More Struggling Borrowers Face Pay Garnishment | Hacker News Reader

More Struggling Borrowers Face Pay Garnishment

nytimes.com

11 pointspg36 comments

This is getting uncomfortably close to debt slavery.

In ancient times, or less ancient times in some countries, people who got into sufficiently large debt to someone had to sell themselves to them. And since credit card lenders' ideal situation is when someone can pay the interest on their debt but not the balance, if they tuned the percentage of the garnishment to do that, the debtors would end up paying them for the rest of their lives.

Indeed, it is bizarre that the courts allow creditors to continue charging 25%+ interest even after garnishment has begun. High interest rates like that might be considered "fair" while there is still a high chance of default---but pretty gratuitous once the person is already being forced to repay.

I actually believe that's one of the points of chapter 13 bankruptcy: To stop the accrual of interest on debts when the person can pay the interest for functionally forever, but almost never the principal.

>How long does a Chapter 13 Bankruptcy take to pay off?

>The size of your monthly plan payments is determined by the amount you can afford to pay after paying necessary living expenses (including insurance, mortgage payments, etc.). Typically, the Plan payments last for 36 months, unless additional time is requested, but in no event will they last more than 60 months. Therefore, if your payment analysis shows, for example, that you can afford to pay $200.00 per month (above and beyond your normal living expenses), you would pay that each month to the Chapter 13 Trustee, who would disperse it pro rata among your creditors. At the end of 36 months, you are discharged from all dischargeable unsecured debts, regardless of how much your creditors have received.

from: http://www.creditinfocenter.com/bankruptcy/chapter13BK.shtml

The article did mention that it costs money ($2000 or so) to go into bankruptcy, which means you have to save up that much money before you can go broke. Not always an option when a quarter of your wages are being garnished.

These people can still declare bankruptcy. They still have assets, so I'd say it's nothing like debt slavery.

So it turns out that if you make more than some specified amount, determined by the average for your state, you can no longer have your debts absolved by bankruptcy. Best you can do is enter into a 5+ year payment plan, where they garnish your wages automatically.

That's a 5 year payment plan supervised by a judge, and at its conclusion if your reorganization fails, your debts are resolved. Most reorgs fail.

Even after the BK "reform", the US still has a generous bankruptcy system compared to the EU.

Yes, the new bankruptcy system tries to eliminate that option for people making more than the average. It's an extremely bad reform, as it hits higher income people trying to take risks and build businesses.

Here's what to do if you're caught in that: decide to declare bankruptcy, then figure out a way to establish a six month period with your income below your state's average. Quit your job, stop paying yourself a salary from your company, whatever. If you've got to feed a family, make a mortgage, pay for your kids college tuition and otherwise support an above state average lifestyle for people you love... I don't know. Consult a good bankruptcy lawyer, and if they don't have a solution for you, ask them directly for a recommendation of a lawyer who will help you to beat this system.

It would be more humane to deny some people large amounts of perpetual unsecured credit to begin with. I think the ongoing compounding of credit card debt might even be worse for some people than the limited-term high interest rates of payday loans or pawnshops.

If we were omniscient and could tell who would pay back their credit, and who wouldn't we could do this.

If we're not omniscient, the best we can do is put people in bins: "99% of the people in this bin will pay back their debt in full ...but only 65% of the people in this bin will pay their debt in full".

So...what do we do with people who are in the 65% bin?

Do we cut off ALL of them from access to credit?

Or do we give them access to credit, but at higher interest rates?

Personally, I don't think that someone X who shares demographic traits with someone else Y who will not pay his debt should be punished by lack of access to credit.

You are being a message board geek. It's ok. It happens to all of us. But:

(a) We don't need to be omniscient to know that giving a no-doc zero-down mortgage to someone making $30k a year is a bad plan, or that it makes no fiscal sense to let people take out HELOCs on their houses that can only be paid back if the house appreciates 5+N% year over year.

(b) In the real world outside this message board, lenders are actually employing intelligence in the exact opposite direction, optimizing lending to capture people who will pay more in interest and penalties than they will in principal.

I wouldn't base it on demographics, either, just personal credit history. If you don't want to let people borrow themselves into servitude, then people without reliable credit history shouldn't be given credit cards. If you can't get a creditworthy person to co-sign liability for you, go without. There are other sources of credit if you really need them, and yes they are expensive, but they have a limited impact.

Conversely, if you do give credit cards to just about anyone, then you shouldn't have sympathy for them if they borrow themselves into servitude.

Yes, and even closer to Debt Bondage: http://en.wikipedia.org/wiki/Debt_bondage

Note it's a pretty thin line between the two, and this is a feudalistic system of peonage. The only difference from peonage really comes down to whether you are forced to work for one company or can switch employment while still garnished.

I think this speaks to the value of credit scores and social pressure for enforcing consumer debt contracts, as opposed to prison or garnishment. Sure there are always abusive edge cases to point to, but it's worked quite well overall.

Obviously there's going to be a problem with a massive real estate gold rush bubble fueled by lax regulation, profiteering and fraud by both consumers and finance companies. But last I checked the consumers are getting whacked pretty hard for their sins. Not so sure about finance.

"But last I checked the consumers are getting whacked pretty hard for their sins"

Please elaborate. Consumers are walking away from their mortgages (in many cases, 0 percent down and ARM) or they have been defaulting (staying in the house without paying mortgage for 2+ years in many cases) . Consumers are walking away from their obligation of credit card debts (10%+ discharge rate) at an all time high. Credit scores get reset after bankruptcy pretty quickly now, after 3 years. Heck, you can buy a house with a FHA mortgage up to 500k with 3% down only 2-3 years out of bankruptcy.

What is real is consumers don't have 'jobs' anymore.

Companies that issue no-doc 0-down ARM loans should be forced under. It's hard for me to care that much about the unfairness of the "consumers" in that scenario. The real problem is the vast network of Wall Street arbitrage opportunities that radically incentivized stupid lending.

Well, I don't know if you're ever been through any financial trouble, but in my experience it is very traumatic and has long-lasting physical and psychological repercussions.

Those people walking away from all that are essentially signing up for years of more pain, self-doubt. They will have poor reputation in commerce and finance.

And what's more, clearly you're talking about people with financial resources, that's really not what we're talking about here, you make it sounds like some party, but the vast majority of people who are affected by this aren't going to be getting their credit score back to the level now needed for the FHA mortgage, nor will they have 3% to put down on a house.

Look, dude, I realize you'd like to throw peeps in debtors prison, as you said in another comment, so it's likely I'm talking to either a mean person, and uninformed person, or a troll, but, like, ummm, totally whatever.

So the creditors should just take the loss? That would make credit more expensive, perhaps prohibitively so, causing less people to get into the problem in the first place. That's bad for the industry though, not to mention people's insatiable desire for things they don't need and can't afford.

In a lot of cases I would be happy to have the creditors take the loss. The credit card companies are not simply innocent victims. They deliberately try to lend money to people who will have trouble paying it back, because the longer people take to pay back the principal, the more interest they'll pay.

The cases where people incur too much debt even to pay the interest are just instances of the credit card companies' algorithm missing slightly-- like a torturer accidentally killing his victim.

In a sense, this makes credit cards even worse than the Mafia. If you borrow money from the Mafia and don't pay back, they will maim or kill you, but they probably want to avoid that as it is expensive. If you borrow money from the credit card and don't pay back, the credit card gets to garnish your wages for life, which is a pretty nice deal for them. So the Mafia actually has its incentives better aligned with their creditors.

What loss? With interest, fees, etc the debtor ends up paying many times the value of the debt.

So I could take my credit card with no balance, run up the debt to its limit (11K-ish), make no payments or anything and my bank wouldn't have a loss? There's plenty of ways they can lose.

The post you replied to (and the parent article) are talking about garnishment, interest, fees, etc when debt is collected upon.

If you ran your credit card up to the limit and did nothing (including doing nothing when you were sued for the debt), you would end up with your wages garnished and proceed to pay far more than $11k, just as I said.

Debt slavery? Not even close. In America, there are numerous ways still to discharge your sins of a previously extravagent lifestyle funded on credit card. You can declare bankruptcy (the article mentions the high cost of $2000+, but there are free social services that will help reduce that cost). You can refuse payment for many years, eventually settling to pay off 10-20 cents on the dollar for debt. You can choose to work in jobs getting paid in cash, thereby having no records of salary, and pay no taxes, and eventually your debt is discharged. And so on.

Personally I would like to see people who declare bankruptcies multiple times to serve some sort of jail terms.

I would like to see the people who design business models that target the kind of people who file bankruptcies multiple times serve some sort of jail term.

Ok, let's take it to a bigger scale. Airline industries declare bankruptcies and gets bailed out time and time again, to tunes of billions. Homebuilders transfer assets to new entities, then declare bankruptcies, pocketing billions and evades creditors. Banks leverage themselves with trillions of debt, and gets bailed out by the government.

Meanwhile, regular people have to pay for the billions and trillions of mistakes, with loss of social benefits, or taxes, or inflation. When does it stop?

And you would prosecute the politican who enacts a law to incriminate, and prevent future bankruptcies (by saying NO MORE!)?

That's not true of all kinds of debt. Student loans, which lots of young med school and MBA grads seem to have in the 100K+ range, cannot be discharged through bankruptcy. This hurts the country and the world. Surely there have been a few med school grads who would have founded great wealth producing startups had they not been compelled to practice medicine to pay off their loans.

Oh, btw. Guess who pays the sins of the spenders. That's right. People on this board, who watch as their hard work is eaten up by inflation and taxes. Because banks will get paid no matter what.

Guess who benefits from the generosity of the US bankruptcy system? That's right. People on this board, who survive the demise of startup after startup until they manage to start one that lasts and creates hundreds of jobs.

Most startups are on a trajectory towards bankruptcy. That's the point. It's why you can "work very very hard for a couple years and then not work anymore", to paraphrase Graham. Extreme risk.

How common are debt-financed startups? I was under the impression that they were funded by equity, unless they were starting to show profits or had some assets. In fact, a loan to a startup would behave like equity with a ceiling on appreciation, not like consumer debt.

For whatever reason, I can't recall hearing about a single successful startup founder who previously declared bankruptcy. The closest I can think of was Bill Bartmann (http://www.businessweek.com/magazine/content/07_18/b4032066....).

"Most startups are on a trajectory towards bankruptcy. That's the point" Spoken like an irresponsible gambler.

You could utilize:

1.) Savings - Money saved up, maybe used to purchase things, fund companies 2.) Lean startup method - one should bootstrap until a market/user fit is found, while working full time 3.) Scale up when you have the revenue/demand, not until then.

Otherwise, you're just gambling with other people's money. We have enough gambling in this economy as it is. (Goldman Sachs is leveraged 100 to 1)

When people don't pay their debts, the cost ends up going to people who do. I have no sympathy for people who tried to live beyond their means, and are now paying for it. They made their bed, now they have to lie in it.

When the courts step in, what would be the downside to converting the interest rate into one similar to a savings account or bond? The credit card companies are for-profit companies that take some amount of risk in their business. So essentially, they gave out too much credit to a set of people, how much of that do they eat? To me it sounds like an almost optimum situation for them to have someone's wages garnished, and they're still accumulating interest at over 27% and they're making close to no headway on the repayment. Why wouldn't they want someone to be in that situation? In addition to that, they've probably decimated these people's credit. I'm all for living within one's means but some of this is absurd. It seems like they almost have no choice but to declair bankruptcy. At what point to you hurt the credit card company for making a stupid decision to even give these folks credit?

Exactly. No one is entitled to more than what is needed for basic necessities (a roof, clothing, and food). Although some of the blame must go to the companies that enabled people to get into this level of debt.

When you pay $10,000 to address $1,000 of a $5,000 loan, you have not made things any worse for the rest of us, except to help promote a system that allows unscrupulous creditors to exploit people.

It's not the systems fault that those people took out those loans. At some point, people have to take responsibility for their actions instead of always blaming somebody else.

What does that have to do with your original argument?

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