Have we not prisons and work houses?

It’s that time again, when Congress insists on dragging out its nearly annual ritual of attempting to bayonet the sick, unemployed, divorced or merely unlucky, by repealing one of nation’s most important laws guaranteeing that entrepreneurial risk and spirit will remain strong, and that people don’t die in the streets, our bankruptcy protections.
I have commented on the subject before, noting that Bill Clinton’s finest hour was in vetoing a prior version of “bankruptcy reform” (meaning, ostensibly, repeal: forcing debtors with no means of paying back outrageously high interest rate consumer debt… to pay it back). As regular readers know, one of my prior incarnations was as a consumer bankruptcy lawyer, at one time, working for a variety of lawyers that had me probably involved in more consumer bankruptcy cases than anyone in the New York area.
And in hundreds upon hundreds of cases, the grim scenarios were always the same: a job loss (sometimes, even just the loss of a part time second job), an illness or death of a breadwinner, divorce and its attendant after effects, or sometimes, just accumulation of debts from rising interest rates and flat incomes and rising living expenses.
Were there abuses? Every now and again, there would certainly be abusers: property owners who kept belaying foreclosures on property by repeat filings. The system closed in on these people after a while, and unwary attorneys who would represent them. Judges had their ways of dealing with abusers, while making sure that honest debtors (the overwhelming majority– 90%? 95%? 99%? somewhere in that range…) got their fresh starts.
As we are about to go into an era of record high consumer debt levels that are about to be exacerbated by rising interest rates, probably declining asset (especially home) values, and possible unemployment, assuming business cycle dynamics follow their usual course and take us into a downturn, this would not be the time to put further pressure on people who might find themselves in need of bankruptcy relief.
But “people” is a word that seems to offend one Todd Zywicki writing this Dickensian little screed at the Volokh Conspiracy. There are lies, there are damned lies… and Zywicki treats us with a panoply of both in his screed. For one, the “O.J. abuse”, to wit, that Florida has an unlimited value homestead exemption (as does Texas and some other states) in bankruptcy (in Florida, based on the size of the lot the house is on, but not on its dollar value), which he contends would be resolved by the ‘reform”. It would not.
Allegedly, O.J. Simpson moved to Florida to take advantage of this exemption from the judgment obtained against him by the family of the late Ron Goldman.
Zywicki conveniently overlooks that (1) the bankruptcy “reform” would not eliminate the ability of states like Florida and Texas from exempting multi-millionaires from unlimited homestead exemptions, merely forcing certain people to incur waiting periods before moving to such states from taking advantage of their provisions, and (2) O.J.’s income comes from an ERISA qualified National Football League Players Association pension, and is exempt from creditors anyway, and would remain so. The “abuse” is that certain states have outrageous exemptions, and not merely that a few people might move to states to take advantage of the outrageous exemptions from creditors. The “reform” doesn’t alter this.
He also throws out ridiculously misleading numbers like “the FBI estimates that 10% of filings involve some fraud.” Duh. I wonder what percentage of securities filings involve fraud. Or tax returns. I can tell you that when I worked at what is now called the Government Accountability Office (the “GAO”), and when I worked as an insurance defense attorney, in both cases, the standard assumption was… fraud would be in the 10% range. Accordingly, big deal. Besides: bankruptcy fraud is already a crime: punishing people who are already in penury by forcing them to pay back debts at a time when they are busted (see above re: illness, job loss or divorce) will not solve the “fraud” issue.
Thanks to the prevalence of nationwide banking and many banks locating in states with lax usury laws, if any, such laws effectively no longer exist; hence, major banks can now impose consumer interest rates in the high teens, twenties, sometimes over thirty per cent a year, while borrowing (from depositors, for example) at one or two per cent (figures duly reflected in many banks’ profit statements). But, with these record opportunities for profit, banks feel other lending areas are at risk, so that it’s time to stick it to the most vulernable borrowers– consumers– the folks who can’t afford lobbyists. (Note that proposed bankruptcy reform never includes protections from predatory lending practices. NEVER.)
The child and spousal support canard offered by Zywicki is a most peculiar one. Current bankruptcy laws already exempt support payments and arrears from bankruptcy discharge; at worst, there may be very brief interference in collection as a result of the bankruptcy automatic stay, but under current law, this stay can be removed virtually immediately. It’s most peculiar that Zywicki offers that a scheme which may as well be designed to punish divorcees and their dependent children (and widows and orphans) for the benefit of large financial institutions will… somehow help these same people. It will, on net, be a huge punishment, as it is intended to be, for the benefit of banks.
Bankruptcy “reform” is simply a classic case of redistributive risk: from those most able to bear it, to those least. It’s not merely bad, its downright evil. Congratulations to you, Todd Zywicki, for standing up for big capital, and all its abuses, and against individual Americans at a time of their greatest need, even as many economic forecasts predict that the high consumer debt and likely rocky times ahead will make the protections of our bankruptcy laws more important than ever.
Our bankruptcy laws have actually been one of the most effective tools of American economic vibrancy, as well as providing relief for millions upon millions of individuals. The system ain’t broke. This would be a terrible time to fix it. Especially based on spurious “justifications” such as those offered by Zywicki.