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Overcoming Overconfidence in Bankruptcy

posted by Katie Porter

Elizabeth Loftus (UC-Irvine Law) has co-authored a new paper on lawyers' abiliy to predict outcomes in litigation. She and her colleagues surveyed about 500 lawyers with pending litigation, asking them to specify a minimum goal for their case and providing a confidence estimate for the chances of meeting that goal. The key finding: "Overall, lawyers were overconfident in their predictions."  The researchers find that lawyers don't get better at estimating outcomes with more years of experience; recent grads and old hands are equally likely to overestimate their odds of success. The article lays out all the ways that this can be harmful to clients, and to our legal system in general.

I've been thinking about this optimism bias in the context of bankruptcy law (and in the context of legal education). To what extent do bankruptcy lawyers exhibit this phenomenon? We know, for example, that only one in three chapter 13 bankruptcy cases gets to plan completion, and that many chapter 11 cases, particularly those of small businesses, are really liquidations and not reorganizations. And we know that what gets promised in a plan is often not what gets paid Do lawyers reflect these realities to their incoming consumer and business clients who are in financial trouble, or to their creditor clients? Perhaps bankruptcy lawyers, used to dealing with clients who have tried to be positive-think their way out of negative cash flows or buried their heads in the sand while financial problems mounted, are better at straight-talking to clients about their prospects of financial recovery.


I am not sure that there is any reason to assume a significant correlation between the following:
1. Lawyers whose clients propose plans that complete successfully at a relatively high rate.
2. Lawyers who can forecast at a high rate of accuracy whether their clients' plans will complete successfully.
A lawyer in the first category may just be very risk averse in the plans he/she recommends, perhaps to the detriment of some clients.
I don't know that this a disagreement with the post, but the last paragraph seems a bit ambiguous on the point.

A few points:
1. A significant percentage of debtors in Chapter 13 are expecting to convert to Chapter 7 when the 8-year bar expires, so they are "successful" even though they don't reach plan completion.
2. A significant percentage of debtors in Chapter 13 are unrealistic and their attorneys tell them so.
3. A lawyer cannot accurately predict completion of a Chapter 13 because the outcome depends on forces outside his or her control, such as the debtor's finances during the three to five year period of the plan.
4. It is harder to test lawyers' predictions in bankruptcy because a large percentage are chapter 7 cases and the success rate is high simply due to the fact that the law favors debtors. You would need to test predictions about exemption claims, dischargeability disputes, and other litigation common in those cases.

There is a provision which upheld that requires are disallows bankruptcy attorney's from talking the client into taking more debt. In the case of corporations attorneys who specialize make a ton of money so I am not sure how or why they would need to be overconfident.

Any thoughts?

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