Wednesday, May 28, 2008

Personal bankruptcies up in 2007

Add bankruptcy to the list of ways Americans are dealing with the economy:
Despite the 2005 passage of a law that made it more difficult and expensive to file for personal bankruptcy, more Americans are choosing bankruptcy over destitution. Filings -- including Chapter 7, which wipes out debt, and Chapter 13, which reorganizes it -- totaled 822,590 last year, up 38 percent from 2006.
Sadly, unless we start to do something about economic inequality in this country, it doesn't look good moving forward [emphasis mine]:
"The rise in bankruptcies is not about something that happened last week or last month," said Elizabeth Warren, a Harvard Law School professor and a bankruptcy expert. "It's about the fundamentals. It's about declining wages, rising costs, inadequate health insurance, job instability. More hardworking middle-class families simply can't make it in this economy, and it's only getting worse."
However, inequality doesn't explain it all.
Bankruptcy attorneys and economists said the trend cuts across all segments of society -- the young and the old, homeowners with bad mortgages and renters, the poor and the middle class. In the past, bankruptcies were more common among people who had sudden life changes, such as a divorce, illness or job loss. Now, the bankrupt are people who have simply racked up too much debt.

"It is pretty widespread because there are widespread problems in the economy," said Peter Morici, an economist at the University of Maryland at College Park. "Americans have been spending 105 percent of their income for the last three or four years. That's not sustainable."
I have sympathy for those who find themselves in over their heads due to illness or other life changing events, but I have little compassion for those of you who lived beyond your means or scammed the system.

Take the housing mess we currently find ourselves in as an example. I was talking to a friend in the mortgage industry recently and I asked him why so many companies gave loans to people with poor credit. His response shocked me because it boiled down to "everyone else was doing it, so why shouldn't I?" He said if his company turned down an applicant that person would just move on to another company where they'd be approved for a mortgage and that broker would earn the commission. He said he just couldn't see giving the business away even if the person's credit was shaky.

He was quick to point out that credit worthy homeowners aren't perfect angels either. The latest trend he's seeing is homeowners with lots of equity in their homes taking out home equity loans, paying cash for an equally sized or larger home at below market value, and then walking away from their current home. They end up living in a home that's paid off and the bank gets stuck with their old house and the outstanding mortgage. I call that stealing.

Nice world we live in, eh? Everyone is scamming everyone and no one is being held accountable, and those of us who play by the rules and honor our obligations have to live with the results of this mess. Maybe we need to bring back debtor's prisons to restore some common sense to this country.


Lew Scannon said...

Capitalism needs people to be in debt in order for the system to work. People in debt show up to work everyday, are more productive, and work harder to keep job security. When the globalist came along, job security went out the door. Suddenly, you were expendable, no matter how dependable. Some suit in a boardroom decides he wants a bigger bonus, and off your whole plant goes, where the labor is cheap and plentiful. The work ethic America was built on became pointless, and if that did, so did personal responsibility. Screw it, why should someone who's dedicated their life to company continue the charade if the ones in charge of the game changed the rules so they could build castles. And if there are people scamming the system, more power to them, better than being scammed by the free market.

abi said...

I think you're both right about those homeowners and their equity loans. It sure is a basically dishonest thing to do. But I think Lew would agree that it's just playing the system.

To resurrect a tired old phrase, the problem is the system. As Lew says, the system depends on lots of people being essentially imprisoned by their own debt - to keep plugging away and making other people extremely wealthy, while keeping their own mouths shut.

Debt and want - that's what our system requires to work. A system that depends on debt and insatiable want isn't a healthy one.

Kathy said...

Lew, you bring up good points, but how is the mess we're in ever going to change if people aren't held accountable and no one feels guilty about scamming the system? That concerns me. Our economy is like the wild, wild west without a sheriff around to keep order.

Abi, the system definitely isn't healthy, and I think part of that is due to so much dishonesty on so many levels. That's what bothers me. CEOs are merging companies and displacing workers just so they can make million of dollars, brokers are pushing mortgages on people who can't afford them in order to make their commissions, doctors are billing for procedures and treatments they've never performed on patients, etc., etc...

Where do we go from here? How do we cure ourselves?