Last week, Adam pointed us to a NYT's story on "zombie debt" after bankruptcy. I did a bit more research into the story because I had a hard time understanding the problem from the article.
There are a few lawsuits that have been filed about this (I found ones against GE Capital/Synchrony, Bank of America/FIA Card Svcs, Citigroup, and Chase). The GE complaint alleges that the banks have a systematic practice of "selling and attempting to collect discharged debts and ... failing to update and correct credit information to credit reporting agencies to show that such debts are no longer due and owing because they have been discharged in bankruptcy." You can download the complaint in the GE case here.
More specifically, the allegations are that after a discharge, some creditors do not update their tradelines to a status of "in bankruptcy" and instead leave them as "charged-off." The credit report of a person in this situation would then say they have filed bankruptcy and obtained a discharge but you could not tell whether any individual debt has been discharged in that bankruptcy. The (non-binding) credit bureau reporting guidelines (METRO 2) specify that creditors should report accounts as "included in bankruptcy" once they receive a notice of discharge.
The complaint characterizes GE's argument as being that the FCRA does not require it to make this change, perhaps especially in particular after a debt has been sold and they no longer have an interest in it. (GE has not filed an answer yet, but it seems like this is one argument they might make from reading their other filings). That seems to me to be a wrong interpretation of the FCRA and the FTC's Furnisher Rule. It should also be a violation of the discharge injunction. As Judge Drain put it in an opinion denying a motion to compel arbitration:
One could argue that the reporting of a discharged debt as still outstanding when the credit report also shows that the debtor has been in bankruptcy is even a worse result, indicating to those who are considering providing credit in the future that the debtor has fallen into the category of the dishonest debtor who did not receive a discharge.
I am told that NPR's On Point will be doing a segment on this on Thursday at 10AM EST with one of the attorneys filing these cases. You can listen to the podcast here.
Note: post has been edited to correct the timing of the NPR program and to add the link to the podcast.
Former Virginia Congressman M. Caldwell Butler died last week. He is widely known for his role in the Nixon impeachment proceedings, his efforts to limit extensions of the Voting Rights Act, and his support for ensuring legal representation for low-income individuals. But Congressman Butler is also a major figure in the history of bankruptcy law. He was a principal co-sponsor of the Bankruptcy Reform Act of 1978 that serves as the foundation of the modern bankruptcy system. Professor and lawyer Kenneth N. Klee worked closely with Congressman Butler on the House Judiciary Committee in the 1970s. I asked Professor Klee to share a few words of remembrance with us, which I repeat in their entirety here:
I first met M. Caldwell Butler in 1975 when he became the Ranking Minority Member of the Subcommittee on Civil and Constitutional Rights of the House Judiciary Committee. Caldwell was most interested in the Voting Rights Act legislation and finding a way for the South to get out from under the Act. In his view, Washington was improperly interfering with the sovereignty of the southern states based on predicate acts that had long since ceased to serve as a basis for federal control. He asked me to draft a series of amendments that would permit the South to extricate itself from the Voting Rights Act. The requirements to regain sovereignty were quite demanding, to the point that the amendments became known as the "impossible bailout." Nevertheless, the amendments did not come close to passing. It was evident that there were no circumstances under which the majority in Congress wanted to let the southern states out from the Voting Rights Act.
Caldwell assumed his responsibilities over bankruptcy legislation with diligence and good cheer. His fabulous sense of humor carried us through many long markup sessions during which the members of the Subcommittee read the bankruptcy legislation line by line. He had a sharp legal mind and deep curiosity. He also was very practical and to the point. He was fond of telling me "don't give me so much that you've given me nothing."
It was a privilege and honor to work with him. The bankruptcy community should join in paying him tribute.
-- Ken Klee
Congressman Butler made another round of contributions to bankruptcy reform in the 1990s. The fact that they are not all reflected in today's Bankruptcy Code makes this story more pressing, not less. Well over a decade after he had returned to the practice of law in Virginia, Congressman Butler was appointed to the National Bankruptcy Review Commission, for which I was a staff attorney. Expressing satisfaction with the 1978 Code, the House Judiciary Committee directed this Bankruptcy Commission to focus, for two years, on "reviewing, improving, and updating the Code in ways which do not disturb the fundamental tenets of current law." Not one to leave the heavy lifting to others, even in a pro bono post, Congressman Butler stepped up to the challenge of forging a compromise, among those with diverging politics and views, to improve the consumer bankruptcy system.
Chapter 13 trustees handle millions of dollars in plan payments every year. At some point in likely a sizable portion of cases, the trustee accumulates these payments instead of distributing the funds to creditors. What happens if a debtor's case is converted while the trustee has this accumulated money in its account? In 2012, the 3rd Circuit, in a majority opinion, held that the trustee must return the funds to the debtor (see decision here). Yesterday the 5th Circuit held that the trustee must distribute the funds to creditors (see decision here), thus creating a split on an issue that, as the Fifth Circuit stated, "has divided courts for thirty years," though only had previously produced one appellate court decision squarely on point.
With only one-third of Chapter 13 cases making it to discharge, the issue potentially affects a good number of debtors and involves a significant amount of money in total. Each individual debtor may (or may not) be entitled to a large sum of money in his or her estimation. In the 3rd Circuit case, the Chapter 13 trustee had accumulated over $9,000 in undistributed payments. In the 5th Circuit case, the trustee was holding about $5,500 in undistributed payments. And to the extent there isn't at least a local rule to rely on, Chapter 13 trustee probably would like clearer guidance on the issue.
Did Law v. Siegel Sound the Death Knell for the Equity Powers of the Bankruptcy Court? Mark Berman thinks so. I'm skeptical (fuller version of my argument here). But it depends what we mean when we refer to "equity", which is often used as a rubric for an array of different non-Code practices. More complete coverage at the Harvard Law School Bankruptcy Roundtable.
I just read Jennifer Taub's outstanding book Other People's Houses, which is a history of mortgage deregulation and the financial crisis. The book makes a nice compliment to Kathleen Engel and Patricia McCoy's fantasticThe Subprime Virus. Both books tell the story of deregulation of the mortgage (and banking) market and the results, but in very different styles. What particularly amazed me about Taub's book was that she structured it around the story of the Nobelmans and American Savings Bank.
The Nobelmans? American Savings Bank? Who on earth are they? They're the named parties in the 1993 Supreme Court case of Nobelman v. American Savings Bank, which is the decision that prohibited cramdown in Chapter 13 bankruptcy. Taub uses the Nobelmans and American Savings Banks' stories to structure a history of financial deregulation in the 1980s and how it produced (or really deepened) the S&L crisis and laid the groundwork for the housing bubble in the 2000s.
Credit Slips readers, please note the publication of a new book edited by Marion Crain and Michael Sherraden. The New America Foundation is hosting an event on the book tomorrow, Wednesday, May 28, 2014 at 12:15 EST. Not in Washington, D.C.? The event will be webcast live.
The book project developed out of a stimulating multi-disciplinary conference at Washington University in St. Louis. Participants had great interest in considering how bankruptcy scholarship fits within the larger universe of research on financial insecurity and inequality. My chapter with Mirya Holman synthesizes the literature on medical problems among bankruptcy filers and presents new results from the 2007 Consumer Bankruptcy Project on coping mechanisms for medical bills, looking more closely at the one in four respondents who reported accepting a payment plan from a medical provider. Not surprisingly, these filers are far more likely than most others to bring identifiable medical debt, and therefore their medical providers, into their bankruptcy cases. We examine how payment plan users employ strategies - including but not limited to fringe and informal borrowing - to manage financial distress before resorting to bankruptcy, and (quite briefly) speculate on the future of medical-related financial distress in an Affordable Care Act world.
That's the title of Denver Law Professor Michael Sousa's new article exploring debtors' evaluations of the pre-filing credit counseling course and the post-filing financial management course mandated by BAPCPA. The data for the article came from in-depth interviews that Sousa conducted with 58 individuals from Colorado who filed under Chapter 7 between 2006 and 2010. Bob Lawless previously posted about another article Sousa wrote based on the interviews that discusses debtors' perceptions of bankruptcy stigma. Like Sousa's previous article, this paper carefully presents the interviews for what they are and what they can reveal about debtors' interactions with these two components of the bankruptcy process.
Sousa's findings generally confirm the limited prior research about the two courses. In fact, they may paint an even grimmer picture of the courses' usefulness. None of the debtors thought the credit counseling to be of any help, and only 2 couples (4 of the 58 debtors, or 7%) thought they had learned anything useful from the financial management course. Indeed, and one of Sousa's more interesting findings, what some debtors took from the credit counseling course contravenes Congress's aim for the course to inform debtors of all their options and thereby convince some debtors to settle their debts outside of bankruptcy. Debtors instead said the course affirmed their decision to file because it showed them how bad their situation was and provided them some psychological comfort in accepting that bankruptcy was the last remaining option.
Thanks to all who commented on my earlier post on the interaction of §§ 544(a)(3) and 551 and homeownership in bankruptcy; as hoped, CreditSlip readers helped me frame the questions that I continue to have about Traverse and the larger policy questions it raises. Some readers emphasized the importance of variations in state mortgage law to the trustee’s strong-arm powers; others questioned whether these distinctions should affect the trustee’s power to sell the residence (or the avoided lien) following avoidance.
Clearly, the trustee had the power to avoid the unrecorded mortgage in Traverse; let’s assume for purposes of argument that he also had the power to sell full title to the debtor’s home after avoidance. For me the more interesting question is whether the trustee should have exercised these powers, and also whether the exercise might be viewed as an abuse of discretion.
Another way to think about this question is from an even broader angle: What position should a trustee play in a individual borrower’s chapter 7 case? Is a trustee’s role to maximize distributions to unsecured creditors, full stop? Or might the trustee’s fiduciary obligations to the estate sometimes sit in tension with an interest in maximizing creditors’ interests?
The U.S. Supreme Court has denied a petition for writ of certiorari in Bank of America v. Sinkfield, an 11th Circuit case raising the issue whether a junior lien wholly unsupported by collateral value can be stripped off in chapter 7.
The high court's denial of certiorari yesterday (March 31) is a victory not only for the debtor who prevailed in the case below but also for the National Association of Consumer Bankruptcy Attorneys, represented by the National Consumer Bankruptcy Rights Center, which argued in an amicus brief against Supreme Court review on the ground that the case had not been fully litigated below and thus was a poor one for the Supreme Court to take up.
The creditor in Sinkfield stipulated to the result that strip off was permitted in the case, based on an Eleventh Circuit opinion so holding in another case, In re McNeal, 735 F.3d 1263 (11th Cir. 2012), one in which en banc rehearing has been sought.
The Supreme Court's decision not to review Sinkfield avoids for now the possibility of disturbing the solid precedent for lien strip off in chapter 13. McNeal is the first circuit court case to allow lien strip off in chapter 7; two other circuits have extended Dewsnup v. Timm, 502 U.S. 410 (1992), to come to the opposite conclusion. See here for background. Lien strip off in chapter 13 has been one of the few ways for debtors in bankruptcy to hold on to homes on which they are underwater while making them more affordable by removing junior liens unsupported by collateral value. Extending that sort of relief to chapter 7 cases would be helpful, but Supreme Court review also poses a serious downside risk of making bankruptcy less promising for consumer debtors.
If you are looking for trite and oversimplified assertions about bankruptcy stigma, then stay away from the latest issue of the American Bankruptcy Law Journal. In those pages, Professor Michael Sousa from the University of Denver has a wonderful paper reporting on his interviews with consumer bankruptcy debtors in Colorado. You can find a preprint version of the paper on SSRN. I had the pleasure of commenting on the paper at a conference earlier in the spring. Sousa is a new voice in the area of consumer debt who demonstrates with this paper the potential to make important contributions in the field.
Conventional wisdom views bankruptcy as a place that protects homeowners and homeownership. One of the primary reasons Chapter 13 allows debtors to retain all property of the estate, whether exempt or not, is to allow debtors to hang on to their personal residences even though applicable exemption law would not otherwise allow this. OK Chapter 13 doesn’t permit modification of residential mortgages, but it does allow debtors to decelerate and cure mortgages in default, providing some consumer debtors some protection from foreclosure. Chapter 7 is traditionally viewed as less protective of the homestead – that is, it protects residences only to the extent of applicable homestead exemption law, but it has been widely accepted that debtors might protect their homes in chapter 7 by combining a discharge from unsecured debts with reaffirmation of a residential mortgage.
The recent financial crisis has strained both the state court foreclosure process and the federal bankruptcy system, raising questions about the continuing accuracy of the notion that bankruptcy provides a safe place for homeowners. Whether bankruptcy does or even should protect homeownership is a very big question, one undoubtedly best answered in combination with careful analysis of data, and I won’t presume to tackle that question in a blog. But I do want to use this format as a safe place for thinking about these issues.
Bhashkar Mazumder (Federal Reserve Bank of Chicago) and Sarah Miller (Notre Dame) have a new study out that examines the effect of Massachusett's major health care reform in 2006 on individuals' financial well-being. Similar to the Affordable Care Act, the law requires all Massachusetts residents to purchase health insurance meeting a minimum standard of coverage (if affordable) or pay a fee. Exploiting the variation in "stock" of uninsured residents pre- and post-reform, they use data from credit reports to assess whether the law improved financial outcomes across various dimensions.
In short, they find that the reform improved credit scores, reduced delinquencies, decreased the fraction of debt past due, and reduced the incidences of consumer bankruptcy filings. Their analysis also suggests that total amount of debt and third party collections decreased. And they further find that the effects are more pronounced for people with lower credit scores pre-reform, suggesting that the law provided greater financial security to individuals and families who already were struggling with their finances. These results highlight a few potential effects of the ACA: increased household financial stability, increased access to more affordable credit, and better debt collection outcomes for creditors.
Hat tip to my (future) colleague, Sarah Jane Hughes, for pointing out the paper.
It's all the rage these days to beat up on law school as a bad investment and to moan about the economic travails of the legal profession. There are some reasonable critiques that can be leveled at the shape of legal education and its costs and there are clearly important changes going on in the economics of the legal profession. But in a NY Times column, James Stewart has tried to connect these important issues with the sad story of the bankruptcy of Gregory Owens, a former equity partner in Dewey LeBoeuf who is now a non-equity service partner at White & Case.
Owens has filed for bankruptcy and for Stewart, Owen's case is informative about "why law school applications are plunging and [why] there’s widespread malaise in many big law firms". There’s just one problem. Owen's case has no connection with either of these things. Owens’ story is one of the expenses of divorce. It is not a tale of legal education debt. And it is only a story of the changes in the legal economy to the extent that Owens’ problem is that he’s earning only $375,000, not $3.75 million. If Stewart weren’t so eager to get his licks in on the law school economy, he might see that there’s a very different story here.
Cross-campus colleagues and I have posted a paper that studies intersections between mortgage foreclosure, chapters of bankruptcy, and other variables, using the Center for Community Capital's unique panel dataset of lower-income homeowners. An excerpt from the abstract:
We analyze 4,280 lower-income homeowners in the United States who were more than 90 days late paying their 30-year fixed-rate mortgages. Two dozen organizations serviced these mortgages and initiated foreclosure between 2003 and 2012. We identify wide variation between mortgage servicers in their likelihood of bringing the property to auction. We also show that when homeowners in foreclosure filed for bankruptcy, foreclosure auctions were 70% less likely. Chapters 7 and 13 both reduce the hazard of auction, but the effect is five times greater for Chapter 13, which contains enhanced tools to preserve homeownership. Bankruptcy’s effects are strongest in states that permit power-of-sale foreclosure or withdraw homeowners’ right-of-redemption at the time of auction.
Bear in mind that most homeowners in foreclosure in this sample did not file for bankruptcy. Among the 8% or so who did, the majority filed chapter 13. For even more context, please read the paper - brevity is among its virtues, and exhibits take credit for page length. A later version will ultimately appear in Housing Policy Debate.
Ribbon house image courtesy of Shutterstock.
Federal bankruptcy law defers to the states on a critical issue: what is the basic minimum income and property that debtors need not surrender to creditors. Four states protect 100% of workers' wages, while 21 states allow creditors to garnish debtors' wages down to 50% of the poverty level for a family of 4, according to a new report from the National Consumer Law Center. Similarly only 9 states protect a used car of average value from seizure, and state home exemptions are still all over the map. Even the exemptions that exist are often evaded by the $100 billion debt buyer industry, whose collection suits are dominating civil court dockets around the country.
This comprehensive and timely survey will be an essential tool not only for bankruptcy research, but also for anyone who cares about economic inequality and the plight of the working poor.
With the Second Circuit's ruling in the Argentina/NML case and the now-urgent need to get secured transactions and bankruptcy into the 1L curriculum, Credit Slips has yet to give attention to Wellness International Network, Limited, issued on Aug 21 by the Seventh Circuit. Luckily, on this issue, I don't mind getting the ball rolling, and then stepping out of the way.
In Russia, a debate is raging over which courts should administer consumer bankruptcy cases, the specialized commercial courts or the courts of general jurisdiction. The Russian commercial courts (Arbitrage courts) currently exercise jurisdiction over bankruptcies of individual small business people, as well as over cases involving artificial legal entities like corporations. Logically, then, in the current bill that would finally expand the Russian bankruptcy system to provide relief to consumers, the Arbitrage courts would handle such cases.
Oddly, President Putin in March issued an edict strongly suggesting that the bill be amended to assign jurisdiction to the general courts. The Supreme Court had already come down solidly on the side of the generalist courts, and in April, it threw its support behind Putin’s edict by introducing a bill into the legislature to amend the Code of Civil Procedure to preemptively assign consumer bankruptcy jurisdiction to the general courts, if and when a consumer bankruptcy bill ever becomes law. The explanatory notes to this bill make what seems to be a rather superficial and formalistic argument about consumer contracts “not bearing an economic character,” since they relate only to personal consumption, and noting that consumer cases will raise all manner of non-economic issues, such as family, housing, and labor, which the Arbitrage courts are ill-situated (if not constitutionally forbidden) to address. The next thing you know, they’ll introduce a distinction between “core” and “non-core” matters—that will really fire things up!
A few weeks ago, I posted about an apparent movement to challenge the bankruptcy-exempt status of IRAs based on boilerplate language commonly found in the account agreements of many of the nation's largest brokerages. The legal argument rested on hyper-technical interpretations of the Bankruptcy Code and the account agreements, but nonetheless several lower courts had ruled that debtors could lose their IRAs to the bankruptcy trustee.
The Sixth Circuit heard oral arguments on the case last Thursday and issued an opinion yesterday. The court rejected the bankruptcy trustee's arguments and ruled the IRAs remained exempt despite language that hypothetically could have led to the brokerage having a lien on the account. And, yes, for you keeping score at home that is four days total, including a weekend, from oral argument to published opinion.
Thanks to Bob and Credit Slips for the warm welcome. In April, after two long years, we completed the American Bankruptcy Institute Ethics Task Force's Final Report. This week we will be guest blogging about “bankruptcy ethics” and discussing many of the issues we confronted as Reporters. We will also do our best to summarize the white papers, “best practices” narratives, and proposed rules presented in the Final Report.
Here is some background about the Task Force and its work product. In 2011, then-ABI President Geoffrey L. Berman asked us if we would serve as Reporters for the newly formed ABI National Ethics Task Force. The Task Force was constituted to address a problem familiar to all bankruptcy professionals and judges: state ethics rules do not always “fit” with the realities of bankruptcy practice. State ethics rules may also not be a perfect fit in the context of other types of practice, either—for example, states may not yet know how best to handle the increasingly interconnected digital and virtual world—but it is clear that the Model Rules do not fit neatly in a practice that involves numerous parties with changing allegiances, often departing from the classic two-party adversarial proceeding.
Some chapter 7 trustees have found a problem that could affect thousands of IRAs, leading to the first post in a two-post series on unintended consequences. A better reading of the law is that these IRAs should remain exempt from the bankruptcy process. Cases are wending their way through the court system, and until the courts resolve the issues, many IRAs may remain under threat. And, there is no guarantee the courts will agree with me on how the cases should be resolved.
The situation begins with the 2005 changes to the bankruptcy law. One of the few ways these changes were favorable to consumer debtors was to clarify and expand the exemptions available to retirement assets, including IRAs. Most retirement assets are exempt from the bankruptcy process, meaning debtors can retain these assets even after the bankruptcy case.
In the fictional worlds of Charles Yu, George Saunders, or Etgar Keret, a person's accumulated life stories and thoughts when she files for bankruptcy might be withdrawn, like blood, then filtered for marketability. In such a world, a debtor might be required to spin her tale for the sole benefit of creditors, or forever silenced. Planning to give a five-minute anecdote about your childhood at The Moth? Don't even think about it.
Casey Anthony's bankruptcy was filed in January 2013 as a no-asset Chapter 7, with nearly $800,000 in debt - not counting scores of claims with amounts identified as "unknown." Ms. Anthony's income and expense schedules list, literally and rather remarkably, zeroes all the way down. At the 341 meeting of creditors in March, Ms. Anthony asserted that friends and strangers take care of her needs. Presumably, this arrangement is not sustainable. Will she seek to support herself in the future by talking about her past?
The bankruptcy trustee wants to auction off something that probably has never been expressly sold in a bankruptcy case (it certainly wasn't listed as an asset in the schedules): exclusive rights in perpetuity to the commercialization of Ms. Anthony's life story, including "her version of the facts, her thoughts and impressions of whatever nature, in so far as these pertain to her childhood, the disappearance and death of her daughter . . . her subsequent arrest . . . and withdrawal from society. . . ." (see the lengthy paragraph 3 in here). How much debt would be satisfied by such a sale?
The European Commission's Financial Services Users Group has published an impressive report and a position paper on financial distress and consumer protection, written by a Euro-think tank called London Economics. The title is a real mouthful: Study on means to protect consumers in financial difficulty: Personal bankruptcy, datio in solutum of mortgages, and restrictions on debt collection abusive practices. The paper does an admirable job of surveying the legal landscape of 18 European countries, concluding with some well-considered "best practices." This paper is a nice addition to the already impressive body of work in Europe analyzing existing legal regimes for treating consumer financial distress and identifying strenghts and weaknesses in their varying approaches. It is highly recommended reading for anyone interested in consumer policy, especially with respect to appropriate solutions to financial distress.
European Union image courtesy of Shutterstock.
Judging by an Irish Times report today, the designers of the new Irish consumer insolvency system seem to be falling into two old familiar traps.
First, the focus of the story is on rumors that the proposed income guidelines for the new regime will make payment plans too parsimonious. Pressing debtors too hard in the name of "responsibility" is a recipe for disaster, as administrators of the French system learned decades ago. A discharge is a nice incentive to get debtors to really exert themselves for the benefit of creditors, but five or six years on an overly repressive budget will produce plan failure, all but guaranteed. Paul Joyce, Senior Policy Researcher at the Irish Free Legal Advice Centres (and an absolute prince of a guy) pointed out this danger in his fine policy analysis of the new regime. It will be a shame if the soon-to-be-released guidelines fail to heed Paul's and others' warnings.
My colleague, Jennifer Robbennolt, and I have posted a paper to SSRN exploring apologies in the bankruptcy context. Jennifer has done some of the leading studies on apologies in different legal contexts. Contrary to the instincts of many lawyers, apologies tend to produce better outcomes for defendants. For example, victims who hear an apology are less likely to feel they need to invoke legal process and are generally more amenable to settlements. Researchers have demonstrated these effects in a variety of legal settings such as personal injury, professional malpractice, and criminal law. We wondered whether we would see similar effects in bankruptcy.
The Yellow Pages that arrived at my door yesterday. This strange book is an object of great fascination to a generation that has grown up watching YouTube and relying on Wikipedia instead of World Book and Brittanica. It was pure Kismet, but when I opened the volume, it was to Lawyers-Bankruptcy. It turned out to be an enlightening experience. The Yellow Pages is perhaps the only place one can find concentrated advertising by bankruptcy (and other) lawyers. There might even be a good article in analyzing the advertisements.
I was surprised that a good third of them didn't have the requisite "we are a debt relief agency" language, while some of the others choose to repurpose the BAPCPA escutcheon by calling themselves things like "federally recognized debt relief agencies". Is that so different than the mortgage modification shops recently warned by the CFPB and FTC regarding misleading advertising for potential misrepresentations about government affiliation?
By far the best ad, however, was patterned on the Dr. Jonathan Zizmor, dermatologist, ad of NYC Subway fame, listing the various types of treatments available for consumers: instead of wart and mole removals, there are second mortgage and lien removals. Instead of chemical fruit peel treatments to reduce blemishes, consumers can get reductions in mortgage balances and taxes. Stop living with those embarassing acne garnishments and get on with your life.
I always thought of bankruptcy lawyers as the legal equivalent of ER docs: stop the hemorraging, stabilize the patient, move them to the ICU, and then on to the next one. But maybe we're really financial dermatologists.
Immigration issues continue to be a major political football, and the work of Jean Braucher, Bob Lawless, and Dov Cohen on race in bankruptcy garnered front-page NY Times attention this year. This makes the publication of Chrystin Ondersma's paper titled Undocumented Debtors particularly timely. The paper is the first-ever look (to my knowledge) at whether and how undocumented people file bankruptcy. The key finding is that while it seems legal--and indeed arguably explicitly contemplated by the bankruptcy system--that undocumented people may file, the rate of filings is very low--on the order of less than one percent of the rate of debtors in the general population. Ondersma also provides a good overview of the credit systems available to undocumented people, ranging from those offered by large national entities, such as ITIN mortgages, to informal mechanisms such as tandas.
Every so often in the United States, I come across a discusion of the choice of the word "cramdown" (cram down, cram-down) to describe either stripping down liens or confirming a repayment plan without creditor consent. The basic thrust of these articles--the best of which is probably this treatment by William Safire--is that the word itself conveys a great deal about the cultural view of the legal action. In the context of cramdown, I think the word choice reflects the fact the U.S. legal regime generally protects the collection rights of secured creditors in bankruptcy.
At a recent World Bank event, a provocative discussion emerged on the choice of what to call people who file bankruptcy. The Working Group report notes an international trend in the law away from calling people "bankrupt" toward the term "debtor." Judge Wisit Wisitsora-at from Thailand offered a slightly different flavor on the problem--that whatever the word chosen, the literal translation, and cultural meaning, of of such a word can vary tremenedously. He reported that the current word in Thai for a person who files consumer bankrutpcy literally translated means "worse than a failure." Even a quick run of the word "bankrupt" through Google translate in several languages produces some words that are a far cry from the dominant U.S. perspective (at least among academics) of the Fragile Middle Class. Here's a sampling: beggar, penniless, upset, defeated, fallen down on the ground, and unsound.
Politics is not my strong suit -- this, ironically, from the faculty sponsor of both the Democratic and Republican student associations at Michigan Law. (No, I am not confused; I was asked presumably because each group wanted a political independent, and I don't like to play favorites.) So I have what may be a naive but is nonetheless a genuine question regarding Senator-Elect Warren's upcoming trip to Washington: does this increase the likelihood of substantive amendment of the bankruptcy laws in the next few years?
I'm not talking about full-throated repeal of BAPCPA or anything like that (although maybe I should?), but does having a bankruptcy expert as one senator matter? Is it a salience focus for committees? E.g., is it more likley we'll see home mortgage policy addressed through amendments to Chapter 13? Does it somehow beef up the CFPB knowing they have a "champion" in the Senate? Does it mean the venue fights will roar back to life?
I'd be curious if those more in the know have thoughts (with apologies in advance if this is dumb/trite).
Unfortunately, it is tough to gain traction for such non-profit sites without paying for promotions through Google or others. Also, there so many sites that purport to provide consumer resources that individuals suffer information overload and are not sure what to trust.
Although not always acknowledged expressly, exceptionalism is pervasive in bankruptcy scholarship. Some work makes no attempt to contexualize bankruptcy within the federal courts, apparently assuming its unique qualities (for example, the disinterest in most bankruptcy venue scholarship about venue laws applicable to other multi-party federal litigation). But other projects are more deliberate in their exceptionalist pursuits.
Sometimes we forget that, with all its flaws, consumer bankruptcy is still a remarkable institution, providing meaningful relief to more than two million Americans a year (counting co-debtors and dependents). The system’s singular feature is that most individuals can find a private attorney to represent them at a relatively low flat fee, typically worth it in light of the benefits of a bankruptcy discharge to most debtors. In other areas of consumer law, it is much harder for individuals to find a private attorney. Despite changes in bankruptcy law in 2005 that increased the cost of access to the system, the consumer debtor bar has figured out how to deliver services for reasonable fees.
If the need to appeal arises, however, the affordability equation often breaks down, a problem made worse by the wretched drafting of the 2005 law, creating hundreds of difficult new legal issues. A debtor in bankruptcy may have a good legal case on appeal but no way to pay a private attorney for the expense of researching and writing a brief and preparing for oral argument. An appeal adds thousands of dollars of additional cost. The National Consumer Bankruptcy Rights Center was formed to address this problem, helping to protect debtors’ rights as well as the integrity of the consumer bankruptcy system by making sure that cogent arguments are made at the appellate level. NCBRC (pronounced Nic-Bric) provides assistance by either working directly with debtors’ attorneys or by filing amicus (friend of the court) briefs in courts throughout the country.
Anyone interested in consumer bankruptcy law should find NCBRC’s web site, www.ncbrc.org, useful as a resource, both for its bank of briefs and its blog about important consumer cases.
I have just finished reading Lois Lupica’s paper on her impressive consumer bankruptcy fee study. This is a model of what empirical, law-and-society research should be – it combines data from electronic court records with focus groups and key player interviews to give a textured understanding of the role lawyer’s fees play in this particular legal system.
The finding that jumped out for me was a little-discussed but critical aspect of local bankruptcy culture: not how much, but when the trustee pays Chapter 13 lawyers’ fees (pp. 105-106). I practiced in a district where (before BAPCPA) the trustee paid out the fees as the first priority claim i.e. ahead of even secured creditors, but adequate protection payments (current mortgage and auto loan payments, e.g.) were paid directly to the creditors. There are apparently districts where every plan must include a $200 monthly payment for the first 15 months to pay the attorney, others where the pre-confirmation adequate protection payments are diverted to the attorney’s fees and added to the arrears paid over the remaining plan life (i.e. borrowed from secured creditors), and many other fascinating variations.
Considering the practical consequences of these disparate rules for attorneys as they decide what cases to take, and how to structure plan payments, it is easy to see why Chapter choice, and Chapter 13 success rates, would vary so dramatically from one district to another. For example, the front-loading of payments for the legal fee, followed by a payment step-down, would seem to increase the risk of plan failure. The sooner the lawyer is paid, the less risk she takes in filing the case. That could increase access, but could also encourage filing more risky Chapter 13 plans. If we are concerned about the high failure rate of Chapter 13s on the one hand, and the high costs and difficulty of obtaining counsel on the other, we might do well to study these variations further to see what outcomes they produce for debtors, creditors and lawyers.
It also struck me that Professor Lupica's extensive data tables with fees actually paid, by chapter, state, district and case outcome, and no-look fees for Chapter 13, can provide important independent variables for other studies modeling bankruptcy outcomes.
Joshua Goodman at the Harvard Kennedy School and I have a new paper out examining the impact of Chapter 13 cramdown on the cost and availability of mortgage credit. Historically, when cramdown was permitted in some judicial districts prior to 1993 it was associated with a statistically significant, if small, increase in the cost of credit. Here's the abstract:
Recent proposals to address housing market troubles through principal modification raise the possibility that such policies could increase the cost of credit in the mortgage market. We explore this using historical variation in federal judicial rulings regarding whether Chapter 13 bankruptcy filers could reduce the principal owed on a home loan to the home’s market value. The practice, known as cramdown, was definitively prohibited by the Supreme Court in 1993. We find evidence that home loans closed during the time when cramdown was allowed had interest rates 10-20 basis points higher than loans closed in the same state when cramdown was not allowed, which translates to a roughly 1-2 percent increase in monthly payments. Consistent with the theory that lenders are pricing in the risk of principal modification, interest rate increases are higher for the riskiest borrowers and zero for the least risky, as well as higher in states where Chapter 13 filing is more common.
A 5% recovery is pretty bad, even by modern Greek standards, but maybe that's where things are headed. Of course, maybe the proper point of comparison is actually personal bankruptcy. But note the numbers -- £1,000 in 1818 (the year the Queen died) would be worth about £70,000 today; about £85,000 if we count from 1827, the date of the Duke of York's death. So the Duke's debts were ... large. Much larger that most personal bankruptcies today for sure.
For the past couple of years, I've been thinking that cramdown is dead as a policy solution. But I was thinking about cramdown as requiring legislation. It doesn't. We could start doing it tomorrow. Under current bankruptcy law, a Chapter 13 plan may be confirmed only if secured creditors receive their collateral, receive the value of their collateral, or consent to the plan. The legislative proposals for cramdown all sought to enable involuntary modification of mortgages; cramdown was to be the stick that would encourage voluntary modifications.
But we could have voluntary cramdown under existing law and this could be done on a large scale staring immediately. Specifically, FHFA could require the GSEs to adopt a policy of consenting to Chapter 13 plans that have cramdown. (FHA/VA/Ginnie Mae could adopt a parallel policy for government insured loans.) Such a policy would address the two major objections that have been raised to principal reduction by the GSEs: the much dreaded (and overstated, imho) moral hazard problem and the second lien free-rider problem.
Folks in Washington tell me there is a general sense of “foreclosure fatigue” in our nation’s capital. It’s just so boring to keep thinking about all the people losing their homes year after year. Can’t we move on to something new? This attitude goes along with a failure to do anything meaningful to get out of the five-year-old mortgage crisis, still very much with us. More charitably, the people who would like to do something see no political opening in an election year.
Looking back on all that time, there has been no shortage of good ideas; what has been lacking is will. Remember principal write-down in bankruptcy (aka, cramdown)? Peter Swire, who coordinated housing finance policy at the National Economic Council in 2009-2010, recently admitted that the administration should have pushed for it early on. “Cram-down, on balance, today, would have been a good idea,” he said.
Fascinating story in the Guardian about Irish debtors temporarily moving to the UK in order to gain access to more favorable bankruptcy law. I guess the Brit's have a more lenient version of 522(b)(3) or a looser good faith filing doctrine/plan approval/discharge requirement. I wonder how long this sort of international loophole will remain open within the EU. I wouldn't be surprised to see a lot of Spanish immigrants to the UK between more favorable bankruptcy law (although Spain recently liberalized its bankruptcy law) and the Spanish economy.
Between states, there is a big disparity in the rate at which people file bankruptcy. Over the past four years, Nevada has had the highest bankruptcy filing with an a yearly average of 9.32 persons per 1,000 population file bankruptcy. At the other extreme has been Alaska with just 1.39 persons per 1,000 filing bankruptcy. As points of comparison, consider that the national filing rate over 2008 - 2011 was 3.54 per 1,000 population and that the national filing rate over the last twelve months has been 4.26 per 1,000 population.
I wondered how the filing rates would break down if we looked at just chapter 7 and chapter 13 separately. The result is the chart to the right.
Jialan Wang has a blog post up summarizing her and her co-authors very interesting NBER paper estimating that at least 30,000 to 60,000 liquidity constrained households this will be priced out of bankruptcy because of the increased costs that came with the 2005 changes to the bankruptcy law. Actually, the research does not find that tax rebates lead to bankruptcy filings -- that was just a cheesy trick to get you to read the post. The researchers find that, after receiving tax rebates, people are more likely to file bankruptcy as they now have funds they can use to pay for the bankruptcy fees. They then use the randomization of the delivery of tax rebates in 2001 and 2008 to identify the effect that the higher fees caused on the bankruptcy rates of liquidity constrained households. It is a clever research design, and Credit Slips readers will want to check it out.
On Sunday, March 25, from 5-7pm Eastern/2-4pm Pacific, I am live-blogging about Broke: How Debt Bankrupts the Middle Class at FireDogLake's Book Salon. My host is Edwin Walker, a retired bankruptcy practitioner with over twenty five years of experience. I am certain that he will prompt a lively discussion. I am looking forward to his questions and to engaging with the public on these issues. All Credit Slips readers are welcome to join in the conversation.
In 2005, Congress amended bankruptcy law to require individual debtors with primarily consumer debts to complete an "instructional course on personal financial management" to be eligible to receive a discharge of their debts. Adding financial education as a bankruptcy requirement divided the bankruptcy community, even debtor advocates, judges, academics, and others who almost uniformly did not like the 2005 amendments. Part of the mixed sentiment about the financial education may be that it is hard to dislike something as innocuous-sounding as education (although Professor Lauren Willis makes a good case against it in this article). And there were certainly bigger fish to fry in opposing the 2005 laws. Still, many complained that this was one more example of creditors getting Congress to lard on duties for debtors, driving up the cost and work of obtaining bankruptcy relief and setting up debtors to have their cases dismissed if they tripped up by failing to complete the educational course.
Dr. Deborah Thorne and I have a new study that looks at how debtors themselves feel about the mandatory financial education course. It is a chapter in this book, Consumer Knowledge and Financial Decisions (ed. Douglas Lamdin, Springer, 2012) and available to read here. In the 2007 Consumer Bankruptcy Project, we asked debtors whether they believed that the information from the financial education class 1)would what they learned in the financial education class have helped them avoid bankruptcy originally, and 2) would help them avoid financial trouble in the future. While only 33% thought a financial instruction course similar to the one required of bankruptcy debtors could have helped them avoid filing, 72% thought it would help them avoid future financial trouble. As we report in detail in the chapter, some demographic groups were much more positive about the value of financial education than others.
A few weeks ago, Katie Porter noted the release of the new book, Broke: How Debt Bankrupts the Middle Class. We are trying to feature posts from the authors of Broke about their contributions. Today's post comes from Professor Angela Littwin of the University of Texas School of Law and a founding member of Credit Slips:
After a long absence, I am temporarily back on Credit Slips, blogging about my contribution to Broke, the new book edited by Credit Slips’ own Katie Porter. My chapter is about consumers who file for bankruptcy without a lawyer (known as filing “pro se”). The chapter is entitled The Do-it-Yourself Mirage: Complexity in the Bankruptcy System. which should give you a pretty good idea of my take on the matter. Using data from the 2007 Consumer Bankruptcy Project, I found that pro se filers were significantly more likely to have their cases dismissed than their represented counterparts. My most interesting result deals with education. My analysis suggests that consumers with more education were significantly more likely than others to try filing for bankruptcy on their own, but that their education didn’t appear to help them navigate the process. Pro se debtors with college degrees fared no better than those who had never set foot inside a college classroom. I argue that bankruptcy has become so complex that even the most potentially sophisticated consumers are unable to file correctly.
This bad news, however, is not the entire story.
It's the time of year when professors, including those who are adjunct professors or are interested in teaching as adjuncts, submit their proposed courses for the next academic year. Many of us teach a general 3 or 4 unit bankruptcy course that uses a textbook, and some of us teach specialized seminars on chapter 11. This year think about teaching a seminar on consumer bankruptcy. I've got just the class all ready to go--course pack, syllabus, writing assignments, even in-class exercises. All you need to do is put "Consumer Bankruptcy Seminar" on the form and return it to your Associate Dean.
When the chapter authors and I wrote Broke: How Debt Bankrupts the Middle Class, we wanted to create a reader that could support a seminar on consumer debt. I road-tested the book this fall in a seminar at UC Irvine Law School. The students loved it! (You can check out the course evaluations for yourself.) From my standpoint, it is the most fun, creative and easiest-to-prep class that I've taught. Full details are on this site, but the skinny is after the jump.
Two weeks ago, I blogged about the Forms Modernization Project's effort to create new forms specifically for consumer bankrupts. The chair of that Project, Judge Elizabeth Perris, offered a lengthy comment that shared some information on the goals and process. I recommend it to you. She noted that law students were asked to review the forms.
This fall during my seminar on consumer bankruptcy, I had my students do this as a take-home assignment. We had just read a chapter in Broke by Angie Littwin on pro se bankruptcy filers, and the students' task was to assess whether the forms would make the system easier for debtors. The students' observations ranged from the minute to global. My favorites are below.
Even though I was up at 4am Pacific this morning, the AG and federal government mortgage settlement was nearly old news by then. But in case you haven't heard, here is your official Credit Slips announcement--there was a $26 billion settlement.While the details are still being released, I am already concerned about how the settlement will affect bankruptcy cases. Remember that bankruptcy was one of the first places we saw the misbehavior of mortgage servicers--way back in 2005 when Tara Twomey and I did our study.
As of December 1, new Bankruptcy Rules of Procedure 3001 and 3002 impose new requirements on servicers of loans owed by bankruptcy debtors. Are the terms of the settlement consistent with those new rules? If so, do they add any new procedural benefits to protect bankrupt homeowners against robo-signing and legal violations?
The Department of Justice participated in the settlement and the U.S. Trustee's Office apparently was at the negotiating table. Their press release, however, is just boilerplate of the general DOJ release. The only mention of bankruptcy is that the settlement will impose "new requirements to undertake pre-filing reviews of certain documents filed in bankruptcy court." I'm not sure what to make of that. Presumably, filing claims under penalty of perjury already required a review of claims, and Rule 9011 required a significant review of motions for relief from stay to permit a foreclosure to continue. What does the settlement add? I hope the US Trustee will let us know soon, as I am sure debtors' attorneys will get calls today on the issue.
An additional observation is that it is important to remember who is not a party to the settlement--the chapter 13 trustees. Those folks are not bound by the settlement, meaning that they can still challenge servicing practices that comply with the settlement, but in the professional judgment of the trustee violate bankruptcy law. Of course, the trustees are supervised by the U.S. Trustee so perhaps there will be political pressure to make the settlement the final word on the obligations of servicers in bankruptcy, but this could be an issue.
Comments and thoughts on the implications of the settlement for bankruptcy cases are very welcome!
In the introductory chapter of the book, Broke: How Debt Bankrupts the Middle Class, I present some data about consumer debt levels in the United States. As Bob Lawless and others have shown, levels of consumer debt are strongly correlated with bankruptcy filings. While conditions such as unemployment, rising health care costs, and skyrocketing college tuition--and recessions--all create pressures on consumers that lead to borrow, debt is the sine qua non of bankruptcy--the relief offered by the system is the reduction or elimination of debt--not the promise of a good paying job or a strong social safety net. Because bankruptcy is driven by debt, those filings help reveal whether the levels of consumer debt will create serious problems for the economy and American families.
In Broke, I present a figure, courtesy of the San Francisco Fed, that shows the dramatic growth in household debt in real dollars over the last few decades. Reproduced below, the figure shows that the sharp acceleration began in the mid 1980s. This is an important point to understanding why recovery is proving difficult from the recession. As I explain in the book, "The consumer debt overhang, however, began long before the financial crisis and the recession. Exhortations about subprime mortgages reflect only a relatively minor piece of a much broader recalibration in the balance sheets of middle-class families. . . . The boom in borrowing spans social classes, racial and ethnic groups, sexes and generations." Broke, pp 4-5. The gray bands on Figure show recessions; this recovery is more difficult, at least in part, because we have an unprecedented gap between income and debt. Is this gap disappearing as a consequence of consumer reluctance to borrower and tightened credit conditions?
Credit Slips is pleased to have had the following persons join us as continuing blog authors in the past or as guest bloggers for a week. Their contributions have added new perspectives and ideas to this site, and we thank them for their participation.
PAST REGULAR CONTRIBUTORS
GUEST & OCCASIONAL CONTRIBUTORS
By "Liking" us on Facebook, you will receive excerpts of our posts in your Facebook news feed. (If you change your mind, you can undo it later.) Note that this is different than "Liking" our Facebook page, although a "Like" in either place will get you Credit Slips post on your Facebook news feed.