Bankruptcy Reform Bites Back

In this article here, a tougher bankruptcy law pressures Americans to pay toward consumer debt (like credit cards) than to other debts instead of witting them off. Homeowners are now less able to meet mortgage obligations which increases the likelihood of foreclosures.

The entire credit crunch problem that we are facing is a dirty and ugly situation without a clean and clear resolution. The justice side of me wants to make all consumers suffer and pay for all the debt that they accrued, as well as get after the credit institutions that created and promoted the environment that got us here. But nobody likes to kick families out in the cold dark street, it just seems so inhumane. So what is to be done?

I am a strong believer in the free market and the invisible hand. I think there will be many short-term and some long-term losses, but overall the market and consumers will adapt, and there won't be throngs of homeless scouring the streets of homes they once occupied. Hopefully this is a lesson learned for consumers to not live on the edge of their financial limitations, as well as a lesson to lending institutions to be more selective when handing out money. The truth of the matter is, there is no winner in this type of situation, and we will all suffer or feel the pinch in one way or another.


Timothy said...

When the tougher bankruptcy laws were put on the books, I have to admit, I applauded. From a banker's standpoint, there is nothing I dislike hearing more than one of my applicants having had a bankruptcy.

I think this will be a positive thing because it will discourage people from getting over their heads in debt they cannot pay back.

It will also make lenders better able to collect on the money owed them in a bad situation.

For once consumers will have to be responsible for the purchases they make and for the financial decisions they make and that is never a bad thing.

Dr. Tufte said...

I'm conflicted about all of this.

The core of our economic action is converting our non-liquid endowment of time into liquid wealth by working, and then back into other non-liquid forms by consuming.

Bankruptcy is really about an unwillingness of people to connect the start of that process to the end once the latter gets out of hand.

It's heretical to say this today, but once upon a time we had debtor's prisons to help make that connection. I'm not advocating a return to that, but I'm not sure that any measure that doesn't reconnect the work/income link with the income/spending link is doomed to fail.

This is a roundabout way of saying that the new rules for debt priority in bankruptcy are a band-aid solution.

Anonymous said...

Great site and Merry Xmas


Matthew said...

I am a believer of a free market society, and most of all, people being accountable for their actions. How is it fair that Donald Trump can file for bankruptcy with one company while making millions of dollars with his other companies? Other companies and even Trump's employees will be hurt but it will make little difference in his financial life.

However, there must have been a reason why bankruptcy laws were enacted. Today though, it seems that the people filing for bankruptcy have really been taking advantage of the system.

Jordan said...

Dr. Tufte said:

"The core of our economic action is converting our non-liquid endowment of time into liquid wealth by working, and then back into other non-liquid forms by consuming.
Bankruptcy is really about an unwillingness of people to connect the start of that process to the end once the latter gets out of hand."

It seems like this new bankruptcy law is working more towards making consumers more responsible for the debt they incur. When it comes to people filing for bankruptcy, I tend to feel like most of them don't know how to budget and use their money wisely. Some people were even able to use the system to liquidate debt but still keep many of their things. Do you think it would be a good idea for the government to mandate living within approved budgets for consumers who file for bankruptcy?

Anonymous said...

I've seen both sides of this bankruptcy issue, one working for a struggling finance company that had customers robbing trying to rob it blind through bankruptcy filings and also after seeing a relative forced into living out of her car with her meager wages garnished and being hounded daily for 10 years by her deceased husband's creditors --something she could have avoided if she would only have filed for bankruptcy protection.

Gavin said...

Extra Credit - Dr. Tufte
We do need to set measures that reconnect the work/income link with the income/spending link. Clearly consumers and business are unable to act responsibly on their own. Lending rules need to be reformed so that consumers are protected from themselves.

William said...

Dr. Tufte,
I think that we should make everyone that takes out a loan have to go through some type of economics/business class to fully understand the effects of their decision. It seems that we are pointing the finger at everyone else and that no one is at fault. I think that everyone needs to take some responsibility for their decisions. The consumer needs to realize that they should not take out a loan that they know they cannot pay back. The bank should not give out a loan to someone that they know cannot pay them back. And the government should not allow the banks to get away with this behavior. I think that we all need to step up to the plate and be accountable for our actions. I also don't think it is the government’s job to bail someone out for their faulty decisions. We are so eager to help someone out and not make them take responsibility for their decisions. If the government continues to help the people out every time they make a mistake how will they ever learn their lesson?

Dr. Tufte said...

I think a personal finance course for everyone in the country would be a good idea.

I'm not sure if I'd require it - we require a lot of stuff that people don't pay attention to.

We'd also run into problems with math education - many people just don't seem to get the idea that math underlies a lot of what goes on day-to-day, and you have to keep on top of things to understand it.