment of bipartisan bankruptcy reform legislation has taken 8 years. Second, although the consumer credit industry certainly is a major player when it comes to lobbying, most of their contributions – unsurprisingly – are made to members of the Banking Committees, not the Judiciary Committees.

In fact, a study by Princeton’s Stephen Nunez and Howard Rosenthal using votes on the bill in 2001 concluded that perhaps 15 of the 306 members’ votes in the House in favor of the legislation at that time may have been swayed by campaign contributions from the consumer credit industry – or about five percent of the House’s 74% majority. 15 out of 306 “yes” votes. Hardly enough to account for the consistent overwhelming support for the bill.

3. As I understand it – and I have seen no account disputing this point – the bill will have little impact on debtors whose income is below their state’s median level. They will continue to be eligible for Chapter 7 bankruptcy, in which all dischargeable debts are eliminated. Only the more affluent will be forced into Chapter 13, which requires a post-bankruptcy debt repayment plan (analogous to Chapter 11 for corporations). That doesn’t impress me as outrageously onerous. My confidence that it isn’t is reinforced when I see a prominent bankruptcy lawyer for the upper classes pushing a blatantly phony study asserting the medical debts are responsible for half of all personal bankruptcies. That the bill’s opponents can’t find better evidence for their position leads me to doubt that better evidence is available.

4. Easy access to bankruptcy may indeed encourage entrepreneurship by reducing the cost of failure. On the other hand, it may also encourage malinvestment by reducing the penalties for deploying capital in unproductive ways. If data exist showing that the former effect is more potent than the latter, I’ll consider it. So far, however, the assertion simply hangs in the air without empirical or persuasive theoretical support.

In conclusion, then, those who decry bankruptcy reform haven’t won me over by shrieking. Let them offer a rational basis for their opinion, and perhaps I’ll change my mind. Meanwhile, I’m inclined to concur with Professor Zywicki:

As I noted in an essay published last year in the Michigan Law Review, the driving force in the bankruptcy reform debate is the influence of ideology, and especially the ideology of personal responsibility, that has animated many reforms in Washington in recent years. To the extent that special interests have played much of a role, it appears that the lobbying efforts by the consumer credit industry on one side and the lobby efforts of the bankruptcy bar on the other have largely canceled out each other around the fringes of the debate, leaving the ideology of personal responsibility as the predominant factor in the debate.

For the moment, that old-time libertarian religion is good enough for me.

Further reading: Todd Zywicki, “Bankrupt Criticisms”
Todd Zywicki, “Credit Worthy”
BlameBush!, “Bush’s Morally Bankrupt Bankruptcy Reform Bill”

Comments

[alf]

Very interesting information very good site :)

[Tracy]

As a serious "personal responsibility" proponent let me address that particular issue.

If and when I take a loan, I consider the terms and my circumstances. The loan maker also does - if it knows what is good for it. Once the loan is made, my responsibilities are clear...pay according to the terms. Does the lender have any responsibilities? Careful accounting of my payments?

Now, things change. And, if I am at all a capable person, I adjust. But what happens if I can't adjust quickly, or easily? The bankruptcy law was designed to allow people to get out of situations they can no longer adjust to. The lenders recognize this as a potential circumstance surrounding loans. They charge EVERYONE higher interest rates to make up for those that fail to pay.

On average, when things change, people take out equity from their homes, borrow from retirement funds, borrow from family, use credit cards. When all those avenues are exhausted, they consider bankruptcy. The system does not treat them very well, but given time and care, they can recover.

There are those that 'game the system'. Happens in every bunch. You probably know one or two. Taking the big deductions on the taxes....business deduction on the beamer...you don't risk it...but it seems someone almost always gets away with it. Occasionally they play too close to the edge and with a little smugness that doesn't suit us...we snicker at their downfall. Anyone have sympathy for Bernie? How about the thousands of employees that ended up to their eyeballs in debt keeping themselves afloat til they got settled again? No sympathy for them right...they knew the conditions when they started.

Everyone thinks that tomorrow will be pretty much like today. Next year like the last one. The paycheck will keep rolling in. When it doesn't, it is hard to not hope, feel certain, that things will get back on track pretty quick...just a couple more weeks and everything will be back to normal. Probably more than a few in Virginia and Houston thought so. Bet a lot of them in Lower Manhattan didn't....

Bankruptcy can be an act of personal responsibility. To yourself, your family and your creditors. An acknowledgement that the old ways have changed and they will never return. That what once was, can no longer be. A chance to tell everyone that you can not lead them on any longer, that while the relationship lasted and both sides got what they needed, it isn't possible anymore and 'divorce' is the only option left. Time to make the break and move on. Live and learn. When one side can't, we call it stalking...the credit industry calls it reform.

Tracy

[Bruce Allardice]

Bankruptcy law has always been something conservatives have been ambivalent about--or at least, not "invested" in. While on the one hand "giving people a fresh start" and "encouraging entrepeneurship" are classic conservative themes, conservatives are naturally uncomfortable with people who unilaterally void their contractual obligations through bankruptcy. If conservatives lived up to the left-wing stereotype of always being "pro-business", one would expect conservatives to enthusiastically support the bill. The fact that conservaties aren't, puts a lie to the stereotype.

The Instapundit critique, as Glenn Reynolds sorta admits, is directed more toward alleged abuse by the credit card companies than toward bankruptcy in general or this Bankruptcy bill.

[Allan Darish]

I read the NRO article on bankruptcy, being a bankruptcy practicioner, to see how it would sway me. I have not had much opinion one way or the other - I have represented creditors, and am now on the debtor's side of the fence. But the last rationale about the "costs" of bankruptcy that are passed on to the rest of us left me unconvinced as to the bill's necessity. I'd like to know when we can expect to see the "benefits" when these costs are minimized and reduced. Do you think your interest rate will go down on your credit card? Will car loans become significantly less expensive? Somehow, having worked for banks, auto loan companies, mortgage companies and the law firms that represent them, I don't think the day will come when we can say, "Boy, livin' sure is easier for us regular Shmoes who play by the rules and pay our bills now that the Bankruptcy Code has been reformed!" I have seen the abuses mentioned in the article - these types have been around for years - but there are provisions in the Code right now that allow the judges to deal with filing abuse, if they will just have the guts to call a spade a spade and throw the bums out of court. But many of them don't. I was ultimately most convinced by the personal responsibility argument - you bought it, now pay for it. If the law reinforces that concept, it can't be all bad.