Time to Change the Bankruptcy Code
While not strictly related to criminal law, because of the upcoming presidential election and all the talk on the economy, I think discussing bankruptcy law would be important and relevant right now. As I have written before, one cannot separate criminal law from politics and the economy. That is especially true when the economy has been this bad for this long. What I am most concerned about is that despite all the comments, suggestions, and ideas the various parties and candidates have tossed around regarding fixing the economy, I am surprised not a single major political candidate or either of the two parties have mentioned reforming the bankruptcy code. Maybe it's because both Republicans and Democrats are essentially nothing more than neoliberal trade organizations.
I am referring to two sections of the bankruptcy code that have made it nearly impossible for average Americans to get out of overwhelming debt. And unless Americans have the opportunity to get out of debt for the long-term, they will never start buying and consuming. This is particularly important because it is the American consumer that drives the world market, and in fact, 70% of the American gross domestic product is based on consumer spending. In simple terms, that means until average middle-class Americans start spending and buying again, the economy will never improve.
The first section of the bankruptcy code I wish Congress would change is the fact that student loans debt is nondischargeable under all circumstances. Right now, Americans owe more money to student loan companies than they do in credit card debt and home mortgages (see "Benjamin Franklin was wrong: Student Loan Debt and Death are Certain"). But unfortunately, unlike credit card debt and home mortgage debts, a consumer has absolutely no possibility of discharging student loan debt, regardless of how bad that debt may be. For example somebody who spent $40,000 on culinary school and is only making $15 an hour is a bad predicament. Or even worse, I know plenty of lawyers who owe $250,000 or more in student loan debt and are unable to find work as attorneys.
Understandably, when somebody assumes a great deal of student loan debt they do so with the best of intentions. But for too many Americans the best of intentions have not come to fruition. And the best thing we could do now is allow, under certain circumstances, for consumers to discharge student loan debt. Of course, the end result would be interest rates on student loans would go up and fewer people would start taking those loans. But that might not be such a bad thing in the long run considering the great inflation of higher education costs in the past 20 years. It is no coincidence that higher education costs, a term I use very loosely here because it includes things like massage therapy school, culinary school, etc..., have skyrocketed in the past years while interest rates on student loans have approached zero.
Second, I would like to see Congress reverse the horrible Noblemen decision of the United States Supreme Court. In that decision the United States Supreme Court said somebody could not cram down their primary residence in chapter 13 bankruptcy. A cram down means somebody reduces their mortgage on a home to the market value of the house. For example, let's say somebody has a house that is only worth $100,000 but they owe $200,000 on that house; if they could cram down they would reduce the mortgage debt to only $100,000 or market value. But the Supreme Court does not allow homeowners to do that on their own personal residence. They can do it on an investment property, but even then, they would have to pay the principal during the course of a Chapter 13 plan, which can last no longer than 60 months.
I would like to see Congress change the law so that a homeowner could cram down her home mortgage on their personal residence not only under Chapter 13 bankruptcy, but also in a Chapter 7 liquidation bankruptcy. And I would also like to see the original notes term remain in place. In other words, instead of being forced to pay off the principal in only five years or less, I would like to see a homeowner pay off the loan for its original term.
I know that many people would claim such a change would reduce homeownership in America. But I don't think that's necessarily the case because Canada has a higher rate of homeownership than America even though their mortgage market and banks are much more tightly regulated than ours. And even if that was the case, as people in Western Europe and developed Asian countries can attest to, owning a house is a bit overrated. Too many people put their entire investment portfolio into one asset, their house, and that's not always such a good idea.
To make sure consumers don't abuse the system and that both the home mortgage and student loan credit system remain viable Congress could implement two simple safeguards. One is including a means test to be able to discharge student loan debt. In other words, we need to prevent high income earners like doctors and some lawyers from discharging student loans. That would mean if somebody makes too much money they could not discharge all of their student loan debt. The amount they could discharge would be based on a sliding income scale. Second, to make sure homeowners are not abusing the cram down provision of personal residences, the cram down would be granted only by a judge's order. That way, a cram down would only occur when a bankruptcy court judge thought it was a good idea. Those two simple safeguards would maximize consumer protection, while at the same time ensure the viability of the credit markets.
The basic point here is that until consumers have the confidence to spend money economy will never ever improve. And the simplest and most efficient way we could do that is with a simple tweak of the bankruptcy code.