The Two-Income Trap - Elizabeth Warren [42]
Besides, the bankruptcy statistics are not the only signs of financial distress. The number of home foreclosures has more than tripled in the past 25 years, and car repossessions have doubled in just five years.25 Judge Jones may think that bankruptcy filings are just a “big game,” but for a family who no longer has a roof over their heads, we doubt that financial failure is much fun.
Fraud and Abuse
The Myth of the Immoral Debtor has one other variation: Today’s families are more willing to lie, cheat, and file for bankruptcy under false pretenses. Everyone from Senator Orrin Hatch to the American Bankers Association contends that massive numbers of families filing for bankruptcy are engaged in “fraud and abuse.”26 Could they be right?
No one knows for certain how much fraud there is, although the courts go to great lengths to try to prevent it. If a person wanted to commit fraud in a bankruptcy petition, he would usually try to hide his assets from his creditors, perhaps in an offshore account, a bogus trust, or through transfer to a separate corporation or another person. In order to prevent this, every single personal bankruptcy filing is accompanied by detailed financial disclosures, filed under penalty of perjury, reviewed by a court-appointed trustee, and made public for any creditor or other interested party to scrutinize. Every debtor seeking bankruptcy relief must come to court in person, swear to “tell the truth, the whole truth, and nothing but the truth,” and submit to cross-examination both by the trustee and any creditors who appear. If anything suspicious emerges, the debtor will be ordered back into court by a judge and examined further—under oath. Anyone who files a fraudulent bankruptcy petition or misrepresents his circumstances violates federal law and risks prosecution by the Department of Justice. A guilty verdict can result in jail time.27 Any creditor who can show that a debtor lied on a credit application or otherwise committed fraud can have that debt exempted from discharge in bankruptcy; the creditor is also entitled to file criminal charges.
Even if they had evil in their hearts, it would be extremely difficult for the average family in bankruptcy to commit serious fraud. The overwhelming majority of people who file for personal bankruptcy aren’t the financial sophisticates one usually associates with Swiss bank accounts and dummy corporations. They are ordinary, middle-class families whose total assets consist of a home, a car, and maybe a checking account. In our study of more than 2,000 bankrupt families, only one owned a second home—a small rental house that produced income, not a vacation place—and no one had an offshore account or a self-settled trust. Nor did these families have a personal attorney on retainer or a longtime accountant who might be persuaded to do a little finagling on the side. Just the opposite. Most people who filed for bankruptcy never even met a lawyer until the mortgage company sent a foreclosure notice, at which point they hired someone whose ad appeared in the yellow pages or on late-night television.28 Typically the attorney spent less than half an hour giving them advice before passing them on to a paralegal who completed the paperwork necessary for the bankruptcy filing.29
The number of families committing fraud may have inched up over the years, although there is no evidence to support that claim. But if fraud alone accounted for the increase in the number of bankruptcies over the past generation, then eight out of every ten families filing for bankruptcy today would have to be committing fraud.30 It seems pretty absurd to suggest that over the past decade roughly 10 million families independently decided that they would commit a felony that could land them in jail—and that no one else heard about it.
The Myth of the Immoral Debtor might make for good headlines, but, like the Over-Consumption Myth, it won’t hold up to hard analysis. Are there some families who are cheating? Of course. Just