On the bankruptcy debate, a small amount of light is beginning to shine on a position held dearly by the "Reality Based Community".
Jon Chait, LA Times: "The more likely explanation [for the increase in bankruptcy filings] is that the rise in health insurance costs has driven more people into bankruptcy. A recent Harvard study found that half of Americans who declared bankruptcy did so because of illness or medical bills."
E. J. Dionne, Washington Post: "[Harvard law professor Elizabeth] Warren and her colleagues surveyed Americans in bankruptcy courts and found that half said illness or medical bills drove them to bankruptcy."
Paul Krugman, NY Times: "One recent study found that more than half of bankruptcies are the result of medical emergencies."
Noam Scheiber, TNR: "As Paul Krugman pointed out today, the bill makes no exceptions for families wiped out by medical expenses (which make up more than half of all bankruptcies)..."
NY Times story: "A recent study by bankruptcy and medical experts at Harvard University found that more than half of the 1,771 personal bankruptcy filers in five federal courts cited medical bills as a primary reason they filed."
Could all of these sources be wrong? Law professors Todd Zywicki and Gail Heriot critiqued this study a while back. Professor Warren of Harvard has been guest-blogging on the bankruptcy bill at Josh Marshall's site, and does not seem to have responded to either Zywicki or Heriot (and isn't it great for Googlers that the rebuttals were not offered by Professors Johnson and Smith?).
And finally, reality is beginning to seep in to some of the bastions of the Reality Based Community. The NY Times Week in Review discussed the bankruptcy bill, and provided this:
Elizabeth Warren, a law professor at Harvard, is the co-author of a study arguing that more than half of all bankruptcies are linked to medical costs (the study is controversial in part because its trigger for medical expenses is just $1,000). In Senate testimony, she said, "Most debtors are filing for bankruptcy not because they had too many Rolex watches and Gameboys, but because they have no choice."
But Todd J. Zywicki, a professor at George Mason University School of Law, said that financial distress cannot explain the surge in personal bankruptcies in the 1990's. They were not preceded, he said, by equally steep increases in unemployment, divorce or health-care costs.
Professor Zywicki has a number of theories on why bankruptcies have increased, but if asked to rank them, he said that the No. 1 would be "the generosity of the bankruptcy code - it makes it so easy."
And the Washington Post ran a belated response from Gail Heriot which read, in part:
In "A Bill Bankrupt of Pity," E.J. Dionne [op-ed, March 1] claims that a recent study on bankruptcy found that half of bankruptcy debtors "said illness or medical bills drove them to bankruptcy." In fact, the study, "Illness and Injury as Contributors to Bankruptcy," found no such thing. The number of actual debtors who said that illness or injury was even a significant cause of their bankruptcy was much smaller (28.3 percent). And many of those had quite modest medical bills and missed very little work.
To be able to claim that half of all bankruptcies had a medical cause, the authors had to include a number of dubious case categories, including bankruptcies caused by chronic gambling, alcohol and drug addiction, and birth or adoption, as well as all cases in which the debtor had paid more than $1,000 in medical bills over the two years leading up to the bankruptcy.
Ms. Heriot has some blog commentary as well at he Right Coast, and includes this poignant thought - "I had hoped that having a blog would avoid the need to write letters to the editor...". Darn. But hey, she got her letter published!
Now, the medical argument being wrong does not mean the critics of the bill are wrong. And is the medical argument wrong? At this point, I have not seen anyone rise in its defense, but the day is young.
In any case, we are always fascinated by the reaction of the "reality based community" to a study which seems to meet their political needs. The Stassen study purporting to show that abortion increased under Bush was not exactly convincing, but it convinced some Dems.
And while we are on the subject of the difference between evidence and unsupported assertion, perhaps we can take up a second popular talking point on the bankruptcy bill. Let's see, here is Krugman again: "To the extent that there is significant abuse of the system, it's concentrated among the wealthy - including corporate executives found guilty of misleading investors - who can exploit loopholes in the law to protect their wealth, no matter how ill-gotten.
One increasingly popular loophole is the creation of an "asset protection trust," which is worth doing only for the wealthy."
Chait, again: "The worst abuses are loopholes allowing corporations or wealthy individuals to declare bankruptcy and keep millions of dollars safe from creditors. One such device is something called an "asset protection trust" — a kind of savings fund that can't be touched by creditors."
The NY Times editors: "Contrast that with the bill's gaping "millionaire's loophole," detailed by Gretchen Morgenson of The Times.
The bill spares this popular gimmick, which lets wealthy people file
for bankruptcy yet still protect major resources in five states that
cater to sheltering assets from creditors in special trusts."
Indeed, let us contrast that with the research provided by Gretchen Morgenstern. Who is using these trusts?
Asset protection trusts have become increasingly popular in recent years among physicians, who fear large medical malpractice awards, and corporate executives, whose assets are at greater peril now because of new laws. The Sarbanes-Oxley legislation, for example, requires chief executives and chief financial officers to certify that their companies' financial statements are accurate; anyone who knowingly certifies false numbers can be fined up to $5 million.
Hmm, were these issues back when the earlier version of this bill first passed in 1998?
Perhaps because the current bill was written so long ago, some legal authorities say, it does not address the new state laws that have allowed asset protection trusts to flourish.
And are these trusts "flourishing?
While it is difficult to quantify how much money is sitting in domestic asset protection trusts, their popularity is undeniable, bankruptcy specialists said. "I've heard figures for foreign asset protection trusts and those probably are in the billions," said Adam J. Hirsch, a law professor at Florida State University. "I haven't seen any figures for domestic asset protection trusts, but they could very well be the same."
They could be the same? They could be TEN TIMES AS LARGE! Or not.
Now, do these trusts actually produce the legal result claimed by their promoters?
Money held in asset protection trusts can elude creditors because federal bankruptcy law exempts assets governed by "applicable nonbankruptcy law." Intended to preserve rights to property under state law, the exemption makes it difficult for creditors to get hold of assets that they would not be able to seize through a nonbankruptcy proceeding in state court.
Emphasis added, and wait a second - do they know if these assets
will be protected, or are the legal eagles just guessing? This website
says that these trust are essentially the latest marketing gimmick of
the estate/insurance promoters, and probably won't hold up to a serious
The Domestic Asset Protection Trust (“DAPT”) was created largely as a marketing tool to attempt to exploit the growing market for the Foreign Asset Protection Trust (“FAPT”). After the Anderson and Lawrence cases, the FAPT went out of vogue, and many planners are now advocating the use of DAPTs as a primary asset protection planning vehicle for clients. However, as with the FAPT before it, the benefits of the DAPT are largely theoretical, and as of this writing there have been no significant court cases validating the benefits of DAPTs in tough debtor-creditor situations.
Emphasis again - no significant cases? A similar point is made here.
As to the notion that these trusts are the exclusive province of "the rich", we see that $2,500 per year will be enough to get the good people at Capital Trust in Delaware on your side (minimum balance for an asset protection trust - $10,000). Just so you know, $2,500 per year will not buy a lot in the way of private jets and yachts.
I have a suggestion: just out of respect for the process, couldn't someone from the Reality Based Community invent some evidence for the rest of us to rebut? Even a supporting anecdote would be fine. Right now, the Times and others are fretting about something that has not happened, may very well not be possible, and, in any case, is surely not driving the increase in default s or charge-offs on consumer debt.
Better talking points, please.
MORE: Todd Zywicki gets space in the NRO to defend the bankruptcy bill. Hmm, conservatives never figured to be monolithic on this.
UPDATE: Let's hear from both sides - Bizzyblog responds to Zywicki's NRO column.