Post by Bozur on Mar 13, 2005 18:31:29 GMT -5
DEBT'S HONOR
Bankruptcy, the American Morality Tale
By LESLIE EATON
Published: March 13, 2005
William Hogarth, 1735
Deadbeat or sympathetic victim? America's struggle with how to regard debtors dates from before the founding of the country, echoing a perennial theme in English literature from Dickens to William Hogarth's "The Rake's Progress."
HAT could be more American than the idea of a second chance, a fresh start, Act Two? It is embedded in the culture, the notion that you can reinvent yourself in every way, by moving to a new city, buying a new car, getting a face lift - or by filing for bankruptcy.
For generations, Americans who found themselves drowning in debt have turned to the federal bankruptcy laws, which, as the Supreme Court wrote in 1915, are meant to give honest debtors a chance "to start afresh free from the obligations and responsibilities consequent upon business misfortunes."
In other words, if you give up most of what you own (assuming you own anything at all), you can start all over again.
But that may be changing. Last week, the Senate passed a bill that its backers say will curb abuses and force those who can pay their debts to do so. Critics contend that Congress is, in effect, turning its back on the principle of a debtor's ability "to start afresh," and punishing some victims of calamity.
The legislation is almost certain to be passed by the House of Representatives and signed by President Bush in the next month or two. It includes highly technical provisions and involves issues like the role of credit-card companies in causing the bankruptcies that they have now lobbied to curb.
But at its broadest, the debate illustrates the clash between competing American values: the right to a fresh start versus the idea that people must be held responsible for their actions.
"Except for those with evil motivations and a willingness to take advantage of the system, no one likes to be in debt," said Senator Orrin Hatch, Republican from Utah, which has the highest bankruptcy rate of any state.
But once people borrow money, "they need to take personal responsibility to pay it back," he said. "Personal responsibility is a core American value."
Debt was an important and complicated subject for Americans long before there was a United States, said Ron Chernow, the biographer of Alexander Hamilton. As a founder of the new nation's banking system and a supporter of a federal bankruptcy law, Hamilton was naturally sympathetic to creditors, Mr. Chernow said. But he also helped friends who found themselves in debtors' prison.
And like modern spendthrifts, some Founding Fathers ran up debts to pay for luxuries. "Jefferson felt the great nightmare of his life was that he was in debt, and it preyed on his mind," Mr. Chernow said.
The tension between the views of bankruptcy as a moral failing and as an economic problem played out during the 19th century. Debtors' prisons eventually fell out of favor for humanitarian reasons - and for the practical reason that imprisoned people could seldom pay their debts.
Starting around 1800, Congress would ease the pain of economic crises by enacting bankruptcy protection laws, and then repeal them once the financial picture had improved. In 1898, the laws that became the foundation of the current bankruptcy system were enacted, and in 1915, the Supreme Court declared that one of the laws' purposes was to protect honest debtors. That view was reinforced in a 1934 Supreme Court case, Local Loan Company v. Hunt. The court declared that a man who had pledged his future wages to repay a $300 loan could not be forced to turn over those earnings once he declared bankruptcy.
The argument over new beginnings and personal responsibility has changed little, said David A. Skeel Jr., a law professor at the University of Pennsylvania and the author of "Debt's Dominion: A History of Bankruptcy Law in America." (Princeton University Press, 2001). Even in the 1930's, "there was the same debate," he said; people would remember that "in the good old days, everyone paid back what they owed, and they are shameless now."
What has changed, he added, are the kinds of people who file for bankruptcy. In most of the last two centuries, bankrupts were usually farmers or owners of small businesses, because only they could borrow much money. "One of the historical realities is that bankruptcy was not for the lower class," he said.
Today, bankruptcy is for everyone. Last year, there were more than 1.1 million "fresh start" bankruptcy filings, according to the American Bankruptcy Institute, which uses data from the court system. That is twice the number of such cases, known technically as Chapter 7's, that were filed in 1994.
How you explain the huge increase in filings tends to reflect where you come out in the broader moral debate.
Supporters of the bankruptcy bill cite the rise of borrowers who spend money they never intend to repay. During the Senate debate, Mr. Hatch spoke of a Wisconsin couple who deliberately ran up their bills before filing for bankruptcy, sticking their credit union with $3,000 in unpaid debt. In these stories, gamblers and greedy consumers are the main players.
Opponents of the bill maintain that most people who file for bankruptcy are honest but struggling; they've been laid low by some unavoidable catastrophe, like illness, divorce or unemployment.
Elizabeth Warren, a law professor at Harvard, is the co-author of a study arguing that more than half of all bankruptcies are linked to medical costs (the study is controversial in part because its trigger for medical expenses is just $1,000). In Senate testimony, she said, "Most debtors are filing for bankruptcy not because they had too many Rolex watches and Gameboys, but because they have no choice."
But Todd J. Zywicki, a professor at George Mason University School of Law, said that financial distress cannot explain the surge in personal bankruptcies in the 1990's. They were not preceded, he said, by equally steep increases in unemployment, divorce or health-care costs.
Professor Zywicki has a number of theories on why bankruptcies have increased, but if asked to rank them, he said that the No. 1 would be "the generosity of the bankruptcy code - it makes it so easy."
Down in the trenches of the legal bureaucracy is George W. Liebmann, a bankruptcy trustee - the court-appointed lawyer who scrutinizes "fresh start" filers for abuses. Most of the cases he has seen over 24 years, he said, are people who have gotten in over their heads on credit cards, sometimes with as many as 20 separate accounts.
What he describes is a sick, symbiotic relationship between consumers hooked on credit and the card companies that charge them enormous fees - at least, until they go bankrupt. "It's a fundamentally corrupt situation, corrupt for both debtors and creditors," he said. "Both get away with murder."
Bankruptcy, the American Morality Tale
By LESLIE EATON
Published: March 13, 2005
William Hogarth, 1735
Deadbeat or sympathetic victim? America's struggle with how to regard debtors dates from before the founding of the country, echoing a perennial theme in English literature from Dickens to William Hogarth's "The Rake's Progress."
HAT could be more American than the idea of a second chance, a fresh start, Act Two? It is embedded in the culture, the notion that you can reinvent yourself in every way, by moving to a new city, buying a new car, getting a face lift - or by filing for bankruptcy.
For generations, Americans who found themselves drowning in debt have turned to the federal bankruptcy laws, which, as the Supreme Court wrote in 1915, are meant to give honest debtors a chance "to start afresh free from the obligations and responsibilities consequent upon business misfortunes."
In other words, if you give up most of what you own (assuming you own anything at all), you can start all over again.
But that may be changing. Last week, the Senate passed a bill that its backers say will curb abuses and force those who can pay their debts to do so. Critics contend that Congress is, in effect, turning its back on the principle of a debtor's ability "to start afresh," and punishing some victims of calamity.
The legislation is almost certain to be passed by the House of Representatives and signed by President Bush in the next month or two. It includes highly technical provisions and involves issues like the role of credit-card companies in causing the bankruptcies that they have now lobbied to curb.
But at its broadest, the debate illustrates the clash between competing American values: the right to a fresh start versus the idea that people must be held responsible for their actions.
"Except for those with evil motivations and a willingness to take advantage of the system, no one likes to be in debt," said Senator Orrin Hatch, Republican from Utah, which has the highest bankruptcy rate of any state.
But once people borrow money, "they need to take personal responsibility to pay it back," he said. "Personal responsibility is a core American value."
Debt was an important and complicated subject for Americans long before there was a United States, said Ron Chernow, the biographer of Alexander Hamilton. As a founder of the new nation's banking system and a supporter of a federal bankruptcy law, Hamilton was naturally sympathetic to creditors, Mr. Chernow said. But he also helped friends who found themselves in debtors' prison.
And like modern spendthrifts, some Founding Fathers ran up debts to pay for luxuries. "Jefferson felt the great nightmare of his life was that he was in debt, and it preyed on his mind," Mr. Chernow said.
The tension between the views of bankruptcy as a moral failing and as an economic problem played out during the 19th century. Debtors' prisons eventually fell out of favor for humanitarian reasons - and for the practical reason that imprisoned people could seldom pay their debts.
Starting around 1800, Congress would ease the pain of economic crises by enacting bankruptcy protection laws, and then repeal them once the financial picture had improved. In 1898, the laws that became the foundation of the current bankruptcy system were enacted, and in 1915, the Supreme Court declared that one of the laws' purposes was to protect honest debtors. That view was reinforced in a 1934 Supreme Court case, Local Loan Company v. Hunt. The court declared that a man who had pledged his future wages to repay a $300 loan could not be forced to turn over those earnings once he declared bankruptcy.
The argument over new beginnings and personal responsibility has changed little, said David A. Skeel Jr., a law professor at the University of Pennsylvania and the author of "Debt's Dominion: A History of Bankruptcy Law in America." (Princeton University Press, 2001). Even in the 1930's, "there was the same debate," he said; people would remember that "in the good old days, everyone paid back what they owed, and they are shameless now."
What has changed, he added, are the kinds of people who file for bankruptcy. In most of the last two centuries, bankrupts were usually farmers or owners of small businesses, because only they could borrow much money. "One of the historical realities is that bankruptcy was not for the lower class," he said.
Today, bankruptcy is for everyone. Last year, there were more than 1.1 million "fresh start" bankruptcy filings, according to the American Bankruptcy Institute, which uses data from the court system. That is twice the number of such cases, known technically as Chapter 7's, that were filed in 1994.
How you explain the huge increase in filings tends to reflect where you come out in the broader moral debate.
Supporters of the bankruptcy bill cite the rise of borrowers who spend money they never intend to repay. During the Senate debate, Mr. Hatch spoke of a Wisconsin couple who deliberately ran up their bills before filing for bankruptcy, sticking their credit union with $3,000 in unpaid debt. In these stories, gamblers and greedy consumers are the main players.
Opponents of the bill maintain that most people who file for bankruptcy are honest but struggling; they've been laid low by some unavoidable catastrophe, like illness, divorce or unemployment.
Elizabeth Warren, a law professor at Harvard, is the co-author of a study arguing that more than half of all bankruptcies are linked to medical costs (the study is controversial in part because its trigger for medical expenses is just $1,000). In Senate testimony, she said, "Most debtors are filing for bankruptcy not because they had too many Rolex watches and Gameboys, but because they have no choice."
But Todd J. Zywicki, a professor at George Mason University School of Law, said that financial distress cannot explain the surge in personal bankruptcies in the 1990's. They were not preceded, he said, by equally steep increases in unemployment, divorce or health-care costs.
Professor Zywicki has a number of theories on why bankruptcies have increased, but if asked to rank them, he said that the No. 1 would be "the generosity of the bankruptcy code - it makes it so easy."
Down in the trenches of the legal bureaucracy is George W. Liebmann, a bankruptcy trustee - the court-appointed lawyer who scrutinizes "fresh start" filers for abuses. Most of the cases he has seen over 24 years, he said, are people who have gotten in over their heads on credit cards, sometimes with as many as 20 separate accounts.
What he describes is a sick, symbiotic relationship between consumers hooked on credit and the card companies that charge them enormous fees - at least, until they go bankrupt. "It's a fundamentally corrupt situation, corrupt for both debtors and creditors," he said. "Both get away with murder."