Bankruptcy Law Fails to Keep Creditors in Line

NPR's report on the new bankruptcy legislation, which goes into effect in less than two hours, piqued my interest.

First, is the timing of the bill. Why now? People have been going bankrupt for years. But now that consumer debt is at an all-time high, and both inflation and interest rates are poised to increase, lenders are worried about losing their shorts unless bankruptcy laws are revised.

Second is how the report mentioned that consumer advocate groups opposed the legislation because it lets lenders off the hook. I agree. You'd think if a company were going to lend money to someone, it'd make sure the person seems responsible enough to pay back the loan. But that's not happening. Just sift through a week's worth of junk mail and count how many offers you get for home equity loans and credit cards. Lenders are saving money by failing to properly screen applicants, and now they've gotten the government to enforce payment.

What the bill/law should do is penalize the "worst" lenders in some way. Here's how. Whichever lender has the "most money" in default should be forced to forgive those debts. By "most money," I mean the highest ratio of money in default to total loan money in any given month. This makes it fair for large lenders.

So in November, when Capital One complains that it extended $1M to customers and $100K cannot be paid back, the government can respond, "Sorry, but no other company has anything as large as 10% of its loans in bankruptcy court. You're an irresponsible lender, and you're not entitled to get it back."

This might lead to a stalled economy. After all, our economy is fueled by irrational credit spending. But it might also lead to lenders that take an interest in its customers.