Why can only the rich and powerful go bankrupt?

Most people get clobbered when they can’t pay up.

Friends,

Within days of a nearly $150 million judgment against former New York Mayor Rudy Giuliani for defaming Ruby Freeman and Shaye Moss, the election workers Giuliani falsely claimed stole the 2020 election in Georgia for Joe Biden, Giuliani filed for bankruptcy.

He thereby shielded himself from having to surrender his assets to fulfill the judgment, at least in the near term.

The long term may be quite long. Freeman and Moss may not see a penny of that judgment for many years, and when they do, it’s likely to be far less than $150 million.

ONE OF THE MOST BASIC OF ALL QUESTIONS in a market economy is what to do when someone can’t pay what they owe. The U.S. Constitution (Article I, Section 8, Clause 4) authorizes Congress to enact “uniform Laws on the subject of Bankruptcies throughout the United States.”

Congress has done so repeatedly. In the last few decades, Congress’s changes have reflected the demands of the wealthy, giant corporations, and Wall Street banks, which have made it harder for average people to declare bankruptcy but easier for themselves to do it.

Many people are too broke to go bankrupt. Filing for bankruptcy costs money, as does hiring an attorney (which is the best way to make sure you actually get debt relief). Because attorney fees, like other debts, are wiped out in a bankruptcy, most bankruptcy lawyers require clients to pay in full before filing.

In an economy where nearly half of adults say that if they were hit with an emergency expense of $400, they wouldn’t have the cash on hand to cover it, large numbers of people simply can’t afford those upfront costs.

The 2005 bankruptcy bill pushed by Wall Street worsened the problem. To prevent people from cheating their lenders, the bill put new burdens on debtors and their lawyers. The extent of such abuses was questionable, but the new requirements have driven up attorney fees nationwide by about 50 percent. The result? Even fewer filings.

Bankruptcy was designed so people could start over. But these days, the only ones starting over are those with enough political clout to shape bankruptcy laws to their liking, and enough money to hire bankruptcy lawyers to use those laws to their full advantage.

ON THE OPENING DAY OF TRUMP PLAZA in Atlantic City in 1984, Donald Trump stood in a dark topcoat on the casino floor celebrating his new investment as the “finest building in the city and possibly the nation.” 

Thirty years later, after the Trump Plaza folded, Trump was on Twitter praising himself for his “great timing” in getting out of the investment. He got a giant tax write-off, too.

But some 1,000 of his former employees were left holding the bag — without jobs, and with homes worth a fraction of what they paid for them. They couldn’t declare bankruptcy. Chapter 13 of the bankruptcy code — whose drafting was largely the work of the financial industry — prevents homeowners from declaring bankruptcy on mortgage loans for their primary residence.

THE GRANDDADDY OF ALL FAILURES TO REPAY occurred in September 2008 when Lehman Brothers went into the largest bankruptcy in history, with more than $691 billion of assets and far more in liabilities. 

Some commentators (including yours truly) urged that the rest of Wall Street should be forced to grapple with their problems in bankruptcy, too.

But Lehman’s bankruptcy so shook the Street that Henry Paulson Jr., George W. Bush’s outgoing secretary of the treasury (and, before that, head of Goldman Sachs) persuaded Congress to authorize several hundred billion dollars of funding to protect the other big banks from going bankrupt.

Paulson didn’t explicitly state that big banks were too big to fail. They were, rather, too big to be reorganized under bankruptcy — which would, in Paulson’s view, have threatened the entire financial system.

The real burden of Wall Street’s near meltdown fell on homeowners. As home prices plummeted, many found themselves owing more on their mortgages than their homes were worth, and unable to refinance.

Some members of Congress tried to amend the bankruptcy law so distressed homeowners could use bankruptcy, which would have helped prevent the banks from foreclosing on their homes. But the financial industry (among the largest donors to both parties) claimed this would greatly increase the cost of home loans (no convincing evidence showed this to be the case), and the bill died.

Subsequently, more than 5 million people lost their homes.

ANOTHER GROUP OF DEBTORS WHO CAN’T USE BANKRUPTCY to renegotiate their loans are former students laden with student debt.

Student loans are now about 10 percent of all debt in the United States, second only to mortgages and higher than auto loans and credit card debt. But the bankruptcy code doesn’t allow student debts to be worked out under its protection.

If graduates don’t meet their payments, the law allows lenders to garnish their paychecks. If they are still behind on student loan payments by the time they retire, lenders can even garnish their Social Security checks.

The only way graduates can reduce their student debt burdens — according to a provision enacted at the behest of the student loan industry — is to prove that repayment would impose an “undue hardship” on them and their dependents.

This is a stricter standard than bankruptcy courts apply to gamblers trying to reduce their gambling debts.

FOR YEARS, PURDUE PHARMA, the maker of the prescription painkiller OxyContin, was entangled in civil lawsuits seeking to hold it accountable for its role in the spiraling opioid crisis.

A major settlement reached last year seemed to end thousands of those cases. It exempted members of the billionaire Sackler family, which once controlled the company, from all civil lawsuits in exchange for billions of dollars toward fighting the epidemic (although aware of OxyContin’s risk for abuse, members of the family had continued to aggressively market it).

Under the deal, the Sacklers do not have to personally declare bankruptcy and are insulated from liability even without the consent of all of those who could potentially sue them. (The Supreme Court has taken up the case.)

The prevailing myth that America has a “free market” existing outside and apart from government prevents us from understanding that the very rules by which the market runs — including the basic one about what to do when someone can’t or won’t pay what they owe — are made by lawmakers.

The real question is whose interests those lawmakers are pursuing. Are they working for the vast majority of Americans, or are they beholden to those at the top? The recent history of bankruptcy — right up to Rydy Giuliani’s use of it last week — provides a clear answer.