Before the deregulation of the debt industry in the 1970s, Americans were limited in how much debt they could take on. If they wanted to take out a mortgage, monthly payments could not be more than 30 percent of their paycheck, while car loans could take up no more than 10 percent of their monthly paychecks. And that's not all, once upon a time, the loans remained with the originating bank; but after reform, loans are now repackaged and passed on to others like a proverbial hot potato. The originator of the loan is able to profit regardless of the debtor's eventual default.
According to university professor Kevin Leicht, such changes in how we borrow has perpetuated a train of bankruptcy filings that can only be stopped if we choose to create our own debt limits and stick to them.
"If you looked at these people that were near bankruptcy and attempted to figure out how many of them probably wouldn't have been able to borrow that much money to end up in bankruptcy in the '70s, the number is pretty stark," Leicht says. In the 1970s, a person couldn't get a mortgage that was greater than 30% of his or her income - or get a car loan that required monthly payments of more than 10 percent of their income.
While it will probably take a lot more than debt limits to reduce the number of bankruptcy filings in this country, Leicht has a good point. The amount of staggering debt combined with unemployment is doing more than anything to push the number of bankruptcy filings to record levels. But on the other hand, self-imposed "personal debt limits" are not effective for everyone. How many Americans have the will and savvy to resist tempting credit card offers and enormous mortgages when everyone else is doing it? If we really want to reduce the number of bankruptcy filings, we need to empower bankruptcy courts with the ability to modify some of these loans so that banks can feel the pain of their carelessness.