An article by law professor Linda Coco, “Debtor’s Prison in the Neoliberal State: ‘Debtfare’ and the Cultural Logics of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005,” (hat tip Michael Hudson) is a an informative, if disheartening, overview of the significance of the bankruptcy law reforms implemented in 2005.
One might cynically observe that after 25 years of making it easier for consumers to borrow and encouraging them to load up, banks realized that they might have too much of a good thing and realized they needed to improve their ability to extract payments from the credit junkies they had created. But the passage of the 2005 law had been a prize the financial services industry had chased for over a decade. Credit card company MBNA (later bought by Bank of America) was one of the most aggressive backers of the bill. MBNA had penciled out that the new law would increase its profits $85 million a year, by extracting an extra $100 a month on average from consumers in bankruptcy.
As Coco points out, bankruptcy expert Elizabeth Warren said the new law would destroy the consumer bankruptcy system. It greatly restricted access to Chapter 7 bankruptcies (which apply all consumer funds, ex retirement accounts, to existing debts and wipes out the balance) and also made certain types of debt non-dischargeable, most important, student loans (note the change applied to private student loans). It also created hurdles to filing bankruptcy by making the process more costly: higher court charges and attorney fees, as well as requiring useless but borrower-paid credit counseling. As Jialan Wang noted in VoxEU, these changes increased the cost of filing for bankruptcy by 60%. She and her co-authors of a NBER paper found that this had the intended effect of inhibiting families from filing for bankruptcy, and getting an extra chunk of cash (they looked at tax rebates) led to an uptick in bankruptcy filings. She noted:
Liquidity-constrained households are likely to have the most to gain from bankruptcy, yet they are the ones screened out by high fees. Moreover, the increased costs do little to mitigate strategic behaviour such as OJ Simpson’s notorious purchase of an expensive home in Florida to exploit that state’s generous bankruptcy provisions.
This is only one piece of a bigger picture, and Coco sees the overall impact as a major shift between creditor and borrower rights, the creation of “debtfare”:
Under the guise of preventing abuse, BAPCPA imposes a litany of confusing procedures and requirements on consumer debtors and their counsel; therefore it contravenes the purpose of the 1978 Code which sought to provide debtors with a clean slate and a fresh start. BAPCPA destroys a “safety valve [for society] to deal with financial consequences of misfortunes,” and it undermines “one of the few areas of consumer law that works reasonably well to meet consumer needs.” BAPCPA successfully frustrates the operation of the 1978 Code, because it manifests fundamental changes in the class and power structures of the U.S. economy….
Free-market policy and the practice of deregulation facilitated enormous debt loads which resulting in a socio-economic experience of “debtfare”52 for the average American.53 Debtfare is interlocking payment obligations that last for years, such as mortgage payments, credit card payments, car loan payments, and other monthly debt obligations. Debtfare is a socially constructed trap. Political scientists Genevieve LeBaron and Adrienne Roberts explain debtfare as structures “that lock people’s current and future life choices and possibilities into unequal and unfree capitalist relations and limit their social and physical mobility within these relations.”54 BAPCPA supports the structures of debtfare by limiting the possibility of a discharge of debts and by regulating the manner, form and amount of debt repaid. By forcing repayment to lenders both inside and outside the bankruptcy system, BAPCPA mandates a lifestyle of austerity for middle class debtors. Thus, the insidious effect of BAPCPA is the creation of a large group of Americans servicing burdensome debts without any relief.
Consider how this works in practice. In the word before 2005, lenders had more incentive to restructure the debts of overextended individuals. Now the power has shifted decisively in their favor. While the original consumer bankruptcy law assumed the borrower was a good faith actor who had fallen on hard times, the 2005 revisions presume the stressed borrower is operating in bad faith, legitimating more punitive standards. It’s more costly for the borrowers in the most duress to file for bankruptcy. And the ones with higher incomes go into a 60 month straightjacket if they can work out a repayment plan. Those are based on budgetary norms from another planet. I recall learning in the mid 2000s (I had several tech friend who either had filed for bankruptcy or considered it) that the food expenditures allowed for a single person in Manhattan was $200 a month. The result is that many borrowers continue to struggle to pay make payments outside of bankruptcy and some file for bankruptcy (and not all make it through the more draconian repayment requirements).
Coco describes the overall impact:
BAPCPA’s impact on the middle class is effectuated in many areas. First, the Act seeks to re-moralize consumer debt relations and reignite and re-enforce notions of social stigma denying debtors access to a fresh start. Second, the Act creates increased fiscal and procedural barriers to entry for the consumer in financial distress. Third, once in the bankruptcy system, trap doors and pitfalls work to ambush the unwary or the unrepresented resulting in needy debtors falling out of the bankruptcy system and losing the protection of the automatic stay. Fourth, after the debtor survives the initial filing requirements, scrutiny of the debtor’s income and expenses to determine the disposable income and the kind of relief, if any, available to the debtor. Finally, BAPCPA reduces the “fresh start” benefits of bankruptcy by requiring repayment plans and reaffirmation agreements, making more debts non-dischageble, limiting dischargeability of debts, and limiting dollar amounts of exempt property. In effect, BAPCPA’s mandated austerity reduces the overall benefits gained from the bankruptcy process.
Borrowers can also simply stop paying lenders and wait out the statute of limitations in their state. But as we’ve observed in other posts, debt collectors are becoming far more aggressive, including finding ways to get non-payers jailed (not for the debt per se, but for failing to show up for a hearing, with the debt collectors often found not to have given proper notice).
Most members of what remains of the middle class view debt slavery as someone else’s problem, the result of greed or at best bad planning. But Elizabeth Warren’s research found that most bankruptcies were the result of job losses, medical emergencies, and divorce. It’s easy to be moralistic and not recognize that our hold on financial security is largely illusory. But the campaign to stigmatize borrowers in trouble has been effective, and it will take a concerted effort to rally citizens against the march of debt peonage.