Megan McArdle has a paen
to the US bankruptcy system today:
The current system works pretty well. Recognizing that we don’t have any
very good mechanism for picking out the profligate from the unlucky (most
bankruptcies involve a little from Column A, a little from Column B), we let
people get rid of their debts regardless of how they were incurred. (Except
for special exceptions, most of them involving the government, such as taxes
and student loans). Then, recognizing that it is not a good idea to make it
painless to borrow money you don’t repay, we make life a little bit miserable
for people who declare bankruptcy–though not very miserable; the chief result
is that it’s somewhat harder to get credit. It’s hard to overstate how well
this works. America’s bankruptcy system is the most generous to the debtor,
the least interested in assigning fault, in the entire world. There’s strong
evidence that this is one of the reasons behind our high rates of entrepreneurship;
it makes it easier to take economic risks.
And on the opposite side of the ideological spectrum, Andrew Leonard ends up
agreeing that bankruptcy
doesn’t seem to reduce Americans’ access to credit very much:
According to data compiled and analyzed by Katherine Porter, a law professor
at the University of Iowa, in the superb "Bankrupt
Profits: The Credit Industry’s Business Model for Post-bankruptcy Lending":
…Creditors repeatedly solicit debtors to borrow after bankruptcy. Families
receive dozens of offers for new credit in each month immediately after
their bankruptcy discharge. Some offers specifically target these families
based on their recent financial problems, using bankruptcy as an advertising
lure. Other credit offers emanate from the very same lenders that the families
could not repay before bankruptcy. While not every lender will accept a
"profligate" bankrupt as a customer, debtors report being overwhelmed
after bankruptcy with a variety of credit solicitations from many sources.
Lenders offer families most types of secured and unsecured loans.
It turns out, according to Porter, that a year post-bankruptcy, bankrupts are
receiving more than 14 credit offers per month – more than double the
six offers per month that the average American receives.
Clearly, bankruptcy is not particularly harmful to creditors. Bankrupts are
the kind of people who tend to run large revolving balances at high rates of
interest, so that even if they don’t pay back every penny, the lender can still
end up making a tidy profit. In other words, even if Megan is right that "America’s
bankruptcy system is the most generous to the debtor," the creditors hardly
seem to be hurting either.
Maybe this is the reason that the arguments about the human consequences of
the subprime debacle tend to concentrate on foreclosure, rather than bankruptcy.
Foreclosure is serious; bankruptcy seems like just another dance step in a long
and complex tango between debtors and creditors.