Asymmetrical Information

No, the bankruptcies wouldn't track the overall debt load of the population. Bankruptcy filers, even at their highest level, are still less than one percent of the adult population. They are an outlier on the bell curve and what happens with the middle doesn't necessarily predict what happens on the ends of the curve. (Recent discussions of the Larrry Summers flap and test scores is an example of this.)

What would be a meaningful statistic is to see if there has been a change in the unsecured debt load of, say, the five or ten percent of the population with the heaviest debt load, which is then pushing them into the one percent who are filing for bankruptcy.

Interesting to note how debt as a percentage of income started decreasing right after TEFRA '86 which did away with the tax deuction for interest payments.

Doesn't this run counter to the credit industry's claims? Wouldn't this trend suggest that 1) most bankruptcies are a result of external events, not the individual's management of their own credit, and 2) changing the bankruptcy laws is going to do little or nothing to rein in the surging consumer debt levels? Am I reading this wrong?

I don’t know about reigning in consumer debt level, but it does seem designed to catch more deadbeats who can afford to pay but file (often fraudulent) Chapter 7 applications. I particularly like that they put a cap on the homestead exemption for people who haven’t lived in their home for the previous 40 months, have committed securities fraud, or committed an intentional tort that resulted in serious bodily injury or death in the last 5 years. Seems to me that this is a feature that would prevent people from abusing the unlimited homestead exemption that many States offer in order to hide their assets.

The means-testing was also a good idea. What it does is apply a three-step process for deciding which Chapter 7 applicants should be required to file Chapter 13 in order to better weed out the fraudsters or those who afford pay. The first step is it separates those who above their State’s median income level (less than 20 percent of all Chapter 7 applicants) and scrutinizes their expenses. Step two, is to deduct all of the allowable expenses (based on the IRS) including health care expenses and caring for a sick family member (basically letting people who file bankruptcy for these reasons get the same protection as before). If after deducting all of these expenses you have more than $10,000 in income or more than $6000 in income that represents 25% or more of your unsecured debt, then you move on to Step Three (those making below these amounts go on to Chapter 7, same as before) which is basically the judge uses his discretion to determine whether you can afford to pay on your bills and ought to go to Chapter 13 instead or whether while you may look “richer” on paper, you still get to file Chapter 7.

Not a perfect bill, but a definite step in the right direction.

No, the credit industry is actually arguing that a lot of bankruptcy is discretionary. They say that whereas in the past virtually all accounts involved bankruptcy filings showed a pattern of getting 30, 60, 90 days past due before the filing, suddenly in the 1990's they began seeing accounts that were current right up to the day the consumer filed bankruptcy, which shot their loan-writing models all to hell, and that they can't find any predictive metrics to change their loan models.

Joe, unless the rich are biasing their debt downward, an increase in the bottom 5-10% should show up as an uptick in the debt-to-income ratio--particularly since consumer advocates are arguing that this isn't some wild band of profligates, but ordinary Americans overwhelmed by circumstance and the wiles of the credit card companies.

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