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Better Days Ahead?

June 19, 2009

The bankruptcy filing rate is at its highest rate since the 2005 changes to the U.S. bankruptcy law and are approaching the level they were at before the law's passage. The 2005 bankruptcy law made it more expensive and more hassle for consumers to use the bankruptcy system, and the return to pre-2005 bankruptcy filing levels shows how U.S. households are hurting. 

There were over 103,000 bankruptcy filings in February 2009. Spread over the 19 business days of February, the filing rate is 5,433 filings per day.  The February 2009 filing rate represents a year-over-year increase of 29.9% as compared to February 2008.  The American middle class is hurting, and it’s showing up in the bankruptcy courts.

Filing bankruptcy is often a misunderstood practice.  Most people believe bankruptcy means having to lose everything in order to pay your debts.  This couldn’t be further from the truth.  Today’s Bankruptcy is a set of federal laws that have the power to override certain state laws, contracts, and other financial arrangements.  How exactly these federal laws affect each situation depends on the specific facts, and there is no uniform answer. 

As for businesses in financial peril, the alternative to a government bailout is letting troubled financial institutions declare bankruptcy. Bankruptcy means that shareholders typically get wiped out and the creditors own the company. 

Bankruptcy does not mean the company disappears; it is just owned by someone new (as has occurred with several airlines). Bankruptcy punishes those who took excessive risks while preserving those aspects of a business that remains profitable.

In contrast, a bailout transfers enormous wealth from taxpayers to those who knowingly engaged in risky subprime lending.  Why isn’t there a government bailout for an individual consumer?  Why are our taxes available to encourage companies to take large, imprudent risks and count on getting bailed out by government. This “moral hazard” generates enormous distortions in an economy's allocation of its financial resources. 

The closest thing to a bailout is the credit card companies’ new willingness to negotiate with consumers.  As they confront unprecedented numbers of troubled customers, credit card companies are increasingly doing something they have historically scorned: settling delinquent accounts for substantially less than the amount owed. 

The practice started in the fall of 2008 as the economy worsened. But in recent months, with unemployment topping 9 percent and more people having trouble paying their bills, experts say this approach has risen drastically.

They say many credit card issuers have revised internal guidelines to give front-line employees the power to cut deals with consumers. The workers do not even have to wait for customers to call and ask for a break. 

The U. S. economy is on the way up, according to several economic “experts”.  Gas prices are expected to hold steady this summer while companies are expected to increase production and eventually create more jobs.

In the words of Warren Buffett “I think it's a terrific country. You never want to go short on America. ….. this country -- our children and our grandchildren are going to live better than we do in this country. No question about it in my mind.”

What do you think?