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Over and Over Again

posted by Katie Porter

The Bankruptcy by the Numbers feature in the June American Bankruptcy Institute Journal contained a study on the prevalence of repeat bankruptcy filers. Several things about the study were good news. First, its author, Dr. Jean Lown, is a consumer science researcher who specializes in family finance. Legal scholars benefit from learning about how other disciplines approach research on consumer financial issues. Consumer educators may play an increasingly important role in the bankruptcy system as consumer debtors must satisfy credit counseling and financial education requirements. It makes sense to connect these folks with the bankruptcy community. Second, the research was funded by the ABI, and it's great to see the ABI supporting consumer bankruptcy research (for those who don't know, the ABI has poured lots of money into a big study of professional fees in business bankruptcy). Third, it's hard to drum up motivation for studying the dark underbelly of the bankruptcy system.  Repeat filers are troubling. Bankruptcy relief isn't free. Families spend money to file; courts and trustees process their cases; creditors retain counsel and submit proofs of claim. When some families re-enter the bankruptcy system, it raises concern about the core function of consumer bankruptcy--rehabilitation of debtors. Lown deserves credit for tackling this issue. Fourth, her key finding is that there are few people who file over and over again. In a total sample of nearly 5,000 debtors drawn from 10 districts, she found that first-time filers represent a hefty majority of bankruptcy cases. She concludes that repeat or serial filers are not a significant problem in most districts. Districts where Chapter 13 is popular, however, had significantly higher numbers of repeat and serial filers. While still a small fraction of all cases, Lown suggests that families re-entering the system partially explain the higher filing rate per capita in states with a high fraction of filers choosing Chapter 13. 


So bankruptcy filers should go directly to 7? (At least a semi-serious question.)

A friend of mine long ago suggested that chapter 7 was the only rational choice for most consumers. It's fast, it gets rid of the unsecured debt quickly, and reaffirmation handily deals with the secured debt. That's the model that BAPCPA effectively adopted -- making chapter 13 more costly and difficult, while adopting the "mandatory reaff" position espoused by many circuits' rulings on section 521.

But ch 7 can't effectively deal with home mortgage arrearages. Only chapter 13 does that. And chapter 7 requires a one time up front payment of attorneys' fees that is often difficult for people in dire straights to come up with.

Our experience with repeat filers has been fairly consistent. In almost all cases, the first case failed because of a job loss, wage cut, or cut in hours. In almost all cases, the debtor's new case coincides with a new job. And lenders (even car lenders) have not been opposing the new filing. That may be because the transaction costs of opposition can't be justified. But it also may be that lenders still prefer a stream of payment to repossession -- there are large transaction costs associated with repossession too.

Thus, the fact of repeat filing is essentially meaningless. The real policy question focuses on the "why," not the "what."

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