One of my commenters has asked me to explain my assertion that the bankruptcy reform bill was a bad idea. I think this is an interesting question, even though it's a little bit of ancient history, so I'm going to answer it.
For readers who were not following along at home, the bankruptcy reform bill passed in 2005 made it somewhat harder to discharge one's debts.
- If your income was above the median in your area, you had to file for Chapter 13 (which requires that you cut your budget and go on a payment plan, rather than simply discharging your debts.)
- Everyone was required to provide more documentation of their income and assets in order to file, particularly tax returns.
- It altered the procedure for writing down loans somewhat, which some advocates argued would have the effect of making car loans senior to child support payments.
- Bankruptcy lawyers were required to certify their filings, which forced them to charge higher fees--both to cover insurance, and to do more due diligence.
- It outlawed specific abuses that virtually no one is willing to defend--serial filings of Chapter 13 in order to stave off foreclosure or eviction; the practice of buying large houses in states with unlimited homestead exemptions in order to shelter assets from pending civil judgements. (This latter was made famous by OJ Simpson, who bought a mansion in Florida to shelter his money from the Goldmans.)
I covered this for the Economist, which consisted of being ranted at by two groups:
- Credit card issuers, who claimed that the steady march upwards in the bankruptcy rate was due to consumers having, suddenly and for no apparent reasons, deciding en masse to become deadbeats. Backed up by amusing but entirely anecdotal "research", they argued that the real problem was fraud, or strategic behavior by consumers who ran up debts knowing full well that they were never going to pay them back.
- Consumer advocates, who claimed that the steady march upwards in the bankruptcy rate was due to the predatory behavior of lenders, and the cruel, cruel realities of America's heartless economy. Backed up by less amusing, but not much more rigorous, "research", they argued that the real problem was skyrocketing medical bills, or strategic behavior by banks who lent money knowing full well that consumer would never be able to repay it.