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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.

Speaking very generally, a debtor can file chapter 7 (1) if his or her income is below the state median income for the same size household or (2) the debtor has $100 left over as disposable monthly income (as calculated by IRS guidelines) to pay creditors. If the debtor fails these tests, then a presumption of abuse arises, which Mr. White first noted that 94% of the debtors who filed after the 2005 bankruptcy law went into effect were below their state median income. That is not surprising given what we know about debtors who file bankruptcy and given that there are huge incentives to report a figure that is below the state median income.

Mr. White stated that in 10% of the cases where the debtor was above the state median income, a presumption of abuse arose (i.e., the debtor had disposable monthly income of more than $100). Although Mr. White has access to more data and more recent data than I do, a ballpark estimate of the number of people who filed bankruptcy since the 2005 law went into effect is 500,000. (There were 482,314 filers from Nov. 1, 2005 - Sep. 30, 2006). That would mean approximately 30,000 of those filers had incomes above the state median, that 3,000 of those filers were "presumptively abusive" in filing chapter 7, and that the EOUST followed up on the abuse presumption and objected in 2,250 of the filings. We don't know how many times the court sustained those objections, but before the 2005 bankruptcy law went into effect, most were predicting the courts would sustain these objections once the means test indicated abuse. We also don't know how many times the EOUST declined to object based on its announcement that, in the wake of Hurricane Katrina, it would consider natural disaster losses not to be "special circumstances" justifying deviation from the means test. If a good number of the EOUST's decisions not to object were based in natural disaster, the EOUST's practices in the first year could understate the percentage of time it will object in more general cases in the future.

Turning to the testimony of Steve Bartlett, president of the Association of Independent Credit Counselors, he testified that 10% of debtors who go through prebankruptcy counseling do not file bankruptcy. During Mr. Bartlett's testimony and through the rest of the hearing, this figure was touted as evidence that the 2005 bankruptcy law was working, that credit counseling was diverting some debtors from the bankruptcy system who did not need it. There were several thoughts that came to mind as I heard this. First, 90% of the debtors who go through credit counseling DO file bankruptcy, even by Mr. Bartlett's numbers. During the lead-up to passage of the 2005 bankruptcy law, critics said it was imposing huge procedural barriers and hurdles to get at a small number of debtors who were abusing the system. Second, why do we presume that the 10% who get credit counseling and do not file made a conscious decision to divert from the bankruptcy system. Maybe they just did not follow through on the huge paperwork needed to file? Maybe the six-month period on the credit counseling certificate expired, as it did for two debtors who tried to negotiate with creditors before filing bankruptcy (In re Jones, No. 06-33790 (Bankr. S.D. Tex. Oct. 20, 2006) (available at 2006 WL 3020477)). Third, what is the rate of debtors who go to a bankruptcy lawyer's office and do not file bankruptcy? Do nine out of ten debtors who go to a bankruptcy lawyer's office also file bankruptcy? If this statistic was evidence the 2005 bankruptcy law was working, it seemed like thin gruel.

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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.

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