Complex Factors Drive Bankruptcies
The writer is an attorney and history professor emeritus at UNO. He has practiced bankruptcy law in Nebraska and Iowa for over three decades.
Some 34 million Americans have filed for bankruptcy since 1980. About 30 percent were married, thus about 45 million people filed for relief. They are our friends, family, neighbors, work associates and employers.
A static minimum wage, predatory lending, medical expenses, long-term unemployment, income inequality and lagging economic indicators lead to the Bankruptcy Court discharging debts. Child support, back taxes and student loans are not dischargeable.
The Constitution provides that Congress shall enact “uniform laws on the subject of Bankruptcy.” The U.S. Supreme Court stated in 1915 that bankruptcy was to “relieve the honest debtor from the weight of oppressive indebtedness, and permit him to start afresh.”
Apocalyptic events include unemployment, underemployment, divorce, declining health, disability, credit cards, subprime mortgages and auto loans, home foreclosure and automobile repossession. The 20 percent health insurance co-pay can be daunting. Bills pile up; bill collectors, lawsuits, judgments and garnishment follow.
During July, the Chapter 7 bankruptcy hearings I observed in Omaha’s Roman L. Hruska U.S. Courthouse revealed dramatic distress demographics: Ages ranged from 22 to 88, from single mothers to great grandfathers. Forty-six women and 20 men filed, confirming that women make up the majority in bankruptcy. There were 14 married couples.
White-, blue- and no-collar debtors, homeowners, renters, minimum-wage workers, self-employed, disabled, veterans, retirees and widows all are battered by financial stress. Harsh reality undermines optimism.
Hearings take as little as two minutes. The trustee questions debtors under oath about debts and assets. His search for property to distribute to creditors is occasionally successful. Most Chapter 7’s are “no asset” cases.
Bankruptcy filings declined from 1.6 million in 2010 to 1.4 million in 2011 to 1.26 million in 2012 and to 1.1 million in 2013. Filings in 2014 are running behind 2013. About 96 percent are consumer cases, and 4 percent are businesses. Nebraskans filed 6,248 cases in 2011, 5,507 in 2012 and 5,169 in 2013.
The 2013 U.S. Court Report cautions against optimistic conclusions: “The complex relationship between bankruptcy filings and other economic factors — including unemployment, foreclosures and consumer confidence — means that the continuing decline in bankruptcy filings does not necessarily indicate broader economic well-being.”
These factors suggest filings rise when consumers and businesses with access to credit and confidence about economic prospects (positive economic developments) financially overextend themselves. Filings also rise when unemployed debtors forestall foreclosures (negative developments).
Filings fall in response to lack of access to credit, lower consumer confidence, lower unemployment or fewer foreclosures. Interpreting declining bankruptcy filings “as either a positive or negative economic indicator is problematic,” according to the Court Report.
American Bankruptcy Institute Executive Director Sam Gerdano attributes the filing “nose-dive” to low interest rates for business borrowers and “tepid” consumer spending. “Some individuals are too broke to afford the cost to file for bankruptcy,” Gerdano says.
Bankruptcy filings are also sensitive to inflation, consumer debt, payment delinquency, saving rates, home building starts, consumer confidence, stock market, national debt, GDP, balance of payments, and the price of oil, a daunting concatenation.
Creditors dislike bankruptcy. Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act in 2005 to reduce filings. Lawmakers also increased the time before a second case could be filed from six to eight years; the Bible provided debt forgiveness every seven years.
Many of the 2.1 million who filed just before the more lenient 1978 law expired in October 2005 are filing again, suggesting systemic “negative income shocks.”
The better course to reduce bankruptcy filing and sustaining economic growth, in addition to the Affordable Care Act and the post-Great Recession Consumer Financial Protection Bureau, would be a fair living wage, investment in employment-geared education without stultifying loans, encouragement of homeownership and Janet Yellen’s Federal Reserve pro-employment strategy.
Overcautious extension of credit damages the economy.
Risk is conditioned on interest rates. Economic growth is predicated on production and consumption.
Everyone hopes to earn more and honor their obligations. The free market has no insurance for failure. Bankruptcy is a deductible similar to health, automobile and property insurance.
By Oliver B. Pollak
*See this article in today’s (8.13.14) Omaha World Herald, written by our very own Oliver B. Pollak! Reprinted with permission from Omaha World Herald.