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One AFM Reader’s Response to a New York Times Op-Ed Piece
By JLP | March 17, 2010
AFM reader, “EZ,” sent me an email with a link to this op-ed piece that was recently published in the New York Times. The op-ed piece was about how the bankruptcy process should be easier so that “American families torn apart by the economic upheavals of the last two years…” (Ronald Mann’s words) can move on with their lives.
EZ’s response was quite good:
Good Morning Sir,
I just read your Op-Ed piece in the online NY Times. I disagree with your premise as summarized by your last paragraph.
“Such a bold reshaping of the bankruptcy system would provide Americans immediate respite from crushing debt and the ceaseless emotional and financial pressure that comes with it. Then they could turn their attention to finding new jobs, moving into housing they can afford and caring for their families.”
I believe making it easier to declare bankruptcy would only put more pressure on citizens who are responsible, pay their debts and taxes, and positively contribute to our economy and country. My wife has been in the mortgage business for nearly 30 years and she thinks your idea is wrong headed. She has experienced people, well before the meltdown, who had declared bankruptcy and waited 2 years to purchase another house. Inevitably, when she told them they were purchasing too much home for their income, they would respond by saying that if they couldn’t make the payments, they would declare bankruptcy again. A lot of folks have lost jobs or are experiencing reduced wages through no fault of their own but many more people who used their homes as a bank to pay for vacations and new cars or who bought homes they really couldn’t afford are in trouble by their own volition and irresponsibility. If we make it simple to declare bankruptcy, these people will use it as a financial turnstile to once again live beyond their means at our expense.
Take a look at the US savings rate over the last 10 years. So many were living paycheck to paycheck, not planning for a financial misstep. Also look at the lifestyles of these same people. New cars, houses they could not afford and vacationing like there was no tomorrow. Too much credit, not enough responsibility. And yes, there are others that share the blame. Congress, banks, regulators, credit ratings companies and overpaid CEO’s. But at the end of the day, it was the consumer who purchased homes, cars and vacations they never could afford.
Why do you think people should not honor their debts and commitments? Who made them buy the house they could not afford? By the way, just because a homeowner is underwater on their mortgage doesn’t mean they cannot afford to keep paying for their home. It just means they cannot use the home as a bank anymore.
I truly do not mind helping people who are in need. But I do mind when someone tries to make me help someone who lived irresponsibly and is now looking for a handout(that includes corporations). Making it easier to declare bankruptcy punishes those of us who lived frugally and responsibly. In this area, I believe my wife has much more experience than you do. So many times she told borrowers they were trying to get a mortgage they could barely afford. Most times she was told that they did not care and if my wife would not do the loan, they would find someone who would. My wife lost a lot of business that way.
First sentence of the second section of the Declaration of Independence: “ We hold these Truths to be self-evident, that all Men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.” It only guarantees the Pursuit of Happiness, not happiness itself.
Have a Great Day!
EZ
Topics: Consumer Debt, Housing Market, Mortgages | 15 Comments »
March 17th, 2010 at 1:19 pm
I think it is easy to meet the standards for filing bankruptcy right now, and it should not be made easier. I do think that for those who qualify to do so, the process should be made easier.
March 17th, 2010 at 1:21 pm
I really don’t see how people declaring bankruptcy affects all the responsible consumers. Most of these big corporations plan on a certain number of defaults, so it’s all the same to them no matter how many hoops a consumer has to jump through on the other side. Also, it seems like EZ is assuming that most of the people declaring bankruptcy are in that position due to reckless financial decisions. This seems akin to those people who use one or two families they heard about gaming the system to declare the entire welfare system a scam. I’m not saying bankruptcy should be easy as pie, but just not so punitive either.
Also, when a corporation makes shrewd business moves, often at the expense of others, people just brush it aside as the way business works. But when a consumer makes a shrewd financial move, for example walking away from an underwater mortgage, they are viewed as irresponsible. It really seems as though there is an ethical double standard here.
March 17th, 2010 at 1:40 pm
“Who made them buy the house they could not afford?”
I completely agree. But, in the same respect, who made the banks give the loans to the consumers? Furthermore, who made the banks give the newly bankrupt, and incredibly risky, consumers another loan?
Just like the first question, the answer is no one. Banks and loan originators were just as greedy as consumers were.
Don’t get me wrong, I still disagree with Mr. Mann’s proposition; however, I do think that something should be done to our bankruptcy laws.
March 18th, 2010 at 8:16 am
Hi Adam, Corporations produce a good or a service, that’s why they are in business. People are primarily comsumers. The more it costs a corporation to do business, the more that cost is passed on to consumers. Everybody pays more when people do not meet their obligations. I know there are alot of folks in financial trouble through no fault of their own, but the economy is in trouble due to bad decisions by everyone from consumers to CEO’s.
As I said in my email to Mr. Mann, my wife has quite a bit of experience with people who have declared bankruptcy. How many people do you know who have filed for bankruptcy? If someone files for bankruptcy on your street and then has their house go into foreclosure, that foreclosure will affect your home’s value.
In my opinion, bankruptcy is a necessary part of our society, but it should not be easy or cheap. Cheap money is one of the reasons we are in economic hard times right now.
March 18th, 2010 at 10:45 am
I talk to 60 subprime credit card holders each day and would like to point out that future consequences play a limited roll in these people’s financial lives. If you cannot pay a minimum payment of 3-10% of a debt each month, then at one point, you spent at least 10-20 times what you had in descretionary income that month.
People get themselves into these predicaments precisely because credit distances them from the logistics of a reasonable committment to pay.
I don’t think that these people would notice or care if the bankrupcy laws became more loose, or if we brought back debtor’s prison.
Most debtor’s respond somewhat to interest rates, fees, and little else. That is why so many people are overextended.
Facilitating bankrupcy would probably just cause lenders to raise rates.
March 18th, 2010 at 6:39 pm
Unfortunately, the people that write these types of letters are often the same people that think all their tax dollars go to black and brown people who will not go out and get a job. The reason: Simplemindedness.
Most people that declare bankruptcy didn’t do it because they just spent too much on the credit cards. Half of them went into bankruptcy because of medical expenses they couldn’t afford.
As long as it is easy for corporations to declare bankruptcy and start anew, I don’t see any reason it should be harder for the average person to.
March 19th, 2010 at 6:27 am
Hi Retiredat40, Nice ad hominem argument. In one pargraph you imply stupidity and racism without ever meeting me or any facts. From Newsweek and the National Foundation for Credit Counseling the over-55 crowd has become the age group most likely to declare bankruptcy “They are in financial distress [for a variety of reasons]: because a spouse has died, they are helping their children and grandchildren, they have credit-card debts, and their home values have declined.” From what I have found from reading and the web, medical expenses are not the primary cause of bankruptcy.
Also, I do not believe it is “easy” for corporations to declare bankruptcy.
March 19th, 2010 at 10:36 am
Aside from the implication of racism, Retired@40 is correct when the #1 reason people file for bankruptcy is MEDICAL:
http://www.cnn.com/2009/HEALTH/06/05/bankruptcy.medical.bills/
“Medical bills prompt more than 60% of U.S. bankruptcies”
March 20th, 2010 at 7:26 am
There seems to be some controversy over the study cited on CNN by BG. The American, the journal of the American Enterprise Institute, has an article by Brent Skinner, a canadian who did a study “Health Insurance and Bankruptcy Rates in Canada and the United States”. AEI researchers looking at the 2005 data of the study cited by CNN and concluded that medical spending was a contributing factor in 17% of US bankruptcies. The article is here: http://www.american.com/archive/2009/august/the-medical-bankruptcy-myth. I do not know how to insert a hyperlink in these comments.
March 20th, 2010 at 1:50 pm
Great link EZ!
The only people I know that had been seriously financially impacted by medical costs are my wife’s parents. Both were self-employed, with no health insurance — she got breast cancer. They wiped out their life-savings in the first two months — no amount of savings can stand up against cancer treatment.
After their savings were gone, they qualified for indigent care (basically like Medicaid at the state level in TX). Ironically she was able to get better care this way than if she had health insurance — because once the standard chemo treatments didn’t work, she got to do a lot of the ‘experimental’ treatments that prolonged her life: and which insurance would never have covered (according to the doctors).
They were debt free, so no need to file for bankruptcy. She’s gone now, and my father-in-law is building his business back up.
Not sure why I’m telling you all this, but perhaps to show a case where financial devastation can happen in the US even though a bankruptcy was never filed for. Lesson of the day: Get Health Insurance! It might not make you live longer, but it does protect your wealth/assets.
March 20th, 2010 at 5:46 pm
Yes BG, I concur. Health Insurance is a must. I’m retired military so my immediate family has good coverage. Thankfully my parents, siblings and in-laws all have insurance. If something happened medically to a close relative, I would have to help, regardless of the financial consequences.
The whole Health Insurance issue is critical and I hope our congress and President have their act together. I’m ambivalent about the health care bill primarily because I don’t have alot of faith in politicans of either party.
March 22nd, 2010 at 7:57 pm
First of all, I had Professor Mann as a law professor in law school. And, no EZ, you do not have more experience than him. Talking down to one of the foremost experts in consumer law does not really help your argument at all.
And JLP, as a loyal reader of your blog, I have to say I’m completely stumped as to what you are trying to say by posting this ridiculous response to Professor Mann’s argument that is nonresponsive and frankly insulting to Professor Mann and the arguments he posits in the op-ed.
Professor Mann is targeting two very specific parts of the Bankruptcy Code. First, the 2005 amendments that include a ridiculously arbitrary and resource-consuming “means test” for Chapter 7 filers. This provision of the Code was purportedly adopted to prevent “abuse” of the system. Instead, as anyone versed in the data can tell you, what it has done is simply increased the cost of those who are legitimately eligible for Chapter 7 to do so. Fees are increased all around. Bankruptcy lawyers charge more because now they are given additional liability for errors on filings, even those not attributable to their malfeasance. The rules for who can file vary state-by-state and year-by-year. The entire premise of bankruptcy is the orderly distribution of what is left of a debtor’s estate for creditors. The alternative is someone stuck in neutral, who maybe can’t earn any money and is facing many judgment liens in court; but, since the bankruptcy system has raised the bar to file and get this orderly process going, what’s left is a total mess where nobody wins. EZ’s arguments are about the system in general, which are on a completely different plane than Mann is arguing. It is easy to knock down a strawman.
Second, the other provision of the Code that Mann cites as being an impediment is the “principal residence exception.” Typically, Chapter 13 permits debtors to modify their debts in order to pay them off on a realistic timetable with future income. But, mortgages on a debtor’s principal residence cannot be modified. Period. This is a brazen giveaway to the real estate interests and banks that no other creditors get. What Mann points out is that the 2005 reforms were supposed to force those irresponsible borrowers who got too big of a mortgage into Chapter 13 – and have to pay back a significant portion of those debts without the big discharge. Instead, the fact is these debtors are unable to do either because of the runaround Congress is making them go through. Meanwhile, doing nothing helps nobody. Debts don’t get paid. Incentives to continue working are gone. People just get harassed and it becomes a race among creditors to loot the debtor of what he or she has left. We have a bankruptcy system to avoid this.
The underwater mortgage discussion is laughable. The contract system is all about freedom. You have the freedom to make a contract and the freedom to breach it. To cast it in moral terms is just a consumer drinking the Kool-Aid about the capitalist system. Do you seriously think a business would not breach a contract if it were forced to overpay massively for an underwater asset? Heck, if it was a public company, it might be breach its fiduciary duties to its shareholders by NOT breaching the contract. All this does is give sophisticated parties even more leverage to get unsophisticated contracting parties to do something economically foolish. Yes, this compounds the initial mistake of getting too big of a mortgage.
And, yes, it is very easy for corporations to declare bankruptcy. Corporations, if you can believe it, have to jump through none of the 2005 amendments “means test” hoops to file Chapter 7 liquidation. And with limited liability anyway, creditors definitely do not get paid. Go figure.
I’m tired of people bashing the bankruptcy system that don’t know what they are talking about. I pay every bill on time and am responsible in all facets of my financial life. I don’t need to leave those who aren’t as blessed as I was left with a bankruptcy system that is utterly incapable of performing its important task in our society.
JLP, please get back to what you do best, which is educating us about how to handle our own financial lives. You are so good at it.
March 23rd, 2010 at 9:36 am
Garrison,
Excellent, well thought-out post. It’s funny how your post quickly put an end to the discussion. Weird how a calm, reasonable attitude with substantiating facts tends to do that.
March 23rd, 2010 at 12:49 pm
Garrison, if you are a loyal reader of JLP’s blog you should not be surprised at his post because he’s written the same nonsense more than once.
March 25th, 2010 at 12:26 pm
The driving force behind most medical bankruptcies aren’t the medical bills per se, but rather loss of income due to the medical condition. That’s not going to change regardless of how much medical insurance you have. Supplemental insurance will help at the margins, but the blunt fact is if your health has deteriorated to the point you can’t work, you’re pretty much screwed regardless of bankruptcy laws, health care, insurance, etc.