postings by Jason Kilborn

Bankruptcy in Russia, 1740-1800, and the First Non-Merchant Discharge!

posted by Jason Kilborn

Boyar creditorI discovered something surprising in my summer research on the history of bankruptcy in Russia: It seems that the first modern, court-ordered bankruptcy discharge available to non-merchant debtors appeared not in the US or England, but Russia, in 1800. I suspect the relief offered was largely theoretical, but I found it shocking and intriguing that a discharge appeared in Imperial Russian law that early on. The law will finally come full circle in October 2015, when the new Russian law on personal insolvency becomes effective. It's been a long time coming!

As in England, bankruptcy law in Russia started from a much more hostile and punitive position toward debtors. In the Charter on Bankrupts of 15 December 1740 (law no. 8300, available online here), debtors who fell into distress through no fault of their own were to be released from debtor's prison and not fined (s. 19), while debtors whose fault contributed to their downfall (e.g., by continuing to trade while insolvent) were to be fined and executed by hanging (ss. 31-32). Luckily for debtors, this law was apparently ignored in practice and was replaced in 1753 with a new law (without a death penalty) by Peter the Great's daughter, Elizabeth. 

A more radical departure from past practice appeared in the landmark Charter on Bankrupts of 19 December 1800 (law no. 19,692, available online here). This law for the first time drew a distinction between merchant and non-merchant debtors, making bankruptcy relief available to the latter in a distinct Part Two.

Continue reading "Bankruptcy in Russia, 1740-1800, and the First Non-Merchant Discharge!" »

Relief Delayed for Russian Consumer Debtors?

posted by Jason Kilborn

BlindbearI studied Russian in college because I thought a post-Gorbachev Russia was poised to become an economic superpower. I've been bitterly disappointed to see that country's leaders taking one step forward and two back for years now. The latest disappointment concerns my new academic focus: consumer bankruptcy.

First, Russian lawmakers seem to have ignored the rest of the world as they drafted a new law on "rehabilitative procedures" for "citizen-debtors." The law reflects neither direct input from international experts nor indirect analysis of the challenges and successes that dozens of other countries have encountered over the past 30 years with consumer insolvency systems. That Russia would ignore the 120-year-old U.S. consumer bankruptcy system is understandable; that it would ignore 30 years of recent trial and error in Europe and the rest of the world is ... disappointing.

Continue reading "Relief Delayed for Russian Consumer Debtors?" »

No Evading Illinois Pension Woes

posted by Jason Kilborn

The Illinois Supreme Court issued its unanimous opinion this past Friday putting a stake through the heart of the legislature's latest attempt to evade its responsibility for woefully underfunding four of the state's five public pensions. Adam (among others) has discussed the pension issue in the Detroit bankruptcy case and the Michigan constitutional provision protecting pension benefits from impairment. The Illinois Constitution of 1970 has an identical provision (art. XIII, s. 5), which will have much more bite in the case of the state of Illinois--an entity that, unlike Detroit, is not eligible for bankruptcy protection. Long story short: the Supreme Court all but scoffed at the state's arguments that contracts can sometimes be impaired (and the state has a really, really good reason here) and that prohibiting the legislature from reducing vested pension benefits is an impermissible abdication of sovereign authority. The Court pointed out that it wasn't the legislature, but the people of Illinois, who imposed the pension protection restriction ... and it seems now the people will likely have to revisit the idea of vastly increased state income taxes and the like, as "[a]dherence to constitutional requirements often requires significant sacrifice, but our survival as a society depends on it."

I had long wondered why we still see defined-benefit pensions, in either the public or the private sector. It seemed obvious to me that defined-benefit plans are not sustainable and that every retirement protection system needed to switch to defined-contribution plans (like 403(b) and 401(k) retirement savings plans). It turns out that even this "obvious" switch won't necessarily fix the problem prospectively, as this paper reports.

Where's bankruptcy (or some other kind of restructuring) protection when you need it!?

New and Improved Warren & Westbrook, now with Porter & Pottow!

posted by Jason Kilborn

WWP&PMy school bookstore asked me to identify my fall book choices the other day, which reminded me that I had intended to comment on the new book I've been using for my Bankruptcy class. The new 7th edition of the classic Warren & Westbrook Law of Debtors and Creditors now features Katie Porter and John Pottow as co-authors (note the Credit Slips sweep of the author page). This is not the type of frustrating and all-too-common new edition incorporating a few nits here and there and swapping out two cases to change the pagination on your syllabus. The previous editions, which I've used for 15 years, were very good; this latest edition is really great.

Continue reading "New and Improved Warren & Westbrook, now with Porter & Pottow!" »

Quantifying the Benefits of the Fresh Start

posted by Jason Kilborn

I recently discovered a not-so-new paper that provides a useful answer to a question I've asked before:  Who benefits from consumer bankruptcy, and to what degree? This is a real challenge for policy-making, and well-supported answers are essential to greasing the wheels of reform.

In this paper, Will Dobbie (Princeton) and Jae Song (SSA) use a creative technique, comparing the financial outcomes of Chapter 13 debtors whose plans were--and were not--confirmed to probe the positive effects of access to such relief (apparently whether or not the payment plan is successfully completed). Successful access to Chapter 13 protection led to over $5000 in increased annual earnings in the first ten post-filing years and a 3.5 percentage-point increase in employment over the first five post-filing years, including a nearly 3 percentage-point increase in self employment. Access to relief also reduced the receipt of "welfare" benefits and increased retirement savings contributions.  Most striking, access to debt relief reduced mortality (presumably by decreasing stress) during this period by almost 2 percentage points--which is a 47.5% decrease from the mean for filers whose cases were dismissed, largely attributable to a large, positive effect on filers over 60. The authors attribute these gains to an increased incentive to work and produce earnings and  reduction in economic instability and stress.

The results of this study are among the many individual and societal benefits of consumer bankruptcy commonly identified in legal literature. Indeed, the authors conclude that "individual debt relief is much more likely to be welfare-improving than previously realized"--and these instances of individual welfare redound in direct ways to the state and society as a whole. While I can see a variety of quibbles that empirical scholars might have with this study, the results provide fairly solid support for the most common working theories of relief, and they offer even greater comfort for policymakers searching for reasons to introduce or expand individual debt relief.

Consumer Bankruptcy with Chinese Characteristics?

posted by Jason Kilborn

Yuan trapDeng Xiaoping's famous description of the "new" Chinese development-oriented economy begs the question of what that system intends to do with the inevitable casualties of consumerism and economic development. What of the increasing number of people in danger of falling out (or who have already fallen out) of the new middle class? In contrast to 20 years of concentrated efforts to establish and reform a business insolvency regime, it looks at though China is still very far from introducing a relief mechanism for consumer insolvency. The simple basis for debtor-creditor law in China is Article 108 of the PRC General Principles of the Civil Law:  "Debts shall be paid" (also allowing for installment payments pursuant to "a ruling by a people's court").  I suspect the Chinese phrase long predates "pacta sunt servanda."

Continue reading "Consumer Bankruptcy with Chinese Characteristics?" »

All Late-Filed Taxes Now Nondischargeable?!

posted by Jason Kilborn

Tax formSometimes a tax return is not a tax return. As a result, bankruptcy is becoming a less effective response to back tax woes in the US. Yesterday, the 1st Circuit joined the 5th and 10th in holding that old income tax debts are nondischargeable if the taxpayer-debtor filed the related tax returns late. This is the latest negative impact of BAPCPA and an oddly worded statute with an even odder citation.

Section 523(a)(1)(A) of the Bankruptcy Code has long made nondischargeable recent income tax debts, for taxes for which the return was due within three years before the bankruptcy filing. But older tax debts might also survive the discharge thanks to section 523(A)(1)(B)(i). That section renders taxes nondischargeable if the taxpayer-debtor failed to file a return. Not surprising. What is surprising is a recent revision and its expansive interpretation, which have created a vast new category of nondischargeable tax debts.

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Consumer Bankruptcy Circles the Globe

posted by Jason Kilborn

Peace around the worldAs of 2015, for the first time, laws providing for insolvency relief to natural persons (consumers) now form an unbroken chain around the world (at least on the land masses of the Northern Hemisphere). North America has been covered for some time now, of course, and individual debt adjustment laws have been spreading across Europe for three decades. The big missing link was Russia. On 29 December 2014, the final legislative steps were taken in the adoption of a long-pending bill to incorporate procedures for natural persons into the 2002 law "On Insolvency (Bankruptcy)". The new Russian law will become effective on 1 July 2015.

I have not had time to analyze the new law in detail yet, but it appears to provide for a liberal "fresh start" liquidation very much in line with the US approach, though with a minimum debt limit qualification of 500,000 Rubles (currently only about US$7500, but surely substantially more on a PPP basis). I understand that many Russian consumers are struggling with debts of at least this size, so it will be very interesting to see how the courts deal with the burden of this new procedure and how the process plays out, especially the provisions on suspending the liquidation proceedings if the debtor and creditors hammer out an agreed composition. I anticipate that real or imagined debtor fraud and "abuse" of this new relief process will be a big issue, and agreed compositions will be as rare as coconuts in Krasnoyarsk. We'll see.

Peace Around the World image courtesy of Shutterstock

Bar Examiners Abandoning Commercial Law

posted by Jason Kilborn

StudyrejectedExams are on my mind this time of year, and I'm disappointed that bar examiners are increasingly regarding commercial law as unimportant. Earlier this year, the National Conference of Bar Examiners announced that Negotiable Instruments/ Commercial Paper (UCC Articles 3 and 4) will no longer be tested in the essays they draft for about 30 states. And just before Thanksgiving (ironically?), the Louisiana Sup. Ct. Committee on Bar Admissions abruptly announced that Secured Transactions (UCC Article 9) would no longer be tested on the Louisiana exam at all--this after years of very heavy testing of that material twice a year since Louisiana adopted the UCC in 1990. And California has long excluded all but a smattering of the UCC from their bar exam--no Negotiable Instruments, and no Secured Transactions (except for fixtures). What is the deal?! Is this a trend in other jurisdictions, too? As a longtime commercial law professor, I'm feeling very unappreciated by bar exam authorities.

Photo courtesy of Shutterstock.

Some Bibles Are More Exemptable Than Others

posted by Jason Kilborn

Holy BibleI wonder how many Bankruptcy professors have posed a hypothetical about the exemption of a rare Bible worth lots of money? Well, a federal District Court in Illinois had to answer the question for real.

The Illinois personal property exemption statute includes the debtor's Bible. A debtor in Southern Illinois asserted this exemption in a rare, first-edition Mormon Bible that she had acquired (for free) from her local library. Apparently, the library director had not been paying attention, as the 1830 Bible was appraised at at least $10,000.

Amusingly, the debtor's lawyer described this item of property on Schedule B as "old Mormon bible," further observing that "debtor has been told that there is a 100% exemption for bibles but valuable bibles may or may not be covered under such exemption" (!). The trustee accepted this open invitation and objected that the statute was never intended to apply to a Bible of such value, and the bankruptcy court agreed. The District Court reversed.  Responding to the standard law professor questions, the court noted that the word "necessary" in the statute modified only the first word, "wearing apparel," not the other words ("one does not need a bible, school books, or family pictures to survive"), and unlike other property in the statute, bibles are not subject to an explicit value restriction. QED.

Sometimes life does imitate fiction.

Holy Bible image courtesy of Shutterstock

Sign of the Times: Tightening Mortgage Rules in Europe

posted by Jason Kilborn

EuroMortgageLoanTwo stories in today's world news caught my attention because they were both related to rising consumer debt and tightening mortgage rules. 

First, Sweden is proposing a particularly aggressive approach to reducing the weight of mortgage debt on consumers' balance sheets. The new accelerated amortization rules really struck me from a comparative US perspective: Swedes borrowing more than 70% of the value of their homes would have to pay the loan down by 2% a year (that's 2% of the principal) until the LTV falls to 70%, then 1% of the principal of the loan each year until LTV reaches 50%, the desired level. Wow. In the 15 years that I've been wrestling with a variety of home mortgages, I don't think I've ever paid 2% of the principal (given the back-loaded amortization schedule of most standard US home mortgage loans). To make matters worse (better?), the Swedish central bank is also considering grabbing onto the third rail of US tax reform--reducing tax deductions for mortgage interest. These are pretty aggressive moves to cool off the mortgage market and bring down consumer leverage, and they stand in stark contrast to efforts in the US and the other country in today's news ...

Continue reading "Sign of the Times: Tightening Mortgage Rules in Europe" »

Econometric Optimization of Fresh Start Policy

posted by Jason Kilborn

"What is the optimal consumer bankruptcy law?" Now that's an abstract first line that grabs my attention! I've thought about this question for most of my academic career, and I've struggled to find solid bases for an answer. Now, Indiana Univeristy economist Gray Gordon offers an intriguing if difficult to understand possibility. In his paper, Optimal Bankruptcy Code: A Fresh Start for Some, Gordon actually quantifies the sweet spot: (1) an optimal system offers a discharge of debt (a constant refrain in policy papers, e.g., here and here), (2) it does so for households whose debt is 2.6 times their endowment, and (3) this optimal system results in a welfare gain of 12.2%. The conclusion is nowhere near as confusing for a non-economist (like me) as the proof, expressed in inscrutable Greek-symbol-filled equations which occupy the bulk of the paper. But this paper offers a rock solid answer to a question that has plagued Europe, in particular, for many years--how does one define "overindebtedness" and therefore the proper entry criterion for personal debt relief. Gordon's answer is very powerful, though I wonder how compelling the econometrics are behind these hard numbers. I'm not at all qualified to critique Gordon's proofs, but I'm a bit skeptical in light of Gordon's observation that "[r]elative to the U.S., the optimal policy results in a four-fold increase in the bankruptcy filing rate and a thirty-fold increase in debt." Whoah! Anyone care to comment on what could be a really groundbreaking new approach?

Yoga for Stressed Out Lawyers ... and Their Debtor-Clients

posted by Jason Kilborn

Yoga for lawyersAnd now time for something entirely different. I noticed a great new book in our list of library acquisitions recently that might be of particular interest to two groups that suffer from lots of stress: lawyers and debtors! Credit Slips' own Nathalie Martin has teamed up with a lawyer-turned-yogi and the ABA to produce a really wonderful new book, Yoga for Laywers: Mind-Body Techniques to Feel Better All the Time. The book contains a very nice discussion of stress, its causes and effects, and its relief through yoga poses, mindfulness and meditation.  I've read a lot of these kinds of books, and this one stands out as particulary clear and readable. Moreover, the yoga section is extraordinarily accessible. The poses are (almost) all simple and doable even for beginners, and the photos demonstrate proper practice. Spoiler alert: I was practically buzzing with anticipation at the chance to see photos of my friend Nathalie contorted into various pretzel shapes, but alas, only her co-author (Hallie Neuman Love) is pictured in the book. Great book, great way to relieve stress and feel better. Check it out! 

New ADP Garnishment Report

posted by Jason Kilborn

A Adp-garnishment-report-1 valuable and groundbreaking source of data on wage garnishment has just been released by ADP, the nation's largest payroll services provider. I immediately recalled a great paper by Rich Hynes about the paucity of wage garnishments in Virginia and Illinois in the mid-2000s. According to ADP, things have changed since the recession, especially for blue-collar (manufacturing and transportation/utilities) workers in the Midwest making between $25,000 and $40,000 a year, of whom more than 10% suffered a garnishment in 2011-2013. About half of these garnishments were for child support, but the other half were for taxes, consumer debts, and bankruptcy cases (presumably wage orders entered for Chapter 13 plans). The report is available here in html and here in pdf and makes for very interesting reading.

Continue reading "New ADP Garnishment Report" »

Hoping in Vain for Secured Creditors to Cede Control

posted by Jason Kilborn

ISI_logo_FinalInitial results of the bargaining process in the new Irish personal insolvency system have been unsurprisingly disappointing. This is particularly true with respect to the most pressing problem for which the system was designed: bargaining with secured creditors over distressed home loans. The new system provides a framework for debtors and their secured creditors to negotiate a so-called Personal Insolvency Arrangement, or PIA, to reduce and/or otherwise restructure home loans and other secured (and unsecured) debt. Someone by the initials JK colorfully predicted in April 2012 that the new "PIA is DOA." I was wrong about this, but not too far off the mark.

Continue reading "Hoping in Vain for Secured Creditors to Cede Control" »

Cui bono?

posted by Jason Kilborn

At a conference on consumer bankruptcy policy over the weekend in Athens, Greece (a place that knows all too well about consumer financial distress) and again today in class, I confronted a really nagging, fundamental problem of bankruptcy policy: For whose benefit do modern societies develop consumer bankruptcy laws, and do these systems actually deliver such benefits? In my view, the most convincing and common explanation for why existing systems offer debt relief to consumers is that relieving their suffering redounds to the greater benefit of society at large (see, e.g., section I.9, pp. 26-40, in the World Bank's Report). The problem is that I know of no empirical proof of this essential assertion. Indeed, to the contrary, I have seen well done empirical evaluations of the fresh start that suggest that, at least in the US bankruptcy system, many consumer debtors are not being reinvigorated and reintroduced into the productive, open-credit society.

I'm no empiricist, but it strikes me as potentially impossible to substantiate the premise of consumer bankruptcy policy empirically. It would be a monumental task to even formulate a research agenda for such a question. How would/could anyone ever prove that society benefits from relieving consumers of overburdening debts? Has anyone tried? Am I missing something I should be citing? Is anyone attempting to answer the question today? Any leads welcome.

Insolvency + Tax Season = Good News?

posted by Jason Kilborn

After seeing yet another prominent news article grousing about the tax consequences of short sales and other forms of mortgage relief, I thought I'd pass along a discovery I made a few years back that seems to be ignored over and over in the popular press. Bottom line: the "income" from cancellation of debt (e.g., from a mortgage modification) is often NOT taxable to the debtor.

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The New Irish Split Mortgage Solution for Underwater Homeowners

posted by Jason Kilborn

This just in from Ireland:  A large mortgage bank there, AIB, has agreed to a plan to split some mortgages into a "good" tranche, equal to 80% of the current market value of the home (forgiving the other 20% of that tranche) and another, "bad" tranche equal to the remaining, underwater portion of the mortgage loan. The first tranche will be serviced regularly, vastly reducing the monthly payments of eligible borrowers. The second tranche will be "warehoused," not serviced at all and lying dormant, interest-free, for some period of years. There are provisions for offering homeowners incentives to pay down the remaining balances quickly, especially if their financial situations improve unexpectedly.

Sounds like just the type of creative solution the world has been looking for. Alan and other experts on these issues may see some hidden traps that I don't (perhaps strict eilgibility requirements, which are not reported in the story I saw), but this struck me as quite good news on the "actually looking for solutions" front.

When an Oath of Poverty (or Waterboarding) Isn't Even Enough ... !

posted by Jason Kilborn

I've been following with some interest the saga of pitchman Kevin Trudeau and his battle with a federal judge here in Chicago. The judge refuses to believe that Trudeau is not hiding scads of wealth in offshore accounts to avoid paying a $37 million FTC fine against him. In a move that harkens back to the dark days of not-so-jolly old England,  the judge remanded Trudeau to prison for failing to reveal his supposed hidden assets. Indefinitely. No way out. Indeed, when Trudeau came back for the "have you had enough" hearing today, he offered to be waterboarded to prove that he wasn't hiding wealth offshore. The judge simply refused to believe him and, oddly, seems to have admitted that he "may never believe Trudeau has disclosed everything – waterboarding or not." If this isn't prejudicial bias, I'm not sure what is.

Continue reading "When an Oath of Poverty (or Waterboarding) Isn't Even Enough ... !" »

Isn't Consent for Suckers?

posted by Jason Kilborn

As I wrestle with the EBIA v. Arkison case and the great paper pointed out by Melissa last week, I can't get past a nagging feeling that the argument about party consent to bankruptcy courts' issuing final orders on "core but unconstitutional" matters is more theoretical than practical. Why would any well-represented defendant in a fraudulent conveyance case consent to making the case against them smoother and more efficient for the trustee?! It seems to me (and this was the case in my practice days long ago) that defendants who know what they're doing will throw up any possible roadblock in the way of such a case in the hopes of wearing down the trustee and making settlement more likely and/or cheaper. For example, as EBIA did, fraudulent conveyance defendants for years now, since Granfinanciera, have been demanding jury trials and insisting that such trials proceed before the district court. What makes anyone think defendants will consent to bankruptcy courts' entering final (e.g., summary judgment) orders, even if this is allowed?

In other words, why all the fuss? What am I missing? Even if the Supreme Court holds that individual defendants can waive the Article III concerns at issue in Arkison, will this really change anything meaningfully? It seems to me that the much more important issue in Arkison is the second, about allowing bankruptcy courts to make proposed rulings in such "core but unconstitutional" cases despite the supposed "gap" in 28 USC § 157(b)(1)--a "no" answer on that question would bring the system to a screeching halt. But isn't consent for suckers--and how many suckers do we expect are out there in such cases?

Evaluating the First Official Irish Debt Settlement Arrangement (DSA)

posted by Jason Kilborn

DebtSettlementAgreementA headline about Ireland's new personal insolvency relief system crows, "Most of borrower's debt written off in first deal under new insolvency regime." I thought, "Great news!"  Both that the new system is up and running, and that creditors are already agreeing to relief, which I had thought earlier was extremely unlikely.

Then I read the details. "Most" is quite a relative term. It turns out that creditors agreed to write off 70% of a reported "unsecured debt for a six figure sum." In other words, the debtor had agreed to pay creditors a 30% dividend. As readers of this blog will know, that's an extraordinary dividend. Most consumer bankruptcies around the world offer creditors zero or close to it, and even payment plans tend to offer in the single-digit range.

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Consumer Bankruptcy Law Poised to Circle the Globe

posted by Jason Kilborn

MoneyGlobeIf the Russian Duma adopts the pending consumer bankruptcy bill, it will fill in the final (very large) link in an unbroken chain of countries circling the globe who have adopted a debt relief law. No country seems to have taken this step as an early planning measure. Only the impeding doom of a huge credit bubble or, more likely, the aftermath of the bursting of such a bubble has spurred lawmakers to action. Russia seems perfectly poised to follow that path.

First regional banks and credit reporting agencies and now the Central Bank have begun to sound alarm bells about the rapid rise of consumer (over)-indebtedness in Russia. According to a study of credit reports from summer 2013, the number of consumer borrowers with five or more loans increased to nearly 20% in 2012, with average debt mounting to over US$15,000 (average annual income in Russia is only US$7500). In only the first nine months of 2013, consumer lending rose nearly 40%, and about 8% of those loans are already non-performing (an increase of about 33% in NPLs from the beginning of 2013). Standard & Poor's expects Russian consumer credit to expand another 30% in 2014.

Continue reading "Consumer Bankruptcy Law Poised to Circle the Globe" »

Debtors' Prison in the West?

posted by Jason Kilborn

DebtorprisonI've been corresponding with an analyst in a country that still jails people for unpaid general debts. The question posed to me, and which I pose to Credit Slips readers, is "can I find statistics of similar imprisonment for debt in Western countries like the US, Canada, and Europe?"

Now we're not looking for accounts of imprisonment for failure to pay specific debts like child support, or for contempt for failure to respond to a judgment debtor examination bench warrant--this is a related but different problem, which has been the subject of a great FTC report. And we're not looking for stories of indigent inmates being re-imprisoned for unpaid criminal fines and "user fees," another problem which has also been the subject of several shocking ACLU reports. And we're not looking for references to rogue judges who violate their citizens' constitutional rights to freedom from imprisonment for debt, though again, we know such problems exist in the US and elsewhere.

The question concerns only standard imprisonment for general debt. My strong sense is that no such statistics exist because no Western country does such things any longer. I hope no one can point out that I'm wrong, but if so, please do let me know in the comments.

On a related note, if anyone knows of statistics on revocation/suspension of driver's licenses (and the like) for failure to pay general debt (again, not for specific debts, like child support, parking or speeding fines), I'd love to hear about that, as well.

Thanks!

Imprisonment photo courtesy of Shutterstock

Banks Fighting New Irish Insolvency Service Before It Starts

posted by Jason Kilborn

ISI_logo_FinalOn Monday, the new Insolvency Service of Ireland will begin taking applications from overindebted Irish consumers seeking relief under the new debt relief law. Already, Irish banks, who received a huge government bailout, are scurrying to deploy scare tactics to deter consumers from seeking relief. According to one report, a major Irish bank has sent letters to distressed customers warning that relief under the new law requires "continuous review and any increase in income would be included under the [relief] scheme." Also, debtors seeking relief under the new law are "subject to the ISI [expense] guidelines, which are quite severe. ... These place restrictions on all spending, ban a second car and holidays, and only allow private healthcare in exceptional circumstances." In fact, anyone familiar with "means testing" and other budgeting practices in world consumer bankruptcy laws would be quite impressed with the Insolvency Service's new expense guidelines, which are sensitive, flexible, and reasonable.

The banks' scare tactics are particularly odious in ligth of the fact that the banks, predictably, have opposed all efforts to implement reasonable concessions voluntarily to turn around the horrible mortgage mess the country is in. The Central Bank has all but ordered the major Irish mortgage banks to implement long-term solutions, rather than simple stop-gap measures of interest reductions and temporary payment holidays, but the banks are not budging. Where have we heard this before (here, here, and especially here)? Will regulators never learn?

The Central Bank may have the last say here, as it is reportedly threatening to force banks to make special provisions (beefed up loss reserves?) to respond to the continuing risks related to distressed mortgage debt remaining on the banks' books. This seems like the sort of incentive that might "nudge" the banks in the right direction--do a deal that implements relief, or set aside special reserves if you refuse to do so, but acknowledge and deal with the problem one way or another. Color me skeptical that the threat will materialize or, if it does, that the banks won't figure some clever way to evade any thoughtful and effective solution.

Update:  In case there was any lingering doubt, the CEO of Bank of Ireland (a private bank) recently told the Irish legislature that engaging with distressed mortgagors to strike debt adjustment deals is “not a policy of the bank.” Falling back on the same, tired old excuse, he claimed that any debt forgiveness deal would impose costs on the bank. The now well-established notion that these losses are already baked into the cake is either lost on people like the BofI chief, or they're playing a rhetorical game with legislators.

Earlier discharge for German debtors ... but not many

posted by Jason Kilborn

PiggybankemptyAfter years of wrangling about the details, the German legislature has finally approved a reform of the consumer provisions of the Insolvency Act (InsO). The only notable change is a reduction in the so-called "good behavior period"--that is, the time during which the debtor is supposed to be devoting all disposable income to creditors (or looking for work). It started in 1999 at 7 years, reduced in 2001 to 6 years, and as of 1 July 2014, it will be halved in some cases to 3 years.

But not so fast! The only debtors who can get out of jail in three years are those who can (i) pay all of the adminstrative costs of their insolvency case, and (ii) pay creditors a minimum dividend of 35% of their claims. This minimum dividend was 25% for most of the discussion period of the reform bill, but it was increased to 35% at the eleventh hour.

Continue reading "Earlier discharge for German debtors ... but not many" »

Russian Courts Battling For Authority Over Consumer Bankruptcy

posted by Jason Kilborn

Polar_bear_brawlIn Russia, a debate is raging over which courts should administer consumer bankruptcy cases, the specialized commercial courts or the courts of general jurisdiction. The Russian commercial courts (Arbitrage courts) currently exercise jurisdiction over bankruptcies of individual small business people, as well as over cases involving artificial legal entities like corporations. Logically, then, in the current bill that would finally expand the Russian bankruptcy system to provide relief to consumers, the Arbitrage courts would handle such cases.

Oddly, President Putin in March issued an edict strongly suggesting that the bill be amended to assign jurisdiction to the general courts. The Supreme Court had already come down solidly on the side of the generalist courts, and in April, it threw its support behind Putin’s edict by introducing a bill into the legislature to amend the Code of Civil Procedure to preemptively assign consumer bankruptcy jurisdiction to the general courts, if and when a consumer bankruptcy bill ever becomes law. The explanatory notes to this bill make what seems to be a rather superficial and formalistic argument about consumer contracts “not bearing an economic character,” since they relate only to personal consumption, and noting that consumer cases will raise all manner of non-economic issues, such as family, housing, and labor, which the Arbitrage courts are ill-situated (if not constitutionally forbidden) to address. The next thing you know, they’ll introduce a distinction between “core” and “non-core” matters—that will really fire things up!

Continue reading "Russian Courts Battling For Authority Over Consumer Bankruptcy" »

Cries for Relief from the Hungarian Financial Crisis

posted by Jason Kilborn

ForintNo, not that Hungarian financial crisis. Now that the country seems to have more or less righted itself, its citizens are still struggling with their own debts. Reuters reports that the Managing Director of the National Bank of Hungary has called for the country to adopt a personal insolvency law, much as Ireland just did in the midst of its own crisis. The Director seems to envision an approach along the lines of an emerging European standard, a clean slate after a 4- to 5-year payment plan. The IMF agrees, noting in its latest annual report on Hungary (see p 15, para  25) that establishing a personal insolvency system would help the banking sector to clear out its portfolio of non-performing loans and get Hungarian productivity back on track.

So what's the holdup? "Resistance from the banks." Where have we NOT heard that before!? Of course the banks resist, because they want to continue to maintain the illusion that their non-performing loans are actually worth more than a few fillér on the forint (if not zero). A Hungarian economics ministry secretary reports in the Reuters story that they're in talks with the banks about a potential personal insolvency law, but it is "unlikely to be launched this year," as "there should be sufficient time to prepare for it." Time!? A full-blown and well-developed proposal for a new personal insolvency law was floated and commented on by, among others, me, beginning in the fall of  ... 2008!  Is five years not "sufficient time" for these banks? And why did the 2008-09 proposal fail?  "Resistance from the banks." Someone over there in Hungary needs to stand up to the banks and stop allowing the time-honored cry of "we need more time" to delay reasonable relief that complies with an international standard that has developed throughout Europe during the past 30 years.

Forint photo courtesy of Shutterstock.

New Study on Consumer Protection and Financial Distress

posted by Jason Kilborn

Shutterstock_115002976The European Commission's Financial Services Users Group has published an impressive report and a position paper on financial distress and consumer protection, written by a Euro-think tank called London Economics. The title is a real mouthful: Study on means to protect consumers in financial difficulty: Personal bankruptcy, datio in solutum of mortgages, and restrictions on debt collection abusive practices. The paper does an admirable job of surveying the legal landscape of 18 European countries, concluding with some well-considered "best practices." This paper is a nice addition to the already impressive body of work in Europe analyzing existing legal regimes for treating consumer financial distress and identifying strenghts and weaknesses in their varying approaches. It is highly recommended reading for anyone interested in consumer policy, especially with respect to appropriate solutions to financial distress.

European Union image courtesy of Shutterstock.

Lessons Not Learned in Designing a Consumer Insolvency Regime

posted by Jason Kilborn

PennilessJudging by an Irish Times report today, the designers of the new Irish consumer insolvency system seem to be falling into two old familiar traps.

First, the focus of the story is on rumors that the proposed income guidelines for the new regime will make payment plans too parsimonious. Pressing debtors too hard in the name of "responsibility" is a recipe for disaster, as administrators of the French system learned decades ago. A discharge is a nice incentive to get debtors to really exert themselves for the benefit of creditors, but five or six years on an overly repressive budget will produce plan failure, all but guaranteed. Paul Joyce, Senior Policy Researcher at the Irish Free Legal Advice Centres (and an absolute prince of a guy) pointed out this danger in his fine policy analysis of the new regime. It will be a shame if the soon-to-be-released guidelines fail to heed Paul's and others' warnings.

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Creeping Privatization of Justice

posted by Jason Kilborn

Shutterstock_99036074Lauren's and Bob's recent posts brought to mind a theme that keeps cropping up in my teaching and research: public authorities increasingly offloading responsibility for important justice-related issues, especially consumer justice, to the private sector.

On the teaching side, I teach Civil Procedure, and that world is all abuzz with talk of a slew of recent Supreme Court and Court of Appeals opinions that have prioritized private arbitration over public adjudication of disputes (see, e.g., here and here). And this movement is afoot not only in the classic context of complex business disputes, where arbitration makes some sense; rather, it has taken hold in David-and-Goliath situations involving important rights like employment contracts and consumer sales and service contracts of a variety of kinds. In the big case that started the latest round of hoopla, AT&T Mobility v. Concepción, Justice Scalia acknowledges that "the times in which consumer contracts were anything other than adhesive are long past," yet he and the majority proceed to bend over backwards to ensure that clever company counsel can relegate disputes over such contracts to arbitration, effectively ensuring no suits will be brought in many cases, where the stakes are too low without aggregate (class) litigation, as in Concepción.  

On the research side, virtually every discussion around the world of consumer insolvency reform begins from the premise that out-of-court workouts are to be preferred, and court-sanctioned payment plans and coercive discharge should be a last resort. Many world consumer insolvency regimes require consumers to engage in an informal workout negotiation as a mandatory prerequisite to seeking formal relief. The notion of private workouts in this context is like Communism: it sounds great in theory, but it just doesn't work out in practice. In the highly morally charged context of consumer workouts, creditors consistently refuse to offer any kind of relief from the inflated principal debt, and only limited relief from spiraling interest (sound familiar?).

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Inadvertent Humor in Today's Bankruptcy Headlines

posted by Jason Kilborn

One major benefit of being a member of the American Bankruptcy Institute is a nice rundown of daily bankruptcy-related headlines delivered by email daily. Today's list included a combination of headlines that made me smile ...

"Girls Gone Wild Files for Bankruptcy" was an interesting enough headline, but immediately following it was this: "Grupo Bimbo Wins Hostess Beefsteak Auction." Nice.

Consumer Bankruptcy Around the World (Bank)

posted by Jason Kilborn

Thanks so much to Bob and everyone else at Credit Slips for inviting me to join on a more consistent basis! I'm absolutely thrilled to have this unique platform to share my observations on the world of bankruptcy, literally. With some early inspiration from my hero, Jay Westbrook, I've spent my entire academic career focused primarily on why and how countries beyond the United States have extended relief from overindebtedness to ordinary people, including "consumers" not engaged in significant business activity. The pace of development in this area has been mind-blowing over the past three decades, and for my inaugural Occasional post, I'd like to draw attention to a World Bank report that draws together much of this development and marks the extremely satisfying culmination of my own work in the area. 

A working group of the World Bank decided a couple of years ago that financial distress and overindebtedness among individuals represented a structural drag on world economies and economic development. The group decided that the time was ripe to go beyond its focus on business insolvency and to undertake a survey of the state of law and policy around the world for treating the ills of insolvency among individual "natural persons" (a catch-all term designed to encompass human beings of all kinds, regardless of the source of their income and debt distress). A small drafting group was charged with recording our observations on the variety of evolving approaches to treating insolvency, noting particular attitudes and provisions that seemed either particularly successful or problematic in some sense. Other expert groups had undertaken this kind of survey in the past, but this was the first by an organization with the convening power and persuasive authority of the World Bank. In part for this reason, the project strictly avoided offering recommendations, instead confining itself to objective observations, both positive and sometimes critical.

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The Mother of All Cross-Border Bankruptcies?

posted by Jason Kilborn

No, not Lehman.  Though  much smaller in monetary terms (probably), a filing by BP would likely be the biggest international insolvency case in engaging the U.S. public interest, and probably its ire.  And what of a BP filing in its jurisdiction of registry?  A BP filing in the U.K. seems sure to create a cross-the-Pond furor not seen since the late 1700s, or so this BusinessWeek article suggests.  One line from that article particularly intrigued me:  "No doubt London courts would deliver an outcome more favorable to BP. And they’re apt to be less generous when it comes to paying damages to folks three times removed from directly affected claimants."  No doubt, eh???  This is, of course, the primary concern in cross-border cases, generally, but I think this worry is overblown (sensationalist journalism from BW--go figure!).

First, British reorg/rescue law still remains less debtor-friendly (and decidedly less management-friendly) than the U.S. Chapter 11 system (see, e.g., this very useful comparison), and management decides where to file.  While a U.S. DIP might well be able to maneuver the proceedings to low-ball Gulf-area claimants, I doubt a U.K. administrator would be willing to face the international backlash of such a tactic, especially since the adminsitrator would not be biased by his or her own participation in the creation of the catastrophe (unlike the DIP) and would have no reputational "sunk costs" to attempt to salvage (again, unlike a DIP).

Second, to the (unlikely) extent that the Businessweek article is making the sophisticated suggestion that British law would be chosen to control matters of claims administration and distribution, this is probably just wrong.  Cross-border insolvency law doesn't deal with such matters, and Jay Westbrook has written some very thoughtful analyses of the sticky choice-of-law issues in this context (I couldn't find any public hyperlinks, but see especially 23 Penn State Int'l L. Rev. 625 (2005); 33 Texas Int'l L.J. 27 (1998); and 65 American Bankruptcy L.J. 457 (1991)).  Any reasonable choice of law analysis would lead to application of U.S. law to the Gulf disaster, and a U.K. judge would be very hard-pressed to "deliver an outcome more favorable to BP" if that meant doing anything that remotely resembled flouting the governing law.

Might BP avoid punitive damages and other uniquely U.S. craziness by filing in the U.K.?  Probably, but my sense is BP would not face such emotion-driven madness in U.S. Bankruptcy Court, either.  State court tort trials get big headlines, but the bankruptcy cases that bring those damage awards back down to earth seldom catch the public's attention.  A long line of cases beginning with Maxwell suggests that U.K. and U.S. bankruptcy judges are more or less of one mind, so the only remaining questions concern choice of adminitration and choice of law.  The former strongly favors a U.S. filing (if any), and the latter should be indifferent to the choice of forum (no, I'm not being Pollyanna-ish here, I really do believe the choice of law would work out the same on either side of the Pond).  So, John Conyers, put down that silly bill to prohibit U.S. cooperation with a U.K. filing by BP, and focus on helping to clean up the mess down in the Gulf! 

What's Wrong with PIGS?

posted by Jason Kilborn

The financial and economic woes of the Southern European bloc of Greece, Italy, Portugal, and Spain have been constantly in the headlines recently (just this morning, the ABI's quite useful Global Insolvency daily headlines included just such a story).  Indeed, I learned that the cognoscenti call this group by an acronym:  PIGS (PIIGS if you add also struggling Ireland).  What do these countries have in common that might bear some causal relationship (forward or backward) with their money trouble?  I now have proof positive that I am a certifed weirdo, because the first thing that popped into my head when I saw these countries grouped together was that they are unique in Europe in not having a consumer insolvency system (or at least any reasonably functioning system).  For a long time, these countries had no robust consumer borrowing that might lead to consumer insolvency, but lots of data (no hyperlinks come readily to mind) indicate that those days are over, and it's high time for PIGS to respond to a growing incidence of consumer financial distress. The NYT story linked above suggests that geography, culture, religion, and history might tie these countries together and distinguish them from the rest of Europe.  Now I'm really intrigued by the causation-correlation issue here:  I suspect the lack of an effective consumer bankruptcy system is a result of unique cultural, religious, etc., characteristics of PIGS (and PIIGS), but I can't help wondering if there might be a causal effect the other direction, or at least that the conspicious absence of a serious effort to deal with consumer financial distress is a canary in the coal mine revealing the pernicious effects of certain other, otherwise unobjectionable cultural tendencies.  Hmmmmmm . . .

New Reorganization Law Imminent in United Arab Emirates

posted by Jason Kilborn

The key word in the title to this post is "reorganization," as opposed to what one generally finds in the context of laws on business failure--liquidation or "bankruptcy" laws.  The U.A.E.'s current bankruptcy law is a relic of the (British influenced) past, clearly designed more to punish debtors than to protect creditors (yes, I do mean to suggest that these goals have virtually no cause-and-effect relationship, despite constant unsupported rhetoric to the contrary among some commentators).  For several months now, U.A.E. authorities have been promising a new reorganization law to deal with recent spectactular financial collapses in what may well be the Arab world's most advanced and diversified economy.  Along with an advanced economy, they have implicity acknowledged, goes advanced failure, and a safety valve for treating that failure is a must for disciplining creditors and investors at both the investment and the recovery stages.  Even the insolvency law in the Dubai International Financial Center is not particularly forward-thinking, so even though reports are that the new U.A.E. law will not be as reorg-friendly as U.S. law, I hope the drafters drew their inspiration from sources other than British law (no "anti-British" sentiment is intended here).

Islamic Finance v. Islamic Bankruptcy

posted by Jason Kilborn

As Bob mentioned in his introduction, I have spent many hours over the past year-and-a-half studying Arabic as a prelude to exploring the Islamic and Modern Middle Eastern law of financial distress--by far the most intense intellectual challenge of my life.  I've only begun to scratch the surface (the language alone is fiendishly difficult), but this promises to be a very interesting and productive project.

While most Credit Slips readers have heard of or, indeed, know some of the detail of the modern movement known as Islamic finance, I suspect virtually none of us knows anything about the way in which Islamic law deals with financial distress and bankruptcy.  The only non-Arabic source on this subject I have found is an early 1900s doctoral disssertation from the University of Paris, and it is largely a French summary of the bankruptcy law of Morocco at the time (heavily influence by Hanafi Islamic doctrine).  We've probably also all read the stories of ex-pats leaving their cars at the Dubai airport, fleeing to avoid imprisonment for debt, but even in places like Saudi Arabia, where shari'a is supposed to be the law of the land (and where a kind of nascent debt settlement system is developing, albeit slowly), I haven't see any evidence of serious engagement with the notion of bankruptcy as it appears in the primary Islamic law sources.

And appear it does!  One rather famous verse of the Qur'an, 2:280, directs (liberally translated) "If [he, the debtor] is in a difficult situation, let there be a postponement until easier times [and he is able to repay,] and if you were to remit [forgive] the debt [as charity,] it would be better for you, if you only knew."  And in the other major source of Islamic law, the sunna (tradition) of the Prophet (pbuh), one finds at least one story where a creditor is ordered to forgive half of his claim against a distressed debtor.  There are other similar stories in the sunna, and I very much look forward to sifting through the scholarly commentary on this issue, a process that I've begun with halting success.  If any Credit Slips readers are familiar with what Hanifa or Shafi'i or Hanbal or Malik or Ja'far or any other authoritative commentator has to say about this specific issue, any input would be welcome.  My greatest point of curiosity is why we don't see any serious treatment of bankruptcy in modern Middle Eastern law, despite its treatment in Islamic doctrine.  This is one of many interesting facets of my longer-term project.  As I've said before, we in "the West" have so much to learn, both about and from, "the Rest" of the world.

The Forum Shopping Debate Heats Up for In-Bound Cross-Border Cases?

posted by Jason Kilborn

Thanks so much to Bob and the rest of the Credit Slips crew for having me back!  For my first post, I thought I'd draw some attention to what seems to be the latest in the forum shopping (corruption?) wars in the U.S. Bankruptcy Courts (which also ties in my new Arabic study a bit).  Many people, including myself, have written on the seemingly foreign-insolvency unfriendly decisions out of the Southern District of New York involving the Bear Stearns and Basis Yield collapsed hedge funds.  Relatively few people seem to have picked up the latest, a decision from traditionally more friendly Delaware in a case involving a Saudi-owned, Cayman-registered hedge fund called Saad Investments Finance Co. (No. 5) Ltd. (Case No. 09-13985) ("SIFCO").  Ironically, SIFCO's name (sa'd) means, in Arabic, “good luck” or “good fortune.”  As it turns out, the liquidators’ choice of the District of Delaware to seek cooperation in this cross-boder bankruptcy case was, indeed, fortunate.  Not only did the Delaware court not go out of its way sua sponte to find reasons to reject SIFCO's liquidators' petition for recognition (as the New York court had done), it seems to have almost glibly concluded that SIFCO's "center of main interests" was in the Cayman Islands, despite circumstantial evidence to the contrary (as discussed in the Bear Stearns and Basis Yield cases) and without citing either the controlling law or any particular fact that supported this crucial finding (see p. 2, finding "I").  This decision, in stark contrast to the New York holdings, seems rather transparently based on public policy and comity, rather than (and perhaps in derogation of) the new governing statute, Chapter 15 of the U.S. Bankruptcy Code.  While a few commentators have tried to rationalize this case by contrasting SIFCO with the Bears Stearns and Basis Yield hedge funds, the only explanation that seems at all persuasive to me is that the Delaware court has once again positioned itself as the "debtor-friendly" (or now, foreign-representative-of-the-debtor friendly) forum for U.S. bankruptcy proceedings.  I'll leave it to those who are both more expert (see also here and here) and much braver than I to conclude whether this is in fact the meaning of the latest Delaware decision and, if so, whether that represents a good or not-so-good development for U.S. cross-border bankruptcy policy.  I'll have more to say about this decision in the next issue of the Cayman Financial Review, for which I have been invited to write a bankruptcy column this year (thanks so much to Andy Morriss for the invitation).  Thanks once again to Credit Slips for having me back!

Austrian Banks, East European Subprime, and Hungarian Consumer Bankruptcy

posted by Jason Kilborn

Change the names, and you don't even have to read the rest of the story any more. Europe and the United States are on parallel tracks to hell in a handbasket. Today's Washington Post has a fascinating story on the woes of Austrian bankers, whose drive to conquer emerging East European credit markets is now coming back to haunt them. Substitute Wells Fargo and Citigroup for Erste Bank and Raiffeisen Bank, and mention California, Nevada, and Florida instead of Hungary, Romania, and Ukraine, and any U.S. reader of popular news can see what's coming. Austrian banks for years ignored warning signs that these fast-growing markets were overheating, and the banks expanded faster than regulators could keep up--sound familiar? The big problem in Eastern Europe was banks would lend Euros or Swiss Francs to, say, Hungarians, at lower interest rates than similar loans denominated in local currency (e.g., Hungarian forints). While it's probably overkill to call these "subprime" loans (and the borrowers were generally creditworthy), these loans were subject to a different but still substantial risk; i.e., a potential upside-down position for borrowers if currency markets shifted, which is exactly what happened a few months ago. Imagine earning your pay in Russian rubles but having to repay in U.S. dollars, especially after the exchange rate of the former heads south.  Not good.

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Party Time in the Netherlands?

posted by Jason Kilborn

A comment from the Netherlands reminded me to post about an intriguing statistic I've been exploring. While consumer insolvency filing rates have been up around the world this past year (at least in the last quarter of 2008, as mentioned here and here), the Netherlands represents a serious anomaly. Total admitted consumer cases there plummted 38% in 2008, including a 42% drop in Q4 2008 as compared to Q4 2007, and a 1% decline from Q3 to Q4 of 2008. This is seriously surprising and somewhat troubling.

On the one hand, it might be that Dutch debtors are just way better off than their neighbors, and consumer financial distress is low in that corner of Europe . . . but I doubt this very much. The Raad voor Rechtsbijstand, which follows developments on the Dutch consumer insolvency law (known by its acronym, WSNP) has also expressed confused anxiety about the source of this drop in admissions (see here and here, in Dutch, noting among other things a 67% drop in admitted cases in Haarlem and a 54% drop in Rotterdam in the first half of 2008). The Raad speculated that perhaps improvements in the out-of-court workout process had led to less need for formal, coercive relief, but my own quick review of the results of that system and remarks from a friend in the Netherlands suggest that a slight uptick in consensual out-of-court arrangements does't begin to explain a 38% drop in admitted formal cases.

Alternatively, it could be that a reform implemented on 1 January 2008 drove down the admission rate, though I doubt this tells the whole story, either. The reform generally made the system simpler and more predictable, which should have made it more attractive to filers. While it made small changes in the admissions criteria (article 288 of the WSNP), I can't imagine that any of these seemingly minor changes would explain the drop. My Dutch colleague suggested that courts might be much more restrictive now in admitting cases for debtors whose problems are viewed as predominantly "social" rather than "financial" (e.g., drug addiction, compulsive disorders, inability to control spending [sic!]), so these needy cases may not be making their way into the system after 1/1/2008. I don't see anything in the paper record to support this view, but I'm still looking, as this disturbing approach to consumer relief would signal a very significant shift in perspective. As anyone who has dealt with consumer cases knows, MOST consumer insolvency clients have some substantial problem that might be categorized as "social" rather than "financial," and there's a strong causal connection between the two . . . but that certainly doesn't mean that these folks don't need (or wouldn't benefit greatly from) debt relief.

Cognitive Dissonance About BAPCPA

posted by Jason Kilborn

I don't know why I continue to be surprised by the statements about BAPCPA made by the now-infamous Prof. Zywicki, but like a moth to a flame, I keep reading them with utter amazement. Yesterday's hearing before the House Judiciary Committee on the impact of BAPCPA on retailer reorgnaizations (i.e., Circuit City) is a perfect example (a list of witnesses and their prepared remarks is available here).

On the one hand, you have Harvey Miller, arguably the top (at least one of the top) bankruptcy lawyers in the United States, testifying that "the balancing of interests that was enacted in 1978 has been upset through a series of amendments of the Bankruptcy Code, culminating in the enactment of [BAPCPA] that have clawed back Bankruptcy Code protections that had been enacted to assist and enable a debtor to rehabilitate and reorganize its business." His full prepared statement is well worth reading.  This seems to be the majority view, approaching consensus.

Then on the other hand, you have Zywicki continuing on his "this bill is perfect" odyssey of cognitive dissonance. His remarks included these gems:  “BAPCPA was designed to correct a system that had gotten out of whack,” and the new post-BAPCPA system in Zywicki's estimation is “well-calibrated.” I wonder if more than a handful of people in the reorganization industry share this view. I certainly have not heard this view expressed by anyone other than Zywicki.

It gets better (rather, worse). Zywicki takes a nice jab at debtor's counsel by posing a rhetorical question:  “is it really worth burning through $40 million to $50 million in attorneys' fees for a company whose time has passed?”  Another panelist challenged Zywicki's suggestion that counsel were prolonging cases just to increase fees. I wonder if Zywicki has read the latest empirical studies of professional fees in reorganization cases, which doesn't seem to support his attack on professional fees. I am beginning to wonder if Zywicki every reads empirical studies, and if he does, whether he internalizes any of the information in those studies. His public comments don't seem to suggest that he is influenced by the facts on the ground--certainly not in consumer cases (he started the means testing craze, remember), much less in business cases. Sigh.

Hoping for Failure!?

posted by Jason Kilborn

As if negotiating a confirmable reorganization plan weren't difficult enough already, apparently credit default swaps (CDS) are making it even more difficult. The March 7th issue of the Economist has a great sidebar article, aptly entitled "Burning down the house." The author helpfully analogizes CDS to fire insurance--if a corporate borrower defaults (i.e., the house burns down), the CDS seller pays the buyer for the loss. That seems like an acceptable hedge if the buyer of a CDS is the lender, but what if high-risk investors (speculators?) buy CDS, banking on a corporation's default (akin to "naked short selling" of a company's stock, a tactic also under attack of late).

This explosive situation comes to a head if the borrower company attempts a reorganization. Now you've got very dedicated and often aggressive investors hoping for your failure! If they have enough riding on the CDS paying out, one can easily imagine a CDS holder offering to buy a blocking position (34%) of the unsecured debt of a company attempting reorganization--which the CDS holder can probably do for a song in light of the pending reorganization (and the payout on the CDS will almost inevitably be more than a plan promises to unsecureds). I've heard lots of grousing among judges wanting to know how certain "creditors" voting unsecured claims came to own those claims--now I understand why these judges want that info and what scary info they might find if the question is answered. I presume the "not in good faith" votes of CDS holders voting down a reasonable reorg plan could be equitably subordinated or classified (rejected). What a nightmare for debtor's counsel! All that work to then have your plan fail because investors with no real skin in your game tank your deal so they can collect the equivalent of hazard insurance on your failure. 

It gets worse when national borders are involved. The Economist article mentions the Chapter 11 case of LyondellBasell, initiated in early January. Apparently, some CDS holders want to force the debtor's European parent to default, bringing in the complications of a cross-border reorganization. That would so complicate the case that the chance of a total meltdown--and a payout on the CDS--would spike, so DIP lenders have ponied up just to avoid that eventuality. The strategies of securing plan support are FAR more complex today in the CDS-influenced and cross-border complicated world of reorganization. I guess that's why the bankruptcy lawyers get the big bucks.

Great New Reading on Mortgage Modification

posted by Jason Kilborn

It's not all just fun and games with old credit cards at Katie Porter's house!  She and a couple of co-authors have a great new paper on SSRN describing the history of the anti-modification provision for principal residence mortgages, an empirical study of home mortgage burdens in Chapter 13 plans, and some comments on how reasonable forced modifications of those burdens could save not only these folks' homes, but Chapter 13 in general.  This had not occurred to me (I admit), but the 66% failure rate for Chapter 13 plans must be in large part explained by the burden of bloated mortgage obligations. Katie's paper more or less confirms this suspicion empirically. Reducing that burden to a reasonable level would therefore not only help people to stay in their homes, but it could result in a much higher plan-completion rate in Chapter 13 generally. This would be a great double-whammy. The paper deserves a close look by anyone interested in this hot topic. 

In other related news, another CreditSlips blogger has released a particularly high-profile paper on the subject of addressing mortgage foreclosure woes. Elizabeth Warren heads the Congressional Oversight Panel looking into foreclosure mitigation practices, and the panel released its report last Friday. I can only assume the report was authored in large part by Elizabeth--it has the tell-tale signs of her incredibly lucid and incisive writing style, backed up by a wealth of empirical knowledge about how struggling with mortgages and other debts really looks in practice. Check it out!

We're in the Money!(?)

posted by Jason Kilborn

Here in the U.S., lawyers in other areas must be eyeing their bankruptcy counterparts with envy, as our sector enjoys (if we can use that word without multi-directional guilt!) rapid growth while others areas are contracting. In England, this U.S.-bankruptcy-lawyer envy is doubly powerful, as even bankruptcy lawyers there are not as high-profile as in the U.S. As this TimesOnline story reminds us, reorganization ("administration") in the U.K. is not a lawyer-driven process, as is the Chapter 11 process in the U.S. Rather, it is an administrative process run mainly by accountants, who exercise significant business discretion with much less court oversight, and therefore much less need for lawyers. As more global businesses run into trouble, insolvency professionals from these two great nations separated by a common language will come into contact more frequently. When this happens, we U.S. lawyers need to remember that our U.K. colleagues are situated quite differently, and the reorganization process there is administered in a very different way. Just ask Richard Gitlin, who could regale us endlessly with stories about liaising (perhaps "doing battle" would be more apt?) with PriceWaterhouse in the Maxwell bankruptcy in the early 1990s (CreditSlips blogger John Pottow, among many, many others, has written about the case here). When these cross-cultural encounters among lawyers occur, let us U.S. bankruptcy lawyers try not to be too smug (for the humor impaired, yes, this is a little joke!).

Rising Pain in the Heart of Europe

posted by Jason Kilborn

Apparently, statistical agencies all over the world are finally releasing their 2008 bankruptcy data. The AOUSC released its CY 2008 report yesterday, and today, the German agency (DeStatis) released the report for December and CY 2008. As it usually does, DeStatis tried to paint a rosey picture--the headline is "7.1% fewer consumer bankruptcies in CY 2008." This seems to contrast quite nicely with the 31% rise in U.S. bankruptcy filings. But the DeStatis report reveals that business filings rose 13% from a year earlier, and non-business filings rose 12.3% in December 2008 over December 2007, nearly 13% for "pure" consumers (as opposed to former small-business people). The Q4 filings, especially December, show a rapid and troubling spike, and one suspects this will continue in force well into 2009. Hang on!

Consumer Insolvency Filing Pattern Variations

posted by Jason Kilborn

The latest figures for insolvency filings in Sweden are now out.  Somewhat contrary to Bob's observations on U.S. filing patterns in the last quarter of the year, Sweden saw a 21.5% increase in filings in Q4 2008 over Q3 (and a 21.7% increase in filings in Q4 2008 over Q4 2007). Total filings for 2008 were slightly down from 2007 (6528 in 2008, 6831 in 2007, in a country with about 9 million total residents), but 2007 was Sweden's equivalent (actually, opposite) of 2005 in the U.S.--a huge rush of filings occurred in Q1 2007 after the implementation of a reform to make the system simpler and more widely accessible.  The biggest difference between 2007 and 2008 was thus the rate at which the administrative structure made its way through the huge backlog of new cases. The number of orders opening insolvency proceedings rose steadily through 2007 and 2008 and then spiked over 63% from Q3 to Q4 of last year in what appears to have been a major push to clear out old filings. Luckily for Swedish debtors, while the successful admission rate has returned to its historical level of about 55% of filings, the filing rate per 1000 residents has spiked to around 0.75 since the 2007 reform, so nearly 70% more debtors are being successfully admitted to the system now in comparison to two years ago. Unfortunately, very little empirical data exists on the content of the relief granted to these people, but the 2007 amendents have made some form of relief much more widely available and substantially more predictable. This is a trend that has swept over Europe in recent years, quite the opposite of what we've seen here in the U.S. It's tought to make accurate and meaningful comparisons between Europe and the U.S. in these complex systems, but the contrast in direction of reform policy is striking.

The Father of Consumer Bankruptcy in Continental Europe?

posted by Jason Kilborn

I hope some kind CreditSlips reader can confirm (or at least not disprove) what I believe to be my recent exciting discovery. For nearly a decade, I've searched for the stone that caused the very first ripple that became the wave of consumer bankruptcy (i.e., discharge) laws across continental Europe in the 1980s and 1990s, and I think I've found it. Thanks to extraordinary help from Ulrik Rammeskow Bang-Pedersen at the University of Copenhagen, I've identified what I believe to be the first published suggestion that a continental European nation should adopt a specific regime of coercive debt reduction (discharge) for consumers. The comment appeared in a Danish law journal in January 1972, and it was written by a barrister named Frederik Bang Olsen (father of Peter Bang-Olsen, a current lawyer at what formerly was the Bang-Olsen firm, now Ret&RådAdvokater--thanks, Peter, for the background info!). One can clearly trace the development from this comment into a private law reform initiative and report that led to the adoption of the Danish debt adjustment act in May 1984 (the first consumer insolvency law in continental Europe--influenced, but not very powerfully, by the earlier laws in England and the United States).

I have found discussions of debt relief and discharge in other European countries beginning in the 1980s and later, but never anything as early as 1972. France adopted the second consumer debt relief law on the continent on December 31, 1989, but it contained no general discharge provision (yet), and I have not found any evidence that discussions of that law began before the early 1980s. This would explain my fascination (obsession?) with European consumer bankruptcy, as both it and I were born in 1972.

So, three cheers for the father of European consumer bankruptcy, Frederik Bang Olsen! What an amazing story of grass-roots initiative that finally moved past a centuries-old rule (pacta sunt servanda) and changed the world for the better for countless others to follow. Inspiring!

Waiting for H.R. 1106 (a.k.a. H.R. 200/S. 61)

posted by Jason Kilborn

The comment thread from the previous post raises an important point that deserves treatment in its own post: what's the deal with the House version of the mortgage lien stripping bill (H.R. 1106), a vote on which has been postponed due to fears from pushback from "Blue Dog" and "new" Democrats.

First, my two cents: I believe (1) limiting application of this relief to property "that is the subject of a notice that a foreclosure may be commenced" is foolishly short-sighted and a significant restriction that has not gotten much press, but (2) relieving these folks of the idiocy of pre-filing credit counseling is to be roundly praised (perhaps we can be rid of this requirement for all filers in the not-too-distant future, as Sweden did in its 2007 reform of consumer bankruptcy law), (3) the balance of interests is impressive and eminently fair, allowing for reasonable modification of interest rates, extension of repayment term, and a reasonable strip-down of the secured claim, but also allowing for recapture of a declining portion of that loss if values rebound and the home is sold for a profit within 5 years. The big question will be valuation, and I fully expect the banks to push back hard on that question in any future case, probably irrationally, as I've complained elsewhere. As usual in bankruptcy discussions, people just don't get that this law doesn't create losses, it forces banks to acknowledge already existing losses, which is an important prerequisite to getting us out of this financial crisis. Banks' arguments that this law will reduce lending are subject to only two appropriate responses, in my view: if banks reduce lending in response to this law, that would indicate either (1) yet more irrational mismanagement by banks, which makes me feel like nationalization of the home mortgage industry is a more attractive option, along the lines of the full nationalization of the student lending industry in President Obama's budget proposal, or (2) a proper reevaluation of the risk of lending to uncreditworthy borrowers--forcing the banks to engage in the sort of responsible risk management that was needed all along. Heads we win, tails we win. The only losers here are irresponsible banks, who deserve to lose given their mismanagement, and they should no longer be allowed to externalize the negative consequences of their mistakes onto debtors, their families and communities, and society at large. Internalizing negative externalities from irrational creditor action is the primary reason why country after country in Europe adopted consumer bankruptcy systems in the 1980s and 1990s, as I'm writing in an article on the Danish system now.

Second, though I hope and expect this bill will pass next week, the "Blue Dog" Democrats appear to have fallen prey to the Jedi mind tricks of the lending industry lobbying juggernaut. This reminds me of a portion of the late 1980s Eddie Murphy Raw monologue, in which Eddie recounts an exchange with Mr. T. Eddie explains that he had been making fun of Mr. T in an earlier monologue and was accosted by Mr. T when Mr. T found out about this: "I heard you been saying @#$% about me," Mr. T accused. Eddie explains in Raw that, fearing reprisal from impressively scary Mr. T, he decided to use his "Jedi mind trick": he responded calmly, "It wasn't me." When Mr. T retorted that he had heard Eddie saying these things about him, Eddie simply repeated, "It wasn't me." Finally, Mr. T conceded, "Well, well . . . I guess it wasn't you. I pity the fool who's been telling me them lies!" The Bankers Association apparently saw Raw and has effectively applied Murphy's Jedi mind trick on the Blue Dog Democrats (no offense is intended to Mr. T through my comparison between him the weak-minded Blue Dogs).

Comments are wide open--what do you think about H.R. 1106?

U.S. Banks Are Not Alone in Feeling the Pain

posted by Jason Kilborn

In yet another instance of "it's a small world," Royal Bank of Scotland yesterday posted the largest annual net loss in British banking history--£24 thousand million (US$34 billion). Like many U.S. megabanks, RBS (1) suffered from extreme investments in complex financial instruments, especially with its acquisiton of part of the Dutch bank ABN Amro, (2) lent heavily to consumers all over Europe in what I have heard are shoot-for-the-moon risk-fests similar to what we've seen from Citi and other U.S. consumer-heavy lenders, and (3) has already received a partial nationalizing investment (68%) and might be on its way to a full nationalization, all on the heels of impressive profits in 2007 (apparently, Citibank will likely remain only half-way nationalized). Notice that, while the U.S. discussion has focused nearly exclusively on the fallout from bad security investments (CMBS, CDS, CDO, etc.), RBS appears to suggest that significant losses will stem from "consumer loans." This makes me wonder how much pain from poor consumer lending (e.g., credit cards) big banks like Citi are managing to conceal behind the complexities of this financal crisis.

One line in the linked story particularly caught my eye: "The restructuring will leave the bank centered on Britain, with smaller, more focused global operations." This seems to be the approach du jour in many areas--abandoning wild-frontier global expansion and concentrating on familiar markets with more predictable risks (at least ostensibly more predictable). Is the world now no longer shrinking, but indeed expanding again?

Hat tip: Global Insolvency Daily News from ABI

New English Bankruptcy History Archive on SSRN

posted by Jason Kilborn

Actually, it's not really an archive per se, but the long list of collected works by John Paul Tribe, KPMG Lecturer in Restructuring at Kingston University (London) School of Law, is impressive enough to merit its own subject heading in a library collection (also, check out the intriguing ancient bankruptcy images at the Muir Hunter Museum of Bankruptcy, of which Prof. Tribe is the curator). Tribe's work was uploaded to SSRN in January and February, so many may not know of its existence yet--this is a resource not to be missed. Most of the work is historical, a great resource for those of us looking for citations (for academic or persuasive rhetorical purposes) on the earliest history and development of bankruptcy and insolvency in England, including its ever-famous death-penalty roots. Not all of the papers are downloadable (the one entitled Discharge in Bankruptcy: A Comparative Examination of Personal Insolvency Relief is particularly enticing to me, but the full-text paper is not available), but other attractive titles are free for the taking, such as A Definitive Bankruptcy and Related Subject Bibliography: From the Earliest Times to 1899 in Chronological Order and Bacon in Debt: The Insolvency Judgments of Francis, Lord Verulam. Check them out--and Prof. Tribe, if you're reading, please upload the missing papers and share the extraordinary wealth!

United Arab Meltdown & Bailout

posted by Jason Kilborn

It's often shocking how stories emerge from the other side of the globe that seem almost perfectly to echo the U.S. experience. Take, for example, this story, from the front page of the W$J today:

"The cash infusion from the [federal government] comes as [the country]'s once-soaring real-estate market comes crashing down. Falling prices, some down by 50% or more, have burned speculators who never intended to hold on to properties in the first place. Sales have plummeted, crimping cash flow for developers -- which are now scrambling to shed employees, cancel or postpone billions of dollars worth of projects and extend installment plans to avoid missed payments."

This story is not about real estate woes in California or Florida and a Washington bailout, it's about real estate in Dubai and a bailout from the federal capital of the United Arab Emirates, Abu Dhabi, in the form of a $10 billion bond purchase (i.e., a distressed loan!). I have found more than once in recent research that Middle Eastern governments have often resorted to bailouts in response to private sector distress, easing the pressure on the legal system to provide an effective bankruptcy-like remedy.

This latest round of crises (and a decline in oil prices) may well push the region more forcefully toward effective insolvency systems instead. Dubai adopted its own new insolvency law in 2004, modeled on British law. Perhaps due to the rising market and government proclivity for bailouts, the Dubai law saw its first winding-up hearing only in September 2007, and I have found no evidence of its use as of yet for a company voluntary arrangement. This may be on the horizon, though, as the largest Dubai developer recently sought Chapter 11 relief for its U.S. arm. The W$J article linked above mentions a surprising increase in debt collections actions in Dubai, which may well increase pressure for a collective and broad-based legislative mechanism for relief, perhaps even for individuals.

The farther away you go, the more things seem like home!

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