By now you've heard a
lot about the rewrite of the federal bankruptcy act that the
U.S. Senate has approved and sent to the House. President Bush
has said he
will sign the controversial bill if it reaches his desk.
The bill would make it more difficult for debtors to wipe
their slate clean through a
Chapter 7 bankruptcy filing, and many of the 1.6 million
Americans who file for
bankruptcy every year would be forced to file under Chapter 13,
which requires a
partial repayment to creditors.
The bill has created significant debate about its impact on
the middle class versus
the power of the financial services industry, which backed the
bankruptcy bill.
The debate says something about our society and the judgments
we make, and is
worth noting.
America has always been very tolerant of debt. After all,
many early settlers came
here because it was a better alternative than the overflowing
debtors' prisons of merry
old England. So it's no surprise that our earliest laws provided
for the orderly
liquidation of debt for those who could not repay borrowed
money.
First Bankruptcy Law:
1800
The earliest U.S. bankruptcy laws passed by Congress in 1800
provided that only a
creditor could institute a bankruptcy against a person who
failed to pay his debts.
The laws were seen as protecting the interests of commerce and
business.
The first national bankruptcy laws were enacted in 1800, and
revised in 1841 -- after
the depression of 1837 -- to allow a debtor to start the
bankruptcy filing. But creditors
complained this process favored the debtor, and the law was
repealed in 1843.
Other laws came and went, influenced by the economy and power
shifts between
business and social conscience. Finally, the Panic of 1893
brought a new law in 1898,
which became the foundation of our current bankruptcy laws. By
1915, the Supreme
Court had validated those laws, saying their purpose was to
protect "honest debtors."
The Depression of the 1930s triggered a revision of the
bankruptcy laws in 1938, and
brought the creation of Chapter 13, a program by which debtors
were supposed to
pay a portion of their debts.
By 1978 another revision was enacted, Chapter 7, which
allowed debtors to wipe
their slate clean. The only exceptions were student loans (few
in those days),
some back taxes, alimony and child support.
Today the age-old American debate continues: How "easy"
should it be to escape
debt through bankruptcy?
Every debate had its own participants: failed farmers and
failed businesses in the
19th century were replaced by failed investors in the 1930s, and
by those burdened
with uninsured medical expenses today. And business has always
faced off against
debtors, reminding everyone who would listen that the cost of
write-offs is passed on
to all consumers. Critics of today's bill tend to be consumer
activists who point out
that big business and wealthy taxpayers use loopholes that
remain in the bankruptcy
laws to protect assets.
But one prominent financial services executive, Arkadi
Kuhlmann, CEO of ING Direct,
the largest online bank and fourth largest thrift in the
country, has publicly broken
ranks.
Among other things, he charges that the bill is actually bad
for the financial services
industry-- and the country -- because "it actually encourages
further bad lending
decisions by removing an important market discipline: the
possibility of a clean
bankruptcy."
In other words, lenders will make more unwise loans, knowing
that borrowers will
have a tougher time erasing their debt.
The Ultimate Irony
If you find that ironic, here's another irony to consider:
The Senate bill mandates
educational counseling for those who declare bankruptcy. But at
the same time,
the credit industry is dramatically cutting back on its funding
of the major consumer
credit counseling services. Their reason: They can't afford it,
because of rising credit
losses.
In my opinion, if the credit industry wants to lobby a bill
like this through Congress --
and the industry contributed millions to many campaigns -- then
they should ante up
at least that amount, and much more, to educate people about the
dangers of debt.
That's a debt the financial services industry owes to all
Americans. And that's The
Savage Truth.
Terry Savage is a registered investment adviser, and
appears weekly on
WMAQ-Channel 5's newscasts. Distributed by Creators Syndicate.
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