Pur Autre Vie

I'm not wrong, I'm just an asshole

Thursday, September 25, 2014

Debt and Consequences

There is an article today in the New York Times about borrowers whose cars are disabled remotely when they miss a payment.  It strikes me that the UCC will probably need to be amended to deal with this issue, although arguably the UCC already doesn't permit this.  (The UCC permits a creditor, upon the debtor's default, to "render equipment unusable" under Section 9-609(a)(2).  But a car would ordinarily not be "equipment," because that term excludes "consumer goods."  So a household car, as opposed to a business vehicle, shouldn't constitute "equipment."  Comment 4.a to Section 9-102 notes that a physician's car or farmer's truck might be on the borderline between "equipment" and "consumer goods," and Section 9-609(a)(2) would arguably allow the creditor to disable the car in those circumstances.  As far as I can tell, the UCC doesn't expressly forbid a creditor to disable consumer goods, but the fact that Section 9-609(a)(2) only covers "equipment" suggests that this is not a remedy that was contemplated for other types of collateral.)

I'll also note that if a debtor has declared bankruptcy, then disabling the debtor's car would be a violation of the automatic stay, and creditors would be well-advised to re-enable the car's ignition system immediately upon learning of a bankruptcy filing.  If I were a bankruptcy judge, I would sanction the shit out of a creditor who knowingly violated the automatic stay by disabling the debtor's car, even for a relatively brief period of time.  Arguably, disabling a car without confirming that no petition has been filed is reckless behavior, and because disabling a car is so dangerous, I would also consider sanctions on that basis.  (To be clear, the ignition-disabling systems aren't intended to disable a car's motor while it is operating.  But it can be extremely dangerous if an individual relies on a functional vehicle and then the vehicle becomes suddenly unusable.)

Okay, so, I'm no fan of this particular creditor remedy, in its current form.  (I can imagine allowing it in certain circumstances, for instance, after judicial process.)  On the other hand, there is a sick tendency in our society to adopt what you might charitably call third- or fourth-best policies to address severe deficiencies in our public policy.  All the time you see people using consumer debt to paper over deeper problems in our society.  And I have some (limited) sympathy with the lenders in these cases, because often they are just doing business, offering a product for which there is a lot of genuine demand.  (I have much less sympathy for lenders who induce people to incur debt that is not appropriate for their circumstances.  But I think rarely would car lenders fall into that category, in the sense that few Americans can get by without cars.  A car loan can enable employment, which in turn can lift someone out of poverty.)  All too often creditors are portrayed as villains when they try to conduct their business in a reasonable way (as noted above, I don't think disabling a car's ignition when a payment is a few days late is reasonable).  For instance, it can be tempting to side with the homeowner when a bank forecloses on a house, but ultimately it doesn't make sense to argue that because someone is sympathetic (disabled, a veteran, laid off, etc.), he can stop paying his mortgage with no consequences.  The same goes for paying rent.  (Certain elements of the left wing are behaving absolutely shamefully when it comes to mortgage default.  It is rarely in the homeowner's interest to file frivolous lawsuits, violate the law, etc.  Before indulging their irresponsible conspiracy theories, leftists should consult responsible experts, who would generally give sensible advice:  talk to your lender, be completely honest and open about your financial situation, try to find an outcome that actually makes sense for everyone.)

The problem here is a gap between what people think they deserve to consume and what they can actually consume in a capitalist society like ours.  Sometimes that gap is driven by unrealistic ideas of what constitutes reasonable consumption (so there are plenty of people who go deep into debt to finance what are essentially luxuries).  But often enough, the gap is driven by the failure of our society to provide jobs that pay enough to meet basic human needs.  And then instead of using tax dollars to cover the gap, we lash out at creditors when they (having financed the gap for some time) try to enforce their lawful remedies.

So in short:  (A) we need good debtor/creditor law to prevent abuses, but (B) we also need to maintain the basic rule of law, the expectation that debts will be repaid, and the ability of creditors to enforce their lawful remedies, and (C) we need to enact a much more thorough social safety net so that people aren't forced to rely on the tender mercies of the credit markets for their basic needs. [Updated to add:  I forgot to mention (D) it is important to recognize the importance of a humane bankruptcy code to basic dignity, and the U.S. Bankruptcy Code should be amended to make it easier to use.]


Anonymous Anonymous said...

Well we have some common ground there is much I don't agree with here.

The core is that although subprime auto rates are high they are 10-15% lower than consumer credit rates and such loans are available to people with poor credit rating that could not get a substantial consumer line. The reason this is the case is due to the much better loss given default on auto loans which is made possible by recovery programs just like this. A change of the kind considered would significantly curtail the ability of low income Americans to obtain transit.

11:20 AM  
Blogger James said...

It's unreasonable to let creditors disable cars without regard to the consequences, when a payment is a few days late. This will inevitably cause severe hardship and probably in some cases death. The GPS functionality by itself probably represents a dramatic improvement over the old system, since you can always seize the collateral if you can do so without breaching the peace. The old problem was that people would park blocks away and so it was impossible to find the car.

We could generally achieve low interest rates with all kinds of dangerous and inhumane remedies. If debtors lost 10% of kidney function for every day a payment is late, recovery rates could probably be dramatically improved. As a society we've decided that wouldn't be worth it.

11:36 AM  
Anonymous Anonymous said...

If someone misses credit card payments the credit card can stop letting them charge on the card. Almost all of these arguments apply in exactly the same form to people who run low on gas and have their credit cards cut off while they are low on gas.

Would you contend that 25% the people this article profiles would be better off not having a car?

Would you contend that 75% of the people profiled would be better off not having a cut off switch but paying an additional 5% each month?

In the world, trade offs exist. It is not really fair to deplore one side of a balance without endorsing the consequences of changing the balance. Obviously the status quo is ugly, but if you tinker with it you need to look at all the results of the tinkering.

12:45 PM  
Blogger James said...

Yeah, I'm embracing higher borrowing costs in exchange for reasonable foreclosure laws. I'm fine with a policy that doesn't absolutely maximize the availability of credit (and I think I've been clear on this point). Are you really opposed to the concept of a uniform commercial code that puts limits on what a secured creditor is permitted to do?

I note that the UCC doesn't just protect the debtor, it protects other creditors as well. A borrower who can't get to work is a borrower who can't repay his other creditors. And a car is not the same as a line of credit: the car belongs to the debtor, the line of credit is a financial accommodation that can (rightly) be withdrawn at any time (if permitted by the contract). So for instance, I have no problem with a credit card issuer withdrawing a line of credit even if there has been no default, whereas I would be outraged if a car lender foreclosed on a vehicle in the absence of a default. (For instance, if the borrower lost his job and the lender decided it no longer wanted to bear his credit risk.) That would be grossly illegal, and I would oppose it even if it knocked a few basis points off the cost of getting a car loan.

3:13 PM  

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