Credit Slips

Why I Use AACER's Filing Statistics

Every month, I try to post on the latest bankruptcy filing statistics using data provided by a private company, Automated Access to Court Electronic Records (AACER). Recently, Jason Kilborn, a law professor at Chicago's John Marshall Law School, posted a comment asking why AACER's filing statistics were lower than the ones provided by the Administrative Office of U.S. Courts (AO). For example, AACER reported 826,665 bankruptcy filings in the 2007 calendar year, about 2.9% lower than the 850,912 filings reported by the AO.

The differences seem to stem from the AO's including a old but reopened bankruptcy case in its count of bankruptcy filings where AACER's data only counts new filings. The AO data also appear to count transferred cases. Thus, for new filings, AACER's statistics are the ones to use. Besides, as I have mentioned previously, the AO's data come out woefully late, as much as three months after the fact. AACER is able to provide timely data.

Without access to the AO's data to audit and compare their data to AACER's data, I only can say that the difference "seems" to be explained by the way the AO counts reopenings and transferred cases. But why do I hold this belief?

Still on Target for 1,000,000 Bankruptcy Filings

While I was busy with last week's Debtor World conference, the April 2008 bankruptcy filing figures became available from AACER. If I wanted to be sensational, I could compare the latest figures to the 2007 figures and tout how filings are up over 37% from the previous year. Or, I could compare the April 2008 total of 93,096 to the March figure and note filings climbed 3% in one month. Although both of those calculations are technically correct, they also are misleading.

On a daily basis, filings were 4,232 for each business day in April as compared to 4,301 for each business day in March. That is a slight decrease (a 1.6% decrease to be exact). Does this mean that filings are easing off? Not really. In recent years, April filings per day have been roughly the same as March. In fact,  if the past patterns hold, daily filings will hold steady until October or November when they again will climb. The calculations still suggest we'll see over 1,000,000 bankruptcy filings for all of 2008.

Many, Many Thanks to Mechele Dickerson

On behalf of all the regular Credit Slips bloggers, I wanted to express our deep appreciation to Associate Dean and Professor Mechele Dickerson. Her contributions were just superb. Professor Dickerson did a great job of blogging the Debtor World conference, bringing those papers and ideas to a wider audience. Also, in her first posts, Professor Dickerson discussed her most recent work on home ownership. Whether you agree or not, anyone with an interest in guiding this country toward a more coherent consumer credit regime must grapple with the issue Professor Dickerson raises about a housing policy that aims to put everyone into home ownership. Thanks again for all of your efforts, Mechele.

Streaming Academics

I hope our readers will excuse a little promotional material, but I have received several inquiries about our upcoming conference, "A Debtor World: Interdisciplinary Academic Symposium on Debt." Shockingly, Champaign, Illinois, is not a major travel destination for many of you, and readers have written me to ask about the conference proceedings.

If you are unable to join us here in Champaign, the conference sponsors (the University of Illinois and the American Bankruptcy Institute) have made available a live webstream for the conference. To view the live webstream, you would need to pay the same registration as the in-person attendees ($195 for ABI members, $395 for nonmembers). More information about the live webstream can be found here.

The papers presented at the conference will be collected for publication in an edited volume by an academic press. When that volume becomes available, I will make an announcement here on Credit Slips. We now return you to regular programming.

Congrats to Professor Warren!

What do B.B. King, Justice John Paul Stevens, University of Illinois chancellor Richard Herman, and Credit Slips blogger Elizabeth Warren have in common? They were all named today as part of the 2008 class of fellows for the American Academy of Arts & Sciences. This is a major, major accomplishment. Congratulations, Elizabeth!

Welcome to Mechele Dickerson

Credit Slips would like to welcome Professor Mechele Dickerson as a guest blogger. Dickerson is the Associate Dean for Academic Affairs and the Fulbright & Jaworski Professor of Law at the University of Texas School of Law. She is a widely known and respected scholar of bankruptcy law. Her current paper, forthcoming in the Indiana Law Journal is entitled "The Myth of Home Ownership, and Why Home Ownership Is Not Always a Good Thing," and I am sure we will hear little bit about that work. As an academic dean, Professor Dickerson also is uniquely situated to talk about how bankruptcy and credit is covered in the university classroom. At the end of the week, Professor Dickerson is joining us here in Champaign for "A Debtor World: An Interdisciplinary Academic Symposium on Debt," and she may have a few contributions for those of you who are unable to join us. Welcome to Credit Slips, Mechele.

Abe Simpson Gets His Wish?

Dear Mr. President:

There are too many states nowadays. Please eliminate three.

/s/ Abe Simpson

For those of you who do not watch The Simpsons as maniacally as I do--and that probably would be pretty much all of you--Abe Simpson is the senile grandfather who penned that letter. Now, according to a site calling itself the Los Angeles Chronicle, comes the news that Abe maybe has gotten his wish, and we perhaps have lost three states. Or, to quote Homer Simpson, "Anything is possible with President Koo Koo Bananas in charge."

Why Don't More Walk Away

My buddy, Buce over at Underbelly, has a post up using the concept of option value to help explain why more people are not walking away from their underwater homes. By "underwater," we're not talking about Homer Simpson's imaginary home under the sea, but situations where the mortgage on the residence is more than the value of the residence. A cool, rational economic actor would walk away from the home, leaving the lender to take a loss (assuming the lender has no legal or practical alternative to collect the difference from the homeowner). We're not seeing that as often as the cool, rational economic model might predict. Buce points out, correctly, that ownership of the house is just like having an option to buy (i.e., pay off the debt and the house is yours) and even underwater options have value. Thus, part of the reason why more people don't walk away from their homes is because of this option value.

Lubben on Corporate Bankruptcy Costs

Professor Stephen Lubben of Seton Hall University (and a former Credit Slips guest blogger) has recently published the findings from his massive study of professional fees in corporate reorganizations. The paper appears under the very descriptive title of "Corporate Reorganization & Professional Fees" in volume 82 of the American Bankruptcy Law Journal at pp. 77-139. This paper will be a standard reference on corporate bankruptcy costs.

Lubben reports on a dataset of 1,026 cases that filed chapter 11 in 2005 in thirty-three separate judicial districts. Among Lubben's key findings:

• Courts rarely deny applications to retain professionals and rarely reduce professional fees
• Time in bankruptcy is not related to the level of professional fees
• Professional fees in chapter 11 are subject to economies of scale (i.e., larger bankruptcies result in a lower percentage of value being devoted to professional fees)
• Thirty-five percent of chapter 11 cases result in no payments to professionals whatsoever.

You'll have to read the study for the details. Professionals who work in chapter 11s and who like to get paid will want to do so. It contains a lot information about the expectations for the costs of an average chapter 11. In a "big case subsample," Professor Lubben provides separate data for the biggest corporate reorganizations.

I'm not quite sure how one goes about getting a copy of the study. The American Bankruptcy Institute, which provided the funding for Professor Lubben's study, was selling a CD-ROM with the study's contents. Full disclosure notice: I served on the advisory committee for Professor Lubben's study.

UPDATE (4/21): Professor Lubben wrote me to say a copy of the paper is available on SSRN here.

Monthly Filings, Jan. 2006 - Mar. 2008

A reader asked about the total U.S. bankruptcy filings for a month earlier this year. Looking around, I found I had not updated those figures in a while, and I thought others also might have a use for those figures. Thus, presented without analysis and for everyone's convenience is this table with those figures, running from January 2006 to March 2008. The figures are for total U.S. bankruptcy filings. Clicking on the table should bring up a larger, more legible version.

The data are from Automated Access to Court Electronic Records (AACER). Over the past two days, there  have been news stories about the latest data from the Administrative Office of U.S. Courts (AO). The AO's  data are three and a half months old, from the last quarter of 2007. AACER's data are much more current.

Bankruptcy Filing Rates by District, Apr. 2006 to Mar. 2008

The March 2008 bankruptcy data showed that the U.S. average filing rate went over 4,000 per day for the first time since the 2005 bankruptcy. Bankruptcy filings have been steadily rising since the 2005 law's effective date, but national trends can mask local variation. Although bankruptcy data often is aggregated by state, it easily can be broken down to a little bit finer level. Bankruptcy filings are readily available by federal judicial district, for which there are ninety in the fifty states. Some districts occupy an entire state, but looking at districts allows us to see variation within a particular state. As always, these data are courtesy of Automated Access to Court Electronic Records (AACER).

The map to the right shows how bankruptcy filings have increased from April 2006 to March 2008 in each of the ninety federal judicial districts. Yeah, I know, it's really small and illegible, but clicking on the map should open up a much bigger version. The states are color coded into deciles of growth, with the legend appearing in the lower right-hand corner. It won't be the greatest map you'll ever see, but I think it will serve the purpose. Also, no criticism of the selections of color codes will be brooked. I have a heck of time dressing myself in the morning--somebody could make a lot of money selling me Garanimals for Adults--and a coordinated color palette is too much to expect from me.

Before diving into what the heck this all means, a few caveats and explanations are in order. First, I picked April 2006 as the comparison date because it seemed like the first month after the 2005 bankruptcy law during which filings had returned to a somewhat normal pattern. Picking a different date, of course, could produce a different result. Second, every district in the country has had an increase in filing rates since 2006. Thus, even the tenth decile still represents an increase. It's just less of an increase than any other decile. Finally, consider that deciles are a convenient way to group, but they can be arbitrary cutoffs. For example, dividing ninety judicial districts into deciles means the 9th and 10th highest districts are grouped into different deciles. The map is best understood and used for its patterns.

Light Blogging

Our regular readers might have noticed the very light blogging this week. Sorry about that. Events conspired to keep the regular Credit Slips bloggers really busy this week at our day jobs. I have some really cool graphs on state variation in the bankruptcy filing rate I'll write up soon over the weekend.

San Francisco City Attorney Sues NAF

My semi-favorite debt collector, er, I mean arbitration service, the National Arbitration Forum (NAF), has been sued by the San Francisco city attorney. The San Francisco Chronicle reports the story here. Different contributors have discussed the NAF here on Credit Slips (see here, here, here, and here), noting the high win rate for creditors and describing how the NAF acts almost as if they are a disguised debt collection agency. According to the article, the lawsuit makes very similar allegations against the NAF.

The lawsuit also names Bank of America as a defendant, which makes me wonder if that part of the lawsuit (not the part against the NAF) will be preempted under the Supreme Court's Watters decision from last spring (see here).

More Than 4,000 Bankruptcy Filings Per Day in March

For the first time since the 2005 changes to the bankruptcy law (BAPCPA), the U.S. bankruptcy filing rate went above 4,000 per day in March 2008. There were 90,288 total bankruptcy filings spread over twenty-one business days in March for an average daily filing rate of 4,299 bankruptcy filings. The March 2008 filing rate is an 8.6% increase over the previous month (February 2008 with 3,969 filings per day) and a 29.4% increased compared to one year previously (March 2007 with 3,322 filings per day). As always, these statistics come courtesy of Automated Access to Court Electronic Records (AACER).

Illinois Academic Fellowships

The University of Illinois College of Law has just announced a program where persons looking to enter the legal academy can spend one or two years in residence. The program's goal is to help prepare persons for tenure-track positions at leading law schools.

Given our blog's focus on credit and bankruptcy matters, I was somewhat reticent to make that announcement here, but I have heard from Credit Slips readers who are aspiring legal academics. Rather than make an elaborate post, I'll just direct interested persons to the web page describing the program. The Illinois Academic Fellows program is not at all subject-matter specific, but Credit Slips readers might have a particular interest because of our law school's Program in Business Law and Policy, which would offer numerous events and opportunities for interaction with senior scholars in business and commercial law. If any of our readers have an interest in this program and have any questions, please feel welcome to contact me.

Online International Bankruptcy Course

My friend, Professor David Epstein at Southern Methodist University, was telling me about an innovative course in International Bankruptcy. The course is offered at NYU, but through distance learning technology, law students at other schools can participate. I asked David if he would write up a few paragraphs about his experience with the course that I could share with Credit Slips readers. Here is what David wrote back.

I have often thought that students who are considering a transaction practice would benefit from a course in International Bankruptcy. The problem always has been that very few law schools have faculty members (or adjuncts) willing and/or prepared to teach such a course. I have been working with the American College of Bankruptcy (ACB) to address this need.

Presidential Candidates and Short-Term Fixes

In this morning's New York Times is a story about Senator McCain's position on the mortgage crisis. With the story is a graphic comparing the candidates' positions on short-term and long-term fixes to the credit problems in the United States. Long-term fixes I get, but here is what I would like the candidates to say about the short-term fixes:

If I am elected president, I would not take office for another eleven months. Our current financial crisis will look very different by then. In eleven months, we could be dealing with a housing problem where the issue is simply ensuring that large numbers of people have the shelter they need. In eleven months, the credit problems could have spread even further to areas like the credit card industry or the student loan market. In eleven months, we may have seen a string of bank failures that will require us to prop up the banking system. Maybe things will go in another direction. In eleven months we may have had more positive outcomes with confidence on Main Street and Wall Street increasing and credit again flowing.

Different experts will tell you what they think will happen, but nobody knows for sure. As president, you should want someone who will be nimble enough to deal with the situation as it will be presented to them next January. If you want to know what I would do if I were in office today, I'll tell you, but don't think these ideas necessarily will be the best solutions one year from now.

Yeah, I know, not going to get said.

Are Bankruptcy Judges Unconstitutional?

The title to this post is the question asked by former colleague, Professor Tuan Samahon (UNLV), in  an article just posted to SSRN: "Are Bankruptcy Judges Unconstitutional? An Appointments Clause Challenge." Click here to view the abstract or download the full version. Bankruptcy judges are appointed by the U.S. Courts of Appeals, but Article II of the U.S. Constitution allows only "inferior officers" to bypass presidential appointment and Senate confirmation. Samahon's article explores whether bankruptcy judges are "inferior officers." A taste from the abstract:

Although the Courts of Law have appointed bankruptcy adjudicators since the earliest bankruptcy laws, this Article advances the position that bankruptcy judges have gradually and over time accrued tenure, safeguards against removal, expansive jurisdiction and duties that are incompatible with inferior officer status under the balancing approach of Morrison v. Olson. Accordingly, they are not amenable to being opted out of advice and consent and they must be appointed pursuant to the Article II procedure. The appointments of present bankruptcy judges are consequently suspect and their judgments and orders are of questionable validity.

An Article II challenge has escaped the attention of academic commentators and (largely) that of the courts. Resolution of the challenge will require the Supreme Court to clarify its Appointments Clause jurisprudence This Article argues that the Court's pronouncements on inferior officers in Morrison and Edmond v. United States are irreconcilable. Which authority controls would (likely) dictate the outcome of any challenge. . . .

Samahon examines alternative interpretations of the relevant Supreme Court precedents and includes bankruptcy judges are suspect under some of these different interpretations but not others. Samahon's analysis is careful and balanced. Also, for the skeptics out there, he has an answer to why the issue has not been raised previously. He has laid out a road map for any litigant frustrated with a bankruptcy court to challenge the court's constitutional authority. The article is well worth a look.

Are Bankruptcy Filings Highest at the End of the Month?

REVISED 3/19: Courtesy of Automated Access to Court Electronic Records ("AACER") come new data about the U.S. bankruptcy filing rate throughout a month. From January 2007 through February 2008, the average daily filing rate for the first 14 days of the month has generally been higher than for the entire month. These data would suggest that bankruptcy filings tend to clump at the beginning end of the month.

This is a completely revamped post on the topic. I had misread the data that were initially sent to me as showing the opposite. The clumping at the end of the month, rather than the beginning of the month, makes more sense to me.

It is still important to note that these data represent only 14 months of filings. Also, an end-of-the-month filing clumping, that is consistent with the general trend of an ever-increasing filing rate. Still, the end-of-the-month increases are higher than the overall monthly increases suggesting that general trend cannot explain all of the clumping effect. If bankruptcy filings do clump at the end of the month, the reasons for this clumping may help us understand the trigger of why people choose to file bankruptcy at a particular point.

Although the clumping may seem like it is coming at the end of a month, it may actually be a beginning-of-month effect. One thing to appreciate is that bankruptcy filings do not happen instantaneously at the moment someone first consults an attorney. In a completely unscientific survey this morning on the Bankr-L e-mail list (see signup instructions to the right), I asked bankruptcy attorneys for their estimate of the typical number of days that it takes for a routine consumer bankruptcy filing to occur from the moment of initial consultation to filing. Sixteen attorneys responded, and the median answer was about 12 days. Eight of the responses specifically mentioned the great variance in time, and five of the answers stressed that the date of the bankruptcy filing is often dependent on when the debtor can scrape together the money to pay the attorneys' and filing fees. In fairness, I should stress again that 12 days was only the median. The range was large, with two responses suggesting that the typical case took about six months from consultation to filing. The mode (or most common) response was 10-14 days.

What a Law Professor Does on a Saturday Afternoon

It's Saturday afternoon, and as a law professor I'm spending it in my usual way--reading and rereading the various form contracts to which our household is subject. I was all involved with an engrossing new form describing my rights under section 631 of the Cable Communications Policy Act of 1984, when this caught my attention. The contract directed me to a web page that allows you to opt out of arbitration with Comcast. The hitch is that you have to opt out within 30 days of receiving your contract. You also have to know your Comcast account number.

Bankrupt Consumer Arbitration

A couple of years ago, I got all exorcised about MBNA v. Hill, 436 F.3d 104 (2d Cir. 2006). The case involved a consumer bankruptcy where MBNA had offset $159 from the consumer's account despite MBNA's admission that it had notice of the bankruptcy case. The consumer brought an action for damages because of MBNA's violation of bankruptcy's automatic stay and styled it as a class action. MBNA invoked the arbitration clause in its account agreement, and the Second Circuit agreed the case had to go to an arbitrator. Because the automatic stay is central to the U.S. bankruptcy court's power to protect the bankruptcy estate and because Hill had the potential to be an important precedent that undermined the bankruptcy court's authority, a few of us signed an amicus brief urging the court to reconsider its decision. The Second Circuit disagreed, and the case still stands.

I have been wondering where things stand with consumer arbitration in U.S. bankruptcy courts. I did a little poking around this morning and found a few reported cases where MBNA had been cited. Most of these are cases where a bankrupt consumer has asserted rights under a consumer protection statute as a counterclaim to the creditor's claim in the bankruptcy case. These are just the reported cases, and my curiosity is not about the law in the books but the the law on the ground. Are institutional creditors aggressively asserting arbitration clauses to avoid the jurisdiction of the U.S. bankruptcy courts? It's not really the assertion of arbitration against consumer protection claims in which I am interested. Rather, I am really curious to know whether institutional creditors are using arbitration in an attempt to avoid core bankruptcy procedures like the automatic stay or the claims resolution process. Comments are open.

Illinois Statute Gives Debtors Less Protection After Bankruptcy?

A crazy Illinois law demonstrates how bad drafting is not just for the U.S. Congress. State legislatures can do it too! It is my understanding that some Illinois automobile lenders are citing this law (625 ILCS 5/3‑114) as a reason to give some debtors less protection after they filed bankruptcy. Under this reasoning, these debtors are in  worse legal position because of the bankruptcy filing. That can't be right.

February 2008 Filing Rates Hit Post-BAPCPA High

This just in. Bankruptcy filings in the U.S. are now at their highest daily rate since the 2005 changes to the federal bankruptcy law. According to Automated Access to Court Electronic Records (AACER), there were 79,198 bankruptcy filings in February 2008. Spread over the twenty business days in February, that is 3,959 filings per day. That's a 28% increase over the same time period one year before and an 18% increase over January 2008. Is this a big deal? Yes and no.

Some persons may seize on this news as further evidence of the decaying economy but that would be a mistake. There may be plenty of evidence that the U.S. economy is headed toward recession, but the February 2008 bankruptcy filing rate alone should not be taken as part of that evidence. Put simply, the monthly filing bankruptcy rate goes up and down. One month of data does not tell us a lot by itself. Perhaps more importantly, the monthly bankruptcy filing rate has a lot of cyclicality, and bankruptcy filing rates tend to rise in February (as discussed here). While we shouldn't overreact to this news, we probably also should not dismiss it either.

A Debtor's World: An Interdisciplinary Academic Conference

On May 2-3, the University of Illinois College of Law and the American Bankruptcy Institute are sponsoring "A Debtor's World: An Interdisciplinary Academic on Debt." Our goals is to bring together leading scholars from different disciplines to have a conversation about how our society should use and think about debt. Confirmed speakers include Terry Halliday (American Bar Foundation), Heidi Hurd (Illinois, Philosophy and Law), Brian Knutson (Stanford, Neuroscience), Stephen Lea (Exeter, Psychology), Gerry McNamara (Michigan State, Management), Craig Muldrew (Queens College of Cambridge, History), George Ritzer (Maryland, Sociology), Amir Sufi (Chicago, Business), Teresa Sullivan (Michigan, Sociology), Paul Vaaler (Minnesota, Management), Elizabeth Warren (Harvard, Law), and Rich Wiener (Nebraska, Psychology). The keynote speaker is James Scurlock, the producer of the documentary Maxed Out. More information, including a link to the registration materials is here.

Commercial Law at DePaul

On May 1, DePaul University College of Law and the Commercial Law League of America are sponsoring a symposium entitled "Lawyers, Law Firms & the Legal Profession: An Ethical View of the Business of Law." The program appears aimed principally at practicing lawyers with topics such as whether the billable hour must die (echoing Scott Turow's recent claim in the ABA Journal), lawyer mobility, and the state of ethics in the legal profession. The event will take place at the Westin Hotel on Michigan Avenue in Chicago, Illinois. More information and how to register can be found here.

Welcome to the Blogosphere: Less Than the Least

Professors David Skeel (Penn, Law) and Bill Stuntz (Harvard, Law) have started Less than the Least. Skeel and Stuntz say they will write about what interests them personally and professionally. Thus, Credit Slips readers may want to check out this new blog. Bankruptcy types will know Professor Skeel's work and his history of United States bankruptcy law, Debt's Dominion. One of Skeel's first posts discusses his take as an evangelical Christian on Senator Durbin's proposal to give bankruptcy judges the power to modify home mortgages, a proposal that Credit Slips blogger Katie Porter discussed earlier this morning.

30-70%? -- Probably Not the Real Rate of Mortgage Fraud

I've been catching up on some reading and again found the statistic that 30% to 70% of early payment defaults on home mortgages can be linked to significant misrepresentations borrowers made on their loan applications. This most recent time I saw the statistic cited as coming from the U.S. Federal Bureau of Investigation. Enough! Can we stop this?

This statistic is misleading and when presented as a fact makes it seem like there is an easy solution to the mortgage crisis, which would be to let the fraudfeasors get the fate they deserve. If those numbers seem too high to you, it's because they likely are.

A Law Unto Themselves?!

A thank you to one of my students, Scott Wilson, for pointing me toward yesterday's front-page article in the Wall Street Journal about the growing phenomenon of "civil demand" that retailers are using against shoplifters. It was a new topic for me, although I am sure some Credit Slips readers were aware of it already. The article is worth reading.

It's very difficult to get people to see what is wrong with this system. No one could responsibly argue that shoplifters should not be held responsible for their actions and make restitution to their victims. What I see in this article, however, is troubling. It's the same pattern with the broader debt collection system, a system where a few abusive private actors essentially have become a law unto themselves. Their threats against uninformed consumers become shakedowns where the consumers have no choice but to pay.

This is not an indictment of debt collectors generally. Some of my best friends are debt collectors. Hey, I even did a few debt collections myself when I was in practice. The debt collection industry needs to stop its own bad actors before they get more regulation.

OTS ... ?4U ... WITW

Office of Thrift Supervision, I have a question for you. What in the world is this?

CNN reported that the OTS is in the early stages of a plan that would give some lenders an incentive to write down mortgages where the value of the debt now exceeds the value of the home. According to CNN, if a home was worth, say, $100,000 and if the mortgage was $120,000, the lender could write down the mortgage to $100,000 and get a $20,000 warrant. If the house later sold for more than $100,000, the warrant would entitle the lender to receive up to value of the $20,000 warrant plus interest. The OTS also is suggesting that these warrants could trade on a secondary market. The idea is the lender would be able to share in any recovery in the value of the housing market.

I don't get it.

A Face for Radio

If readers will excuse a little self-promotion, I wanted to say that I'll be on Focus 580 with David Inge on WILL-AM. The program is scheduled for tomorrow morning, February 19, at 11:00 AM (CST). We'll be talking about the credit crisis. If you're in the Champaign-Urbana area, you can hear it on 580 AM. If you're not inclined to travel to the Illinois prairie even to hear compelling public radio such as this, WILL-AM streams their broadcasts here.

For-Profit Student Lenders Win Again

Yesterday, the U.S. House of Representatives passed H.R. 4137, College Opportunity and Affordability Act of 2007. Reading that, you might query whether the House has a calendar, but the main point of the bill is to make some reforms to the market for student loans. I'll leave those details to the N.Y. Times story reporting on the bill's passage. Readers of this blog are likely more interested in the fact that the bill left the House of Representatives without changes to how student loans are treated in bankruptcy.

The December Effect

Most every month, I write up a post with some thoughts about the latest monthly filing statistics from AACER. I've always been a little hesitant about those monthly updates because a focus on the monthly ups and downs doesn't really tell us much about how, say, August was compared to July. If we measured filing data on a daily basis, we wouldn't say that Tuesday was a better day than Monday because there were fewer bankruptcy filings on Tuesday. The same is likely true for the monthly data measure too small of a time period to be able to say much about how one month compares to the next. Consumer financial distress unfolds over a longer time period than to be accurately captured by monthly financial data.

In addition to these concerns, one thing that drives me bats is when I see media reports about monthly bankruptcy filings that fail to adjust for the number of business days in a month. While it is true that electronic court filing means that bankruptcy filings can occur any day of the week, the number of business days in a month will be the primary driver of month-to-month changes in the filing rate.

Properly adjusted, the monthly data are useful for looking at longer trends and for trying perhaps to find recurring patterns. It has only been fairly recently that we have had good monthly data. I've only been able to get monthly data going back to January 2004, some from the Admin. Office of U.S. Courts and some from AACER. (By the way, if anyone has monthly filing data going back farther, I would be ever so grateful if you would let me know.) Looking at these monthly data, I am wondering whether we maybe don't have an annual pattern where filings fall in November and December, surge again in early spring and then plateau again in the summer.

Bankruptcies Continue Their Slow, Upward Pace

We ended the year 2007 with 826,665 total bankruptcy filings, according to the data from Automated Access to Court Electronic Records (AACER). This figure represents a 39.9% increase over 2006, but the 2006 figures were affected by the huge surge of filings October 2005 to beat the effective date of the new bankruptcy law. The 2005 surge created a trough in demand for bankruptcy filings that continued into the first part of 2006.

What we can say is that bankruptcy filings appear that they will continue their upward trend since the 2005 law's enactment. For example, in December 2007 and January 2008, total bankruptcy filings per filing day were both about 3,300 as compared to around 2,700 for the same period a year ago. As I wrote a few months ago, I think the rate of increase in bankruptcy filing rates has been leveling off, but overall it's still an upward trend. The trend line alone suggests that there it looks like there will be more than 1,000,000 bankruptcy filings in 2008. Tightening credit markets mean both consumers and business will have much less ability to use further borrowing as a way to stave off the day of financial reckoning. Thus, I think the conditions are right for the United States to continue to see rising bankruptcy rates and again go over 1,000,000 total annual filings.

Worth Reading--Moral Responsibility to Pay

Two very thoughtful posts by Buce at Underbelly are worth reading. Both get at the question of whether "can pay" debtors are acting wrongfully when they don't pay. The first post looks at the issue generally. The second post is a followup discussing the mortgage foreclosure problems in California and whether banks should expect debtors to pay more than they are legally obligated to pay. Good stuff.

Thank you to Jim White and Welcome to Jean Braucher

It's Monday, and we have a changing of the guard. We wanted to thank Professor James J. White of the University of Michigan Law School for joining us last week. Professor White now holds the Credit Slips record for most comments for his post offering a libertarian perspective on the home mortgage crisis.

Beginning today and for the rest of the week, we will be joined by University of Arizona law professor Jean Braucher. In addition to an extensive body of work on bankruptcy law, Professor Braucher also teaches and writes about contract law and has written an number of articles about software contracts, including those fine-print licenses we find after we open the shrink-wrap. We look forward to her contributions.

NYT Topic Page on Bankruptcy

One of my friends--and you know who you are--gave me some serious stick for not putting up a post on Jane Birnbaum's January 12 New York Times article on the state of the bankruptcy system. It took me a while to find it on the NYT web site. For some reason that is not readily apparent to me, searching on the word "lawless" produces more hits about tribal regions in Pakistan than for myself. Is it possible that it is really not all about me? Anyway, the article featured several great quotes from fellow Credit Slips bloggers Debb Thorne and the usual boring numbers stuff from me.

The real reason I thought it was a good idea to bring up this article now was the NYT also put together a "Times Topic" page for bankruptcy. It collects a number of resources on bankruptcy as selected by the NYT editors, including a number of scholarly papers and books by Credit Slips contributors.

Thank You to Nathalie Martin

The Credit Slips crew wants to thank Professor Nathalie Martin, of the University of New Mexico School of Law for joining us a guest blogger. Professor Martin attracted some attention around the blogosphere with her post on the reality of how collection law treats Social Security benefits and other public benefits. She does a lot of great work on financial literacy and education, and we hope our readers benefited from hearing about her efforts. Her post about her colleagues' reaction to one of her financial education seminars is a classic.

Nifong Files Bankruptcy

Courtesy of the Law Blog over at WSJ.com, I learned that Michael Nifong has filed bankruptcy. Nifong was the district attorney in the rape case against the three Duke lacrosse players. After Nifong was removed from the case, the charges were later dropped. Nifong was accused of withholding evidence and has lost his law license. The bankruptcy petition and schedules are here courtesy of WRAL television in Raleigh-Durham. Apparently, if it bleeds cash, it also leads.

Clinton, Edwards, and Obama on 2005 Bankruptcy Law

Adam Levitin's post and Katie Porter's comment on about last night's Democratic debate and the candidates' discussion of the 2005 bankruptcy prompted me to start writing a comment about the Democratic candidates' stand on the 2005 bankruptcy law. It started getting too lengthy, and the comment turned into this post. Adam is right that we have stayed away from electoral politics. Actually, there is not really a "we" as we don't coordinate our posts or viewpoints. As I have said, we can't even agree on where to go for dinner when we're all together. So, this is just my view on the 2005 bankruptcy law and the Democratic candidates.

Illinois State Treasurer Shilling for Barclays Bank

Well, I won't sleep so well tonight knowing the same masterminds that came up with the following idea are also in charge of our state funds. Today's State-Journal Register (full article here) reports the following:

Moms, dads and other adults can use credit card purchases to beef up children's college savings accounts under an initiative state Treasurer Alexi Giannoulias announced Wednesday.

The Bright Start Futuretrust MasterCard is "like a frequent-flier program geared toward college savers," Giannoulias said in a telephone interview.

Similar to credit cards that allow their holders to accumulate "miles" or "points," the Bright Start card directs 1 percent from every purchase into a Bright Start college savings account, he said. Some merchants offer additional rebates.

"If you're using the card to purchase items you'd buy anyway, why not pay for college?" Giannoulias said. "Every little bit helps."

Later, Giannoulias adds, "This credit card should not be used to incur more debt or as a substitute for a family's obligation to save for a child's higher education," he said. "It's a supplement, not a replacement." His full press release is here, half of which looks like it was cribbed from credit card company marketing materials. At least the corporate marketing genuises were smart enough to call it the "Futuretrust Master Card," which sounds better than what it is--just another credit card from Barclays Bank.

What's wrong with this? Here are a few starters.

Requests for Help

Maybe it's the growing mortgage crisis ... maybe it's the blog's growing readership ... maybe it's a little of both. But, we seem to be getting more direct inquiries from people facing legal troubles. It seemed a good time to remind everyone of what we say on the policies page:

We do not provide legal advice, and nothing on this site should be construed as legal advice. We are not all even lawyers. Those of us who are lawyers can get in trouble for giving advice outside the states where we are licensed. Being in debt can be very stressful, and we understand the desire to reach out for help. Please do not contact us for advice because we cannot help you.

It pains me to turn people away, but neither myself or anyone else connected with the Credit Slips blog is in a position to help. I'm sorry if you have contacted one of us, and we have not gotten back to you, but those of us with legal training are just not set up to help people with their individual legal problems. In any event, the legal profession is regulated, and we're not allowed to give out advice in places where we are not licensed. For regulatory reasons, many of us are on inactive status in places where we are admitted to the bar. Finally, we are not familiar with local practices in jurisdictions around the country, and you're better off with someone who is.

Welcome Back, Adam . . . Glad You Can Stay This Time!

Credit Slips is very happy to announce that Georgetown law professor Adam Levitin has agreed to join us as a regular contributor. Readers may remember that Professor Levitin did a guest blogging stint back in September 2007. Although Professor Levitin has only recently joined the Georgetown faculty, his papers already have made him a well-known figure in the legal academy, and he promises to be an influential voice on issues related to credit and bankruptcy. Professor Levitin's research interests include an emphasis on financial institutions and their regulation, an area that will add to and complement many of the topics we discuss on Credit Slips. Professor Levitin's SSRN page shows his prolific contribution to these areas already in his career.

Welcome, Adam, to Credit Slips. We're looking forward to your contributions.

Did the 2005 Law Make for More Chapter 13s?

In my last post, I discussed whether the chapter 13 rate in different states told us much about the mortgage crisis. Short answer: not really. The problem is the assembling the time it would take to assemble the statewide chapter 13 rates going back historically. The national trend in the chapter 13 filing rate is not as difficult to assemble, and it reveals an interesting pattern. The proponents of the 2005 U.S. bankruptcy law said it would force more people into repayment plans in chapter 13 rather than taking the "easy way out" in chapter 7.

The graph shows the monthly changes in the chapter 13 filing rate since January 2004 through November 2007. The data are from the Administrative Office of U.S. Courts except for October and November 2007, which are from AACER. The month the 2005 bankruptcy law went into effect should not be hard to spot. The percentage of cases that were chapter 13 filings spiked immediately after the law went into effect, but the spike was aberrant. Immediately before the 2005 law went into effect, people rushed to file to beat the law's harsh provisions. It made more sense to beat the law's effective date if one intended to file chapter 7 rather than chapter 13. Thus, the big spike after the 2005 law's effective date represents the absence of chapter 7s rather than a rush toward chapter 13. As bankruptcy filings have continued their steady climb (discussed in previous posts gathered here) and looking again to be over 1,000,000 in 2008 (see here), the chapter 13 ratio has been trending back toward the same levels as before the 2005 bankruptcy law.

Still, even a casual inspection of the graph will tell us that the levels are not the same. Where a little over 30% of all bankruptcy filings were chapter 13s before the 2005 law, a little under 40% of all filings are now chapter 13s. The precise figure for November 2007 was 38.8% as compared to 32.2% in January 2004. Two years after the 2005 bankruptcy law went into effect, there seems to have been a slight shift toward more chapter 13s. In my previous post, I said that one really needed longitudinal data to get a handle on how the home mortgage crisis is interacting with bankruptcy filing rates. One wonders whether the persistence of the slightly increased chapter 13 rate might be partly attributable to homeowners filing chapter 13 to save their homes during the mortgage foreclosure crisis.

Does the Chapter 13 Filing Rate Tell Us Anything About Mortgage Foreclosures?

A few days ago, I had the bright idea of looking at the chapter 13 filing rate in the different states and seeing if that told us anything about what might be happening with home mortgage foreclosures. Generally speaking, homeowners often will find it easier to save a home in chapter 13, and thus changes in the chapter 13 rate could give us some understanding of the financial distress being caused by the home mortgage crisis. It's a nice theory, but in practice the data are unilluminating on that point. There is great variation from state-to-state in the chapter 13 rate, making it difficult to draw meaningful conclusions from the data.

Nationally, 38.8% of all November 2007 bankruptcy filings were chapter 13s, but the table shows the national figures masks considerable state variation. (The data are courtesy of AACER.) Bankruptcy experts will not find the state variation very surprising. In an 1993 article, Professor (and upcoming Credit Slips guest blogger) Jean Braucher documented how consumer bankruptcy attorneys can influence chapter choice. (See Braucher, 1993. "Lawyers and Consumer Bankruptcy: One Code, Many Cultures," American Bankruptcy Law Journal, 67:501-83.) On the heels of that article, Professors Teresa Sullivan, (Credit Slips blogger) Elizabeth Warren, and Jay Westbrook described important variations in bankruptcy practice that could not be explained by difference in formal rules but rather were likely the byproduct of differing cultures by local professionals. (See Sullivan, Warren & Westbrook, 1994. "The Persistence of Local Legal Culture: Twenty Years of Evidence from the Federal Bankruptcy Courts," Harvard Journal of Law & Public Policy, 17:801-865.) From these studies and others, we know that local legal culture plays a significant role in bankruptcy chapter choice.

The persistence of local legal culture makes it difficult to use a snapshot of differences in state bankruptcy filings rates or the percentage of chapter 13 cases as a proxy for the financial distress of homeowners. To make such a measure meaningful, one would have to follow the filing rate of particular states across time. In statistics-speak, we need longitudinal (over time) not cross-sectional (across observations) data. Bankruptcy filing data by state are difficult to get and assemble, especially going back in time--why that should be probably should be the subject of another post--making the task beyond what I have time to devote to a blog post. Thus, I'm going to say that we can't say a whole lot about the mortgage foreclosure crisis from the chapter 13 data.

Best Wishes for the New Year

On behalf of the Credit Slips crew, I wanted to wish all of our readers best wishes for the new year. Our blogging has been a little light the past week, but we'll pick it back up after the holidays. Be looking for guest blogger updates from the scholarly happenings related to credit and bankruptcy at the Association of American Law Schools annual meeting.

Also, I wanted to update our readers on the problem with the comments. Two weeks ago, Typepad had been having problems with a new spam filter as I mentioned here. Those problems seem to be fixed, and we have not had any recent problems with comments not appearing on this site. Typepad addressed the overall situation with a nice update and apology here. I really appreciated that and wish more companies would follow this straight-forward approach with their customers--"Sorry, we made a mistake, and we've fixed it."

That approach is much more likely to keep me as a customer than . . . oh, I don't know . . . shipping my mother's Christmas present in a box that looks like it came through a war zone, breaking the contents inside, refusing to simply exchange the present for the precise same item in the local store, charging me more sales tax to exchange the item because the in-store return policy is different than the return policy for online purchases, and then not even offering a simply "we're sorry for your trouble."

Buce Is the World

Our correspondent, Buce over at Underbelly, wonders exactly how does one say "adjustable-rate mortgage" in Czech. Don't kid yourself that consumer indebtedness is uniquely American.

On a different note, Buce also describes the similarities he sees between today's mortgage crisis and the fraud fandango of the early 1970s. It's not that Buce was around to see that, but he's heard others talk of it. Buce's post is worth reading. It reminds us that the fundamentals of our problems are not new, just the same dynamic with with different labels. Everything old is new again, especially when we're talking about creative ways used to convince someone to part with his money.

Projecting the Past

The sloppy drafting of the 2005 bankruptcy amendments created a large number of ambiguous statutory provisions. Among them is section 1325(b)(1)(B) says that a debtor has to devote all of his or her "projected disposable income" to payment under a chapter 13 plan. The problem is that section 101(10A) has a strict, technical definition of "currently monthly income" to mean the average of the debtor's income over the past six months. How does one "project" the average of the past six months? Isn't that simply the average of the past six months? On the other hand one might say that the statute must mean something different when it added the word "projected," because otherwise it would have used the defined term "current monthly income."

The bankruptcy appellate panel (BAP) for the Tenth Circuit recently was presented with the type of case where the problems arise. A debtor lost her job within the past six months and hence had a relatively low current monthly income of $1,922. The debtor had received a modest buyout of her employment contract and that extra income bumped the average of the last six months' income to $5,344. The technical statutory calculations would have required the debtor to devote almost sixty percent of her current income of $1,922 to payments under the chapter 13 plan.

Spam Filter Trapping Comments

We've heard from a number of readers that our blog hosting service's comment-blocking software--er, I mean spam filter has been blocking legitimate comments. This seems to be a universal problem with Typepad blogs that they claim to have fixed, see here. If you have problems going forward with comments, let me know.

UPDATE (12/20 morning): Although Typepad said they believed they had made a change that would stop most comments from being trapped by the spam filter, we continue to have problems. When I got to the office this morning, there were three comments sitting in the spam filter that I had to released. I've notified Typepad, as they requested, and hopefully we'll get a fix soon. In the meantime, be aware that any comment that gets trapped as spam is not deleted. Rather, it sits in a queue where I have to individually release the comments. I'll try to keep on top of that queue as much as my schedule allows.

Live Blog Conversation on Mortgage/Bankruptcy Amendments

This morning, beginning at 10:00 AM 11:00 AM EST (in the U.S.), there will be a live blog discussion over at TPM Cafe's Warren Reports on the Middle Class. This discussion will feature  Congressman Brad Miller and Credit Slips own Elizabeth Warren. I've been asked to provide some commentary along with former Credit Slips guest blogger, Professor Adam Levitin of Georgetown.

UPDATE: My original post was up for a few minutes with the wrong time -- it's 11:00 AM EST.

Equal Footings

Professor Mark Scarberry of Pepperdine University posted a comment taking issue with my statement that the proposed mortgage stripdown bills would do nothing more than put home mortgage lenders on an "equal footing" with other secured lenders in chapter 13. Given the criticisms of Scarberry's congressional testimony in this space, at the least I should put his own words on an equal footing. Here is a link to Scarberry's full testimony for our readers to examine it for themselves.

I appreciate Professor Scarberry's engagement on this issue. Heck, I appreciate it when any one even bothers to read this blog, let alone post comments. It looks like that the two of us will just have to disagree. Scarberry states that "no other stripped down secured debt can be paid off over more than the five year maximum life of the chapter 13 plan." I just disagree. Section 1322(b)(5) of the Bankruptcy Code clearly allows a debtor to maintain payments over the life of the original mortgage, beyond the 5-year provision. That is true even if the plan proposes stripdown of the mortgage. (See here for an earlier explanation of the concept of "stripdown" in bankruptcy.) Thus, I continue to think it quite apt to point out that the pending bills would do nothing more than put home mortgage lenders on an equal footing with other secured lenders.

Mortgage Deal Reached in House of Representatives

Newspaper reports (e.g., here from the Wall Street Journal) say that a deal has been reached in the U.S. House of Representatives to advance legislation that would give bankruptcy judges more power to adjust the payment terms of a home mortgage. For those who want the basic background, I wrote a post trying to explain what this legislation would do. The short version is that home mortgage lenders get special protections in bankruptcy court that most every other lender does not get, including lenders on rental and vacation property. These bills would eliminate this special protection and put home mortgage lenders on the same footing as other lenders.

Democrats apparently have received the backing of Rep. Steve Chabot (R-Ohio) who had his own version of the legislation. To get this deal, Democrats apparently had to agree to limit its applications to loans made after January 1, 2000 that already are in default or in foreclosure at the time of bankruptcy filing. Also, the bankruptcy judge would have discretion to reject a debtor's request to modify the mortgage if the judge determined the debtor had sufficient income to pay the mortgage under its original terms.

The politics of this deal are murky. I completely agree with my the comments of my co-blogger, Elizabeth Warren (here and here), that the mortgage deal reached last week wasn't much of a deal at all and was primarily an industry job designed to give the appearance of action to head off legislative efforts at real mortgage assistance. I'm glad to see that little bit of political theater has been unheeded at least in some quarters. The big lenders, including those represented by the Financial Services Roundtable, continue to oppose these changes to the Bankruptcy Code. This latest development may get the bankruptcy changes out of a House committee but it is unlikely any legislation would emerge from the House before the end-of-the-year recess. Even if it gets past the House, it will have a lot of hurdles to become law. The banking industry appears to be relying on the Senate and the White House to block the  bankruptcy legislation. It would be helpful if this legislation were to become law, but those facing home foreclosures should not expect the bankruptcy laws to change anytime soon.

Welcome to Nathalie Martin

Credit Slips wants to welcome Professor Nathalie Martin as a guest blogger. We're going to do something a little different. She had planned to guest blog beginning January 4, updating the world on the bankrupt happenings of the Association of American Law Schools annual meeting. Wait, that did not come out too well--adjective trouble. I meant Professor Martin was going to update us on the papers and scholarly events at the Association of American Law Schools annual meeting as they relate to credit and bankruptcy. But, she had a few timely posts on the mortgage crisis and the bankruptcy legislation pending in Congress, so I prevailed upon her to make a few posts while that subject matter was current.

Professor Martin was the American Bankruptcy Institute Scholar in Residence during the fall of 2005, when the new bankruptcy law became effective. In that capacity, she gave numerous media interviews and provided advice about the effects of the new law. Thus, with another bankruptcy law pending in Congress, Professor Martin seems particularly well positioned to offer some insights on whether the proposals in Congress would do anything to help alleviate the mortgage crisis.

Professor Martin is the Dickason Professor of Law at the University of New Mexico as well as the director of the school's Economic Development Program. With one foot in the classroom and one foot in the real world, I always enjoy sitting down with Professor Martin to hear how the law is affecting people on the ground. Martin is a former chair of the Association of American Law Schools Section on Creditors' and Debtors' Rights and has written several books on bankruptcy. We look forward to her contributions.

Show Us the Fine Print!

From what I've seen, I completely agree with my fellow Credit Slips blogger Elizabeth Warren's characterization of the president's subprime announcement as a "slick deal." It looks like too little with too many loopholes. Although it will help a few homeowners, the ones who most need relief will be left out. The primary effect of the announcement is to give the Bush administration and the lenders some cover to make it look like they are taking serious steps to address the problems from the explosion of home mortgage foreclosures.

But, I base all that on what I've seen in media reports. As I write these words (about 3:15 PM CST on 12/6/07) I cannot find the actual text of the agreement anywhere on the Internet. I've looked on the web sites for the White House, the U.S. Department of Treasury, and the Department of Housing and Urban Development. I've also searched through a few major media outlet web sites. As a lawyer, I know the important terms are always in the fine print. Exactly what does this agreement provide? Who has signed the agreement? In his remarks, Treasury Secretary Paulson characterized the agreement as "industry standards." Is there any requirement that mortgage servicers abide by the terms of this agreement? What happens if they don't? The agreement supposedly freezes interest rates. What happens to the foregone interest? Is it forgiven?

It worries