We’ve all heard that a certain degree of unemployment is good – it means we college kids can enter the job market after graduating – but high levels just means that no one’s hiring.
Likewise, it’s been thought that a certain number of personal bankruptcies are good, representing Americans taking entrepreneurial risks. But the high levels we’re seeing today show that something’s wrong.
2007 filed the most personal bankruptcies in decades, and 2008, with its increased housing foreclosures and job losses, will probably be higher when we get the numbers.
Harvard Bankruptcy Law Professor Elizabeth Warren addressed the incoming members of Congress in December, saying that stagnant real income coupled with rising core expenses were creating the need for most Americans to finance more and more. This along with a credit market that’s largely unregulated and lacking proper oversight, has given rise to predatory lending practices, duping those Americans who rely on financing.
Credit card scams have become widely known, and you’ve probably seen a few companies out earlier this year on Third Street trying to entice us kids with freebies.
But the fact that advice from Suze Orman and Dave Ramsey is so popular means people are still getting nabbed every day.
Warren recommended to Congress that they establish a committee that protects the consumer from malicious financial services like consumer protection does with other goods like toys and kitchen appliances.
The example of the 30-year fixed mortgage is often mentioned, the contract for which used to be just two pages. Now, it is fifteen or more pages long and mostly filled with “traps” to be misunderstood by purposefully contrived language.
And while I agree that not every American is competent enough on their own in handling these contracts to say that they’re “personally responsible” for any misunderstanding, especially when the language is purposefully ambiguous or misleading, are we really addressing the whole problem?
Looking back at people who have filed bankruptcy, we can see the majority of filers aren’t those who recklessly went splurging one day, but are frugal individuals who didn’t have much of a safety net.
Due to some unforeseen circumstance that creates a pause or a stop in their cash flow, such as job loss or divorce, they are suddenly in over their heads. The overwhelming majority of these people had every intention of paying back their debt. Living in this culture of financing the things we need, it’s like living on thin ice, waiting for a crack to appear.
And people in their 20s are desperately trying to file for bankruptcy due to the “undue hardship” of their student loans. In this economy, can you blame them? When were they supposed to save up?
It’s going to be a scary reality for seniors who will be graduating into this dismal job market with the obligation to pay back any student loans, even with a grace period.
So while I love to see our newly appointed congressmen being educated on the dangers of predatory lending, I’d like to see a bigger solution, one that addresses America’s lust for financing.
Predatory Lending
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