BANKRUPTCY UPDATES

• Minnesota Distillery of Fine Vodkas Files Chapter 7 Bankruptcy (February 10, 2012)
• Court Approves Newspaper Magnate Lee Enterprises’ Bankruptcy Plan (February 07, 2012)
• Suspected Felon Filed for Bankruptcy Shortly Before Untimely Death (February 09, 2012)
• Ireland Overhauls Bankruptcy Laws (February 06, 2012)
• IL State Representative Files for Chapter 13 Bankruptcy (February 08, 2012)

Economic Warning Signs. Should You Be Worried?

The amendments to bankruptcy laws enacted in October of 2005 were largely the result of aggressive lobbying on the part of credit card companies.

The companies claimed that American creditors were unable to control themselves when borrowing money, and when they racked up more debt than they could handle, simply filed for bankruptcy and got off scot-free.

In reality, that image of debtors proved incorrect. With bankruptcy-qualification standards tightened since the new legislation, the number of bankruptcy filers seems to be rapidly approaching what it was before.

And, as most people who file for bankruptcy know, that's because most bankruptcies are the result of divorces, serious injuries, foreclosures, layoffs and other unforeseen crises.

The "deadbeat" borrowers described by credit card companies make up a tiny percentage of all people filing bankruptcy.

Robert Kuttner, a finance and economics journalist, recently testified before the House Financial Services Committee about the state of the U.S. economy-and highlighted many abusive practices of the credit industry (not people seeking loans).

He focused mainly on the similarities between today's lending practices and those of the 1920s that led to the stock market crash of 1929. Here's a summary of the five major parallels Kuttner draws between the two time periods:

1. Excessive Use of Leverage: When the stock market crashed in 1929, the government imposed limits on margins (what percentage of an investment people can borrow). But those restrictions, according to Kuttner, are generally ignored by the very wealthy. This means that lenders are giving loans (whether for speculating on real estate properties or in the stock market) that stand to earn OR lose them huge amounts of money. Which brings us to…
2. Asset Bubbles: When leverage is used by too many investors, stocks (or properties) are attributed with a value much greater than their actual worth. A great example of this is the recent housing boom that finally burst and is now causing so many foreclosures. Houses were bought and sold for more than they were worth, and now that prices have normalized, many families are realizing they overpaid for their homes. This is related to…
3. Securitization of Credit: Lenders (especially banks) agree to give risky or speculative loans to borrowers, then sell the loans to investors. The banks allow the strength of their names and reputations to reassure the investors of the quality of the loan. In the subprime housing market, this was a common practice. Now, investors that bought the risky loans aren't receiving payment because families simply don't have enough money to pay their re-set mortgages.
4. Conflicts of Interests: In his testimony, Kuttner emphasizes that lenders act in their best interests-which are not the same as borrowers'. This is illustrated by the often unbelievably complicated contracts that come with new credit cards. Lenders want to make money, and they are known for using innovative and sometimes questionable methods for doing so. In general, loans and lines of credit that are riskier for borrowers are more lucrative for lenders.
5. Belief in Market Self-Regulation: Kuttner points out that American investors often don't want government intervention while the economy is booming-especially if that intervention is of a limiting nature. But, he adds, when things turn sour, opinions change. This is generally true for bigger businesses and investors, who are freer to make money without government regulations. For individuals hurt by predatory lending practices or risky loan offerings, though, the opposite may apply. Unfortunately, these individuals don't have billions of lobbying dollars behind their desires.

Kuttner's testimony was intended to warn U.S. policymakers and regulators about harmful and dangerous practices that are commonplace today and were last commonplace before a serious stock market crash.

He suggests government intervention before another such crisis occurs-but his views are not popular.

Though regulation of the sort recommended by Kuttner would alleviate some of the stresses of bankruptcy and foreclosure, and could help prevent lending and investing practices that caused the current foreclosure crisis, most big-time investors prefer to make money in an unregulated market.

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