Monday, December 27, 2004
Bankruptcy: Current Headlines
Bloomberg has an article describing pending legislation in Congress that would modify the existing bankruptcy laws. Before going any further, I should note that the studies I cited in previous posts attempted to answer 'why' people file bankruptcy and also to quantify the debtor's ability to repay.
The answers to these questions are important for legislators to consider in developing new laws. Primary changes, favorable to the lenders, are 'means tests' which would evaluate the debtor's ability to repay.
Visa International is a consortium owned by banks and other financial institutions. While I don't doubt that some borrowers have the ability to repay their debts, it comes off as misleading to the reader to cite a study by an organization effectively owned by the same companies that are suffering losses. (Yes, the typcial Bloomberg reader may know these things.)
One aspect I am curious about is the recent trend towards of major banks securitizing a pool of consumer debt and selling it to investors. This accomplishes a couple of things: raises funds for additional loans and transfers an element of the risk of loss to the investor. Tightening up bankruptcy laws would make these securitized loans more attractive to investors, but this article does not consider this aspect of many of the major lenders business.
Bills have been introduced in recent years that propose changes to the existing laws, but have been unable to pass. This year the outlook is different. Reasons cited are the seats gained by the Republicans in Congress and the ascension of Henry Reid to the Minority Leader in the Senate.
The financial institutions cite growing loan losses and abuse by debtors of the current bankruptcy laws. Chapter 7's, or straight liquidations, currently do not require any evaluation of the debtor's ability to repay their obligations. Pending legislation may change that.
I am not against banks or any companies for that matter seeking to improve their bottom line. That is the economic system we live in. However, by imposing a 'means test' based on one's income levels in an attempt to effectively determine whether one's abusing the system seems shaky, especially when numerous studies cannot pinpoint the actual reasons people file for bankruptcy.
I do not think the borrowers are blameless either. Although it is next to impossible to determine the nature of the debt seeking to be discharged (ie consumer goods, life's necessities, major purchases, etc.) it does seem likely that many individuals lack the basic concepts of money management skills.
The lack of individuals financial acument, coupled with the constant deluge of credit-card marketing, seems to be a 'perfect storm'. The ever increasing bankruptcy filings and losses by lenders is ample evidence of the fallout.
If I had to choose sides, I would start with asking the borrower/consumer/individual about their financial affairs and goals in order to assess their 'money-skills'. Sadly, these skills are lacking in today's society.
The answers to these questions are important for legislators to consider in developing new laws. Primary changes, favorable to the lenders, are 'means tests' which would evaluate the debtor's ability to repay.
The law the banks want would apply a means test to individuals seeking bankruptcy. Those, like the Rhodeses, whose family income is above the median for their state would be subject to the test, and might not be able to file for the kind of debt-canceling protection, known as Chapter 7. Instead, they'd have to file a Chapter 13 bankruptcy, in which they would be required to repay some debt while being allowed to retain assets.
About 11 percent of those who filed for Chapter 7 would have failed the means test, according to a 1998 study funded by San Francisco-based credit-card servicer Visa International Inc.
Visa International is a consortium owned by banks and other financial institutions. While I don't doubt that some borrowers have the ability to repay their debts, it comes off as misleading to the reader to cite a study by an organization effectively owned by the same companies that are suffering losses. (Yes, the typcial Bloomberg reader may know these things.)
One aspect I am curious about is the recent trend towards of major banks securitizing a pool of consumer debt and selling it to investors. This accomplishes a couple of things: raises funds for additional loans and transfers an element of the risk of loss to the investor. Tightening up bankruptcy laws would make these securitized loans more attractive to investors, but this article does not consider this aspect of many of the major lenders business.
Bills have been introduced in recent years that propose changes to the existing laws, but have been unable to pass. This year the outlook is different. Reasons cited are the seats gained by the Republicans in Congress and the ascension of Henry Reid to the Minority Leader in the Senate.
Republicans gained four Senate seats in the election, giving them 55 out of 100; three former House Republican lawmakers who won Senate seats -- John Thune of South Dakota, Jim DeMint of South Carolina and Richard Burr of North Carolina -- voted in favor of the bill in the past. In addition, a long-time supporter of the legislation, Senator Harry Reid of Nevada, was elected Senate Democratic leader; New York-based Citigroup Inc. has a credit-card processing center in his home state.
The financial institutions cite growing loan losses and abuse by debtors of the current bankruptcy laws. Chapter 7's, or straight liquidations, currently do not require any evaluation of the debtor's ability to repay their obligations. Pending legislation may change that.
The biggest boon to creditors from the proposed legislation is that many consumers will be discouraged from filing under Chapter 7, said Edward Janger, a professor at Brooklyn Law School. The bill allows creditors to demand a hearing before a judge to determine whether a person filing for bankruptcy would fail the means test and should instead file under Chapter 13. The cost of hiring an attorney to prepare for and attend the hearing would deter many applicants, he said.
I am not against banks or any companies for that matter seeking to improve their bottom line. That is the economic system we live in. However, by imposing a 'means test' based on one's income levels in an attempt to effectively determine whether one's abusing the system seems shaky, especially when numerous studies cannot pinpoint the actual reasons people file for bankruptcy.
I do not think the borrowers are blameless either. Although it is next to impossible to determine the nature of the debt seeking to be discharged (ie consumer goods, life's necessities, major purchases, etc.) it does seem likely that many individuals lack the basic concepts of money management skills.
The lack of individuals financial acument, coupled with the constant deluge of credit-card marketing, seems to be a 'perfect storm'. The ever increasing bankruptcy filings and losses by lenders is ample evidence of the fallout.
If I had to choose sides, I would start with asking the borrower/consumer/individual about their financial affairs and goals in order to assess their 'money-skills'. Sadly, these skills are lacking in today's society.
