This paper utilizes the population of personal bankruptcy filings in the state of Delaware during 2003 and finds that household expenditures on durable consumptions, such as houses and automobiles, contribute significantly to personal bankruptcy. Adverse medical conditions also lead to personal bankruptcy filings, but other adverse events such as divorce and unemployment have marginal effects. Over-consumption makes households financially over-stretched and more susceptible to adverse events, which reconcile the strategic filing and adverse event explanations.
According to Zhu, having a serious medical condition makes you 50% more likely to file for bankruptcy, but not because of medical bills; medical bills are only a very small percentage of the overall debt of bankrupts, and are not significantly correlated with higher credit card debt, which one would expect if people were keeping down their medical bills by charging them to Visa. Presumably it's the income effect of disability or caretaking responsibilities.
Job loss may precipitate bankruptcy, but bankrupts don't report being laid off at a significantly higher rate than the control group. The difference is, the control group had savings to cover its financial emergency.
The paper seems to have covered most of the ways I initially suspected it had gone wrong; for example, I thought they might have missed people who had had an adverse income event like being forced into a lower-paying job, but length of job tenure was actually higher for bankrupts. I still have the lingering suspicion that it overstates its case, but it seems pretty robust--unlike the more widely quoted Warren study, which had to use a tenuous definition of causation to make its sensational claim that 50% of bankruptcies were due to a medical event--which turned into the even more sensational claim that 50% of bankruptcies were due to high medical bills in the hands of innumerate activists and journalists.
It's also worth noting that it's harder to save on $25,000 a year than $75,000, and bankrupts as a group tend to be poorer, which means they have little shield from adverse events. On the other hand, the bankrupts were consuming at levels comparable to the wealthy controls. Spending as much money as those who are much richer than you is pretty much definitionally a recipe for disaster.
Wouldn't job loss only be a significant contributor in a down-turn, which wasn't the case in 2003?
I've been a bankruptcy lawyer for over 15 years. My experience is that the main cause of personal bankruptcy is overconsumption compared to income. The main cause of business is also overconsumption compared to income.
To bankrtuptcy lawyers, saying someone filed because obligations exceeded income is like saying someone died of death.
On the other hand, the bankrupts were consuming at levels comparable to the wealthy controls. Spending as much money as those who are much richer than you is pretty much definitionally a recipe for disaster.
I for one have never said that most bankruptcies result from circumstances outside of one's control. In fact, I don't think most liberals say that; if anything, we're likely to say that someone should get a second chance to make up for mistakes they've made monetarily. So I don't know that it's a great discovery that most people go into bankruptcy because in fact they spent out of proportion to their income.
That being said, it seems fair to ask why anyone would begrudge the insolvent person for having spent more money on consumer goods than they really had, or for not saving enough to shield themselves from hard times. We don't exactly live in a culture that encourages this sort of thing. Chiding the bankrupt is essentially saying "Well, why were you so stupid to buy all that stuff just because we told you to??"
"Presumably it's the income effect of disability or caretaking responsibilities." But how is that consistent with the proposition that unemployment has only a small effect?
"Well, why were you so stupid to buy all that stuff just because we told you to??"
What we, kemosabe?
Left out of this discussion is the matter of small business startups. Most people finance attempts at self-employment on their own credit, there's almost never investment funding available. When the business goes belly up (and most do) they're stuck with the debt. That may look like "over-consumption" but is it something we ought criticize or discourage? I'd be interested to see some hard stats on how many personal bankrupticues are related in some way to an attempt at starting a business. Not most, I'm sure, but I expect they's be significant.
That being said, it seems fair to ask why anyone would begrudge the insolvent person for having spent more money on consumer goods than they really had, or for not saving enough to shield themselves from hard times. We don't exactly live in a culture that encourages this sort of thing. Chiding the bankrupt is essentially saying "Well, why were you so stupid to buy all that stuff just because we told you to??"
Cultures do not act, only individuals act, and they are responsible for those actions. Or at least they were, once upon a time.
Which is not to say that bankruptcy should be made more difficult, or anything along those lines. But excusing bankrupts who dug their own holes is a bunch of postmodern malarky.
Megan,
So knowing that, do you have disability insurance? Long-term care insurance? Is the Swing Voter likely to rely on you, or is your dad likely to rely on you, if they should need long term care in the home? Do they have long term care insurance in place? Or is that going to fall to you, whether you can take time off work or not?
Who will care for you if you get hurt and need care for months or years? Your parents?
Cultures do not act, only individuals act, and they are responsible for those actions. Or at least they were, once upon a time.
Which is not to say that bankruptcy should be made more difficult, or anything along those lines. But excusing bankrupts who dug their own holes is a bunch of postmodern malarky.
There's no "excusing" going on here. It does not seem remarkable to state, at this point, that consumer spending drives the growth of our economy. Popular culture reflects this. Everybody "knows" they should save a little money, but everybody around them lives to the hilt. It is not excusing anyone to say that outside incentives and influences play a part in the fiscal decisions that Americans make.
Yes, we all know that everybody should save. Who does?
Jason,
I've carried long term care and disability insurance since my early 20s.
My siblings and I went without a lot of stuff as kids so my parents could be financially responsible and save for contingencies and their own retirement, in large part to insure they need never burden my siblings or myself.
My grandparents (both sets) carefully arranged their lives over decades so as to never have to be a burden on their children (my parents).
Lots of folks have and do run their lives the way I (and my parents and grandparents) do. We make sacrifices to insure we won't be burdens on others.
Or to put it another way:
Of what I make:
I get to spend a third on myself
I save and invest a third to insure I need not burden others in the event of catastrophe
I get taxed a third *mostly* to support others through transfer payments
It makes me slightly cranky towards folks who get to spend 150% of what they earn on themselves, particularly when a big chunk of the third I get taxed goes to subsidize it :(
JonF,
"Left out of this discussion is the matter of small business startups. Most people finance attempts at self-employment on their own credit, there's almost never investment funding available. When the business goes belly up (and most do) they're stuck with the debt. That may look like "over-consumption" but is it something we ought criticize or discourage?"
In most cases, yes. Scott Shane wrote an article about this in a recent issue of the American:
I'd be interested to see some hard stats on how many personal bankrupticues are related in some way to an attempt at starting a business.
That's what precipitated my personal BK. Started a business about 18 months after a job loss (and a frustrating period trying to land a position at comparable pay in the slowly dying field -- newspaper advertising -- I had spent the previous five years in). I had some savings -- about fifty grand in a 401k -- I was still pretty young at the time -- and I blew through that as well as about 80k in CC debt over the next two years. Massively stupid of me in retrospect, of course, but I learned a few valuable lessons. My BK would have been one of those "stealth bankruptices" (or whatever the exact term used was) referred to in the previous post about Amex. That is to say, I faithfully made my monthly minimums to the bitter end -- even when it got all the way up to 1800/month. Obviously when ones gets to that point -- unless one is a complete and utter moron -- one has been aware for many months that one is headed for Chapter 7. Oh yes, I fully deserve the crappy FICO I'm currently living with (although you'd be amazed at some of the creative strategies in use to repair credit). Sigh.
dearieme - I'd wager (without looking) that there is a distinction made in the study between being fired/laid off and simply not working. Most sick people who are no longer in their jobs probably weren't fired. (For starters, there are laws about that.)
Also, illness may be a double-whammy on household income, taking out both the sick person and a caregiver spouse, making them much worse off than someone simply getting canned, even in a downturn. And more intractably so, since you (and if applicable your spouse) may not be able to make up the lost income partially (by taking a lower paying job or working fewer hours), because an illness that affects your ability to work is likely to require one (or both) of you to be at home doing nothing but dealing with the illness. So the income effect of a medical issue may be much larger than that of simply getting canned.
Jason VS, you are quite right that people tend to be way, way underinsured for disability. You are massively more likely to need disability insurance than life insurance. But people are really, really bad at rationally calculating risk.
Scott Shane thought that an appropriate policy response by the U.S. and state governments would be to stop encouraging everyone to become an entrepreneur...
I dunno. Seems to me a bit of a reach to claim government is encouraging everyone to become entrepreneurs, at least given the complexities and hassles of the tax code, and sundry other counterincentives. I mean, perhaps some governmental units pay lip service to the notion that universal entrepreneurship is a good thing, but the machinery of government still seems fairly firmly in place behind the current, dominant mode, whereby the vast majority of workers are employees. (I'm once again running my own -- this time rather more successful -- business in a different field -- if anyone is wondering how the tale of woe above ended).
"I dunno. Seems to me a bit of a reach to claim government is encouraging everyone to become entrepreneurs, at least given the complexities and hassles of the tax code, and sundry other counterincentives. I mean, perhaps some governmental units pay lip service to the notion that universal entrepreneurship is a good thing, but the machinery of government still seems fairly firmly in place behind the current, dominant mode, whereby the vast majority of workers are employees."
A fair point, February. Scott Shane (or I, in my paraphrasing of his point) may have overstated the case a little. His broader point though, I think, is intact.
Re: your current, successful business versus the one that precipitated your bankruptcy, what's the main reason you were successful the second time around? Any lessons you benefited from from the first attempt?
...what's the main reason you were successful the second time around?
1) I'm in a much less capital intensive field now.
2) I was already working successfully as a 1099 worker for somebody else for a couple of years (so for all intents and purposes I was already self-employed and "making it" prior to hanging out a shingle), so, starting another business was mainly a matter of taking my ongoing concern and telling my boss bye bye.
3) I'm not using any debt at all to fund this business (one of the benefits of a low FICO - LOL) so there's no interest expense.
Any lessons you benefited from from the first attempt?
I've drawn more lessons from the second attempt, actually: Watch every penny. Think twice before you sign up for some business service that will raise your monthly nut. Cut expenses to the bone. And then cut some more. Think LEAN LEAN LEAN.
Any lessons you benefited from from the first attempt?
Well, one lesson mainly: if starting a business requires a serious risk to your net worth, ask yourself what your life would be like if it doesn't pay off, and are you willing -- and really prepared -- to live life as a much much poorer individual if your business doesn't make it. I would say nearly all first time entrepreneurs should avoid debt like the plague, and ideally they should already have a cash-flow positive ongoing concern they're doing in their spare time, prior to going full-time.
Thanks for the insight, February. Your focus on "LEAN" reminds me of something. Back in 2000 I joined a start-up, the offices of which were, at the time, located in a business incubator (the A.C. didn't work there, so the joke was that it was really like an incubator). Anyhow, when the company moved to permanent offices (nowhere fancy) after a few months, they were furnished with all used desks, chairs and computers. The CEO was a real tightwad, compared to a couple of the company's better-financed competitors, both of which had fancy offices in big cities.
Long story short, those two competitors are long since out of business and the company I worked for is profitable, grew earnings & sales in '08, has money in the bank, and no debt.
JonF, your scenario of a business start-up also applies to companies with angel investors. We have a investments in a few start-ups, with willing deals that meet our exit-plan goals. But there's no financing/credit in the form of either venture or bank loans. The system is frozen, as if everyone is holding their breath. If they don't exhale soon, I too may look like I fit a stereotype excess, though I have no other debt, live modestly, and own other assets.
My problem will be the decreased value of those other assets.
And with it will go some great companies with terrific ideas and jobs for a few hundred people.
Zic,
Are your portfolio companies currently profitable? How much money are you looking for for them? Are you looking for follow-on equity investments (e.g., private placements) or debt?
Who "told" bankrupts to overconsume?
It makes obvious sense that BKs had too much debt-to-income and no savings cushion. Personal BKs aren't that much different than business BKs.
There are unfortunates who lose their jobs or their health, but this research apparently do not describe that as an underlying cause.
The appalling Elizabeth Warren - discredited BK theorist - was quoted in the press today as saying the Treasury overpaid $78 billion for their $350 billion of TARP preferred stock purchases, e.g., 20%
How anyone can ascribe any credit to what comes out of her mouth is astonishing.
There is a world of difference between borrowing and spending to engage in a potentially productive enterprise (aka as going into business) and borrowing to overconsume (through credit card debt or home equity loans). That distinction is critical. If everyone confined their (careful) borrowing to paying for an education, a home, and perhaps a car (which facilitates employment) and otherwise stuck to the very simple rule "never borrow to consume," the personal bankruptcy rate would plummet. It may require restraint, but it's just not that complicated. Believe it or not, generations of prudent people have accepted these simple rules as a given. (I have never failed to pay off my credit card each month, and never taken a home equity loan. I saved a substantial home down payment, and always pay cash for cars).
All,
Well put. Startup businesses financed on debt (which I think are a good thing provided that said individual has a sound business strategy) and unforeseeable medical expenses aside, the fundamental problem is that most people do not plan for the future.
I am currently in a very stable job market making good money, but I still retain a cushion of liquid assets that will tide me over for at least 5 months. I try to live within or below my means as much as possible, and see the value of contributing a percentage of my paycheck to a 401(k) and savings every month. It may keep me from buying a brand new BMW, but in the long run it's worth it.
I don't think that we should radically tighten BK rules and make the process more restrictive, but more people definitely need to focus on getting a good cushion and having a well-prepared backup plan if their current job goes in the tank.
Yes, we all know that everybody should save. Who does?
Right now, a lot of people, actually.
I think there's been a pronounced and surprising cultural shift in the US in the past year or so. It seems that massive economic shocks can shift cultural norms pretty rapidly. There has come to be a prestige associated with living within your means and not promising things you can't deliver. One of the reasons Obama was elected is that he radiates responsibility; but you can see this shift across the culture, too. I'm hopeful it will last.
Re: I get taxed a third *mostly* to support others through transfer payments
Transfer payments aren't trivial, But the populist notion that most of your taxes go to "welfare" (and the rest to "foreign aid") is balderdash. Check out the fraction of the federal budget devoted to defense-- and the fraction devoted to interest on the federal debt. The latter is a transfer of course, but not to people who can't take of themselves.
Re: In most cases, yes.
I very much disagree. Small business startups may be like the manner in which fish and amphibians produce offspring: most are going to fail and die, but those numbers are still necessary so that some few may survive and flourish. Natural selection (which operates in economics as well as biology) sometimes needs lots and lots of trial subjects in order to get it right eventually.
Re: Jason VS, you are quite right that people tend to be way, way underinsured for disability.
Once upon a time I looked into getting disability (I didn't have a workplace policy). I was under thirty and completely healthy and the premiums were shockingly outrageous, well in excess of what I was paying for a good health insurance policy at the time. And yet the benefits were meager to say the least (another issue: even people with disability insurance do not have good insurance; no policy fully replaces income, only a minor percentage of it). This sort of insurance needs radical restructuring if we are ever to make it viable for the average person. As curently structured it's major ripoff and I am not surprised most people don't have it.
Re: You are massively more likely to need disability insurance than life insurance.
??
Everyone of us is going to die. Some non-trivial fraction of us will never be disabled (not counting the final days or weeks of our last illness).
Re: more people definitely need to focus on getting a good cushion and having a well-prepared backup plan if their current job goes in the tank.
For most people the backup plan means being employable so that if you are laid off at one job you will quickly be hired for another. (Been there, done that; in 2006 I was let go when my employer went bankrupt. I was unemployed less than a week) But there are disasters of a magnitude that can overwhelm even the best preparations. The current economy is well on its way to becoming one of those. Also accumulating a cushion is easy to say, but surpassingly hard to do, unless you come from money to start with or have some other special advantage (like the 60K inheritance I got when my father died when I was 24). Most entry level jobs don't pay enough these days to allow for much in the way of savings, or even for young people to consider marriage and families. Add to that the fact that many (most?) students graduate already in debt with student loans. Our system is fouled up in some important ways, almost structured to force debt and prevent saving.
I've been a bankruptcy lawyer for a while now.
I agree with Phil. But in order of size, from most to least:
I'd say the majority of cases are just people who don't make enough money; they have 3 kids and make 20-30 grand a year or they retired and realized that Social Security is a bad joke (the almost qualifies for food stamps set).
Then there's the guys who bought a 40,000 F-150 when they make 40g a year; this is mostly people skating on the edge until the ice cracks (the guy who lives in a studio apartment and drives a BMW, or has a 250,000 house and drives a 99 Malibu.)
Fairly common but not as much are the guys and gals who got divorced, got cancer, got laid off, their business failed, or they otherwise were pretty much doing OK until something terrible happened.
And then there's the guys who are truly just... mentally handicapped when it comes to money. The kind of guy who, if they won 200 million in the lottery, would end up living in a cardboard box 20 years later (the Mike Tyson/MC Hammer guys). These are the rarest but most memorable clients. Also the most likely to repeat.
Transfer payments aren't trivial, But the populist notion that most of your taxes go to "welfare" (and the rest to "foreign aid") is balderdash. Check out the fraction of the federal budget devoted to defense and the fraction devoted to interest on the federal debt.
I took a look at the 2009 estimates in the Economic Report of the President. Excluding interest, defense spending accounts for about 23% of the federal budget. Social Security also accounts for 23%. Medicare is 14%. "Health" and "income security" are 10% and 15%, respectively. I'm not entirely sure what all is in those, but I suspect that the former is mostly Medicaid and the latter mostly welfare programs. Then another 14% for "Other."
The reason I exclude interest in these calculations is that it seems reasonable to say that if program X accounts for Y% of the budget, then we should also attribute Y% of the interest payments to it. Actually, this should probably be based on historical budget figures, but it's a reasonable simplification. In any case, interest is only 8% of the budget.
So...yeah. Taxes paid to the federal government do, in fact, go mostly to transfer payments.
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"Everyone of us is going to die"
Yeah, but life insurance generally* isn't about insuring against you dying, but against you dying while you still have a spouse and/or kids dependent on your livelihood. If a 35 year-old father of three toddlers dies, that usually lives a big hole in the family finances; if he dies 40 years later, not so much. By then, his kids are adults, and he has accumulated a nest egg that, along with Social Security, will take care of his wife.
*There are two general exceptions: small life insurance policies (~$5k) designed to help offset funeral expenses, and big life insurance policies designed to offset the estate tax liabilities of the rich.
"Yes, we all know that everybody should save. Who does?"
Well, I do.
I would rather have money in the bank than "stuff".
Not having an Asian work ethic and sense of morals is probably a contributing factor.
someone should get a second chance to make up for mistakes they've made monetarily.
Like most warm and fuzzyheaded socialist ideas, it sounds nice but neglects the question of who pays for it.
Yes, we all know that everybody should save. Who does?
The people who don't declare bankruptcy, that end up making up the debt of those who do.
Guy,
A friendly tip: you may generate more inquiries into your book if you mention it within a comment that engages directly with the post, or with some of the other comments in the thread, rather than simply cutting and pasting a description of your book here. That's just common sense and tact; it's not brain surgery.
Interesting paper, thanks for passing it along.
Guy,
I mean seriously - it's not brain surgery :-P
Phil et al,
People always talk about overconsumption. I had friends who graduated from college with 20k in credit card debt. Keeping in mind that 20k at 28% or 32% is something like $500 a month. Is it possible, that someone who declares bankruptcy at 32, actually consumed less than a similar person who earned the same amount but didn't have any credit card debt?
For example:
32 year old person A
Total lifetime earnings - 750k
Total lifetime consumption - 750k
Total lifetime CC interest paid 0
32 year old person B
Total lifetime earnigns - 750k
Total lifetime consumption - 690k
Total CC debt at bankruptcy - 100k
Total lifetime CC interest and fees - 80k
Is something like that even possible?
If one had a $5,000 medical bill from an Emergency Room which they could not finance and were not able to put on a credit card and they filed bankruptcy on $10,000 of consumer debt which was already on credit cards, how would such a bankruptcy be treated in this study, because in such a case the reason for filing is probably the medical bill but the predominant debt discharged would be credit card debt?
Over-consumption makes households financially over-stretched and more susceptible to adverse events
Call it Over-Spending instead of Over-consumption and then ask yourself:
wouldn't it be nice if spenders at the government level also would keep this hometruth in mind????
rgds,
Silke
Yea, times are tough. Yea, I’ve made some stupid decisions. And yea, I’m not real good managing my money. Oh and yes, bankruptcy is bad, very bad. I don’t recommend it.
But sometimes you just do what you have to do to survive.
This country has gone down the tubes morally in just about every way you can imagine, and bankruptcy is just one of the clearest proofs of it.
When I was a young man in the 60's, to go bankrupt was not only a financial failure, it was a MORAL one. The bankrupt person was seen as having taken money in good faith from others and was now refusing to pay it back. Reasons didn't matter, results did, and the result of a bankruptcy to an investor was effectively exactly the same as if the bankrupt had strapped a bandanna over his face and held a gun on the investor for the same amount of money.
Bankruptcy now is just considered another financial tool. There's no shame whatsoever about using it despite the fact that it is effectively theft. Abe Lincoln and Harry Truman both went bankrupt, but both worked like dogs to pay back their creditors until the last owed penny was repaid. That type of individual morality is what I thought was the birthright of Americans. It's long since gone and I deeply mourn its departure.
The "I got mine, screw you" attitude I see now will be the death of this country because it destroys the trust necessary to conduct business with people one doesn't actually know personally. Anyone who hasn't read Kipling's "The Gods of the Copybook Headings" should do so to see what happens in such a society.
Bankruptcy is caused by debt? Who'd of thunk it? The earth shifts on this discovery.
Studying 2003 is as relevant as studying sheep entrails.
I've often felt that it "takes brains to be poor."
I've lived on as little as $12,000 a year...not in my folks place, on my own (well, with roommates).
The year my income "exploded" up to $20,000 I saved $8,000 of it. This despite the fact that I live in a major metropolitan area.
You really can do it. But you can't be vain and you have to be organized. Shop at thrift stores, rent a place that's "dirt cheap" (clean it up if its dirty!)...and for heaven's sake, you have to have roommates.
You also qualify for a lot of free health care if you're poor. Planned Parenthood offers free or nearly free womens' care. The local university provided nearly free flu shots. I probably would have qualified for medicaid, but fortunately didn't need to.
You can't go out to eat except on special occasions, you really do need to brown bag it. No Starbucks...used book stores are your friends...buy discount movie passes for wild nights out...don't drink.
And voila...you're loaning your parents money instead of the other way around. Sigh.
You're not alone Mama73, I did basically the same living inside the Capital Beltway in the 1990s.
If you don't borrow money, you can't go bankrupt.
You may end up with emergency bills you can't pay right away (or maybe even ever pay with the way gov't and other 3rd party insurance has inflated medical prices) but that sort of thing even the most conservative will make allowances for.
JMO
I would argue that if someone makes an election to consume something earlier than he can afford it, the interest costs is part of the consumption cost. Silke probably has it right by calling it overspending rather than overconsuming, but the basic idea is that you commit yourself to more than you can legitimately repay.
A general comment -- many of you would actually be surprised at the similarities between even large business cases and personal bankruptcy cases. Most are caused simply by taking on more debt than you can ultimately repay, although you had some basic plan to repay it at the time (ie. "I'll get a raise" or "The acquisition will be accretive to my business and profitable.") Very often the plan is more of a justification to make a vanity purchase than a rational business plan. And the culture of debt that pervaded personal finance also pervaded corporate finance. In fact, if you take a macro view of the credit markets, you could say that the low interest, loose covenant debt of roughy 2002 through 2007 was analogous credit card teaser rate. The basic effect of all of this is it force people and companies at the margin to file bankruptcy.
The problem is a nutshell. Irresponsible individual behavior. The "TV commercials / consumer socienty made me do it" defense is just bull. Adults don't act that way.
I was an engineer then middle management in a Fortune 500 company. Good job, at which I worked very hard and typically 60 hour weeks, but I never made a huge salary.
Similar to another poster above, I saved 30%+ of my income, lost 30% to taxes, and lived reasonably on the remaining ~ 30%. I choose my spouse wisely - she doesn't much care about jewely, designer clothes, keeping up with the Jones, etc. We always bought much less house than we could have afforded, drove cars for 10 years, avoided expensive habits, etc. No debt except mortgage, and we paid that off early.
My goal - and I think most people should have it -was to be financialy independent - to no longer have to work.
We made it, and retired in Texas - no income tax, quite reasonable house on a small lake for ~ $200K.
Not much sympathy for the guy who lives in the million dollar house, has a second home, vacations overseas, leases a new sports car every other year, and has no savings. Lots of sympathy for the young National Guard widow with 2 small kids.
We should as a culture encourage responsible, prudent behavior leading to maximum personal independence, i.e., people should behave like adults.
The Democrats systematically encourage irresponsbile childlike behavior, leading to maximum dependence on the State. One has to believe this is intentional.
In 1995, my wife and I would have been seen as prime candidates for BK. We were grad students (only one loan for $4000, though, unlike some friends with 50K+) who got stipends of 6500 and 8000 (less required uni health ins pmt), and two part-time jobs that paid another 400/mo. An 89 Chevy which was paid for and I kept tuned up, and a 500 apt.
Then she had an appendectomy which turned out to be unnecessary when it was discovered that she had previously undiscovered congenital pancreatitis. Over the next three years, our cost for treatments, after what the insurance paid its share averaged more than we grossed each year. It totaled out at just under 80K.
We arranged a payment plan, graduated (1999 and 2000), started jobs, lived tight, and paid it all off by 2003. At that time we were still driving the 89 Chevy.
Today we are debt free except for a reasonable mortgage (re-wrote a sub-prime after 18 months to a 5.125 30-year, and we round up to the equivalent of 14 pmts/yr). We have two small but decent cars, nice but inexpensive clothes, lots of used books, and a year's expenses in savings (CDs, mostly), 401K, 403B, Roth IRA, and some investments. We routinely save 1/3 of out net after tax income. We eat out once a week.
It can be done. Just takes planning and willingness to live lean.
I see this problem in my children all the time,...
poor understanding in evaluating the difference between "wants" and "needs". The deluxe cellphone plan, HD TV, a new car, a better computer, the latest video games, running to the movie theater, eating out regularly.....etc.
I am the child of Depression and WWII parents. They taught us to always live far, far below our means. My cars may be old, I may not be familiar with the fancy restaurants in our area, my children may not have cellphones, but we have financial security. Next to good health, that is a very valuable thing to have.
Phil,
I'd think that most business bankruptcies are caused by management being overly optimistic. While most personal bankruptcies are caused by people being unable to defer gratification.
The study shows that people declare bankruptcy because they spend too much and make too little - not, as some might have thought, due to a job loss, divorce, or health crisis. I would argue that the low income and excessive spending can be linked back to the same trait, the inability to defer gratification.
If you're a person who "lives in the moment" you are going to be the type who would rather hang out with your friends than study for the big exam. Given the opportunity to go the extra mile at work, you'd rather surf the Internet. Over time that can add up to a significantly reduced income vs. someone with a similar background and level of intelligence, who thinks more about the future.
Similarly, if you "live in the moment" you won't have a problem with buying that 60" plasma, or going out for drinks with the guys, or getting new rims for your car. Those things are fun now and you aren't the type to think about the long term burden those purchases will place on you.
"It can be done. Just takes planning and willingness to live lean."
"We should as a culture encourage responsible, prudent behavior leading to maximum personal independence, i.e., people should behave like adults. The Democrats systematically encourage irresponsbile childlike behavior, leading to maximum dependence on the State. One has to believe this is intentional."
Amen to both those statements. The Republicans have their cohort of greedy overspenders, but the democrats specialize in apologizing for irresponsible behavior. That's their stock in trade. The clear message: "We know you just can't help yourself, we'll bail you out." It isn't just money, but all kinds of personal choices that lead straight to dependency and insolvency. As Charles Murray said decades ago, "For all but a privileged few, rhe single parent family is not a viable economic unit." Duh!
If one had a $5,000 medical bill from an Emergency Room which they could not finance and were not able to put on a credit card and they filed bankruptcy on $10,000 of consumer debt which was already on credit cards, how would such a bankruptcy be treated in this study, because in such a case the reason for filing is probably the medical bill but the predominant debt discharged would be credit card debt?
----
I think this shows terrible financial thinking.
The reason is the credit card debt. Expenses like a medical bill, a leaky roof, a dead car, etc are going to happen. If such a person had a rainy day fund rather than credit card debt, they wouldn't have had to file bankruptcy.
Crashex, TheOldMan,
There is a way to have all and items you mentioned and have financial security. You just have to make more money.
I don't think parents do enough to show kids what careers are available and what lifestyles they can support. I haven't met anyone who, if they had followed a different career path, would be making twice their current income.
I think parents don't teach their children about different career choices because they fear what their kids might think. For example, dad works for the government as an accountant and makes $65k. He doesn't really want to explain to his daughter that he could be working for Price Waterhouse making 180k but that would mean more hours and more travel. He's afraid his children would think that he is just lazy.
I think kids would be well served if their parents made more of an effort to explain these sorts of things.
FEBRUARY: You wrote, although you'd be amazed at some of the creative strategies in use to repair credit...well, try me. It sometimes seems like everyone who's gone broke or unemployed has gone into the credit repair business--there's so much chaff, I can't sort it out.
Any pointers or suggestions or ideas would be hugely appreciated. Thank you, Feb.
Re: Bankruptcy now is just considered another financial tool. There's no shame whatsoever about using it despite the fact that it is effectively theft.
Are you also willing to apply this sermon to businesses that use Chapter 11 as a planning tool, to stiff their vendors, lenders and their employees?
Re: I've lived on as little as $12,000 a year...not in my folks place, on my own
I once lived on 17K a year, albeit with 40K in the bank for emergencies. But I also shared a cheap townhouse with a roommate; our rent was just $350/mo. Where can you find that kind of deal today (except maybe in some back of beyond rural area)? Big problem today is that three big ticket items-- housing, education and healthcare-- have gone up by leaps and bounds, far outpacing wages, and all the dollar stores and Walmarts and coupon clipping and cheap electronics can't make up for that.
So apparently bankruptcy is caused by borrowing more money than you can pay back. Ya think???
If bankruptcy is caused by buying houses and cars (pretty basic necessities of modern life) that are too expensive, then one wonders what went wrong.
JonF:
"Re: Bankruptcy now is just considered another financial tool. There's no shame whatsoever about using it despite the fact that it is effectively theft.
Are you also willing to apply this sermon to businesses that use Chapter 11 as a planning tool, to stiff their vendors, lenders and their employees?"
Damn straight I am. Where do you think the average J6P got the idea such behavior was acceptable to begin with?
Bankruptcy is bankruptcy and it is effectively theft, no matter who does it, individual, corporation, government, whatever. I have little sympathy and no respect for those who declare bankruptcy and do not discharge their debts. The only difference between bankrupts and armed robbers is that one is legal and the other isn't. To the unfortunate person losing his money, the result is exactly the same for both actions. That we as a society no longer appear to understand that is a horrible admission that we cravenly accept straightforward criminality in our society.
"Bankruptcy is bankruptcy and it is effectively theft"
That makes no sense at all. If Exxon Mobil and GM both go to the bond market to raise cash Exxon would pay 5% and GM would have to pay 25%. The buyers of the GM debt know there is a significant risk of bankrutcy, hence the high rates.
As long as both GM and Exxon are honest about their financial situation and business prospects the buyers of those bonds know exactly what they are getting into, hence it's not theft.
Is bankruptcy always 'theft', as mac alleges? Here's a specific example: if someone spends 10 years trying to get out of credit-card Hell, paying the minimum balance on (among others) an Optima card with a $5,000 limit, a $4,900+ balance, and an 18% interest rate while trying to find a higher-paying job or a cheaper place to live, then finally gives up and files for bankruptcy, has Optima lost any money? I haven't done the calculations, but with ten years of 18% interest, it looks to me like they got their $5,000 back and then some, even after adjusting for inflation. I don't mean to call Optima thieves, but it seems a bit simplistic to say that this (non-hypothetical) card-owner has 'stolen' $5,000 from Optima.
We don't exactly live in a culture that encourages this sort of thing. Chiding the bankrupt is essentially saying "Well, why were you so stupid to buy all that stuff just because we told you to??"
What you're saying is the schools are a failure if people aren't taught the long term value of thrift at some point.
Is bankruptcy always 'theft', as mac alleges?
Not at all, theft is taking money from somebody who does not want to give it to you. Sure, the borrower signed a contract, but the bank did as well. The bank lent the money of their own free will. The bank understood before lending the money what would happen if the person couldn't pay it back. The bank understood that there was a risk of Chapter 11 bankruptcy discharging the debt. They charge an interest rate that is commensurate with that risk. Everybody knew the terms of the contract and rules of the game beforehand, so I don't cry for the bank or the borrower.
And stop with that "back in the 1960's we always paid out debts BS" You also didn't extend credit to people who were so close to the edge financially. If we used similar underwriting standards today, we'd have far less debt but also far fewer bankruptcies. Secondly, I never hear this type of hang wringing over "theft" when it's a business declaring bankruptcy either.
"And then there's the guys who are truly just... mentally handicapped when it comes to money."
I think Toxic is right more than he realizes. I've counseled people for several years now, and I honestly believe undiagnosed bi-polar disorder, in a mild or moderate form, afflicts an enormous percentage of the population.
My husband is a bankruptcy attorney as well and I'd say this guy hit the nail on the head:
Yes, it's theft. The example of the higher rate that GM has to pay compared to Exxon (GM's rate is approximately 56% at this time, BTW) isn't an appropriate counter-argument NO ONE would lend to GM if they KNEW GM would go bankrupt. You're mistaking gambling for lending.
This is the kind of fuzzy and basically immoral thinking that has put us in the position we are. When a debtor signs his name to a loan, it used to be that not only his financial credibility but his moral credibility was at stake. The debtor clearly states that he WILL repay the loan. Not that he will if it's convenient, or if he feels like it, or if he hits the lottery, but that he WILL repay. The debtor's personal honor is at stake.
Now, when debtors fail to repay, they have abandoned their personal responsibility. Many of the commenters in this thread seem to think "Oh well, the lender should have known better than to trust that individual." Right. Just as in Animal House, "You f***** up. You trusted us!"
You want to justify that abandonment of personal responsibility, go for it. Just understand that the easier society makes it for people to avoid their personal responsibilities and shed their voluntarily contracted obligations at will, the more likely they are to do so. Such behavior makes America weaker, poorer and more fragmented as a nation because it poisons the wellsprings of trust that underpin a free society.
Why do you think the Arab societies are so far behind socially? A near-complete lack of trust for ANYONE other than family members greatly circumscribes the home-grown commercial opportunities available in those societies.
The underwriting standards used in the 60's should NOT have been abandoned. It SHOULD be difficult to get a loan if the borrower doesn't appear to be able to repay it completely and on time. I can't think of a more certain recipe for national financial disaster than easy credit combined with collapsed standards of personal responsibility. Isn't that exactly how we got into the parlous condition we face today?
As for Dr. Weevil's example, the debtor voluntarily undertook to repay on the schedule the lender stated prior to borrowing the money. If I had a dollar for every free balance transfer offer I've seen in the last ten years I'd have a considerable sum of money. The fact that the debt is onerous does not relieve the debtor of the moral obligation to repay; it simply poses him the necessity of finding an honorable and legal way to do so. That could mean transferring the debt to a different credit card, trying to negotiate lower rates, or borrowing from a more sympathetic lender. The key is that the debtor voluntarily accepted the responsibility. He needs to discharge it.
Really, mac? If bankruptcy is theft, why don't creditors ever call the police when they get notice of a bankruptcy? You say that bankruptcy doesn't count as an "honorable and legal way" to deal with a debt, but honorable and legal are two different things: it is certainly legal. If you want to call it dishonorable, sleazy, immoral, unethical, feel free. But don't call it illegal, and don't call it theft unless you're willing to add a proviso like "morally, but not legally, theft". When you claim it's illegal or call it theft without qualification you say something that is not true.
By the way, "transferring the debt to a different credit card" doesn't always work, and some creditors are in fact thieves, both legally and morally. There is one bank you've heard of that I once had a Visa with. Every payment I sent them was late, with a $30 late charge, unless I sent it certified mail with delivery confirmation. If I could prove when it arrived, I could mail it 3 or 4 days before it was due and it would get there on time every time. (Certified mail and delivery confirmation do not speed up delivery, they only make the delivery date provable.) If I sent it without such proof, it was always one day late. If I sent it 4 days before the due date, it took (they claimed) 5 days to get there. If I sent it 5 days before, it took 6, and so on. (They made sure to mail it to me so close to the due date that I would have at most a week to get the payment back to them, and that was never enough.) That bank was run by thieves, who ought to be in jail. I paid them off, with difficulty, since the first supposedly-late payment upped my interest rate from 2.9% to something like 27.9%, but if I had gotten out of that debt by declaring bankruptcy I wouldn't have felt half so guilty as you seem to think I should.
"Bankruptcy is bankruptcy and it is effectively theft"
Article 1, Section 8 of the Constitution: "The Congress shall have Power To establish an uniform Rule of Naturalization, and uniform Laws on the subject of Bankruptcies throughout the United States."
It's not quite theft, more like a fact of life. Professional lenders don't loan money with their eyes shut, but build the risk into their pricing. Since the risk is low, the premium is low. The cost of bankruptcy to the filer is high, and it is not used very often.
We need to stop with the hysterics and get real. Lenders would rather take a few losses along with the profits that accompany them, than avoid the risk but necessarily forgoing the profits that accompanies that risk. Lending is a business, and it's unrealistic and shrill to expect every loan to be repaid.
The problem with bankruptcy isn't so much that it reduces profits for lenders; as others have noted, this is priced into the loans, though an unanticipated increase in bankruptcies does tend to screw over lenders. The main problem is that it raises the cost of borrowing for the majority of borrowers who are responsible.
In the long run, bankruptcy isn't a transfer from borrowers to lenders; it's a transfer from responsible borrowers to irresponsible borrowers.
In the long run, bankruptcy isn't a transfer from borrowers to lenders; it's a transfer from responsible borrowers to irresponsible borrowers.
Banks are loaning the money, because on the whole, they are making billions doing it. Credit was expanded to the poor, because banks can make billions doing that as well. Nobody forces the banks to loan to irresponsible borrowers. Even right after a bankruptcy, I guarantee you'll get credit card offers.
Banks loan money to these people, despite knowing the bankruptcy risks, because they make money on them. Even if the debt is discharged, if the debtor paid a couple of years of minimum payments, they've likely gotten their money back anyways. Banks also make little money on giving credit cards to responsible borrowers. With a decent rewards card they are most likely just breaking even if you pay it off at the end of the month. They make money on the people irresponsible enough to keep balances on 28% interest credit cards. If you're responsible, the irresponsible borrowers are the ones funding the rewards you get from using a CC.
"Banks are loaning the money, because on the whole, they are making billions doing it. Credit was expanded to the poor, because banks can make billions doing that as well."
No, in many cases, banks were extorted or threatened into it to allow Poor Minorities (TM) to enjoy the wealth-building that came with owning a home. (CRA, Acorn lawsuit, etc) Banks have since admitted that since the regulations on lending were required to be loose, they simply upped the price of loansto everyone, and tried to balance the money to be lost at the lower end of the income scale by being equally loose at the upper end.
No, in many cases, banks were extorted or threatened into it to allow Poor Minorities (TM) to enjoy the wealth-building that came with owning a home.
What did the CRA have to do with credit cards and bankruptcies? It's not like mortgages can be modified in the bankruptcy process. What did it have to do with million+ dollar loans being given without income verification?
I'm telling you, the sub-prime problems aren't what's causing the banks to fail. It's the realization that Alt-A loans ended up being toxic. Banks are going to lose far more money from lending to the middle-class to rich than to the poor.
Re: The example of the higher rate that GM has to pay compared to Exxon (GM's rate is approximately 56% at this time, BTW) isn't an appropriate counter-argument NO ONE would lend to GM if they KNEW GM would go bankrupt.
This is a consequence of the fact that the future is indetermninate and we can only make probabilistic statements about it. That's a feature of bedrock reality by the way, not just a limitation on human intelligence. If we could know the future with certainty, then insurance would also not exist. Life is uncertain and in some ways it is a gamble.
By the way I wonder what Mac thinks of people who die in debt? Are they thieves too? Should we haul their corpses into court to demand payment? Dun either God or the Devil before their souls may enter their final abode?
Re: In the long run, bankruptcy isn't a transfer from borrowers to lenders; it's a transfer from responsible borrowers to irresponsible borrowers.
You can say the same about insurance payouts.
Re: No, in many cases, banks were extorted or threatened into it to allow Poor Minorities (TM) to enjoy the wealth-building that came with owning a home.
I see that this ugly, racist calptrap refuses to die even though it has been debunked countless times. Again, short version: CRA-conforming mortgages are defaulting at lower rates than non-CRA confroming loans. Accept reality, not Rush Limbaugh's flatuence.
JonF,
Sorry to let reality intrude, but there are relevant differences between the races. For example, check out Student Loan Default Rates by Ethnicity
Weevil,
First, read the whole thread. I said bankruptcy is effectively theft. I also said it is legal but that the end result for the creditor is the same as theft.
You signed on the dotted line for the loan. You chose the lender you borrowed from. No one forced you to do either. They were your choices. If you picked a jerk for a lender, the responsibility is on you, as is the responsibility to pay the debt you contracted. Squirm, wriggle, evade, rationalize all you want: you have the moral responsibility for paying off the debt you contracted and gave your signed word you would repay.
Oh, you don't care that you signed your name to documents obligating you to repayment? Your personal honor is a luxury you find too expensive to maintain? If that's the decision you've made, I hope you can live with it. You're the one who has to face yourself in the mirror with the knowledge that your word isn't worth the paper it's written on. For their sake, I hope your friends, relatives and business associates know how much trust they can place in your signed word. It's obviously not much.
"you have the moral responsibility for paying off the debt you contracted and gave your signed word you would repay."
Huh? In most commercial deals you never sign anything that says you are wholly and personally liable for the debt owed. In a $100 million dollar deal, you and your investors might kick in $20 million and borrow the other $80 million. The $20 million is the only obligation you have. The bank knows that if you default they can foreclose on the property, and you lose all of your investment. At no time did you ever agree to be personally liable for the debt.
JonF:
Re: In the long run, bankruptcy isn't a transfer from borrowers to lenders; it's a transfer from responsible borrowers to irresponsible borrowers.
You can say the same about insurance payouts.
Yes, you can, and it's a real problem with insurance, which insurance companies should take steps to mitigate, insofar as this is possible.
Likewise, we should take reasonable steps to mitigate the abuse of bankruptcy, including but not limited to stigmatization.
Re: Yes, you can, and it's a real problem with insurance, which insurance companies should take steps to mitigate, insofar as this is possible.
Hmm. So isnurance companies should take suscribers' money and then not make payouts?
Re: Sorry to let reality intrude, but there are relevant differences between the races. For example, check out Student Loan Default Rates by Ethnicity
I wonder what happens if you control for this by income? Also, this is no way addresses my point about CRA mortgage default rates.
JonF: Hmm. So isnurance companies should take suscribers' money and then not make payouts?
Perhaps they should just pool risk more aggressively or refuse to cover some applicants.
Of course, this seems to just inspire regulatory prohibitions (see: health, fire and flood insurance). Which require increasing premiums for those with better risk profiles. Not that insurance companies wouldn't try to do that anyway, but if rejections and premium differentials are regulated they've got justification for it.
What did the CRA have to do with credit cards and bankruptcies?
Nothing, of course. It's another right-wing canard, one that is sorrowfully out of touch with reality, which often includes a racist subtext. Most defaulting loans come from the prime borrower pool, subprimes comprise a minority of the total loan pool, and lenders who pursued the higher risk loan market did it to make money.
I also said it is legal but that the end result for the creditor is the same as theft.
Fraud and willful misrepresentation are forms of theft. Bankruptcy is a legal orderly process that is quite the opposite, and a reasonable and fair alternative to debtor's prisons.
The founders of this country created bankruptcy laws in order to encourage reasonable risk taking. One of the reasons that the US became a strong, powerful country is because its citizens have long been encouraged to dream big and take some chances.
A people who are too risk averse would not have accomplished nearly as much. The social benefit overwhelms the cost of the occasional failure. There is little here that can't resolved with a bit of underwriting, some collateral and appropriate pricing.
JMO, please read the title of the thread. We're talking personal bankruptcy here. Your example is comparing apples to pineapples because you're talking about a secured loan. If there is a default in your example, the bank will receive the security on which they lent the money. A rational bank would presumably not have lent an amount greater than what the proffered security was worth.
In personal bankruptcies, where the security is normally the debtor's future earnings, the usual result is that the creditor ends up with nothing but a piece of paper with the debtor's name on it promising to repay. If the creditor is lucky, he receives a small fraction of the amount he is owed. The debtor has broken his written promise to repay and the creditor has effectively lost whatever amount the debtor still owes just as certainly as if the debtor had robbed him of that amount at gunpoint. Bankruptcy is legal and armed robbery is not, but the effective end of both practices is an almost certainly unrecoverable loss to the creditor.
mac:
Read the whole thread your damned self, and try not to be so ignorantly self-righteous. I gave you an example of a creditor that was in fact a lying thief, that I nevertheless paid in full, and you lecture me on the importance of honor and honesty as if lenders were universally purer than driven snow.
Does it bother you that a well-known bank lied repeatedly about when they received their credit card payments? Does it bother you that they charged a $30 late fee every month by leaving my payment in the mail room until the day after it was due, no matter when I mailed it, as long as I couldn't prove they got it on time? Do you even understand the issue? There's at least one bank in America that intentionally holds on-time checks until they are one day late so they can punish the creditor under false pretenses, and you can't come up with a single word of criticism of anyone on the industry side. The managers and employees of that bank are in fact, both morally and legally, thieves, but you somehow can't see that or don't care. I had to spend several dollars a month for certified mail and delivery confirmation to keep them from cheating me over and over again, and you have no problem with that, because I should have picked my lender better. I'm afraid it hadn't occurred to me that a bank would be able to get away with that sort of thing: I would have thought that one of the mail-room flunkies would have felt guilty, blabbed to someone, and got them indicted, but apparently not. So why do you save all your indignation for creditors?
If the culture changes so that most American consumers spend less than they earn, how would it impact the economy long-term? Any thoughtful research on this?
Some economists seem to think that only irresponsibility can save us. If individuals won't overspend, the government must, or an unspeakable horror will incinerate the American Dream.
I wonder.
Mac is absolutely right that keeping promises and paying debts should be (and used to be) recognized as a moral obligation. our society's prosperity is an outgrowth of this "moralization" of financial obligations and the abhorrence of dependency. He is right that "the easier society makes it for people to avoid their personal responsibilities and shed their voluntarily contracted obligations at will, the more likely they are to do so. Such behavior makes America weaker, poorer and more fragmented as a nation because it poisons the wellsprings of trust that underpin a free society."
On the other hand, wealth creation and capitalism involve risk -- business ventures fail, and bankruptcy is a way of dealing with this. And lenders "price in" this risk when charging for money -- so in this sense, bankruptcy can be seen as "value neutral." That's the way the system works.
Can these approaches co-exist? Only uneasily. The world of high finance, which is cost/benefit and leverage driven is absolutely essential for our prosperity, but tends to undermine the ordinary virtues of obligation, self-sufficiency, prudence and thrift. Once again, I think one way to reconcile these not entirely compatible ways of thinking about debt is to separate investment (for production and wealth-building -- the realm of business) from personal consumption, which is not generally productive or wealth building. Taking risks with money -- and the safety net of bankruptcy -- is more appropriate to the former than the latter, and perhaps should be more forgiving. That doesn't mean personal bankruptcy should be abolished (because there's some risk in running one's financial life, too). But it ought to be stricter, and remain "moralized." When people overconsume and then get out of their debts, it really is a form of 'theft' -- even if the credit card companies "price it in." First, we are all paying higher rates because some people live beyond their means. Second, outr society desperately needs people to be personally responsible in their lives, or trust will ultimately erode, our system will implode, and we'll all be poorer.
Annie W
Bankruptcy is legal and armed robbery is not, but the effective end of both practices is an almost certainly unrecoverable loss to the creditor.
The huge difference is that overall the bank makes billions of dollars at the risk that some of that money will be lost to bankruptcy. The victim doesn't make any money when they are robbed at gunpoint. The robbery victim also didn't hand the money over from their own free will. Robbery also doesn't make a country more prosperous like credit does either. It's not theft because the bank lent money to the borrower of their own free will. They did it despite knowing all of the risks up front, because in the long run they make billions of dollars in profits doing it. Banks do not want responsible borrowers with credit cards, because if you pay your balances off in full (which is the responsible thing to do) they don't make any money. If banks were so worried about always being paid back, they'd be far more risk averse with their lending practices.
Then people overconsume and then get out of their debts, it really is a form of 'theft' -- even if the credit card companies "price it in."
Banks only make billions off of credit card holders that over consume. They want the person who runs the bills up and makes the minimum payments on the credit card. Because there are people like this, banks offer cash-back rewards, airline miles etc. to entice everyone to use the cards. If you use them responsibly, the irresponsible borrowers actually make it cheaper for you because of these rewards.
I don't understand the argument that banks make billions of dollars off of giving credit cards to irresponsible borrowers, and somehow that makes it more expensive for the responsible borrowers. Especially when that's not how it works. If the irresponsible stop using their credit cards, the banks will lose billions of dollars in profits.
First, we are all paying higher rates because some people live beyond their means.
We ultimately pay lower rates, not higher rates, because of this phenomenon. Those who carry balances pay the interest charges that make the companies money. The money lost from those few who default is more than offset by those who are in debt who repay it. Under most circumstances, the upside outweighs the downside more than enough to justify the extension of credit.
The creditors can't get the upside without the downside; the downside is integral to the business and cannot be avoided without sacrificing profits. Less risk would mean lower overall returns, and performing borrowers would have to pay more to make up for the lower volumes.
Megan,
You can delete my comments if you like, but the reality is that Steve Sailer has done more original thinking and gotten further to the bottom of the financial collapse than you and other mainstream pundits have. Read what he's written and decide for yourself. Start with this: "The Minority Mortgage Meltdown". Read the whole article, and if you think Sailer is full of crap or has made some obvious mistake, call him on it.
Steve Sailer has done more original thinking
Being a bigot isn't particularly original. The guy is known for his belief that whites are smarter than ethnic minorities.
Here's a basic factoid for you -- the number of prime defaults exceeds the number of subprime defaults. No borrowing class has a monopoly on defaulting mortgages.
The right wing is clueless about this stuff, which isn't surprising given that they are largely responsible for creating the deregulated environment that produced these high LTV loans that could be expected to default whenever asset values inevitably corrected. It's amazing how they can cause so much damage and still take no responsibility for it.
You can delete my comments if you like, but the reality is that Steve Sailer has done more original thinking and gotten further to the bottom of the financial collapse than you and other mainstream pundits have.
Then go read Calculated Risk, Tanta has done far more original thinking the Steve Sailer could hope to have done.
Interesting, but irrelevant. Golden retrievers inflict more bites than Presa Canarios too - because there are a lot more of them.
The question is what proportion of prime mortgages default, as opposed to that of subprime ones?
In the mortgage meltdown, the term "subprime" is oten used very sloppily as a catch-all for a lot of things. The real dividing line in regards to defaults is not between prime and subprime, but between conventional fixed rate mortgages and everything else. ARMs and other exotic products are where the big default surge has come from. The includes prime ARMs. and subprime fixed rate mortgages have seen fairly minimal increase in their default rates
The question is what proportion of prime mortgages default, as opposed to that of subprime ones?
Wrong. The damage to the system is measured in absolute terms, not relative terms. If prime loans are defaulting in larger numbers, then the damage is being done by those prime loans that are defaulting.
The problem has been with high LTV and alternate payment loans, such as option ARM's. High LTV loans are, by nature, more risky than low LTV loans, whether prime or not.
I'm wondering how far beyond their means someone making $25/yr is living versus someone making $75K/yr. My sense is that proportionately speaking, the former class is living only a bit beyond their means, whereas the latter tends to go way beyond. This is only anecdotal data of course.
My theory in search of confirmation is that not only are those in the lower income quintiles financially limited, but so is their support network and the finances they can tap from family and friends. My daughter's mother and I together make substantially less than than 60K/yr. But we tend to be the go-to guys for others in our families less well off and who seem to be weathering one calamity after another. Otoh, I have a friend who makes well over 100K/yr, with others in his family similarly well-positioned. There is, of course, one black sheep there, as in mine(more than one, actually), but where my family costs me only a few thousand every couple of years, this relation costs my friend and his family tens of thousands of dollars at least every other year, even though his own income is not inconsiderable. He's the sort of guy who makes $80K/yr with the $250K mortgage, the $60K car, the $20K club memberships. All necessary for his job, of course.
Pulling back to the macro level, I'm guessing that the since the small fry not only have smaller personal resources, but a smaller support network as well, their mistakes and misfortunes, when they occur, are much more sharply felt. They only get one chance, maybe two, before having to declare bankruptcy. Those better off, having a good support network as well as a good income, may get seven or eight or nine chances before having to into bankruptcy. And it is those sorts I posit, who tend to 'live beyond their means' in terms of frivolous consumption. Not the poorer sorts.
Weevil,
YOU CHOSE THE LENDER. YOU. YOU DID IT TO YOURSELF. YOU PICKED A JERK FOR A LENDER. YOU. YOU DID IT TO YOURSELF. YOUR MISTAKE. THE FAULT FOR MAKING THE MISTAKE LIES WITH YOU. THE OBLIGATION FOR CORRECTING IT LIES WITH YOU. YOUR RESPONSIBILITY.
WANT TO SEE WHO'S RESPONSIBLE FOR YOUR PROBLEMS? LOOK IN THE MIRROR.
Actually, the lender was obviously doing you at least a small favor. I wouldn't lend you fifty cents after reading your "it's God's will or somebody else's fault" drivel.
Lenders may "price in" the risk of some defaults and failure to make loan payments, and may "make money" through high interest on some people's failure to pay off their credit card balances. But step back and look at the system as a whole. The integrity of the system depends on MOST people paying their bills and meeting their obligations MOST of the time. That is what creates the cash flow. Ultimately, people need to get paid for the goods and services they provide, or they will stop providing them. If they do not get paid, that is "theft." Thus if everyone -- or most people -- flout their 'responsibility', spend money they don't have, and cease to pay, the whole system collapses. In this sense, the shleppers who honor obligations, are prudent, don't overspend and don't overborrow are carrying everyone else. The system exploits their good behavior.
The integrity of the system depends on MOST people paying their bills and meeting their obligations MOST of the time.
Right. Most, not all. And that's happening as we speak.
Creditors have a vested interest in maximizing collections, but they cannot reasonably expect to earn above-average collections for a given risk pool, by definition. A failure to account for risk appropriately would be akin to a restaurant that didn't account for food spoilage, or a manufacturer that didn't plan for storing its inventories, that would just make no sense.
A smart lender will make project realistic default rates, and act accordingly. A greedy or inept one will fail to have lending policies that match the risk profile. Borrowers tend to behave in a predictable fashion; if lenders failed to properly account for those risks, then that's the fault of the lender who should have known better.
YOU CHOSE THE LENDER. YOU. YOU DID IT TO YOURSELF. YOU PICKED A JERK FOR A LENDER. YOU. YOU DID IT TO YOURSELF. YOUR MISTAKE. THE FAULT FOR MAKING THE MISTAKE LIES WITH YOU. THE OBLIGATION FOR CORRECTING IT LIES WITH YOU. YOUR RESPONSIBILITY.
What little credibility you may have had was blown out of the water by that rant.
If a lender violates its cardholder agreement by failing to credit payments timely, etc., then the fault would clearly lie with the lender, and it should be punished accordingly. That would clearly be an act of bad faith and a breach of contract.
Assuming that the other poster is telling the truth, there is no reason to blame the victim while giving a pass to the perpetrator. None at all.
Nonsense.
Lending models take into account an expected rate of prime loan defaults as a cost of doing business, and set aside reserves accordingly. A large dollop of unexpected defaults arising from subprime mortgages break the models, dump an extraordinary number of units on the market, and lead to ...well, what we have today.
A large dollop of unexpected defaults arising from subprime mortgages break the models
That's the fault of those who constructed the models. The distinction between prime and subprime is the default rate, by definition. Of course they default at higher rates; the issue is one of whether the contingencies match the profile.
Clearly, those "mistakes" were made at every level. The models were clearly wrong, at every tier. We can debate whether lenders undershot because of stupidity or greed, but my vote is for the latter.
The money was being made by churning and flipping, so every effort was made to generate business, no matter how overlevered it was. Simply by ignoring relevant historical data, they were able to justify their forecasts of impossibly low default rates that were illogical from the start.
It is easy to manipulate a spreadsheet; lowballing the assumptions, and then compounding them over a period of years, will achieve astounding deviations between one pro forma and another. Anyone who works with models understands this. Those who express surprise are either unfamiliar with the business or else had an ideological ax to grind before they entered the fray.
In any case, a defaulted loan is a defaulted loan. If a portfolio has five defaulted loans, three of which are prime, the prime defaults provide no consolation. A failure to pay is a failure to pay is a failure to pay.
I hold no brief for those manipulating spreadsheets to generate commissions, but the subprime mortgage fiasco wrecked lending models in the same way that the 1918 influenza epidemic type increase in mortality would wreck actuarial models: by causing a large, unanticipated increase that, being unprecedented, could not be effectively modeled.
I don't understand the argument that banks make billions of dollars off of giving credit cards to irresponsible borrowers, and somehow that makes it more expensive for the responsible borrowers. Especially when that's not how it works. If the irresponsible stop using their credit cards, the banks will lose billions of dollars in profits.
It depends on what you mean by "irresponsible." Arguably, people who continue to pay their debts (even at high interest rates) are not irresponsible ... because they continue to pay their debts. The risk of default must still be priced into a bank's services, making it more expensive for people who don't default (the high-interest, excessive borrowers included) than it otherwise would be.
Brandon is still technically correct, as far as I can tell.
The risk of default must still be priced into a bank's services, making it more expensive for people who don't default (the high-interest, excessive borrowers included) than it otherwise would be.
That's true, but a properly managed expansion of the borrowing pool would be expected to lead to higher default rates that would be offset by a correspondingly higher increase in profits that make the increased default rate worthwhile.
A higher default rate within that context should save the other borrowers money, not increase it, because the marginal revenues attached to the higher default rate increase overall profitability.
There should be some equilibrium point between writeoffs and revenues that would determine the optimal balance. The keys would be properly calculate that, and to have underwriting standards that match that balance.
The thing I find intellectually dishonest is those maligning lenders for extending credit to irresponsible borrowers in the full knowledge that had lenders not done so, those same people would be excoriating them for denying credit to the poor.
That's true, but a properly managed expansion of the borrowing pool would be expected to lead to higher default rates that would be offset by a correspondingly higher increase in profits that make the increased default rate worthwhile.
A higher default rate within that context should save the other borrowers money, not increase it, because the marginal revenues attached to the higher default rate increase overall profitability.
Your point is well-taken. But it's still not the higher default rates, as such, that save other borrowers money. Profits aren't made by defaults, they're lost. They're made from people who pay their debts, as you've pointed out. Just because there's a correlation between an expanded borrowing pool and higher default rates doesn't change this.
To put it another way, assuming an expanded borrowing pool without defaulters, prices would be lower and profits higher. It may be true that one is not possible without the other, but borrowers who pay their debts still indirectly pay for those who don't, no matter how you frame it.
The thing I find intellectually dishonest is those maligning lenders for extending credit to irresponsible borrowers in the full knowledge that had lenders not done so, those same people would be excoriating them for denying credit to the poor.
I don't disagree with that, but I find it more disingenuous when conservatives pretend that lenders pursued the subprime market because they had some sort of gun to their heads.
Lenders such as Countrywide dived in with both feet because they were making money from doing it. There were and are ways to comply with CRA that don't entail jumping into the deep end and lending willy nilly to anything that moves.
There were conservative institutions that sacrificed short-term profits by avoiding such risks, but the megabanks preferred the short-run returns. The CEO's preferred to pocket their bonuses to explaining to Wall Street the lower profits that more prudent practices would have produced.
In any case, prime and non-prime defaults are a substantial part of the issue. Loans that are being paid but lack sufficient collateral to survive mark-to-market scrutiny are an even larger problem. High LTV loans are a mistake, prime or otherwise.
assuming an expanded borrowing pool without defaulters, prices would be lower and profits higher.
Right, but the issue here is precisely that -- that circumstance cannot be assumed. If the pool is expanded to include higher degrees of leverage and/or lower quality borrowers, then default rates will increase, by definition.
If expanding the pool leads to higher profits, net-net, then the other borrowers benefit because they receive a benefit that exceeds the corresponding cost. What happened here is a bit of both -- expansion of the pool increased profits in prior periods, but those have since been offset by larger losses today and in the near future.
I don't disagree with that, but I find it more disingenuous when conservatives pretend that lenders pursued the subprime market because they had some sort of gun to their heads.
My impression is that some lenders were pushed into subprime lending by the CRA, and some jumped in with both feet. But that is just an unfounded impression, so let me make it a premise: I have time for lenders who were pushed, if any such there be, and none whatever for those who jumped. The latter should be forced to face the consequences of their decisions. As everyone should, imo.
Right, but the issue here is precisely that -- that circumstance cannot be assumed. If the pool is expanded to include higher degrees of leverage and/or lower quality borrowers, then default rates will increase, by definition.
I'll try to be more clear: Just because expansion of the borrowing pool leads to both higher profits and higher defaults, does not mean that higher defaults lead to higher profits--they obviously don't.
This question (at least the one I was responding to) was whether the "responsible" pay for the "irresponsible." Defining the "responsible" as "people who pay their debts", and the "irresponsible" as "people who don't," makes this necessarily so, for the reason already explained.
Just because expansion of the borrowing pool leads to both higher profits and higher defaults, does not mean that higher defaults lead to higher profits--they obviously don't.
The income generated by these financial institutions during the boom period suggests that these practices were profitable during previous periods, when the macroeconomic cycle was more favorable, but that they aren't today. Like their customers, the lenders were high flyers that ultimately crashed when unfavorable winds blew.
In essence, the financial models failed to properly account for inevitable economic cycles and the higher default rates that accompany them. It just wasn't much fun to manage for the worst case scenario when times were good.
The income generated by these financial institutions during the boom period suggests that these practices were profitable during previous periods, when the macroeconomic cycle was more favorable, but that they aren't today. Like their customers, the lenders were high flyers that ultimately crashed when unfavorable winds blew.
Absolutely agree. I say, let 'em all crash and burn.
I use the "windfall tax" criterion: if the situation were reversed, would the cash flow reverse? (E.g., would populists proposing windfall taxes on oil companies six months ago be willing to give those companies tax money when they face hard times?)
Same principle applies to the high-flying lenders and prodigal borrowers - antisymmetry with respect to exchange of variables.
I say, let 'em all crash and burn.
Unfortunately, we can't do that without hurting ourselves. The banks aren't just businesses like the corner store, but are integral components of the monetary system, so we can't allow them to fail without hurting ourselves in the process.
They need to be regulated so that they behave more like utilities and less like dot.coms. Their losses are necessarily socialized, so we have every reason to place specific boundaries on them that wouldn't necessarily be applied to other industries.
Unfortunately, we can't do that without hurting ourselves. The banks aren't just businesses like the corner store, but are integral components of the monetary system, so we can't allow them to fail without hurting ourselves in the process.
Yeah, I know. I was venting. /g
Too big/important to fail essentially allows banks and other companies to hold society hostage to their own stupidity, incompetence, or plain bad luck. Maybe Glass-Steagall wasn't all bad after all.
Defining the "responsible" as "people who pay their debts", and the "irresponsible" as "people who don't," makes this necessarily so, for the reason already explained.
I wouldn't use that description personally. I'd say responsible are people who don't take on CC debt, except in an emergency They don't normally carry a CC balance, because the high interest rates costs them money.
Irresponsible borrowers carry a balance on their CC, because they don't save for purchases. They end up paying far higher prices for items if you include paying off the interest on the CC. IMO, even if you pay off the CC in the end, if you pay high interest rates on a CC just so you can have a TV now instead of later you're fairly irresponsible.
"If a lender violates its cardholder agreement by failing to credit payments timely, etc., then the fault would clearly lie with the lender, and it should be punished accordingly. That would clearly be an act of bad faith and a breach of contract.
Assuming that the other poster is telling the truth, there is no reason to blame the victim while giving a pass to the perpetrator. None at all."
You're absolutely correct. However, I never said that the lender should be given the slightest break for any failure to perform or breach of agreement. What is more, I fully agree that any lender using unscrupulous tactics should be prosecuted to the full extent of the law.
The only problem with that is where it meets reality. If Weevil had such serious financial difficulties that he's in danger of bankruptcy, he probably doesn't have time to be chasing down the relevant law enforcement agency and getting them to investigate. Moreover, it's not the best use of his time; he needs to have a second job.
most importantly, however, HE NEEDED TO CHANGE LENDERS! That was an action fully within his control and he failed to do so.
Case in point: I had Chase hit me with an $29 late fee after a fifty dollar total payment posted one day late. I called and explained that I had been overseas without regular computer access. They told me they didn't care what my explanation was, they would not waive the $29. I then told them to cancel the account immediately and that I would never do business with them again. It has been a pleasurable experience throwing their continuing CC solicitation in the garbage.
Balance transfer arrangement offers abound in the CC world. If you're not happy with a lender, there's no problem with changing to a different one. Weevil could have done this with only a small modicum of effort, far less than it would take to fight them through the courts or regulatory agencies, and get on with the business of getting his debts paid. Instead, he chose to live with the problem and gripe about it.
Again, he chose the lender and made the first mistake. He compounded it by not changing lenders when he found his lender was a jerk. He at all times had it within his power to do something about the situation but did not. Anyone who can ameliorate a bad situation but chooses rather to gripe about it instead of taking action doesn't get much sympathy from me.
As John Wayne said, "Life is tough. It's tougher when you're stupid." He was stupid not to change lenders and paid the price. That doesn't let the lender off the hook one bit for being a crook. If he had quit the bad lender and told them why he was doing so, he would have been doing the most damaging thing he could be certain of managing--hitting them in their bottom line, where it hurts. He didn't even do that.
I see that 'mac' has learned to turn off the caps-lock key. If he would only learn to turn off the insults and the lies, he would be more convincing.
The fact is that I did pay off the credit card, but it took a lot longer than it would have otherwise, because I was paying 27.9% (I think that was the rate) instead of the promised 2.9%, so the portion of my payments that went to cover the interest was almost ten times what I had been promised. Do I really have to explain something so simple? Having to spend something like $3.50 instead of 39 cents every month for postage didn't help.
It also took a few months to figure out that the problem was with the lying bank, not incompetence on the part of the Post Office. At first I thought I was just unlucky, and kept mailing the payments ever earlier to solve the problem.
I never wasted any time trying to prosecute the bank, because there was no point. Again, 'mac' just makes up his criticisms out of thin air. I couldn't prosecute because I couldn't prove what they were doing. The pattern made it absolutely clear: every single payment sent without delivery confirmation was 'late', no matter how early I sent it, while every single payment sent with delivery confirmation was on-time, even if I sent it just 3 days before the due date. But it took quite a few months to prove that to my own satisfaction, and I had (and have) no way to prove it to anyone else, and the bank knew it, which is why I haven't named them. It would have been pointless to prosecute, and I simply paid off the debt as soon as soon as I could. I have already mentioned that I did that, so mac's suggestion that that's what I should have done utterly misses the point.
Why didn't I just change banks immediately by taking the next unsolicited balance-transfer offer? Because I had no way of knowing whether the next bank would be equally crooked. Do I really have to explain this? If there's one crooked bank in America, it's likely that there are at least two or three.
To sum up, the bank I described was not "a jerk", as 'mac' so mildly puts it, it was a bunch of lying thieves who belong in jail. What they did was (unlike bankruptcy) illegal as well as unethical, and poor stupid 'mac' still can't get his head around the fact that some banks are run by out-and-out criminals. He's more outraged that Chase charged him a late fee when he was in fact, by his own admission, late than when another bank repeatedly charged me and (I assume) thousands of other debtors fraudulent late fees when we were not in fact late.
Why 'mac' insists on blaming the debtors in every case I do not know. Perhaps some deep-seated psychological trauma? Did his own mother borrow $50,000 from him and then declare bankruptcy and laugh at him when he asked for the money back? Something like that would explain the irrational vehemence of his reaction to logical argument and specific examples. He's certainly in no position to call others stupid.
Weevil,
Your bank's behavior as described is illegal, unethical, disgusting and deserving of punishment.
But if it happens again, consider having a checking account at a bank that pays bills electronically for free, and as long as you schedule payments the recommended 2 or 3 business days ahead, will take it up with the payee if they claim you're late. Schedule recurring payments automatically if you like.
Weevil,
Yes, I am in a position to call YOU stupid. You were getting screwed by your lender and didn't change because you thought all other banks were crooked? Yes, you're stupid. You think everyone would accept such poor behavior on the part of a lender as supinely as you did? Dream on, bud. It's easy to see why you were, and probably still are, in the financial hole. Lenders provide a service, just like auto repairmen, dentists, doctors, and restaurants. If you go to a restaurant and they don't serve good food, do you keep going back? Heck, YOU probably do.
YOUR MISTAKE. YOUR RESPONSIBILITY TO FIX IT. YOU MADE THE INITIAL MISTAKE, ACCEPTED THE POOR SERVICE AND ALLOWED IT TO CONTINUE. YOU DID IT TO YOURSELF.
If you don't like that assessment, too bad. It's the truth, which is why it cuts you so deeply. It would have at least been useful experience if you had learned something from it. Judging from your posts here, however, you haven't. Again, too bad. Maybe Obama will give you a unicorn to make up for it, but I'm done with you.
You are indeed in a position to call me stupid, mac. Anyone can call anyone stupid if he is willing to lie, and lie, and lie again, as you have done. You don't possibly work for a certain bank in Delaware, do you?
You say I didn't change, but I did as soon as I realized the problem. Got that? I did what you said I should do: paid off the card. What else should I have done? Told them my payments were not actually late? They knew that. Sent all my payments certified mail with delivery confirmation so they could no longer lie about when they received them? I did that. Paid off the entire debt as quickly as possible, i.e. within six months? I did that, too. Taken the next unsolicited balance-transfer offer I received in the mail so I could pay it off immediately? That's how I got screwed by the unnamed bank in the first place. Your proposed solution is half what I was already doing, half stupid.
You really think your criticism cuts me "so deeply"? I am feeling entirely uncut. It's an honor to be abused by such a pathetic swine as you.
HE NEEDED TO CHANGE LENDERS! That was an action fully within his control and he failed to do so.
He was carrying a balance, so he couldn't simply just dump his card without another one to replace it. With late payments on his record, that could be difficult to do.
Case in point: I had Chase hit me with an $29 late fee after a fifty dollar total payment posted one day late. I called and explained that I had been overseas without regular computer access. They told me they didn't care what my explanation was, they would not waive the $29. I then told them to cancel the account immediately and that I would never do business with them again. It has been a pleasurable experience throwing their continuing CC solicitation in the garbage.
I guess we look at the world differently. Had I been in that situation, I would have dealt with a higher level of the organization, and given my previous experience with such things, would have most likely ended up with a full credit to my account, plus something extra.
Negotiation skills and clarity of thought best a temper just about every time. Still, I won't call you names even though you didn't handle that very well.
Mismanagement of finances I think is the main reason for bankruptcy. Sure medical bills can lead to financial turmoil but this can be avoided if you invest in your health. You should also have contingency savings just in case something happens. The most important thing is that you manage your finances well and invest on things that truly matters.