Bankrupt, Completely Bankrupt

A family member nearly filed bankruptcy last year. They overextended themselves, got caught up in the housing bubble, and made some overly optimistic assumptions about their earning potential. But the 2005 toughening of the bankruptcy laws dissuaded them from filing bankruptcy.

Those changes were made by Congress at the behest of the banking industry, which insisted Americans were abusing bankruptcy after bacchanals of overspending to discharge their debts. And based on my relative’s experience, that seemed plausible.

Of course, people declare bankruptcy because they lose jobs, have crushing medical bills due to a lack of adequate health insurance, or perhaps receive a home loan at predatory interest rates in which the payments ratchet up to unaffordable levels, and they can’t sell their house because the lender and appraiser colluded on a phantom value, and the house wouldn’t sell when the market tightened.

Whatever.

But if you read The New Yorker, James Surowiecki’s always illuminating Financial Page had some surprises this week.

According to the column, bankruptcies fell 62 percent from ’04 to ’06, and credit card issuer profits rose 30 percent in the succeeding years. But promised drops in usurious-card interest rates and outrageous fees for late payments and the like—no longer needed to cover the costs of all the debtors who had their obligations discharged by bankruptcy courts—have not taken place. Are you surprised? (I switched to a credit union two decades ago and haven’t looked back.)

Surowiecki’s column makes a couple other interesting connections, suggesting nations with the most lenient bankruptcy laws have higher rates of entrepreneurship because people can start over quickly and become productive participants in the economy again, and a suggestion that the housing bubble might have been exacerbated by changes in the bankruptcy laws.

Of course, he notes, credit card issuer profits were tripling over the decade before the bankruptcy laws were tightened—meaning the “threat” Congress dealt with was “imaginary.”

Sure, the GOP Congress loved to do the bidding of its patrons in the banking business. But even average Americans, when given the option, prefer punitive to permissive, a kick in the ass to a lift off the ground. But now that so many Americans’ economic lives are messed up, perhaps Congress and the next President will see some wisdom in unfixing a system that wasn’t really broken.