He's rich but claims to be broke - and you're not
ROBERT REICH in Robertreich.Substack.Com
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 President Joe Biden, Giuliani filed for bankruptcy.
Getty Images
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’ 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%. 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% 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 Rudy
Giuliani’s use of it last week—provides a clear answer.
© 2021 robertreich.substack.com
Robert Reich, is the Chancellor's Professor of Public
Policy at the University of California, Berkeley, and a senior fellow at the
Blum Center for Developing Economies. He served as secretary of labor in the
Clinton administration, for which Time magazine named him one of the 10 most
effective cabinet secretaries of the twentieth century. His book include:
"Aftershock" (2011), "The Work of Nations" (1992),
"Beyond Outrage" (2012) and, "Saving Capitalism" (2016). He
is also a founding editor of The American Prospect magazine, former chairman of
Common Cause, a member of the American Academy of Arts and Sciences, and
co-creator of the award-winning documentary, "Inequality For All."
Reich's newest book is "The Common Good" (2019). He's co-creator of
the Netflix original documentary "Saving Capitalism," which is
streaming now.