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Republicans Cause Bankruptcy

Mok notes that red states have far higher bankruptcy rates than do blue ones and adduces this as evidence that the GOP is once again screwing its constituents over. That's true, but I think it misses the larger point. The red states have higher bankruptcy rates because they elect Republicans who pass creditor-friendly laws at the state level. The more creditor-friendly the laws become, the more incentive lenders have to offer loans to bad credit risks. The more loans made to bad credit risks, the higher the bankruptcy rate gets.

Say the bankruptcy rules were super lax. You just say, "I can't pay!" and you don't need to pay. No muss, no fuss. That wouldn't produce a situation in which everyone declares bankruptcy, it would create a situation in which nobody declares bankruptcy because nobody could get a loan. Contrary to the credit card industry, high bankruptcy rates aren't evidence that the laws are too lax. Genuine evidence that bankruptcy laws are too debtor-friendly would be evidence that it's hard to get a loan, which isn't the case in the USA.

March 11, 2005 | Permalink

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» Bankruptcies highest where Dems control legislature from New World Man - learning to match the beat
Well, sort of. In journalism there's an old saw about the story that's too good to verify. Matthew Yglesias has a theory like that. The red states have higher bankruptcy rates because they elect Republicans who pass creditor-friendly laws at the state ... [Read More]

Tracked on Mar 11, 2005 8:13:31 PM

Comments

Say the bankruptcy rules were super lax. You just say, "I can't pay!" and you don't need to pay. No muss, no fuss. That wouldn't produce a situation in which everyone declares bankruptcy, it would create a situation in which nobody declares bankruptcy because nobody could get a loan.

That doesn't quite capture the whole picture, though. Say the opposite were true: there was no such thing as bankruptcy, or it was only possible under the most unusual of circumstances. That would also create a situation in which nobody declares bankruptcy.

So having states with higher levels of bankruptcy is neither proof that the laws are too creditor-friendly or too creditee-friendly. There is probably some sort of continuum to look at here, and I'm sure that local imperfect credit economies play a role, but I'm not quite smart enough to work it all out.

Posted by: right | Mar 11, 2005 1:10:49 PM

Good points, but keep in mind that one major consequence of bankruptcy - the long-term damage it does to one's credit score - is the same anywhere in the country.

Posted by: Peter | Mar 11, 2005 1:11:54 PM

It seems to me that once you are an adult and you sign an agreement to borrow funds or make purchases on credit, with the promise that you will repay those funds or reimburse the creditors who have made the outlays allowing you to make those purchases; the onus is on you - not the creditor who extends you the credit.

But I guess that's only if you believe that adults are responsible for the decisions that they make (as opposed to mindless sheep who can be convinced to join the evil military, vote for generation after generation against their economic interests (at least in Tom Frank's Kansas), forced against their own will (by society, that is) to commit crimes, be tricked into electing Republicans blah blah blah) - not exactly a major plank of the liberal platform.

You're probably right; the real problem is that too many of the wrong people are being offered credit (Some people are more wronger than others) not that individuals are willingly compiling more debt than they can pay back.

Posted by: MJ | Mar 11, 2005 1:18:26 PM

Actually it is the urban-based Democrats in those states who file most of the bankruptcies.

Posted by: Deuce | Mar 11, 2005 1:18:53 PM

The red states have higher bankruptcy rates because they elect Republicans who pass creditor-friendly laws at the state level.

I wonder if Matthew had an example of a "creditor-friendly law" at the state level that affects the rate of bankruptcy in that state. Or if he is just making this up.

Posted by: Al | Mar 11, 2005 1:25:33 PM

The Dear Leader has spoken Words Of Wisdom:

"I applaud the strong bipartisan vote in the Senate to curb abuses of the bankruptcy system," Bush said in a statement. "Reforming the system with this common sense approach, more Americans -- especially lower-income Americans -- will have greater access to credit."

Posted by: MonarchyNow! | Mar 11, 2005 1:34:11 PM

I wonder if Matthew had an example of a "creditor-friendly law" at the state level that affects the rate of bankruptcy in that state. Or if he is just making this up.

I wonder if certain commentors will ever believe their lyin eyes when faced with counter-propaganda from the right wing filter?

Posted by: postit | Mar 11, 2005 1:40:55 PM

Actually it is the urban-based Democrats in those states who file most of the bankruptcies

i'm sure you have the cites to back this up.

Posted by: cleek | Mar 11, 2005 1:42:19 PM

Al,

There was an article on this in yesterday's WSJ.

Posted by: Brock | Mar 11, 2005 1:42:50 PM

Most likely if you looked at the data you would find that red states have the most bankruptcies because they have the weakest incomes.

Posted by: spencer | Mar 11, 2005 1:44:06 PM

Postit nails it! Al committed the unpardonable sin of asking for evidence to back up an empirical assertion - when any right-minded individual knows there's no room for facts here: we're talking about those red state people!

Posted by: MJ | Mar 11, 2005 1:45:57 PM

In Georgia, bankruptcies are high and spread around the state (sorry, Deuce). We actually passed some decent credit laws here a few years ago, but the feds said states could not have more restrictive rules than they in banking (so much for states rights). A big component down here is the practice in many parts of the economy to pay people as independant contractors rather than employees. The worker is then responsible for both halves of FICA and it is paid quarterly rather than withheld. Bankruptcy does not wipe out tax debt but does stop some things like taking your bank account. Everyone from construction workers to software developers to real estate agents get caught in this bind along with the double hit of having to pay for their own medical care. Many independant contractors are making back tax payments along with penalties and interest. They stay one mis-step from bankruptcy.

Posted by: ted | Mar 11, 2005 1:57:40 PM

Thanks, Brock. I'll take a look for it.

Posted by: Al | Mar 11, 2005 2:01:07 PM

Red state Utah is number one on the bankruptcies per capita list. A big reason is that 10% tithe off the top of your salary. It must be done to keep your temple status down at the LDS Church.

That and a average family income of 30k per year.
Most of those I-15 SUV's are on the credit card.

And they keep electing Republicans...

Posted by: Slothrop | Mar 11, 2005 2:05:01 PM

The red states have higher bankruptcy rates because they elect Republicans who pass creditor-friendly laws at the state level.

I am loath to be on Al's side of any argument but unless I am missing something I think this is clearly wrong.

On the pre-filing-for-bankruptcy side of the equation, the law of what your creditors can do to you is largely set by (i) the law of the creditor's jurisdiction (notice how your credit card bills get sent to Delaware or South Dakota? that's not an accident), (ii) federal banking and consumer protection law and regulations, and (iii) the Uniform Commercial Code, which is virtually word-for-word identical in every state that's adopted it (basically all of them). Where you live determines in part what your creditors can do to you pre-bankruptcy, but not a huge part. I would be surprised if the laws of red and blue states were really all that different in that respect.

On the post-filing-for-bankruptcy side of the equation, the important thing is that federal law gives states a lot of leeway to determine what is exempt from bankruptcy. In some states -- I'm specifically thinking of you, Florida, and more generally I think this is a red state thing -- you can buy a fabulously expensive home and your creditors can't touch it once you file for bankruptcy. (O.J. did this after he lost the civil case.) That does suggest a red-state/blue-state dynamic but it's not a "red states are creditor-friendly" thing; in fact, just the opposite.

Posted by: alkali | Mar 11, 2005 2:21:34 PM

Al (and anyone else interested),

The title of the 3/10 WSJ article was "Creditor-Friendly South Offers Preview of Bankruptcy Changes."

Posted by: Brock | Mar 11, 2005 2:23:09 PM

Al, just to help you out, it was an article on yesterday's front page entitled "Creditor-Friendly South Offers
Preview of Bankruptcy Changes."

Here's a couple of key grafs:

That system continues to exist today and has spread from Alabama to Tennessee and other parts of the South. "People in the South essentially use the bankruptcy court as a publicly funded consumer-credit counseling service," say Samuel Gerdano, executive director of the American Bankruptcy Institute in Washington, whose members include bankruptcy judges, as well as accountants and lawyers who represent both creditors and debtors.

Some economists and consumer advocates are concerned that Southern states have relatively higher rates of bankruptcy filings and that this could stem from the creditor-friendly system.

According to the American Bankruptcy Institute, one of every 72.8 households in the U.S. filed for bankruptcy protection during the 12-month period that ended in March 2004, but the rates varied sharply by region. Tennessee had the second-highest rate, with one household in every 38.7 filing for bankruptcy, and Georgia had one in every 42.4 households filing. Utah, with one in 36.5 households, has the highest bankruptcy rate of any state.

In contrast, filings are low in the Northeast and parts of the West and Midwest. One in 156.2 households filed for bankruptcy in Vermont, one in 144.3 in Massachusetts. Alaska had the lowest bankruptcy rate, at one filing for every 171.2 households.

There are several reasons for the large regional differences in bankruptcies. Economists say that a major reason is that incomes are generally lower and more volatile in the Southeast than in other parts of the country. Less income leaves families with smaller financial cushions to fall back on when problems arise. But income differences can't explain all of the gap.

Some bankruptcy economists theorize that there's an inverse relationship between strong consumer-protection laws and bankruptcy filings. In states where it's harder for lenders to get judgments against consumers, bankruptcies might be lower because lenders are pickier about who gets credit. In states that make it easy for creditors to repossess property, bankruptcies might be higher because more consumers are extended credit.

That, the economists say, might explain why many Southern states -- known for the creditor-friendly laws -- have higher bankruptcy rates. Alabama, Georgia and Tennessee provide a wide range of prejudgments, creditor remedies, attachments, garnishments and wage assignments with limited or no litigation, Mr. Gerdano says.

Some economists argue that because creditors in many Southern states tend to have more power to repossess goods, debtors in the region tend to file for bankruptcy quickly as an end run around the repo man. Once a debtor has filed for bankruptcy he usually is protected against repossession.

"In those states, bankruptcy filings are a way to stave off creditors," says Mr. Gerdano. In contrast, he says, in states with strong consumer-protection laws, a company has to go to court and get a judgment before it can take property.

Posted by: howard | Mar 11, 2005 2:26:29 PM

One example of a law that affects the bankruptcy rate is one from a blue state, not a red state. New York has a miserly homestead exemption, only $10,000, which means if you have any significant equity in your home, there’s a good chance you’re going to lose it. Result: homeowners in New York don’t file for bankruptcy unless they really must. Texas and Florida have huge exemptions, available to people who don’t even live in the state. Of course, this helps Texans and Floridians themselves by allowing them to keep their homes, as well as helping the real estate industry in those states. New York could have done this and protected its’ residents, but has chosen not to. Kansas protects your house, up to an acre around it. And 160 acres of your farm. Mississippi protects up to $75,000 of equity. I think you’ll find that red states may be more protective of debtors than blue states. Connecticut also protects $75,000, but 75k in New Canann won’t get you far. Why is this so?

The answer is simple: banks. New York is a creditor state. Pennsylvania, New Jersey, Connecticut, Massachusetts? Creditors. Historically speaking, the banking industry is centered around New York, along with Boston and Philly. So I think that Matt is all wet on this one. In important ways, Northeastern states are less debtor friendly than populist states.

I think I have to finish Thomas Frank’s book. The GOP is a perversity: it claims to represent the little guy against elitist East-coasters, while systematically screwing them over, to the benefit of eastern liberals like myself.

Posted by: Phil | Mar 11, 2005 2:40:08 PM

Thats all beside the point. The main reason, according to the sponsers of the bill and the credit companies, is to cut down on the abusers of the system. Yet they estimate about 5% of these are abusers. Hence, there is no need to make it impossible for everyone, especially the ones that need it. Instead, they ought to spend more time prosecuting the true 5% who do abuse to make abuse less attractive.

Posted by: Adrock | Mar 11, 2005 2:41:10 PM

Ted, actually I have nothing whatsoever to back up that previous assertion. It was a joke. Thanks for the info on Georgia. Let me point out however that bankruptcy will discharge some old income tax debt or will allow its repayment without interest and penalty accruing. Not a bad deal, and one that won't change with this new bill signed into law.

Posted by: Deuce | Mar 11, 2005 2:44:52 PM

Thanks, howard. My office's Thursday WSJ has run off somewhere. Key sentences:

Economists say that a major reason is that incomes are generally lower and more volatile in the Southeast than in other parts of the country.

and

Some bankruptcy economists theorize that there's an inverse relationship between strong consumer-protection laws and bankruptcy filings. (emphasis added)

So Matthew's "larger point" is just an economic theory. Not nearly the fact that Matthew makes it out to be. Sounds possible, I suppose. But how strong is the evidence?

OTOH, that the lower mean incomes and higher volatility of incomes that lead to greater bankrupcies (as we see in the south) seems pretty solid.

(PS - howard - you see the Chelsea/Barca match the other day? Fun.)

Posted by: Al | Mar 11, 2005 3:02:52 PM

chelsea-barcelona was an awesome match, and ronaldinho's second goal was awe-inspiring in particular - i still can't figure out how he found the opening.

as for "theorize," every single economics principle in the known universe is "theorized." you have to work a little harder than that, ol' buddy! As the article notes, you can't explain the bankruptcy differentials by income differential alone - that's empirical evidence. You're welcome to propound an alternative theory, but it has to be at least as credible as this one....

PS. i'd give you a link to the article, but when you search the Journal for previous articles, you don't get URLs, just the article itself....

Posted by: howard | Mar 11, 2005 3:11:26 PM

Air America Phoenix' Independent/Libertarian, Charles Goyette, pointed out exactly the same thing this morning. The fix he said is not more regulation, but just letting the market work and that will ensure creditors give the proper amount of credit.

Posted by: jerry | Mar 11, 2005 3:20:17 PM

Well, howard, there are plenty of economic theories, but they are more convincing if they have actual evidence supporting them. Has anyone done a study of this?

I'll accept that you can't explain the bankruptcy differentials by income differential alone, and I don't have any alternate theories that would explain the gap. That, of course, is not evidence that the "creditor friendly state law" theory is correct.

My point was that Matthew's statement "The red states have higher bankruptcy rates because they elect Republicans who pass creditor-friendly laws at the state level" cried out for a link - which was not supplied, making it (to me) suspicious. So I see there is a theory that this is correct, but am not aware of evidence supporting the theory. The post remains a bit suspicious.

Posted by: Al | Mar 11, 2005 3:53:58 PM

As Bill Clinton said so eloquently on his weblog, Bush is preparing the world for a default on America's huge government debt. Argentina defaulted, so why not us?

Posted by: Marc Cantor | Mar 11, 2005 4:08:52 PM

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