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.

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.

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.

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.

http://www.cnn.com/2009/HEALTH/06/05/bankruptcy.medical.bills/

“Medical bills prompt more than 60% of U.S. bankruptcies”

Also, I do not believe it is “easy” for corporations to declare bankruptcy.

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.