TPM Cafe: Opinion

As more people begin to look at the squeeze on middle class families, the impending changes in the bankruptcy laws look worse and worse. Both Republican Senator Vetter and Democratic Senator Feingold have proposed exemptions and modifications for Katrina victims. The details differ, but the central message is the same: bankruptcy is an essential middle class safety net, and the new amendments tear holes in that net.

Now a second movement is emerging: As Washington reflects on the impact of bankruptcy amendments that were written by credit industry lobbyists, states are recognizing that they have some power to help their citizens. Jason just noted that in a very quiet move, New York has just increased its homestead exemption from a laughable $10,000 to a more plausible $50,000 (and perhaps $100,000 for couples).  The consequence is that a family can declare bankruptcy in New York and have a better chance of saving their home — even after the federal laws do their best to make bankruptcy harder.

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Senator Feingold and 15 cosponsors have introduced legislation similar to that introduced yesterday in the House. The proposal is straightforward: delay the bankruptcy for hurricane victims, and make permanent amendments to the bankruptcy laws to give more leeway for courts to deal with the victims of natural disasters. A little help for people who will be struggling hard to get back on their feet.

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On October 17, about the time the lights are scheduled to go back on in New Orleans, the new bankruptcy law is supposed to go into effect. Whatever else anyone can say about this bill, everyone agrees on one fact: the law makes it harder for anyone to go bankrupt. Sure, the credit industry says the means test will snag only people with above-median incomes, but literally hundreds of provisions in the bill apply to every family, not just those with higher incomes. Filing fees will increase, paperwork will increase, credit counseling will become mandatory, consumer education will be required, the amounts to be paid to confirm a plan in Chapter 13 will go up — and on and on.

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Common sense says that bankruptcy filings rise when families are wiped out after a hurricane. And the data back it up. Peter Gosselin at the L.A. Times gives the first report of a data analysis put together by Professor Robert Lawless at University of Nevada Las Vegas. I’ll write more on this after my class this morning, but take a preliminary look for now.

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Congress is calling an emergency session for next Tuesday to do something about the aftermath of Katrina. Representatives Conyers, Jackson Lee and Nadler have an idea: let’s take another look at the bankruptcy legislation. It seems that in the haste to adopt the credit industry version of the bill, some amendments to cut a little break for the victims of natural disasters were defeated. Now everyone is scurrying to re-read the those amendments to see just how hard this new bankruptcy law will fall on families and small businesses thrown into financial chaos in the wake of Katrina.

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Newsweek counts eight ambassadorships handed out to $100,000-plus donors since January. Add in Bush’s appointee from Friday, billionaire Roland Arnall, and that brings us to a Big Donor Appointment Rate of one every 24 days. Billionaires, get your bids in now.

Roland Arnall paid in at least $600,000 to President Bush’s causes to earn him an ambassadorship to the Netherlands, but where did he get all that money? Should he have the Ambassadorship — or should it go to the people his company is accused of cheating?

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Todd Zywicki (credit industry head cheerleader, Volokh Conspirator and maybe the only bankruptcy professor in America who actually supported the recent Congressional mangling) has a lot of work ahead of him. Families will soon discover what life is like when the door to the bankruptcy court, the financial refuge of last resort for the past 107 years, is too narrow to permit many of them any relief. So what’s the best way to head off a Congressional stampede to bring back the century-old system? Blame families.

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Todd Zywicki (TZ), the long-time cheerleader for the credit industry on the bankruptcy bill, says on Volokh Conspiracy that bankruptcy rates have gone up in anticipation of the bankruptcy bill’s becoming law on October 17. (He says filings in April increased by 70% from January, but the same data source shows that filings were only up 16% from April ‘04.) This increase, he claims, just proves what he said all along — that the debtors could pay, but they are strategic and take advantage of those poor credit card companies.

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When the Wall Street Journal compared the tech bubble with the housing bubble, they offered one comparison that was a stunner. It had that same home-as-piggy-bank notion that appeared in Money magazine. Comparing owning stock with owning a home, the WSJ concludes: “Families are also better able to tap into the value of their homes to finance the purchase of new homes and other items.”

You can sell stock in a recognized market one share at a time, but if you need cash you can’t sell off a bedroom or chop ten feet off the back yard. A second mortgage doesn’t “tap” the value of a home. It is just plain old borrowing.

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Money magazine’s July issue has an article on the 50 smartest things you can do with your money. Number One? “Tap your home equity.” This is my nomination for the Worst Advice of the Year. But since Alan Greenspan has repeatedly applauded Americans for tapping their home equity, it has become heresy to suggest anything else.

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