October 18, 2006
From the desk of Jane Galt:Bankruptcy, revisited
The Economist has an article today on America's bankruptcy reform, which has proved more effective than even its sponsors hoped (and its opponents feared):
Either way, the evidence so far suggests that the bill has succeeded tremendously. Until 2005, when consumers began rushing to file before the new laws came into force, personal bankruptcies had been hovering around 400,000 a quarter. In the first half of this year that number plummeted (see chart).Unsurprisingly, how you feel about that depends on which side of the bankruptcy proceedings you are on. Consumer advocates say the higher costs of filing and of hiring lawyers are unreasonably deterring people from seeking bankruptcy. Lawyers have raised their fees to cover the cost of extra paperwork and to guard against stiff fines for signing off on a fraudulent bankruptcy filing. Bankers, on the other hand, praise the law for weeding out fraudulent or abusive filers, while still letting those in genuine need get relief from unpayable debts.
It is unclear, yet, who is right. Anecdotal evidence suggests that few who show up for (now-mandatory) credit counselling have any chance of repaying their debts. Most continue to go into Chapter 7, America’s uniquely generous bankruptcy provision, which allows them to discharge all their debts in exchange for liquidating all their assets. They can even protect important assets like houses from creditors to some extent, unless they are security for an unpaid loan.
But no one knows quite what has happened to those who have not shown up at the credit counsellor’s office. Some may simply have filed a little early: over 440,000 more people filed for bankruptcy in 2005 than did so the previous year. But this cannot be the whole explanation. The first half of 2006 shows a sharp decline compared with the same period in 2004. More recent weekly figures suggest that trend is being sustained. Although many bankruptcy professionals seem to expect that filings will gradually return to their old levels, as more consumers learn it is still possible to file for bankruptcy, nobody is sure of that.
. . . his provides a sort of natural experiment on the reform. If bankruptcy rates do not return to historical levels, it may indicate that many of the previous filings were opportunistic. But even this would not prove the new rules are worthwhile. There is considerable evidence that tougher bankruptcy laws inhibit would-be entrepreneurs, who often must personally guarantee business loans. Even if American consumers do not need quite as much bankruptcy protection as was once thought, America’s economy might.
Incidentally, for those who may not have realized it, The Economist has moved all of its web content out from behind the pay barrier. That means that you can read all the daily news articles for free.
Posted by Jane Galt at October 18, 2006 4:28 PM | TrackBack | Technorati inbound links"); ?>I think it is great that there are less bankruptcies.
It should be hard to file for bankruptcy. Just looking at the sleezy old, ugly, perverted, b@stard, Larry King, sends a chill up my spine that such a human being could be so irresponsible and so unaccountable as he is, to declare bankruptcy more than once. He was able to file specifically because it was easy. So he is able to marry much younger women who are gold-diggers, and when he is done with them, he can dispose of his marriage and his financial responsibilities....
....and we all had to pay for his recklessness with higher interest rates on our debt.
Screw that. I think it is great that people can't exit as easy as they could prior to the changes in bankruptcy law.
Posted by: Paul on October 18, 2006 7:31 PMBest news I've heard all week! About the Economist I mean, no the bankruptcy rate.
Posted by: Urstoff on October 18, 2006 8:49 PMIndeed, Urstoff. News to me, as well. I just wish they did a better job of price discriminating on the dead tree edition. I'l continue buying the magazine only when I have time to read it, rather than subscribing and having it around all the time.
Posted by: Bob Dobalina on October 18, 2006 9:52 PMRising real estate prices may have contributed to the dropoff in bankruptcy. Homeowners who get overextended on credit cards or other forms of installment debt often can get out of the hole by borrowing against their ever-increasing home equity. It would be interesting to see if the decline in bankruptcy filings is more pronounced among homeowners, but I don't know if any such statistics are available.
And it should go without saying that if house prices stop increasing - the rate of increase already has slowed considerably - or, God help us, decline, we may be seeing a major pickup in bankruptcy filings, reform law or not.
The Economist has moved all of its web content out from behind the pay barrier.
How socialist! But seriously, that's cool. I still subscribe, but prefer to read magazines online these days when I'm not on the subway.
Peter, I think, is on to something. it is way to soon to talk about the actual impact of the change, let alone the desirability of same. Property prices over the next two years will make things interesting... One reason we made a big push to "reverse-outsource" - we're working at picking up software arch jobs from overseas, to stabilize the firm against a national downturn. I'm going to buy a nice place, come the revolution.
Posted by: fishbane on October 18, 2006 11:42 PM16 October 06
LIMIT UP
Wednesday 18 October 2006 - DAY 372 of a 159/398/372 of 398
Maximum 2003-2006 X/2.5X/2.5X Growth Fractal
On the previous EF posting on this weekend, the fractal saturation
solution for the Wilshire's 2002-2006 echo three- phase growth fractal
was delineated. A smarter fractalist might have been able to delineate
the big picture pattern in May 2005 - after the end of the Wilshire's
second growth fractal. The x/2.5x/2.5x patterns were already there
with a 40/100/100 rolling fractal to the 5 January 2005 top. For this
extremely myopic fractalist, 97 percent of the elephant's picture had
to be drawn in large bold and black letters, before the whole elephant
could be imaged - pretty bad and not much to be said for personal
gestalt or analytical abilities. Day 398 of the third fractal is the
ideal final day of maximum saturation.
A personal basic flaw in interpretation of valuation fractals for the
last four years has been in viewing the fractal system predominantly
in the context of an the expected 140 year plus second fractal
saturation collapse. This has been continuously reinforced with a
number of recurrent lower order ideal 2.5x second fractal units with
their characteristic terminal punctuation of nonlinear decay. Missed
was the equally important recurrent theme of three phase quantum
x/2.5/2.5x maximum growth fractal. This X/2.5X/2.5X maximal growth
pattern also occurred in a recurrent theme throughout the last 4 year
evolution.
What lies at the end of the third fractal's maximal growth? Is it a
slow unwinding or is it a profound cataclysmic macroeconomic collapse
reflecting the extent of over valuation and over saturation of a
6-year predominantly debt-driven illusive asset wealth phenomena that
characterizes the new manufacturingless United States?
One thing is true and not arguable. All Congressional Budget Office
formulas and equation's regarding the longevity and viability of US
(and state and local) entitlement programs are based on a linear 2-3
percent GDP growth model. What would happen to that model if a
contraction occurred equal to or much worse than the 40-45 percent
contraction of GDP in the 1930's?
Commodities: LIMIT UP
As predicted on the week-end posting, the CRB was ... limit up on
Monday 16 October. Treasuries fell with the yield up to 49.30, with an
inversion of yield over the thirty year of .11 percent.
Investment money will, over the next 5-6 weeks, temporarily exit the
bond market, drive commodity- especially grain- prices up and support
higher equity prices. At the Wilshire's secondary saturation point -
secondary to its March 2000 high - at 159/398/398 days, the system's
available investment money will have been optimally 'self assembled'
into both a maximally saturated summation index composing the sum of
the commodity and equity markets. At the system's saturation point,
interest rates will be higher reflecting that particular investment
area's transiently exiting funds (and higher commodity prices). Higher
interest rates will cast gloomy shadows over those recent real estate
speculators and those otherwise recently acquiring mortgages in the
over supplied housing market.
Qualitatively, these are the ideal conditions for a very old, very dry
and decayed forest to be ignited and consumed, No external events such
as lightening are necessary for collapse at the macroeconomic
saturation area. The activation energy exists within the complex
system at the saturation point. Like oily rags and gasoline
inappropriately stored in the attic on the hottest of summer days,
spontaneous combustion will occur.
Gary Lammert
Posted by: gary lammert on October 19, 2006 5:39 AMJane:
I recently declined to re-up for another year with The Economist, because I realized a few weeks ago I seemed to be able to get nearly everything free (I was a web-only subscriber). I'm grateful for quality free stuff.
You're correct when you write the following:
That means that you can read all the daily news articles for free.
But you're a bit off to say (pedantry alert): The Economist has moved all of its web content out from behind the pay barrier.
It hasn't moved all its web content out from behind a pay barrier; when one clicks on the link that says "opinion" one finds one cannot read leaders without a susbscription. Maybe you don't consider The Economist's opinion pieces to be "web content" but they are content, and they are on the web.
Posted by: 99 on October 19, 2006 9:15 AMGary Lammert,
I thought you had moved on to pursue other research interests?
Posted by: Yancey Ward on October 19, 2006 11:21 AMGary Lammert,
However, the Carl Sandberg was a very nice touch!
Posted by: Yancey Ward on October 19, 2006 11:39 AMPeople are letting the bank foreclose the house and just walking away.
The lower number of filings does not mean anything has improved.
The costs and complexity of the law are too much so people are bypassing the system
This is an improvement?
Posted by: save the rustbelt on October 19, 2006 1:08 PMRising real estate prices may have contributed to the dropoff in bankruptcy.
Except that bankruptcy rates were increasing even pre-enactment of the law, when real estate prices were rising faster, and then zoomed up after enactment before the conditions hit. They're now down, far down, despite the real estate bubble largely ending in many of the places where it was going on.
The new law doesn't even affect anyone who (continues to) makes less than the median income in their area. (If you lost your job, you're okay.) It only requires that people who still have a good job make some effort towards repaying their debts.
Of course, people seem to have little idea about what's actually in the law, so once they figure it out filings may well rebound.
Posted by: John Thacker on October 19, 2006 1:53 PMWhat's the deal with publications putting their valuable content on the web and then keeping their opinion pieces as 'subscriber only.' You'd think that editorials would be what a paper would want folks to read for free, and the rest of the content is what folks should have to pay for. What's stranger is that this isn't the first time this has happened.
Posted by: Ryan on October 19, 2006 1:55 PMIn particular, bankruptcy soared during 1995-2000, despite the economy (and asset prices) doing very well.
Posted by: John Thacker on October 19, 2006 1:57 PMI don't think the bankruptcy legislation went far enough... Why shouldn't the banks be allowed to send goons over to peoples' houses to break their kneecaps when they don't pay? Again more free market BS using one egregious example (Larry King) to justify requiring the government to bail out lenders for their bad business model. Consider this: a person wants to get out from under oppressive debt and he's considered morally deprived deadbeat, while, when big business does essentially the same thing, and it's an "aggressive restructuring strategy" met with cheers and praise.
Posted by: Adolph Fischer on October 19, 2006 2:18 PMrequiring the government to bail out lenders for their bad business model.
Changing the rules on already signed contracts is certainly, I concede, bad. But there was the phase-in period.
What about all the borrowers who always would pay back their loans who now get lower interest rates, since the lenders know that they can't flee their debts? Surely in the long run this bill doesn't help or harm lenders, per se. It helps some borrowers (who will pay back their loans) by discouraging others with identical profiles (but who would be less likely to make their payments.)
Consider this: a person wants to get out from under oppressive debt and he's considered morally deprived deadbeat
A person who's in the upper middle class, sure. Remember, the bill doesn't affect households below the median income at all. Well, unless they own multiple homes, or bought a new expensive home in Florida or another state with a big homestead exemption just before filing.
So the person with "oppressive debt" is also someone who works at a steady job and has a generous income. (And if you lost your job, you're exempt from the new rules). I don't think you'll necessarily find a ton of sympathy for, e.g., people in Fairfax County VA with household incomes (still) in the six figures who bought extra houses that they couldn't afford, intending to flip them for big profit. They can still declare bankruptcy, but they would have to make some payments.
Posted by: John Thacker on October 19, 2006 3:28 PMI have nothing really substantive to contribute. I just want to comment that I love discussions like this where people get all huffy about changes in the law, as though the status quo were somehow holy writ.
It's even more fun when they're discussing something I know about (IAAL), but without bothering to understand it.
Out of curiosity, in what sense is the change in the definition of "substantial abuse" found at 11 U.S.C. 707 away from a presumption of relief to an elaborate--but also objective--test involving the debtor's income (P.L. 109-8) somehow grossly immoral? Is it better to have a rule that everyone can read, or leave it entirely to the discretion of the judges, as it was before?
And are those objecting to this provision aware that Ch. 11 (reorganization) and Ch. 13 ("adjustment") are still availabe regardless of income? That is, you can still benefit from discharge and not pay your debts in full, you just can't walk away from them quite as easily.
Posted by: Rob Lyman on October 19, 2006 4:07 PMYou'd think that editorials would be what a paper would want folks to read for free, and the rest of the content is what folks should have to pay for. What's stranger is that this isn't the first time this has happened.
Typically, publications calculate they can most easily charge money for contest that is the most "original" or "unique" (ie., not found elsewhere). News tends to be found everywhere, but the The Economist's omniscient opinion pieces can be found only in The Economist. Of course, its reportage is pretty damn unique, too. Free news and analysis from The Economist is definitely a good deal. FWIW I miss their opinion pieces, but not enough to shell out cash right now (plus, as a long time reader, I can look at the headline and pretty much guess what their argument is).
Posted by: 99 on October 19, 2006 4:15 PMSurely in the long run this bill doesn't help or harm lenders, per se.
Right. The lending industry fought tooth and nail for legislation that doesn't "help" them. Whatever.
Posted by: 99 on October 19, 2006 4:17 PMAdolph Fisher,
I agree. There is nothing quite like the personal touch you get from hired goons.
Posted by: Hired Goon on October 19, 2006 4:44 PMExactly. The Big Business come-on is all about how they're your friendly neighbor down the street, remember your name, personalized service, all that jazz, but then all they can manage come collection time are cold-impersonal form letters, and recorded telephone messages. Complete phonies.
Posted by: Adolph Fischer on October 19, 2006 4:56 PMAdolph,
I agree completely.
p.s. Will you be home between 8 and 12 tonight? If so, we have some business to discuss.
Posted by: Hired Goon on October 19, 2006 5:43 PMAn awful lot of people seem to think that personal bankruptcy has been abolished in America. _I_ know this isn't true. _I_ know that for most of my affected friends, the effective law didn't change at all (since they're well below the median income...which is why they're having debt service difficulties in the first place). But no matter how much I try to explain to them that bankruptcy is still an option, they retain their belief that the change in the law has shackled them to their old debts in perpetuity.
The plural of "anecdote" is not "data", I know. But I still have to wonder just how widespread this misunderstanding is. Certainly the anti-reform lobby spent enough effort trying to propagate it during the reform debate, and from what I can see they were quite successful.
Posted by: Matt on October 20, 2006 1:30 AMExcept that bankruptcy rates were increasing even pre-enactment of the law, when real estate prices were rising faster, and then zoomed up after enactment before the conditions hit. They're now down, far down, despite the real estate bubble largely ending in many of the places where it was going on.
Good point, but not necessarily a refutation. It would be entirely rational for people to declare bankruptcy when it is easy, but instead go deeper into debt when bankruptcy is difficult.
Related business: The article makes two important statements without quite connecting the dots:
Statement 1: "Until 2005, when consumers began rushing to file before the new laws came into force, personal bankruptcies had been hovering around 400,000 a quarter."
Statement 2: "Some may simply have filed a little early: over 440,000 more people filed for bankruptcy in 2005 than did so the previous year."
I read that as, an entire quarter's worth of bankruptcies were filed in 2005 (i.e. before the new law went into effect), over and above the normal rate of filings. Moreover, it is worth noting the economy started upticking again right about the same time that the new law went into effect.
So: while the new law was encouraging people to seek alternatives, the economic situation was enabling them to do so, and the high-risk cases had already filed?
Let's see what things look like in a couple years or so...
Posted by: anony-mouse on October 20, 2006 1:32 AMThe unexpected volatility risk of interest rate risk induced by the overall economcial condition is a social burden ,which should be undertaken by the ultimate consumers, but should be shared socially.
The documentation of the bankruptcy claim could be standardized, but with the embeded option to simulteneously simpily the process and personalise the case judgement.
The final brankrupcy is a measure to stimulate the consumers to take the risk, but also find the final resort for protection, which is beneficial to explore the potential growth of the overall economy.
Posted by: Sally on October 20, 2006 7:27 AM"What's the deal with publications putting their valuable content on the web and then keeping their opinion pieces as 'subscriber only.'" I'm not familiar with The Economist, but when the New York Times did the same, I wondered if this meant that people would pay for honest opinion, but biased (and occasionally even fabricated) "news" is worthless.
Posted by: markm on October 20, 2006 8:01 AMRight. The lending industry fought tooth and nail for legislation that doesn't "help" them. Whatever.
I said in the long run. In the short run it obviously helps lenders for loans were made on the old assumptions, which no longer hold. (One reason why the delayed enforcement was absolutely necessary.) Nice job of not addressing the argument at all, though.
My proposition: Lenders like to make money. The easier it is for people to declare bankruptcy, the more likely that people will do so. The more likely that people will do so, the higher interest rates the lenders will demand from people. If you were going to pay your loan back, then the higher rates hurt you. Do you really believe, 99, that lenders will just charge the same interest rates even if it's easier for people to declare bankruptcy? I don't.
I agree with Matt and anony-mouse; it's definitely worth waiting a few years, and it is astonishing how many people are completely mistaken about the new law. And yes, the people who informed the law told scare stories that are responsible for much of the confusion. Sort of remniciscent of welfare reform, where the scare stories of opponents convinced some recipients that welfare was going to be completely ended.
Over the long run, people (with high incomes) should be less likely to make very risky investments; over the long run, this should decrease interest rates for loans.
Posted by: John Thacker on October 20, 2006 1:46 PMAt the same time, there may well be people who otherwise would not have gotten loans that will now get loans, thanks to the lower interest rates.
There's a difference between increasing the size of the industry and increasing its average profits, also.
Yes, the lending industry fought for the law. Would the industry fight for total revocation of bankruptcy laws? Unlikely, since without them people wouldn't seek loans at nearly the same rate, which would massively decrease the size of the industry, and its total profits.
Merely because the industry favored the law is no proof that it automatically hurt consumers, especially not in the long run. It certainly doesn't hurt *all* consumers. Just as a law limiting or forbidding interest rates on loans would not help all consumers, either, as such laws make it impossible for certain people to get loans at all.
Posted by: John Thacker on October 20, 2006 1:54 PM