Credit and Immigration

Credit and immigration have been in the news recently. Bank of America started a pilot program that offers credit cards to customers even if they don't have social security numbers. Miriam Jordan and Valerie Bauerlein, Bank of America Casts Wider Net For Hispanics, Wall Street Journal, February 13, 2007, Page A1. 

A credit union in Chicago will lend legal permanent residents the money to apply for naturalization and go through a required fingerprint check.  Antonio Olivo, Loans for citizenship applications offered, Chicago Tribune, February 19, 2007, Online edition,
http://www.chicagotribune.com/news/local/chicago/chi-0702190130feb19,1,5609562.story

The Federal Reserve sponsors a service that allows customers without Social Security numbers to wire money through the Fed system to Mexico's central bank.  The cost is much less than what was the going rate charged by private wire services.  Molly Hennessy-Fiske, Immigrants who wire money get help from the Fed, Los Angeles Times, February 26, 2007, http://www.latimes.com/news/nationworld/nation/la-na-remit26feb26,0,6622923.story?coll=la-home-nation.   

Several members of Congress have introduced a bill to limit the forms of identification that can be accepted by financial institutions. HR 1314, the Photo Identification Security Act. One of the sponsors, Marsha Blackburn, (R.TN) said that the effect of the bill would be "You can’t get a Visa without a visa.”  Bartholomew Sullivan,  Bill would block credit cards for illegals, Memphis Commercial Appeal, March 6, 2007, http://www.commercialappeal.com/mca/business/article/0,1426,MCA_440_5397139,00.html

Bankruptcy and naturalization do share the same clause in the Constitution.  Article I, Section 8, clause 4.   Are there more significant relationships between them?

To a lender a borrower who it knows is undocumented is in one way more attractive than a citizen or legal resident: he or she is effectively barred from filing bankruptcy.   Strictly speaking, there is no requirement that someone be in the United States legally in order to be a debtor in bankruptcy.   But someone who is undocumented and wants to stay in the country would be inviting trouble if he or she filed bankruptcy.   A debtor now must present a picture ID and proof of social security number at the creditors meeting.  Interim Bankruptcy Rule 4002(b)(1).   The debtor must also provide the most recent Federal income tax return, or explain why there is none.  Interim Rule 4002(b)(3).  This should be enough to deter most undocumented borrowers from filing bankruptcy.  If one does file despite this risk, whether out of ignorance or recklessness, the lender has a powerful threat -- withdraw the bankruptcy or else the trustee will be told the truth.   At a minimum the debtor risks denial of discharge for presenting fraudulent documents.   Deportation is much more likely; even prison is a possibility.

Does this actually enter into the decision making of potential lenders?  We know that some lenders consider the fact that someone has just received a bankruptcy discharge as a positive factor, because they can't file again for eight years (up from six years before BAPcpA).  In lending to someone who is undocumented the lender must weigh the positive factor that bankruptcy is unavailable to the borrower against the possibility of deportation or voluntary departure.  But are those risks so different than the risks that a citizen or permanent resident would go "underground" in the United States, or voluntarily emigrate to another country (perhaps for better health care)?

If the Bank of America program, or others like it, does go forward, lenders will soon have actual data to test this hypothesis.

Reading Recommendation from a Judge's Web Site

Recommended reading, and watching

Recently I was in court before Judge Jack Schmetterer.   In one of the cases that came before mine there was an issue about whether proper notice had been given.   The Judge used this occasion to recommend to the attorney for the movant, and no doubt to the other attorneys in attendance, that he should read The Trial, by Kafka.   The judge said that this recommendation was already included in his section of the bankruptcy court's web site.  I had never seen a recommended reading list on the court's web site, but when I went back to my office to check, it was there, in the part that describes the procedures for cases assigned to Judge Schmetterer.

"All motions to be called.

Because many debtors come to court without counsel on motions and some have defenses, all motions are heard in open court. (All counsel are advised to read “The Trial” by Franz Kaffa [sic] to understand how important the judge considers transparency in the Justice system.)...."

http://www.ilnb.uscourts.gov/JudgeSchmetterer/Schmetterer.htm 

Are there any other "official" reading suggestions from Judges?   

Earlier this year Jack Ayer's posts gave us a wealth of bankrutpcy related literature to read.   I wouldn't dare to offer a list of my own.   I do think that Bleak House should be added to his list of Dickens novels.   If you are an unsecured creditor in a heavily lawyered liquidation, or ever worse a shareholder, you would have sympathy for the wards in the famous case of Jarndyce v. Jarndyce. 

Professor Ayer also discussed bankruptcy and credit issues found in The Sopranos, which I take as license to start a discussion about  some movies that touch on these themes. 

Last week I finally saw the movie "Maxed Out" at a screening sponsored by various groups, including the Heartland Institute and my employer, the Legal Assistance Foundation of Metropolitan Chicago.   Interesting movie, which may be a sign of public concern about debt practices.  I'll try to post something on this later this week.  But I'm going to exclude documentaries from this post.   

Surprisingly for a consumer advocate, two of my favorites in this category portray the other side sympathetically.  In Repo Man Harry Dean Stanton lives by the repo man's code.  Definitely fiction.  In Breaking Away the son learns that everyone cheats - his favorite cycling team, and the privileged college students who patronize his father's car dealership.   The used car dealer as the working class hero! 

Then there is the mini-series, The Pallisers, based on the novels of Anthony Trollope.  The take away lesson -- never co-sign a loan.  Well, there was a lot more than that, but that's still good advice, most of the time.

Bankruptcy, Utilities and the Poor

One of the most common reasons that my agency files bankruptcy for clients is to preserve utility service.  The LIHEAP program provides assistance to many of our clients, but not nearly enough of them.  If a client is behind on utility bills, we can often get them through one winter with some combination of energy assistance, charity and a payment plan.  For many clients though, this only works for one hard winter, or maybe two mild ones, and at some point bankruptcy is the only way to keep or restore utility service.

We are under no illusion that this is anything but a band aid.   Indeed, this is one area where we don’t reject a case even though it is clear that bankruptcy isn’t a long term solution.   There are many other cases where we counsel the client that bankruptcy is not indicated because the client’s income just isn’t enough to live on, so within a year or two the client will be heavily in debt again, without the option of filing bankruptcy.   But when the option is no heat in a Chicago winter, there’s really no choice.

But there should be another choice.  When I first moved to Chicago there was a percentage of income plan (PIP) for heating bills.   For whatever reason, that program was abolished.   Now we accomplish the same result through bankruptcy.   This is worse for everyone.   The cost of unpaid heating bills is still shifted to the other utility customers.  It takes much more of our time and money for an attorney to file  bankruptcy than for a paralegal to help a client qualify for a PIP.   The client can only do this once every eight years, up from once every six years.    While a PIP requires the client to pay the specified percentage of income every month, which keeps the client in the habit of paying the utility, the bankruptcy solution rewards the client who manages to pay the least amount possible.  And the client has a bankruptcy on her credit record, which can hurt her chances of renting an apartment. 

I haven’t read the Porter and Thorne paper on the failure of bankruptcy’s fresh start, but this may be yet another example that supports what I take is their thesis -- that bankruptcy is a very incomplete solution to problems that initially present themselves as debt problems.   

Cars and Bankruptcy Revisited

Thanks to Bob Lawless for inviting me to contribute. In addition to the usual Credit Slips disclaimer--- the opinions in these posts are not the opinions of my employer, the entities who fund it, my fellow employees, or the legal service community in general. Also, I am doing this on my own time.

Before the recent changes to the bankruptcy law, many Chapter 7 debtors who had liens on their cars would exercise the so-called "fourth option”. Some background. There were, and still are, three options that are clearly available to the debtor. If the debtor wants to keep the vehicle, he can redeem (pay what the vehicle is worth, in a lump sum) or reaffirm (reach an agreement with the creditor in which the debtor in essence waives the discharge as to this debt). Another option is to walk away from both the debt and the vehicle (“surrender”).

The fourth option is (was?) to keep the vehicle and stay current on the payments, without reaffirming the debt. The debtor’s position is that the secured creditor could not repossess the vehicle, because the payments were current, so there was no default. The advantage to the debtor of using the fourth option is that if he falls behind, while the vehicle could be repossessed, there would be no liability for any deficiency after the sale of the vehicle. Not surprisingly, the secured lenders would much prefer it if the debtor would reaffirm the debt instead of using the fourth option.

Now this is a fact scenario that doesn’t come up that often in my practice. Not many of my potential Chapter 7 clients have cars that are worth very much, and those that do tend not to be current on their car payments.

For purposes of this post, let’s assume that BAPcpA eliminated the fourth option as a legal right that the debtor has. Though many debtor’s attorneys don’t think that’s the case, that is certainly what the auto lenders think BAPcpA did.

What I find interesting is the different positions that various auto lenders have announced that they will take when confronted with debtors who still try to exercise the fourth option. Some have stated that if the debtor fails to sign a reaffirmation on the original contract terms, they will repossess the vehicle once the automatic stay is no longer in effect, even if the debtor was not in default when the case was filed, and has tendered all post-petition payments on time. They are willing to “eat steel” rather than see their legislative victory on this point undermined. Other lenders have said that as long as the payments come in on time, and there is no other default, they won’t take any steps to repossess the vehicles.

Does the hard line policy make economic sense in the long term?  The plus side for the creditor is that some of the debtor, who seem like good payers but in fact will eventually default, will reaffirm the debt, allowing the creditor to try to collect the deficiency after repossession. The down side is that in some of the cases where the creditor repossesses, the debtor would have made all the payments (or at least would have made payments that exceed the decline in the value of the car before repossession). 

Reports are that so far GMAC, Ford Motor Credit and Chrysler Credit have all taken the hard line position of no tolerance for the fourth option. On the other side, at least one of the finance companies associated with a large Japanese auto maker has taken the “can’t we all just get along" position. If this difference is real, and persists, it will be interesting to see which approach makes more money for the financing companies, and whether it has any effect on future sales of cars. Are the Big Three short sighted, or are the other lenders naive about the American way of debt?