NY Times/Krugman: The Debt-Peonage Society

Comment: Canada and England never were, objectively, havens for unfortunate
debtors. Dozens of victims of the Lloyd's scam came to America from those
countries to get bankruptcy relief.
Now, all of a sudden, Canada and England start to look good.
The discharge won't be enforceable in the USA, of course, unless the
creditor appears or files proof of debt. But still, one can start over, get
a fresh start, whatever you call it. Not in the USA: while Continental
European countries -- Germany, even, since 1999, Scandinavia much longer,
have introduced consumer bankruptcy provisions in response to overreaching
by the credit card issuers, the USA is about to give credit card debt higher
priority than child support.
How's that for encouraging dads to be deadbeats?
The New York Times
March 8, 2005
The Debt-Peonage Society
Today the Senate is expected to vote to limit debate on a bill that toughens
the existing bankruptcy law, probably ensuring the bill's passage. A solid
bloc of Republican senators, assisted by some Democrats, has already voted
down a series of amendments that would either have closed loopholes for the
rich or provided protection for some poor and middle-class families.
The bankruptcy bill was written by and for credit card companies, and the
industry's political muscle is the reason it seems unstoppable. But the bill
also fits into the broader context of what Jacob Hacker, a political
scientist at Yale, calls "risk privatization": a steady erosion of the
protection the government provides against personal misfortune, even as
ordinary families face ever-growing economic insecurity.
The bill would make it much harder for families in distress to write off
their debts and make a fresh start. Instead, many debtors would find
themselves on an endless treadmill of payments.
The credit card companies say this is needed because people have been
abusing the bankruptcy law, borrowing irresponsibly and walking away from
debts. The facts say otherwise.
A vast majority of personal bankruptcies in the United States are the result
of severe misfortune. One recent study found that more than half of
bankruptcies are the result of medical emergencies. The rest are
overwhelmingly the result either of job loss or of divorce.
To the extent that there is significant abuse of the system, it's
concentrated among the wealthy - including corporate executives found guilty
of misleading investors - who can exploit loopholes in the law to protect
their wealth, no matter how ill-gotten.
One increasingly popular loophole is the creation of an "asset protection
trust," which is worth doing only for the wealthy. Senator Charles Schumer
introduced an amendment that would have limited the exemption on such
trusts, but apparently it's O.K. to game the system if you're rich: 54
Republicans and 2 Democrats voted against the Schumer amendment.
Other amendments were aimed at protecting families and individuals who have
clearly been forced into bankruptcy by events, or who would face extreme
hardship in repaying debts. Ted Kennedy introduced an exemption for cases of
medical bankruptcy. Russ Feingold introduced an amendment protecting the
homes of the elderly. Dick Durbin asked for protection for armed services
members and veterans. All were rejected.
None of this should come as a surprise: it's all part of the pattern.
As Mr. Hacker and others have documented, over the past three decades the
lives of ordinary Americans have become steadily less secure, and their
chances of plunging from the middle class into acute poverty ever larger.
Job stability has declined; spells of unemployment, when they happen, last
longer; fewer workers receive health insurance from their employers; fewer
workers have guaranteed pensions.
Some of these changes are the result of a changing economy. But the
underlying economic trends have been reinforced by an ideologically driven
effort to strip away the protections the government used to provide. For
example, long-term unemployment has become much more common, but
unemployment benefits expire sooner. Health insurance coverage is declining,
but new initiatives like health savings accounts (introduced in the 2003
Medicare bill), rather than discouraging that trend, further undermine the
incentives of employers to provide coverage.
Above all, of course, at a time when ever-fewer workers can count on
pensions from their employers, the current administration wants to phase out
Social Security.
The bankruptcy bill fits right into this picture. When everything else goes
wrong, Americans can still get a measure of relief by filing for bankruptcy
- and rising insecurity means that they are forced to do this more often
than in the past. But Congress is now poised to make bankruptcy law harsher,
Warren Buffett recently made headlines by saying America is more likely to
turn into a "sharecroppers' society" than an "ownership society." But I
think the right term is a "debt peonage" society - after the system,
prevalent in the post-Civil War South, in which debtors were forced to work
for their creditors. The bankruptcy bill won't get us back to those bad old
days all by itself, but it's a significant step in that direction.
And any senator who votes for the bill should be ashamed.
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