Political Discussions
Bankruptcy Reform Comes Full Circle
Posted by TotalAttorneys • 11/26/08 • Subscribe to this Discussion [RSS] • Report This Topic
Topics: bankruptcy, bankruptcy reform, consumer credit
In 2005, after 10 years of lobbying and hundreds of millions of dollars invested by the consumer credit industry, U.S. bankruptcy law changed. The intention ws to make it more difficult and more expensive to file for Chapter 7 bankruptcy, thus (the credit industry hoped) forcing more people to make good on those debts. It didn't work for a number of reasons (chief among them the fact that people who no longer had access to the bankruptcy courts didn't suddenly find themselves with money with which to pay their bills. Almost immediately, filing numbers started creeping up again, but this year (whether as a natural extension of that pattern, because of the mortgage foreclosure crisis, or as a reflection of the general negative trend in the economy) the numbers have increased to the point that there were more non-business bankruptcy filings during the first six months of 2008 than there were in the whole of 2006--and it appears that the annual total will exceed 1 million for the first time since the new law was enacted.
Obama & Co have (rightly) been pushing for an amendment that will allow bankruptcy courts to rewrite mortgage loans, but is that enough? How to balance the simple fact that hundreds of thousands of people are in debt they'll never be able to pay with the broader impact on the economy when their careless lenders take the hit?
User Comments
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How did they get into debt they will never be able to pay?-
Obviously that's a whole separate debate--and one I suspect we'd disagree on. But I'm not sure it's relevant to the issue before us today. Saying "it's your own fault" doesn't magically make money appear, and preventing people from filing bankruptcy doesn't (as the past three years have proven) increase the rate of repayment of debts that might otherwise have been discharged in bankruptcy. The question is what to do about it today.
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I think you answered it.
If the lenders were indeed careless, they should take the hit. If the borrowers were careless they should take it.
And nothing you do will make money Magically appear.-
Were it only that simple. Would you propose a special court that looked at each and every unpaid debt and determined who caused the problem, for instance? And what exactly does "take the hit" mean? A debtor who makes $20,000/year and owes $100,000 is simply never going to be able to make any appreciable payment toward that debt, so what does it really mean to determine that the debtor "takes the hit" in that case? And what about all of those situations in which no one is really "at fault"--for instance, cases in which a person ends up with tens of thousands of dollars in medical bills and unable to return to work? There's no quick and easy answer here.
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Well lets break it down.
No, there is no special court needed, If the lenders feel that they were given fraudulent information about the borrower. Then they can sue for damages.
If the lender feels that the bank was fraudulent in their representation of the facts, they can also sue. This has been done before and can be done again.
If someone makes 20,000 a year, and got into debt for 100,000 the question is actually just that simple. What kind of debt is that? If it is a secured debt, like a house, foreclosure or reposession is an option. If not, then the person spent beyond their means. Why is that any one elses problem.
And as you know.. Bancruptcy is still an option, Which is where the lenders take the hit. they have that baked into their profit margin, if they extended too much of it to cover themselves when the sh-t hits the fan, that is their problem. Why should for instance Anok, who never uses credit pey for their inability to make good business decisions.
And if you are indeed unable to return to work, and you don't have insurance. Bankruptcy is coming either way. But still, why is that Anyone elses problem? I'd say take the hit and be happy that you are alive, would you rather be dead than in debt? -
Something has gotta give under current economic conditions. Didn't I hear a week or so ago that American Express was having trouble. That's consumer debt, not mortgages. Even before things got bad, credit cards often acted as the only health care plan many people had. That's how expensive prescriptions get paid for. Lotta groceries go on the things too. That was pretty much how the economy functioned.
Since these companies practice something like usury, raising rates on people to near 30% because they were late with someone else's bill, I have little sympathy for them. Before things hit the fan this fall, I read where some companies were even thinking in terms of setting up a permanent revenue stream with certain types of borrowers always in debt. The interest rates, late fees, and late-mailed bills all tie into a scheme of permanent payments adding up to much more than anything lent plus a reasonable profit for risk. Anyway, besides the whole bankruptcy thing, I wonder if there shouldn't be some regulation of just what these companies can get away with. Until such time, I really can't feel for these companies.-
In some cases, people were enticed into charging expensive items on their credit cards with low interest rates, only to have their rates raised afterwords, which made it more difficult to pay the money back. Others lost their jobs, only to get behind in their payments and had their rates raised. A loan with an interest rate of 30% doubles in a little over 2 years. Soon, there's no way of paying the money back. -
And that is just what these companies desire. That steady revenue stream. They only hope it goes on long enough to make a nice fat profit. It almost makes sense, but I wonder how sustainable a business model it is over the long run. Maybe they saw no limit, but what TotalAttorneys is talking about suggests that there is. Course, the incentive to renegotiate these things is not there for these companies, since these are unsecured loans and there is worry about getting stuck with a house while prices fall. Or would there be some benefit in gaining a firmer fix on what their assets actually are? No idea.
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As far as mortgages go, something will indeed change and it may not take a law to change it.
Just a fer instance - let's say that 90% of a bank's mortgages go south, and they foreclose on all of those homes. Let's say the numbers are similar in other banks in the area too.
They can take the homes back, but who are they going to sell the houses to?
I don't see why banks can't look at the situation with a clear eye on what the greater ramifications are, and simply renegotiate with their customers. Some customers will still probably lose their homes, but for the most part, the idea is to keep money coming into the financial institution one way or another. And taking a bunch of homes back that aren't going to sell, and probably go to auction for a fraction of what they loaned for it - isn't good business.
Negotiate some new terms, let the people pay in at the new rates, they may take a small hit but really, it'll be better than what they would get otherwise.-
Part of the problem is that many of these mortgages are in mortgage back securities. While in some cases the banks may still be servicing the loans, the value has largely transfered to the investors in the mortgaged backed securities. To protect themselves from the banks trying to refinance good loans out of the securities and to ensure the banks tried to protect the notional and future value of the security, the security itself prevents the banks from doing many adjustments on the loan. Now the security is owned by a large group of investors, who all need to come together to change the security. Some of the investors think they are better off not negotiating. The hope that the government will step in and make things better is also causing many of them to hesitate.
Basically your logic is sound though. -
That's a good point that I hadn't considered originally.
It would seem that the investors then, will have to pull their heads out of their you-know-whats and figure out a way to minimize losses the rational way. -
I agree. Unfortunately, you need to get a very large share of diverse investors agreeing to live by the same adjustments. I don't believe it will happen.
It's like a bunch of people with shiny new buckets in a sinking boat. No one wants to use their bucket to bail the water out because it will damage the value of their bucket. As they stand there pointing to which person should start bailing and others are wondering if the government bailout will help them, they all sink.
This is part of the reason why I'm against the bailout. It leads to people to bank on false hopes and they don't take action to save themselves. -
You hit the nail on the head, X.
Everyone is standing around saying "You do it...no YOU do it!!"
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You're absolutely right Anok.
Should the market be left to fend for itself. Investors will be forced to make the old choice. Sell at a loss to free up capital. Or sit on the asset until it gets its value back.
Now because the economy is shrinking, that would take a long time, a long time where the asset will continue to bleed. (property tax, upkeep etc)
So the likely would be that unless there is a bailout to protect the investors, the market price of these assets will drop until people are willing to buy again. Creating a position where the value isn't overspeculated.
That would mean that more people would again be able to buy properties. THe investors would be forced to take the pill of a bad investment, and the market prices would be matched to actual demand.-
Once in a while, we agree
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The scary part is that you are actually in favor of the market being forced to regulate itself here.... lol..
You sure that you didn't give you a rufie capitalist pill in your homebrew? -
Well, yes and no
I am not in favor of these huge companies falling on their own petard simply because of the economic backlash it creates. However, I agree that bailing them out won't correct the problem for future generations, when this will inevitably happen again.
Like X mentions above, they probably won't renegotiate and do the right thing - because greed and delusions (I would guess) are telling them not to. Also, the ability to be saved yet again by someone infusing them with a large amount of cash helps.
So, while I say that there may not be a law needed to fix the problem, I also see that a law will probably be created to fix the problem because it would seem that they do not want to regulate themselves with any modicum of logical business practices.
On the other hand - I would like to watch these companies - and their CEO's crash and burn. It's a sort of "just desserts" kind of vindictivenesses that I have... (Muwahahahaha) -
petard.
–noun
1. an explosive device formerly used in warfare to blow in a door or gate, form a breach in a wall, etc. -
I was using the idiom version, though:
4. hurt, ruined, or destroyed by the very device or plot one had intended for another. -
Anok, I wasn't correcting you. I didn't know what the word meant.
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Oh! LMAO sorry
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Well i completely agree with you in the crash and burn part. But i do it for other reasons.
Allowing for faliure is the best medicine to create success. And as you said, bail them out now, and greed and delusions wont allow them to correct their misstakes. In fact, if you get bailed out with free money, then by all means these executives have done exactly the right thing. Building companies to great and cumbersome that they can fail as much as they want, government will give them extra money, in essence they will get more income than they produced.
(Kinda sounds like the argument we right wingers make on welfare.. but I won't push that one any further lets it becomes a petard in your read end.... -
Oooh you're bad
We agree on the aspect of them becoming too big as a marginal success, but only if that was the game plan - I don't know if that is true, or if greed really just got the better of them. On the other hand - where you and I disagree is that I personally believe there should be regulations in place to prevent that from happening in the first place. The reason I say that, is because even if they don't get the bailout, the pattern seems to show us that companies will do what companies do, and each new comer seems to think that they can get away with the same old act as the previous ones, only they'll do it better, or not get caught.
So something in place to prevent Depressions from rocking the economy due to incompetence of corporations. Now, that could be done form the inside - such as lowering the enormous salaries of the upper management so that they too will feel the effect of a depression or economic backlash (or collapse of the company) and not have a nice golden parachute, or, the companies could write in a clause that if they are willing to take such a large salary due to the company's success, then they will be financially responsible for bailing the company out should it fail under their management.
That should serve as an incentive for better business practices.
I do see a difference between welfare and bailouts, though. -
Let's not forget that these companies have recieved support and special treatment in the past. If they hadn't. they most likely wouldn't have gotten as big as they are.
These companies have always enjoyed the "protection" of government because of their production capacity.
It is in the best interest of any company not to grow beyond it's own limits, and I for one don't think that they would have been as big if they hadn't been protected to begin with. -
You may have a point, there.
I know the big three have - but I'm not so sure about companies like AIG, and mortgage and lending institutions.
Meh, corporate welfare is one welfare I adamantly oppose (Get your kicks in now ) -
I'm not a proponent of corporate welfare at all.
When it comes to companies like AIG, although i know we disagree on that one. Their "backing" is actually caused by the meddling of government. With the housing acts, through Fannie/Freddie particuarily. Which admittedly isn't protection, but still comes back to government meddling in the wrong way.
A perfect example of this is the redlining. Which in itself is discriminatory. And shouldn't be allowed. This is fine. But when you say you can't discount a whole neighborhood. You are being protective. When you say, You have to take higher risks and invest in bad neighborhoods to a certain percent. You are getting into dangerous waters.
You know my affinity for wierd analogies, but think about it like someone telling you that you're not allowed to tell your son that he can't play with a certain group of people. To limit a group, you are being discriminatory. But then telling you that you HAVE to pick some iffy characters that you really dont agree with for him to play with. Now you are getting into forced bad decisions.
Now Imagine Acorn being at your doorstep with pickets and threathening to sue you unless you start sending him to crackhouses to play (ok.. a little much.. but you get my point)
In the end, we should maintain control of corporations to stick within limits, rules and regulations, this is fine.
When you meddle, be it through welfare, rewarding bad behavior, or through legislation forcing risky decisions. You are getting into a position where compmanies aren't able to function like they should. And when you remove that, you all of a sudden enter a realm where the governmenets actions are causing these fluctuations to swing harder than they should.
You mentioned above the re-negotiation of mortgages. Which is a grand idea, Providing that the bank can and wants to do it. WHen they signed those mortgages, they balanced their risk against the potential profit. If you force them to lower that profit, they have to either lower their tolerance for risk, or they risk ending up in the permanent red.
And I won't be kicking you just yet.... -
Yeah, but I AM the "iffy person"
You have a lot here in this reply - I'm thinking we could start a whole new thread or even blog post about this.
What say you? -
So now the gov't wil force you to have him playing with the KKK facist millionaire exploiters kids.
New thread if you'd like.. I'm still messing with the new site.. So posting is off. -
Would you two stop being so civil. It's just doesn't seem right.
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I think they'd be more scared of my influence on their kids then theirs on mine heh.
I do allow guest bloggers, you know - we could have a LOAD of fun with that Muwahahahahaha
Sati - I know, it's crazy, aint it? -
Allow me to join in...
CSI, you're nothing but a right-wing sheep.
Anok, who let you out of the left-wing loony bin?
Okay... continue... -
Sati,
Go back to your doodling..
Anok, You start, and tell me where to go to. -
LMAO
"You tell me where to go"
It's....too....easy....must...resist....
Uhm, well do you want to do a dueling blog post kind a thing? I was thinking about the credit/mortgage crunch welfare thing.... -
As a guest poster on your site.. Sure..
Can you try to keep each installment of your posts to 1000 words or less for a change? (ducks and runs)
And if you want me to go to hell,, you'll have to pay for the Inagural tickets... I hear they are expensive. -
I could....try? Heh. I think I can cut a post down to a minimum of 800 words. But that's the best I can do
And I would SO buy you the tickets, but I'm sure they won't let your crazy-ass in, anyway -
No I hear my Impeach Obama T-shirt would be frowned upon.
and 800 it is.. Get your lazy anarchist @ss moving. -
I think I have to send you an invite...which e mail do I send it to? (Oh, you can shout that to me)
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shouted...
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and sent
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singed up... let me know when the first post is up.
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OK, I've posted the warning - post at will!
identitycheck-anok.blogspot.com/2008/12/im-going-to-have-guest-author.html -
And i thought you were going to kick it off.. lol..
So who goes first? -
I might get a post up tonight - I've been really busy though, so I haven't had much time.
I say, not limit or order, just do what you do when you do it.
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The reply is up.
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I read it, it's good! I'll rebut tonight when I have more time
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