Credit Slips

A New Form of Medical Debt (and Jacoby's Final Post)

This is my final contribution to the Credit Slips blog.  I thank Bob, the other contributors, and the readers for the opportunity to participate the past few months.    

I will sign off with a quick mention of an emerging form of medical-related debt.  This debt will not arise from the receipt of medical care, but rather from the failure to buy health insurance in contravention of the new individual mandate in the Massachusetts health plan now getting underway.  Oversimplifying greatly, uninsured people (at least those who can be identified through tax returns) will be legally required to buy insurance, and the government eventually will impose steep financial penalties for non-compliance and collect those penalties through the tax system and other enforcement methods.  In other words, a person may owe many thousands of dollars in penalties to the government because she didn't buy an insurance policy that the government deemed affordable for her, even if she has paid every medical bill she has ever received (and if she files for bankruptcy, I assume the government will argue that the penalties are nondischargeable -- unlike most debts owed for actual medical care to providers).  As the prior sentence suggested, the requirement is triggered on the availability of affordable insurance products.  Other facets of the Massachusetts plan aim to ensure that cheaper insurance products are offered (e.g., through subsidies and the Connector). But cheaper and affordable are not synonymous.  And we learn from personal bankruptcy and the debates over means testing (in both concept and in detail) that affordability often is in the eye of the beholder.  The able people charged with developing the various affordability determinations have a complex and consequential task.

Anniversaries and Audits

On a week of anniversaries relevant to bankruptcy reform and policy, it is worth noting that exactly 9 years ago, the National Bankruptcy Review Commission filed its final report.  The second proposal in this telephone-book-sized report was for random audits (proposal number 1.1.2) that, in a more detailed iteration, becomes operational today via section 603 of the 2005 bankruptcy amendments as Bob has noted.  Unlike other personal bankruptcy proposals discussed in the Commission Report, this one had widespread (indeed, possibly unanimous) support among the members of the Bankruptcy Commission who otherwise had fundamental descriptive and prescriptive disagreements about the personal bankruptcy system.   As Bob's 33% Solution post illustrates, however, Congress insisted on putting some consequential details in the statute that, if put into practice literally, undercut some of the justifications for the otherwise-popular audit proposal.   Now others are charged, within these constraints, to try to implement the concept in a cost-efficient and effective manner (for how the U.S. Trustee program is approaching this, see the press release here and 71 Fed. Reg. 58005 (Oct. 2, 2006)).

New Inter-Agency Nontraditional Home Mortgage Guidance For Consumers

Per our running discussion of mortgage credit, the Federal Reserve and others have just released "Interest-Only Mortgage Payments and Payment-Option ARMs -- Are They For You? . . .   

Bankruptcy, Eviction and Patient Records

The 2005 bankruptcy amendments added a provision to the Bankruptcy Code to help protect the privacy of patient records in the bankruptcy case of a "health care business."  The provision sets forth a process by which a trustee can notify patients about their records (broadly defined) and then ultimately destroy them if they are not claimed.  But reality may not always operate according to such plans.   According to this news story, a giant pile of patient financial records of a bankrupt doctor were found in a parking lot after an eviction overseen by the sheriff and the building manager in the doctor's absence (thanks to Rebecca Redwine for the tip).   

"By Cancelling These Debts, We Want to Give Rise To An International Debate on Lender Responsibility"

The title of this post is a quote from the development minister of the nation of Norway.  Norway is unconditionally forgiving debt owed to it by five countries (thanks to Adam Feibelman for the tip).  Some sovereign debts can be characterized as illegitimate or, in some cases, even "odious" (in general because they are unbeneficial to, and perhaps affirmatively bad for, the people of the debtor nation) and there is no standard mechanism by which they can be released of those obligations.  Countries and institutions are not exactly lining up to unilaterally forgive other countries' debts, so Norway's decision to do so is highly significant.  But the stated and suggested reason for the debt forgiveness is also notable - that the lending was motivated by Norway's self/sovereign-interest and not legitimate developmental objectives in the five debtor nations.  Although lending to countries and individuals are two very different animals, those in the sovereign debt and consumer/private entity debt worlds are engaging in parallel responsible lending debates.   

Defaulting on inter-family loans

Major news media outlets have been reporting on a business that manages inter-family or inter-friend loans, focusing on a company called Circle Lending (thanks to Salil Mehra for the tip).  Medical debts are among the business'  list of popular reasons for personal loans between family members, so the service was of immediate interest to me.  But beyond this, I would focus readers' attention on the stated protect-the-personal-relationship justifications for an formalizing intermediary and how these justifications relate to broader discussions of our debt collection system that sometimes is thought to be inefficient.  If an inter-family secured loan is set up properly, and the borrower defaults, the lender may exercise formal remedies (and in an NPR story linked on the website, the founder makes clear that this is contemplated).  Of course, foreclosing on one's grandson could indeed have relationship implications, so the relationship-protecting idea presumably stems from the belief that a borrower is less likely to default on an inter-family loan given the use of extra formalities that expand collection and enforcement entitlements even if rarely used.  Presumably, the risk of default is also lessened to the extent that these loans are granted with lower interest rates than those available from those in the business of extending credit to individuals?

New Bankruptcy Legislation

S. 4044, the Religious Liberty and Charitable Donation Clarification Act of 2006, was introduced on Sept. 29 and passed by unanimous consent on Sept. 30.  For the story that led up to this, see here and here.

UPDATE: My link to the bill isn't holding, so here's the substantive content of the bill: "Section 1325(b)(3) of title 11, United States Code, is amended by inserting `, other than subparagraph (A)(ii) of paragraph (2),' after `paragraph (2)'.

Differential Methods of Medical Debt Collection

Should medical debt be subject to different collection rules than debt owed to other creditors such as credit card issuers?  My answer to this has generally been "no," in part due to the fungibility of obligation. But even if states refrain from imposing differentially restrictive rules, various collection approaches are naturally generated through other means.  Specialty publications on collections have featured a variety of articles on the evolution of medical debt collection (thanks to Jason Kilborn and Nick Sexton for tips on some of the recent ones).  The stories in periodicals such as Collections & Credit Risk have been paying particular attention to the outright purchasing (as opposed to contingency collection) of medical debt from hospitals or other providers.  The stories in the collection industry publications convey the impression that medical providers impose more constraints on the collection techniques of debt buyers than the originators of other debts do because of the nature of the obligation and the localized nature of the business and resulting public relations issues.   Thus, less litigation, prohibitions on resale of the debt, etc.  Of course, some patients immediately use a credit card for the self pay portion of the debt.  If they don't pay, and if such bad credit debt gets sold, it will be sold as general consumer debt, presumably without these particular originator restrictions.  Medical providers still have incentives to encourage patients to use credit cards at the outset; bad medical debt portfolios are selling for only a few pennies on the dollar.  It is possible that some convergence could occur if buyers purchase newer accounts receivable, and then team up with lenders to provide financing options for patients. 

Senators on Tithing in Bankruptcy

Bob recently posted about a court decision refusing a deduction for tithing in a chapter 13 case.   That case has prompted Senators Grassley, Hatch, and Sessions to write a letter to the Attorney General asking the DOJ to direct chapter 13 trustees not to object to tithing that meets the requirements of the Religious Liberty and Charitable Donation Protection Act of 2005.   

HMDA Data and Piggyback Lending

Federal Reserve researchers have a new paper in the Federal Reserve Bulletin evaluating the 2005 Home Mortgage Disclosure Act data (if the prior link doesn't work for you, try this).  For now, I would particularly direct readers'  attention to the analysis of piggyback lending on pp. A135-A138.

And Speaking of Medical Debt . . .

. . . check out this story (thanks to Lisa Stifler for the tip).   Although the story was written to draw your attention to the magnitude of the hospital debt and the collection efforts, I suggest that readers also focus on the signs in the story that hospitals often do not make collection practice decisions unilaterally.  Also buried in the story is the indirect financial impact on the patient's household.  

OJ, Rights of Publicity, and Debtor-Creditor Relationships

According to an Associated Press report (yes, as published on ESPN.com), Ron Goldman's father has asked to receive OJ' Simpson's rights of publicity because Simpson has never paid out on the multi-million dollar wrongful death claim.  Seems to me that if the right of publicity is considered a property right under the relevant state laws that a judgment creditor should be able to reach it.  After all, some sports figures create separate corporate entities that manage and own their rights of publicity.  Of course, as Diane Zimmerman and I wrote here a few years ago, the issues may be just a bit more complicated than I'm now suggesting  . . . 

Job Security Polling Data

Employment problems figure prominently in discussions about personal bankruptcy filings, so both the perception and reality of job security are relevant to those of us who study or work in the debtor-creditor system or who are trying to figure out whether people adequately recognize and prepare for adverse events.  Karlyn Bowman, a resident fellow of the American Enterprise Institute, has just posted a very useful updated set of major polling data on work and workers' perceptions -- see here for the press release and here for the report containing the polling data. 

It is particularly interesting to compare responses to questions about events that actually have happened (in the past to themselves or to other people) with questions about perceptions of their own job security risk.  For example, in a 2005 poll that asked whether their employer had laid off any employees in the past six months, 27% reported that there had been layoffs.  And 22% in a 2005 poll reported having been personally laid off or fired in the past five years (I can't tell from the report whether these 2005 results are from the same or different polls - check out pages 10-12 of the report).  But in April 2006, only 10% said it was very likely or fairly likely that they would lose their jobs (15% said they were worried about being laid off in a 2005 poll, in response to a differently worded question).  Readers also may want to check out the results of the questions about wage and benefit reductions.  Although interpreting the job loss findings together should be undertaken with care, they appear to present an interesting contrast to polling respondents' worries about falling deeply into medical debt that I wrote about when Credit Slips first began. 

Commissions, Specialized Courts, and Business Law

At the end of a forthcoming Columbia Law Review article, Lucian Bebchuk and Assaf Hamdani propose that Congress establish a National Corporate Law Commission to comprehensively review corporate law and -- not surprisingly given their prior work -- determine which aspects should be federalized.  Bebchuk and Hamdani mention in a footnote (fn 184 to be exact) that their preferred model for the corporate commission is . . . the National Bankruptcy Review Commission. 

Putting aside whether corporate law should be federalized, I'm wondering whether the bankruptcy commission is the right model.  For one thing, the bankruptcy commission had a limited existence (I remain hopeful that the provision in a recent Senate bill proposing to forcibly reconvene the bankruptcy commission will never become law).  But Bebchuk and Hamdani suggest in the article that they think a standing commission is preferable.  I'll leave to the public choice scholars to discern the implications of the distinction here for purposes of turning commission recommendations into law.    In addition, the bankruptcy commission's members were selected not only by Congress, as the authors indicate they desire for the corporate commission, but by the President and by the Chief Justice.  I suspect it was well understood that the late Chief Justice Rehnquist would choose federal judges for the bankruptcy commission (he chose one circuit judge and one bankruptcy judge). Given the underlying federalization mission that Bebchuk and Hamdani advocate for this commission, identifying the right judicial members of such a commission could be delicate. 

In any event, Bebchuk and Hamdani would like the corporate commission to consider the creation of a specialized federal corporate law court (they don't advocate for the specialized court but note its possibility as a response to those who like the idea of the Delaware Chancery Court).  Here's another place where the bankruptcy experience might be useful.  Bankruptcy cases are part litigation, part transactional, part administrative.  Assuming a specialized federal forum is justified at all, it seems that this is a better reason than in-depth knowledge of a substantive legal field.   Notably, the recently-created "business courts" in states like Nevada are far broader in jurisdictional scope than the Delaware Chancery Court (admittedly, the new courts would probably go out of business quickly if their jurisdiction was limited to corporate disputes as traditionally defined).  Even the Delaware Chancery Court is getting a bit more generalist; the state of Delaware has given the court jurisdiction over money damage technology disputes and mediation-only business disputes.   All this being said, one federalization possibility -- certainly controversial -- would be to expand the bankruptcy court to include corporate and related matters.  Greater legal integration of shareholders and creditors would be a good development, and perhaps more exposure to the governance of financially healthy corporations would aid courts in presiding over the bankruptcy cases of insolvent corporations.      

Cycling Through Chapter 13

Scott Norberg and Andrew Velkey's seven district longitudinal study on chapter 13 has just been published in the Creighton Law Review (volume 39, p. 473).   It contains too many interesting findings for just one post, so I will focus for now on repeat filings.  In Norberg and Velkey's words, "Among the most remarkable findings of the Project is that at least half of all of the Chapter 13 debtors in the sample had filed one or more bankruptcy cases in addition to the sample case."  (p. 497, emphasis added).  The percentage could be higher because of limits of the PACER system.  Most of the prior or subsequent filings that Norberg and Velkey found also were in chapter 13, and most took place within a year of the sample case. The Norberg and Velkey sample precedes the screening of repeat filers implemented by the 2005 bankruptcy bill, so it is possible -- although no foregone conclusion -- that the timing patterns could change.  Nonetheless, if the project sample is representative of all chapter 13 filers, the filing rates reported by the government (see Bob's recent post) have overstated the number of actual households in bankruptcy because each new filing gets a different case number. In any event, those who believe that chapter 13 is an ideal form of bankruptcy and thus praise districts that report higher proportions of chapter 13 cases should take a closer look.   

A Real Live Involuntary Bankruptcy

Involuntary bankruptcy petitions are a fascinating and a fundamental part of our bankruptcy system.  They are quite rare overall, although somewhat less so in the biggest chapter 11 cases, according to LoPucki and Whitford's early research.   But the disappearance of a Chapel Hill lawyer has prompted the filing of an involuntary petition - - a media report here.   Pursuing a bankruptcy case against a missing person will be a challenge worth watching.

Turn Your Stucco into Sand

I once received a pink flyer from a major bank that said in bold letters “Turn your stucco into sand,” while the inside of the flyer advertised home equity loans for purposes of taking beach vacations. This was supposed to be an enticement, but with this stucco-into-sand imagery, it seemed more like a warning about the consequences of using home equity, leaving people to make their own choices. I’m starting to wonder whether the bankruptcy system needs a similar warning. First, studies by Cheryl Long and Aparna Mathur suggest that there generally are longer-term home-owning consequences to filing for bankruptcy. Second, some homeowners file for bankruptcy primarily to save their homes from foreclosure -- presumably because their lenders/servicers will not agree to a workout with a borrower they believe cannot or will not sustain the mortgage, but possibly for other reasons. These filers use chapter 13 bankruptcy, which not only stops a foreclosure but allows them to cure a default over time over the objection of the lender/servicer. The administrative costs alone of chapter 13 to the homeowner probably add up to at least one or two mortgage payments, or, if homeownership is not to be, then a few months of rent in a new home. But I’ve seen no evidence that chapter 13 turns out to save homes in the long term, or that it is any more successful than other anti-foreclosure interventions. We’ll get help figuring this out once real estate finance experts recognize chapter 13 for what it is – a federal mortgagor protection device, albeit of unknown efficacy, that overrides many of the state real estate laws they have spent considerable time analyzing.

Chapter 11 as Federal Tax Collection?

Debtor-creditor types tend to focus on private creditors in the business of extending credit or loaning money. Of course, debtor-creditor relationships vary considerably and accordingly have rather different dynamics. The findings in several empirical studies of chapter 11 should keep us mindful about the significant role of the Internal Revenue Service as a creditor in bankruptcy and how tax obligations affect the bankruptcy initiation decision for small businesses. In the recent working paper Dynamics of Large and Small Chapter 11 Cases: An Empirical Study, Douglas Baird, Arturo Bris, and Ning Zhu analyze chapter 11 cases in the Southern District of New York and the District of Arizona between 1995 and 2001. Baird and co-authors find vastly different patterns of general unsecured creditor payout between the big cases and the small cases (short version: general unsecured creditors get paid very little in the small cases). Although perhaps not their main result, they also report that “The need to resolve tax obligations is the engine that drives the typical small chapter 11 case.” (pp. 19-20). In in-depth research on chapter 11 cases in the Northern District of Illinois, Baird and Ed Morrison similarly have found the IRS in a prominent role. In their 2005 Columbia Law Review article Serial Entrepreneurship and Small Business Bankruptcy, Baird and Morrison suggest that the IRS essentially encourages entrepreneurs to put their struggling businesses into chapter 11, where it will renegotiate the entrepreneur’s personal liability.  So notwithstanding the special collection entitlements the government gives itself, it seems that the IRS prefers to encourage the initiation of a costly bankruptcy process, with other parties footing the bill. 

Following the Money in Large Chapter 11 Cases

In the new working paper "Rise of the Financial Advisors: An Empirical Study of the Division of Professional Fees in Large Bankruptcies," Lynn LoPucki and Joseph Doherty of UCLA report findings distinguishing patterns of compensation of lawyers and financial advisors using data from the extremely valuable Bankruptcy Research Database. According to this paper, approved financial advisor fees rose at a much faster rate (25% per year!) than lawyers' fees in the big cases during the study period (plans confirmed between 1998 and 2003).  Although the paper's other findings are independently interesting as well, they are especially intruiging when considered in connection with LoPucki's other recent work.  In the book Courting Failure, LoPucki hypothesized that chapter 11 outcomes (including a repeat filing rate of nearly half among the largest cases) are in part a function of court practices -- including the handling of fee applications -- designed to attract repeat players (many from New York) who help decide where the cases should be filed. LoPucki characterized the Delaware and New York courts as the major case competitors racing to the bottom.  Those looking for a more detailed summary and critiques of these aspects of Courting Failure should check out the Buffalo Law Review symposium on Courting Failure that was organized by Bill Whitford of the University of Wisconsin and should be on Westlaw and elsewhere imminently.

In Rise of the Financial Advisors, LoPucki and Doherty fill in a few more pieces of the puzzle regarding the New York and Delaware courts.  According to the working paper, debtor-in-possession (DIP) attorneys fees awarded by New York and Delaware courts were not statistically different from those awarded by other courts (p. 13).  And fees awarded to New York DIP attorneys were not significantly higher than those awarded to non-New York DIP attorneys.  But approved financial advisors' fees were generally higher in the Delaware court than in other courts (p. 19), and the New York court was "more likely than other courts to award fees to investment banks at very high hourly rates" (p. 29).  The paper indicates that the raw data will be posted here so that other researchers can independently evaluate.  Among other things, these findings could lead to a refinement or adjustment of LoPucki's theory regarding the pathways through which court practices may affect reorganization outcomes.

21st Century Debt Collection Techniques

Several years ago, Lucette Lagnado wrote a series of Wall Street Journal articles on the use of formal debt collection techniques for debts owed to hospitals by patients.  That series probably helped set off a chain reaction of Congressional hearings, state legislative initiatives, lawsuits, and self-regulation measures by the hospital industry. As Bob Lawless has reported, the Boston Globe is nearly done with a set of investigative reports that broaden and deepen the inquiry regarding debt collection practices in Massachusetts, framing each article so far on a major institution or actor that shapes the debt collection process (e.g., debt collection companies, small claims court, and -- perhaps the most intriguing -- the constable).  Like the Wall Street Journal series, the Globe investigation apparently has been a wake-up call of sorts, this time to the Massachusetts court system.

The Globe investigation comes at a time of reawakened interest among debtor-creditor scholars in the use of formal collection procedures for consumer debts (including some important systematic in-the-trenches studies being conducted now by Rich Hynes at William and Mary and separately by Sidney Watson and colleagues at Saint Louis University).  In the past several decades, many scholars have assumed that the formal judgment collection process was too expensive and cumbersome for relatively small consumer debts, and largely have focused their research energies elsewhere (e.g., federal bankruptcy, or laws that regulate informal collection techniques such as phone calls or letters).  With technology that facilitates spreading default risk and encouraging debtor repayment through other means, one might have expected even less use of the arcane formal process by repeat player claim holders today than a decade or two ago.  The Globe investigation does not study changes over time, but it does invite the question of whether technological developments and innovation in the credit and collection industries actually have increased, rather than decreased, the use and cost-effectiveness of arcane state collection procedures.

Bankruptcy Filings and Consumer Behavior

When it comes to the bankruptcy filing rate, fiscal year 2006 (10/1/2005 onward) is turning out to be a very odd period. First, filings surged to historic heights in early October. Then, in the second quarter, filings dropped to the lowest rate since the mid-1980s. An intervening event was the mid-October effective date of an omnibus bankruptcy reform bill, the most extensive changes to the formal bankruptcy law in a generation. Most bankruptcy filers are individuals rather than business entities, so it appears that individuals became sensitive to changes to the Bankruptcy Code and may have altered their plans accordingly. Does this mean that individuals also can be expected to alter their borrowing behavior because of the bankruptcy law changes? Not so fast, say Professors Susan Block-Lieb and Ted Janger in an article just published in volume 84 of the Texas Law Review. 

Block-Lieb and Janger apply insights from behavioral decision research suggesting that individuals’ cognitive limitations, and not strategic behavior, provide an explanation of consumer overextension that is more consistent with consumer credit data. They also consider the possibility that lenders capitalize on these cognitive limitations. Whatever happens with the official bankruptcy filing rate reported by the government, Block-Lieb and Janger warn in their Texas article that “overleverage is here to stay.”

Hospital Bad Debt and Medical Credit Cards

A leveraged buyout is in the works for the Hospital Corporation of America, a giant for-profit hospital operator.  The stated reasons for HCA’s disappointing stock performance in recent years depend on the news story, but at least one national news report has highlighted uncollected patient bills as a major culprit. Surely this is too simplistic an explanation, but the existence of significant bad debt owed by patients to for-profit hospitals makes one wonder why medical providers haven't been more successful in encouraging patients to use third-party credit (e.g., credit cards) to finance the self-pay portion of their care. Apparently, various credit providers and accounts receivable management businesses have had similar thoughts.  As can be seen here and here and here, credit products now are being marketed specifically for medical expenses to both patients and providers.  The real growth in medical credit will flow from the rise of health savings accounts that offer credit components.  These medical credit products aren't likely to transform the for-profit hospital industry, but, depending on their terms, could have a significant effect on household finances.

Credit Slips from Getting Sick?

Everyone is talking about household medical debt this week. American Enterprise Institute Research Fellow Aparna Mathur has just issued a report finding that “nearly 27% of bankruptcy filings are a consequence of primarily medical debt” based on an analysis of data from the Panel Study of Income Dynamics. Meanwhile, over at the Center for American Progress, we can find the results of a poll in which 44% reported being worried about falling deeply into debt because of medical expenses – more than were worried about being hurt or killed in a terrorist attack or losing a home in a natural disaster.

Medical debt deserves a prominent place on the public's radar screen and on the research agenda of scholars from a variety of disciplines.  Still, a slight reframing of the problem is in order.  Incurrence of catastrophic medical expenses is a serious policy issue but a rather rare event.  Flowing far more commonly from medical problems is the incurrence of non-catastrophic (but still substantial) out-of-pocket health and incidental expenses coupled with income loss, various opportunity costs, and the price of credit used to smooth consumption when household savings are not up to the task.  It is this more subtle and complex combination that is heightening financial risk for many American households.