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One Call Too Many?

posted by Ronald Mann

If most bankruptcy is induced by external factors -- divorce, health problems, and job loss being the most commonly mentioned -- we still don't really know why people call lawyers when they do.  Is it too many calls from a collection agent?  Or perhaps a collection lawsuit is filed.  I suspect that most families use the legal system only when they are already involved in it.  This question of course can be addressed through surveys, but I am considering a project designed to shed some light on this question using quantitative data about bankruptcy filings.

Weekly bankruptcy filings over the last several years reveal several patterns.  For example, at the end of each year, Chapter 7 filings fall steeply during December but rise shortly after the first of the year.  Total filings fall sharply after the first week of the year and then increase steadily through the first quarter (until April 15).  Chapter 13 filings, by contrast, are more evenly distributed throughout the year.  Notably, both Chapter 7 and Chapter 13 filings show a monthly peak.

This led me to wonder what would cause bankruptcy filings to surge on a monthly basis.  In Texas where I live the obvious answer is foreclosures.  Because all foreclosures in Texas happen on the first Tuesday of the month, it might be possible to isolate the share of bankruptcy filings motivated by foreclosure avoidance.  Georgia has a similar statute, so I plan to collect the number of Chapter 7 and Chapter 13 filings by individuals in Texas and Georgia on each date from January 1, 2004 through December 31, 2006.  The statistical analysis might be tricky, especially if foreclosure-motivated filings are a small share of filings.  And I don't see any easy way to account for differences in state foreclosure law or practice.  Still, a discernible rise in the last few days before the foreclosure date might quantify a share of filings attributable to foreclosures.

Looking forward, what would it tell us about bankruptcy filings if we know how many were filed to protect homes?  Also, how can we quantify bankruptcy filings that might be attributable to other causes?  Ultimately, I would be interested in trying to isolate the filings caused by informal collection practices -- people trying to escape what they perceive as harassment.  The policy initiative I would like to explore is the idea that borrowers would benefit if lenders were forced to initiate formal collection procedures more quickly.  When I interviewed collection attorneys several years back, one of the things I learned is just how much information collection calls can produce.  People are willing to give out bank account numbers and places of employment that enable the formal collection actions to proceed.  If the caller can persuade the debtor to make even a single $10 payment, the collector then has access to the acccount information from that check.  It is not clear how much of this activity is efficient.  More fundamentally, as I argue elsewhere, procedures designed to push individuals into bankruptcy more rapidly might be beneficial.

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Comments

I think the dip in December, followed by a January spike, has several contributing factors. In my part of Ohio, some courts place a moratorium on evictions during December. Some courts do not hold foreclosure sales in December. Also, I know some collection attorneys and agencies are more lenient during December. Also, a pick-up in holiday employment may help many people make it through the end of the year.

To be sure, these reasons do not fully explain the phenomenon. I agree that timeing of foreclosure sales will probably impact filings. I think the only real conclusion one can draw at this point, and it is really the premise of your post, is that most bankruptcy filings are reactionary.

A question for you, Mr. Mann. What precisely do you mean by the last two sentences of your post?

Thanks for the information! What you say makes perfect sense. Re the end of my post -- I was offering the idea that one profitable revenue model used by debt-focused credit card lenders is to squeeze debt servicing income out of distressed borrowers (those who should file for bankruptcy but are trying to hold out by making minimum payments on credit card bills or by making small payments to debt collectors). A legal system that makes it harder to squeeze out that type of revenue will do several things. The first effect might be to accelerate bankruptcy filings, but in the longer run as lenders react to the quicker trigger, it well may force lenders in their underwriting to focus more on "ability to repay" and less on "ability to service debt without ever repaying."

If I get this right, you are proposing restrict a creditors ability to accept certain payments on defaulted debt in order to force them to sue quicker. This, in turn, will apply pressure needed to get these people to file bankruptcy and force the credit card companies to absorb their loss sooner (hence, changing their lending criteria).

What of those who do, in fact, just need a little more time - those who are between jobs, recovering from an illness or trying to sell their deceased grandma's house? By forcing the creditor's hand, you may be damaging to those who could benefit from a creditor's good will. (I know, you don't believe such a thing exists. It does, but you never hear about it. Only the bad guys get press.)

I would generally agree that suing can shake out those who can pay from those who can't more quickly than taking small payments. But don't force me. Believe it or not, my discretion can do more for debtors (and creditors) than the broad rules I think you are proposing. You perceive an illness in one industry and want to dose everyone with your elixir. I would caution that the law of unintended consequences will exact a price.

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