Smart Lending

May 2005


Our government just made it more difficult to declare bankruptcy. They did this, they said, because there was too much bankruptcy. Does anybody else think this is like improving medicine by making it harder to sue doctors?

Just last week, the Senate passed sweeping reforms of the bankruptcy laws. Supporters of this legislation declare that there is too much bankruptcy. They say that bankruptcy is harming the nation and making every consumer pay more for credit, products and services. This is true. When your credit card company gets stiffed, they pass on that cost to their other customers. If we eliminated any real possibility of bankruptcy, lenders could relax their credit policies and lend money to anybody. Confident of their being paid back, lenders could then loan ridiculously large sums of money to people of marginal credit-worthiness. Some naysayers argue that this is the case now, which is why the rate of bankruptcy is so high.

Loaning money to people too easily, ensures that hundreds of thousands (if not millions) of working people, and their children, will get the chance to live in poverty. Families with two wage earners can look forward to years without any possibility of having discretionary income for luxuries like medical and dental care, education or legal representation.

What they should do is to act as responsible lenders, eat bad loans when they make them and revise their loan policies so they don't make so many bad loans. They wouldn't make as much money, but the working people of this country would be better off with less unnecessary stuff bought with unnecessary debt.

Retailers would be the big losers from a rational adjustment in lending policies that made it harder to borrow -- a policy that made probability of repayment a prerequisite to borrowing. Companies like WalMart would suffer. Ordinary working families would make do with less stuff.

Why should people have to make do with less? Because we can't afford it as a nation any more than they can. We've become a nation of debtors in less than a generation, and it is getting worse.

What is bankruptcy? It is a second chance. It is a way for people who have made mistakes or suffered misfortune to have their debts forgiven without losing everything they've worked for. Most personal bankruptcies in this country arise from three principle causes:

The people who declare bankruptcy are not, by and large, deadbeats. They are ordinary working people who have had some personal catastrophe wreak havoc on their lives. Sometimes hindsight affords some clarity, but other times there is no way to foresee catastrophe. Even those who should have seen it coming are usually only guilty of optimism. Some people just do stupid things.

The amount of money these bankruptcies cost the average consumer is a few dollars a year. The consumer bears the cost, passed on by banks and other lenders. It would be less if financial institutions were more responsible about who they loaned money to, but not a lot less. Financial institutions lose potential profit when they turn down an application for credit. Over millions of transactions, this represents a substantial loss of imaginary income, a "loss" these industries will not need to absorb any longer. This legislation means more profit for them and more misery and desperation for working people. The consumer will still be paying the same few dollars, possibly more, but for larger collection departments, instead of defaulted loans.

The humane answer here is to pander less to the greed of retailers and lenders, to make it more difficult to borrow money and to continue to allow stupid people a second chance.

Our current national legislature has provided us with a solution that stops just short of debtors prison. The human misery that results for millions of Americans -- less time parents spend with children, more divorce, more crime and the other fruits of human suffering and desperation -- is much too high a price to pay, just to continue to prop up the profits of the retail and personal finance industries.

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