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Make Bankruptcy Great Again

When it comes to matters of nostalgia there are things you expect people to look back on fondly like films, their first car, etc. but there are many out there that look back on the “good ol days” of something unexpected…..bankruptcy.

You see back in the proverbial day, if you went bankrupt, it was a shameful thing – and you often “lost everything” as a result of declaring bankruptcy. As a result, it was a last-ditch thing to do, when all else failed. You called a time-out, everyone lost a lot of money, and you started over.

Not so today. Bankruptcy no longer has a stigma for businesses or individuals. It’s a strategy used by companies to get out of debt and as for consumers…it just isn’t the get out of jail free card it once was.

Things have changed. Student loans now survive bankruptcy, in most cases, as many clever students (mostly law students) figured out you could duck out on these obligations by declaring bankruptcy immediately after graduation – when your income and assets were essentially zero, and your debt load staggering. They closed that loophole, and opened an abyss.

Bankruptcy doesn’t clear:

Student loans

Government debts like taxes, fines or penalties

Child support and alimony

Expensive items purchased right before filing bankruptcy like cars, boats, or jewelry

When you file for bankruptcy, creditors have to stop any effort to collect money from you, at least temporarily. Most creditors can’t write, call or sue you after you’ve filed. However, even if you declare bankruptcy, the courts can require you to pay back certain debts. Each bankruptcy case is unique, and only a court can decide the details of your own bankruptcy.

Bankruptcy laws were changed to prevent “abuses” of the process. No longer were debts utterly wiped out, but in many instances would be “worked out” over a period of years. You could borrow $10,000 on a credit card, make years of interest payments totaling $10,000, and then be forced to pay back the $10,000 debt over five years in a bankruptcy workout. The banks loved this – they made huge profits, and customers found it harder to duck out on the debt.

But then, how did banks survive before these laws were changed? Well, for starters, it was a lot harder to get loans back then. Since the bank was “on the hook” for the debt if it went bad, they scrutinized loan applicants more closely.

Today, loans are bundled and resold as investment vehicles. Banks – and increasingly mortgage brokers and online companies – now are just loan originators. Even credit card debt, student loans, and car loans are bundled and resold with regularity. The guy making the loan gets a commission for completing the application – but no bonus when the loan is paid back in full. A disconnect appears between the nominal lender and the borrower. As a result, too, lenders encourage more borrowing by “sub-prime” lenders, instead of turning them away for bad credit, as in the past.

Since bankruptcy laws were changed, and borrowers have a harder time ducking out on their obligations, many banks and lenders have discovered an odd thing: You don’t make much money from the guy who borrows money and pays it back. On the other hand, if you utterly ruin someone there is a lot of profit to be had. Once they fall behind on their loan payments, you can tack on penalties and fees. With credit cards, the possibilities are endless, with late fees, punishment interest rates, and overdraft fees and whatnot. By the time the customer finally throws in the towel and tries to call it quits, you’ve gotten all your money back and then some and now get a workout in bankruptcy court as well. You’ve turned a human being into a perpetual debt slave.

And it doesn’t end there. Once they’ve pulled the trigger on bankruptcy, it doesn’t mean you stop loaning them money. Far from it – now they cannot declare bankruptcy for another seven years, making them the ideal patsy for more borrowing. Pretty soon, half their income is going to service debts and you’re laughing all the way to the bank – the bank which you own. Once they are out of bankruptcy and seven years have past, you offer them yet more credit – on onerous terms – on the premise that it will “repair their credit rating” and the whole process continues. You’ve utterly ruined a human being, tearing them down from the middle-class or at least working-class, to utter poverty, in the world’s wealthiest country.

Bankruptcy takes a huge emotional toll on a person. It ranks up there with divorce, loss of a loved one and business failure. Beyond the emotional impact, here are other effects of declaring bankruptcy:

Your bankruptcy becomes public domain.

This means your name and other personal information will appear in court records for the public to access. That’s right . . . potential employers, banks, clients and businesses can access the details of your bankruptcy.

Filing bankruptcy is expensive.

Filing fees for Chapter 13 bankruptcy will cost around $310 plus attorney fees, which can be anywhere from $1,500 to $6,000. For a Chapter 7 bankruptcy, you’ll shell out $335 for filing fees and $835 to $3,835 for an attorney.

Buying a home could be more complicated.

Unless you pay cash for a home, it could take one to four years before you qualify for a mortgage loan.

One theory to fixing the system is to go back to the old ways – bring back real bankruptcy, and allow people to duck out on their debts – entirely – by declaring Chapter 7 bankruptcy – without a “means test” or debts surviving bankruptcy, and let them bail on the debt. This would allow people a chance to start over, debt-free. Banks would stop lending money to insolvent people – and ruining them with loans. Since the bank would be on the hook for bad debt, they wouldn’t try to entice a poor person with a 25% interest rate credit card. And payday loan places would evaporate overnight.

Of course, like anything else, if we went “cold turkey” back to the old bankruptcy laws, the economy would be severely disrupted. It would be like eliminating the home mortgage interest deduction – it would put some people out on the street, or at least force them to move to a less expensive house.

Ultimately filing for bankruptcy needs to be “worth your while,” meaning it should give you relief from your debts to ensure you don’t find yourself in a similar situation in the near future.

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