I noted a small blip in a story by Rick Lyman at the New York Times about the newly released census data.  It seems that another 1.3 million people lost health insurance between 2004 and 2005.  That brings the 2005 total to 46.6 million Americans without health insurance.

I figure that pretty much all the poorest Americans already had no health insurance.  The latest 1.6 million most likely represent a continuing expansion of the uninsured middle class.

With "medical bankruptcy" having entered the lexicon in the past year, this new stat makes me pause to think about risk.  I just did an interview about this with Karen Springen at Newsweek.  On the research side, papers with Melissa Jacoby and Debb Thorne (both on this blog) and David Himmelstein and Steffie Woolhandler (both Harvard Medical School) show that health insurance is no guarantee that someone won’t end up in financial collapse following a serious medical problem.  But insurance makes a difference on where the tipping point occurs.  For the uninsured, the $11,000 hospital bill following a slightly dodgy appendectomy spells financial doom.  For the insured, it may take a more serious round of surgery and rehab after a bad fall to hit that same $11,000 in uninured costs out of a total bill of $50,000.  Of course, either group can be beaten up financially by time lost from work.  This is all just a question of vulnerability by degrees.

With the changes in the bankruptcy law making many people feel that the option has become too expensive or too difficult to accomplish, what will happen to the 1.6 million newly uninsured?   Many won’t get sick, and others who get sick won’t seek medical care.  But for some, modest medical problem will put them in a financial hole from which they can never recover.  If they don’t go to the bankruptcy courts, what will happen to them? 

Any comic strip that has the term "chapter 22" in it is alright by me. Today (August 29), Blondie becomes a critical vendor. For the uninitiated, a "critical vendor" is a supplier whose goodwill is so necessary to the debtor’s business that the court will authorize full payment of prebankruptcy debts, circumventing the normal distribution scheme in bankruptcy court. A special thanks to the not-so-little bird that brought this to my attention.

President Bush announced this morning that he is recalling 2,500 Marines to active duty, and more recalls may be on the way in the next few months.  "Recall" in this context means that men and women who have completed the agreed term of their active service and who are now civilians with jobs, families, mortgages, credit card bills, car loans and, as Zorba said, the "whole catastrophe" will pick up stakes and head back to Iraq. 

So what do their families do?  What if they made financial commitments based on new jobs that pay better?  What if their families need to move to wait out the deployment?  What if they can’t make it on a marine’s pay? 

Katie Porter just posted about the recently released report from the Department of Defense that tells what the market solution has been:  some of these families will turn to the payday lenders that surround the military bases.  And some of these families will seal their financial doom when they do so.  The DoD has weighed in, asking Congress to rein in the payday lenders, explaining that the practices of payday lenders hurt our troops. 

I note the deployment here to make a point:  it’s all connected.  There are no credit issues in a vacuum.  Lenders ring military bases because military families are vulnerable.  As we push our troops harder to fight a war in Iraq, their families become more vulnerable.  And as their vulnerability increases, the payday lenders and other predators close in tighter.

I cannot think of an issue that affects American families that does not also connect to a credit issue.  And I cannot think of a credit issue that does not affect an American family.  Iraq and payday lending are just one more reminder.

Those in attendance at Charles Tabb’s excellent symposium on BAPCPA this past spring in Chicago will recall a discussion we had on this topic prompted by my article, which is also being published in the Illinois Law Review, on this very theme —  "Reckless Lending: Time for a New Lender Liability?"

Here is a link to the symposium web page, although I do not know whether they have the articles available for downloading yet:  Illinois Law Review.  My article explores the various policy arugments in favor of — and some non-trivial ones against — creditor liability in this area.  It’s an idea which traces a pedigree back to the inimitable Vern Countryman.  Those who can’t wait to read the article may be interested to know at the outset that because the idea has so many complicated ramifications, I also propose a "gentler" version than outright tort liability.  That is of an affirmative defense to a collection proceeding, but no independent cause of action for consequential damages.

The title to this post is neither spam nor a joke. A new service, called Prosper Marketplace, gives individual lenders "the privilege to bid" on loaning up to $25,000 to individual borrowers. Building on the success of E-bay, Lending Tree, and, well frankly, Match.com. Prosper allows borrowers to post a picture of themselves and a story of why they want or need money. Borrowers also submit credit information and receive a rating from AA to HR ("high risk".) Borrowers can join "groups" to add to their credibility, such as "Veterans Helping Veterans," "Marquette University Alumni and Friends," and "Teacherloans.com." Prosper charges a modest fee for each loan completed. The Wall Street Journal and Salon have both reported in detail on Prosper.

While it is too early to know if Prosper will live up to its name (the first loans are just hitting the 120 day period after which they can be labeled in default), I think the early interest in the site reflects frustration with the lending industry. Traditional banks are viewed as too slow and stodgy. Credit cards are viewed as overpriced and too aggressive in collection. Prosper’s model is to literally "bank" on people’s interest in each other. The bidding process combats lender greed, and the vetting process forces borrowers to answer very personal questions about why they need the money. Prosper provides a public glimpse at the variety of reasons that people borrow small sums of money, including to fund a wedding, to make up a gap period before college financial aid arrives, and to pay the closing costs on a house purchase. These types of transactions are usually hidden from view because payday lending and credit card data are proprietary and confidential. The willingness of Prosper’s borrowers to share their financial lives is perhaps a reflection of society’s comfort with borrowing money as a routine part of American consumer behavior.

Congress is putting the final touches on a pension reform bill as the House-Senate Conference is ironing its final differences.  This bill deals with some relatively arcane but nontheless vital issues,
especially for workers with traditional defined-benefit pension plans.

When companies make pension promises to workers, they are in effect binding themeselves to pay future debts.  How do we know these promises aren’t pie in the sky that the companies will never be able to pay?  Because the government requires companies to "fund" these future pension obligations.  It does so by making a bunch of actuarial calculations on what these future promises will cost, and how many assets the companies will need to cover them.  When companies don’t have enough assets to cover these liabilities, as set forth in the pension regulators’ formula, their pension plans are deemed "underfunded."

In the big pension reform of the 1980s, Congress gave companies with underfunded pension plans 30 years to make catch-up payments, and even then they only had to reach a target of assets sufficient to cover 90% of pension liabilities.

The new bill clamps down (at least somewhat).  For example, it would require fully funding underfunded pensions within 7 years (the airlines have squalked they’ll fold with that requirement, so will probably get a carve-out exception).  And by "fully funded," they mean it this time: 100% coverage, not just 90%.

Good news for future pensioners (i.e., current workers, i.e., most of us), right?  Not necessarily.  One of the clear results of Congress’s sensible clamp down on underfunded pensions is that other companies will do just what the airlines are doing in bankruptcy: discontinue defined-benefit pension plans for their workers.  When we account honestly for how expensive these plans really are to American businesses, the unfortunate price for our commendable transparency is the unhappy realization that many companies simply can’t afford the promises they’re making (or, more precisely, the promises that were made some time ago).  Whether they were dishonest in making those promises back then, grossly optimistic, or just incompetent is, sadly, now water under the bridge.  Whatever the reason, as the true costs of defined-benfit pension plans set in — and are drawn into the light by the new pension bill which makes them harder to hide — companies will simply get out of defined-benefit plans altogether and move to defined-contribution plans (the fancy name for 401(k)s).  We’ve seen this happening already with historical data gathered by the Survey of Consumer Finance.  So instead of shouldering the huge risk of uncertain future health care costs and longevity increases of a baby-boom population, businesses will pass that risk along to their workers.  If the workers make poor investment decisions and lose all their future pension money, they’ll always have the final, ultimate defined-benefit plan of all: social security.  At least for now.  (That’s an underfunded pension plan that Congress has
so far avoided.)

An article appears In today’s NY Times (reg. req’d) discussing the government’s plans to overhaul financial assistance for hurricane victims. FEMA will give only $500 under its new rules and directly deal with hotels and landlords to control access free housing. The inevitable fraud that followed FEMA’s relief efforts last year has become the favorite subject of those who want to blame the hurricane victims for living in the path of Hurricane Katrina. What is never discussed is how some relatively simple changes to bankruptcy and credit laws would make life easier for victims of natural disasters.

Last year, I wrote an article that found bankruptcy filing rates tend to go up twelve to thirty-six months after a major hurricane. This article appeared in the Nevada Law Journal, although you can read an earlier draft on SSRN. The data show that for every two new bankruptcies that occur in areas unaffected by the hurricane, there are three new bankruptcies in the judicial district where the hurricane made landfall. In addition to the physical and emotional devastation, natural disasters leave people financially distressed as well.

Some simple changes might alleviate a few of the financial problems that natural disasters can cause. For example, after a natural disaster, a victim not only has to find new shelter and transportation but also may be paying off an old house or car that sits under a pile of rubble. In these circumstances, federal law should limit the creditor’s to the value of any insurance recovery. By tying the creditor’s recovery to insurance, the law would create incentives for the creditors to see to it that their debtors had insurance against natural disasters. Other measures would help such as temporary moratoria on debt collections in federally declared natural disaster areas and mediation of debt collection effects. Similar moratoria and mediations played an important role in the farm debt crises of the 1980s. Temporary bans against adverse credit reporting for persons in a natural disaster area would help those affected establish new credit. Immediately after Hurricane Katrine, some lenders flatly refused to extend new credit to anyone in the affected areas, and such natural disaster redlining should be banned. These are just a few ideas and meant to prompt some thinking on the topic.

I am not trying to suggest that credit relief measures should be a substitute for disaster aid. Not everyone has access to credit either before or after a natural disaster. The time has come, however, for a serious discussion on what credit relief measures are appropriate after a natural disaster.