Wednesday, March 16, 2005

Too Broke To Pay Attention

There's been a lot of commentary these last few weeks about the bankruptcy bill.

The issue is fairly complex, and a wee bit outside my usual area of expertise, but I've managed to figure out a few worthwhile things to say about it. In a nutshell, while the system is fairly screwed up, the bill fixes the wrong problem. I want to spend a moment looking at both sides of the problem.

First, I'll put on my Financial Industry Executive hat.

They have a right to see that they get their money back. When they make a loan, they ordinarily make it with the expectation that they will see their principal again, with a bit of interest into the bargain. And that's all to the good. If it weren't for this system, I'd have had to come up with the full price of my house before I could buy one. By extending credit to consumers, they keep money in motion, which is what keeps the economy running. If bankruptcy is too easy, they stand to lose money on the deal. If that happens, they tighten credit, which may not bring things to a screeching halt, but will certainly heave a monkey wrench in the engine compartment.

On the other hand ... let me change hats, and put on my Poor Broke SOB hat. It's got a few holes in it.

He's got a problem. He got a fistful of pre-approved credit accounts in the mail, and sent them all back in. Lo and behold, he was now swimming in available credit. Mind you, he didn't use them all right away. But it made him happy to have it, for a rainy day. Well, that rainy day came soon enough when he lost his job. He began to use his credit to get by. Which worked, for a while, after a fashion. Weeks stretched into months, and job leads weren't panning out, and the bills were coming due. He kept up with them for a while. But inevitably, he fell behind. Then, BLAM! Up went all his rates. And SLAM! Here's a $35 late fee, and a $40 over-limit fee, on all of his open accounts. Pretty soon, he owes about $25,000, and isn't any closer to finding a job. Well, he gets a spot of luck and lands a job. But he's having trouble making his minimum payments, and the balances don't really go down. He gets a second job, and a third, and keeps hammering away at his debts, but can't keep up with the over-limit fees, and the occasional late fee when he misses a payment by a day or two. In a few years, his balances balloon to $50,000, and he's at his wit's end. Now what?

Here's the thing: while creditors have a clear right to get their own back, consumers also have a right to a fresh start if they well and truly go under. Mind you, there are people who try to game the system. It doesn't work very often. Judges and trustees are on the lookout for that sort of thing, and won't stand for it. What concerns me is that by tightening up the bankruptcy system, a valuable life-line for honest Americans who've fallen on hard times may slip away.

You see, a man who can seek a fresh start, who can negotiate a court-supervised repayment plan, is a free man and a citizen. But a man who can be enslaved to outrageous balances and usurious interest rates is not a free man at all, but a serf. A debt-peon.

What's liable to destroy the American middle class isn't necessarily the paucity of good jobs, although that's definitely not helping. No, what's going to do us in is this exciting new form of debt-peonage that the more unscrupulous lenders want to saddle us with. Smart people can usually figure out how not to fall into the trap in the first place. But with half the population being below average by definition, a lot of people are going to get caught. What happens to them?

This was a bad bill, bought and paid for by the banks and credit card companies. Shame on them, and shame on people like Senator Joe Biden, who ought to have known better. Do those thirty pieces of silver jingle merrily in your pocket, Joe? I hope so, 'cause you'll never see the inside of the White House now, except as a visitor.

Because in the long run, what goes around, comes around.

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