For about a week I have been thinking that I should try to write something on the bankruptcy bill that's currently being considered in Congress. I did research, I collected links, but I couldn't figure out how to get around one crucial problem: I don't know anything about bankruptcy law, and I try not to write about things I don't understand. Luckily, however, Josh Marshall has created a new blog devoted to this subject, and turned it over to someone who does understand it: Elizabeth Warren of the Harvard Law School. She's the author of the recent study that showed that over half of bankruptcies are due in part to medical emergencies. (The study was described in this NY Times article.)
Warren's take on the bankruptcy bill:
"The bill is more than 500 pages long, all in highly technical language. But the overall thrust is pretty clear:
• Make debtors pay more to creditors, both in bankruptcy and after bankruptcy, so that a bankruptcy filing will leave a family with more credit card debt, higher car loans, more owed to their banks and to payday lenders.
• Make it more expensive to file for bankruptcy by driving up lawyers’ fees with new paperwork, new affidavits, and new liability for lawyers, so that the people in the most trouble can’t afford to file.
• Make more hurdles and traps, with deadlines that a judge cannot waive even if someone has a heart attack or an ex-husband who won’t give up a copy of the tax returns, so that more people will get pushed out of bankruptcy with no discharge.
• Make it harder to repay debts in Chapter 13 by increasing the payments necessary to confirm in a repayment plan, so that more people will be pushed out of bankruptcy without ever getting a discharge of debt.
There are people who abuse the system, but this bill lets them off. Millionaires will still be welcome to use the unlimited homestead exemption. And if they don’t want to buy a home there, they can just tuck their millions of dollars into a trust, a “millionaire’s loophole” that lets them keep everything—if they can afford a smart, high-priced lawyer.
I don’t get paid by anybody on any side of this fight. I just think it isn’t fair."
More resources and discussion below the fold.
Resources on the bankruptcy bill:
- A post at Angry Bear, in which Kash asks a friend who is "an attorney working for a federal bankruptcy judge" what's wrong with the bill, and posts her response. It's detailed, and quite good.
- A NYTimes story about the 'millionaire's loophole' Warren referred to above. (She cites this article as well, but the link didn't survive my cutting and pasting.) It lets wealthy people shelter their assets from creditors.
- A good post by Kevin Drum, which includes (among other things) a list of some of the proposed amendments to the bill that have been shot down. Do you think that it would be a good idea to allow senior citizens to protect $75,000 of the value of their homes during bankruptcy proceedings, or prevent creditors from recovering on loans made to military personnel who file for bankruptcy if those loans had an APR over 36%? If so, a majority of U.S. Senators do not agree with you. A full list of amendments to the bill is here.
- An analysis of a particularly bad amendment that's supposed to come up for a vote tomorrow. Short version: the amendment raises the minimum wage, but changes the requirements of the minimum wage law in such a way that 6.8 million workers would no longer have to be paid a minimum wage. It also has a host of other bad bits. Read the whole analysis. It's ugly. (Via Atrios.)
In this country, we have chosen to adopt policies that expose people to a large and increasing amount of economic risk. (If you haven't read Peter Gosselin's excellent LA Times series on economic insecurity, you should.) In particular, we have a health insurance system that leaves something like 45 million people without any health insurance at all, and tens of millions more with shaky or inadequate coverage. When they get sick, they have to pay for much of their medical care themselves. As a result, people who file for bankruptcy are not just spendthrifts who rack up credit card debt and then expect to be allowed to walk away from it. Many of them are poor people who just had the bad luck to get sick.
To see what this is like, it's worth checking out this report (pdf) on the budget tradeoffs made by low-income families, from the Kaiser Family Foundation (whose website has all sorts of information on the uninsured.) The report profiles twelve low-income families, and includes detailed information on their budgets, including health care spending and related debts. It's worth reading the report just for the pie charts showing each family's spending during the previous month, and in particular the terrifying proportions that go to housing and food. Here are quotes about the role of health care costs in some of these families' financial lives:
- Josh has worked at a fast-food restaurant for four years, and is looking for a higher-paying job. The hours are uncertain, sometimes dropping to 20 or less a week. His last paycheck for two weeks was just $213. Carol is a stay-at-home mother. The couple is keeping their dial-up internet connection in the hopes that she can find home-based data entry work. Just before their son was born, Josh had a higher-paying job with overtime, but had to quit when Carol got sick. Medicaid covered her two pregnancies but Carol lost coverage after her second baby was born. She is now uninsured. She continues to have serious medical problems, triggered by her pregnancy, and suffers from severe asthma. Josh’s current employer does not offer health coverage. They still owe about $1,000 in medical expenses (not covered by Medicaid) from her two pregnancies and her son’s severe medical and developmental problems. Without coverage, Carol has stopped taking the expensive medicine she needs to prevent a recurrence of blood clots, a condition that almost killed her after giving birth to her first child.
- The family has a heavy load of debt, mostly from unpaid medical expenses. These bills create stresses for the family. “(with Michael working) I hope we get a little peace,” says Patty, “Mostly, all the fighting is financial ... you mad because the light bill people done sent you the disconnect, and you don’t know how you going to pay it, so you take it out on the next one.” Many of their unpaid medical bills date to when they had private health insurance, which did not cover the physical therapy services their daughter needed after she had a serious accident. Because of their poor credit the family pays high interest rates on their mortgage and car loan.
- The family is having a hard time paying off credit card debts. They also have $7,000 of medical debt from treatment Mary got last year when she broke her jaw. Still, they do not want to file for bankruptcy. “We don’t want to get out of our debt,” Mary states, “You know, we made them debts. We needed everything we got from them. So we’re going to pay it.”
- Faith recently had a bout of pneumonia and a slight stroke that landed her in the hospital. Even though Medicare covered 80 percent of the cost, they were still left with a bill of about $3,000, which the hospital is trying to recover through a collection agency. Recently she has been able to get a number of prescription drugs free or at low cost through pharmaceutical company-sponsored programs she found out about through the county hospital. Jack uses the Veterans Administration hospital or the county hospital, where he receives free or subsidized care.
These are the people who would be nailed under the current bill. Contrast this to its treatment of people with enough money to hire good lawyers (from the NYT article cited earlier):
"The loophole involves the use of so-called asset protection trusts. For years, wealthy people looking to keep their money out of the reach of domestic creditors have set up these trusts offshore. But since 1997, lawmakers in five states - Alaska, Delaware, Nevada, Rhode Island and Utah - have passed legislation exempting assets held domestically in such trusts from the federal bankruptcy code. People who want to establish trusts do not have to reside the five states; they need only set their trust up through an institution in one of them. (...)
Current federal bankruptcy law protects assets held in a type of trust, known as a spendthrift trust, traditionally set up by one family member to benefit another. But current law does not protect the assets of people who set up spendthrift trusts to benefit themselves. And the law limits the purposes of the trusts that qualify for exemption. Retirement planning or paying for education are two approved purposes for such trusts.
By contrast, domestic asset protection trusts can be set up by the same people who plan to benefit from them. In addition, there are no caps on the dollar amount of assets they can hold and no restrictions on their purpose, Ms. Marty-Nelson said. "
This is just unconscionable. The Senators and Representatives who vote for this bill should be ashamed.