Tuesday, September 4, 2012

With Increasingly Harsh Bankruptcy Laws the United States Is Becoming A Less Decent Nation – Turning Its Back on Decades of Progress

And Turning Its Back on Unfortunate Individuals and Returning to Medieval Times

Bankruptcy is a lose-lose process.  The debtor is always a person who has fallen on such difficult economic times that he or she cannot pay his or her debts.  The creditors who have extended credit in the belief that they will be paid back suffers a loss on the investment.  The entire process is humiliating, degrading and expensive.

In earlier times failure to pay one’s debts resulting in imprisonment (often at the expense of the debtor resulting in even higher debts) and in some occasions death.  But modern and intelligent thinking realized that such punishment was cruel, inhumane and ineffective, improving neither the lives of the debtors nor the fortunes of the creditors.

So the bankruptcy process was developed, in which the debtor goes before a court and demonstrates that he or she cannot pay the debts.  If the court finds that to be the case, the debts are discharged and the person is free to try to resume their life.  The rationale for this is given by a Supreme Court decision from almost 80 years ago.

One of the primary purposes of the Bankruptcy Act is to

"relieve the honest debtor from the weight of oppressive indebtedness, and permit him to start afresh free from the obligations and responsibilities consequent upon business misfortunes."

Of course such a system has the potential for abuse.  In fact, it is impossible not have some abuse, situations where debtors could pay some or all of the debts but are allowed escape them through the bankruptcy process.  In order to provide for those who need the help of bankruptcy it is necessary to accept that those who do not need the help will exploit the system.  Sorry, there is no other way to do this.

Student loans are a particular problem for the area of bankruptcy.  Unlike almost every other kind of debt, the loans are not made on the basis of credit quality, but upon the principle that the education received will allow the recipient to earn more money, and hence be able to pay back the loans.  But the greed and incompetence of those who manage higher education, along with the greed and competence of those who manage for-profit higher education has resulted in a crushing burden of student debt for many young people.

The response to this has been a federal government which instead of aiding debtors, has tightened the bankruptcy law so much that it is almost impossible for an insolvent person to discharge the debts in the bankruptcy process. 

In an effort to protect the taxpayer money that is on the line every time a student or parent signs for a new federal loan, Congress toughened the law again in 1990 and again in 1998. In 2005, for-profit companies that lend money to students persuaded Congress to extend the same rules to their private loans.

The result,

Federal bankruptcy law requires those who wish to erase that debt to prove that repaying it will cause an “undue hardship.” And one component of that test is often convincing a federal judge that there is a “certainty of hopelessness” to their financial lives for much of the repayment period.

That’s right, in order to escape the lifelong burden of a student loan which one can never repay the debtor must go to court and prove that their life is one of certain hopelessness.  It is, or course, a process that is not only degrading and unproductive but difficult to obtain help for as well.

Lawyers sometimes joke about the impossibility of getting over this high bar, even as they stand in front of judges. “What I say to the judge is that as long as we’ve got a lottery, there is no certainty of hopelessness,” said William Brewer Jr., a bankruptcy attorney in Raleigh, N.C. “They smile, and then they rule against you.”

In effect student loans are a pledge of future earnings against a current loan.  But the Supreme Court ruled in the above cited case, Local Loan Co. vs. Hunt, that such a requirement defeats the very purpose of the bankruptcy laws,

From the viewpoint of the wage earner, there is little difference between not earning at all and earning wholly for a creditor. Pauperism may be the necessary result of either. The amount of the indebtedness, or the proportion of wages assigned, may here be small, but the principle, once established, will equally apply where both are very great. The new opportunity in life and the clear field for future effort which it is the purpose of the Bankruptcy Act to afford the emancipated debtor would be of little value to the wage earner if he were obliged to face the necessity of devoting the whole or a considerable portion of his earnings for an indefinite time in the future to the payment of indebtedness incurred prior to his bankruptcy. 

and that was the law of the land until a craven Congress passed laws to overturn that legal concept.

It is not clear what purpose the prevention of student loan discharge in bankruptcy court achieves.  It certainly does not get the debt paid.  Consider Doug Wallace, Jr., who owes $89,000 in student loans.

Diabetes had rendered him legally blind and unemployed just a few years after graduating from Eastern Kentucky University. He filed for bankruptcy protection and quickly got rid of thousands of dollars of medical and other debt.

but unless the court rules that he is “hopeless” he will carry that burden for the rest of his life.  Exactly how much a creditor will be paid on an $89,000 loan from a person blind and disabled is not known, but the guess here, not very much.

And what about the concept of “due process”, that everyone is allowed their day in court?

One reason so few people try to discharge their debt may be that such cases require an entirely separate legal process from the normal bankruptcy proceeding. In addition, those who may qualify generally lack the money to hire a lawyer or the pluck to file a suit without one.

Oh, and try to get a lawyer and a person may run into this situation.

Nor is the process quick, since the lender or the federal government often appeals when it loses. And even if clients can pay for legal assistance, some lawyers want nothing to do with undue hardship cases. That’s the approach Steven Stanton, a bankruptcy lawyer in Granite City, Ill., settled on after trying to help David Whitener, a visually impaired man who was receiving Social Security disability checks. The judge wasn’t ready to declare him hopeless and gave him a two-year “window of opportunity” to recover from his financial situation, saying he believed that Mr. Whitener had the potential to obtain “meaningful” employment.

Mr. Stanton did not see it that way. “It’s the last one I’ve ever done, because I was just so horrified,” he said. “I didn’t even have the client pay me. In all of the cases in 30 years of bankruptcy work, I came away with about the worst taste in my mouth that I’ve ever had.”

So once again we find that a country that is supposed to be built on protecting and supporting the rights of an individual, a country founded by those who lived in the Age of Enlightenment reverting back to justice as it was applied in the 16th century. 

And with the student loan crisis not yet crested,

In its most recent snapshot of student loan defaults, the Department of Education reported that among the more than 3.6 million borrowers who entered repayment from Oct. 1, 2008, to Sept. 30, 2009, more than 320,000 had fallen behind in their payments by 360 days or more by the end of September 2010. About 10.3 million students and their parents borrowed money under the federal student loan program during the 2010-11 school year.

tens of thousands will face financial ruin and degradation in the future, with no help from the laws of the land.

As for the above mentioned Mr. Wallace, well here is his situation now.

In December 2010, C. Kathryn Preston, a federal bankruptcy judge in the southern district of Ohio, tried to assess Mr. Wallace’s hopelessness by pointing to expert testimony that blindness does not necessarily lead to an inability to ever work again. But she also noted that because he lived in a rural area, he faced significant transportation obstacles. So she set a new court date for Sept. 5, to give him “additional time to adjust to his situation.”

The question for Mr. Wallace then became what sort of adjustments he was supposed to make aside from a court-ordered $20 monthly loan payment. His routine has not changed much. Aside from hernia surgery a few months ago, his days consist of sitting close to the television (he can just make it out through one eye that still has a bit of vision) and regular trips to the gym with his father. His college diploma hangs on the living room wall, and at night he sleeps underneath it on the couch of the rental house he shares with his father and sister.

And as far as we know while he has not stated a position on the issue, it is reasonable to assume that Mr. Romney would address the problem by advising Mr. Wallace to “borrow $10,000 from his parents and start a business”.  Oh, and at $20 bucks a month do the math on his $89,000 debt.

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