Tuesday, April 2, 2013

Bankruptcy in Trouble

The whole principle of bankruptcy is in danger.

We saw this again yesterday in a court action where wealthy creditors tried to force the city of Stockton, California, to pay money it quite palpably didn’t have. It is a vaguely similar situation in Detroit and Harrisburg, two other cities that have been effectively bankrupt for more than two years but are kept out of bankruptcy court by legal obstacles set up by state officials.

A little less than a decade ago, the United States virtually eliminated consumer bankruptcy in order to benefit Wall Street. There is also the problem of student loan debt, which by being exempt from bankruptcy can put a person in debt for a lifetime. The problem with this is that without the protection of bankruptcy, there is nothing to prevent wealthy people, billionaire-investors if you will, from forcing people who are broke into a form of slavery.

It is not so different when cities are involved. Residents of cities like Detroit and Harrisburg aren’t getting normal city services in exchange for their tax payments anymore. Taxes have become, instead, little more than a way to take money out of the city, and there is no sign of this changing. In the absence of a corrective mechanism, it is a situation that could persist for generations.

Bankruptcy is in even worse trouble in Europe, where the EU sued to force a half-century of poverty onto Iceland (but lost that case), then tried to force Cyprus into a similar arrangement just to keep the bond payments coming from a few of its banks (the EU lost that vote also).

It is not just the wealthy and elite rallying against the idea of bankruptcy. We have also seen consumer advocates and unions try to extract concessions from businesses that had already been liquidated, or were days away from being wound down, seeming not to understand what it meant that there was no money left.

It does not help that bankruptcy has become an option only for those wealthy enough to hire really good lawyers. Bondholders took Stockton to court on the theory that the city wouldn’t be able to hire lawyers good enough to uphold the law. The fact that the big-money people pressed their case with so much confidence shows how much trouble we are already in. But if bankruptcy is limited to those who have a lot of money, it makes bankruptcy seem like a money-shuffling trick. The barriers to bankruptcy should be lowered enough that ordinary people can have access to bankruptcy protection too when they are actually out of money. If we could see that it was not just a way to protect the rich, bankruptcy protection would have a better reputation.