Credit Slips

Bankruptcy Filings Jump in July, Highest Since 2005 Law

Bankruptcy filings jumped in July to their highest level since the 2005 changes to the U.S. bankruptcy law. According to the latest figures from Automated Access to Court Electronic Records (AACER), there were 96,355 filings in July 2008 for a daily filing rate, spread over 22 business days, of 4,380. That is a 2.4% jump from the previous month and a 33.2% increase from the same time period one year ago.

Headline mongers can make the monthly jump look even bigger. In terms of raw numbers, July bankruptcies were up 7.3% from the previous month. That calculation, however, ignores the fact that July had one more business day, and when comparing monthly filing numbers, they are very sensitive to the number of business days in a given month. Careful reporting will focus on the daily filing rate rather than the total number of filings for the month of July.

Although I think it is wiser to look at long-term trends rather than monthly changes in the U.S. bankruptcy filing rate, the July figures surprised me. Since the 2005 bankruptcy law had gone into effect and even before that, the summer months had seen a relative plateau for bankruptcy filings with few monthly increases. The July figures buck that trend and are a rare summer increase in the U.S. bankruptcy filing rate. I'll be watching the August figures with great interest. Another increase there will be cause for significant concern and will be yet another sign of increasing economic pressures on American households.

In terms of filings for the 2008 calendar year, the July figures are starting to move the prediction toward the 1.1 million mark. It's looking more and more certain that there will be more than 1,000,000 bankruptcy filings. Specifically we will have

• 1,037,000 filings if bankruptcy filings continue for the rest of the year at the same daily rate (4,116 per day) as they have averaged for the first seven months of 2008
• 1,064,000 filings if bankruptcy filings continue for the same daily rate (4,380 per day) as they have averaged for July 2008
• 1,092,000 filings if bankruptcy filings for the remaining five months of 2008 constitute the same proportion of total filings as the last five months of 2007 constituted for total filings that year (about 44.2%)

Stay tuned.

The Slow Road to Recovery

Lois Lupica, a bankruptcy professor at the University of Maine, has co-authored A Study of Consumers' Post-Discharge Finances: Struggle, Stasis or Fresh Start, (spring 2008 issue of the American Bankruptcy Institute Law Review) on the long-term consequences of filing bankruptcy. Using data from a large national sample (the National Longitudinal Survey of Youth 1979), Lupica and Zagorsky report that among the study's cohort (people who are now in their mid-40s), 13.7% have filed a bankruptcy case. The core of the analysis is a comparison of bankruptcy filers and non-bankruptcy filers in the sample to examine whether debtors recover after bankruptcy, and importantly, how long that process might take. The findings are mixed.

As a group, bankruptcy filers are more likely to be divorced, female, less educated, live in an urban area, and have a bigger family than those who report not having filed bankruptcy. These data are largely consistent with the prior research of Dr. Teresa Sullivan, Elizabeth Warren, and Jay Westbrook about the characteristics of families at the time of their bankruptcy. However, people who have filed bankruptcy, even years ago in the past, continue to earn much lower wages than those who have never filed bankruptcy. In short, below-average income is a troubling, but enduring, quality of families who seek bankruptcy relief. This conclusion dovetails with the work that Deborah Thorne and I did on the one-year outcomes from chapter 7 bankruptcy, which suggested the importance of stable or rising income to a fresh start. As Lupica & Zagorsky admit, their sample is people in their mid-40s. The trajectory of recovery could look different for people who file bankruptcy later in life or could be different for post-BAPCPA debtors or even for those who filed in the early 1990s as opposed to those who filed in the last few years because of a changing social safety net. More work is needed, but this study single-handedly doubles our collective research on the longitudinal effects of bankruptcy. It's well worth a read.

No Cushion

This past weekend The Washington Post began an excellent series on the financial issues facing low-income workers.  The first installment is based on a poll of 1,350 randomly-selected people who made $27,000 or less in 2007.  According to the Post, this covers approximately 40 percent of the American work force. 

The results will not come as a surprise to many Credit Slips readers, but they are worth examining because they document the fragility of so many families’ finances outside of a bankruptcy setting.  Some of the respondents probably have filed for bankruptcy – the poll does not appear to have asked – but, unlike many of the studies we discuss on this blog, it is not a survey of people in bankruptcy.  Yet many of the surveyed families are coping in the same ways that bankruptcy filers do.  They are doing things like putting off medical treatment, working additional hours or jobs, and moving to cheaper housing.  A full 26 percent said that they had increased their credit card debt in the past year in order to make ends meet.

What is particularly interesting is that the financial profile of the people surveyed looks something like a “before” picture of the “after” families we see in bankruptcy. 

The Banks, Private Equity, and the Fate of Consumers

The New York Times has an interesting op-ed about private equity investment in banks. Long story short: banks need money now, and private equity is one of the last remaining sources of capital available. PE investment strategy is to buy a control stake, maximize efficiencies, and resell the company in 5-7 years. Because current bank regulations require that an entity holding beyond a certain threshold of a bank's stock either register as a bank holding company (which subjects it to various regulation, including disclosure requirements) or forgo involvement in the bank's management, PE firms are reluctant to invest in banks. Private equity is about control and lack of transparency. PE smells a great buy in banks, however, so PE shops are pushing federal banking regulators to relax the regulations. Their argument: without us, the banks will fail and/or credit will contract, and this will be on your heads, banking regulators, so beggars can't be choosers.

The Times rightly notes that PE shops shouldn't get special treatment and if banks fail, well let that be a lesson to their investors and creditors to monitor lending practices better in the future. Depositors are largely protected by FDIC insurance.

But there's another worrisome angle left unmentioned in the Times editorial. Because PE shops are simply trying to maximize efficiencies in the short-term in order maximize their return on exit, they aren't concerned about the long-term safety-and-soundness of banks. If the company blows up after the sale, the PE shop doesn't really care. This could spell bad news for consumers. If a PE shop buys a bank and sets out to maximize revenue/cut costs, it will likely start milking the consumer cow much more vigorously. And this means PE shops might be tempted to push all sorts of abusive, but very profitable lending practices. This is quite concerning, and if federal bank regulators do loosen the investment requirements for PE, it should be with very explicit commitments to maintaining best practices vis-a-vis consumers. Of course, once the camel's nose is under the tent, these commitments could start to look a lot like the ones on human rights that China made the International Olympic Committee.

Alternatives to Arbitration: Government ADR

The serious problems with binding mandatory arbitration (BMA) as a consumer dispute mechanism for financial services raises the question of "how can we do this better?" Any solution to financial services consumer dispute resolution must take into account four salient factors--(1) the disparity of sophistication between parties, (2) the disparity of resources between parties, (3) the repeat player interest of financial institutions, and (4) the frequently small amounts in controversy. Thus, litigation in court might do better at accounting for factor (3) than BMA, it does not deal will with factors (1), (2), and (4)--it is simply not practical for many consumers to litigate--court procedures make effective pro se representation difficult, time-consuming, and expensive, and the amounts in controversy are too small. Class actions can overcome these problems, but many disputes are not class action issues, and class actions have their own problematic dynamics. The fairness vs. practical trade-off between court and BMA isn't very satisfactory. Fortunately, we do not live in a binary world of public litigation vs. private ADR.

A very interesting new paper by Professor Daniel Schwarcz at the University of Minnesota School of Law raises another possibility: a public ADR system. Schwarcz's suggestion comes from his study of the United Kingdom's consumer dispute resolution system for insurance. In the UK the Financial Ombudsman Service (FOS) provides a dispute resolution mechanism for the entire insurance industry--it combines mediation, arbitration, and negotiation in a single scheme. The FOS (originally created by industry), is staffed primarily by non-attorneys and is separate from the insurance safety & soundness regulator, which helps guarantee its independence. And by being a public, rather than a private system, there are political checks and balances on its operations. Most important to note about the FOS, though, is that both consumers and industry are very happy with its operation.

Frisky Philly Sheriff

Did people see the news reports a month or so ago about John Green, the Sheriff in Philadelphia, who has been exercising "civil" ("official"?) disobedience regarding home foreclosures?  I'm torn between whether I think this guy is a shameless opportunist betraying the taxpayers who expect "The Law" to be the final line to enforce such unpopular decisions as a judgment of foreclosure or whether he's a hero who who's bringing a dose of common sense to the housing debacle.  Here's the webpage for his office.  Thoughts?

Public Citizen Responds to Their Critics on Arbitration

In September 2007, Public Citizen released a report entitled The Arbitration Trap: How Credit Card Companies Ensnare Consumers. Using data from California arbitrations, the Public Citizen report shows how consumers are forced into a mandatory arbitration where they will be systematically disadvantage. Credit Slips blogger Elizabeth Warren wrote a post about the report, including this:

Public Citizen has picked a good target, and they have written a superb report.  There is solid research to back up the claim that arbitration is systematically biased. Senator Russ Feingold has introduced legislation to ban mandatory arbitration clauses imposed on consumers. Will this be the first serious consumer reform initiative in more than two decades?

That's exactly right, but the U.S. Chamber of Commerce did not like it. Through its Institute for Legal Reform, the Chamber had Navigant Consulting write a response to the Public Citizen report. Public Citizen has now released their own response to the Chamber of Commerce/Navigant report. The Public Citizen response, The Arbitration Debate Trap: How Opponents of Corporate Accountability Distort the Debate on Arbitration, which also takes on a law review article and a different Chamber of Commerce report by law professor Peter Rutledge.

Consumer Protection and Bankruptcy; How Do They Relate?

Every other year Richard Alderman holds an extraordinary conference at the University of Houston Law School for faculty from around the world who teach in the consumer law area. It mixes a super learning experience with networking and with a lot of fun. Most of the folks in attendance do not teach in the bankruptcy area but at each of the last two conferences there has been a healthy minority of people who teach in both fields. So, what is the relationship between consumer protection faculty and bankruptcy faculty and what should it be?

A Quick Look at Revised Article Nine; Seven and a Half Years in.

Although the Revised Article Nine drafters were severely and justifiably criticized for increasing the complexity and length of the statute and for destroying the work of art that was Grant Gilmore’s Magnus Opus, their product has so far been very successful in meeting the drafters’ goal of increasing certainty for business lenders and borrowers. Their lightning fast and complete ratification by the fifty state legislatures was nothing short of miraculous. Their decision to abandon the general principles of the original version of Article Nine and replace them with a host of specific rules backed up by comments and, if necessary, commentaries or even phone calls from the drafters has made the rules clearer to borrowers, lenders and particularly to judges. This system of rules will, however, require that as new or unanticipated types of transactions or issues arise the Code must be amended rather than expecting these unanticipated  issues or transactions to be decided under the general principles of the Code. Let’s look briefly at two issues, the Code’s treatment of individual names and its effort to integrate agricultural statutory liens into Article Nine. 

What Is The Effect of Having So Many Adjuncts Teaching Bankruptcy Law Courses?

Two surveys show that a high percentage of bankruptcy courses is taught by adjuncts rather than full time faculty. A 1997 survey by an ABA Committee looking soly at bankruptcy courses and completed by bankruptcy teachers showed that over half the 100 schools that replied made major use of lawyers or judges in teaching their bankruptcy courses, 20% made occasional use and 30 % made little or no use. In a 2007 survey which covered a dozen or so law school subject areas and completed by law school associate deans one third of the 75 reporting schools indicated that adjuncts taught one or more of the bankruptcy courses in the curriculum. (See Lander, Are Adjuncts a Benefit or a Detriment? 33 U. Dayton L. Rev. 285 (2008). The key question is whether this high use of adjuncts helps or hinders the teaching of bankruptcy law and whether it helps or hinders bankruptcy scholarship.

Enjoyable but not Educational? Debtor Financial Management

In May, the Executive Office for the U.S. Trustee released another of the studies mandated by the new bankruptcy law. I expressed optimism in this symposium piece that this research may be a bright spot to emerge from BAPCPA but the results so far have been quite mixed (the pretty good and the awful). The latest study purports to evaluate the postbankruptcy financial education that all individuals with consumer debts are required to complete to receive a discharge. The study considered three curricula: one developed by the Chapter 13 trustees (TEN), one developed a private credit counseling agency, and the EOUST's own program.

Across these providers, 97 percent of bankruptcy debtors reported that they would recommend the program to others and 97 percent agreed with the statement that their overall ability to manage their finances had improved as a result of the educational course. This is consistent with a finding from the Consumer Bankruptcy Project that Dr. Deborah Thorne and I reported here--debtors seem to believe that financial education is useful. However, there were very, very few measurable improvements in debtor's actual financial knowledge after the course and only about 22 percent of debtors who could be interviewed three months later had adopted any recommended change to their financial practices. The findings seem to suggest that while financial education makes people feel optimistic about their financial prospects, it may have a much, much more limited effect on knowledge and behavior. The policy take-away remains ambiguous. Like so many other things, whether bankruptcy financial education continues will probably turn more on politics and public perception than hard evidence in either direction.

It Is Time to “Sunset” Preference Law As We Have Known It Or at Least To Test Its Underlying Basis Empirically .

It is time to “sunset” preference law as we have known it or at least to test its underlying basis empirically .

Ten years ago or so Lynn Lopucki helped to focus our attention on the unfairness of the treatment of unsecured creditors vis a vis secured creditors.  In the past decade things have only become worse for unsecured business creditors as Revised Article 9 tightened the hold of secured business creditors, but that topic has seemed to have fallen  off of the radar screen.

This is a good jumping off point for examining the one area of technical bankruptcy law that most unsecured creditors love to hate “preference law.“ Preference law has outlived whatever usefulness it might have  had. The effort to separate the wheat from the chaff  is not worth the energy.  The litigation costs and aggravation costs far outweigh the benefits.  What are the benefits?  The recoveries are intended to be redistributed among all unsecured creditors. Although few studies have been done it does not appear that this redistribution is meaningful when the litigation costs, extorted settlements and bad feelings of defendants are measured against those net redistributions. Moreover, the courts have held that those recoveries may be pledged to a DIP Lender and in those cases the general unsecured creditors have money taken out of their pockets and receive no benefit from this “redistribution.” Some commentators feel that the threat of preference recovery limits the potential preference payments that a failing debtor may make, or that overreaching creditors may demand and collect, but there is simply no evidence that this is accurate and the only study indicates that this is not true.  Finally, some preference aficianados justify preference recoveries on the basis of equality of distribution and fairness and justice.  Just ask unsecured creditors that are caught in a bankruptcy and  you are likely to find that the opposite is true; the efforts at recovery are deemed unfair and unjust. The only lobby for current preference laws seems to be people who are outraged by apparent  unfairness of one creditor receiving more than others, or who believe that the existence of these laws promotes “better” conduct among debtors and creditors in the wake of financial distress, those who benefit from the litigation spawned by preference laws and perhaps bondholders who believe these avoidance actions increase their recoveries.

Toward a World with Rational National Consumer Credit Public Policies

The current economic downturn started in the consumer credit area. One of the glaring failures during the build up of the factors that led to the current mess was the lack of sufficient economic or sociological analysis from within the academic communities. There are simply too few funded prestigious institutions that study consumer credit issues. It is interesting that law school bankruptcy professors who operate outside of funded centers and may or may not have credentials in economics and sociology have provided a significant percentage of the analysis that does exist. The current economic recession is hurting many many people and will hurt many more before it comes to rest, but perhaps one benefit to which it could give rise would be more regular and effective analysis of the micro and macro economic and sociological issues that inhere in the supply and demand sides of the consumer credit world, including housing finance, car finance and credit card debt. Such an analysis might lead to a more well informed public and more well informed legislators and other public policy makers. We need this in the United States and the rest of the world. 

As a starting point let’s think about the spending and borrowing habits of both Americans and of the hundreds of millions of potential likely consumers and spenders in China and India and other emerging Asian economies. Ronald Mann has written insightfully about the preferences for debit or credit cards in Japan and Korea and perhaps now it is time to look at China and India, particularly since the numbers of people who will have either money in their pockets or credit available to them is so staggering.

Welcome to David Lander

On behalf of all the regular contributors to Credit Slips, I wanted to welcome David Lander of St. Louis's Thompson Coburn as a guest blogger. Lander's work gives him a vantage point we don't often have on the blog. As a partner in Thompson Coburn, he represents some of the nation's largest and most well-known corporations. Lander teaches as an adjunct professor of law at St. Louis University, is chairman of the Foundation for Credit Education, and holds leadership positions in national professional organizations devoted to both business and consumer credit issues.

I've known David almost since I first became a law professor, way back .... well, let's just say for both our sakes, a few years ago. He is a thoughtful, careful practitioner of law and is a tremendous resource for many of us in the legal academy. It's a real honor and great to have him with us for a few days.

Revisiting Increases in the Bankruptcy Filing Rate

From time-to-time, I try to check how the bankruptcy filing rate is changing around the country. We know bankruptcy rates are going up nationally, but looking at variations by geographic region tells us something about how different parts of the country are doing economically.

The map to the right is my latest effort. You have two choices at this point -- (a) magnifying glass or (b) turn off your pop-up blocker and click to get a larger version of the map. The map shows increases in the bankruptcy filing rate by federal judicial district comparing May and June 2008 bankruptcy filings to the same period one year previously. I used two months of data to minimize the effect one particular month's results would have. The boundary lines for federal judicial districts are not necessarily a perfect geographic unit for these purposes, but they do  tend to provide large enough geographic units within state to allow for some localized comparisons. For example, they distinguish between northern and southern California.

The map is color coded by decile. There are ninety judicial districts in the fifty states plus the District of Columbia. Hence, each decile represents nine districts.

Playing in Peoria

President Bush visited Peoria, Illinois, today for a fund-raising luncheon for the local Republican congressional candidate. From the coverage in the local paper (the Peoria Journal-Star):

Kent and Kristin Boyer of Peoria Heights decided to purchase the $500 tickets to the fund-raiser instead of buying the new water heater they needed.

Maybe I should update my last post and make it "What Can You Buy for $500?"

Comments are open, but let's go easy on the Peoria area. Some of my best friends grew up there, although it was Peoria proper, not the contiguous and indistinguishable Peoria Heights.

What Can You Buy for $5?

Thanks to the always interesting The Consumerist, a project called, "the Five Dollar Comparison" caught my eye. It's a photo stream on Flickr that asks people to show what five dollars (or its equivalent) can buy around the world. (The project also seems to have its own web site, but I could not get it to come up.) Did you know that five dollars can buy 13 lottery tickets in Wales, a package of ham in Helsinki, or a can of air in Los Angeles? I didn't, but I do now--and my life is better for it. Yes, I must lead a boring life.

Hearings on Squeezing the American Family

Yesterday, the Joint Economic Committee of the U.S. Congress (JEC) held a hearing on the economic state of the American family. We've got falling real incomes, a mortgage crisis and a housing market in turmoil, record gas prices, and other increases in the costs of living. It's not going well.

Among the witness was Credit Slips's own Elizabeth Warren who started off with this:

From 2000 to 2007, measured in real dollars, incomes declined while basic expenses increased sharply. By the time today’s family makes a few basic purchases—housing, health insurance, food, gas, phone—it has about $5800 less than it had back in 2000.

Warren backs up that statement with numerous charts and statistics that demonstrate how incomes have failed to keep up with the rising cost of living. Her full testimony is here.

The Big 2 for the Slips

Today is the second anniversary of the launch of Credit Slips. We started this blog to have some fun and have been very gratified by the many readers who have found us. We are fortunate to have such an informed readership. The many blog comments help to make Credit Slips an even better source of information on bankruptcy and credit policy.

Looking at the numbers, we have had almost 600,000 page views, and those are just the ones we can track. We know many of you read us through news aggregators and other web services that do not show up in these hit counts. Those 600,000 page views came from 838 separate posts (make that 839 if you count this one). As of this moment, we're just a little short of 2,300 comments on those 838 posts.

It's been a great experience, and we'll keep writing if people will keep reading.

photo courtesy of stOOpidgErL at Flickr

Senate Hearings: Bartholet on NAF

Today, the Senate Judiciary Committee again held hearings on how recent Supreme Court decisions affect the everyday lives of Americans. Professor Elizabeth Bartholet of Harvard Law School testified about mandatory binding arbitration in both the employment and consumer context. As part of her testimony, she recites her own experience as an arbitrator for the National Arbitration Forum or "NAF" (for information on NAF, see previous Credit Slips posts here, here, here, here and here). Professor Bartholet summarizes this portion of her testimony thusly:

All this, together with my other experience as an arbitrator, and my reading of the literature, is what has led me to conclude that the Supreme Court's approval of pre-dispute arbitration has led to a private justice system in which banks and credit card companies are able to purchase the results they want, at the expense of the debtors forced into the system.

Professor Bartholet's full statement is available here so that you can read for yourself what caused her to come to this conclusion.

Debtors Win Victories Against Mortgage Servicers

In the last few weeks, several courts have issued opinions ruling that mortgage servicers' actions have harmed consumers. Some of you follow this issue closely, but if you need an introduction, I've previously posted a bit on the basics of mortgage servicing and why it's an important component of the foreclosure problem. After the jump, I summarize three recent and newsworthy decisions. Debtors won big in these cases, variously recovering sizeable damages, having the foreclosure action against their home dismissed, or getting a preliminary injunction issued against a servicer's misconduct. Taken collectively, they all signal an increased willingness by courts at all levels (state, federal, bankruptcy) to take challenges to mortgage servicers' actions seriously. While I'm convinced that legislation, regulatory enforcement, and different market incentives are necessary to stop the misbehavior of mortgage servicers, this trio of decisions shows how litigation can help real families and point the way for further policymaking.

More Good News from the Big Three

More good news from the Midwest - GM has announced its plans to "reform" its retiree health benefits to help its financial crisis.  (Here's an article from today in the Detroit Free Press.)  What's the plan?  Make the workers pay higher percentage of the health insurance premium?  Well, sort of.  How high -- 20%? 50%?  Hmm, try 100%.  Yup, they're canning health insurance altogether for retirees.  (In fact, it's actually worse than 100%, because that would be 100% of a group-priced health insurance policy -- presumably now the retirees will scrounge for medigap insurance in the healthcare state of nature spot market.)  As a bone, GM's going to increase the defined-benefit pension payment by up to $300/month.  Sounds like yet another shuffle from defined-benefit to defined-contribution, writ large.

I'm not picking on GM.  Economic life sucks here (although Google opened a facility in Ann Arbor -- so let's keep those hopes for the new Michigan economy alive).  I'm just sharing the news...

Usury Bill

This week Senator Richard Durbin (D-IL) introduced a federal usury bill, S.2387, the Protecting Consumers from Unreasonable Credit Rates Act. I haven't found a copy of the bill yet, but according to Durbin's website, the the bill:

• Establishes a maximum interest rate of 36% on all consumer credit transactions, taking into account all interest, fees, defaults, and other finance charges.
• Clarifies that this cap does not preempt any stricter state laws.
• Applies civil penalties for violations including nullification of excess charges, fines, and prison.
• Empowers attorneys general to take action for up to three years after a violation.

There are four major points to make about this legislation. First, it would restore an important element of democratic political accountability to consumer protection in financial services. Second, it would significantly restore states ability to protect their own citizens. Third, it offers a solution to the problems of financial products being structured so as to avoid APR disclosures and to catch consumers with hidden fees. And fourth, it represents a very important first step in a legislative process of rethinking the model of credit industry regulation.

[Hat tip to Dan Ray for the link to the text.]

Credit Card Promises

During the debates over bankruptcy reform, the credit industry launched a public relations campaign claiming that bankruptcy cost every American family $400 every year. The stat was picked up and repeated as fact by both the politicians and the press (more details here). The promise was clear:  pass bankruptcy reform and watch the costs of consumer credit fall. Now the numbers are coming in. Did credit industry losses decline? Did the cost of a credit card go down? A new paper, The Effect of Bankruptcy Reform on Credit Card Prices and Industry Profits, assembles pre- and post-BAPCPA data to answer that question.

First, the answers from the author, Mike Simkovic: 

Credit Cards and the Mortgage Meltdown

The role of subprime lenders in inflating the housing bubble, then bringing down the whole economy has received plenty of headlines.  But there has been little attention paid to the role of credit card lending and BAPCPA in the current home foreclosure crisis. 

A new academic paper, Bankruptcy Reform and Foreclosure, argues that the 2005 bankruptcy amendments are deepening the mortgage crisis. The article was written by David Bernstein, an economist at the U.S. Treasury who chose to post this analysis as private citizen listing only his home address and home e-mail address.  Drawing on data from the Survey of Consumer Finance, he links credit card debt, access to bankruptcy, and mortgage foreclosures. If more families could use bankruptcy to deal with their credit card debts, more could avoid foreclosure on their homes.

Consumer Credit Fairness Proposed for the Bankruptcy Code

On Monday, Senators Whitehouse and Durbin introduced S. 3259, the Consumer Credit Fairness Act. The bill would cut back on some of the worst consumer credit abuses by trimming back on collection rights in bankruptcy.

The bill begins by defining a "high cost consumer credit transaction" as any extension of credit, including costs and fees, that exceeds the lesser of (a) 15% plus the 30-year Treasury bond rate (a calculation that currently stands at 22.4%) or (b) 36%. There are two consequences that would flow from a transaction that met this definition. First, the creditor in a "high cost consumer credit transaction" would have their claim subordinated to all other claims in the bankruptcy case. Second, any debtor who filed bankruptcy as a result of a "high cost consumer credit transaction" would be exempt from the means test that determines eligibility for chapter 7 bankruptcy.

Bankruptcy Filing Fees Through the Ages

The cost of everything keeps rising, even the cost of going broke. When something costs more, people use less of it. I've been thinking lately about that idea and how it relates to the U.S. bankruptcy filing rate.

The filing fee for a chapter 7 bankruptcy is now $299, which is a 43% increase from the cost just before the 2005 changes to the bankruptcy law took effect. Chapter 13 filing fees are now $274, a 41% increase from 2005. Those increases would help to explain why U.S. bankruptcy filings remain at historically lower levels. For example, I project that there will be slightly over 1.0 million filings in the 2009 calendar year as compared to about 1.6 million filings in the years immediately preceding the 2005 bankruptcy law.

I recently had occasion to compile the rising cost of chapter 7 or 13 filing fees since the Bankruptcy Code's became law in 1979. Sure, attorneys' fees are the big cost of filing bankruptcy, and with one of my great research assistants, Heather Miller, I'm working on a paper that quantifies how the 2005 bankruptcy law changed the total cost of filing. (Heather probably would be more pleased if I worked on the draft instead of blog posts.) As part of that work, I felt compelled to see how one component of the cost of bankruptcy, filing fees, had changed and felt even more compelled to share it with all you.

The REALLY Sad State of Mortgage Servicing

In 2003, Chapter 13 trustee Henry Hildebrand III wrote a short piece for the American Bankruptcy Institute magazine entitled the Sad State of Mortgage Servicing. On the front lines of chapter 13 every day, Hildebrand was one of the first people to draw national attention to the problems of mortgage servicing in bankruptcy. The mortgage servicers didn't like the characterization, but years later, even after a Senate hearing and major media coverage of the problem, the description is still apt.

A customer legally tape-recorded his conversation with his mortgage servicer, one of the nation's largest financial institutions (and no, it's not Countrywide!) His attorney shared it with me, and I'm posting some excerpts after the jump. I won't give away all the fun, but as you read, remember that mortgage servicing agents are the people on the front-lines of purported foreclosure prevention efforts. Without better training of servicing agents and regulation of mortgage servicers' financial incentives, is it any wonder that we continue to see loss mitigation stall while foreclosures spiral upward? 

What Would a Fannie/Freddie Conservatorship Look Like?

One of the possible rescue options for Fannie Mae and Freddie Mac is a conservatorship.  But what would this look like?  The New York Times relates that "Officials said that [Treasury Secretary] Paulson wanted to convey the message that...a conservator would have to prepare a plan to restore the company to financial health, much like a company in Chapter 11 bankruptcy proceedings." 

That's the general idea, but the devil is very much in the details, as explained below the break.

The "Oh Shit" Moment

Today was the "oh shit" moment in the mortgage crisis. (Hey, this isn't a family-oriented blog...) Fannie Mae and Freddie Mac's shares crashed because of fears that they are overleveraged and even balance sheet insolvent on a mark-to-market basis. And the FDIC shut down IndyMac, the ninth largest thrift in the country, and the first major bank failure since the S&L crisis.

Federal Government Off-Balance Sheet Entities

As attention in the mortgage crisis starts to focus on Fannie and Freddie, I think it's worth pointing out that they're basically the same problem as the SIVs--Fannie and Freddie are the federal government's off-balance sheet entities. They are the federal government's SIVs. And like the SIVs they got overleveraged, and the question is whether to pull them back on the balance sheet in some way or not.

The Saturn Card?

Saturn's shtick in the car market is familiar enough: different kind of car, different kind of car company. Saturn tries to distinguish itself by being the what-you-see-is-what-you-get, we-don't-haggle, not-pulling-any-fast-ones, reliable car company. And there is definitely a market niche for that. So why haven't we seen it in the credit card industry? Why isn't there a Saturn card--a card with simple, straightforward pricing, no abusive billing practices, and excellent customer service?

Arguably, some of the high-end T&E cards fit this role, but Saturn isn't a high-end car. Is it just impossible to do profitably, or is it so much less profitable than current practices? Or is everyone just scared to try? I would think that there'd be a large market for a Saturn card--parents sending their kids off to college, for example. Maybe the rates would be higher, but the trade-off of higher upfront rates for no tricks and better service is one that some people would surely take. Comments welcome.

Chase Freedom Card

This evening I saw a commercial for Chase's Freedom Card, a Visa Signature card. The card has been around for a few years now, but what was remarkable in the commercial was that the card featured in the commercial did not have the Visa logo on it. In fact, there was no indication it was a Visa card.

Combine this with Chase creating its own proprietary contactless technology brand ("Blink") and its reduced ownership of Visa because of Visa's IPO, and one has to wonder whether Chase is laying the groundwork for ending its relationship with Visa. At the very least, Chase has no reason to subordinate its brand to Visa's. Chase is the second largest card issuer in the US, and with the dissolution of Chase's joint venture with First Data Corp, Chase is among the largest acquirers. If Chase became its own independent network, it would outstrip Amex and would have the dominate position in parts of the country (especially the Northeast). Would Chase ever become its own independent card network? Probably not in the near future, but if there are unfavorable outcomes for Visa from antitrust litigation or legislation, then go-it-alone might make a lot of sense for Chase. And that could be a very good thing for competition among networks.

New Bankruptcies from Michigan!

I forgot to alert Credit Slips readers last month about an exciting new chapter 11 here in Michigan. No, not an auto parts supplier, and no, not (not yet) one of the Big Three. It's the Greektown Casino, in good ol'  Detroit. If mayoral sex scandals aren't enough to distract you from a floundering economy, apparently neither is the escapist joy associated with emptying your wallet pursuant to a random (but certainly sloped) dissipation curve. (By the way, did "gambling" change to "gaming" the same time "debt" changed to "credit"?) And for the curious, the Greektown casino is not run by Greeks but another ethnicity with an established tradition of running casinos.

And yes, there's currently a casino expansion project underfoot (about $500 million at last count).