Wednesday, June 24, 2015

Banking on the Supremes

It’s been several years since I had to file bankruptcy. It’s a very emotional and dispiriting process and is a frustrating and laborious. To succeed in bankruptcy court means that you have to prove that you’re unable to pay your debts. For most people who are not looking to scam the system that’s a startling thing to go through. The other side of Chapter 7 liquidation is the prospect of having a fresh slate to start anew. The consequences of having your debts dismissed is no access to credit for many years – literally having to live within your means. The Supreme Court on June 1st just took away that fresh slate.

According to the Wall Street Journal “All nine Supreme Court justices agreed that filing for chapter 7 bankruptcy protection doesn’t give homeowners the power to cancel a second mortgage when their properties aren’t even worth the value of the first mortgage.”

Bankruptcy is not something new. According to Wikipedia debt bondage was common as far back as 600BC. When people couldn’t pay their bills they literally were turned into slaves to work off the debt. By the Middle Ages debtors were locked up in debtors prison and forced to work for the state.   The U.S. had a similar model in the early years of the republic. After the War of 1812 when the populations swelled in the prisons there were a variety of attempts at creating bankruptcy code. By 1898 the first “modern” act was implemented and has been revised several times, the latest being 2005.

The punishment for being poor or not being able to pay one’s bills moved away from criminalizing and more towards creating the ability to start fresh. With the consequences and low access to capital there is a punishment to individuals. Conceptually, too, banks and lenders know that they are at risk of having the debt eliminated – so it is then incumbent upon them to make sure that the person whom they’re lending to has the ability to repay.

The 2005 revision and this ruling continues the trend of punishing debtors and protecting those who make the loans. My house lost more than 50% of its value, so I lost the property, the deposit I paid and the improvements I made along with my home. I had a mortgage and a second – with the house leveraged at 80% of value at purchase, well within reasonable guidelines. Several banks competed to give me those loans. Should they have? Based on the result, no. But they did.

The economy changed, I was laid off, the property’s value plummeted. As I’ve previously written, I am fully responsible for that failure even though there are lots of “reasons.” I’ve paid the price for that through high interest rates, no access to capital, etc. The bank lost money – so maybe they shouldn’t have made the loan. That lesson would indicate that they should change lending practices. But instead of the bank bearing any of the responsibility, the homeowner is now left will the bill.

Under the ruling by the Supreme Court I would still be responsible to pay the second mortgage even though I didn’t own the property any more and once it’s paid would have no value for having done so. It’s punitive. It benefits the banks. Instead of turning the house over to the bank and facilitating an orderly transfer, squatting would make much more sense.

This ruling is one of hundreds that the court makes each year, and it’s a pretty dry and below-the-radar type of issue. The decision – which impacts millions of people – was only carried in one major news publication in the two days from its determination.

If the people of the United States want to move back towards debtor prisons and punishing people for making poor financial choices –that should be something that’s part of the political discourse and engaged with in a legislative way. Right now, however, the banks can count on the Supreme Court to keep them in business.

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