John Quiggin is blogging about an under-appreciated aspect of US financial markets: we're much, much nicer to borrowers than any other country in the world. (Yes, even after the bankruptcy reform1.):
As with bankruptcy, however, the high frequency of financial distress is partly offset by the fact that US law and standard contractual arrangements are more friendly than in other countries. Compared to those in other places (at least in Australia) US mortgage contracts have commonly favored borrowers in two important ways. First, they have been fixed rate contracts with no, or limited penalties, for early repayment. That means that borrowers can stick with their fixed rate if market rates rise, but can refinance at lower cost of market rates fall.Second, most mortgages are non-recourse, meaning that the lender can take the house but cannot recover the debt from the borrowers income or other assets. That means that once the value of the house falls below the amount owing (equity becomes negative) the borrower can walk away from the house and the debt. As Felix Salmon notes, the difficulty of pursuing deficiency payments means that most loans are non-recourse in practice even if the contract says otherwise
The mystery, of course, is why American capital markets are so much deeper than places where it is presumably more attractive to lend.
1 I was living in London during the 2005 bankruptcy reform, and I had a lot of difficulty putting across the notion that the new law was a "draconian" reform. The terms were so much more generous than British bankruptcy law (and British bankruptcy law is positively lavish compared to European laws) that they thought the reform was needed to curb the absurdly generous terms of the new law. Indeed, one chap simply refused to believe that I wasn't having him on about the existence of Chapter 7.
The bigger mystery to me is why so many lenders would lend huge sums of money to people without checking out whether they had the income to repay it.
Maybe we're not so "nice" to banks and other lenders because they're a bunch of gambling fuckwits who look to the government to bail them out for their own poor decisions.
"and British bankruptcy law is positively lavish compared to European laws"
How do personal and corporate bankruptcy laws in Germany, France, and Sweden compare with the US?
I would have assumed... that personal bankruptcy laws are more generous in socialist countries. I would also assume that corporate bankruptcy laws would be more generous, in that every effort would be made to keep the company in business, in order to save jobs.
Some of the people who find themselves deeply in debt in America get that way not because of contractual obligations but because of medical bills. You don't see much of that in Europe.
While considering the relevance of Peter's remark, I googled up this article. It has two very interesting quotes:
and
The first is just funny. The second suggests that these are not catastrophic medical expenses provoking bankruptcy (because the catastrophic part is covered by private insurance). I suppose this would have to be true for them to be significant in the overall bankruptcy stats.
The trouble here is that money is fungible. Many people who should have some money for a rainy day have spent it on a large screen TV and a luxury car. So was it these expenses, or the entirely predictable operation that put them under? And to what extent are we responsible for bailing people out for poor planning?
I don't mean to present the above as a statistical argument. The study in the article clearly has major flaws (consider that first quote is from one of the study sponsors!). But, money really is fungible, so a medical expense can provoke bankruptcy but be far from the cause.
What does this have to do with relative strength of bankruptcy laws? Hmmm.
American capital markets are so much deeper than places where it is presumably more attractive to lend because in America it is more attractive borrow.
American capital markets are so much deeper than places where it is presumably more attractive to lend because in America it is more attractive to borrow.
Jmo, the more of the economy dominated my the state the more the state has a vested interest in you paying your debts. I'd sure as hell rather owe mastercard money than the IRS
The quoted passage says:
As you can tell from following the links that are the source of this information, this is a pretty big exageration. This is really only a significant issue in states with anti-deficiency laws, of which California is the only big one (and even there this may not apply to refinancings). California is a big state, but this is not the law that governs the majority of mortgages.
Of course borrowers with no assets can always "escape" deficiency judgment in bankruptcy, but this is hardly unique to the United States and is, again, not likely for the majority of borrowers.
...not to mention that you won't owe MasterCard anything, you'd owe the bank that issued your particular card. And there would be others... legions of others... willing to "buy" that debt from the original creditor paying you with reduced rates... reduced to 0% for a year if your credit ain't shot yet. Ask me how I know... on second thought, don't :(
Unless there's something I'm missing about US bankruptcy law, I rather doubt that it's much more generous than English bankruptcy.
My impression was that the US is not so much legally kinder toward bankruptcy as philosophically kinder. Though our law is somewhat more lenient too.
In Europe, if you declare bankruptcy, it is more or less impossible to secure credit afterwards. Here, you can take out a loan on a car the next day. (An exaggeration, but not by much)
That philosophical difference leads to both gentler treatment of bankruptcy buy the law, and greater willingness on the part of financial institutions to extend credit.
With regard to corporate bankruptcy law, in general British law is harshest toward the debtor corporation, which usually proceeds immediately toward liquidation. Continental European (and SE Asian, for that matter) law is very protective of the debtor corporation -- creditors have a very difficult time enforcing their rights against the existing management. US law shakes out in the middle.
I would think a look into the reasons that people go chapter 7-13 would be more instructive, to see where the needs arise from, and then compare that to europe...
with much respect for MindlesH... if you were [speaking no ill omens] to find out that you have cancer tomorrow you would certainly be introduced to the magnitude of what healthcare can cost for something catastrophic. If you pay $10k or $13K in out of pocket expenses for your beginning treatemnt, and you will, does your houshold budget have that much discretionary headroom in it? If you have to go on long term disability [assuming you have it] that gets you 60% of your income. Remember we are assuming catastrophic, meaning you can't work if you are throwing up from the chemo. If you don't have LTD, and aren't able to work at all, who is going to pay you?
So suddenly you have lots of costs, and no income, and because you are sick, it's not like you have the ability to get an extra job to cover.
Perhaps your family can help out if you have one, perhaps a charity can, but for many this is the beginning of a long spiral down, because it takes a long time to come back, it costs a LOT, and there are lots of other forces that are pulling on you. It is the magnitude of it all that gets you, and can send you Ch7. Is this something that you can budget for?
In Europe, does this sort of thing happen?
Second big reason for Ch7-13 is divorce. I've heard that there is no easier way of losing 3/4 of your assets save giving it away. It is, naturally, widely variable who gets shafted in the divorce... but there is no secret that the fallout is ugly, and often for one more than the other. If there is an income disparity and children involved, the non-custodial parent can often, and quite legally be told to pay close to what they even make, to the other spouse. All the while still paying various lawyers, mortgages on houses they don't own anymore, etc. In the eyes of the domestic courts, the children come first at any cost, and they don't particularly care who you owe. Interestingly they generally won't go after the custodial parent for under employment. They will often go after the other parent for the same thing, though. Coupled to debt that the ex may have run up in the meanwhile that you are responsible for, and here is another downward spiral. In this case even if you did have extra money socked away, the ex can plunder the account, and the court will likely not care. There is also the tax deductions and bracketing that you lose. Child support isn't deductable, while some of alimony is. It is likely that the child support is the higher, and it often goes on longer.
*disclosure: I have bias on the divorce Q? because I pay well over half my after tax pay to my ex. I got off easy, compared to several friends I know. Plus, I got all the debt, and she got all the assets.*
It is my understanding that these two issues are amongh the leading causes of Ch7-13, along with out and out losing your job.
I wonder if we have more discretionary laws for Ch7-13 because the laws for Divorce, and med issues are worse in the US or not...
I would have assumed... that personal bankruptcy laws are more generous in socialist countries.
The bankruptcy laws are for the most part legacies of a legal tradition far older than the current policies of those governments. For instance, civil law countries have historically allowed heirs to inherit debts as well as assets; countries operating in the English tradition have (at least since the legalization of wills) limited the liability of heirs to the assets of the estate, leaving creditors out of luck.
Death in these countries is a form of Chapter 7.
Rover, I'm going to go ahead and suggest that you're basically making this up. Just as in the US, in the UK a business will often end up owned by another corporation in law, and only the proceeds of sale exist to satisfy the creditors.
Megan tells me that the site will now remember commenters. I'm going to test.
PS - I'd be interested in better stats on medical costs and bankruptcy.
guess not
So how much money do people who don't declare bankruptcy spend on medical care? If they are spending a similar amount, then perhaps medical care isn't the problem.
Also, to reinforce the point about the fungibility of money, if someone spent $10,000 on medical care, $40,000 on a car, and $5,000 on a television, and they only have $40,000, what caused them to go bankrupt? Some studies would say "medical costs" because they spent $10,000 on them. I would say that maybe spending $40,000 on a car when $20,000 would have done the job is their real problem.
I have actually worked through a bankruptcy in the U.K. from the lender side. Several in the U.S.
I must say, I was amazed at how fast we could take over the company relative to the U.S. We presented our obligations as the largest creditor by far,and we were able to come in and make orderly liquidation before everything else went to hell in a handbasket. And competing claims among creditors were resolved quickly at the beginning.
Our attorneys told us at the onset "you're going to love bankruptcy in the U.K.", and we did - relatively speaking, of course.
It was a private company, but obviously this says little about personal bankruptcy.
Also, to reinforce the point about the fungibility of money, if someone spent $10,000 on medical care, $40,000 on a car, and $5,000 on a television, and they only have $40,000, what caused them to go bankrupt? Some studies would say "medical costs" because they spent $10,000 on them.
$10000 is a pretty small quantity for medical care for any kind of serious medical situation. $40,000 isn't really that big either. Maybe everyone would always be better off if they saved all of their extra money for medical emergencies, but the example you gave just looks unrealistic.
BP - remember the cite in the article above that the people *with* private insurance had spent more than those without. And the *with* population was going bust. Certainly for those people, because the truly catastrophic is covered, it is reasonable to expect them to have some money socked away, and it is well within car range.
For people who have to cover their own catastrophic illnesses you are right, no amount of saving could prevent. But there is medicaid for these folks.
because the truly catastrophic is covered...
yeah, except with the magnitude Q? ... I'll see if i can find the stats, when i get home, but you have to look at out of pocket costs, over time. If catastrophic covers 90% of a million $ worth of service... that still $100k you have to come up with yourself. I'll see if I can find the numbers, later... but having catastrophic insurance, isn't the slam dunk it seems to be. Especially if it has a lifetime cap on benefits...
Mindles Dreck -
Would you say that it was any harsher on the company or the business than a US liquidation, or was the difference mostly that it was creditors rather than lawyers who got paid?
Marcin, does the UK allow for a non-liquidating corporate bankruptcy, as US Chapter 11?
One reason creditors don't get paid in the US is that the management that brought the company to bankruptcy is often permitted to remain in place and try to turn it around, and a liquidation doesn't occur until it become obvious that they're failing at it.
It's more likely that medical bills are a symptom, but not the cause. Having 13K in medical bills, plus losing your job and having either no pay, or 60% pay for 6 months may be enough to bankrupt all but the very rich. Is it reasonable that everyone have 40K-50K socked away for a rainy day?
In Europe, does this sort of thing happen?
Yes, of course it does. If you're too sick to work, the health care system won't pay your mortgage, or your car payment, or buy your groceries. If "universal health care" is to cover all expenses arising from a health problem, including lost income from the inability to work, rather than just (some fraction of) your direct medical costs, it's going to have to be much more than just a "health care" system.
Re: If you're too sick to work, the health care system won't pay your mortgage, or your car payment, or buy your groceries.
The European public disability system often will go a long ways toward that end. Along with a lack of universal healthcare the US also lacks a comprehensive system of short-term and mid-term disability insurance*. Are you trying to argue in favor developing one?
* We do have a system of long-term disability via Social Security, but it is very stingey and needs to be supplemented with a private disability policy to be truly adequete.
The European public disability system often will go a long ways toward that end.
A European public disability system is not on the table. If proponents of universal health care plan not only to cover medical bills but also to replace lost income, and to cover any other indirect expenses arising from poor health, then they need to say so, and explain how they're going to pay for it. Am I going to be mandated to purchase comprehensive disability insurance as well as health insurance? How much is all this going to cost me? Are you going to subsidize it for me? Where are you going to get the money from?
Along with a lack of universal healthcare the US also lacks a comprehensive system of short-term and mid-term disability insurance*. Are you trying to argue in favor developing one?
No, I'm pointing out that "universal health care" will not solve the problem of bankruptcy due to illness.
"Some of the people who find themselves deeply in debt in America get that way not because of contractual obligations but because of medical bills. You don't see much of that in Europe.
Posted by Peter | January 30, 2008 10:24 AM"
I can't speak for the rest of Europe, but it happens all the time in the UK. In theory, the government supplies all your health care free at the point of use through public funds. In practice, it is fairly common for people to find themselves having to privately fund (or even go to other countries to get) treatments that the NHS either won't provide, or won't provide in a timely fashion:
http://www.rnib.org.uk/xpedio/groups/public/documents/PublicWebsite/public_RonandOliveRoberts07207.hcsp
http://icbirmingham.icnetwork.co.uk/sundaymercury/news/tm_headline=wonder-drug-nhs-bosses-can-t-afford-to-offer-cancer-victims&method=full&objectid=18811177&siteid=50002-name_page.html
http://www.dailymail.co.uk/pages/live/articles/news/news.html?in_article_id=490233
http://www.telegraph.co.uk/news/main.jhtml?xml=/news/2008/01/27/nhs127.xml
Bottom line - people who borrow money and do not pay it back are criminals. They stole the money just as if they walked into the bank with a gun. Their criminal behavior is losing me money on the stock market and I don't care what excuse they offer. I feel nothing for them except contempt and feel they should all be jailed and forced to work off their debt working on the chain gang.
"The bigger mystery to me is why so many lenders would lend huge sums of money to people without checking out whether they had the income to repay it."
Part of the answer is that the government required it. Lenders, for some time, have been required to have a significant portion of their portfolios in ethnic, deprived, minority, or other disadvantaged arenas. Banks have to have, for example, branches in neighborhoods where the only people on the street are hookers and thieves. The questions bankers then asked themselves is "How can we satisfy government 'requirements' and still not lose money?"
"Let there be sub-prime loans!" And the government looked around and said "This is good."
I'm interested in the odd claim that the 2005 bankruptcy reform was "draconian" -- not relative to Europe, but relative to anything. The reform was a series of minor changes. What on earth was "draconian" about requiring that people above the median income use Chapter 13 rather than Chapter 7?
What are you talking about? I have perfectly good short and mid term disability insurance. Just because it's not government run doesn't mean it doesn't exist.
Having 13K in medical bills, plus losing your job and having either no pay, or 60% pay for 6 months may be enough to bankrupt all but the very rich. Is it reasonable that everyone have 40K-50K socked away for a rainy day?
In cash? No. In available equity and credit? Definitely. As a simple example, suppose a small family is living in an expensive house with a $2500/mo morgage, $400/mo utilities, two $400/mo car payments, $550/mo home and auto insurance, plus gas, food, minor healthcare expenses, and household consumables.
This family needs a combined income of at least $70-75k/year, pre-tax, just to make the minimum payments on these fixed expenses while having any hope of eating and purchasing soap and toilet paper. For the sake of an example, he's maybe making $55k/year as a small contractor and she's pulling in another $18k/year as a school teacher. In practice, many people are living like this, and sometimes worse -- e.g. perhaps $60k combined pre-tax income, an AMR or interest-only mortgage on the house, and several thousand dollars in credit card debt on which they are only making the minimum monthly payments.
$13k in unexpected medical expenses is more than enough to send this family into bankruptcy immediately, let alone after accounting for lost income. And this will be just as true at year ten or fifteen as it would be when first starting out. But the reason is not the medical expenses or the impracticality of having most of a year's income saved in the bank. It is because, by living on the mentality of payments, they have made it impossible to save anything or build significant equity in their possessions, while also using up their available lines of credit.
Suppose this same family buys housing with the perspective of being able to pay it off on a fixed-rate 30-year at present income levels, buys cars with the perspective of being able to pay for them immediately or with three-year bank loans, and then budgets the difference into savings for the inevitable maintenance and repair expenses over an 8-10 year vehicle life. The mortgage and car payments drop by half, monthly utilities and insurance costs drop substantially, etc. $13k in the short term may still be a bankruptcy issue, but at year ten, they've got $20k+ equity in the house to fall back upon, available lines of credit at their bank, little or no credit card debt to chew away income, and $7-10k savings against car repairs (or worse) rather than car payments.
Now $13k is a manageable dillemma. Inconvenient and possibly a cause of belt-tightening for a couple years, but manageable. Especially if "60% of income for six months" occurs after 10-15 years of promotions and raises.
SwissArmyD,
I don't think the horrible divorce industry in this country caused the more lenient bankrupty provisions. The latter came first, and the former is a fairly recent invention.
There are some people reading this who will not believe what you wrote, that "I pay well over half my after tax pay to my ex. I got off easy, compared to several friends I know. Plus, I got all the debt, and she got all the assets."
I would have been skeptical before my own encounter with the divorce industry. I went into it naively expecting to split everything 50/50. I was soon disabused of my naivete. I too ended up paying more half my income and assets in alimony and child support, my attorney fees, half of her attorney fees, plus the considerable amount of debt she had recently incurred (for credit cards that I hadn't agreed to be responsible for, or that I ever knew about).
I know state "law" varies from state to state, but in a number of states, this seems to be the norm.
And few people think there is anything amiss with this state of affairs.
The average bankrupt person surveyed had spent $13,460 on co-payments, deductibles and uncovered services if they had private insurance. People with no insurance spent an average of $10,893 for such out-of-pocket expenses.
This might simply indicate that among people who eventually became bankrupt, those who could afford medical insurance had an average of $2567 more in liquid assets then those who couldn't. I'm actually surprised that the difference isn't bigger.
I hate insurance. I paid $3600 out of pocket for premiums this year and another $6000 in co-pays.
I've been to the doctor once in 12 months. Wife is had a baby is the reason for the other expenses and maternity has a 5k deductible.
So basically I coughed up $3600 for "just in case I get cancer" insurance while the insurance company took my money and didn't pay a dime for maternity costs...
So for having a decent job, I get penalized from health care access and I immediately have to discount my salary 10 grand a year.
Long story short, insurance sucks. But I don't know if increasing tax rates by 20% and giving everyone equally crappy health insurance is the solution...
Actually, even in California, most loans are full recourse. It is only actual purchase money loans that are, in general, not subject to recourse. Even in this case, there are several exceptions that enable recourse (e.g. fraud, to name one that applies more often than most people think).
I've been writing on this subject since long before the bubble started popping, even in bleeding edge San Diego where I live (and work in the mortgage and real estate fields)
Re: What on earth was "draconian" about requiring that people above the median income use Chapter 13 rather than Chapter 7?
We can debate that particular provision, but I do find the new procedures of Chapter 13 to be draconian. Before 2005 a person in Chapter 13 had his payments based on his own particular circumstances. Nowadays it's one-size-fits-all for everyone, and people with special circumstances (say, child support payments or a serious medical condition) are just plain out of luck. Like all laws of this sort this is just stupidity of the first order.
Re: Just because it's not government run doesn't mean it doesn't exist.
You have good disability. I have good disability too. (Or so we hope.) But many (most?) people do not. Don't be so self-centered that you judge all things by your own experience.
Re: for credit cards that I hadn't agreed to be responsible for, or that I ever knew about
???
If you did not sign for those cards and your name was not on them the creditors should not have a legal leg to stand on if they tried to dun you for that debt. And if your ex forged your signature then she committed fraud and can be prosecuted.
First off, I'm an American that has lived in both the EU (Spain) and also India. The health care system in the US is terrible for everyone but the very rich and very poor. The rich have access to hands-down the best, most modern treatments available in the whole world, and the poor get decent care for free. However, the system is very convoluted because of the insurance industry and also the American Medical Association. There is simply no way to buy medications or services at market cost - prices aren't even known for anything because of deals between the providers and insurance companies. A 50 year old drug that cost me about $10 in Europe, or $4 in India would end up costing $150 in the US. Furthermore, I wouldn't even be able to obtain it because nearly every drug in the US is 'behind the counter' and requires a doctor's prescription. One cannot even see a doctor without having an insurance policy, and for-pay clinics do not exist. Personally, I wouldn't believe the government would do a better job if it were nationalized, however getting rid of the insurance middle-men and also the power of the AMA would go a long way towards improving the system - true free markets and competition among the providers and pharmacists could cut costs in half, at least. Of course, with the retiring of Generation Debt in the next 20 years, there will no other way to pay their liabilities besides drastically cutting out the insurance business, the pharma companies, and even the doctors - obviously we will be heading towards more low-priced care (nurses and 'assistants') and less expensive generic drugs available without a prescription.
A 50 year old drug that cost me about $10 in Europe, or $4 in India would end up costing $150 in the US.
Would you mind naming that drug?
I just noticed this:
and for-pay clinics do not exist.
So, in addition to having lived in Europe and India, have you also lived in the US, where for-pay clinics are quite common? Like the one I went to in small-town Virginia when I had pneumonia, leaving an hour after I walked in, having undergone chest X-rays, with a sore butt from the shot they gave me, and a prescription for antibiotics?
Such clinics are in every phonebook.
Re: One cannot even see a doctor without having an insurance policy, and for-pay clinics do not exist.
This is definitely bizarre. Is there is medical practice in the US that does not accept cash?
When I lived in St Pete (FL) I went to a doctor who only took cash (well, checks and credit cards)-- thereby absolving himself of the immense hassles of insurance paperwork. He had one employee (and possibly a backup for her, and probably an accountant to do his books). I always got top-notch service from him, and because he was not on an HMO treadmill to see as many patients as possible he could take time to get to know his patients. Office visits were $60, which I could partly defray by turning the bill in to my insurer later and being reimbured $25 a visit (he was out of network of course). So yes, you can certainly see a doctor without insurance, provided you have the $$ to pay for it. And many US doctors will even give away free samples of Rx to patients who do not have insurance.
By the way I am a strong believer in the need for universal healthcare, and I am aware that there are plenty of people who would have trouble scrounging up that $60 I paid, but I see no reason to grossly exaggerate the situation in making that argument.
"The mystery, of course, is why American capital markets are so much deeper than places where it is presumably more attractive to lend."
You just raise rates a bit to compensate for the better borrowing terms? Coase shouldn't be a mystery for you Megan. Plus, a deep capital market would be more likely to produce easily refiancable mortgages since it would be sophisticated enough to handle refinancing option (even if it gets burned every few years).
Rob Lyman -
The answer is "sort of." We have two such regimes: administration in which the management is replaced by an independant manager, and we have "Company Voluntary Arrangements" which require the consent of a majority of the creditors, and leave management in place, but supervised by an independant supervisor.