On Bankruptcy

Megan McArdle has a paen

to the US bankruptcy system today:

The current system works pretty well. Recognizing that we don’t have any

very good mechanism for picking out the profligate from the unlucky (most

bankruptcies involve a little from Column A, a little from Column B), we let

people get rid of their debts regardless of how they were incurred. (Except

for special exceptions, most of them involving the government, such as taxes

and student loans). Then, recognizing that it is not a good idea to make it

painless to borrow money you don’t repay, we make life a little bit miserable

for people who declare bankruptcy–though not very miserable; the chief result

is that it’s somewhat harder to get credit. It’s hard to overstate how well

this works. America’s bankruptcy system is the most generous to the debtor,

the least interested in assigning fault, in the entire world. There’s strong

evidence that this is one of the reasons behind our high rates of entrepreneurship;

it makes it easier to take economic risks.

And on the opposite side of the ideological spectrum, Andrew Leonard ends up

agreeing that bankruptcy

doesn’t seem to reduce Americans’ access to credit very much:

According to data compiled and analyzed by Katherine Porter, a law professor

at the University of Iowa, in the superb "Bankrupt

Profits: The Credit Industry’s Business Model for Post-bankruptcy Lending":

…Creditors repeatedly solicit debtors to borrow after bankruptcy. Families

receive dozens of offers for new credit in each month immediately after

their bankruptcy discharge. Some offers specifically target these families

based on their recent financial problems, using bankruptcy as an advertising

lure. Other credit offers emanate from the very same lenders that the families

could not repay before bankruptcy. While not every lender will accept a

"profligate" bankrupt as a customer, debtors report being overwhelmed

after bankruptcy with a variety of credit solicitations from many sources.

Lenders offer families most types of secured and unsecured loans.

It turns out, according to Porter, that a year post-bankruptcy, bankrupts are

receiving more than 14 credit offers per month – more than double the

six offers per month that the average American receives.

Clearly, bankruptcy is not particularly harmful to creditors. Bankrupts are

the kind of people who tend to run large revolving balances at high rates of

interest, so that even if they don’t pay back every penny, the lender can still

end up making a tidy profit. In other words, even if Megan is right that "America’s

bankruptcy system is the most generous to the debtor," the creditors hardly

seem to be hurting either.

Maybe this is the reason that the arguments about the human consequences of

the subprime debacle tend to concentrate on foreclosure, rather than bankruptcy.

Foreclosure is serious; bankruptcy seems like just another dance step in a long

and complex tango between debtors and creditors.

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