March 5, 2005

The Bankruptcy Debate: A Question of Values

Filed under: Bankruptcy & Reform — Tom @ 2:55 pm

1:00 PM ET March 7 Update–More “reform” objections from across the political spectrum: Wizbang, Kevin Drum, and Jane Galt:

Drum–“Credit card companies want the ability to make risky loans, but they also want federal protection that protects them from bearing the risk that goes along with making those loans. That’s a pretty cushy setup….”

Wiz–“Considering the profit banks and credit card companies make from exorbitant late fees and interest rates I’d wager that they’d think twice about supporting bankruptcy reform if it included strict usury limits”……”Of course that isn’t happening…”

2 PM March 7 UPDATE–From Hogg’s Blog, a personal perspective from someone on the edge who doesn’t deserve the back-of-the-hand treatment the financial industry dishes out. And thanks to “Hogg” for linking back here.

11:45 PM ET March 6 Update–Welcome Instapundit readers (Instapunditeers?)! Look around, there’s still a bit of “construction” going on, but I think you’ll like what’s covered here. And thanks to Glenn at Insta for the extended quote at his blog (near the end, staring with ‘MORE STILL”).

9 PM ET March 6 UPDATE: The db level of the debate and linking has risen at the estimable InstaPundit. There is definitely some passion here, as there should be, against an industry that is doing just fine inflicting more financial and emotional hardship on vulnerable people.


ORIGINAL March 5 Post:

Readers of this blog may, with some justification, consider it be “conservative” or at least “right-of center.”

I beg to differ, and you’re going to see one example of why right here.

One of my core beliefs is that if you are in business and conditions give you a chance to rip off the uninformed without penalty, you still don’t do it. “It’s their fault for being so stupid ” doesn’t cut it. There will always be opportunities to shortchange the ignorant, but anyone with a “do unto others as you would have them do unto you” outlook on life would not capitalize on ignorance.

Unfortunately, too many in business don’t have that outlook, which goes a long way towards explaining why the public perception of the business community is so low. Hollywood could not successfully portray businesspeople as negative if there was not a lot of truth out there to draw from.

Which brings us to the debate about “bankruptcy reform.”

Some points:
- Personal bankruptcies have been filed at a rate of 1.5 million a year for about the past 3 years, though they have declined a bit in the most recent couple of quarters. Nevertheless, bankruptcies are still near their all-time highs.
- A sizable plurality (perhaps the majority) of filings are over unpaid medical bills from people who had no medical insurance and could not reasonably have beeen expected in their circumstances to have any.
- Yes, there are people gaming the system, and these people should be reined in.
- As a number of sources have noted, the credit-card and lending industries, through their use of out-of-control penalty fees, “risk-based pricing” and the misnamed “universal default” clauses in the fine print of their agreements, have been making tons of money off of people in difficult circumstances. In practical terms, “universal default” means they can raise your interest rates to obscene levels of 25% or more if your credit score goes down, regardless of why it went down. This can occur even if you’ve never been late with any payments. It could happen simply because you borrowed more than you “should have,” or in an extreme case if someone stole your identity and ran up debts.
- Financial education in America’s schools is a national disgrace. (link requires free registration)

So where does this leave us? I’m very uncomfortable allowing an industry that sends out 4 billion pieces of mail every year that say “You’re pre-approved–borrow from us” to squeeze more money out of people who plainly don’t have it by preventing them from filing for bankruptcy, which it appears will happen if the legislation passes in its current form.

Further, an industry that cynically manipulates the uninformed into getting in over their heads, and then shafts them when they do with $39 late fees, 25%-plus interest rates, and the like should not be permitted to collect their excessive charges from people who don’t have the money by peeling off a large percentage of their future income, which is what it appears the legislation will enable.

If the industry would agree to abandon risk-based pricing, universal default, and excessive fees (late fees were $10-$15 ten years ago–what possible justification, besides flat-out greed and lazy regulators, is there for $35-$40?), and, finally, agree that there’s no excuse for ever charging a rate above, say 18% (that includes retail cards), I might be inclined to be supportive of bankruptcy “reform” legislation designed to nail the relatively few cynical cheaters.

All I expect is that the lending business return to a “do unto others” framework.

Is that too much to ask? If it is, they should be told to pound sand.

Now does that sound “conservative”?



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