The Fed's Apparently Nonexistent Interest

Last week, Katie proposed that we might have a blog category for "Beyond the Comfort Zone." I'll add another new category: "Things Bob Does Not Understand." It's sure to have lots of entries. Here is what I don't understand today.

As illlustrated by a Wall Street Journal article from last week, a number of media sources reported that credit card interest rates are rising. The conventional story is that credit card lenders are hiking rates to recoup income lost from new restrictions on fees and penalty rates. Even if credit card interest rates are rising, it would not necessarily mean the regulatory changes have backfired. The point was not to make credit card borrowing free, but just to make its costs more transparent. To the extent the regulatory changes have moved the costs into easily understood front-end interest rates instead of "gotcha" penalty fees at the back end, these changes have accomplished their purpose. But here is the thing, I don' t understand how the world has come to the conclusion that credit card interest rates are rising.

There Is a Jury Trial for that Proof of Claim

Imagine the following. A debtor files bankruptcy and schedules a $10,000 bill owing to a credit card company. The credit card company files a proof of claim, saying the debt is $20,000. The debtor objects. OK, at that point, the dispute sounds like a pretty routine procedural matter requiring a hearing before the bankruptcy judge to resolve the disputed claim. Bankruptcy mavens would call it a "contested matter" under Federal Rule of Bankruptcy Procedure 9014.

Suppose the credit card company objects to this procedure and instead insists on a jury trial to resolve the disputed claim, arguing the Seventh Amendment requires a jury trial unless the parties waive it. Well, that's just crazy talk.

If You Have Complained About Financial Industry Regulation

. . . . today's Dilbert is for you:

Welcome to Alan White

We are happy to have Professor Alan White of Valparaiso University School of Law join us as a guest blogger. White joined the Valparaiso faculty in 2007 after substantial practice experience with Community Legal Services in Philadelphia. In practice, White filed numerous chapter 7s and 13s on behalf of consumer debtors and even represented consumer creditors on the creditors' committee in a corporate chapter 11. His policy views are leavened with a good dose of reality about what happens on the ground, and consequently his academic work has had immediate effect. Also, he maintains a web page where he posts regular analysis of foreclosures and modifications from securitized mortgage data. Welcome, Alan.

The Market for LLCs

It's a little off from our usual topics, but I have a post up over at The Conglomerate blog as part of their junior faculty scholars' workshop. Gordon Smith and Larry Ribstein also are commentators. The paper under discussion is by Professor Mohsen Manesh of the University of Oregon and is entitled "Delaware and the Market for LLC Law: A Theory of Contractability and Legal Indeterminacy." Most of the discussion is about the regulatory competition for LLC charters, but a part of the debate is something that does lie at the heart of this blog's topic. Manesh's paper describes a competition for operating businesses, but I would bet that many of the Delaware LLC formations are financial shells set up for securitizations or similar purposes. Also, a good deal of these LLCs are probably wholly owned subsidiaries used for asset partitioning.

Student Loans Now Greater Than Credit Card Debt

Total outstanding student loan debt now exceeds credit card debt, as reported yesterday in the Wall Street Journal which in turn elaborated on a web article by Mark Kantrowitz, publisher of FinAid.org. Revolving consumer credit according to the Federal Reserve is $826 billion. Kantrowitz calculates outstanding student loan debt at almost $830 billion.

Colbert: Elizabeth Warren Is No Oprah

Stephen Colbert last night opining that "a huge budget and no constraint on authority" should be reserved only for Oprah Winfrey here, including an interview with Barney Frank on why Warren is the best pick.

July Bankruptcy Filings Rise, But Look at the Big Picture

The folks at Automated Access to Court Electronic Records (AACER) sent over the July bankruptcy figures. Total U.S. bankruptcy filings in July (134,600) were about the same as they were in June (133,900). There was extra business day in July, however, meaning that the daily filing rate, rose 5.3% to 6,408. The year-over-year increase in the daily filing rate was 7.7%.

Regular readers know that I am skeptical of reading very much into the ups and downs of the monthly filing rate. If you had looked at the June fiing rate, you would have seen an 8.9% drop in daily bankruptcy filings and perhaps concluded the economy was beginning to turn around. The July increase might lead you to the opposite conclusion. The most informative analysis comes from taking a longer term look at the data. And, there is my usual caveat that bankruptcy filings are, at best, a weak and trailing indicator of overall economic strength.

Credit Slips & the WSJ's Washington Wire

Mary Pilon of the Wall Street Journal's Washington Wire has a post up about Elizabeth Warren's blogging here at Credit Slips. Long-time readers will undoubtedly remember many of these posts highlighted there. I'll highlight two others. First, there is a post dated September 14, 2008, just after the U.S. government's bailout of Bear Stearns with some prescient comments about what the future would hold:

More bailouts will be needed, and, at some point, even the American taxpayer can't handle it. Bailouts will not put a stop to the underlying problem: we can't find a bottom in the housing market. Until that happens, the value of financial instruments based on those mortgage obligations will keep falling, and the worldwide market will keep sliding toward collapse.

Second, one of my favorite posts from Warren was this one about the distinction between facts and deductive reasoning. We used this great example in the introductory materials to our empirical methods text.

Four Years of the Slips

Over last weekend, we passed the four-year anniversary of Credit Slips. We've been blessed to have the bit of modest success we have enjoyed. As I wrote once, I was amazed the day that I typed in "creditslips.org," and the Intertubes took me to this site we had set up. The idea that anyone would read or care about what got posted here was even more novel.

Thanks for reading and participating as part of our little corner of the Tubes. We'll keep plugging away, and we hope you like the new format.

And, yes, the image is relevant to this post. Katie will explain why in the comments.

Two Thoughts on the Warren Nomination for the CFPB

The latest catnip for the 24-hour news cycle seems to be speculation on whether President Obama will nominate Elizabeth Warren to head the new Consumer Financial Protection Bureau. Like Adam, I was resistant to say anything on Credit Slips because I figured few would care or be surprised to learn that she has the unequivocal and strong support of a co-author, collaborator, and friend posting on a site where she used to be a regular blogger. As I have read the media reports, it has struck me that the debate is becoming about the caricature of a person I know rather than the actual person. Along those lines, here are two thoughts.

Local Currencies

One moment that everyone seems to remember from The Office television show is the creation of Schrute Bucks, a motivational tool created by Dwight Schrute in his few moments of power as office manager. Any worker who accumulated 1,000 Schrute Bucks was entitled to five extra minutes of lunch break.

In the most recent issue of American Banker, Sara Lepro has a fascinating article on the growth of local currencies. Hardly worthless Schrute bucks, these currencies generally allow local residents to purchase them at a discount and then redeem them for full face value at local merchants. The idea is that local currencies promote local commerce, but Lepro points out their use has been growing in today's climate of mistrust against large financial institutions. The article will interest many Credit Slips visitors.

Undercount of Student Loan Default Rates

From Kelly Field in today's Chronicle of Higher Education:

According to unpublished data obtained by The Chronicle, one in every five government loans that entered repayment in 1995 has gone into default. The default rate is higher for loans made to students from two-year colleges, and higher still, reaching 40 percent, for those who attended for-profit institutions.

These numbers are much higher than the official government statistics that track student-loan defaults only in the first two years of payment. The default rates become very high over a 15-year window. For example, over a 15-year window, the default rate is 31% for loans made to community-college students. I highly recommend reading the full article, which provides much more detail and an extended discussion of default rates at for-profit colleges.

Thank You to Henry Sommer

On behalf of Credit Slips, I wanted to thank Henry Sommer for joining us as a guest blogger. Henry is one of the leaders of the consumer bankruptcy bar, and it was our privilege to have him share his views as part of Credit Slips. Andrew Leonard over at How the World Works and Brian Wolfman at Consumer Law & Policy from Public Citizen both noted his posts (and, thanks for doing so). It is always good to have leading practitioners like Henry join us for the important perspectives they can offer about how things are working in practice instead of just in theory.

Automated Due Process

Many Credit Slips readers likely saw the article on automated debt collection by Andrew Martin of the New York Times. If you did not yet find it, you almost certainly will want to read because . . . well, you read this blog. Martin chronicles how many debt collection lawsuits have become an output of automated processes, complete with computer-generated summons and complaints. The result is a strain on court resources and automated due process for litigants. After a day of getting the new web design working, I'm too tired to write very much about the article, but I'll raise a question for the comments. Do we really need new laws or rules to stop the abuses Martin chronicles or does existing law already empower judges with the tools to stop abusive debt-collection suits?

New Looks

Credit Slips is featuring a new look. We've tried to make the site design a little cleaner and easier to read. Plus, we've moved some things around, but all of the same information should be there. This is a do-it-yourself web site. Everything should be working, but please post a comment if you find a glitch. Also, we'd like to hear any suggestions for formatting and design. I can't promise we can implement everything, but we'll do our best to make the blog as useful as possible to our readers.

New Faces, Old Faces, and a Few Changes

As the Credit Slips blogger with the oldest face, I probably should be announcing a new face for myself. Instead, it's the blog that is going to get some new faces and is going to see a few changes. Before discussing those changes, I have been remiss for not thanking Jason Kilborn for his time with us. As always, Jason updated us on issues happening around the world and offered his always insightful take on them.

June Sees Big Drop in Bankruptcy Filing Rate

The U.S. daily bankruptcy filing rate dropped in June by 8.9%, the second-largest monthly drop since 2006. Although bankrupt debtors filed approximately the same number of cases in June as May (about 133,000 - 134,000), there were two more business days in June meaning the daily filing rate actually declined. On a year-over-year basis, June 2010 was a 6.6% increase from June 2009, but this is the lowest year-over-year increase since the wave of cases from the 2005 changes to the bankruptcy law worked their way through the system.

These latest data provide the strongest evidence yet that the U.S. bankruptcy filing rate may be leveling off after nearly five straight years of steady increases. As always, many thanks to Automated Access to Court Electronic Records (AACER) for providing the latest statistics.

Welcome Back to Jason Kilborn

This week, Professor Jason Kilborn of the John Marshall Law School will be joining us as a guest blogger. Jason has guest blogged in the past and should be well known to Credit Slips readers for his insightful comparative work on insolvency law. Since he joined us last, Professor Kilborn has published a book, International Cooperation in Bankruptcy and Insolvency Matters. An expert in many languages, I understand his latest efforts have been to understand Arabic with the intention of learning more about Islamic finance. Professor Kilborn always has interesting things to say about credit and insolvency matters around the world, and it is a pleasure to have him join us for a while.

Thank You to Michelle Harner

On behalf of all the regulars here at Credit Slips, I wanted to extend our thanks to Professor Michelle Harner of the University of Maryland School of Law. Michelle's guest posts over the past few days were typical of her work, which combines the detailed institutional knowledge of a partner in a major international law firm with the "big picture" policy perspective from academia. Thank you, Michelle, for spending some time with us, and we hope that it causes some Credit Slips readers from outside academia to go look up your scholarly papers.

Decision in Schwab Is an Irritating Nonevent

The Supreme Court handed down its decision in Schwab v. Reilly today. Schwab looks like a technical case only of interest to bankruptcy specialists because it requires the parsing of specific language in section 522(l) of the Bankruptcy Code and rule 4003(b) of the Federal Rules of Bankruptcy Procedure. In fact, Schwab is of great practical importance and could have had an effect on almost every one of the more than 1.6 million bankruptcy cases that consumers will file this year.

Schwab revolves around how debtors may claim their bankruptcy exemptions--the property that bankruptcy law allows the debtor to keep and is part of the fresh start the bankruptcy system is supposed to give debtors. Exemptions are important in most every consumer bankruptcy case (including chapter 13 where they determine the amount debtors must pay in the chapter 13 plan). For nonspecialists, here is some background on the case. If you're familiar with Schwab and the Bankruptcy Code and rules, you might want to skip the next two paragraphs.

Electronic Copy of Bankruptcy Code and Rules

There are online versions of the Bankruptcy Code such as BankrLaw, which I maintain and which allows for retrieval of historical versions of the code or the one at the Legal Information Institute. These sites divide the Code into individual sections. But, I have been wanting a single file with the full Bankruptcy Code that I could put on my Kindle and laptop for quick access while working or during conferences and classes. Because more than a few Credit Slips readers might have need for such a thing, I was contemplating putting such a file together myself and posting it here, but I just made a great discovery. The Office of the Law Revision Counsel of the U.S. House of Representatives has done the job already. You can get PDF versions of the full U.S. Bankruptcy Code and the Federal Rules of Bankruptcy Procedure with Official Forms (actually a pretty big file). The files are current through the first session of the 111th Congress (i.e., 2009). If you click around, you'll be able to find versions in other electronic formats. If readers have other suggestions for electronic bankruptcy resources, please post them in the comments Internet.

Irrelevant Postscript: I always try to spell check posts before putting them online, and it always seems especially ironic that our blog hosting service's spell checker does not have the word "online" in its dictionary. "Cramdown" I can understand being absent, but one would think that a blog-hosting service would have "online" down pat. And, before any former colleagues who are sticklers for correct usage try to claim the hyphenated "on-line" should be preferred, OED says "online" is correct.

Welcome to Michelle Harner

Credit Slips would like to welcome Professor Michelle Harner as a guest blogger. Harner is a professor at the University of Maryland School of Law teaches courses in bankruptcy and corporate law, including corporate finance. Before joining academia, Harner was a partner at Jones Day, and her work reflects a deep understanding of how bankruptcy law works in practice. Most recently, she has been working on articles that explore the ethical and legal responsibilities of directors of financially distressed businesses. Welcome Michelle.

U.S. Bankruptcy Filings at Same Level as Before 2005 Law

According to Automated Access to Court Electronic Records (AACER), the U.S. daily bankruptcy filing rate for May was 6,672, which was virtually identical to the rate from April. On a year-over-year basis, the May filing rate increase was only 10.5%. As regular Credit Slips readers know, the year-over-year increase has been declining for some time. A year-over-year increase of 10.5% is small compared to recent history. For example, in May 2009 there was a 41.4% year-over-year increase in the daily bankruptcy filing rate.

For the past five years, the story of the bankruptcy filing rate has been a steady increase, but that story might be changing. Even after adjusting for changes in population (see the graph to the right). U.S. Bankruptcy filings are at the level they were before the 2005 changes to the bankruptcy law, suggesting they might be nearing their "natural" rate. Of course, there is no true "natural" rate of bankruptcy filings, but what I mean by that is that the bankruptcy filing rate may be nearing its limit given the amount of consumer debt that exists. Unless there more consumer debt is injected into the system, bankruptcy filings will have to stop rising. And, consumer debt actually has been steady to falling. None of this is to be sanguine about the number of bankruptcy filings, we are on target to get around 1.65 million bankruptcy filings in 2010.

Rigbi on Usury on Prosper

When Credit Slips started, we intended to feature new scholarly papers by the bloggers and others. I am going to attempt to revive that tradition by featuring a paper by Oren Rigbi, an assistant professor in the Department of Economics at Ben-Gurion University of the Negev. Rigbi’s paper, “The Effects of Usury Laws: Evidence from the Online Loan Market,” exploits a change in the lending rules that apply to Prosper.com to examine the effects of interest rate caps. Prosper.com is an online lending web site, as Katie Porter explained just after it launched. In April 2008, a change in the way Prosper is organized meant that the interest rate cap was raised to 36% where previously some borrowers had a lower cap (depending on the state where the borrower lived). Thus, Rigbi was able to explore the effects of raising an interest rate cap on the ability to borrow, the amount borrowed, the interest rate for the loan, and repayments.

There are certainly differences across borrowers, time, and states, but Rigbi uses careful empirical analysis to control for these differences. What’s left is a measurement just of the effect of the changing in the interest rate cap. Rigbi summarizes his findings as follows: “I find that higher interest rate caps increase the probability that a loan is funded, especially if the borrower is risky and previously been just ‘outside the money.’ I do not find that borrowers change the loan amounts they request or that their probability of default rises. The interest rate paid for all loans, however, rises slightly probably because online lending is imperfectly integrated with credit markets.” Rigbi concludes his paper by saying, “The main takeaway point from this inquiry is that interest rate restrictions do not seem to deliver the outcomes for which they were intended.” My description of the methodology and findings glosses over a great deal of detail. Rigbi was kind enough to indulge me in an e-mail exchange and even kinder to allow me to reproduce it here:

Is U.S. Bank Collecting Illegal Interest Rates?

When their customers have complained about an unexpected fee, credit card companies have pointed to the fine print in their credit card agreements. Now, a pro se litigant in California has turned the tables on U.S. Bank, saying it has failed to read the fine print in the North Dakota statute. As detailed in the Santa Rosa Press Democrat, a small-business owner and bootmaker, Michael Carnacchi, is opposing U.S. Bank's collection action against him on the grounds that U.S. Bank's credit card interest rates are illegal.

It all sounds crazy, but it gets crazier. A careful reading of the North Dakota statute and the National Bank Act suggests Carnacchi might be right. U.S. Bank is a national bank located in North Dakota, and the particular language of that state's laws might give it a big headache.

U.S. Trustee Audits on Debtor Bankruptcy Filings

In March, the Executive Office of the U.S. Trustee (EOUST) released its annual report on audits of individual chapter 7 and chapter 13 cases. The audits identified a "material misstatement" in 22% of the cases examined for fiscal year (FY) 2009. The 2005 changes to the bankruptcy law require these audits and the EOUST annual report. The "material misstatement" rate for FY 2009 is similar to previous reports--21% in FY 2008 and 30% in FY 2007. The rate of "material misstatements" suggested both a public policy issue and a research methodology issue.

"Beyond Foreclosure"--Conference in Chicago

On the morning of June 3, the Woodstock Institute is hosting "Beyond Foreclosures: The Impact of the Financial Crisis on the Wealth Gap and Economic Opportunity." The conference will discuss how the financial crisis has affected the access to financial services for the most vulnerable citizens. Topics include credit scoring, access to credit, access to banking, and bankruptcy filings (on which I am speaking). The conference will take place at the Federal Reserve Bank of Chicago, and registration is required. More information can be found on the conference website.

On the Road Again

I'm off to the 2010 William J. O'Neill Great Lakes Regional Bankruptcy Institute in Cleveland. Tomorrow, attendees have the privilege sad duty of holding down their lunches while hearing me speak about bankruptcy filers. The whole conference is supposed to be a great event, and I'm looking forward to it. I'm sorry that I haven't posted on it further in advance. If I have a few moments, I'll post on any interesting developments that come out of the conference.

The Uneven Rise and Fall of Bankruptcy Filings

Using data from Automated Access to Court Electronic Records (AACER), I recently posted about the 4.2% drop in total bankruptcy filings for the month of April, which came on the heels of a 35% increase in the month of March. These are national figures and mask considerable variations across the country. To look at variation across the country, I compared the total daily bankruptcy filing rate for the first four months of 2010 to the daily filing rate for all of 2009. Also, I used the federal judicial districts as the unit of measurement. Although federal judicial districts are not an ideal geographic breakdown, they do allow for a little bit more nuanced picture than using state-level data and avoid what can be an overwhelming morass of county-level data (which are not readily available anyway)

There are some areas of the country that are experiencing declining or flat bankruptcy filing rates. Of the 91 federal judicial districts (not counting Puerto Rico, Guam, and the Virgin Islands), 22 have experienced a decline or no increase in the bankruptcy filing rate. As the map to the right shows (click on it for a bigger image), the areas with declines (blue) are mainly in the southeast. Nevada stands out as an exception, although that district experienced such huge increases last year, its decline for the first four months may just be a regression to the mean.

The rate of increase across the entire nation was 10%. There are 29 judicial districts that saw a rate of increase greater than 10%. Those judicial districts fall principally in three areas: the plains and west coast, the upper Midwest, and the northeast. Thus, the national statistics do mask a great deal of regional variation. I'll stop there -- my flight is about to get called.

Amendment to Repeal Marquette

Senator Sheldon Whitehouse is sponsoring an amendment to the financial regulation bill that would undo most of the damage from the Marquette National Bank decision. In Marquette, the Supreme Court ruled the National Bank Act preempted state interest rate regulation. Thus, a national bank in South Dakota lending to a consumer in California gets to follow the relatively lax interest rate laws of South Dakota. No matter that the high-rate loan might cause financial hardship for families in California--that's not South Dakota's problem.

I've long thought that overruling Marquette would be a wise move. The decision laid the groundwork for the the consumer credit culture we have today and is arguably one of the most momentous (but often overlooked) Supreme Court decisions of the last fifty years. Also, as an interpretation of a technical provision a 110-year old statute, Marquette might also win the prize for the Supreme Court decision with the most unintended consequences.

If you think interest-rate regulation is a bad idea, nothing in the Whitehouse amendment should bother you. It merely shifts the power to make decisions about interest-rate caps to the states and away from Washington bank regulators. California can enact laws appropriate for the conditions there, just like South Dakota can enact laws appropriate for its citizens. The Whitehouse amendment does not take any position on whether the appropriate law is a high cap, a low cap, or no cap at all. California or South Dakota or Delaware or any other state just would no longer be able to export their interest-rate laws to other states. It would allow the states to be laboratories of democracy, as the saying goes, and experiment with interest rate regulation. Also, it should be noted that the amendment would not apply to interest rates on home mortgages.

The predictable response from the banking industry will be that they cannot possibly operate and be subject to 50 different state laws. In the information technology age, however, compliance with different state interest rate statutes should be a trivial matter of computer programming. Also, the banking industry (and many other industries) capably navigate a whole thicket of laws on core state matters such as employment, taxation, and property. The Whitehouse Amendment deserves more attention than it is getting.

UPDATE: The text of the amendment is here, and an explanation of the amendment from Senator Whitehouse's office is here.

Bankruptcy Filings Drop in April

The daily bankruptcy filing rate in April was 6,631, which was a 4.2% decline from March. The April filing rate was 13.2% higher on a year-over-year basis, but that is the lowest year-over-year increase since the trough after the 2005 changes to the bankruptcy law. As always, a thank you goes to Automated Access to Court Electronic Records (AACER) for supplying the data.

Before we get carried away with what looks like really good news, it is important to keep a few points in perspective. First, April has tended to see declines in the bankruptcy filing rate (see the table to the right). It's all part of the annual cycle of bankruptcy filings. Because February and (especially) March tend to have inflated filing rates as people use their tax refunds to pay for bankruptcy court costs and attorneys fees, April tends to see a decline as the filing rate moves back toward its mean. Second, the monthly bankruptcy filing rates do what a lot of data series do--that is, they move up and down. It's probably not profitable to draw conclusions from one month's worth of bankruptcy data. Indeed, it has only been a few years since information technology made reporting of monthly bankruptcy filing figures easy to do. Before then, we generally only looked at quarterly data. Third, as I'll explore later, there is a great deal of regional variation. Some parts of the country, especially in the west, are still seeing increasing filing rates.

I Become Spam

If you run a blog, you know about "comment spam." This blog is often hit by people who want to sell you a credit card or, more recently, want to turn your gold into cash (for them, not you). Our hosting service, Typepad, has a filter that blocks some of them. Others get deleted only after I see them on the list of comments. Spammers try to fool these techniques with empty messages liked "Great post. I agree with you completely." Of course, whenever I see that on one of my posts, I know it's a fake.

On this morning's comment list, I immediately spied a cogently argued and insightful point about small-business bankruptcies. It was comment spam only with a new tactic. They had copied and pasted something I had written as the body of the comment and then tried to sell you a credit card. It had to be deleted, despite the brilliance of my the writing.

More on the Small Business Bankruptcy Designation

A few days ago, I posted on the small-business designation in chapter 11 and how it appears to be honored in the breach. That post prompted further discussion on a listserv for bankruptcy professionals, which in turn led to a summary and some interesting comments from Michael Good on his own blog. Good is a bankruptcy lawyer in the Los Angeles area and does a lot of work with financially distressed small businesses. Whether you agree with Good, his post is worth a read, especially the part where he discusses how the traditional law firm business model might pushes lawyers away from pursuing clients who might have small business 11s.

The Disappearing Small Businesses (Designation) in Bankruptcy

The 2005 bankruptcy law was not just about consumers. It made a number of changes to businesses bankruptcies, including the expansion of safe harbors for derivative claimants about which Stephen Lubben has written extensively (e.g., here). Other changes were to small business bankruptcies--not to make it easier for small businesses to get through chapter 11 but to make it more difficult. Small business bankruptcy filers got new duties and extensive new reporting requirements, both of which can lead to dismissal for debtors who fail to meet them. As I was preparing to teach these requirements this year, I came across a little surprise about the difference between this law on the books and the law on the ground that I thought I would share.

Can You Deduct an Expense for a Car You Own?

The news came today that the Supreme Court has granted cert in Ransom v. MBNA Bank. The issue is whether the Bankruptcy Code means what it says. OK, I'm giving away what I think is the right answer.

The question is whether an above-median income chapter 13 debtor, in calculating "projected disposable income," can deduct an ownership expense for a car even if the debtor owns the car free and clear such that the debtor is not making an debt or lease payments on the car. The Fifth and Seventh Circuits said the plain meaning of the statute clearly allowed the debtor to do so. The Ninth Circuit said the statutory language directed a different result. If you're wondering how so many federal judges can differ over the "plain meaning" of a statute, you're obviously not a lawyer.

Putting the Bankruptcy Option Back on the Table for Distressed Homeowners

The New York Times editorialized that "it is time to revive the fight to open the courthouse door to bankrupt homeowners." Specifically, the NYT wants to revive the proposal to let homeowners use the bankruptcy process to write down the principal balance on their mortgages to the value of the home. Yes, exactly right, as discussed many times here, here, here, here, here, here, here, and here on Credit Slips.

Experian and FreeCreditReport.com Sink to a New Low

One of the many banes of my existence is FreeCreditReport.com. Not only do their ads play incessantly during any sporting event that I care to watch, but my children also used to walk around the house singing the catchy tunes featured in the commercials. That behavior--along with all other forms of fun--has been banned in the Lawless household. And, I suppose I have raised an existential question of whether one can have multiple banes against one's being.

FreeCreditReport.com, of course, is not free. To use the service, you must enroll in "Triple Advantage," a credit monitoring service that you can get for the not-so-low price of $14.95/month. The Federal Trade Commission (FTC) had recently taken action to prevent these sorts of abusive practices. Under rules that just went into effect, any web site that purported to offer a "free" credit report had to include prominent text and a link at the top of the page directing consumers to AnnualCreditReport.com, which is the legitimate site offering consumers to request a free credit report, once every 12 months from each of the nationwide consumer credit reporting companies: Equifax, Experian and TransUnion.

In what appears to be a transparent attempt to evade this new regulation, FreeCreditReport.com's owner, Experian, has begun charging $1 for FreeCreditReport.com and says it will donate the $1 to charity. Under Experian's reasoning, FreeCreditReport.com is no longer "free," and hence it doesn't have to comply with the new FTC rule. Will it comply with truth-in-advertising laws (and common decency) and rename its site "OneDollarCreditReport.com?" That won't make for as catchy of a tune, I suppose.

For further information, read Ron Lieber's article in the New York Times about Experian's move and the FTC's web site about free annual credit reports. There is also the news that the actor in the FreeCreditReport.com ads is French-Canadian, now making poutine only the second-most questionable cultural development to come out of Quebec.

The Congressional Research Service Says No Real Effect from BAPCPA

According to a story in this morning's BNA Bankruptcy Law Reporter, the Congressional Research Service (CRS) released a study stating the 2005 amendments to the bankruptcy law (the Bankruptcy Abuse Prevention and Consumer Protection Act or BAPCPA) will not permanently reduce the U.S. bankruptcy filing rate. Those findings fit with what we have been seeing the past few months. Even on a per capita basis, the March 2010 bankruptcy filing rate matched the rate from before the 2005 amendments.

CRS reports are not publicly released as a matter of course, and the Bankruptcy Law Reporter is a subscription service. Hence, I can't link you anywhere for this information. If someone does have a copy of the CRS report, I will be happy to make it available here through Credit Slips and/or pass it along to Open CRS.

The Business of Document Production

In legal circles, "document production" is a term of art usually used to describe the transmission of evidentiary documents from one side to another as part of the discovery process in civil procedure. With the mortgage crisis, it also now can refer to the business of documenting the complex ownership chains that were created when mortgages were passed from originator to bank to securitization pool and then perhaps even further down the line. As Katie Porter commented a few weeks ago here at Credit Slips, there seems to be a boom industry in creating the documents to be back upon lenders' claims that they own a particular mortgage. (If you're unfamiliar with these issues, Porter's post provides the relevant background plus some links for more information.)

Now comes a Wall Street Journal story, courtesy of reporter Amir Efrati and Carrick Mollenkamp, saying there is a criminal probe involving one of the top providers of mortgage documents to the lending industry. According to the story, prosecutors are said to be "reviewing the business procedures" of Docx LLC, a subsidiary of Lender Processing Services, Inc. Given the problems that have been reported about mortgage documentation, I was surprised that this article did not get more attention. The article also links to some bankruptcy court documents where LPS services were used, and court sanctions are being sought. Well worth a read.

March Bankruptcy Filings Are Up But Not "Spiking"

Media outlets are reporting that bankruptcy filings climbed sharply in March (see, for example, Duff Wilson's report in the New York Times or the Reuters wire story). Those reports are not wrong, but they don't tell the whole story. As always, many thanks to the ever efficient Automated Access to Court Electronic Records (AACER) for providing the data.

It is true that there were over 158,000 bankruptcy filings in March 2010, and it is also true that this figure represents a 35% increase over February. Long-time Credit Slips readers know the golden rule for monthly bankruptcy filing data: Thou Shall Adjust for the Number of Business Days in the Month. The total monthly bankruptcy filing figures are very sensitive to the number of business days in a month. In fact, since 2007, the number of business days alone explains about 30% of the variance in the month-to-month differences.

There were 23 business days in March as compared to only 19 in February. Once one adjusts for the number of business days, the March filing figures show a much less dramatic increase and an increase that is very much in keeping with both historical cycles and recent trends. March had a daily bankruptcy filing rate just under 6,890, which is a 11.6% increase from the February daily bankruptcy filing rate of 6,170. To put some perspective on the 11.6% increase, consider that February was a 14.2% increase over January. These increases are consistent with the historical cycle of filing rate increases early in the year. If the cycle holds again this year--and there is no reason it shouldn't--the rest of the year should have a relatively constant filing rate until late fall.

Financial Consumer Protection--The Last Thing We Need Is Federal Banking Regulator Oversight

Yesterday, I was talking with former Credit Slips guest blogger Pat McCoy about perhaps reprising that role for us. McCoy is a law professor at the University of Connecticut and, along with her co-author Kathleen Engel, was writing about Wall Street's role in financing predatory home loans before anyone else wanted to talk about it. Unfortunately, some upcoming professional travel is going to prevent Pat from joining us until later in the spring.

We started talking about the Dodd financial regulation bill announced yesterday. While we were talking, Pat was explaining to me that the proposed Bureau of Consumer Financial Protection would not be as independent as advertised. It was a point that I had not fully appreciated--it is a 1,300 page bill, after all. Even as she prepared to travel, Pat kindly agreed to write up a few a paragraphs on her thoughts about the issue so I could post them here:

Early Thoughts on Milavetz

This morning, the Supreme Court issued its decision in Milavetz on prebankruptcy attorney-client counseling and bankruptcy attorney disclosures. I've got to get to a meeting so I don't have time for an extended post. The early reporting has been technically correct but misleading, e.g., Reuters, "US top court upholds lawyer bankruptcy advice law." The decision upheld the law but construed its most troubling provision--section 526(a)(4)--in a very narrow way, eliminating almost all concerns about the statute. It appears to come out about the way I expected.

Half-Empty or Half-Full: The February Bankruptcy Figures

Pick which blog post you want to read:

The year-over-year increase in bankruptcy filings for February hit its lowest mark since the trough in filings after the 2005 changes to the bankruptcy. February saw only 6,170 filings per business day which was a 13.3% increase over February 2009. The rate of increase in bankruptcies is leveling off, possibly indicating a brightening financial picture for the middle class. The February figures continue a trend that has been developing over the past several months, as discussed in the blog post discussing the January figures and its accompanying graph.

Or, if you would prefer:

The daily bankruptcy filings in February (6,170) hit its second-highest point since the 2005 changes to the bankruptcy law. February daily bankruptcy filing rate was a 14.2% increase over January. If the trend continues, 2010 will be a record year for bankruptcy filings, possibly even eclipsing the aberrational year of 2005 when people filed in a rush to beat changes to the bankruptcy law. These figures show a deteriorating financial picture for the middle class.

The figures in both paragraphs are accurate. It's all in how you pitch it, and if you read the blog regularly, you will remember me bemoaning the often hyped-up presentation of the bankruptcy figures just to create sensational headlines. To get a balanced sense of what the bankruptcy filing figures are telling us, there are a few key points always to keep in mind.

Thank You to Jim Hawkins

On behalf of the Credit Slips bloggers, I want to thank Jim Hawkins from the University of Houston Law Center for joining us the past couple of weeks. Jim has been a new voice on consumer debt issues and has been pushing against the legal academy's conventional wisdom on these issues for being too . . . . well, conventional. Jim's commentary on financial distress, for example, is a good example. We talk a lot about "financial distress" but rarely give the term the precise meaning it deserves. Jim's posts the past few weeks have given Credit Slips readers a sense of his work, and we have enjoyed having him offer his new perspective to the topics we discuss every day.

Chapter 11 Filing Data Are Noisy

On the heels of Monday's post about the January bankruptcy filing rate, I intended to write something insightful about chapter 11 filings in different places around the United States. After playing with the data, there are at least three problems with such a post. First, it is Thursday already--egad--putting us well past the heels, ankles, or even thighs. Second, "insightful" is a high ambition; "mildly interesting" would be better. Third, chapter 11 data are noisy, making it difficult to impossible to say anything about filing rate trends.

The last point might be of interest to those of us who like to look at filing rate trends, and I thought I would give it some elaboration. The graph shows the monthly number of chapter 11 filings by legal entities (such as corporations, partnerships, and LLCs) in four different federal judicial districts. Note that the scales are different in each graph. The filing rates are from the Bankruptcy Data Project at Harvard (BDP), using data supplied by AACER. My original thought was to look at the chapter 11 filing trends in different locales, perhaps comparing these trends to local economic conditions or consumer bankruptcy filing rates. That's just not going to work, at least not without some further data manipulation.

The problem is that the chapter 11 filing figures show tremendous volatility as shown by the spikes in the chart. All of the four districts--and I picked these because they are higher population districts--have sudden and abnormal surges in chapter 11 filings. For example, in August 2008 legal entities filed 215 chapter 11 petitions in the Central District of California (CACB) as compared to only 48 in July and 31 in September. In fact, in no other month during 2008 were there more than 67 legal entity chapter 11 petitions in this judicial district. This volatility would not be a problem if it was capturing some underlying phenomenon, but it's not.

Bankruptcies Maintain Similar Month-to-Month Rate in January

The January bankruptcy filing basically held steady to December, according to the new bankruptcy statistics now available from Automated Access to Court Electronic Records (AACER). There were just over 102,000 total bankruptcies spread over the nineteen business days in January. That is a daily filing rate of 5,386, a rise of only 1.3% from December's daily filing rate of 5,319. For monthly bankruptcy filing rates, a 1.3% increase probably does not rise above the threshold of statistical noise.

The January 2010 rate is a 20.6% year-over-year increase from January 2009. That may sound like a hugely impressive annual increase, but regular Credit Slips readers will know better. To keep the 20.6% year-over-year increase in perspective, consider that January 2009 had a 31.6% year-over-year increase compared to January 2008 which in turn was a 21.3% increase as compared to January 2007. It's not that double-digit increases in the bankruptcy filing rate are something to be sanguine about. Rather, the rate of increase in the rate of increase appears to be slowing. As the graph shows (click for a larger view), the year-over-year increase started slowing in August of last year. I attribute this slow down to the filing rate just catching up with its "natural" level after the trough following the 2005 changes to the bankruptcy law rather than any fundamental changes in the economic situation.

With one month of data, it is way too early to be making too many projections about annual U.S. filings. When I ran the numbers for January 2010, however, I noticed that the month of January constituted 6.4% of the bankruptcy filings in 2008 and 6.2% of the bankruptcy filings in 2009. Do two years of relatively consistent January numbers make for a trend? If so, then the January 2010 data suggest total annual bankruptcy filings will be 1.60 to 1.65 million. That would be just below my estimate of 1.70 million (or slightly more) filings for 2010.

FJC Posting for Bankruptcy Position

The Research Division of the Federal Judicial Center has an opening for a senior research associate who has expertise in bankruptcy. The job posting is online, and it looked like something that might be of interest to some of our readers.

Anna Nicole Smith --The Bankruptcy That Keeps on Giving

It can really bug me when blogs have posts that are just a naked attempt to draw traffic to their site. These posts always are sure to contain a few words that will attract the attention of search engine users seeking porn or the usual titillating web sites. Seemingly random references to celebrities such as Brittany Spears, Rihanna, or Paris Hilton will be put into the blog. And, worse of all, these naked attempts at self-promotion will use word repetition and appear near the beginning of the web page to optimize their search engine placement. Therefore, I was not surprised to find references to the 15-year old bankruptcy case of the late Anna Nicole Smith, who was often described as sexy and buxom.

On a more serious note, it was somewhat puzzling to see references to this old bankruptcy case. It was dredged up for an AP story that was sourced to "newly released government files" obtained by a Freedom of Information Act (FOIA) request directed to the Department of Justice. The article cites to "the bankruptcy examiner's report." I don't give a rat's pa-too-tee about the contents of the report, but I wondered about the whole FOIA thing. If this was a bankruptcy examiner's report, wouldn't it be part of the public court record? Why did they need to use FOIA? If the court ordered the report filed under seal or otherwise made the report unavailable, then why can a FOIA request effectively circumvent the court order? Or, was this not a bankruptcy examiner's report in the technical sense of the term and, if so, what was it?

There May Be More Financially Distressed Small Business Owners Than You Think

Last night, I caught the tail-end of a commercial for debt relief services aimed just at small business owners. Commercials for debt relief services are hardly unusual, especially in these financially troubled times. It was striking, however, to hear a commercial aimed only at struggling small-business owners.

To some, but this might seem like a small market. The data suggest otherwise. Elizabeth Warren and I once co-authored a paper finding that 1 in 7 bankruptcy filers identify themselves as self-employed at or near the time of bankruptcy. ("The Myth of the Disappearing Business Bankruptcy," California Law Review, 93:745-95 (2005)). At current filing rates, those numbers would imply over 200,000 bankruptcies each year have a relation to a small business. Of course, only a fraction of persons who experience financial distress end up filing bankruptcy. Although I am not aware of any data setting a precise number, for each person filing bankruptcy, there are several more in financial distress who do not. Financially distressed business owners could present a very large market indeed.

Those findings were from the 2001 wave of the Consumer Bankruptcy Project. In a chapter for a forthcoming book edited by co-blogger Katie Porter, I report that the 2007 wave reported a similar incidence of self-employment. Moreover, when the self-employed arrive in bankruptcy court, they arrive in worse financial condition than other bankruptcy filers. Even as compared to other bankruptcy filers, the self-employed have very high amounts of credit card and general unsecured debt, making them perfect targets for the debt relief firms.