As I See It: Final Options
November 24, 2008 Victor Rozek
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Let’s face it: if a couple trillion dollars in bailouts didn’t fix the economy, it’s probably in worse shape than even gloomy analysts want to admit. For one thing, if the economy wasn’t already on life support, we wouldn’t have found out about it until after the election. We all know the trends: a quarter million jobs lost in October alone, hundreds of businesses closing, and the Big Three auto makers trolling the halls of Congress with a sign reading “Will work for $25 billion.” It’s getting so bad Gladys Knight had to lay off one of her Pips. None of this should come as a great surprise, however. For years the health of the economy has been inversely proportional to the health of the middle class. The more jobs were jettisoned, the more pensions were looted, the more healthcare benefits were cut, the more bullish the stock market became. In other words, the less the middle class got, the more the investor class profited, and the higher the stock market soared. Those who ran the economy, it turns out, were as far removed from middle class reality as a Chevy is from a Lamborghini. They were, as George Carlin noted, members of a club to which we did not belong. Having partied hardy, the looters–if you’ll pardon the expression–are spent, and looking for succor from what they surely considered to be middle class suckers. The slick way in which the burden was instantly transferred to taxpayers suggests a cursory clean up of a financial frat party that got out of control. We must, we are told, play the part of parents to brokers and bankers gone wild, but without the right to impose much-needed discipline. It is truly unfathomable that behaviors that threaten to bring down the entire global economy will not be punished in any way, and are in fact being rewarded. For those who have lost their job or their home (or can only survive two or three months without a paycheck) there is, as yet, no bailout, no light at the end of regulatory failure. For them and the rest of us, the bailout is simply a tax by another name. It is deferred middle-class debt accruing interest just like the $13,000 in credit card debt that already burdens the average American family. With jobs hemorrhaging and debt growing, more people are considering what would have been unimaginable just a few months ago: filing for bankruptcy. Like everything else, bankruptcy is not what it used to be. New laws make it harder to walk away from obligations, but there are still two primary avenues for addressing debt through bankruptcy: Chapter 7 and Chapter 13. There is now a “means” test (or, more accurately, a lack-of-means test) for filing Chapter 7. Your average monthly gross income for the last six months must be below the median income for your state. A good attorney, however, may be able to fudge that a little. Also, you will have to take a credit counseling course six months before you file, and complete a financial management course before the proceedings end. It sounds a bit like closing the barn door after the horse got out, but it can’t hurt. Chapter 7, also known as a “straight bankruptcy” (no sexual preference intended), is basically a liquidation proceeding. You are required to turn over all non-exempt property, including real estate, cars, boats, and other toys, to a bankruptcy trustee, who then converts your goodies into cash for distribution to your creditors. In return, you receive a discharge of all “dischargeable” debts usually within four months. (Note that not all debts are forgiven–but more on that later.) You are allowed to keep some personal possessions and minimal assets, but they will vary from state to state. The Chapter 7 option is usually chosen by people who have already burned through their assets and have little left to lose. The most likely reasons for filing Chapter 7 include job loss, overextended credit, divorce (where the spouse had the better attorney), and medical expenses. Not everyone who files for bankruptcy is a profligate spender. In 2001, a Harvard study reported that half of the 1,458,000 bankruptcies in the U.S. were caused by medical bills. And here’s a stunner: The majority of those who cited medical debt as the reason for bankruptcy had some form of medical insurance. The other option is Chapter 13, which sort of shuffles the deck chairs on the Titanic while you plug the holes. Whereas Chapter 7 liquidates your assets, Chapter 13 reorganizes your debt. This is the favored option of those who have non-exempt assets they want to keep and are willing to pay off their debts (at reduced rates) over a period of three to five years. The catch is, at the time you file, you must have predictable income sufficient to pay your baseline expenses with enough money left over to pay off your debts. Plus, you must owe less than $336,900 in unsecured debts and less than $1,010,650 in secured debts. The worst of both worlds is owing more than $1.35 million and having no job. In that case, experts advise, hop the bus for the nearest border. If all goes well, your forgivable debts will be forgiven in three to five months. Regardless of which option you chose, however, there are some debts that will not be excused. Child support, alimony, criminal restitution, liability from personal injury accidents or death caused by drunk driving, government student loans and, of course, income tax. The Feds may have contributed to your problems by their failure to oversee financial markets, causing your investments to lose much of their value but, hey, don’t even think about not paying your taxes. Corporations, you’ll be pleased to know, can fully deduct their losses; but individuals are limited to deducting $3,000 in capital losses per year! It’s no fun owing money: the rude calls, the threatening letters, not to mention the stress debt puts on health and relationships. One of the immediate benefits of filing for bankruptcy is that by law, all actions against a debtor must cease. Wage garnishing stops, lawsuits go away, telephone calls demanding payments cease, liens are lifted. On the down side, bankruptcy stays on your credit record a full 10 years, and makes it challenging to obtain credit in the future. Bankruptcy may sometimes be necessary, and it’s certainly better than the classic debtors’ prison in which, bizarrely, debtors were required to stay until they paid off their debts. But it’s still a lousy solution–unfair to lenders, and demeaning to those who have trouble asking for and accepting help. Still, it offers a fresh start to people who may become overwhelmed by circumstances, often beyond their control. Many of us are one illness, one job loss, one economic downturn away from financial insolvency. It is a measure of our humanity that we offer a second chance to people drowning in debt rather than punishing them. The reality–more often than affluent people care to admit–is that debt is a condition, not a moral failing. As we edge deeper into recession, individual and business bankruptcies will meld one into the other; the failure of the large sealing the fate of the small. And, as always, the one dependable safety net will not be the market, nor the government, but the legions of patient, productive, and much maligned middle class taxpayers. Several years ago, when the airlines were reeling from rising costs and shrinking patronage in the wake of 9/11, I was flying to Arizona on business. As we were landing, the steward got on the intercom welcoming passengers to Tucson and reminding us to take our carry-on bags. Then he said: “I know you have a choice of flying any number of bankrupt airlines, so thank you for flying United.” If things don’t improve soon, I can imagine Barak Obama giving a speech sometime next year in which he tells his fellow citizens: “I know you have a choice of living in any number of bankrupt countries, so thank you for living in this one. We need every taxpayer we can get.”
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