Sunday, November 16, 2008

Pumping up the underclass

In many ways, the bankrupt person becomes the equivalent of an ex-convict

Today's NYT talks about bankruptcies, with a real good chart. A little chunk from the article tells us
Downturn Drags More Consumers Into Bankruptcy

...the number of personal bankruptcy filings jumped nearly 8 percent in October from September, after marching steadily upward for the last two years, said Mike Bickford, president of Automated Access to Court Electronic Records, a bankruptcy data and management company.

Filings totaled 108,595, surpassing 100,000 for the first time since a law that made it more difficult — and often twice as expensive — to file for bankruptcy took effect in 2005. That translated to an average of 4,936 bankruptcies filed each business day last month, up nearly 34 percent from October 2007...
This raises a few questions in my mind.

Foremost is the question: what happens to an individual when he files for bankruptcy?

The answer is twofold. On the plus side, whatever debts he had are dealt with and the collectors are off his case.

On the minus side, a host of difficulties are added to his life, and these persist for a good, long time. In many ways, the bankrupt person becomes the equivalent of an ex-convict (although at present, he doesn't lose his vote).

Ordinary living becomes more expensive. The cost of money, of course, rises. Even the modest leeway of a small credit card or a line of credit may become unavailable.

Jobs become harder to get, too. Many background checks look at credit history and exclude bankrupt people.

Health insurance, of course, is out of the question. Considering that 50% or more US bankruptcies occur in the wake of a serious health crisis, the nasty old "pre-existing condition" clause is going to rule that out, even if money isn't a problem.

In short, we are watching from 50,000 to over 100,000 (October data) Americans per month declaring bankruptcy, with a disproportionate number of them being families with children (either married (about 15 per 1000) or single (about 23 per 1000)). The overall bankruptcy rate is something over 7 per thousand.

There are, in fact, more people declaring bankruptcy than going through divorce. Why don't we hear about them? Because, as law professor Elizabeth Warren tells us, "You can't hide divorce, but you can sure hide bankruptcy."

Every year, another million Americans, increasingly with above-median income, enter the bankrupt zone with all the increased expense and risk and shame that carries with it. Will this have an effect on how they raise their kids, where they live, what opportunities they will have? Will it reduce the social cohesion of their families and set them adrift, scrambling still to make ends meet but with new strikes against them? If they couldn't make it before filing for bankruptcy, how will they manage post-filing?

I said at the top, "... the bankrupt person becomes the equivalent of an ex-convict...", but here is the difference. The bankrupt didn't break a law, isn't being punished, and usually has reached this point by trying to pay their bills, feed their kids, and care for their sick family members. "...job loss, medical problems, and family breakups are cited in nearly 90 percent of bankruptcies."

In other words, random events (with the possible exception of divorce) are tipping people, mostly people with children, randomly into a poorer financial domain where their happiness and their utility are deeply, often permanently reduced.

And it's not just younger families heading for the waterfall -- upcoming retirees are in trouble too. In the same issue of the NYT we read "...To date this year, the average employee's 401(k) balance has dropped by 21 to 27 percent..."

Is that any way to build a nation? No. That's how you impoverish a nation. No terrorists could possibly damage Americans as profoundly as it has been damaged by the credit, mortgage, insurance and financial industry assaults on their substance and prospects.

I hope that a new hand on the tiller and a new mind planning the course will be able to reverse these depredations and set in place new safeguards for the majority of Americans. The initial indications are good, but the forces in opposition, forces which are increasingly feeding off the modest dimes and dollars left over from the monolithic big expenses of daily life, are still strong.


[1] Health insurance was no proof against financial disaster either -- 70% of bankrupts, Warren tells us, had health insurance in place at the time of the health crisis that took them down. The safety net wasn't a net -- it was cotton candy, big and impressive and expensive, but without enough substance.

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