November 15, 2010
Till Death Does You Part

We have a bankruptcy lawyer in the family, so we knew from the beginning what a horror the banks had purchased from Congress — from most Republicans and a shamefully large number of Democrats — back in 2005. It was called bankruptcy “reform,” which in a sense it was. In the same sense that changing bank robbery from a felony to a misdemeanor would look like “reform” to Bonnie and Clyde.

So how’s that reformey stuff workin’ out fer ya? Let Nobel Prize winner Joseph Stiglitz walk you through it.

In 2005, we passed a bankruptcy reform. It was a reform pushed by the banks. It was designed to allow them to make bad loans to people to who didn’t understand what was going on, and then basically choke them. Squeeze them dry. And we should have called it, “the new indentured servitude law.” Because that’s what it did.

Let me just tell you how bad it is. I don’t think Americans understand how bad it is. It becomes really very difficult for individuals to discharge their debt. The basic principle in the past in America was people should have the right for a fresh start. People make mistakes. Especially when they’re preyed upon. And so you should be able to start afresh again. Get a clean slate. Pay what you can and start again. Now if you do it over and over again that’s a different thing. But at least when there are these lenders preying on you should be able to get a fresh start.

But they [the banks] said, “No, no, you can’t discharge your debt,” or you can’t discharge it very easily. They have a right, now, to take 25% of your before-tax income. Now imagine what that means. Let’s assume that you wound up, as it’s not that hard to do, with a debt equal to 100% of your income. You’re making $40,000, and your debt is $40,000. You have to turn over to the credit card company, to the bank, $10,000 of your before-tax income every year. But, the banks can now charge you 30% interest.

So what does that mean? At the end of the year, you’ve paid the bank $10,000, a quarter of your income. But what you owe the bank has gone from $40,000 to an even larger number because they’re charging you 30%. So you’re debt is larger. So the next year you have to give a quarter of your income again to the bank. And the year after. Until you die.

This is indentured servitude. And we criticize other countries for having indentured servitude of this kind, bonded labor. But in America we instituted this in 2005 with almost no discussion of the consequences. But what it did was encourage the banks to engage in even worse lending practices.



Posted by Jerome Doolittle at November 15, 2010 06:04 PM
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Hey, look on the bright side. Could be even worse. In Spain if you default on your mortgage the bank can foreclose and sell it to someone else, or rent it, etc. But Spanish banks also made borrowers sign personal guarantees which means that debtors will always owe the full amount of money they borrowed until they die, and, in some cases, can go after family members of the debtor. And this debt is not discharged after the banks take back the property/foreclose/whatever...

Posted by: Mike on November 15, 2010 8:50 PM

I have heard that even in the U.S., foreclosure may not discharge the debt owed on the house if the bank can't recover the cost by selling it. And so many houses are underwater that this happens a lot.

In traditional indentured service, wasn't it for a specific, term of years? At least they had some hope of getting out someday. What Stiglitz describes seems more like "debt peonage," which we used to associate with landless Latin American peasants and some "company towns" in the U.S.

Posted by: Tim on November 16, 2010 12:04 PM

Eventually, our "leaders" will bring back debtor's prisons.

Posted by: colonelgirdle on November 16, 2010 7:02 PM
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