Monday, January 16, 2012

Personal Bankruptcies

Going through comments of the last couple months. There are several I would like to follow up on. Here's one that required only a Google search.

On mine of 18 November 2011, Jazzbumpa quoted me

It is possible to assert that no individual owes more debt than he can afford

and responded

But it is not possible for that assertion to be correct, or there would be very few personal bankruptcies.

I was not making the assertion, of course. I was assessing a trend. Anyway, it struck me to look at personal bankruptcies. Didn't find anything at FRED. But I did find this graph from BankruptcyAction:

Pretty good increase since the mid-1980s. And a suspicious-looking fall in personal bankruptcies around 2006.

And I did find these remarks from Smart Debt Repair:

Bankruptcy Law Change

In 2005 the U.S. Government passed legislation that made it more difficult for the average person to file for bankruptcy. This came at a point when the number of Chapter 7 bankruptcy filings were skyrocketing.

The law changes have meant that it is now compulsory for anyone attempting to file for bankruptcy to first undergo credit counselling. The government also attempted to stem the tide of Chapter 7 filings by creating new restrictions on who can file under Chapter 7 based on income.

Essentially, if your monthly income is greater than the median income for your state and you can pay $100 or more towards your debt each month, you have an obligation to file under Chapter 13.

The theory behind this change was to force more people to take action that would let them keep their homes, reducing other relevant social problems. All this doesn’t seem to have worked very well when one considers the state of the housing market and general economy in the U.S. and world today.


nanute said...

Nothing like enacting a more restrictive law just before the economy is ready to tank.(Beware of unintended consequences.) The biggest proponents of the changes to the law were, you guessed it, financial institutions. Credit card companies were concerned about the amount of debt that was uncollectable disappearing under the old bankruptcy rules. Bail out the banks, no problem. Let debtors get a fresh start with a clean slate? How dare you!

The question in my mind is, how can there be different rules for bankruptcy for corporate persons? What happened to the equal protection clause of the Constitution?

The Arthurian said...

Hi Nute, you tied that in nice, tied it back to the whole problem. So, like, the banks saw the crisis coming, I guess. Remember when the story was "nobody saw it coming" ?

I wonder if stuff like this somehow related to the low approval rating of Congress...

All animals are equal, but some animals are more equal than others.

Greg said...

Getting to your quoted assertion;

"No one owes more debt than he can afford"

One must first define "afford". Most people "afford" their debt by counting on a certain level of income being available. Once that availability is threatened, the affordability goes away.

Jazzbumpa said...

That jump up before the drop and the drop itself are certainly artifacts of the law change.

As an aside, it strikes me that this action is the very antithesis of a jubilee.

And clearly, it was done to protect the interests (and principles, in one sense of the word) of the rentier class.

Also notice the post law-change trend line is steeper than the previous trend, post 1988.

Even with the greater restrictions, people are still legally going belly-up (though you can't get out of student loans this way.)

Quite a dire graphic when you think about it.


The Arthurian said...

Jazz, I think I agree with everything you said there. First time for everything.

Greg -- "Most people "afford" their debt by counting on a certain level of income being available. Once that availability is threatened, the affordability goes away."

Thus the weakness of the Debt-relative-to GDP ratio!