Changing the Bankruptcy Laws and Social Unrest

Front and centre in political debates these days is student loan debt.  It’s led to much of the romance of socialism amongst the Millennials (never mind that a good portion of that debt was spent in state schools, socialist institutions par excellence.)  One of the nasty things about student loan debt is that it is no longer dischargeable in bankruptcy, a change made in the last decade.

Although I wasn’t considering student loan debt, I felt at the time that changing the bankruptcy laws in a society so driven by easy credit would lead to social unrest, as this 2005 post/2008 repost attests:

On the other hand, the passage of the legislation as it stands is a recipe for social unrest.

Some of it was necessary: it was too easy for wealthy debtors to shield too many of their assets. And, as an inducement for people to lighten their debt load, this legislation has the potential to do good. But getting from here to there is not going to be fun.

To start with, tightening the bankruptcy laws will only make it easier for lenders to continue their “numbers game” of lending to credit unworthy people, since their downside risk has been reduced. Lenders could have achieved a similar result by tightening the access to credit by more selective lending; they could have even submitted to some kind of re-regulation to accomplish this. But they have decided to throw the burden of “credit regulation” on borrowers rather than themselves…

It is our opinion that the change in bankruptcy laws will come much quicker than changes in American attitudes towards consumption and debt. The result of this will be many more people who will find themselves on the wrong end of the credit system, and enough of those people around can and will be socially destabilising.

If what we’ve got now isn’t social unrest, I don’t know what is.  But it was predictable.

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