Bankruptcy, the Forgotten Right of the Consumer

Economic recessions are things that, by nature, few ever expect.  But it would be hard for any responsible statesman to believe that economic downturns would never happen at all.  Didn’t the drafters of the constitution expect financial difficulty?  If “we the People” made this country, wouldn’t the founding fathers have thought to help the people first as they anticipated these economic downturns?

Well, regardless of whether they had our troubles in mind or not, the constitution includes a remedy just right for the situation: Bankruptcy.  Power over bankruptcy was given to the federal government in the very first article of the constitution.  That means it was included before things like freedom of speech, protection against illegal searches and seizures, and other basic rights.  The idea of bankruptcy soon thereafter evolved into the ability to file bankruptcy as a voluntary choice, and even that concept predates the right of equal protection, and the right for all citizens to vote.  People are often surprised to discover that Bankruptcy was considered so important historically.

And it has certainly been important in recent history.  Last week at the Health Care Summit, Senate Majority Leader Harry Reid brought light to the fact that 70% of all consumer bankruptcies every year are caused by health care costs.  Lately as well, many have pointed out the financial benefits of defaulting on home loans and giving the title back to the bank.

The truth is that the health care controversy, the mortgage crisis, the stock market downturns… they’re not just a Garfield Monday, where everything bad happens at once.  The housing bubble was a major root cause of the recession, and then when the federal government had to pay for Wall Street’s losses, the fact that the majority of federal expenditures are for Medicare, Medicaid and Social Security causes a breakdown in health care as well.  In short, what we pay for is directly linked to how we’re paying for it.  And the traditional criticism that bankruptcy usually only follows a frivolous lifestyle starts to look like a pernicious lie when in so many cases Americans are forced to take on debt just to stay alive.

For that matter, there seems to be an overabundance of opposition to bankruptcy considering it is such a long-standing right.  Some have suggested that you may not be able to get a job if you file bankruptcy, even though there are provisions in the Bankruptcy code that prohibit discrimination by both government and private agencies based on prior filings.

Others cite the correlation between bankruptcy, job loss and divorce to suggest that the morally deficient are the only ones filing.  But illness is positively correlated to bankruptcy as well.  No one since the Dark Ages would argue that sickness is caused by moral corruption.  The fact is that job loss, divorce, and illness commonly cause bankruptcy, not the other way around.

Some also give advice that if you feel bad about filing bankruptcy (as they say you should), then you might consider going back afterward and pay those creditors whose accounts were discharged.  Reaffirmation, as it is called, is something that attorneys are required by the professional code of conduct to counsel against.  After all, it’s strictly against the interests of those the lawyers represent.  Still, many people who would benefit from filing bankruptcy are convinced that it is their moral obligation to pay their debts.

Is the assumption of debt a moral responsibility?  Well, maybe so.  But even if it is, that obligation is not at all unlike the fiduciary duty that home mortgage lenders owed their constituencies to whom they sold risky securities.  It’s also not unlike the duty the government had to manage social security payments in a way that those who paid into the program would have the retirement promised.  Even Donald Trump and many other celebrities filed bankruptcy.  They may not be moral paragons, but they are certainly financial ones.

So, if it seems to you that the honoring of obligations isn’t the two-way street it’s supposed to be, you’re not the only one.  And ever since the idea of fascism, all you need to do is follow the trail of misinformation to find those who would benefit from the lie.  In this case, it’s the same banks that were bailed out by taxpayers.  Law professors have even thought that the negative stigma of default is actively cultivated by those who are trying to pass the buck.  It’s like a game of hot potato where the other players promise a prize in the afterlife if you stick with it and hold on.  But if there’s one group in the economy who has to step up and pay out, why should it be consumers?

This game of accounts payable is a financial game.  And as such, the rule is that if you can save money doing something, you should do it.  I could bore you with the many scholarly theories that seem to indicate a certain morality all its own behind financial savvy, but it’s enough to say that many experts consider default a cheaper, easier alternative to the mortgage crisis for all parties.  And in the recent economic downturn, more and more professionals have counseled those they represent to just say no.  Consumer bankruptcy is a fundamental way to do that.

And you might be surprised what happens when you demonstrate that you know the rules of the game.  The simple act of considering bankruptcy in itself can be the last bargaining chip needed to tip the scales.  Creditors will often be more willing to negotiate debt if they know their client is aware of the option to file.  And if they don’t offer acceptable terms pre-bankruptcy, there are lenders on the other side who are more than willing to extend you credit afterwards.

That’s right.  Most people are in a better position to get credit after filing bankruptcy.  You’re not as great of a credit risk once all the debts you had before filing are discharged because you’re more able to pay new ones.  Who would have thought that bankruptcy happens because people can’t pay their debts, not because they won’t?  Lenders have certainly caught on to that fact.  And if that’s contrary to what you’ve been told of bankruptcy, then maybe you’ve been informed by the wrong people.  I would suggest the Bankruptcy Code, and even the Constitution.  But that’s just me.