Prof. Zywicki’s View on Rising Bankruptcies

Professor Todd Zywicki of The George Mason University School of Law has been one of the principal proponents of the “it’s too easy and it shouldn’t be” line of reasoning that has been the impetus behind that Bankruptcy “Reform” law that has passed the Senate and will be considered in the House beginning this week.

The Cliff’s Notes version of Zywicki’s position, for those who don’t want to read the whole post (remember, this is HIS position) is:

- Bankruptcy laws, which was already pretty lenient, became unreasonably lenient in 1978.

- The lenient 1978 law led to:
— aggressive attorney advertising.
— a realization on the part of many that they could be better off after a Chapter 7 bankruptcy filing than they were before.
— (gradually) a decay in personal morality over paying one’s bills.
— (gradually) a reduction in the social stigma involved in bankruptcy.
— an increased willingness to stiff the big, bad, impersonal out-of-town bank.
— collectively, the steep growth in bankruptcy filings.

- Creditor lobbyists, long ineffective at making their case in Washington, are finally being heard.

- When it’s passed, the Bankruptcy “reform” law (finally) sets things right.

To prove his point, much of Zywicki’s other research attempts to disprove possible other causes. So he systematically eliminates a number of other potential factors (with some paraphrasing): debt service and household net worth (even in the lowest income quintile); housing costs; divorce; and illness, unemployment, and other financial shocks.

He does a very good job–almost, but his two major omissions pull the rug out from under his arguments. That’s for the next post.

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(end of Cliff’s notes–For those who read on, you may experience wailing and gnashing of teeth)

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Bankruptcy legislation first became a permanent feature of the landscape in 1898. The only major rewrite of bankruptcy law, the one Zywicki say made filing (Chapter 7) “easy” (others might argue, “less creditor-friendly”), occurred in 1978.

Zywicki argues that how we got to the alleged “easy” situation was due to a number of political factors (from his paper “The Past, Present, and Future of Bankruptcy Law in America”–PDF download is at the bottom of the linked page):

- Until recently, bankruptcy lawyers and their lobbyists have worked diligently to defend their position and have used their technical expertise to cleverly craft rules that favor them and the growth of their business, even when creditors seem to have the upper hand politically.

- Again until recently, the financial services industry has NOT been an effective lobbying group.

- The general public (called “repayers” because they end up “repaying” debts not collected through higher prices and less availability of credit) have not had, and really still don’t have, an effective voice at all.

- So-called progressive ideology from early in the 20th century through today’s consumer advocacy groups has favored debtors over creditors.

Now the landscape has changed (and Zywicki thinks this is a good thing–the italics on “moral” are HIS):

“Congress is animated by a new political ideology of ‘personal responsibility’ that serves as a counterweight to the traditional prodebtor ideology….The personal responsibility ideology sees consumer bankruptcy as primarily a moral issue, rather than an economic issue.”

“….Consumer bankruptcy filing rates (should be) viewed as a crisis of the American soul, rather than a mere matter of economic policy. Put simply, there is no economic explanation for the upsurge in individual bankruptcy filings in the late-1990s, an era of unprecedented prosperity, low interest rates, low unemployment rates, and soaring levels of individual wealth. Given the anomaly of economic prosperity combined with the staggering rise in bankruptcy filings, many have concluded that the problem is social and spiritual, rather than economic.”

“(in the changed environment) Despite …. intense lobbying efforts, bankruptcy professionals have been unable to replicate their previous successes in turning the reform process to their advantage.”

“(meanwhile) for the first time in recent memory creditors as a group have been able to overcome their collective action problems to lobby effectively for their interests.”

“Promiscuous consumer bankruptcy laws were just one of the many social experiments of recent decades that have proven contrary to human nature and the needs of successful societies. The movement toward greater accountability in consumer bankruptcy represents a necessary step of social self-correction after a period of chaos and revolution.”

Prof. Zywicki’s position now being established, his other work (example here (PDF download is at the bottom of the linked page) is meant to disprove all other conventional-wisdom causes for the rise in personal bankruptcies:

- debt service, payments vs. income (even in the lowest income quintile), which he shows hasn’t gone up much.

- household net worth (even in the lowest quintile), which has grown across the board.

- consumer revolving and non-revolving credit, which he claims has remained stable on a combined basis.

- housing costs, for which he says the effect of their increase has been offset by the presence of more two-income families.

- financial shocks like unemployment, downsizing, divorce, health problems, and lack of health insurance, for which he claims no correlation with bankruptcy filings.

He gets a lot of it right, but his omissions are glaring. They’ll be discussed in the next post.