129 posts categorized "2005 Bankruptcy Amendments (BAPCPA)"

Bankruptcy Filing Fees Through the Ages

posted by Bob Lawless

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

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

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

Continue reading "Bankruptcy Filing Fees Through the Ages" »

Obama: Amend Bankruptcy Laws

posted by Elizabeth Warren

As I write, Senator Obama is giving a major policy speech on bankruptcy.  So far as I know, he is the candidate to discuss consumer bankruptcy in a general election.  I can think of many reasons that bankruptcy is a terrible subject for someone running for president.  It is very technical (hard to wedge into a sound bite). It is depressing (no one wants to think about going bankrupt). It will annoy big-money interests (financial services gave big money to pass the current bankruptcy laws). 

Savvy handlers would advise against it.  So why would a presidential candidate make bankruptcy relief a visible part of his platform? 

Continue reading "Obama: Amend Bankruptcy Laws" »

One More Means Test Problem

posted by Gene Wedoff

Another example of questionable legislative drafting in BAPCPA--the 2005 amendments to U.S. Bankruptcy Code--appears in an opinion of the Ninth Circuit BAP issued last month, In re Weigand.   At issue is whether “current monthly income” (CMI) includes the gross receipts from a debtor’s business or rental property or only includes the net income--gross receipts reduced by business or rental expenses.  There can be a big difference between the two possibilities.   One Mary Kay saleswoman, for example, reported net income of $150 on weekly gross receipts of $620.  On an annual basis, that would be $32,240 in gross receipts versus $7,800 in net income.  The difference matters.  If a debtor’s CMI is greater than the median household income for the debtor’s state, there are two negatives.  First, the debtor has to fill out a complex statement of deductions from income to determine whether a means test presumption prevents the debtor from obtaining a Chapter 7 discharge.  Second, in Chapter 13, the debtor has to propose a five-year rather than a three-year repayment plan.  $7,800 doesn’t come close to any state's median income; $32,240 actually exceeds some of them.  It's pretty certain that counting gross business and rental receipts would make many debtors "above median" who otherwise wouldn't be.  So, are gross receipts part of CMI?

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The New Politics of Bankruptcy

posted by Elizabeth Warren

Recently Albert Winn, a long-time Congressman from Maryland, was challenged in the primary for his seat. His opponent, Donna Edwards, campaigned on several issues, but among the most prominent was her opponent's vote for the 2005 bankruptcy legislation. He had ignored the needs of his constituents, she argued, and favored the financial interests whose executives (not coincidentally) gave his campaign financial support. Ms. Edwards defeated that incumbent in a landslide (60%-32%).

Last month, in a nationally televised debate among Sen. Edwards, Sen. Clinton, and Sen. Obama, Tim Russert essentially asked, How could two of you have voted for the 2003 legislation (much like the 2005 legislation), even though it never became law (because of a dispute within the Republican House caucus over the dischargeability of judgment debt arising from protests at abortion clinics)? Sen. Edwards immediately said that his vote for the bill was a mistake. Sen. Clinton expressed regret for the vote, adding she was glad it never had become law. Sen. Obama pointed out his steadfast opposition to the bill once he got into Congress.   

Why is a three-year-old, highly-technical set of amendments to an oten-obscure law now the stuff of popular political discussion? 

Continue reading "The New Politics of Bankruptcy" »

What the Foreclosure Mess Tells Us About Private Student Loan Dischargeability

posted by Adam Levitin

The most recent attempt to roll back some of the BAPCPA's limitations on the scope of the bankruptcy discharge seems to have faltered in the House. The House passed an education bill, but without a proposed amendment that would have made private student loans dischargeable in bankruptcy, as they were before October 2005, was voted down. A Senate bill (S.1561) sponsored by Dick Durbin (D-Ill.) that proposes making the private loans dischargeable is still in committee. (For a discussion of the legislation see here.)

Continue reading "What the Foreclosure Mess Tells Us About Private Student Loan Dischargeability" »

$175,862.27 in Credit Card Debt and a Bleg

posted by Adam Levitin

I've been going through consumer bankruptcy filings recently and have been astounded by the levels of credit card debt that show up on some (but certainly not most) debtor's schedules of assets and liabilities. I've seen a bunch of cases with upwards of $60,000 of debt for a single debtor, a few with over $100,000, and the current record holder is $175,862.27. Yes, that's right, $175,862.27. That's larger than a lot of mortgages.

Continue reading "$175,862.27 in Credit Card Debt and a Bleg" »

Even the US Trustee Has an Occasional "Credit Crunch"

posted by Katie Porter

On January 14, 2008, the US Trustee announced that it has suspended audits of consumer debtors. While consumer advocates have criticized the audits as overzealous and unnecessary, the temporary end of audits occured for a simple (if somewhat, ironic, reason)--the US Trustee is out of money. The 2008 Appropriations Act didn't provide any funding for debtor audits, and consequently the US Trustee has stopped the audits. While the Financial Services Roundtable, a credit industry lobby group, says "nobody" benefits when the watchdog is taken off the job, I suspect many in the consumer bankruptcy bar will applaud the audits' current status as an unfunded mandate.

NYT Topic Page on Bankruptcy

posted by Bob Lawless

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.

Clinton, Edwards, and Obama on 2005 Bankruptcy Law

posted by Bob Lawless

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.

Continue reading "Clinton, Edwards, and Obama on 2005 Bankruptcy Law" »

Bankruptcy at the Dem's Debate

posted by Adam Levitin

I think this blog has been really good at eschewing electoral politics issues, and I don't want to be the one to change that. Serendipitously, though, during the five minutes I had the TV on watching the Democratic debate, Tim Russert asked the Democratic candidates tonight about bankruptcy reform and their past positions on bankruptcy legislation, and the occasion cries out for a blog post.

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Is Cheaper Better?

posted by Katie Porter

As part of the 2005 amendments, consumer bankruptcy debtors must complete a financial education course to receive a bankruptcy discharge. The requirement was controversial among law professors, with some seeing the requirement as one of very few reforms that could help consumers and others viewing it primarily as a cumbersome obstacle designed to deter filings or increase the hassle and expense of bankruptcy.  As John Rao noted in his excellent post on the topic, the quality of this education left a lot to be desired. Specifically, he noted that the courses were not tailored to the particular educational needs of bankrupt families. Guestblogger Nathalie Martin shared her experiences as a financial educator on just why tailored education is vitally important.

I have no evidence that these problems have been remedied, but I can report that at least bankrupt families won't have to pay as much for their under-education in the future. I've recently gotten notices from two financial education providers, both of whom are approved nationwide by the United States Trustee. The respective costs of the services are $25 and $15. This is a dramatic drop in price from the $50 that most providers initially charged. Do you get what you pay for? Or is this a good cost-savings for consumers? The most interesting thing about both advertisements was that neither of them contained ANY mention of the quality of their course--no mention of curricular content; quality of intructors; or pedagogical methods. Instead, the programs emphasized their low cost--and non-educational features such as their acceptance of credit cards, and their immediate certificate delivery. If even the financial educators aren't competing on quality--or perceive that doing so is of no use--I think we should be pessimistic that bankruptcy financial education is going to delivery on its promise at any price. 

Credit Card Charge-Off Rates

posted by Adam Levitin

It's great to be a permanent addition to Credit Slips. This blog has become a really great forum for discussing credit and debt issues, and I’m looking forward to contributing to the conversation. It's a nice way to start a new year.

As it is New Year's Eve, people are making resolutions, including about their finances, and that puts me in the mood to think about how to measure the effect of the BAPCPA on bankruptcy and credit. (Happy New Year, btw).

One way to measure the effect of the BAPCPA is to look at credit card charge-off rates. Credit card issuers have to charge off debts that are 180 days delinquent or otherwise uncollectable, such as by a bankruptcy discharge. Below the break are two graphs (my apologies for the HTML layout issues), one showing historical credit card charge-off levels, and the other the percentage of those charge-offs related to bankruptcy.

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Did the 2005 Law Make for More Chapter 13s?

posted by Bob Lawless

Chapter_13_ratio_3 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.

Projecting the Past

posted by Bob Lawless

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.

Continue reading "Projecting the Past" »

Delegation of Authority

posted by John Rao

Did Congress intend for an administrative agency in the executive branch to have the power to determine whether a debtor can receive a discharge in a chapter 7 case?  Or whether a debtor can save a home in a chapter 13 case or should be committed to making payments in a chapter 13 plan for a five year rather than three year period?  Or whether an unsecured creditor should get paid in a chapter 13 case?  Did Congress intend that this power should be exercised from time to time by that agency without notice to the bankruptcy community or an opportunity for comment?  And did Congress intend that this unbridled power should be held by an agency that has never been delegated any rulemaking authority under the Bankruptcy Code or any other statute in regard to bankruptcy? 

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Missed Opportunity: Education Courses Not Targeted to Bankruptcy Filers

posted by John Rao

While many have appropriately questioned the value of the pre-filing bankruptcy counseling mandated by BAPCPA, including the GAO in its report to Congress, few have passed judgment on the post-filing debtor education courses.  For those not familiar with these requirements, an individual filing bankruptcy must receive a briefing from an approved credit counseling agency within 180 days before the bankruptcy case is filed and must also take an approved education course after the case is filed.  The education courses, it seems, have been considered helpful to consumer debtors, at least as much as any two-hour course can be expected to improve a consumer’s financial well-being.  But could these courses be designed to provide a more meaningful educational experience for their intended audience?

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A High Grade for High-Grade

posted by John Pottow

Apologies in advance for this post.  When my co-bloggers and I brainstormed this site, we talked about trying to merge scholarly issues with accessibility.  This post woefully shortchanges the latter.  But I can't help myself -- I'm just too excited about the recent High-Grade opinion out of Judge Lifland's chambers.

One of the quiet successes of BAPCPA was finally getting Chapter 15 passed into law, which pertains to cross-border insolvency proceedings, an area that I write about a bit.  Yet there have been fits and starts in some early opinions by courts who, how shall I put this in a politic manner -- seem to be struggling.

One of the big deals from the theoretical side is Chapter 15's embrace of an idea that goes by the label "universalism," which basically means we would be better off with a coordinated system of choice of law in cross-border proceedings following some jurisdiction-selecting rule, as opposed to reverting to the choice of law "state of nature" of territorial sovereignty.  (Our European cousins are off and running with the centre of main interests test ("COMI") under their Regulation.)  One of the necessary foundations of a universalist approach to regulating transnational bankruptcies is what I dub "jurisdictional hierarchy," recognizing that some jurisdictions are going to have to bite the bullet and bow to the laws of other jurisdictions in any given case.

Chapter 15 imposes such a jurisdictional hierarchy by requiring U.S. courts to distinguish between a "main" and "non-main" foreign bankruptcy proceeding when a U.S. Chapter 15 proceeding is opened.  (A Chapter 15 is opened by a foreign representative, like a trustee, in a bankruptcy proceeding taking place abroad.)  And yes, the COMI test is used: if the foreign proceeding is being conducted in the country that houses the debtor's COMI, then it is a foreign "main" proceeding.  One reason it is important to get this distinction (i.e., is it a request from a main or a non-main (or possibly neither!) proceeding?) is because it signals the jurisdictional hierarchy.  If the proceeding is recognized as a foreign main proceeding, that means the U.S. court will be mindful of its necessarily inferior legitimacy to legislative (and maybe adjudicative) jurisdiction over the dispute.  If the proceeding is recognized as a non-main proceeding, the assistance offered to the foreign representative is curtailed, on the theory that he's not really the person who should be travelling abroad asking for help.

An ominous early case, SPhinX, tried to pooh-pooh the relevance of main vs. non-main, cavalierly implying it doesn't really matter because U.S. bankruptcy judges have such wide discretion they can shape and fashion almost any sort of remedy (and so get a non-main proceeding representative the sort of relief generally intended for a main proceeding representative).  In addition to stumbling a bit doctrinally, the SPhinX case was worrisome for trying to scuttle the very foundation of jurisdictional hierarchy so central to universalism -- and so importantly advanced, albeit gingerly, in Chapter 15.

Enter High-Grade.  In that case, the actual holding denied the (Cayman) foreign representative's request for assistance because it was found not only was the Cayman proceeding not a main proceeding (COMI of Bear Stearn's investment fund was, unsurprisingly, in New York), it wasn't even a non-main proceeding, because the connection to the Cayman Islands was purely a legal formalism devoid of economic substance (incorporating offshore for tax advantage).  Yet what is so important about the case is that (arguably in obiter dicta) it goes through a thoughtful and careful analysis of the centrality of the distinction between foreign main and non-main proceedings and hence of the importance of jurisdictional hierarchy in a Chapter 15 world.

SPhinX's retirement will be welcome; I predict it is High-Grade that will get the cites.  I just couldn't help but give it a "shout out" as it rolled hot off the presses.

Apologies again for readers who are now utterly bored.  You were warned.

Giving Congress What They Want, Not What They Wrote

posted by Bob Lawless

This morning, I was preparing for class with a new case that I had assigned, Perlin v. Hitachi Capital America Corp. (In re Perlin), No. 06-3199 (3d Cir. Aug. 3, 2007). Although the case came out a few weeks ago, I still wanted to post about it, because the case shows how the post-2005 U.S. bankruptcy law often can be a "heads I win, tails you lose" proposition for consumer debtors. The court seemed to go out of its way to interpret ambiguities in the statute against the interests of consumer debtors and hands large financial institutions a potentially troubling tool to use against consumers in bankruptcy court. With all of the lobbying that went into the 2005 bankruptcy bill, one might think that ambiguities would best be resolved against the consumer credit industry as they are the ones with the clout to get changes in the law. Interestingly, the court might have taken its cue from the position of the United States Trustee, who filed an amicus brief on behalf of the financial institution. (I wonder how many appellate court amicus briefs the U.S. Trustee files on behalf of consumer debtors?)

Because the case revolves around the interaction of several different subsections of the Bankruptcy Code, some explanation is in order. As Jon Stewart once said (paraphrasing here)--"Yes, it's boring. That's why they can get away with it." Nonetheless, I'll try to keep it brief.

Continue reading "Giving Congress What They Want, Not What They Wrote" »

US Trustee Report on Effects of Means Test

posted by Katie Porter

The U.S. Trustee recently released a report, Impact of the Utilization of Internal Revenue Service Standards for Determining Expenses on Debtors and the Court. This study was mandated by section 103(b) of BAPCPA. The U.S. Trustee contracted with RAND corporation to conduct the study, and Marianne Culhane and Michaela White were brought on as co-authors. As I've suggested before, these collaborations produce better studies that incorporate different viewpoints and methodologies. Compare the quality of this study with the Federal Reserve's "study" of credit card solicitations, which we highlighted about a year ago on Credit Slips.

The study is by no "means" (get it, hah!) the final word on the means test because the data come from only eight districts and the law on how to apply and calculate the means tests continues to evolve. Nonetheless, it is the most reliable national study that I have seen, and its findings are provocative. There is a lot to say about this study, but I start with the most basic point--how often do debtors come under the expense standards?

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Professor Zywicki's Testimony

posted by Bob Lawless

In a Credit Slips post here, Professor Elizabeth Warren discussed Professor Todd Zywicki's testimony at a recent congressional hearing. In the comments to that post, Professor Zywicki protested that Professor Warren had misinterpreted his comments. After the transcript became available, Professor Zywicki wrote to me to say that he did not state that bankruptcy judges actively lobbied against BAPCPA. Because the transcript is available, I thought the best thing to do would simply be to post the relevant testimony so readers can make up their own minds. The testimony appears "below the fold"--

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Living with the New Bankruptcy Law Conference

posted by Katie Porter

The Debtor-Creditor section of the American Association of Law Schools is having a special meeting in conjunction with the National Conference of Bankruptcy Judges'  Annual Meeting in Orlando. The NCBJ will meet October 10-12 and the Debtor-Creditor section will meet October 12-13. Registrants who sign up for the AALS Debtor-Creditor program, entitled Living with the New Bankruptcy Law, are admitted to the entire NCBJ program. The fee is very reasonable, thanks to efforts by the NCBJ to reach out to the academic community.

What's on the program? It kicks off with a discussion led by six judges on collaborative curricular and extracurricular programs that can improve law students' knowledge of bankruptcy law and practice.  The next day, Eric Brunstad will give a keynote presentation of how federal courts do and should rule on bankruptcy issues. The plenary program that follows is entitled Perspectives on the Impact of the 2005 Act, at which I plan to present the first data from the new 2007 Consumer Bankruptcy Project Phase IV. Jonathan Lipson and William Widen are also making presentations at that panel, and Judge Wedoff will offer comments. The event winds up with concurrent sessions and an off-site dinner. All this is on top of the preceding days of NCBJ Annual Meeting presentations.

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Bankruptcy Judges and BAPCPA

posted by Elizabeth Warren

Yesterday the House held a hearing on Medical Debt and Bankruptcy. Donna Smith, a smart, thoughtful woman forced into bankruptcy by medical problems was the star witness. (She was also featured in Michael Moore's SICKO--see it!) My co-author Dr. David Himmelstein from the Harvard Medical School was terrific, as was Mark Rukivana from The Access Project. I also testified, mostly about our studies and other people's studies on medical bankruptcy.

But I learned something new. During the Q&A, Professor Todd Zywicki testified that one of the key lobbying groups opposing the 2005 bankruptcy bill was the bankruptcy judges, who with bankruptcy attorneys balanced out the influence of the credit industry lobbyists. Why would the judges lobby strongly against BAPCPA? He said flatly, "Bankruptcy judges just want more bankruptcy."

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The Unconstitutionality of 11 U.S.C. 522(p)

posted by John Pottow

I’ve been mulling this provision of BACPA over for sometime now, including conferral with a colleague of mine on the faculty here who specializes in constitutional law, and I’m becoming increasingly convinced that s. 522(p) is unconstitutional.

For those who want to see the Code, I’ll copy it in at the bottom of this post.  For those who want a reminder, this is the “hard cap” of $125K homestead exemption that applies for debtors who have recently moved.

Why is it unconstitutional (in my view)?  It has nothing to do with the generic exemption challenges that have failed in the past (e.g., the dis-uniformity of different states having different exemptions, or the dis-uniformity of some states opting out of the federal exemptions).  No, this is a somewhat arcane matter of constitutional law that rarely gets litigated (just because it’s so unusual to be implicated).  The problem is that it inhibits the unenumerated but generally accepted right to interstate travel under the Fifth Amendment’s Due Process Clause.

Here’s the problem.  The Feds could exercise their Supremacy Clause power and pass hard caps in Bankruptcy for everyone.  (Cf. Recommendations of NBRC.)  But what they’ve done here, with 522(p)(2)(B), is made a cap but then made an exception to the cap for intra-state movers.  What this means, therefore, is that the cap only applies to inter-state moving debtors.  As such, it is a direct discrimination on those who move states.  Moreover, this is not like a “vesting requirement,” which has survived constitutional scrutiny in previous cases, because the rule is not that the debtor keeps his old exemptions until he vests into the new ones.  Rather, the rule is if he moves from Texas to Florida, he forfeits his unlimited exemption under each state’s laws just because he was an inter-state mover – a “penalty” visited by neither state’s laws!

If the level of scrutiny applied to this provision were strict, then I don’t see how it could possibly pass constitutional muster (I’m not even sure how it’d do on a lower standard).  I could be off-base, so I’m open to changing my mind.  Herewith the Code:

11 U.S.C. s. 522
(p)(1) Except as provided in paragraph (2) of this subsection and sections 544 and 548, as a result of electing under subsection (b)(3)(A) to exempt property under State or local law, a debtor may not exempt any amount of interest that was acquired by the debtor during the 1215-day period preceding the date of the filing of the petition that exceeds in the aggregate $125,000 [$125,000 (added by BAPCPA 10-17-05) effective 4-1-04. Adjusted every 3 years by section 104.] in value in--

            (A) real or personal property that the debtor or a dependent of the debtor uses as a residence;
            (B) a cooperative that owns property that the debtor or a dependent of the debtor uses as a residence;
            (C) a burial plot for the debtor or a dependent of the debtor; or
            (D) real or personal property that the debtor or dependent of the debtor claims as a homestead.

(B) For purposes of paragraph (1), any amount of such interest does not include any interest transferred from a debtor's previous principal residence (which was acquired prior to the beginning of such 1215-day period) into the debtor's current principal residence, if the debtor's previous and current residences are located in the same State.

BAPCPA's Success in Driving Lawyers from Bankruptcy Practice

posted by John Pottow

Susan Thurston, Clerk of the Bankruptcy Court of the District of Rhode Island, had an insightful piece in last month's ABI Journal, "Behind the Numbers: The New Workload of the U.S. Bankruptcy Courts."  It is not a random national sample or anything so methodologically sophistated, but it is one clerk's reflections on the patterns in her courthouse.  She finds, which should surprise no-one, that while case numbers have gone down, the clerk's work per caseload (and, indeed, the number of motions per case) has gone up.  Here's what's even more interesting (and distressing): "So too, we have experienced an increase in the percentage of pro se filed cases from pre-BAPCPA days. . . .  [A] substantial time investment is required by clerk's office staff both at the intake counter as well as on the telephone to impart filing and procedural instructions to individuals who are overwhelmed by the complexity of the process . . . ."

So we find that as BAPCPA succeeds in driving lawyers out of practice, more people have to file pro se.  I'll leave aside the cynical suspicion that by driving debtors' lawyers out of practice, creditors were hoping to improve their distress negotations lot.  I'll also leave aside the serious issues of proceeding unrepresented in bankruptcy -- an already unenviable time.  What I want to underscore is that there's no such thing as a free lunch.  The BAPCPA proponents who celebrate scaring off part of the debtor's bar have just shifted costs onto overworked goverment clerks who continue to provide yeomen's service.  Yet another reason why my taxes are too high....

D'Oh, I've Filed in the Wrong Chapter!

posted by Bob Lawless

On June 10, Fox rebroadcast an episode of The Simpsons called "Rome-old and Juli-eh." We had a DVR malfunction back in early March, and somehow I missed this episode when it first aired.  It wasn't the end of the world, but it was close to it. I watched the rebroadcast last night and discovered what I had missed. Two of my favorite topics--The Simpsons and bankruptcy law united at last. Those of you who neglected to point this out to me on the original air date--and you know who you are--have severely let me down.

After building a new rec room in the basement, Marge asks how Homer could afford it. It goes from there:

Continue reading "D'Oh, I've Filed in the Wrong Chapter!" »

Manipulating the Means Test

posted by Katie Porter

Several months ago, I wrote on Credit Slips about my instinct that BAPCPA effectively has empowered the US Trustee's office to expand its authority.   My suspicision hasn't gone away. The prior post noted that the US Trustee's office has promulgated the median income numbers from the Census (an act that requires the exercise of some discretion and is subject to multiple interpretations). More recently, the UST took it upon itself to promulgate the so-called "IRS Expense" standards for non-mortgage home expenses." (number 2a when you link). Debtors seem to be required to use these numbers or face an objection from the UST office. The US Trustee is basically breaking down what the IRS gives in its own Collection Standards as a single figure (housing) into two numbers--ownership (mortgage/rent) and non-ownership (repairs, insurance, utilities, etc). The UST seems to be using a figure of about 67% for the former and 33% for the latter, but in other counties it was closer to half and half. Where on earth did this come from? Does the US Trustee have any expertise in determining the costs of maintaining a residence? Where does the statute empower the UST to be the interpretative guide of the IRS Standards? Section 707 says "IRS Expenses", not IRS Expenses as souped up or split out by the UST. Is this overreaching? Shouldn't the IRS standards be interpreted by, well, the IRS? Obviously, if there is a dispute, someone needs to solve it. But isn't that what we have bankruptcy courts for? Or why Congress can amend statutes? Does this go too far beyond the boundaries of the UST's traditional role of "maintaining the integrity of the bankruptcy system" and become substantive law-making?

House Hearings on 2005 Bankruptcy Law

posted by Bob Lawless

The Subcommittee on Commercial and Administrative Law of the U.S. House of Representatives Committee on the Judiciary held hearings this morning on the second anniversary of enactment of the 2005 bankruptcy law. There were four witness today:

  • Steve Bartlett, president and CEO of the Financial Services Roundtable
  • Shirley Jones Burroughs, a resident of Gastonia, North Carolina, who refinanced both a first and second mortgage three times with the Associates (now CitiFinancial)
  • Yvonne D. Jones, director, Financial Markets and Community Investment of the U.S. Government Accountability Office
  • Henry Sommer, attorney and president of the National Association of Consumer Bankruptcy Attorneys.

Guess which witness thought the 2005 law was just peachy? Isn't there anybody without strong industry or political ties that can be trotted out to defend this law at congressional hearings?

Undoubtedly, the other Credit Slips bloggers will have something to say about this hearing. Mainly, I wanted to note they had happened. The written statements are here and are worth the read. I especially commend Ms. Burroughs statement as evidence of what happens in a real world with predatory subprime lenders. Ms. Burroughs and her husband continually refinanced their mortgage debt in an attempt to be responsible and lower their monthly payments. The end result was more interest, more fees, and higher payments that ultimately became unbearable once her husband was called to active duty in Iraq.

From the Practitioners' Mouths (Worth Reading)

posted by Bob Lawless

Cathy Vance, the vice president of research and policy and associate general counsel at Development Specialists, Inc., and formerly national education coordinator at the Commercial Law League of American (CLLA) during the eight years the 2005 bankruptcy law wended its way through Congress, has reported on a CLLA survey of bankruptcy practitioners and their reactions to the 2005 bankruptcy law. The Bankruptcy Litigation Blog has Vance's summary here. If you have not seen it, the summary is worth reading. To whet your interests: 47% of respondents reported they had increased what they charge clients because of the 2005 law, and 23% said they had recommended an alternative to bankruptcy for their small-business clients because of the 2005 law's harsh treatment of small business debtors. To learn the rest of the findings, you'll have to read the summary.

Get Last December's Figures Today!

posted by Bob Lawless

Only 107 days after the close of the calendar year, the Administrative Office of U.S. Courts (the "AO") has released bankruptcy filing statistics for 2006. The AO released the statistics in a press release under a headline stating "Bankruptcy Filings Plunge in the Calendar Year 2006" and contrasted the 617,660 filings in 2006 with the 2,078,415 filings in 2005. Thus, the AO's statistics conveniently match the conventional story told before passage of the 2005 bankruptcy law, namely that the system was plagued by filers who did not need it and who would be purged by a bankruptcy law that cracked down on abusive filings.

There are only two things wrong with the AO's press release. It is woefully outdated on the day of its release, and its comparisons are misleading.

First, let's explore the press release's old information. Two weeks ago, I posted about private data from AACER for the first quarter of 2007 that show U.S. bankruptcy filings on a trend to reach or perhaps top 1,000,000 in this calendar year. These same private data were the subject of an AP story. We are working our way back to the filing levels experienced before the 2005 law and much more quickly than I expected. Rather than bankruptcy filings plunging, the current view is that bankruptcy filings are on an upward trend.

One might ask why it is taking the AO so long to release filing data. Looking at the dates on the press releases from the AO's web site, it has released the previous calendar year's filing statistics on these dates:

  • February 19, 2002
  • February 14, 2003
  • February 26, 2004
  • March 1, 2005
  • March 24, 2006
  • April 17, 2007

It has been a long, slow steady progression of delay. This year, we did not receive the filing statistics for the last quarter of 2006 until after the first quarter of 2007 was already in the books. As my previous post on this year's filing trend indicates, receiving filing statistics that are over three months old can provide a misleading picture. I also posted about a data access issue--whether the AO is giving some persons access to their filing data before releasing them publicly. The AP story mentioned earlier suggested that some persons might already have seen the AO's statistics for the first quarter of 2007. If those statistics are available, they should be released to the general public.

Finally, I wanted to spend a moment on why the AO's press release is misleading where it compares 2006 filing data to the same data from 2005. As is well known, there was a huge number of persons who filed bankruptcy in the days and weeks leading up to the effective date of the 2005 bankruptcy law. Almost 550,000 people filed bankruptcy in the last quarter of 2005 and almost all of them just before the law went into effect on October 17, 2005. (See Charles J. Tabb, Consumer Bankruptcy Filing and Trends, available at http://ssrn.com/abstract=931172 for more details, especially at pp. 4-11). Those filings were done to avoid the harsh effects of the 2005 law, and thus the 2005 figures represent a large number of persons who would have filed later in 2006. Put another way, the 2005 law increased the number of filings in 2005 and decreased the number of filings in 2006. Although there is no question that filings declined in 2006, a direct comparison of the two years exaggerates the decline.

Oh, and the AO's data undercount business filers and overcount consumer filers (see here and Robert M. Lawless & Elizabeth Warren, The Myth of the Disappearing Business Bankruptcy, California Law Review, vol. 93, p. 745 (2005)), but you're probably all sick of hearing me say that.

Pottow on "Lawless v. Tabb"

posted by John Pottow

I was delighted to see a spirited debate on Credit Slips a month ago between Professors Lawless and Tabb on the latter's recent writings and the former's recent opinings on the means test, posted here.

Yet what even these two great legal minds neglected was that I have answered this question -- at least the one regarding new section 707(b)(3)(B) of the Code -- in "The Totality of the Circumstances of the Debtor's Financial Circumstances in a Post-Means Test World: Trying to Bridge the Wedoff/Culhane & White Divide, published at  71 Mo. L. Rev. 1053  (2006).   (And I will make the link to SSRN, just to see if I get any credit counselling services down my page's side too!)

I'll leave it to die-hards only to see on which side I came out....

The Case of the Upside-Down Trade-In

posted by Tara Twomey

The more times I read section 1325(a), the more I am convinced that not even Leroy “Encyclopedia” Brown, the wonder boy detective, could solve the mysteries of the “hanging paragraph.” The latest chapter, in what is sure to be a very long series, involves the case of the upside-down trade-in.

An upside-down car is one in which in which the value of the car is less than the amount owed on it. It is not unusual for owners with longer-term loans, low or no down payments, and/or cars that are depreciating rapidly to be “upside-down.” According to J.D. Power and Associates, more than one-third of U.S. car buyers who traded in for a new car in 2005 were upside-down. When an owner of an upside-down car goes to buy a new car, not only must he pay the purchase price of the new car, he must also payoff the negative equity on the old car. Is a loan that includes refinancing of negative equity a purchase money loan, in whole or in part? Does the “hanging paragraph” cover claims in which only a portion of the debt is purchase money? These were the puzzlers faced by the court in the recent case of In re Price, 2007 WL 664534 (Bankr. E.D.N.C. Mar. 6, 2007).

Continue reading "The Case of the Upside-Down Trade-In" »

Super Trustees?

posted by Tara Twomey

Faster than speeding bullets, more powerful than locomotives and able to liquidate fully exempt property with a single motion—they’re super trustees! Taking their cue from a Superman comic book, trustees around the country are attempting to exert their self-proclaimed super trustee powers by filing motions to liquidate exempt property, particularly homesteads, to pay domestic support obligations. According to these trustees their superpowers derive, not from some Kryptonian heritage, but rather BAPCPA’s amendment to section 507(a)(1)(A).

In 2005, Congress made several changes to the bankruptcy code to benefit payees of domestic support obligations. Significantly absent from these extensive amendments was any mention of the power to liquidate exempt property. Despite the lack of express authorization for such power, trustees have argued that the amended language in section 507 gives them “implied authority” to liquidate all of the debtor’s assets, whether exempt or not, to pay domestic support obligations. The amended language of section 507(a)(1)(C) states that: “If a trustee is appointed…the administrative expenses of the trustee…shall be paid before payments of [DSO claims], to the extent that the trustee administers assets that are otherwise available for the payment of [DSO claims].” The trustees argue that Congress, in adding the trustee compensation provision and using the term “assets” instead of “property of the estate,” impliedly bestowed upon them this superpower. Given the additional fees that the trustees would generate for themselves by liquidating exempt assets (admittedly a less than altruistic motive), no one can blame them for wanting these superpowers, but here’s why this one won’t fly.

Continue reading "Super Trustees?" »

Tabb & McClelland on the Means Test

posted by Bob Lawless

A few weeks back, I made a few posts about the bankruptcy conference at Southern Illinois University, including a post about the presentation by my colleague, Charles Tabb. The paper on which that presentation was based in now available on the Social Science Research Network (SSRN) at http://ssrn.com/abstract=964460 and will eventually appear in the Southern Illinois University Law Journal. The paper is entitled "Living with the Means Test" and is co-authored with University of Illinois law student Jill McClelland. Tabb and McClelland do a great job of pulling together the materials on the means test, including an analysis of precedents since the 2005 bankruptcy law. As I explained in my previous post, I disagree with some of Tabb and McClelland's solutions to some of the most tricky statutory issues created by the 2005 law. Still, if I were having to deal with the means test on a daily basis, it's a paper I would want as a reference.

Guess Who's Coming to Lunch?

posted by Elizabeth Warren

Judge Martin Isgur attended a Houston debtor's counsel luncheon in which the speaker, MMI's CEO menionted the company's policy against hiring any person who had filed for bankruptcy.  It is easy to imagine the thought bubble over Judge Isgur's head: "525?"  So the judge launched an investigation.  In re Credit Counseling in the Southern District of Texas, No. MC-07-301 (Bankr. S.D. Tex. 2/15/07).

Eric Van Horn, a former student of Jay Westbrook and now an attorney with Diamond McCarthy, emailed to point out the irony:  The same Congress that wanted to limit judicial discretion in dealing with the parties in court (e.g., creating automated tests for substantial abuse and disposable income), told the judges to get out there and police those credit counselors.  Sec. 111(e) authorizes the district court (and therefore the bankruptcy court?) to launch an independent investigation based on whatever he learns wherever he learns it.  Here, lunch results in an investigation.

Continue reading "Guess Who's Coming to Lunch?" »

The Second Part of Shredding the Safety Net

posted by Bob Lawless

OK, the "live blogging" thing did not work very well at the "Shredding the Safety Net" conference at the Southern Illinois University School of Law. It was too difficult to pay attention to what was being said and try to compose blog posts at the same time. I eventually settled on taking notes for a later post. "Later" became Saturday afternoon, which became Sunday, and now here it is Monday afternoon.

All of the conference papers will be published in the SIU Law Journal later this spring, which reminds me that I had better get to the point here because I owe the law journal revisions on my paper. Without further ado . . . .

Continue reading "The Second Part of Shredding the Safety Net" »

The First Part of Shredding the Safety Net

posted by Bob Lawless

As mentioned yesterday, I'm at a symposium sponsored by the Southern Illinois University School of Law's symposium on the 2005 bankruptcy laws called "Shredding the Safety Net," and I thought I would try a little "live blogging" I have never tried this before, so consider this an experiment. I'll try my best to summarize the papers, but I'm sure my summaries will only be able to capture the outline of the presentations. The papers will appear in an issue of the Southern Illinois University Law Journal later this spring.

The first speaker of the morning is Professor Nathalie Martin of the University of New Mexico School of Law. She is presenting a paper on debtor education after the 2005 bankruptcy law. As Credit Slips readers probably know, the 2005 bankruptcy law requires credit counseling for consumers prior to filing bankruptcy as well as a postfiling debtor education course as a condition for the discharge. In her paper, "Mind Games: Rethinking BAPCPA's Debtor Education Provisions," Professor Martin proposes that we eliminate the prebankruptcy credit counseling requirement. She argues that by the time debtors are ready to file bankruptcy, it is too late for credit counseling to be meaningful. The debtors are under a lot of stress. Moreover, the industry administering credit counseling has been under investigation from the IRS for possible loss of their tax-exempt status. The IRS Commissioner labeled the industry "a big business dominated by bad actors." Although I agree with this recommendation, I don't believe even the congressional opponents of the 2005 bankruptcy law the political will to propose repeal of the credit counseling requirement.

Continue reading "The First Part of Shredding the Safety Net" »

SIU Bankruptcy Conference

posted by Bob Lawless

Tomorrow, the Southern Illinois University School of Law is hosting a symposium "Shredding the Safety Net." The symposium will examine the effects of the 2005 bankruptcy law, and the papers will appear in a future issue of the Southern Illinois University Law Review. From the press release:

Top bankruptcy scholars from throughout the nation [as well as Bob Lawless] will participate in a daylong symposium at Southern Illinois University Carbondale. . . .

"Shredding the Safety Net" will examine the impacts of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. The symposium is from 8 a.m. to 4 p.m., Friday, Feb. 16, at the SIU School of Law, which is sponsoring the event.

OK, I added the "as well as Bob Lawless" part to the press release to enhance its accuracy. The dean of the SIU law school is Peter Alexander, a noted bankruptcy scholar in his own right and a good friend. He wouldn't have said that about me in the press release . . . probably.

Besides myself and Dean Alexander, the other speakers will be Margaret Howard (Washington & Lee) who is also the keynote speaker, Nathalie Martin (New Mexico), Judge Judith Fitzgerald (Western District of Pennsylvania), Charles Tabb (Illinois), Tom Plank (Tennessee), and Kelli Alces (currently at Richmond but soon Florida State). The full press release is here.

If I have an Internet connection, I'll try to make a few posts from the conference summarizing the papers.

Going to Texas for a Discharge?

posted by Bob Lawless

Yesterday, a practicing attorney left a note on a December post from Elizabeth Warren, "Bankruptcy Reform and Credit Card Losses." He wrote:

[A]s a consumer practitioner I have noticed a tendency among debtors to suffer the indignities of bottom feeding debt collectors rather than the indignities imposed by Congress. True creditors are not any better off, because they still write off debt, but now it is now bought up at deeply discounted rates by a developing cottage industry of bottom feeders who attempt to collect by being obnoxious. I have actually had clients move and leave no forwarding address to escape such practitioners as Collect America.

If this one report has captured a more general phenomenon, we have come full circle as a society. The United States did not have a permanent bankruptcy law until 1898, and there were various bankruptcy laws in effect for only 16 of the first 109 of this republic. That did not mean there was no discharge from your debts. Many debtors would simply move west, beyond the reach of their creditors. The phrase "G.T.T." or "Gone to Texas" was shorthand for a debtor who had moved to escape creditors. It is no coincidence that the United States enacted a permanent bankruptcy law about the same time as the frontier closed. Is history repeating itself? Debtors cannot move to the frontier anymore to escape their creditors, but is going underground the new "Gone to Texas?"

This comment also made me think about some of the concerns that were raised about the harsh 2005 bankruptcy law. Its proponents even admitted that the goal was to get fewer people to file bankruptcy. Of course, shutting the door to the bankruptcy courthouse does not solve hopeless financial problems. It just leaves consumers with hopeless financial problems with one less place to turn for a solution. I like to analogize the law and its proponents to shutting down a hospital and claiming to have cured disease.

There were concerns raised that the 2005 bankruptcy law might create a permanent underclass of debtors, perpetually hounded by creditors with no hope of being restored to financial health. It was not uncommon to hear the term "debt peonage" thrown around or to hear predictions that consumers in hopeless financial straits simply might go underground. We don't know whether that is happening, and one person's experiences does not tell us whether a general trend is afoot. The comments are open here, however. Does the comment represent a more general phenomenon? Are there debtors going underground, so to speak, to avoid their creditors? If so, has this behavior increased after the 2005 bankruptcy law?

Because a Minute Is More Than Enough

posted by Bob Lawless

The University of Illinois decided to feature yours truly on the main university web site, raising the question of exactly what someone thought they were doing. My guess is that there is someone in  the university public relations office looking for a job. There is nothing more certain to attract prospective students than to have a professor on your web site discussing bankruptcy law. In a feature called, "A Minute With . . .," I was given four questions:

(1) Congress passed the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act because of widespread concern that the bankruptcy system was too lenient and was being abused. Has the new law curtailed the number of personal bankruptcy filings?

(2) Given the reduction in filings, do you consider the law a success?

(3) What are the most common reasons behind personal bankruptcy?

(4) Do you foresee an increase in bankruptcy filing rates?

In no particular order, I gave the following short answers "no," "a little bit," "urrggh!," and "many." If you're interested in the full answers, the university posted them here. If you're a student interested in attending the University of Illinois, be aware that the university has many fine qualities despite what you read on that web page. They really don't let me teach all that many students and then only law students at that.

Healthcare Privacy and Bankruptcy

posted by Ted Janger & Susan Block-Lieb
Yesterday I (Ted) was invited to testify at an HHS advisory committee hearing on healthcare privacy.  My assigned topic was to describe the effect of bankruptcy on the privacy protection afforded medical information held by entities that are not covered by the HIPAA Privacy Rule
The hearing raised the problem of transfers of patient medical information in two contexts:
  1. B2B, when health care providers give patient information to other non-covered "Business Associates" for purposes such as billing or data analysis; and
  2. B2C, when patients either provide medical information to non-covered entities, or authorize their doctors to do so.  An example is the emerging concept of a portable electronic healthcare record.

The short answer used to be that confidentiality promises are contracts and that breach of contract claims end up getting paid in bankruptcy dollars.  The chair of the committee presumably knew that I would say this because I'd already said it once before in a slightly different context.  Edward J. Janger, Genetic Information, Privacy and Insolvency, 33 J. L. Med. & Ethics 79 (2005).

He probably didn't expect that he'd be giving me my first chance to think about the effect on my answer of the so-called Leahy Amendment, contained in BAPCPA. The Leahy Amendment amends section 363 and adds a new section 332 to the Code.  These provisions prohibit the sale of customer data in violation of a published privacy policy unless a "consumer privacy ombudsman" is appointed and the court approves the sale.

So, does the Leahy Amendment enhance the security and protection of your medical records?  Bottom line, a qualified "No."

Continue reading "Healthcare Privacy and Bankruptcy" »

Lee & Parrish in Today's NY Times

posted by Bob Lawless

In today's New York Times (reg. req'd), Judge Joe Lee and author Thomas Parrish have an op-ed entitled, "Banks Gone Wild." This passage gives a flavor of the piece:

"As for the morality involved in lending money at exorbitant rates, the word 'usury' itself has taken on a quaint, archaic sound, like 'jousting' or 'necromancy.' What happened?"

If you're interested in the sorts of things we talk about on Credit Slips, you will want to read the entire op-ed.

Judge Lee has been a federal bankruptcy judge since 1961 and is a well-respected judge (see here for an announcement about Judge Lee being named to receive the William B. Norton, Jr., Award for Judicial Excellence). He is precisely the type of person with precisely the type of experience to whom Congress should be listening but isn't. I'm sorry to say that I don't know Mr. Parrish, but I'll try to make amends by linking to his Amazon.com author page with his eclectic list of publications. His Grouchy Grammarian book looks interesting. Maybe I need to consider a book called the Grouchy Law Professor, or is that redundant?

A K Street Theory of Bankruptcy Reform

posted by Buce

Reading stuff like this prompts me to showcase an idea I was noodling around with last year; nobody much paid attention then, so I am delighted to get another shot. Specifically: we talk about bankruptcy “reform” as the credit “industry” versus the poor, beleaguered debtor. But if Professor Warren is reading the data right, then the industry is no better off now than it was before 2005.

How can this be? Here’s a thought: maybe the true proponent of bankruptcy “reform” was never the credit industry per se, but rather the lobbying industry. Lobbying is a business that lives on hope and fear. No lobbyist makes any money by saying “no matter what we do, things will stay pretty much the same.” You make money by finding a problem and undertaking to solve it—or, if you can’t find one, then manufacture one, as in: you are being ripped off by Federal bankruptcy law. We can help.   

 This 900-pound gorilla was in the bedroom through all the years of the runup to BAPCPA: Creditors losing a gazillion in bankruptcy! Forget about any other problems with the data (how much is a gazillion, anyway?). Dawson Debtor owes Carlotta Creditor $1,000. Carlotta isn’t getting paid; Dawson goes bankrupt. Did the bankruptcy cause the loss? So far, there is no evidence that it did. We only know that Dawson isn’t paying; we have no reason to assume that he would have been able to pay had bankruptcy not intervened.   

 Granted, this is the point of the “means test”: the premise that there are debtors who do have “the means” to pay and would pay but for bankruptcy. There was a fair amount of contention over the question whether and to what extent there were such debtors. Early data seems to suggest that the current means test isn’t capturing many debtors. But it is not clear what inference to draw from this fact. It may be that debtors with “means” are just staying home—in which case, we would have to say that “the means test” accomplished its express purpose. It could be that creditors knew full well that the means test as drafted wouldn’t catch very many debtors, but that they wanted to get their snout into the trough to establish the principle leaving details for later. It could be that creditors just made “a mistake” and miscalculated how much it would yield.

Or it could be—and here is my point—that lobbyists sold their clients a blivik: got big fees for delivering, well, nothing at all. In a simple world, you might expect creditors to get shirty about this sort of betrayal and extract some kind of penalty later. Maybe, but that’s then and this is now: by the time the betrayal shows up, you’ll have a new set of lobbyists (or at least a new sign on the door) and, come to that, a new set of loan officers, who may not remember what the fuss was all about in the first place.   

 Meanwhile, it may be that the creditors (and their lobbyists?) have pushed us into a lose-lose situation where (a) creditors are working harder, spending money to (b) collect no more debt than they were collecting all along.

Postscript:  After drafting this, I ran across a fascinting post at Daniel Shaviro's blog, summarizing and quoting an otherwise-unavailable (to me) paper Edward Glaeser on "The political economy of warfare." From Shaviro, quoting Glaeser:

"This paper ... presents a model of warfare where leaders benefit from conflict even though the population as a whole loses. Warfare creates domestic political advantages, both for insecure incumbents like Napoleon III and flr long-shot challengers, like Islamic extremists in the Middle East, even though it is costly to the nation as a whole. Self-destructive wars can be seen as an agency cost problem where politicians hurt the nation but increase their probability of political success. This problem becomes more severe if the population can be falsely persuaded that another country is a threat."

Do with it what you will.

Bankruptcy Law Making Agencies Bankrupt

posted by Katie Porter

The National Foundation for Credit Counseling released its report on how its member agencies have handled the first year of required credit counseling and financial education. The report is based on surveys completed in September 2006, and offers several insights on how these BAPCPA changes are playing out. For example, while phone and Internet counseling are dominant, a decent proportion of debtors are participating in face-to-face sessions (15% for pre-filing credit cousenling and 38% for pre-discharge financial education). Interestingly, if you attend face-to-face education, your session is substantially shorter in length than if you complete the education through the Internet.

The big news is the funding deficit the agencies report from providing bankruptcy-related counseling. Waivers of fees were given in about 15% of cases, and apparently even when fees are collected for pre-filing counseling, the agencies report a shortfall of about $12 in providing each session. Will these agencies raise their fees? If so, will more debtors apply for waivers, setting off another round of raising fees to cover shortfalls? The credit counseling industry has its share of other problems, including heat from the IRS over non-profit status of many agencies. Budget woes will present an interesting challenge for the groups. Should charitable foundations or groups such as the United Way donate to these agencies? Should the government fund the "mandate" for counseling or education from court filing fees? Is this problem just a variant of the so-called "bankruptcy tax"--debtors can't pay and we collectively bear the cost?

Filling in the Blank (Forms)

posted by Bob Lawless

The last thing I was going to mention from last week's Senate hearing was this somewhat surreal exchange about the structure of the forms used to compute the application of the new means test in bankruptcy court. Before I get into the details of last week's Senate hearing, it should be noted that Sen. Carl Levin has announced that he will hold hearings next year about abuses in the consumer credit industry. These hearings will go beyond the bankruptcy law and address broader issues about the lending practices of credit card companies and other consumer lenders.

Returning to a narrower issuer that was vetted at last week's Senate hearing, Senator Grassley appears quite concerned about the new forms used to decide whether someone has passed the means test to be eligible to file bankruptcy. For the nonspecialists, this issue requires only a basic understanding of the means test. To decide whether someone is eligible for chapter 7, the law requires two basic calculations: (1) is your income over the state median for a household of your size and (2) do your expenses leave you $100 month (generally speaking) with which to pay your creditors. The bankruptcy law calculates your monthly expenses based on guidelines the IRS uses in making determinations whether to compromise on tax liabilities.

Senator Grassley expressed his displeasure with the forms used in the federal courts to compute the application of the means test. After railing against the "powerful special interests here in Washington that opposed bankruptcy reform," Grassley's next stated, "For example, the federal courts produced a bankruptcy form that is supposed to measure repayment ability. But it's my understanding that this form actually directs consumers to claim deductions for expenses a debtor may not even have." The federal courts are an example of special interests opposed to bankruptcy reform! What logic could possibly twist the federal judiciary into a special interest group on this particular issue? I suppose we can chalk the statements up to more rhetorical excess--if you oppose me, you're a special interest--but what was Grassley talking about?

Continue reading "Filling in the Blank (Forms)" »

Bankruptcy Reform and Credit Card Losses

posted by Elizabeth Warren

In 2004, when more than 1.6 million households were filing for bankruptcy, the credit card default rate was 4.09%.  The credit card lenders claimed that bankruptcy cost every American family $400 in discharged debt.  In 2005, the default rate jumped when more consumers filed for bankruptcy in anticipation of the new bankruptcy amendments.  Now that burst of consumer bankruptcy filings is over, and the bankruptcy filing rate is less than half that of 2004.  But the credit card default rate is right back where it was in 2004.

                 Jan 06: 6.05%
                 Feb 06: 4.73%
                 Mar 06: 3.75%
                 Apr 06: 3.95%
                 May 06: 4.24%
                 Jun 06: 4.19%
                 Jul 06: 3.99%
                 Aug 06: 3.95%
                 Sep 06: 4.15%
                 Oct 06: 4.09%
                 Nov 06: 4.19%
        Source: CardData (www.carddata.com)

Continue reading "Bankruptcy Reform and Credit Card Losses" »

Small Business Loses Again

posted by Bob Lawless

Why is bankruptcy law the only area where Congress seems to go out of its way to strike out at small business? Hey, I understand that Congress routinely does things that disadvantage small business, but it seems to make laws that are hostile on its face to small business. A bill is sitting on the president's desk that would again do just that.

In October, I wrote about S. 4044, the Religious Liberty and Charitable Donation Clarification Act of 2006. This is another truth-in-advertising violation in the naming of statutes. Who can be against religious liberty and charitable donations? I'll leave the details of how this amendment works to my previous post, but what it's trying to do is make it clear that chapter 13 debtors can make charitable donations at the expense of their creditors. The problem is that by including one thing, Congress is excluding others. The law does not mention the expenses of a business, meaning self-employed chapter 13 debtors who are above their state median income may not be able to deduct the expenses of a business in a chapter 13 plan. That would pretty much leave them out of chapter 13 altogether.

I doubt Congress is deliberately try to harm small business on this one. It is just another example of what can happen when Congress shuts out bankruptcy professionals from the process of drafting the bankruptcy laws. The president almost certainly will sign this bill. It is noncontroversial (although it should be). Maybe someone can get something inserted in the Congressional Record to make it clear this law does not change long-standing rules for self-employed debtors in chapter 13.

Some Data Points from the Senate Hearing

posted by Bob Lawless

In my blog post summarizing last week's Senate hearing, I promised to make this post about some statistics from the Executive Office of U.S. Trustee (EOUST) and from the Financial Services Roundtable. In my earlier post, I had remembered the data on credit counseling came from the Association of Independent Credit Counseling Agencies, but it was the Financial Services Roundtable, which represents "100 of the largest integrated financial services companies providing banking, insurance, and investment products." As to the EOUST is part of the Department of Justice and is charged with overseeing all bankruptcy cases to ensure fair administration. At the hearing, the acting director of the EOUST, Cliff White, testified and offered some interesting statistics about the means test, which is the new gatekeeping mechanism to determine which debtors are eligible for chapter 7.

Continue reading "Some Data Points from the Senate Hearing" »

Restrictions on Attorney Speech Held Unconstitutional

posted by Katie Porter

On December 7, 2006, Chief Judge James Rosenbaum of the District of Minnesota issued an opinion in In re Milavetz (05-CV-2626). The case was a constitutional challenges to sections 526, 527, and 528 (the "debt relief agency" provisions) of the Bankruptcy Code brought by law firms who represent consumer bankruptcy clients. The court denied the government's motion to dismiss for failure to state a claim and held that the debt relief agency sections of BAPCPA unconstitutionally infringe on attorneys' First Amendment Rights.

A few highlights from the opinion: 1) The court said that 526(a)(4), which prohibits attorneys from advising clients to take on debt in advance of a bankruptcy, is content-based regulation of attorney speech. The government argued that one of the compelling interests that justified the speech restriction was "the protection of creditors." In rejecting that argument, the court not only ruled that a lawyer's duty is to his client and not to creditors but also noted that creditors are "scarely without their own resources" and "may have contributed to a potential-bankrupt's straits by making credit easy to obtain."  2) As an apparent alternative basis for its holding, the court ruled that attorneys are not "debt relief agencies" as the term is defined and used in the Bankruptcy Code. Sections 526, 527, and 528 were therefore held inapplicable to attorneys. 

My guess is that the Department of Justice will appeal, and my guess is that they will lose at the appellate level. Stake out your position in a comment below, and we'll revisit the issue soon enough, I imagine.

The Rise of Chapter 13

posted by Katie Porter

Despite credit industry claims that BAPCPA is succeeding in reducing the number of bankruptcies, the 2006 bankruptcy filings may well be a poor predictor of the future number of total consumer bankruptcies. The run-up in filings before the effective date of the law, publicity and misunderstanding about the current law, an adjustment to higher fees for bankruptcy and the exit of some attorneys from bankruptcy practice are all likely factors in the overall drop in filings in 2006. Hidden within the gross number of cases is an interesting trend in the relationship between Chapter 7 and Chapter 13 filings.

Based on year-to-date figures running through December 2nd that were provided by Bankruptcy Lookup, the proportion of Chapter 7 and Chapter 13 is wildly different in 2005 and 2006. In 2005, Chapter 7s were 81% of the 7/13 caseload and Chapter 13s were 19%. In 2006, there is a dramatic jump in the proportion of Chapter 13 cases--42% of all Chapter 7 and Chapter 13 cases are Chapter 13s. On a district by district basis, from what my poking around and talking to people has turned up, the absolute number of Chapter 13 filings are almost back to pre-BAPCPA levels in many districts.

I'd really like to hear your explanations or insights on this trend. Higher mortgage foreclosures and housing delinquencies could be pushing more homeowners to seek help from Chapter 13. Another possibility is that the dramatically higher fees for bankruptcy are pushing more people to file Chapter 13 so that they can pay their fees over time. Or maybe these numbers are the means test at work? Or more accurately, the spectre of the means test--fear of the additional scrutiny that comes with filing an above-median Chapter 7?

Being a Judge Means Never Having to Say You're Garbage

posted by Bob Lawless

The 2005 bankruptcy amendments (known as BAPCPA) are garbage. Shhh. Don't tell Senator Grassley I said that, or he might be angry with me also.

At Wednesday's Senate hearing, Senator Grassley expressed his displeasure with bankruptcy judges criticizing the 2005 law and stated he was going to write a letter to Chief Justice Roberts asking if such criticisms were unethical. Senator Grassley said that such statements undermined respect for the law. Senator Grassley's full statement is here. Although lengthy for a blog post, it is only fair to reproduce his exact words:

Continue reading "Being a Judge Means Never Having to Say You're Garbage" »


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  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless (rlawless@illinois.edu) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.