Tag: debt

  • Lessons on Puerto Rico Bonds from the Financial Crisis

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    Katie Porter

    With a fiasco as big as the financial crisis, one of the only positive outcomes is there are a lot of lessons for the future. As Credit Slips thinks about how the administration might influence the resolution of Puerto Rico's bond problems, I think there are a few points from the financial crisis to consider.

    First, and foremost, is the importance of explaining the issue. Particularly in times of crisis, the explanation/education end of things tends to be pushed to the back of policymakers. "Action" is favored over explanation, but ultimately if the public does not understand what is at stake and the administration's goals, the White House and others quickly have to waste time on the defensive or retreat into silence. Neither strategy helps the problem. One need only look at all the calls to audit or disband the Federal Reserve Board in the wake of the crisis actions around Bear Stearns to see the long-term problems that come from policy without a good public relations campaign. If you need another example, read this great and short piece by William Sage, called Brand New Law! The Need to Market Health Care Reform.

    Second, lawyers are fairly lousy at administration. They negotiate hard but the practicability of getting relief is not their strength. We can take a lot of blame for this as law school professors, in that we should teach skills in organizational behavior, project management, etc, especially for those interested in policy. With the financial crisis, the problem was not that the HAMP loan modification term was too stingy or bad on its substance. The problem was severe delays and tangles in rolling out the relief. Jean Braucher has an excellent piece–the title, Humpty Dumpty and the Foreclosure Crisis, gives away the punchline. Whatever is done with respect to Puerto Rico needs to be efficiently administered. In this regard, I think the involvement of seasoned chapter 11 bankruptcy lawyers is a great development. These lawyers are used to being keenly focused on administrative costs in an insolvency situation, and provide a much needed counter-perspective to traditional Washington policymakers. I think if more consumer bankruptcy lawyers had been consulted during the design of HAMP and similar Making Homes Affordable programs, those programs could have been more consumer-friendly, using where people stumble in bankruptcy to identify likely obstacles in obtaining a loan modification (such as submitting paperwork and describing one's own financial situation accurately).

    Third, and finally I think the financial crisis reminds us not to get lost in the billions of dollars at stake and the high finance concepts. Behind every bond, there are real people–investors, Puerto Rican residents, taxpayers, and others. The quality of a solution to Puerto Rico's financial problems is not a Wall Street issue; it is a Main Street issue.

  • BROKE: A New Book on Consumer Debt and Bankruptcy

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    Katie Porter

    Just in time for New Year's resolutions on 1) reading more, 2) paring back your own debt, and 3) learning more about consumer bankruptcy to help you do your job (if you are a lawyer, judge, or academic, media, etc), the book, Broke: How Debt Bankrupts the Middle Class was released from Stanford University Press.

    BrokeThe book makes extensive use of the 2007 Consumer Bankruptcy Project data, providing statistics, analysis, and commentary on consumer bankruptcy and debt topics. I edited the volume, and chapter contributors are many Credit Slips regulars or guest bloggers–Jacob Hacker, Bob Lawless, Kevin Leicht, Angela Littwin, Deborah Thorne, and Elizabeth Warren–along with other top scholars.

    In the next few weeks, the chapter authors will blog here at Credit Slips about the research featured in the book, but to whet your appetite, I've included a table of contents for the book after the break. The book is accessible to lay readers but its scholarly focus provides plenty of data to educate and surprise even bankruptcy experts. Working on the book, I certainly learned a great deal about timely and important topics such as how pro se debtors (those without attorneys) fare in bankruptcy, where families go after they lose their homes to foreclosure, how bankruptcy affects couple's marriages, and the ways that bankrupt households differ in their financial straits from other households of concern such as those with low assets or late payments on debt. Of course I'm biased but I think the book provides the most comprehensive overview of the consumer bankruptcy system since the enactment of the 2005 bankruptcy amendments.

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  • Courts as Creditors

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    Adam Levitin

    I teach my students that the days of the debtor's prison and the workhouse are long past; the only debt you can go to prison for are domestic support obligations.  But it turns out that there's another jailable offense:  failing to pay the court.  The New York Times has a story about Florida's practice of issuing writs of bodily attachment or "blue writs" for failure to appear in court.  The jail time under one of these writs is supposed to be at most 48 hours (plus a $20 fine!), but a study by the Brennan Center for Justice at NYU found that some individuals were imprisoned longer.  Florida's state constitution (like many other state constitutions) specifically forbids imprisonment for debt (excluding fraud), and there's a line of US Supreme Court cases holding that the Equal Protection Clause bars imprisonment solely because someone is unable to pay a debt. 

    Technically it is jail time for failure to comply with a court order (much like failure to comply with a domestic support obligation); in that sense it's just plain old civil contempt.  But the wide-scale use of civil contempt to force payment for court fees strikes me as novel.  It's certainly been used before to effectuate things like turnover orders, but there's something very awkward about the courts in the role of creditor.

  • Credit Cards in the 2007 Survey of Consumer Finances

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    Adam Levitin

    The Federal Reserve has released its much anticipated triennial summary of the Survey of Consumer Finances.  There's a lot to digest in this important report.  I fear, though, that the 2007 SCF is already hopelessly dated because of the economic turmoil of the past year. 

    I'll just offer a brief observation about what the SCF showed for credit card debt.  The SCF is notorious for underreporting credit card debt levels–in the past, the total revolving debt reported in the SCF from voluntary interviews is off by a factor of two from what card issuers report to the Fed for its G.19 statistical release.   Consumers seem to either lack awareness or be in deep denial of their debt levels.  Whether this underreporting has continued in the current report is unknown, but there's not reason to think there'd be a sea change in the nature of voluntary responses. 

    So, with the caveat that consumer credit card debt is likely underreported in the 2007 SCF, consider this: 
    "Overall, the median balance for those carrying a balance rose 25.0 percent, to $3,000; the mean rose
    30.4 percent, to $7,300."  Balances for revolvers grew by somewhere between a quarter and a third in three years.  Wow.  This bespeaks a rapid leveraging up in credit card debt for a large segement of Americans.  And this was at a time when a lot of people were paying down credit card balances by doing cash-out refis on their homes.  One can only imagine what credit card debt would look like absent the tapping out of home equity to pay down cards.  As Paul Krugman noted today, we have a serious consumer overleverage problem, and it's going to be hard to get things on track without addressing consumer debt.   

  • Debt-Free: An Unrealistic Expectation

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    Elizabeth Warren

    A Vice-President at Dickinson College complained about the move by wealthier schools to eliminate student loans as part of the aid package, arguing that such a move creates the "unrealistic expectation that students should graduate debt-free."  He points out that people borrow for cars and homes, and that education is just like any other big-ticket purchase.  In effect, rich people can buy it for cash and those with less money should finance it over time. 

    If education is like a Hummer–cash or credit–then why stop with college?  Why not shut down the public schools K-12, and let those whose parents want them to learn to read and write pay cash or take on loans? (Maybe we’re heading that way with failing schools in some cities.) 

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  • Credit Card Debt Absent the Mortgage Bubble

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    Adam Levitin

    We tend to view credit card debt and mortgage debt in isolation, but its important to remember that the two are highly fungible. This means that when consumers leveraged up with mortgage debt in recent years, the were partially deleveraging their card debt. This means that but for the mortgage bubble, we’d be seeing much higher levels of credit card debt (and that’s where we’re headed).

    The mortgage bubble of the past few years was largely a refinancing bubble, not a purchase money bubble (much less a first-time homebuyer bubble). When people refinanced, they were not just refinancing their mortgages. They were also refinancing their credit card debt. Or, more precisely, they were converting their unsecured high interest credit card debt into lower interest, but secured, mortgage debt. There was a brilliant framing in the subprime pitch—pay off your 22% CC debt with a 9% mortgage. Seems like a no-brainer when pitched that way. There were some folks who refinanced multiple times, each time paying off thousands, if not tens of thousands of dollars of credit card debt (and other non-mortgage debt).

    This has an important implication that has escaped notice.

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  • $175,862.27 in Credit Card Debt and a Bleg

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    Adam Levitin

    I’ve been going through consumer bankruptcy filings recently and have been astounded by the levels of credit card debt that show up on some (but certainly not most) debtor’s schedules of assets and liabilities. I’ve seen a bunch of cases with upwards of $60,000 of debt for a single debtor, a few with over $100,000, and the current record holder is $175,862.27. Yes, that’s right, $175,862.27. That’s larger than a lot of mortgages.

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