Minnesota bad credit personal loan

The growth in unsecured credit over the past two decades has, because of current bankruptcy law, reduced the average welfare of the poor. This striking conclusion emerges from a model designed to maximize the benefits of both plentiful unsecured credit and lax bankruptcy law. Even exclusive concern for wealth redistribution does not provide self-evident justification for lax bankruptcy law in the face of the unprecedented expansion in unsecured credit occurring over the past two decades. Specifically, according to the model, the welfare of low-income, low-asset households appears to have fallen in response to the dramatic increase in the availability of unsecured credit that has occurred since the Marquette Supreme Court ruling in 1978. The driving forces behind this welfare decrease are, first, the role of lax personal bankruptcy law in thwarting debtors from credibly committing to repay debts, second, the premium that the poor must pay to borrow on unsecured credit markets, and third, the welfare loss from the imposition of deadweight bankruptcy penalties. Before discussing the model in greater detail, I will turn to a brief history of unsecured credit and personal bankruptcy in the United States.

The Supreme Court ruling in 1978 in the case of Marquette National Bank of Minneapolis v. First of Omaha Service Corporation, 439 US 299 (1978) was a watershed. This ruling against Marquette National Bank allowed a bank in nearby Nebraska, First of Omaha, to issue loans to residents of Minnesota at rates higher than the ceiling in effect in Minnesota; the maximum rate allowable in Nebraska was higher. Marquette argued that allowing First of Omaha to export loans to Minnesota would undercut Minnesota's usury restrictions. The Supreme Court saw otherwise and ruled that First of Omaha was within its rights to issue loans at rates exceeding Minnesota's ceiling. This ruling was critical to the growth of an organized unsecured credit industry in the United States, as it suddenly made a relatively risky form of lending profitable. Within two years, credit card lenders including Citibank and MBNA moved to states with the highest interest rate ceilings, such as Delaware and South Dakota, and began nationwide operation s.

Since the 1978 ruling, low-income households in particular have seen their access to uncollateralized credit grow dramatically, principally via credit cards. The growth of this credit market enhanced the ability of U.S. households to deal with individual-specific and economywide risks by conveniently allowing them to borrow more when times are bad. The credit card industry, in particular, expanded enormously because lenders were given the opportunity to offer uncollateralized loans and short-term credit to those with little tangible wealth. This expansion of unsecured credit mainly affected borrowers with low tangible wealth. Others could credibly commit to repaying loans via collateral, making usury laws a non-issue. Those who could not credibly commit to repayment were most likely to be deemed unprofitable risks at interest rates below the usury ceiling.

Personal bankruptcy law has a major impact on the ability of unsecured borrowers to commit to repayment of loans. While intended to provide insurance against misfortune, these rules have the perverse effect of preventing borrowers with little collateral from promising to repay a loan. Those who hold collateral can and do avoid the constraints of bankruptcy protection and face lower borrowing costs as a result. Those with collateralizable wealth also obtain all the transactions benefits of credit cards without facing the annual fees and relatively low credit limits typically imposed on low-income credit card users. Therefore, the inability to commit to repayment even affects the distribution of pure transactions cost benefits made possible by recent rapid advances in payment card technology. (1)

The growth in unsecured credit has been accompanied by an unprecedented rise in personal bankruptcy, thereby making bankruptcy law relevant to welfare. The level of recent filings, currently greater than 1 percent of all U.S. households, has led to calls for more stringent law by some, but has been defended by others. The proponents of strict bankruptcy law argue that plentiful unsecured credit and lax bankruptcy law give debtors an easy way out. (2) Opponents argue that bankruptcy and easily available unsecured credit are like insurance and are therefore part of a larger social safety net. Both arguments contain some truth, and it is therefore certain that the welfare gains from the increased availability of unsecured credit and additional implicit insurance available through bankruptcy are tempered by a default premium. (3)

The question we must ask, then, is the following. What is the net benefit or cost of the rapid expansion in unsecured lending that has taken place following the Marquette ruling? This question, first posed over a decade ago in the seminal and prescient work of Sullivan, Warren, and Westbrook (1989), has since gone unanswered.

To the extent that bankruptcy provides additional all-purpose insurance to American households, the rising rate of filings may simply represent a wider group of borrowers cashing in an implicit insurance policy. This policy, in turn, is priced appropriately by increased default premiums in loan rates. From this perspective, the rising level of filings may not be anything to worry about. (4) Those arguing for tighter personal bankruptcy law must show that the very option of easy bankruptcy retards the ability of households to tide over fluctuations in their incomes by making borrowing excessively expensive, or that easy bankruptcy lowers welfare by necessitating the frequent use of socially costly "deadweight" penalties. In what follows, I demonstrate that both of the preceding arguments can be made for U.S. households.

There has been no shortage of opinions on the impact of easy credit and bankruptcy on the poor in recent times. (5) Unfortunately, these views are typically based on anecdotal evidence or static empirical approaches. Such approaches typically cannot quantify the complex interactions between the widespread availability of credit, the bankruptcy system, the behavior of households trying to smooth temporary fluctuations in their income and employment, and the interest rates they pay to borrow. This article presents a simple, unified analysis of how changes in unsecured credit interact with bankruptcy law to affect consumer welfare. The framework provides a preliminary assessment of the net effects of the post-Marquette revolution in unsecured credit and the attendant revolution in personal bankruptcy.

The expansion of credit to low-income households and bankruptcy protection is most often defended as helping to protect the poor against bad luck and unscrupulous creditors. Therefore, this article stacks the deck in favor of generating a positive role for expanded unsecured credit and lax bankruptcy. To this end, I make three assumptions, discussed in detail later, that are designed to maximize the benefits of lax bankruptcy law as a means of wealth redistribution from the rich to the poor.

Surprisingly, despite such assumptions, the existing combination of easily available unsecured credit and current bankruptcy law is found to reduce welfare relative to the environment of tighter unsecured credit that prevailed before 1978. The real welfare loss comes from a subset of low-income, low-wealth households being prevented by bankruptcy law from credibly committing to repaying loans. One possible remedy is therefore to allow individuals to pre-commit to debt rescheduling instead of being forced into Chapter 7 liquidation. (6) The model also strongly suggests that U.S. households are actually less inclined to file for bankruptcy, all else equal, since the increase in filings is well accounted for by an increase in credit availability to low-income households. Therefore, contrary to the popular view, the stigma associated with bankruptcy appears to be as strong as ever. (7)

1. MARQUETTE AND UNSECURED CREDIT