Asymmetrical Information

Bankruptcy hearings are not held in some vacuum.
Therefore, it should be relatively easy for the Master to determine if the credit issuer was dumb to extend credit, if a medical disaster caused the financial problems, or if excessive trips to Vegas or Neiman Marcus were behind it. The irresponsible should not get off so easy.
One case I'm familiar with: dual income couple earning over $125,000/yr. One kid in private school, two late model cars, annual trip to Disney World, eat out five nights/week. etc.
Go thru Ch.7 and get everything discharged. Five
years later, kid still in private school, now have
house in better neighborhood, late mortgage and
car payments again. After 7 years, you can file
again!

"Americans today have less disposable income than they had a generation ago, as more of our income is spent on housing, health care, and transportation."

Um, let's not forget taxes too.

From Talking Points Memo:

We all know about the state of health care costs in this country. Insurance has become more costly and out-of-pocket expenses great as more people join plans with coverage gaps. Too often, families in medical emergency are forced to start paying medical bills with credit cards just to pay for necessary procedures. We have already noted that over half of bankruptcies are due to medical emergency, and when combined with job loss, death, and divorce, the proportion of bankruptcies due to emergency rises to nearly 90 percent.

The fundamental problem is that it isn't true. Despite what the authors have encouraged us to believe, the Harvard study, entitled "Illness and Injuries As Contributors to Bankruptcy," isn't really about medical bills, crushing or otherwise. It's about bankruptcies that can — at least if you're willing to stretch things a bit — be classified as medically related. It finds that 54.5 percent of all bankruptcies have "a medical cause." But "medical cause" is used as a term of art here. In fact, the study does not claim that injury or illness was the primary cause of those bankruptcies. And, perhaps more importantly, it does not claim that the bankruptcies were caused by the crush of medical bills.

Don't get me wrong. Some bankruptcies are caused by crushing medical debt. But they aren't half of all bankruptcies, and the only way to create the impression they are is to jimmy the figures. For example, the study classifies "uncontrolled gambling," "drug addiction," "alcohol addiction," and the birth or adoption of a child as "a medical cause," regardless of whether medical bills are involved. Yes, there may be situations in which a researcher might legitimately want to classify those conditions as "medical," but a study that is being used to prove that Americans are going bankrupt as a result of crushing medical bills is not one of them. A father who has gambled away his family's mortgage payment is not likely the victim of crushing medical bills. Similarly, new parents who find they can no longer afford their previous lifestyle now that one of them has to stay home with the baby will usually find the obstetrician's bill the least of their problems. Babies are a financial hardship even when hospitals give them away free.

Maybe that's why only 28.3 percent of the surveyed debtors themselves agreed with the authors that their bankruptcy was substantially caused by "illness or injury." The rest put the blame elsewhere, even when the study labeled their problems as at least in part "medical."

And the money quote:

Buried in the study is the fact that only 27 percent of the surveyed debtors had unreimbursed medical expenses exceeding $1,000 over the course of the two years prior to their bankruptcy. Presumably 73 percent — the vast majority — had medical expenses during that two-year period of $1,000 or less. Had that figure been recited up front, it would have been obvious that the proportion of bankruptcies driven by unmanageable medical debt was nowhere near half.

Neither, really. I don't buy the legend of blameless bankrpts, but I have no interest in helping credit card companies change the law so they can squeeze that last elusive drop of blood from their victims. I'm against the bankruptcy reform not because I think that one side or the other is getting shafted, but because I think that easy bankruptcy is one of the great unrecognized strengths of the American economic system. Easy bankruptcy is what frees people to be entrepreneurs, to take risks without fearing that one wrong move will destroy them forever.

Seriously the “bankruptcy is necessary for entrepreneurship” line is rather amusing since we already have laws that enable entrepreneurs to form corporations and shield themselves from personal liability. The opposition to bankruptcy reform that requires people to honor their agreements and pay what they agreed to pay (rather than having the government interfere in a private agreement) is simply an opposition to personal responsibility. A position that no true libertarian would support.

Why are credit card companies evil? Companies are, by design, incentivized purely by profits, and not the well-being of society. So whose fault is it when a company profits from the ignorant? The profit-seeking company or the ignorant for not educating themselves?

If you really want to fix this problem, I think the best approach would be to educate high-schoolers on personal finance.

Moreover to follow up on Jane’s larger rationale – where does one get the idea that the sort of “risk taking” that she believes is encouraged by bankruptcy protection is necessarily the kind the leads to entrepreneurship? People take all sorts of risks every day and while some of them are certainly beneficial in the aggregate (e.g. starting your own business, creating an invention, switching careers, etc.) there are many which are generally destructive (e.g. gambling, drug abuse, promiscuity, etc.). It seems to me by having liberal bankruptcy laws we are more likely to encourage the latter rather than the former and it does more to hurt than help promote innovation and economic growth.

Good points all Jane.

But what about the exemptions for wealthy people (unlimited homestead, asset protection trusts) that the bill does nothing to fix and that the GOP specifically refused to change by voting down the relevant amendments?

Good point GT. It's criminal that poor people don't get unlimited homestead while wealthy people do. What was especially amazing was the way the GOP actually made Poor People and Wealthy People defined terms in the bill.

To take just one example, she claims in her book that housing consumtion hasn't increased very much in the last few decades: by less than 1 room per house. But that's a pretty big increase, when the starting average was near 5 rooms.

I wonder if we should also account for actual floorspace in each room, not just the existence of a room itself. My folks' house was built by its first owner about thirty years ago. With 1100 ft^2 + unfinished basement, it was actually a moderately large house at the time. The master suite has roughly a 110-square-foot bedroom with a modest traditional clothes closet and a small, but full-fixtured, attached bathroom.

The new houses being built a couple miles away also have a master suite, but the floor space is something like a fifth of the entire house (which itself isn't small), the closet is a spacious walk-in unit, and the bath is two or three times larger and features a spa tub and separate shower stall. You can replicate this scenario throughout these houses; in the end you'll often get the same number of rooms if that's all you're counting, but clearly it is not the same level of housing consumption.

"I understand that bankruptcy reformers think that they can target the deadbeats without touching the merely excessively daring, but I'm not so sure. And while the abuses of the system may be morally outrageous, I don't see that they're particularly damaging. Capital One and its ilk seem to be getting along pretty well without our help. I'd be happy to leave it that way."

The above says it all.


Thorley,

The first thing the credit card companies do, when an entrepenuer with a corporation signs up for a card, is to pierce the corporate shield by making him sign a personal guarantee.
You state that the borrower knew the rules when he signed up for credit-- that's true, but the credit granter knows the rules too-- all unsecured debt's are dischargable in a bankruptcy court by the ruling of the judge.

I say both sides are even and that each should stop whingeing-- the system seems to work just fine as is. The country is not going to hell in a hand-basket because of our bankruptcy laws. Jane has it just right.

thedaddy

The houses may be bigger, but the fact that the households are smaller doesn't count as an economic gain. In fact, one possible cause of the smaller households is that people can't support large families as often as they did in the past, which would be a sign of a worsened economic position.

Of course, there's plenty of reason to believe that the cause of this is not reduced overall wealth on the part of any sector of society, but an increased overall crime rate meaning that families must buy larger and more expensive houses than they would otherwise have any use for simply in order to keep their chances of being assaulted or murdered acceptably low. And since every distribution must have people at the bottom, and since the deficiency in law enforcement falls upon those of low status rather than those who fall below a certain level of absolute wealth, it's a zero-sum competition for safe housing. Most undesirable.

I have no strong desire to change bankruptcy law - although I strongly dislike the typical arguments against it. Debtors, even college students, should be presumed to be competent to evaluate contracts and make an informed decision whether or not to sign them, and generally be held to them I particularly dislike the implication that college students are not competent to do this - if they aren't, that logically requires them to either be required to move back home with their parents and go back to the same status they endured as teenagers, or for their colleges or bosses or someone to essentially take custody of them and have them go back to the same status they endured as teenagers with a change in guardian. I have no desire to see that happen to people who have already endured overlong childhoods.

I'd like bankruptcy reform better if it was harder for the well-connected to weasel out of paying back what they can. Of course this problem exists with many laws, which is one reason I like to see the body of law trimmed down to the absolute minimum required to keep society functioning. Unfortunately, we've got to have some laws concerning bankruptcy...

I constantly see the "They should have read and understood the contract." argument. But then again the contract can be changed at any time after the debt has been incurred, can't it? Is the language really all that clear? Aren't there constant searches for new excuses to jack up the interest rates, like the "Well, we know you weren't late with a payment to us but you were x days late on this payment to someone else so that makes you enough of a risk to triple your interest rates." one. Sorry, Thorley, I don't buy your argument in defense of the indefensible. Independent operators like them are called loan sharks.

OT: Regarding the two income trap, wouldn't this be an argument for vouchers for private/parochial schools. After all you don't have to be in the same neighborhood or school district to go to a private school. Which brings up another issue. Would vouchers lead to an exodus from expensive neighborhoods as families no long feel the consider where they live as important for guaranteeing access to good public schools.

Jim S wrote:

I constantly see the "They should have read and understood the contract." argument. But then again the contract can be changed at any time after the debt has been incurred, can't it?

No, modifying the terms of a contract usually requires the mutual assent of both parties and the change has to be supported by some form of consideration.

Is the language really all that clear?

Yes, credit card companies are required to list both their interest rate and their late fees and provide this information to consumers. If you’re not sure what they are, you can always ask.

Aren't there constant searches for new excuses to jack up the interest rates, like the "Well, we know you weren't late with a payment to us but you were x days late on this payment to someone else so that makes you enough of a risk to triple your interest rates."

Really, evidence please.

Sorry, Thorley, I don't buy your argument in defense of the indefensible.

I’m not the one trying to defend adults who don’t pay their bills and expect the government to discharge their debts. Those are the only ones trying to make an "argument in defense of the indefensible."

Megan--

Plus if the average size of a room has increased, as I'm fairly sure it has, then house sizes have gotten even bigger than her numbers seem to claim.

The credit card companies set their interest rates and fees in order to price the risk. They never lose money, except if the laws change after contracts are signed. The size of their market might change, though, which could affect investors. But they'll always make a profit.

Given that we can assume greediness on their part, the real tug-of-war is between the people who will pay their bills off and those who want. The more bankruptcies there are, the higher interest rates go up and the harder it is for the poor to get credit. (Since companies can also shield from risk by lending to people with better credit records.) Clearly some people have just poor luck, and bankruptcy is useful for a lot of reasons. I don't know offhand what the proper balance is, certainly. But changing the law will help some borrowers, poor and rich alike, and hurt others. As always, the burden will fall hardest o the poor, whether it's too-high interest rates if there is no reform, or the problems of bankruptcy if there is.

Thorley Winston at March 7, 2005 10:42 PM wrote:

No, modifying the terms of a contract usually requires the mutual assent of both parties and the change has to be supported by some form of consideration.

If the right to modify the terms at will is granted to one party by the other in the original contract, no further consideration is needed.

Insofar as all lenders play by the same rule or lack thereof, there's really no free market as far as borrowers are concerned.

Some years ago, about 50 or so, I was a decently intelligent lad with an interest in scientific method. So performed a little experiment. Having read Benjamin Franklin about the virtue of saving, I put $100 into a savings account with a (then) local federally insured savings and loan association. Interest rates on savings at the time were 4% give or take.

A couple of years ago I got a letter from a financial institution I had never heard of. That was because I hadn't lived in the same state in many decades and it was very new. The letter informed me that the same account I had opened in the 1950s with $100, now contained about $60, and was being charged something like $10-$12 per month for being a small account with no activity.

So much for this guy's belief in the American myth of fair play, honesty and integrity in banking and financial institutions. It's just a scam.

As that song about Jesse James said, "some'll rob you with a six-gun, and some use a fountain pen." At least a six-gun leaves no doubt as to the intentions of the robber.

Luckily it only cost me $100 in 1950s dollars to find out for sure.

IME the credit card issuers are downright polite when measured against the student loan collectors. I've never had a credit card issuer overdraw my checking account by forging a bank draft in my name (leaving me with a misleading record for writing bad checks). I've never had a credit card issuer attack-dial my phone at 3am. I've never had a credit card issuer threaten me with incarceration or physical violence. As a matter of fact, no credit card issuing bank I've ever dealt with, no matter how much money I owed them, has ever committed a single felony in pursuit of the collection. I cannot say the same for the agencies that collect student loans.

Of course, that might be partially because even at the peak of my debt problem, my credit card debt was never more than $1500 while my student "loans" were over $100,000. But I would not discount the possibility that dischargeability in bankruptcy gives the banks issuing credit cards something of an incentive to treat their debtors at least well enough to avoid completely foreclosing the possibility of a voluntary negotiated repayment plan, whereas nondischargeable student debt creates exactly the opposite incentive...grab as much as you can as fast as you can and cheat as hard as you have to in order to squeeze every available dime because the debtor has no recourse against you.

Leave the laws as they are. No need to give even more entities an incentive to abuse people.

Since bankruptcy wouldn't have done me any meaningful good, I didn't bother with it. The good news is that now that my debts are paid off, I only have to wait 7 years for the records to expire before I can start rebuilding. I should be able to get a credit card before I'm 35. Maybe some day I'll even be able to have a new car.

Thorley wrote: "Seriously the “bankruptcy is necessary for entrepreneurship” line is rather amusing since we already have laws that enable entrepreneurs to form corporations and shield themselves from personal liability."

Spoken like a man who never, ever tried to start a corporation. Try getting a bank to lend you unsecured funds without a personal guarantee, and see how far you get.

A position that no true libertarian would support.

Assuming, of course, the existence of a true libertarian. I have never seen any evidence that any exist. Most "libertarians" these days are just Republicans who like to smoke pot and aren't big on Jesus in public schools.

I suspect using the number of rooms was a way to 'enhance' her argument.
My Grandfathers house from 1929 was about 1000 square feet, 4 rooms 1 bath.(7 kids)
My other grandparents home from 1948 was 900 square feet with 4 rooms, 1 bath. (2 kids)
My parents from 1962 is 1400 square feet with 5 rooms 1.5 bath. (4 kids)
My brothers homes from 1990 - 2000 are all about 2200 square feet 5 rooms, 2 baths.

Both my grandparents had rooms added for offices, so they ended up as 5 rooms, 1 bath.

"Easy bankruptcy is what frees people to be entrepreneurs, to take risks without fearing that one wrong move will destroy them forever."

Then you really should support the currently proposed debt slavery act. It does not penalize the entrepreneurs, but rather the wage slave nebbishes. If you look at the fine print, it is all about raising the transaction costs for going into bankruptcy, from around $500-1000 to around $5-10K. It still allows entrepreneurs (who can usually afford $5-10K) to easily get discharge from their creditors. Remember, it not only has asset protection trusts for the medium-big entrepreneurs. Also, most small entrepreneurs should have enough income flexibility (always a matter of discretion for small businesses) to get into Chapter 7 while still affording their lawyer fees.

This bill is a carefully targetted purpose pitch by credit card companies. All they want to do is grab as much from low-moderate income wage slave nebbishes as they possibly can. There are no other principles to this bill.

For a couple of years after graduation, my whole life was nothing but massive debt payments, as I lived with my parents and shoved every spare dime I had into getting that debt down.

You were very fortunate to be able to move back in with your parents. Not everyone has that luxury, and many times people who head to bankruptcy are, in fact, taking care of sick parents themselves on top of their own needs.

Why are credit card companies evil? Companies are, by design, incentivized purely by profits, and not the well-being of society. So whose fault is it when a company profits from the ignorant? The profit-seeking company or the ignorant for not educating themselves?

Using the "why are credit card companies evil" is a cheap way to dismiss the argument. Certainly there should be some limits as to what a credit card company can and can't do. Should a company be allowed to charge 100%+ interest just beacuse it can talk a consumer into it? No matter how much education there is, there will always be someone who can be talked into a bad deal.

re counting rooms...

from personal experience, room counts aren't all that great.

we moved from a 4 bedroom house to another 4bdrm. house 2 had no more rooms, but the master suite went from a decent sized bdrm with ensuite and a walk-in to covering a 3 car garage, plus a deck with hot-tub, 3 walk-ins, a 200sq foot bath with separate shower and jacuzzi. all rooms got much larger, especialy main floor where the office, kitchen, and family room takes up the same sq foot as the old house's entire floor plan including garage.

plus, i moved out, leaving 2 people with declining mobility to this house.... but they had no improvement in housing, as demonstrated by the same # of rooms.

i know anecdotes ain't data, but this is a real trend. people have little need for extra rooms and would rather have bigger and better main rooms. it's only until you get into completely insanely ridiculous sized houses that you start to see additional rooms on "countable" floors (i.e. not basement).

Smokey Joe Wood: Assuming, of course, the existence of a true libertarian. I have never seen any evidence that any exist. Most "libertarians" these days are just Republicans who like to smoke pot and aren't big on Jesus in public schools.

We prefer to think of Republicans as just libertarians who are hypocrites. After all, they just want the government out of the lives of just the people who live exactly like them.

Frankly, I don't understand the responsibility argument. What happened to the responsibility of the credit card issuer to avoid undue risk by extending credit to those who aren't credit-worthy? I don't see a liberty interest here, or a free markets issue, or a responsibility issue that isn't divided equally between borrowers and creditors.

What I do see is the credit card issuers attempting to use the power of the government to reduce the risks on wagers they've already made. That's why I named the credit card issuers Rent-Seekers of the Week.

The houses may be bigger, but the fact that the households are smaller doesn't count as an economic gain. In fact, one possible cause of the smaller households is that people can't support large families as often as they did in the past, which would be a sign of a worsened economic position.

A possible cause, but another (and much more well-documented, I think) is that wealthier people often have smaller families.

Of course, there's plenty of reason to believe that the cause of this is not reduced overall wealth on the part of any sector of society, but an increased overall crime rate meaning that families must buy larger and more expensive houses than they would otherwise have any use for simply in order to keep their chances of being assaulted or murdered acceptably low.

On what basis do you claim that there is an "increased overall crime rate?" Violent crime in the US has been falling overall since the 1970s, IIRC.

Come by where I live sometime. There are smaller houses (900-1200ft^2), mostly older but still livable, for sale in the $170-220k range. They often sit on the market for months. Meanwhile, the contractors just up the highway are putting in houses from $300-450k and making a steady business of it (although there have been signs of slow-down lately, such as $10k buyer signing bonuses and the like). School district? Same either place. Neighborhood? Equally quiet and peacable in either location. Accessibility to local businesses, restaurants, and entertainment? Less than ten miles. Emergency services? There's a firehouse less than five miles away and a hospital less than ten.

Maybe what you're proposing is more true in some heavily urban areas where crime rates have gone up locally, but here on the edge of growing suburbia, the only conclusion a person can reach in looking at this is that people want houses that are large and still have that new plaster smell, and most paying for them through heavy debt load.

Fling93 wrote: "We prefer to think of Republicans as just libertarians who are hypocrites. After all, they just want the government out of the lives of just the people who live exactly like them."

feh. Republicans want to outlaw abortion and gay marriage. Democrats want to outlaw school prayer and to fire Larry Summers.

Trying to cram your opinion down everyone else's throat is as American as apple pie.

And you're proud of that?

Jane wrote:
They (credit card companies) make half their income by surprising people with enormous penalties and usurious interest rate changes if they forget to pay their phone bill one month.

Do you have source for that statistic, Jane? Because Tom Macguire says Kevin Drum just made it up.

Jim

"Moreover, there's ample evidence that a sizeable percentage of bankruptcy filers engage in quite a lot of strategic behavior in the run-up to bankruptcy."

Why would you expect any different? People don't wake up one morning and discover the entire world has gone to hell for them, and file bankruptcy; there's got to be, what, a 6 month lead time where they start arranging things?

Thorley,

Generally I try to avoid name-calling when posting, but you really showed an amazing level of ignorance in your attempt to respond to me.

'Card contracts require constant monitoring because they can be amended quickly and frequently. A card issuer is required to give only 15 days notice of a change in terms. "You can't rely on the original agreement being accurate down the road," says Gary Klein, consumer credit specialist with the National Consumer Law Center and author of Surviving Debt: A Guide for Consumers.

There is almost no limit at all on how often terms can change in states where most of the credit card companies are doing business."
...
" * Credit "purity" -- If you keep digging, you may find a clause that says your cardholder reserves the right to up your interest rate if it finds you have been late paying other bills.

The AT&T Universal Card, bought by Citibank, is doing this now. Card customers were informed earlier this year that interest may shoot to 23.9 percent "if a payment is not received by us or any other creditor within 30 days of the due date."'

The quote above comes from bankrate.com. It's far from the only place where that information can be found.

"if a payment is not received by us or any other creditor within 30 days of the due date."'

In other words, if the US Post Office fails to deliver on time even one payment---you are royally screwed. A good bill must take to task the shenanigans of the credit card companies. They seem to be at least sometimes playing a “gotcha” game with their customers. Kevin Drum may be exaggerating the number of instances where this occurs. Still, I want our elected representatives to reach a fair compromise on this point.

I have been a bill collector in the distant past. A lot of people do indeed scam the system. But it appears to me that this particular bill needs more work. Congress must spend more time to do it right. There’s no reason to accept this particular less than adequate proposal.

Thorley:

I’m not the one trying to defend adults who don’t pay their bills and expect the government to discharge their debts. Those are the only ones trying to make an "argument in defense of the indefensible."

I actually agree with you that adults should not get out of lawfully-aquired debts too easily. Note, howrver, that bankruptcy is not an unlimited ticket to party; even in a discharge proceeding like Chapter 7, it still doesn't extinguish liens and the like, and the debtor can be forced to forfeit certain types of property in the proceedings. Moreover, since bankruptcy provides aid to those who legitimately need it even while some may game the system, taking it away only staunches abuse at the price of injuring those who are legitimately up a financial creek. There's no clear winner for removing these provisions of the bankruptcy code.

Above that, you seem to be prepared to put no strong limit on what a lawfully-aquired debt can be, and that's equally dangerous. The eagerness of a would-be creditor to loan to high-risk parties does not mean that society cannot, or should not, put limits on such behavior, simply on the basis that some behaviors are damaging and irresponsible. Can a lender legally fulfil or even include a contractual obligation to cut off your legs if you fail to pay? No? Then perhaps there are other limits that should be enforced. At present, the availability of bankruptcy seems to indirectly create one such limit: bet the lending farm on a shyster, and the shyster may game you.

Third and finally, as others have pointed out, Capital One et al seem to be doing rather well. Assuming the credit companies are run by economically-rational people, if bankruptcy abuse were costing them excessively, then they would do the logical thing and filter their card applicants more carefully. In that light, this current congressional bill would seem to be nothing more than a blatant attempt by the credit companies to both have and eat cake. Tough crap, guys.

"The eagerness of a would-be creditor to loan to high-risk parties does not mean that society cannot, or should not, put limits on such behavior, simply on the basis that some behaviors are damaging and irresponsible."

Doesn't mean that current limits (i.e., no contract calling for broken legs) aren't eminently reasonable. Limiting people's action "for their own good" also limits the ability of people to take advantage of a course of action that, whatever its drawbacks, is better than the available alternatives.

"if a payment is not received by us or any other creditor within 30 days of the due date."'

"In other words, if the US Post Office fails to deliver on time even one payment---you are royally screwed. "

Well, actually, it's "In other words, if the US Post Office delivers even one payment more than 30 days late", since the threshold is the due date plus 30 days. If this is actually a problem, we should sell off the Post Office before we forbid creditors from using your credit history to set their rates.

Jim S wrote:

Generally I try to avoid name-calling when posting, but you really showed an amazing level of ignorance in your attempt to respond to me.

No, modifying the terms of a contract usually requires the mutual assent of both parties and the change has to be supported by some form of consideration.

Now Jim S tries to suggest that is somehow contradicted by:

" * Credit "purity" -- If you keep digging, you may find a clause that says your cardholder reserves the right to up your interest rate if it finds you have been late paying other bills.

You do understand that a clause in a contract which gives the cardholder the right/option to change the rate in the event of some behavior by the customer is a term of the contract, right? You also understand that if they exercise that option it doesn’t actually change the terms of the contract, right?

In the future, I suggest you take the time to read more carefully before you accuse others of “ignorance.”

fling93 "And you're proud of that?"

Nope. I'm in favor of the right to choose any of those four things.

I'm merely pointing out the fact that Liberals and Conservatives are equally intolerant of ideas they disagree with.

Reminds me of an old joke...A "Developer" wants to build a beach house this year. A "Conservationist" built his beach house last year.

I put $100 into a savings account with a (then) local federally insured savings and loan association. Interest rates on savings at the time were 4% give or take.

A couple of years ago I got a letter from a financial institution I had never heard of. That was because I hadn't lived in the same state in many decades and it was very new. The letter informed me that the same account I had opened in the 1950s with $100, now contained about $60, and was being charged something like $10-$12 per month for being a small account with no activity.

And you clearly cared about that money, given that you took no steps to keep track of it. You didn't sign a forty-year contract for 4% interest--if that's what you wanted, you should've purchased the appropriate financial instrument. Instead you put your money in an account with a fluctuating rate. No one put a gun to your head requiring you to keep your money in that bank once they changed the rules, you're presumably the one who never gave the bank a change of address form when you moved. How much do you think it cost the bank to track you down to send you the new statement?

What I do see is the credit card issuers attempting to use the power of the government to reduce the risks on wagers they've already made.

This falsely assumes that interest rates will remain the same if bankruptcy reform passes. In fact, one can expect that banks will quickly compete away these rents to the benefit of the vast majority of consumers who don't declare bankruptcy.

Thanks for posting another BSer, Thorley. The part of my post that applies to changing the contract was in fact :
'Card contracts require constant monitoring because they can be amended quickly and frequently. A card issuer is required to give only 15 days notice of a change in terms. "You can't rely on the original agreement being accurate down the road," says Gary Klein, consumer credit specialist with the National Consumer Law Center and author of Surviving Debt: A Guide for Consumers.

The section you quoted back to me applied to your request for proof about how much they can jack up your interest rates. Might I suggest you follow your own advice about reading?

Ted at March 9, 2005 09:05 PM wrote:

And you clearly cared about that money, given that you took no steps to keep track of it. You didn't sign a forty-year contract for 4% interest--if that's what you wanted, you should've purchased the appropriate financial instrument.

I didn't sign any contract. If I had, it would have been unenforcable against me because I was a minor. I was around 10 years old at the time.

Instead you put your money in an account with a fluctuating rate. No one put a gun to your head requiring you to keep your money in that bank once they changed the rules, ...

So, it's really just a game. The S&L induces people to save money by making representations that "your money is safe with us". Then when they get the money they just change the rules so they can keep it.

The "fluctuating rate" apparently means "negative rate for people who leave their money in the account too long".

I'm an ardent and stalwart capitalist, and always have been. I also have an abiding respect for honesty and fair dealing, and an abiding contempt for dishonesty and sharp practices. Laws that do not do enforce the former, or enable and promote the latter, make any economic system little more than legalized thievery.

... you're presumably the one who never gave the bank a change of address form when you moved. How much do you think it cost the bank to track you down to send you the new statement?

They gave me a passbook when I made my first deposit. They didn't send statements. I walked to the S&L, presented my passbook, and made deposits, totaling about $100. The nice man who ran the S&L told me that's all I ever had to do to make a deposit or withdrawal.

Obviously he was mistaken. How could he have known that someone would buy the S&L, then just keep the depositor's money by changing the rules?

No theory of capitalism, and no acceptable ethical system, says that bait and switch should be a legitimate practice. But current banking and credit laws do.

No wonder the left still has adherents.

Re: the increasing house size argument.

My own take on this is that it's largely irrelevant. Why? Because if you want a solid education for your kids, and you're therefore shopping for a house in a districts with good schools, you're forced to do so in the market as it exists, not in the market you wish existed.

So, if all the houses for sale in the good school district are big expensive ones with lots of rooms, well that's simply hard cheese. And that's because there ain't any cheap, affordable, tiny little shacks available in tony school districts. That market is simply non-existent.

(But one wonders: does JM Marshall now support school choice?)

(And one suspects: surely in many a metro area the economically rational choice these days would be to buy more cheaply and simply foot the bill for private schools).

Doesn't mean that current limits (i.e., no contract calling for broken legs) aren't eminently reasonable. Limiting people's action "for their own good" also limits the ability of people to take advantage of a course of action that, whatever its drawbacks, is better than the available alternatives.

Government does it by definition, extreme anarcho-libertarian fantasies notwithstanding. The question is under what cases it should or should not be done, with supporting reasons and evidence. (For example, leg sawing or breaking or any other physical mauling is considered too heinous to be tolerated in a civil society, so we explicitly deny it, both to creditors and to all others.) Framing the argument accordingly leads to much more productive discussion.

Dave says:
Frankly, I don't understand the responsibility argument. What happened to the responsibility of the credit card issuer to avoid undue risk by extending credit to those who aren't credit-worthy? I don't see a liberty interest here, or a free markets issue, or a responsibility issue that isn't divided equally between borrowers and creditors.

What I do see is the credit card issuers attempting to use the power of the government to reduce the risks on wagers they've already made. That's why I named the credit card issuers Rent-Seekers of the Week.

---

This is the most perceptive comment on the thread. We are talking about billions of dollars in unsecured debts which the credit card companies always knew were unsecured debts. There is no real debate about being for or against "personal responsibility" its simply a matter of changing the rules so that these corporations can get a one time boost in pure profit.

Sub-prime lenders can go bankrupt. That's right.

They can LOSE MONEY lending to bad risks.

It's not a one way street of poor people versus greedy corporation.

Jim S wrote:

Thanks for posting another BSer, Thorley. The part of my post that applies to changing the contract was in fact :

'Card contracts require constant monitoring because they can be amended quickly and frequently. A card issuer is required to give only 15 days notice of a change in terms. "You can't rely on the original agreement being accurate down the road," says Gary Klein, consumer credit specialist with the National Consumer Law Center and author of Surviving Debt: A Guide for Consumers.

Given that most lenders are profitable under the current bankruptcy rules, I don't particularly see a need for significant changes.

Some tightening up, possibly in the form of instructions to bankruptcy judges, might be appropriate to eliminate the sort of cases that State 29 talks about from time to time, and perhaps better policing for fraud, which could be done by the Justice Department with or without Congressional instruction.

I'm not sure if this is practical, but I believe that if the credit card lenders want tighter rules, those rules should only apply to debt incurred after the rule change. The lenders charge interest rates based (in theory) on the risk of default. The risk of default is governed by, among other things, the structure of bankruptcy laws. So debt contracted under those conditions should remain subject to those conditions. Debt contracted under the new, "tougher" bankruptcy laws will then be offered at lower interest rates as the risk of default is lower, so credit card companies should have little difficulty moving people over to the new! improved! plan.

fling93: We prefer to think of Republicans as just libertarians who are hypocrites. After all, they just want the government out of the lives of just the people who live exactly like them.
Ragnar Danischold: Trying to cram your opinion down everyone else's throat is as American as apple pie.
fling93: And you're proud of that?
Ragnar Danischold: Nope. I'm in favor of the right to choose any of those four things. I'm merely pointing out the fact that Liberals and Conservatives are equally intolerant of ideas they disagree with.

Which is fine. My only point was that libertarians are the ones with any consistency, who are not trying to cram their opinion down everyone else's throat, at least not via the government, anyway. At least liberals don't hypocritically claim they're in favor of smaller government. They're just naive to think they can use a larger and more powerful government to achieve social good -- forgetting that power corrupts.

It's interesting that everyone is harping on borrowers who supposedly read and agreed to all the fine print. Guess what, credit card companies have lawyers and know the bankruptcy laws very well. In the 1990's credit card companies made a strategic call, they started giving people with poor credit more cards and estimated what they would lose in bankruptices would be overshadowed by the higher rates and fees they could charge those people.

The result, of course, was an increase in bankruptcies that started this supposed 'crises'. But both sides knew what they were doing, or at least you can't seriously maintain the credit card industry was ignorant.

Now what you have is a windfall for the credit card industry. If this seriously an attempt at being fair then all debts incurred before this bill would be grandfathered under the old system.

I am not sure yet what I think about this bill. But it seems that people are ignoring some of the things in it.

The bill will not make it impossible for people to file for bankruptcy. My non-expert understanding, is that it will make it harder to file for Chapter 7 and instead force those people to file under Chapter 13. Chapter 13 is hardly debtor's prison (Glenn Reynolds' claims notwithstanding). Filers get to reorganize their debts and get to keep their property. I understand that the fees for non-payment stop accruing so long as the debtor follows the repayment schedule.

If a person really wants to pay their debts (as the debtor sympathizers claim), then what's wrong with them filing for Chapter 13 in most cases (Chapter 7 only in the most extreme of cases)?

A question for the supporters of the reform. Do you think that this reform might destabilize the very lucrative and growing CDO market? If the rules for default on debt and rate of recovery are changed, is there a risk that great volatility in the CDO market (thankfully it's not OTC) would help destabilize things like the bond market? Or does the bill take that into account?

Hey Tholey,
CC companies knew the rules of the bankruptcy game before they handed out debt to untrustworthy customers. If anyone's trying to reneg on previously made agreements, it's them. They set their rates and policies based on the current law and now they're trying to change it. They aren't unsuspecting victims. You're going to need a bigger violin to convince me that they need protecting.

The burden of proof remains at the credit card company side, not the consumer side. They are lobbying for more favorable conditions. Therefore, they need to show why changing the current environment is suprior. I haven't seen any evidence of this yet.

Thorley,

Contracts are mutualy binding. It's not just debtors who are bound by thier terms but creditors as well. Guess what? It's not the debtors who are are trying to abrogate the terms of the contract in this case it is the creditors. If you look in any credit card agreement you find a clause to the effect that the contract is only enforicible to the degree allowed by the laws of the state in which the contract takes place...and that if any portion of the contract is deemed unenforcible by such laws it shall not effect the rest of the contract.

In other words, part of the terms of the contract agreement itself (to which the creditors who are also "responsible adults" agreed) is that the contract shall adhere to the applicable laws....and if a portion of the contract viloates those laws that portion shall be rendered void without effecting the whole. Well guess what? Bankruptcy protections are part of the applicable laws which govern the enforcability of the contract, which by extension are included as part of the contract itself.... and which BOTH parties knew and agreed to when they signed the contract. It is the credit card companies who are, in a backhanded fashion, trying to alter the terms of the contracts they signed by altering the laws which govern them.

There is simply know reason to allow that. Both creditors and debtors KNOW when they sign a contract that it's enforcability is governed by bankruptcy protections. There is no reason for us to allow Credit Card companies to change the conditions under which the contract takes place AFTER the fact.

Thorley, I have never received a letter (or any other communication) addressed to me from my CC company saying: "We would like to change the terms of the contract. Do you agree?" (or any words to that effect). It's "take it or leave it" (as perhaps it should be; I'm not interested in arguing that particular point) - and it is also words to the effect of "we may change the terms/interest rate/late period/etc. at our discretion" (or words to that effect).

Thorley, the script that CC companys make their collectors read to debtors over the phone ("it's your responsibility to pay, because you had an opportunity to read the contract before you agreed to it") bears about as much relationship to today's world as "Atlas Shrugged" does.

Words are supposed to have meanings. You say a CC company has a "contract"? Don't make me laugh!

How do lenders "use the government" to make lendees make good on their debts?

It's clear to me that lendees "use the gov't" to discharge their debts by declaring bankruptcy but I'm unclear on the former.

There's one simple way to use a credit card and never have to file bankruptcy. Never charge more in one month than you can pay at the end of the month. It's worked for me for at least fifteen years and I never have to worry about those interest rates. Of course, it does require fiscal discipline. Unfortunately, such discipline no longer seems fashionable.

Anyone who charges something for which they know they'll never be able to pay should be charged with larceny.

In a Chapter 13 you must account for all your disposable income. You can not save money, you can not repay a 401K loan - considered repaying yourself and therefore subject to IRS tax assessment for early withdrawal - and therefore, people have no opportunity to save to protect themselves from another 'event' that causes financial hardship (things like replacing tires, battery or alternator on a car: a refrigerator gone bad: a kid needing stitches 20% co-pay $150: one week layoff - no unemployment: three one week layoffs in three months) all of which means that for 5 years, you have to pray nothing goes wrong...and I believe there is a 3 year rule. Every three years, something goes wrong.

Tracy

Yes, I work for a bankruptcy attorney: the event that leads most of our clients to bankruptcy usually occurred 2-3 years in the past. Long layoff, injury, job change, divorce. The 'run-up' in credit card bills usually indicates that all other options had been exhausted - borrowing on home equity, borrowing on retirement savings, borrowing from friends. Usually, the vehicles owned are in declining shape and things have been going wrong there too...causing missed work. It is never one event that causes people to file, it is an event that turns a financially stable person/family into one that is starting a slide. Trying to stop that slide causes other actions that lead, not then, but later, to bankruptcy.

Tracy

How do lenders "use the government" to make lendees make good on their debts?

It's clear to me that lendees "use the gov't" to discharge their debts by declaring bankruptcy but I'm unclear on the former.

Civil suits, judgements, leins, wage garnishment and so on.

There's one simple way to use a credit card and never have to file bankruptcy. Never charge more in one month than you can pay at the end of the month. It's worked for me for at least fifteen years and I never have to worry about those interest rates. Of course, it does require fiscal discipline. Unfortunately, such discipline no longer seems fashionable.

It never was fashionable. Back at the beginning credit cards were somewhat new and financing firms did not want to give them to anyone except people with very good income and excellent credit. Those people, by now, already have more than enough credit cards so the only place for expansion is downwards.

While I agree that life would be better if people would aspire to your suggestion it is not practical. First of all what you are saying amounts to "never borrow money". In reality the economy works on borrowed money. If not then economic growth would slow to a crawl as businesses would be starved of capital. Second of all it is fine to borrow money provided you are aware of exactly what you are doing. It is fine if you have to pay 19% per year if doing so let's you get another year out of your car instead of buying an expensive new one. However be aware of that and account for it properly.

You can get into just as much trouble with 'good loans' for things like a house, a car or education. Credit cards have a worse name for the same reason hard liquor does; it is easier to get into trouble with them in less time.

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