On Bankruptcy

Megan McArdle has a paen to the US bankruptcy system today:

The current system works pretty well. Recognizing that we don't have any very good mechanism for picking out the profligate from the unlucky (most bankruptcies involve a little from Column A, a little from Column B), we let people get rid of their debts regardless of how they were incurred. (Except for special exceptions, most of them involving the government, such as taxes and student loans). Then, recognizing that it is not a good idea to make it painless to borrow money you don't repay, we make life a little bit miserable for people who declare bankruptcy--though not very miserable; the chief result is that it's somewhat harder to get credit. It's hard to overstate how well this works. America's bankruptcy system is the most generous to the debtor, the least interested in assigning fault, in the entire world. There's strong evidence that this is one of the reasons behind our high rates of entrepreneurship; it makes it easier to take economic risks.

And on the opposite side of the ideological spectrum, Andrew Leonard ends up agreeing that bankruptcy doesn't seem to reduce Americans' access to credit very much:

According to data compiled and analyzed by Katherine Porter, a law professor at the University of Iowa, in the superb "Bankrupt Profits: The Credit Industry's Business Model for Post-bankruptcy Lending":

...Creditors repeatedly solicit debtors to borrow after bankruptcy. Families receive dozens of offers for new credit in each month immediately after their bankruptcy discharge. Some offers specifically target these families based on their recent financial problems, using bankruptcy as an advertising lure. Other credit offers emanate from the very same lenders that the families could not repay before bankruptcy. While not every lender will accept a "profligate" bankrupt as a customer, debtors report being overwhelmed after bankruptcy with a variety of credit solicitations from many sources. Lenders offer families most types of secured and unsecured loans.

It turns out, according to Porter, that a year post-bankruptcy, bankrupts are receiving more than 14 credit offers per month – more than double the six offers per month that the average American receives.

Clearly, bankruptcy is not particularly harmful to creditors. Bankrupts are the kind of people who tend to run large revolving balances at high rates of interest, so that even if they don't pay back every penny, the lender can still end up making a tidy profit. In other words, even if Megan is right that "America's bankruptcy system is the most generous to the debtor," the creditors hardly seem to be hurting either.

Maybe this is the reason that the arguments about the human consequences of the subprime debacle tend to concentrate on foreclosure, rather than bankruptcy. Foreclosure is serious; bankruptcy seems like just another dance step in a long and complex tango between debtors and creditors.