Asymmetrical Information

The one thing you don't mention is the effects of the economic downturn and drastically falling incomes (in some professions). You structure your life and debt around your income, and you naturally assume what seems reasonable (4 yesrs ago) would continue to not be a problem. What happened by that summer is that the game had changed radically. I have a friend who told me that 2001 was his worst year. My reckoning was put off unitl 2003-2004. The Dallas area IT job market has not recovered. It is not just IT, either, as the telecom collapse in Dallas starting late 2000 has transformed the landscape. I have heard stories about former professionals standing on corners with cardboard signs. Sure, there are people who mismanaged their money, but many here were affected by the downturn, instead.

I'm in no way trying to imply that people in bankruptcy are all spendthrifts; I'm a former IT person who graduated from business school into the 2001 job market with almost $100K worth of debt, and my job offer was rescinded nine months later without my ever having started work. I know how terrifying it is to have the job market drop out from under you; I was lucky that I didn't have a house, and did have parents who lived somewhere I wanted to work, but your situation is all too typical.

But I don't think that the credit card companies can be blamed in your case; you just had bad economic luck. My point was only that if bad economic luck is to blame, it cannot be the credit card company's fault; and that if it is the credit card company's fault, it is also the fault of the borrower--if the borrower can't reasonably foresee that he will not be able to repay the debt, how can the credit card company, which knows much less about his life than he does? But there are a whole lot of people having to declare bankruptcy who did nothing different from their friends and neighbours, except get hit hard by circumstances beyond their control; I wasn't trying to imply that people who declare bankruptcy are wastrels, because I don't think they are.

Agreed. The tempted are ultimately the ones to blame if they fail to live up a contract that they agreed to, especially as in most cases it is a situation of living beyond one's means.

But there are cases of unexpected hardship: sudden medical emergency, spouse walks out on other spouse and fails to make good on his part of the debts and other obligations. And here is where legitimate claims of destitution imply a need for some form of bankruptcy protection.

But then why not spell it out in the contract for the card in the first place? Were I to offer a credit card I would have spelled out clearly what constitutes a right not to pay on time (and assume arbitration or the courts can sort out the truth) as well as a clear recourse on my part as to what I can do to you if you do not pay (garnished wages, indentured servitude (how else to cheaply fill my call centers?))

And ultimately I would be able to offer a competative rate. As it is card companies are usurious not simply because they are greedy (there is that of course) but also because the government allows too many to skip leaving the rest to cover the costs.

Me, I don't carry any credit card debt. Like the lottery, it is a tax on those who are bad at math.

Jane, I'll play devil's advocate for a bit:

1. "The other problem with saying we shouldn't punish the temptee unless we also punish the tempter is, of course, that none of the people making this argument have any interest in punishing the temptee." Maybe they think the temptee is already punished sufficiently. Is going through bankruptcy really all that comfortable? (It's not something I have any experience with.)

2. "if the borrower can't reasonably foresee that he will not be able to repay the debt, how can the credit card company, which knows much less about his life than he does?" Except that the credit card company is able to do math. A whole lot of graduates of public schools, and even universities, can't.

But restricting legal credit just drives desperate people to illegal lenders. At least the credit card company won't send someone to break your kneecap.

“I wasn't trying to imply that people who declare bankruptcy are wastrels, because I don't think they are.”

This sentence needs to be slightly revised. I prefer it to read:

“I wasn't trying to imply that everybody who declares bankruptcy is a wastrel---but as a general rule, most people who declare bankruptcy have only themselves to blame.”

"But restricting legal credit just drives desperate people to illegal lenders."

Why is that? I haven't used credit cards or mortgages AT ALL in almost 20 years, and despite being in very desperate straits for some portion of the seventh or eighth and the fourteenth or fifteenth year, I have managed to completely resist this "drive" you speak of. There's always an alternative to debt as long as you aren't completely incapable of working or even begging (to call a spade a spade).

Read the bill. If you make more than the median income in your state you cannot file under Chapter 7, but must file under Chapter 13. The median income is very low on a state wide average. The act doesn't distinguish whether you live in an expensive city or a small town of the state. Assume you make over the median and are in Chapter 13, you will pay towards your debts everything you earn above the Internal Revenue Service expense allowance, a very small amount about $2,000 per month for all expenses including rent.
Any person with any real income will wind down their income for six months to qualify for the median limit allowing filing under Chapter 7.
People earning below the medium will have a difficult initially filing. More expenses, credit counseling from companies owned by the credit card companies, etc. In addition people who do get to a payment plan approved under Chapter 13 will be unable to refile if their plan fails. 80% of repayment plans don't work out.
1% of the work force files each year. This 1% now and cumulatively for each year therefter will not be working for themselves but totally for their creditors. In my view this is a guarantee of a recession.

If you get uninsured medical bills, divorced or unemployed you are done for. Bye, bye Miss American pie.

OK, let's not legislate paternalism. But let's acknowledge that the credit card industry is at least partly responsible for the problem of people being over-extended on credit cards. The industry keeps moving the barrier to credit lower and lower, encouraging people to shift balances (which always strikes me as a form of "credit kiting") while having sometimes extraordinary interest rates and fees for late payments to offset the cost of the "bets" they've made. The industry is a bit stagnant; they have reached the limits of the reliable debtors and have extended the market to increasingly less reliable debtors and now want government to insulate them from liability for that strategy.

I don't think bankruptcy should be a free pass to people who take on credit they can't handle, but the new bill seems to remove some of the economic consequences for the credit cards companies to keep knowingly inviting people onto the thin ice.

Also, in the drive to hold people "accountable" for their actions, the bill makes people whose situation is the result of unforseeable or unavoidable circumstances (e.g., medical bills from and accident) hostage to (at the risk of overdoing the analogies) Uncle Sam's passing the medicine out to the bad little boys and girls who should've known better.

As an alternative, consider if credit card debt were made WAY easier to discharge. How quickly do you think the easy lending practices of the industry would cease?

If it's the stupid spending, there are other parties to blame/punish, namely the vendors and manufacturers of the stupid products/services.

We can either do it on the back-end, namely clawback all money spent at Disneyland and on alcohol (from stores and brewers) at bankrupcy, or ban the use of credit instruments on such items. (Yes, said vendors faced with the former will impose the latter, but at least our hands are clean.)

If you make more than the median income in your state you cannot file under Chapter 7, but must file under Chapter 13. The median income is very low on a state wide average. The act doesn't distinguish whether you live in an expensive city or a small town of the state.

If you're living in a city that's too expensive, you should move. I don't understand why everyone is so quick to treat a city's high cost of living as a mandatory expense over which teh debtor has no control rather than a luxury expense. Everyone would agree that if you're renting a very expensive apartment and can't afford it, you should move to a cheaper one. The same reasoning applies if you're living in an expensive city. Apartments in NYC are a very scare good. If you can't afford one, get out and make room for someone who can.

It may be "arrogantly paternalistic" to presume that there is a large class of people who can't be trusted with credit, but it is a fact that there is a large class of people who cannot calculate compound interest and to whom credit is offered. (If you've ever signed up your infant for a frequent-flyer program, you know this is true.) The credit card companies understand the risks of lending to such people and can and do price that risk into their interest rates. I don't have much sympathy for the government coming to their rescue.

It would not surprise me if, when the inevitable hardship stories are publicized after the bankruptcy amendments take effect, we see calls for a return to meaningful usury laws.

I admit I haven't been following this, so perhaps you could help me Jane -- how exactly is the government "coming to the rescue" of credit card companies? Are they offering to pay off bad credit card debt with government funds or something?

I hate the credit card companies, but I don't really feel sorry for those who don't pay attention to the interest rates or spend beyond their means. I don't like the change in bankruptcy laws, but its not a big deal to me, bad credit really only removes the "privledge" of paying interest rates that would put a private lender in jail. I realize that bad credit also limits your ability to finance a home, but so does a bankruptcy. My biggest problem with credit is that an individuals credit report is available to potential employers. Imo thats an invasion of privacy.

Interesting, but isn't it right to punish those who act knowing that they're hurting others before punishing those that act ignorant of same?

In other words, assuming (as I think is fair) that consumers who incur credit card debt don't generally know that they're not going to be able to pay it, while credit card companies who induce clueless college freshmen to take out cards are subjectively aware that those kids aren't experienced or knowledgeable enough to handle them (cross reference the credit-card-induced suicides of college students Sean Moyer and Mitzi Pool in Oaklahoma), doesn't it follow that more moral condemnation should be inflicted on the companies?

I don't think your original post really takes that information disparity into account. Credit card companies have a wealth of demographic and statistical information at their hands, plus they know full well the risks of lending to someone with no income history. College kids, on the other hand, are understandably clueless about the consequences of charging thousands of dollars. Perhaps not intellectually, but we know that human nature is such that intellectual awareness of consequences does not always equate to understanding of how those consequences will really impact one's life.

Jane, you don't sign up an infant for a frequent flyer program. They sit on your lap.

But toddlers pay full freight and sit in their own seats. They need to start piling up the miles so that you can send them away on their own when they hit adolesence.

Jane Galt wrote:

The bankruptcy bill was flawed in many ways.

Really, please name some of them. So far the proposals that I’ve read from the bill (means-testing; placing limits on the homestead exemptions for those guilty of securities fraud, intentional torts that result in death or serious bodily injury, and people who clearly are just trying to hide their assets in a home that they haven’t lived in for the previous 40 months) all seem pretty reasonable to me.

DRB asks:

I admit I haven't been following this, so perhaps you could help me Jane -- how exactly is the government "coming to the rescue" of credit card companies? Are they offering to pay off bad credit card debt with government funds or something?

Ed wrote:

Read the bill. If you make more than the median income in your state you cannot file under Chapter 7, but must file under Chapter 13.

Actually that’s not true. The median income level is actually only the first step of the means-testing process. If a filer is at or below their State’s median income level (which is more than 80 percent of all Chapter 7 filers) they proceed on to Chapter 7 pretty much the same as before. Those that are above their State’s median income level has to go through a second step in which the court looks at how much income over the next five years they would have after their allowable expenses. If you have less than $6,000 you go to Chapter 7 same as before. If you have either more than $10,000 or between $6,000 and $10,000 which makes up 25 percent or more of your unsecured debt, then you still get to go before a court and plead exceptional circumstances as to why you shouldn’t have to go Chapter 13 and ought to be able to file Chapter 7 instead.

IMO it seems a pretty sensible way to separate those who truly cannot pay their debts and should be allowed to file Chapter 7, from those who can afford to pay their debts and ought to at least make the attempt via Chapter 13.

Maybe you can punish both the tempted and the temptors.
Could we justify slapping some kind of tax on certain kinds of lending if we thought they had negative externalities on people outside of the 2 parties to the exchange? Say, negative externalities on the public via use of bankruptcy courts, or on the macro-stability of the US economy, or on children of borrowers?

Jane wrote:

"I don't exactly understand how requiring people to fulfil contracts they've undertaken is "punishment"."

I agree in principle, but the reality of credit card contracts limits the applicability of that principle. Credit card contracts are made up almost entirely of what contracts scholars call "invisible terms" - terms that cannot be readily comprehended. Contracts professors give these documents to their advanced law students, who can't make heads or tails of them.

Further, when one signs a credit card contract, one almost certainly agrees to allow the lender to change the terms at its whim (without further consideration from the borrower, which is typically a requirement in this type of scenario). So a credit card company can change your due date DURING A BILLING CYCLE - and notify you post facto. It can change your rate because of a late payment on your car loan. It can sell your data to other creditors without your express permission.

On some level, it's hard to say that borrowers have consented to the contract terms at all.

NON-ECONOMIST & SOMEWHAT O.T. ALERT: I have questions about why credit card companies give people like me credit. I haven't paid interest or a fee of any kind for probably a decade. We charge EVERYthing, for the miles of course. If we could charge our mortgage we would. (Maybe we can... Have to look into that.)

I know the c.c. companies make a certain little bit of money per c.c. transaction from the vendor from whom I buy the item, whatever it is; is that income enough to make up for the fact that I'm not in their thrall? Is this also how American Express makes its money, since their traditional product didn't allow consumers to carry a balance?

Are people like me a secondary cause of high interest rates? Is my responsible but advantage(/miles)-taking credit behavior a factor in getting other people into credit trouble? Truly, I'm concerned about my ethical stance here... I don't want to hurt anybody.

lake powell

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