Part of any lawyer’s struggle is to explain complex and often abstract concepts of the law in terms understandable to the average person. I freely admit that I often fall short of that goal, but have adopted the use of numerous everyday analogies (some sillier than others) in this attempt. In my effort to explain the positive and beneficial purpose underlying Bankruptcy protection under our Federal laws, as well as in common law before that, I have used one such analogy for years and years. I tell clients that bankruptcy is similar to the release valve on a pressure cooker. It allows the steam to escape so that the pot doesn’t explode.
Now this understanding stems from an unfortunate incident when I was about ten when I attempted to help my mother by closing the valve on her pressure cooker which was making a lot of noise. The United States economy is the pressure cooker in this analogy and it lets off a lot of steam. Some of that steam results in people not being able to pay their debts, often from loss of employment or uncovered health expenses, sometimes from failed business ventures and yes, sometimes from ill-advised financial choices. Whatever the cause, there is a tremendous amount of unpaid debt in our economy and has been for the 28 years I have been practicing law – most of it in Bankruptcy law.
There is the legitimate question as to what happens to that debt if it is unpaid, and the credit industry has spent an obscene amount of money over the past years convincing Congress that this unpaid debt is detrimental to our basic fundamental economic system in that it raises the cost of credit for everyone and if only people were forced to pay back their debt, well then interest rates would decline for everybody. This was the fundamental premise behind the 2005 changes to the Bankruptcy laws ( Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, known as BAPCPA) which were championed for nearly a decade by the credit industry before finding a mostly receptive Congress and President after the 2004 elections.
The problem with the premise (besides the fact that I believe it is essentially false, and the lack of any general decline in interest rates after the changes to the Bankruptcy law seems to confirm this belief) is that it misses the more important and critical question. It is not what happens to the debt – but what happens to the Debtors.
If these individuals with their mounting and unpayable obligations are forced to remain in the system, subject to continuing collection actions, garnishments, levies and the like, or forced to pay a percentage of their unsecured debts in a mandated Chapter 13 repayment plan as required for above median income debtors under BAPCPA, how will they survive and be positive forces in the general economy. The fact is that most often they won’t survive, often be driven into the cash non-taxable underground economy, and without the ability to release the debt, and return unfettered to the economic marketplace, there will be unanticipated consequences to the economy in general – thus, the pressure cooker analogy.
The purpose of the Bankruptcy Code has often been stated to afford the honest, but unfortunate debtor “a fresh start.” By ignoring this basic concept, the drafters of BAPCPA tightened the release valve on the economic pressure cooker and arguably, helped bring on, or at a minimum significantly intensified the 2008 economic collapse. By preventing debtors in the tens of thousands from protecting themselves and their homes through Bankruptcy, either by deterring consideration of Bankruptcy with the new burdens, requirements and related increased costs associated with BAPCPA, or by compelling mandatory payments to unsecured creditors for above median income debtors, more and more homes fell into foreclosure exacerbating an already alarming trend.
It has been widely determined that the 2008 crisis in the housing market, and the rippling effect that had on the investment banks and other markets triggered the economic meltdown in September 2008. In a recent article published in National Bureau of Economic Research, economists Wenli Li of the Federal Reserve Bank of Philadelphia, Michelle J. White of the University of California at San Diego and Ning Zhu of the University of California – Davis, made this exact point. They argue that the “unintended consequences of the reform was to cause mortgage default rates to rise” by at least 200,000 a year – before the financial crisis commenced.
In a perfect world everyone would pay their debts and bankruptcy would be the most rare and unusual of occurrences. But in a perfect world, a factory worker would not be routinely laid off after thirty years because his or her job was shipped to Asia where someone will do the work for $ 2.00 an hour, or a lifetime of savings would be evaporated in a flash due to uncovered medical expenses, or one would not be solicited, enticed or even coerced into sub-prime mortgages on properties with inflated values or encouraged to incur unreal levels of credit card debt at interest rates north of 20%.
The causes of financial distress are many but as noted Professor Elizabeth Warren of Harvard University wrote in her book, The Two Income Trap, Basic Books (A member of the Perseus Books Group), New York, 2003, the common conception that we have become a nation of spendthrifts is largely a myth. The vast majority of bankruptcy debtors are hard working everyday Americans who have fallen into debt as events unique in this modern life have consumed them and their resources. It remains the near uniform desire of debtors to obtain that “fresh start” and return to the economic fold being a productive individual who utilizes goods and services and pays for them from the fruits of their labor.
This is good for debtors and the general economy as a whole. This is the positive underlying benefit of the Bankruptcy Code and when Congress erodes this protection , then everyone suffers.