No more Carrots, Just Sticks

Rutgers reports that the Senate will be debating their version of the "cramdown" bill already passed by the House earlier this month. The senate bill is not only having more successful opposition from Senate Republicans, but it is also seeing some opposition from the Obama administration in the desire for the bill to be “narrowed” as reported by Dowjones Business News.

For those of you who are not aware of the “cramdown” bill or the “Helping Families Save their Homes Act of 2009,” the U.S. Congress is attempting to pass legislation which would give judges the power to reduce the amount of the principal on mortgages whom have filed for chapter 13 bankruptcy. Chapter 13 bankruptcy is a way for people to have bankruptcy law protections while attempting to pay off their debts. The benefits of a chapter 13 bankruptcies are that the debtor can prevent foreclosure proceedings and make loan payments of smaller amounts among others.

I would like to take a few moments to address those of you who think that the Constitution forbids the government to interfere with private contracts. I have heard this more than once recently, and I want to debunk this. The contract clause, which people cite when talking about how they think the Constitution and its application to contracts, is found in Article I, Section 10:

“No state shall … pass any … law impairing the obligation of contracts…”

The most important phrase in Article I, Section 10 is “No STATE shall.” This means the federal government can do anything it wants to impair the obligation of contracts in regards to ArticleI, Section 10. So for all of you who keep ignorantly yelling, “Contract clause, contract clause,” go reread the Constitution. What should limit the federal government is the clause regarding Bills of Attainder and Ex Post Facto in Section 9.3.

Since the question about the “cramdown” bills isn’t about whether we can, we can't…and we shouldn’t. But what if the Constitution allowed it? Should we then? The whole point of a chapter 13 bankruptcy is restructuring. There is renegotiation on how fast payments are made, but now the principal amount. Let’s follow the money. A (Debtor) goes to B (Lender) and gets money for a loan. A then goes and buys a home. A then doesn’t pay the mortgage payments back to B. A then applies for chapter 13 bankruptcy. The judge says A doesn’t have to pay back 30% of the principal. B just got hosed, right? Nope. You just did. What B will do is raise interest rates for everyone else wanting a loan. You might be able to look at it this way. The 30% example from above is essentially a tax on B (the lender) so A (the debtor) can get a government subsidized home. The problem is that B is a bank (i.e., a business); and as much as people seem to be unaware, businesses don’t pay taxes. The bank will increase interest rates or fees or even possibly make you take out insurance against you defaulting on the loan. No matter what happens, the consumer is footing the bill. I am certainly not a fan of borrowing money, but I don’t want to be on the hook for someone who got in over his or her head and can’t pay their bills.

Another thing that this will do is that it will encourage people to declare bankruptcy. If people see a payday at the end of a bankruptcy, do you think that will cause more or less bankruptcy filings? We have had nothing but increases in bankruptcy filings for years, and we want to make bankruptcy more lucrative for dead beats? Check out some of the statistics from the American Bankruptcy Institute. Carrots and sticks people, carrots and sticks. Personally, I think we aught to take a couple lessons from Singapore, get rid of the carrots, and just use the sticks.

Really agree with what you read? Really disagree? Somewhere in the middle?....Let yourself be heard in the comments!
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