407 posts categorized "Bankruptcy Generally"

Is Bankruptcy Mortgage Modification Back?

posted by Bob Lawless

As I write this, the Senate Judiciary Committee's Subcommittee on Administrative Oversight and Courts is holding a hearing entitled, "The Worsening Foreclosure Crisis: Is It Time to Reconsider Bankruptcy Reform." The witnesses include Credit Slips's own Adam Levitin.

After the Senate failed to support changing the Bankruptcy Code to allow judges to do mortgage modifications, it appeared to be a dead issue. The hearing is great news and hopefully an indication there may be some interest in moving the legislation forward. There have been increasing reports (e.g., here) recently that lenders are not doing voluntary mortgage modifications in the numbers that need to happen. Yeah, I know -- who could have possibly foreseen the possibility that a solely voluntary system would not work? There need to be carrots that encourage lenders to do the modifications. The change in the bankruptcy law is the missing piece -- the stick that makes the program work.

The Tabb-ed Second Edition Is Out

posted by Bob Lawless

From time to time, I'm asked to recommend a desk reference on bankruptcy law. I have long thought that it was hard to top Charles Tabb's The Law of Bankruptcy. Of late, my only hesitation was that I had thought that for too long. The first edition was more than ten years old. Still, it was a concise and well-written text that covered many timeless principles of bankruptcy law, and despite the passage of time, I still found occasion to use it .

As I was walking through our dean's suite today, it was fantastic to see a gleaming copy of the faculty's newest book proudly on display. The second edition of this wonderful treatise has just become available. The book is organized in a way that will make bankruptcy law accessible to novices. The first edition began each topic with first principles, and Tabb writes in a clear manner that makes any topic understandable. At 1,447 pages, the book also is no quick overview of bankruptcy law. I often used the first edition as a starting point on research topics.

Congratulations to Charles Tabb--my good friend, colleague, and teacher--on the arrival of this new edition. It is sure to become one of the bellwether works in the field.

Bankruptcy as a Disqualifying Factor for Child Custody?

posted by Bob Lawless

Several sources, including our friends over at Bankruptcy Beat, are reporting that Michael Jackson's mother, who has been awarded temporary custody of her three grandchildren, might have trouble gaining final custody because of a 1999 bankruptcy filing. Washington attorney Beth Kaufman is quoted as saying, "I think it would be a negative factor but not necessarily a disqualifier. It could indicate that she is not capable of sound financial management.”

It is often said that bankruptcy experts and family law experts don't know know as much about the other field as we should. That is certainly true for me, but I was surprised to read that a bankruptcy filing could be a negative factor for a family law court deciding a child custody matter. The Bankruptcy Code prohibits discrimination against former bankrupts, but that prohibition applies only in specific situations such as certain state licensing decisions or in employment matters. It would not prohibit a state court from considering a bankruptcy filing in a child custody matter. Still, on the question of fitness to be a parent, an old bankruptcy filing would seem to have little relevance.

Continue reading "Bankruptcy as a Disqualifying Factor for Child Custody?" »

The Supreme Court and What Attorneys Can Say

posted by Bob Lawless

Some other obligations have kept me away from blogging for the past few weeks. One great thing about a group blog is having great colleagues who pick up the slack. I had wanted to say a few words about the Supreme Court's June 8 decision to hear United States v. Milavetz. At this point, the Court's announcement is old news. This post is about what is at stake in the Milavetz decision and why Credit Slips readers might want to watch this case when it gets argued in the fall.

There have been several Credit Slips posts (here and here) about the lower court decisions in Milavetz. Some issues that were raised in the lower court decisions have dropped away, and before the Supreme Court, the case will involve section 526(a)(4) of the Bankruptcy Code, a provision added by the 2005 amendments. It provides that "a debt relief agency shall not advise an assisted person or prospective assisted person to incur more debt in contemplation of such person filing a case under this title or to pay an attorney or bankruptcy petition preparer fee or charge for charge for services performed as part of preparing for or representing a debtor in a case under this title." Yes, that is language that perhaps only a lawyer could love but probably not even then. The upshot is that section 526(a)(4) aims to prohibit bankruptcy lawyers from advising clients to incur debt right before they file bankruptcy. It was not intended to prohibit bankruptcy lawyers from charging for their services, although that might be a natural reading of the language. Rather, the section also tries to prohibit lawyers from advising clients to borrow money to pay attorneys' fees for a bankruptcy filing.

Continue reading "The Supreme Court and What Attorneys Can Say" »

Chrysler and Foreclosures: the Contrast

posted by Adam Levitin

Today it's reported that Chrysler has convinced its creditors to agree to modify its debt obligations.  Chrysler was able to do this in part because of the leverage it had by threatening to file for bankruptcy.  It's instructive to contrast the Chrysler situation to the situation of homeowners.  The voluntary home mortgage loan modifications are still not happening on the scale necessary to address the foreclosure crisis.  How different would the world look if homeowners had the leverage of bankruptcy to induce voluntary modifications? 

Does President Obama need to nominate 339 (or so) bankruptcy judges?

posted by Katie Porter

Tuan Samahon's new article, Are Bankruptcy Judges Unconstitutional?, 60 Hastings L. Journal 233 (2008), offers a fresh twist on the constitutionality of the bankruptcy judiciary. He sidesteps the Northern Pipeline v. Marathon debate about whether bankruptcy judges can or should be shielded by Article III tenure. Instead, he maps out an Article II challenge to the current appointment process for bankruptcy judges. Today, candidates apply for vacant bankruptcy judges positions, are reviewed by a merit selection panel and then are chosen by the U.S. Courts of Appeals. Prof. Samahon argues that modern bankruptcy judgeships have qualities such as safeguards against removal, expansive jurisdiction, and hefty duties that are incompatible, or at least colorably incompatible, with inferior officer status. While the "Excepting Clause" of the Appointments Clause in Article II permits "inferior officers" to be appointed by the courts, if bankruptcy judges are in fact "principal officers" of the United States, the Constitution would require the President to nominate and the Senate to confirm bankruptcy judges.

Prof. Samahon analyzes the tension between Morrison v. Olson and Edmond v. United States, suggesting that an appointments clause challenge to bankruptcy courts could come out either way. If Morrison is overruled, then existing bankruptcy judgs should be safe. However, if Morrison is good law and an appointment challenge succeeds, we would have 339 new positions to fill. And the fix used post-Marathon, vesting appointment in circuits courts won't work, leaving the Senate and its staffers with a big task and lots of bankruptcy professionals with new opportunities.

The article has an interesting twist for judicial egos. Surely most judges would like to retain their positions and not have to endure a Presidential appointment and Senate confirmation process. Yet, it's an odd world where judges clamor to establish their "inferiority," especially after years of the bankruptcy judiciary working to establish its reputation as a highly-qualified and effective judiciary.

Going Broke Like a Pro

posted by Adam Levitin

There are a couple of interesting stories in the sports mags about the financial problems of professional athletes.  ESPN has a piece about Michael Vick's Chapter 11.  And Sports Illustrated has a longer piece about why professional athletes often have financial problems

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.

Responding to Schwartz on Mortgage Modification

posted by Bob Lawless

Professor Alan Schwartz of Yale University has an op-ed in today's New York Times arguing against the proposals to give bankruptcy judges the power to modify home mortgages. For our readers who do not know him, Professor Schwartz is a respected academic and bankruptcy expert, but with all due respect, I think he just gets this wrong. He makes three principal points, but none of them are a good reason not to move forward with this much-needed legislation.

First, Schwartz says that the proposal would swamp the bankruptcy courts and the nation's 300 bankruptcy judges. That seems empirically dubious given that my forecast of 1.4 million filings this year is below the number of filings in 2002 - 2004, when the annual filing rate was around 1.6 million filings and we had about the same number of bankruptcy judges. Even if the mortgage modification bill resulted in hundreds of thousands of extra filings in the short term, we still would be below the 2 million bankruptcy cases in 2005 when filings surged ahead of the draconian new bankruptcy law. The bankruptcy system survived those filing levels and should handle any increases that would come from mortgage modification.

Continue reading "Responding to Schwartz on Mortgage Modification" »

Reorganization Is the Worst Option . . . Except For All Others

posted by Jason Kilborn

The tried and true criticisms of bankruptcy procedures that salvage jobs while forcing creditors to internalize losses are making the rounds again. People just don't understand. In England, in particular, the financial press is all over "pre-packs" that allegedly allow "debt dodgers to revel in return of the phoenix" as companies are sold in fast-track reorganization procedures. The problem with breathless criticisms of these procedures--now attracting legislative attention in Britain--is that they seem to be based on the false premise that the alternative would be superior. Ironically, Churchill's tongue-in-cheek appraisal of Democracy applies in like manner to the pre-pack procedure in particular, and reorganization generally.

I know I'm preaching to the choir in making this observation on CreditSlips, but I just don't understand how sophisticated financial reporters can miss the point so badly. The challenge repeated in the linked stories above is that the procedure for allowing troubled companies to be sold (often to private equity, often to investors already associated with the business) somehow allows the management of these businesses to evade personal responsibility and improperly externalize losses onto small businesses, in particular (the darling of all conservative, anti-bankruptcy rhetoricians). The "moral turpitude" bent of these criticisms is explicit, but morality must be based at least in part on reality, it seems to me. These stories seem to miss that (1) the sale proceeds must be distributed to creditors, unless I'm totally missing something with respect to U.K. and other pre-packaged reorg procedures, (2) since the middle of the 1800s, general corporation law has shielded management and shareholders from personal liability to creditors, bankruptcy or not, and (3) the result for small business creditors would be in probably every case worse without a pre-pack, since secured creditors and other large, institutional investors would eat up most of the value of the business in a bankruptcy distribution, especially since a piecemeal liquidation bankruptcy would tear apart the going concern value of the business--and European law often requires management to seek this liquidation bankruptcy as soon as it becomes clear that the company is insolvent! What is a "moral" manager supposed to do? Creditors are getting the value of the business (defined by a market sale mechanism, the result of new money, be it from old management or not), which is rather clearly enhanced by an honestly conducted pre-pack. If the challenge were that pre-packs were being administered improperly (by public authorities), that would be one thing, but the challenge seems to be, instead, that pre-packs are being used improperly, which totally misses the mark, it seems to me.

These commentators are not comparing apples to oranges, they're comparing apples to unicorns! Yes, the result for small business creditors in these cases may well be sour apples, but the alternative is not a magical ride on a unicorn--it's no apples at all.

What's in a word (or 2?) Cramdown

posted by Katie Porter

Last Sunday's New York Times Magazine's feature, On Language, discussed the etymology and signification of the word "cramdown." (Or is it "cram down?" That's a separate debate that professors have with law review editors every year).

William Safire observes that cramdown is coming into popular parlance as bankruptcy becomes an everday topic and the debate continues about the mortgage modification legislation. Credit Slips guestblogger, the Honorable Eugene Wedoff, found a use of the term in a 1948 law review article and a 1944 judicial opinion. The term has a general use as a verb to indicate forcing unwanted treatment on creditors. In today's bankruptcy context, the term refers to at least two specific types of such treatment: 1) reducing a creditor's secured claim to the value of the collateral and 2) confirming a chapter 11 plan over the objection of a class of dissenting creditors. Law students often become confused when their professors use the terms in these two different contexts. I try to use cramdown only to mean the chapter 11 voting override provision and instead speak of "lien stripping" to refer to the writedown of a secured claim under section 506 of the Bankruptcy Code. (Of course, lien stripping is a misnomer, since the the lien remains on the collateral and should not be confused with lien avoidance. What is being "stripped" in part is the value of the claim.)

Safire suggests that the ugly connotations of the word cramdown may be hindering legislative efforts to pass mortgage modification. Senator Durbin's spokesman said that the appropriate term to describe his proposed legislation is "judicial modification." While not as colorful as cramdown, it has the virtue of reminding people that a write down in principal is NOT the only feature, and may not even be the most beneficial or widely used feature, of the legislation. Depending on property values where you live, when you bought your house, the type of loan, and future interest rates, debtors may find reductions in interest rate or reamortizations of their loans to be more helpful in reducing their monthly payments and avoiding foreclosure. Using cramdown as shorthand to describe the bill gives short shrift to its potential benefits when all the term may invoke for many people is the specific ability to reduce a mortgage to the value of a house.

Should I File Bankruptcy?

posted by Katie Porter

Several news stories have tackled this question about when a consumer should consider bankruptcy. In addition to the Newsweek piece that attracted lots of attention, today's New York Times Cost of Living column by M.P. Dunleavey is entitled "Bankruptcy as a Step to Solvency." The column tackles some of the concerns that people may weigh in deciding whether they need bankruptcy, and if so, whether now is the right time to file, including the effect of bankruptcy on credit, the ability to preserve assets, and other strategies such as dipping into retirement accounts to pay debts. Judge Bruce Markell recently came across a "rule of thumb" book that advised that people should consider bankruptcy if it would take more than five years to pay off your debts or you would have to use assets to do so. (Note: the Judge has no position/comment on the appropriateness/usefulness of such a rule). Many of our Credit Slips readers help clients answer this question about whether they need bankruptcy every day, and most of us have had to counsel friends or family about bankruptcy. What is your rule of thumb, if you have one? What is the "last straw" tactic that you think families should avoid and file bankruptcy instead?

New Orleans DA's Chapter 9?

posted by Adam Levitin

A couple of years ago, it looked like New Orleans itself would have to file for Chapter 9.  Now it might just be the DA's office, which is mulling a rare Chapter 9 filing.  To file for Chapter 9, an entity must be a "municipality," which is defiend as a "political subdivision or public agency or instrumentality of a State."   I guess the local DA's office qualifies.  Interesting game of chicken with the tort plaintiff who was wrongfully convicted of murder.  

Credit Slipping in Newsweek

posted by Bob Lawless

Newsweek columnist Jane Bryan Quinn has a column this week about when it might make sense for a consumer to file bankruptcy. See "The Case for Walking Away. "  For expert commentary, Quinn's column features three Credit Slips regulars: Professors Adam Levitin, Katie Porter, and Elizabeth Warren. Check it out.

Bankruptcy in the Senate, December 4

posted by Bob Lawless

I'm in Providence, Rhode Island, for a field hearing of the Senate Judiciary Committee. The hearing is "Credit Cards and Bankruptcy: Opportunities for Reform." The other witness are former Credit Slips guest blogger and attorney for the National Consumer Law Center John Rao, Bankruptcy Judge Thomas Small of the Eastern District for North Carolina, and Professor John Chung of the Roger WIlliams University School of Law. The cab driver from the airport was among the most friendliest I've encountered and was pointing out the many fine features of Providence as we drove in. It's always nice to have your first contact with a place be with someone who is proud of their town.

One of the topics will be S. 3259, the Consumer Credit Fairness Act introduced by Senators Whitehouse and Durbin. This bill defines a "high cost consumer credit transaction" as one in which the interest and fees create an interest more than 15% higher than the rate on 30-year U.S. Treasury obligations (up to a maximum of 36%). Right now, that would be a credit transaction with an interest rate a little over 18% 19%. The bill then would subordinate to all other claims in a consumer bankruptcy any "high cost consumer credit transaction" and would excuse from the means test any bankruptcy caused by a "high cost consumer credit transaction."

The Bailout -- how do we know we really have a problem?

posted by Stephen Lubben

As the politics of the bailout get more and more heated, my friend and colleague Frank Pasquale, a regular at this blogging stuff who has also been thinking about the proposed bailout, was kind enough to comment on one of my earlier posts.  In essence, he asks how do we know that the credit markets would really collapse if the bailout legislation did not pass?

It is not an easy question to answer, given that the markets are largely anticipating some sort of bailout -- albeit with some doubt thrown into the mix.

I look to three factors:

1.  The interbank LIBOR rate is acting erratically.  This is the rate that banks charge each other for loans.

2.   Non-financial corporations are stockpiling cash in case of a lending market shutdown.

3.  The CDS market (admittedly part of the problem here) is also acting erratically, moving sharply based on the latest news about the government's actions.  The following chart (produced by Markit) tells the story last week with regard to the movement of two leading CDS index measures:



The Bailout -- another perspective (part 1)

posted by Stephen Lubben

First, I want to thank Bob Lawless and the rest of the Credit Slips folks for having me back yet again -- I'm getting to be like the guest who would not leave.

Second, while it might make me part of the "establishment," I'm going to say right from that start that I join those who favor the bailout.

I also think we need to avoid a whole lot of knee jerk reactions that are floating around out there -- like the SEC's ban on short selling, which is quickly becoming the Bad Management Protection Act of 2008.  Of course, the notion that the administration can open the door on this issue "just a little" is also equally suspect.

I view the economy and the larger financial system as being at a Titanic like moment:  post iceberg, per submersion.  It is certainly reasonable to disdain those who got us into this situation, but I'm not going to let my feelings for them get in the way of saving as many people as possible.

That said, I understand why there is a good deal of skepticism about the bailout.  In part chapter 11 is to blame -- there has been almost no effort to explain why AIG is different from Enron, United Airlines, or any other really big corporation that has recently failed.  And the financial industry needs to fess up that it blew its chance to self-regulate the credit default swap market -- too many people, even myself to some degree, bought the "trust us, we're experts" line from ISDA and other market players.

No wonder people aren't buying that line in connection with the bailout -- especially when the administration has its own credibility problems in this regard in connection with other big, complex projects in the non-financial area.

More on the chapter 11 issue, and why I think the administration has done a terrible job of selling this but still generally support the bailout, after the jump.  I'll save my thoughts on the CDS market for another post.

Continue reading "The Bailout -- another perspective (part 1)" »

Not Quite Free and Clear

posted by Stephen Lubben

Beginning with Baird and Rasmussen's End of Bankruptcy, and including papers by Westbrook, LoPucki, and yours truly, much recent corporate bankruptcy scholarship has focused on the frequent exercise of pervasive control by secured lenders in chapter 11 cases.

A key aspect of this new reality is the prevalence of sales of "substantially all" (corporate speak for "all") of the debtor's assets under section 363, before formulation of a plan.  Lenders are willing to fund short cases leading to sales of the debtor as a going concern -- not "old fashion" reorganization plans.  Sale of the debtor's assets under section 363 importantly invokes § 363(f) of the Bankruptcy Code, which appears to allow the new buyer to acquire "clean" title to the debtor's assets.

But along comes Judge Markell, writing for the 9th Circuit Bankruptcy Appellate Panel in Clear Channel Outdoor, Inc. v. Knupfer (In re PW, LLC), to throw cold water on this reliance on section 363(f).  Judge Markell summarizes his opinion as follows:

outside a plan of reorganization, does § 363(f) of the Bankruptcy Code permit a secured creditor to credit bid its debt and purchase estate property, taking title free and clear of valid, nonconsenting junior liens? We hold that it does not.

I discuss this conclusion -- which many chapter 11 practitioners and scholars will find shocking -- after the jump.

Continue reading "Not Quite Free and Clear" »

It Is Time to “Sunset” Preference Law As We Have Known It Or at Least To Test Its Underlying Basis Empirically .

posted by david lander

It is time to “sunset” preference law as we have known it or at least to test its underlying basis empirically .

Ten years ago or so Lynn Lopucki helped to focus our attention on the unfairness of the treatment of unsecured creditors vis a vis secured creditors.  In the past decade things have only become worse for unsecured business creditors as Revised Article 9 tightened the hold of secured business creditors, but that topic has seemed to have fallen  off of the radar screen.

This is a good jumping off point for examining the one area of technical bankruptcy law that most unsecured creditors love to hate “preference law.“ Preference law has outlived whatever usefulness it might have  had. The effort to separate the wheat from the chaff  is not worth the energy.  The litigation costs and aggravation costs far outweigh the benefits.  What are the benefits?  The recoveries are intended to be redistributed among all unsecured creditors. Although few studies have been done it does not appear that this redistribution is meaningful when the litigation costs, extorted settlements and bad feelings of defendants are measured against those net redistributions. Moreover, the courts have held that those recoveries may be pledged to a DIP Lender and in those cases the general unsecured creditors have money taken out of their pockets and receive no benefit from this “redistribution.” Some commentators feel that the threat of preference recovery limits the potential preference payments that a failing debtor may make, or that overreaching creditors may demand and collect, but there is simply no evidence that this is accurate and the only study indicates that this is not true.  Finally, some preference aficianados justify preference recoveries on the basis of equality of distribution and fairness and justice.  Just ask unsecured creditors that are caught in a bankruptcy and  you are likely to find that the opposite is true; the efforts at recovery are deemed unfair and unjust. The only lobby for current preference laws seems to be people who are outraged by apparent  unfairness of one creditor receiving more than others, or who believe that the existence of these laws promotes “better” conduct among debtors and creditors in the wake of financial distress, those who benefit from the litigation spawned by preference laws and perhaps bondholders who believe these avoidance actions increase their recoveries.

Continue reading "It Is Time to “Sunset” Preference Law As We Have Known It Or at Least To Test Its Underlying Basis Empirically . " »

Consumer Credit Fairness Proposed for the Bankruptcy Code

posted by Bob Lawless

On Monday, Senators Whitehouse and Durbin introduced S. 3259, the Consumer Credit Fairness Act. The bill would cut back on some of the worst consumer credit abuses by trimming back on collection rights in bankruptcy.

The bill begins by defining a "high cost consumer credit transaction" as any extension of credit, including costs and fees, that exceeds the lesser of (a) 15% plus the 30-year Treasury bond rate (a calculation that currently stands at 22.4%) or (b) 36%. There are two consequences that would flow from a transaction that met this definition. First, the creditor in a "high cost consumer credit transaction" would have their claim subordinated to all other claims in the bankruptcy case. Second, any debtor who filed bankruptcy as a result of a "high cost consumer credit transaction" would be exempt from the means test that determines eligibility for chapter 7 bankruptcy.

Bankruptcy Filing Fees Through the Ages

posted by Bob Lawless

Filing_fees_over_time_graph The cost of everything keeps rising, even the cost of going broke. When something costs more, people use less of it. I've been thinking lately about that idea and how it relates to the U.S. bankruptcy filing rate.

The filing fee for a chapter 7 bankruptcy is now $299, which is a 43% increase from the cost just before the 2005 changes to the bankruptcy law took effect. Chapter 13 filing fees are now $274, a 41% increase from 2005. Those increases would help to explain why U.S. bankruptcy filings remain at historically lower levels. For example, I project that there will be slightly over 1.0 million filings in the 2009 calendar year as compared to about 1.6 million filings in the years immediately preceding the 2005 bankruptcy law.

I recently had occasion to compile the rising cost of chapter 7 or 13 filing fees since the Bankruptcy Code's became law in 1979. Sure, attorneys' fees are the big cost of filing bankruptcy, and with one of my great research assistants, Heather Miller, I'm working on a paper that quantifies how the 2005 bankruptcy law changed the total cost of filing. (Heather probably would be more pleased if I worked on the draft instead of blog posts.) As part of that work, I felt compelled to see how one component of the cost of bankruptcy, filing fees, had changed and felt even more compelled to share it with all you.

Continue reading "Bankruptcy Filing Fees Through the Ages" »

Older Americans in Bankruptcy--The First Paper Out of the Consumer Bankruptcy Project

posted by Bob Lawless

Many of us on Credit Slips are part of the Consumer Bankruptcy Project (CBP), a multidisciplinary research initiative. This week, many of you probably saw the press coverage for the first paper published out of the CBP data: Generations of Struggle by Deborah Thorne, Elizabeth Warren, and Teresa A. Sullivan. This paper's reports three key findings. Since 1991--

  • Americans age 55 or older have experienced the sharpest increase in bankruptcy filings.
  • Americans age 34 or younger have experienced the greatest decrease in bankruptcy filings.
  • The influence of Baby Boomers on bankruptcy filings has moderated substantially.

A full copy of the paper is available from the AARP here. The paper shows that older Americans are under greater financial stress than ever before. I am sure we will have more to say about this paper here on Credit Slips.

Because the courts do not collect any basic demographic data about who files bankruptcy, this sort of information would not be available without interdisciplinary research teams like the CBP and the organizations who generously support our research (the AARP, the Robert Wood Johnson Foundation, the Federal Deposit Insurance Corporation, and research funds at the University of Michigan and Harvard University). The data collection for the CBP is complete, and we will keep announcing the availability of new papers here on Credit Slips. What exactly, however, is the CBP?

Continue reading "Older Americans in Bankruptcy--The First Paper Out of the Consumer Bankruptcy Project" »

Footing the Billary

posted by Jonathan Lipson

Thanks to Bob and the other Credit Slips authors for having me back. I hope to post about several different things, some more topical than others. The first may be the most topical of all--the presidential campaign.

Now that Hillary has conceded the Democratic primary to Barack Obama, we are left with a question Credit Slips readers might care about: How will she pay off her campaign debt and—more interesting—what if she can’t?
According to filings with the U.S. Federal Election Commission (FEC), which governs these things, as of the end of May, Hillary’s campaign was about $20 million in the red.
Consider the following scenarios:

1. Hillary's Committee receives contributions sufficient to pay off the debt. This is probably the way the federal election law expects things to work. The problem is that individuals are limited to contributions of $2,300, and there is a long history of unsuccessful candidates—famously, John Glenn--who could not pay off their presidential campaign debts.

2. Hillary's Committee doesn’t receive contributions sufficient to pay off the debt, but Hillary picks up the tab. This is possible, and appears permissible under U.S. campaign finance law. But Hillary already “lent” her campaign $10 million. Why? We don’t know, but presumably so that she could repay herself in the event she was able to raise the money from others.

3. Hillary doesn’t pay off the debt and creditors don’t sue. As a general matter, we like the compromise and settlement of claims, and you might think that this would be as true of campaign debts as others. But in fact—for reasons that should be fairly clear on reflection—federal election law is uncomfortable with campaign creditors who forgive debts. The forgiveness might simply be a way around campaign contribution limits.

4. Hillary doesn’t pay off the debt, and creditors sue. Nothing stops creditors from suing an election campaign committee that doesn't pay its debts, and nothing prevents the committee from commencing a bankruptcy case. But an election committee doesn't generally have assets—unless it has avoidance actions under U.S. bankruptcy law or state law causes of action that might recover payments for redistribution to other creditors.
And this is where things get interesting.

Under McCain Feingold, the 2002 federal law that made important (if controversial) changes to U.S. campaign finance law, it appears that Hillary, as the candidate, has an incentive to pay herself first, before other creditors--even if her Committee is insolvent. Why? Because if she doesn’t do so before the conclusion of the Democratic primary (i.e., the Democratic Convention, in August), her repayment is apparently capped at $250,000 under the so-called "Millionaire's amendment." See 11 CFR 116.11(b) (The Millionaire's amendment is being challenged in the Supreme Court on other grounds).

So, it looks like campaign finance law puts a conventional understanding of priority on its head. Here, the “owner” or beneficiary of the Committee—the candidate—would get paid before other creditors. If her Committee were insolvent, and she repaid herself before August, and the Committee is then put into involuntary bankruptcy, can the bankruptcy trustee recover the repayment as a preferential transfer under Bankruptcy Code section 547? Is it akin to a dividend distribution while insolvent, which would be recoverable under state law? Or does McCain Feingold create some kind of defense to these or similar actions?

I’ve written about the uneasy fit between commercial law and campaign finance law, looking in particular at first-amendment (political speech) defenses to fraudulent conveyance actions by insolvent political donors. Jonathan C. Lipson, First Principles and Fair Consideration: The Developing Clash Between the First Amendment and the Constructive Fraudulent Conveyance Laws, 52 U. MIAMI L. REV. 247, 272–303 (1997). Although there is some case law on this, there’s not much. Which suggests that even though campaign committees are often deadbeats, the normal debtor-creditor dynamics—dunning, suit, compromise and/or bankruptcy—do not seem to apply. A recent commentator on NPR observed that "debt retirement is the hardest task in American politics."

So, here are the questions for readers of Credit Slips: What should Hillary and her campaign Committee do? What experiences have you had with campaign finance (or other politically-related) debt? Should we treat political debt differently from, say, home mortgages or commercial paper?

What is the Difference Between a Crack Dealer and a Creditor Soliciting a Bankruptcy Debtor?

posted by Nathalie Martin

The crack dealer leaves you alone once you're broke, right? I know bankruptcy debtors are seemingly better credit risks than average people because they cannot get another bankruptcy discharge for 8 years, and because they seemingly have less debt, but most people still find it unbelievable that creditors hotly pursue bankruptcy debtors in order to give them more credit. My view is that these creditors are also hoping to fuel credit addiction. One would hate to have people outside the credit market too long. They might get used to it. Katie Porter’s work on credit card solicitations and bankruptcy debtors is ground-breaking. I had almost forgotten about the intense solicitation of credit to bankruptcy debtors until I went back into the clinic this semester. A new thing since my last clinic semester (Summer 2003) is that the solicitations come sooner now, within days of the filing and certainly before the discharge. Also, the clear (rather than unspoken) theme of the solicitations is that the debtors have been through a hard time, that these financial problems are not their fault, and that the time has come to treat oneself. As both Katie and Elizabeth Warren have noted elsewhere on this blog, this is a far cry from what creditors said about debtors during bankruptcy reform. The ads also suggest that buying a car now, right after filing for bankruptcy, can improve your entire life. For example, check out this ad, received yesterday, just THREE days after filing for bankruptcy:

Continue reading "What is the Difference Between a Crack Dealer and a Creditor Soliciting a Bankruptcy Debtor?" »

Lawyers Make Good Laws?

posted by Gene Wedoff

I attended last weekend's University of Illinois/ABI Symposium on Debt—a tour de force, as readers of Credit Slips can glean from Mechele Dickerson's recent reports. My main interest in attending was to gain insights about how to improve U.S. consumer bankruptcy law, and I got one insight in particular from an unexpected source--a paper on international corporate bankruptcy. The insight?  Bankruptcy lawyers really may be the best source for good bankruptcy laws.

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Why People Should Be Allowed to Walk Away from Their Debts

posted by Mechele Dickerson

Professor Heidi M. Hurd, a law and philosophy professor at the University of Illinois, ended the conference by discussing first principles in The Jurisprudence of Bankruptcy. Why should we forgive people who break contracts and harm others?

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God Was the Poor Man’s Only Surety

posted by Mechele Dickerson

The Conference opened with a talk on "Debt, Credit and Poverty in Early Modern England" presented by Dr. J. Craig Muldrew, a history professor from Cambridge (the one in England, not the one in the US).  (He used the term that is the title for this post.)

Though his paper related to Early Modern England, you'll notice striking similarities between what happened then, and what's going on now.  Indeed, Professor Edward Balleisen (a history professor at Duke) connected the dots between then, and now, in his response to Dr. Muldrew's paper.

Continue reading "God Was the Poor Man’s Only Surety" »

Abe Simpson Gets His Wish?

posted by Bob Lawless

Dear Mr. President:

There are too many states nowadays. Please eliminate three.

/s/ Abe Simpson

For those of you who do not watch The Simpsons as maniacally as I do--and that probably would be pretty much all of you--Abe Simpson is the senile grandfather who penned that letter. Now, according to a site calling itself the Los Angeles Chronicle, comes the news that Abe maybe has gotten his wish, and we perhaps have lost three states. Or, to quote Homer Simpson, "Anything is possible with President Koo Koo Bananas in charge."

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Are Bankruptcy Judges Unconstitutional?

posted by Bob Lawless

The title to this post is the question asked by former colleague, Professor Tuan Samahon (UNLV), in  an article just posted to SSRN: "Are Bankruptcy Judges Unconstitutional? An Appointments Clause Challenge." Click here to view the abstract or download the full version. Bankruptcy judges are appointed by the U.S. Courts of Appeals, but Article II of the U.S. Constitution allows only "inferior officers" to bypass presidential appointment and Senate confirmation. Samahon's article explores whether bankruptcy judges are "inferior officers." A taste from the abstract:

Although the Courts of Law have appointed bankruptcy adjudicators since the earliest bankruptcy laws, this Article advances the position that bankruptcy judges have gradually and over time accrued tenure, safeguards against removal, expansive jurisdiction and duties that are incompatible with inferior officer status under the balancing approach of Morrison v. Olson. Accordingly, they are not amenable to being opted out of advice and consent and they must be appointed pursuant to the Article II procedure. The appointments of present bankruptcy judges are consequently suspect and their judgments and orders are of questionable validity.

An Article II challenge has escaped the attention of academic commentators and (largely) that of the courts. Resolution of the challenge will require the Supreme Court to clarify its Appointments Clause jurisprudence This Article argues that the Court's pronouncements on inferior officers in Morrison and Edmond v. United States are irreconcilable. Which authority controls would (likely) dictate the outcome of any challenge. . . .

Samahon examines alternative interpretations of the relevant Supreme Court precedents and includes bankruptcy judges are suspect under some of these different interpretations but not others. Samahon's analysis is careful and balanced. Also, for the skeptics out there, he has an answer to why the issue has not been raised previously. He has laid out a road map for any litigant frustrated with a bankruptcy court to challenge the court's constitutional authority. The article is well worth a look.

The Bear is Dead

posted by Elizabeth Warren

The Fed's extraordinary step in propping up Bear Stearns, followed by Morgan Stanley's JP Morgan's purchase of the company at a fire-sale price, has everyone reeling.  But for Credit Slipsters there's an odd little irony worth noting:  Why didn't the Bear file for Chapter 11? 

In the be-careful-what-you-wish-for category, the Wall Street Journal noted:  "Bankruptcy experts said filing for bankruptcy protection wouldn't have been an attractive option for Bear Stearns, partly due to recent changes in the federal Bankruptcy Code relating to financial instruments like derivatives and repurchasing trades. Unlike most parties in bankruptcy, lenders in such transactions aren't stayed or prevented from acting to seize or control the assets involved in those deals."

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Bankrupt Consumer Arbitration

posted by Bob Lawless

A couple of years ago, I got all exorcised about MBNA v. Hill, 436 F.3d 104 (2d Cir. 2006). The case involved a consumer bankruptcy where MBNA had offset $159 from the consumer's account despite MBNA's admission that it had notice of the bankruptcy case. The consumer brought an action for damages because of MBNA's violation of bankruptcy's automatic stay and styled it as a class action. MBNA invoked the arbitration clause in its account agreement, and the Second Circuit agreed the case had to go to an arbitrator. Because the automatic stay is central to the U.S. bankruptcy court's power to protect the bankruptcy estate and because Hill had the potential to be an important precedent that undermined the bankruptcy court's authority, a few of us signed an amicus brief urging the court to reconsider its decision. The Second Circuit disagreed, and the case still stands.

I have been wondering where things stand with consumer arbitration in U.S. bankruptcy courts. I did a little poking around this morning and found a few reported cases where MBNA had been cited. Most of these are cases where a bankrupt consumer has asserted rights under a consumer protection statute as a counterclaim to the creditor's claim in the bankruptcy case. These are just the reported cases, and my curiosity is not about the law in the books but the the law on the ground. Are institutional creditors aggressively asserting arbitration clauses to avoid the jurisdiction of the U.S. bankruptcy courts? It's not really the assertion of arbitration against consumer protection claims in which I am interested. Rather, I am really curious to know whether institutional creditors are using arbitration in an attempt to avoid core bankruptcy procedures like the automatic stay or the claims resolution process. Comments are open.

Illinois Statute Gives Debtors Less Protection After Bankruptcy?

posted by Bob Lawless

A crazy Illinois law demonstrates how bad drafting is not just for the U.S. Congress. State legislatures can do it too! It is my understanding that some Illinois automobile lenders are citing this law (625 ILCS 5/3‑114) as a reason to give some debtors less protection after they filed bankruptcy. Under this reasoning, these debtors are in  worse legal position because of the bankruptcy filing. That can't be right.

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Surprise!!! You've Earned a Discharge AND a Foreclosure

posted by Katie Porter

Tomorrow, the Senate is expected to vote on the Foreclosure Prevention Act of 2008, Title IV of which would permit bankruptcy courts to modify home mortgages in certain ways if the loan and the debtor met specified criteria. We've described that idea before, but the bill has crucial implications for bankruptcy that are not related to loan modification. Specifically, take a look at section 421, which proposes a solution to a problem with current bankruptcy law. Many Chapter 13 debtors pay for 3 to 5 years on a repayment plan, doing everything the law requires of them, and only a week or two later, face a foreclosure. How does this happen? Because the mortgage servicers frequently assess charges during a bankruptcy case, but fail to disclose these fees. Courts don't approve them; trustees don't adjust the debtor's payments to account for them; and debtors aren't even given notice that these charges are piling up. Instead of emerging from bankruptcy with a fresh start, homeowners find themselves defending a foreclosure or having to immediately pony up hundreds or thousands of dollars. Just last week, Judge Brendan Shannon of the Delaware Bankruptcy Court addressed this issue, challenging lenders to disagree that these undisclosed "surprise" fees don't "frustrate" bankruptcy's home-saving purpose. The Foreclosure Prevention Act of 2008 tackles this problem by requiring mortgage companies to disclose all fees within the earlier of 1 year of assessing the charges or 60 days before the end of the bankruptcy. The law also specifies that a lender may only charge such fees if they are lawful, reasonable, and provided for in the contract. It's sad that this latter requirement is even necessary--it essentially just prohibits mortgage servicers from violating existing law by overcharging consumers, a problem that an increasing body of case law and research suggests occurs with alarming regularity. I see lots of reasons why permitting bankruptcy courts to modify mortgages may be the best comprehensive solution to the foreclosure crisis, but I also hope Congress takes a hard look at the rest of the bill and considers its overall importance. If consumers do their part in bankruptcy and make every payment required by law, the system should honor its promise to give them a financial fresh start.

Contracting for Stay Waivers

posted by Adam Levitin

One of my students brought to my attention this recent decision enforcing a prepetition waiver of the automatic stay in a Chapter 11 case. As the decision notes, it's not uncommon to see court enforce pre-petition waivers of the stay when the waivers were made in the context of earlier aborted Chapter 11 plans. But in this case the waiver was made in exchange for a foreclosure forbearance agreement and not in the context of an early Chapter 11.

There is, of course, an important body of scholarship arguing for permitting contracting around bankruptcy on efficiency grounds. The literature has a real problem in addressing the fairness norms that are central to bankruptcy, but leaving it aside, I think prepetition waivers of the stay have a fundamental doctrinal problem--the stay is a right of the estate, not of the prepetition debtor, so the prepetition debtor has no ability to bargain it away.

Continue reading "Contracting for Stay Waivers" »

NYT Topic Page on Bankruptcy

posted by Bob Lawless

One of my friends--and you know who you are--gave me some serious stick for not putting up a post on Jane Birnbaum's January 12 New York Times article on the state of the bankruptcy system. It took me a while to find it on the NYT web site. For some reason that is not readily apparent to me, searching on the word "lawless" produces more hits about tribal regions in Pakistan than for myself. Is it possible that it is really not all about me? Anyway, the article featured several great quotes from fellow Credit Slips bloggers Debb Thorne and the usual boring numbers stuff from me.

The real reason I thought it was a good idea to bring up this article now was the NYT also put together a "Times Topic" page for bankruptcy. It collects a number of resources on bankruptcy as selected by the NYT editors, including a number of scholarly papers and books by Credit Slips contributors.

Between Life and Death, Bankruptcy Style

posted by Elizabeth Warren

The Brits, in their understated way, are on the fast track to revolutionizing the balance between debtors and creditors.  With no public fanfare, the Ministry of Justice announced a plan for debtors to stop making payments on credit cards for up to a year if they had a change in circumstances, such as a job loss or divorce.  (BTW, job loss, medical problems and family break up are involved in 90% of US bankruptcies.) In effect, the debtor can stand somewhere between regular repayment and bankruptcy, getting the automatic stay, but not the discharge. 

There are no reports of mass heart attacks by lenders, no threats to halt all consumer lending, and no reported plague of locusts. 

Continue reading "Between Life and Death, Bankruptcy Style" »

Nifong Files Bankruptcy

posted by Bob Lawless

Courtesy of the Law Blog over at WSJ.com, I learned that Michael Nifong has filed bankruptcy. Nifong was the district attorney in the rape case against the three Duke lacrosse players. After Nifong was removed from the case, the charges were later dropped. Nifong was accused of withholding evidence and has lost his law license. The bankruptcy petition and schedules are here courtesy of WRAL television in Raleigh-Durham. Apparently, if it bleeds cash, it also leads.

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Bankruptcy at the Dem's Debate

posted by Adam Levitin

I think this blog has been really good at eschewing electoral politics issues, and I don't want to be the one to change that. Serendipitously, though, during the five minutes I had the TV on watching the Democratic debate, Tim Russert asked the Democratic candidates tonight about bankruptcy reform and their past positions on bankruptcy legislation, and the occasion cries out for a blog post.

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Debt Slavery? Correlation of Slavery with Chapter 13 Filing Patterns

posted by Adam Levitin

Looking at Bob's posting of chapter 7 and 13 filing rates, I couldn't help but notice the correlation between high chapter 13 filing rates and states in which slavery was legal until 1863 (the "South" broadly speaking). The 11 jurisdictions with the highest rate of chapter 13 filings (and all of those with over half the filings being 13s) were slave states. The top 9 (and but for Lincoln imposing martial law in Maryland, the top 11) states were all part of the Confederacy. With a few of exceptions, all former slave states were in the top 15.


What are we to make of this this correlation?

Continue reading "Debt Slavery? Correlation of Slavery with Chapter 13 Filing Patterns" »

Did the 2005 Law Make for More Chapter 13s?

posted by Bob Lawless

Chapter_13_ratio_3 In my last post, I discussed whether the chapter 13 rate in different states told us much about the mortgage crisis. Short answer: not really. The problem is the assembling the time it would take to assemble the statewide chapter 13 rates going back historically. The national trend in the chapter 13 filing rate is not as difficult to assemble, and it reveals an interesting pattern. The proponents of the 2005 U.S. bankruptcy law said it would force more people into repayment plans in chapter 13 rather than taking the "easy way out" in chapter 7.

The graph shows the monthly changes in the chapter 13 filing rate since January 2004 through November 2007. The data are from the Administrative Office of U.S. Courts except for October and November 2007, which are from AACER. The month the 2005 bankruptcy law went into effect should not be hard to spot. The percentage of cases that were chapter 13 filings spiked immediately after the law went into effect, but the spike was aberrant. Immediately before the 2005 law went into effect, people rushed to file to beat the law's harsh provisions. It made more sense to beat the law's effective date if one intended to file chapter 7 rather than chapter 13. Thus, the big spike after the 2005 law's effective date represents the absence of chapter 7s rather than a rush toward chapter 13. As bankruptcy filings have continued their steady climb (discussed in previous posts gathered here) and looking again to be over 1,000,000 in 2008 (see here), the chapter 13 ratio has been trending back toward the same levels as before the 2005 bankruptcy law.

Still, even a casual inspection of the graph will tell us that the levels are not the same. Where a little over 30% of all bankruptcy filings were chapter 13s before the 2005 law, a little under 40% of all filings are now chapter 13s. The precise figure for November 2007 was 38.8% as compared to 32.2% in January 2004. Two years after the 2005 bankruptcy law went into effect, there seems to have been a slight shift toward more chapter 13s. In my previous post, I said that one really needed longitudinal data to get a handle on how the home mortgage crisis is interacting with bankruptcy filing rates. One wonders whether the persistence of the slightly increased chapter 13 rate might be partly attributable to homeowners filing chapter 13 to save their homes during the mortgage foreclosure crisis.

Does the Chapter 13 Filing Rate Tell Us Anything About Mortgage Foreclosures?

posted by Bob Lawless

A few days ago, I had the bright idea of looking at the chapter 13 filing rate in the different states and seeing if that told us anything about what might be happening with home mortgage foreclosures. Generally speaking, homeowners often will find it easier to save a home in chapter 13, and thus changes in the chapter 13 rate could give us some understanding of the financial distress being caused by the home mortgage crisis. It's a nice theory, but in practice the data are unilluminating on that point. There is great variation from state-to-state in the chapter 13 rate, making it difficult to draw meaningful conclusions from the data.

Chapter_13_ratio_by_statenov_2007Nationally, 38.8% of all November 2007 bankruptcy filings were chapter 13s, but the table shows the national figures masks considerable state variation. (The data are courtesy of AACER.) Bankruptcy experts will not find the state variation very surprising. In an 1993 article, Professor (and upcoming Credit Slips guest blogger) Jean Braucher documented how consumer bankruptcy attorneys can influence chapter choice. (See Braucher, 1993. "Lawyers and Consumer Bankruptcy: One Code, Many Cultures," American Bankruptcy Law Journal, 67:501-83.) On the heels of that article, Professors Teresa Sullivan, (Credit Slips blogger) Elizabeth Warren, and Jay Westbrook described important variations in bankruptcy practice that could not be explained by difference in formal rules but rather were likely the byproduct of differing cultures by local professionals. (See Sullivan, Warren & Westbrook, 1994. "The Persistence of Local Legal Culture: Twenty Years of Evidence from the Federal Bankruptcy Courts," Harvard Journal of Law & Public Policy, 17:801-865.) From these studies and others, we know that local legal culture plays a significant role in bankruptcy chapter choice.

The persistence of local legal culture makes it difficult to use a snapshot of differences in state bankruptcy filings rates or the percentage of chapter 13 cases as a proxy for the financial distress of homeowners. To make such a measure meaningful, one would have to follow the filing rate of particular states across time. In statistics-speak, we need longitudinal (over time) not cross-sectional (across observations) data. Bankruptcy filing data by state are difficult to get and assemble, especially going back in time--why that should be probably should be the subject of another post--making the task beyond what I have time to devote to a blog post. Thus, I'm going to say that we can't say a whole lot about the mortgage foreclosure crisis from the chapter 13 data.

S-CHIP Comes to Bankruptcy Court (Please)

posted by Bob Lawless

A month ago, a debate raged around S-CHIP, the State Children's Health Insurance Program (see here for background from the NYT). In the end, President Bush vetoed a bill that would have expanded the program to make health insurance more widely available to millions of uninsured children (but I digress). Putting aside the political back-and-forth over expanding S-CHIP, there are two empirical points that would seem relatively uncontroversial. First, many families who are eligible for S-CHIP fail to enroll. Second, many individuals arrive in bankruptcy court without health insurance or with gaps in health insurance coverage.

The bankruptcy system has an opportunity here to make the world a little bit better place. Eligibility for S-CHIP programs varies from state to state, but it is generally stated as a matter of annual income (relative to the federal poverty line) and size of household. Income and size of household also are two facts that debtors must disclose when filing for bankruptcy. When individual debtors arrive for their meeting of creditors, why can't bankruptcy trustees make two simple inquiries of debtors who fall within their state's guidelines. Do you have dependents under the age of 18? Do you have health insurance that covers these dependents? For those debtors who answer they do not have health insurance for these dependents, the trustee simply could hand them a form for enrollment in the state's S-CHIP program and refer any further questions about eligibility to the appropriate state agency.

Simply by issuing a directive as part of its oversight responsibilities for the standing bankruptcy trustees, the Executive Office of U.S. Trustee could implement this proposal in a heartbeat. Moreover, as participants charged with promoting the effectiveness of the bankruptcy system, the U.S. Trustee and the bankruptcy trustees should want to help direct eligible persons into state S-CHIP programs. Individuals who risk uninsured medical bills for their dependent children will be less likely to complete a chapter 13 plan and less likely to recognize the full benefits of a fresh start that the bankruptcy discharge gives them in either chapter 7 or 13. In the absence of action from the U.S. Trustee, I know of nothing that would stop bankruptcy trustees from implementing these suggestions on their own, and I hear that some bankruptcy trustees may already be giving debtors information about the S-CHIP program. That is a good idea that should spread around the nation.

A National Conversation on Bankruptcy?

posted by Elizabeth Warren

Bankruptcy isn't a very sexy political issue.  Don't get me wrong:  I think bankruptcy policy is critically important to working families.  In a world with inadequate health insurance, job insecurity, predatory lenders, family break ups and plain old financial mistakes, bankruptcy can be a family's last chance to get back into the economic mainstream. But no one sees bankruptcy in their future, and those who have been through it usually want to forget, so there is no special interest group for the protection of bankruptcy laws.

Today Senator Chris Dodd released a major policy statement entirely about bankruptcy.  The theme is that bankruptcy is a critical safety net for families.

Continue reading "A National Conversation on Bankruptcy?" »

Mortgages in Bankruptcy 101

posted by Bob Lawless

A few weeks ago, Katie Porter discussed how the Wall Street Journal mischaracterized U.S. bankruptcy law while its editorial page criticized bills that would give relief to beleaguered homeowners. Yesterday, the New York Times mischaracterized U.S. bankruptcy law while its editorial page supported bills that would give relief to beleaguered homeowners. Sorry New York Times, but it is not true that "Under current law, mortgages on primary homes are the only type of secured debt that is ineligible for bankruptcy protection." Mortgage debt is part of the bankruptcy case--it is just treated differently from other debt in chapter 13. And, after the 2005 law, some other debt in chapter 13 does get similar treatment. Long sigh.

At the least, we can say that the mischaracterizations are now equal on both sides of the political fence. I doubt either the WSJ or the NYT set out to deliberately mislead. What's the quote? "Never blame malice or ill-will where sloth or ignorance can explain." The complexity is pretty high here. A number of reporters have asked me for an explanation of how bankruptcy law currently treats home mortgages. With these bills pending in Congress, it is not just the reporters who are interested, so I've posted what I hope is a clear explanation below the fold. Bankruptcy jocks and other legal eagles should avert their eyes lest they be exposed to overgeneralization and blinding statements of the obvious (to them).

Continue reading "Mortgages in Bankruptcy 101" »

A $50 Fee There, a $75 Fee There, and Soon It Adds Up to Real Money

posted by Bob Lawless

Credit Slips own Katie Porter is the subject of a front-page article in today's N.Y. Times. The article discusses Porter's recent paper on mortgage claims in bankruptcy cases. Porter found questionable fees added to more than half of the claims and found significant discrepancies between what the bank and the debtor claimed were owed. Fees such as a "fax fee" or demand fee" were added to claims Porter found. In some egregious cases, banks also claimed to be owed far more than was actually due.

Although Porter's paper studies claims made in bankruptcy cases, I think it has broader implications for consumers. There is no reason to think these errors are not made systematically across the mortgage industry. In bankruptcy court, the claims are made in an adversarial setting and subject to scrutiny by the court and the debtor's lawyer. If overcharges are commonly occurring in the bankruptcy system, they are likely occurring across a much broader spectrum of claims.

UPDATE (11/6/07): Professor Porter's paper can be accessed on SSRN here.

How Much Do You Want for that Discharged Debt?

posted by Bob Lawless

Business Week just ran an article about the debt collectors who buy chapter 7 discharged debt. That's right. People pay good money for debts they can't legally collect. Why? It is because they expect to collect some of these debts, legally or not.

It would be perfectly legitimate to buy predischarge chapter 7 or chapter 13 debt and try to maximize collection within the bankruptcy process. The industry literature and web sites are very careful to avoid any statement that might hint illegal activities are occurring. Nevertheless, it all looks very fishy, and it strains credulity to believe that debt buyers are purchasing discharged chapter 7 debt with the expectation of recovering significant portions of that discharged debt. The Business Week article documents numerous instances where creditors or debt buyers were trying to collect discharged debt and failed to stop until hauled into the bankruptcy court.

Continue reading "How Much Do You Want for that Discharged Debt?" »

Reporting on the "Mortgage Meltdown"

posted by Katie Porter

Journalists have produced some really excellent stories about the rising foreclosure rate and the struggles of families to save their homes. I've previously blogged about an interesting LA Times piece about the lack of reliable data about foreclosure numbers; another favorite article is the NY Times story, Can These Mortgages Be Saved?, about difficulties that consumers have in obtaining loan modifications from servicers.

In recent days, however, the Wall Street Journal has published pieces about bankruptcy that contain inaccuracies. An editorial on October 24th, The Mortgage Meltdown, grossly mischaracterizes pending bankruptcy legislation. The bill, the Emergency Home Ownership and Mortgage Equity Protection Act of 2007(HR 3609), would reverse the existing preferential treatment in Chapter 13 bankruptcy law for home mortgages and permit debtors to modify their home loans in certain ways. The Wall Street Journal says that the legislation will "allow bankruptcy filers to treat home loans as similar to unsecured credit-card debt." The editorial then sarcastically posits "Guess how eager lenders will be to offer low mortgage rates if they have no better chance of collecting on a mortgage than they do on a credit card?" This characterization isn't mere alarmist hyperbole. It's flatly wrong. Mortgages are liens; they give the lender a security interest in the debtor's real property. Absent unusual circumstances, secured creditors retain their property interestsin the collateral. If they aren't paid--inside or outside of bankruptcy--they can foreclose on the property. In contrast, credit cards are normally unsecured debt. The lenders have no collateral. Unsecured debt and secured debt are treated differently in bankruptcy law, just as they are in state law. The apt comparison for HR 3609's proposal is that home mortgage lenders would be treated just like lenders whose collateral are vacation homes, or commercial property, or rental houses, or whose collateral are cars, motorcycles, or appliances. The Wall Street Journal should print a correction, making clear that the bill would not put mortgage lenders on par with credit card companies, and retracting its suggestion that the legislation would thereby cause mortgages to have the same interest rates as credit cards. Perhaps some would excuse the Journal because these statements were in an editorial. But a recent news article on bankruptcy as a home-saving device was also misleading.

Continue reading "Reporting on the "Mortgage Meltdown"" »

Duck, Duck, Duck . . . Bankrupt!

posted by Katie Porter

Recent CreditSlips guestblogger Adam Levitin send me a short piece from the American Banker, "Data Tool from Visa, Experian" about a new risk model called "BankruptcyPredict." The technology is proprietary, of course, but one innovation seems to be the use of data from "all forms of payments cards" processed by Visa, not just credit cards. This means that your pin-based debit transactions processed through the VISA network get incorporated into the model, as well as all the usual stuff in an Experian credit report. This potentially gives the model a great deal of information about your bank account and non-credit spending, not just loans. The model purports to be able to identify consumers who are very likely to go bankrupt up to two years in advance.

My first thought on this: WOW--two years in advance! Although more work is needed on this point, the data that I've seen suggest that most people who file bankruptcy report struggling seriously with their debts for about a year or a bit more before they go broke. This model would outperform consumers themselves, it seems. I imagine a room full of consumers in financial trouble (maybe seeking credit counseling at a face-to-face location). From the consumers' perspectives, they are desperately hopeful to stay out of bankruptcy, but they know it is likely to happen to some people who get in deep financial trouble. They hope that they are the "ducks" in the room but wait out the next months in tense silence to see whether they tip over the edge into bankruptcy--who will be the "goose." Visa/Experian apparently are able to sort out the "ducks," who will continue to pay interest and fees and struggle along, from the "geese," who will seek legal relief through bankruptcy. I also wonder whether consumers would want this information? If the Federal Reserve or the National Consumer Law Center or some enterprising academic built a similar model and made it freely available, would consumers use it? Is there a societally beneficial use to a BankruptcyPredict model? Should financial educators pay for the service so they can counsel clients more realistically on the likelihood of that a client's financial problems will deepen and lead to bankruptcy?

Bankruptcy Claims Trading: Part I

posted by Adam Levitin

Let me turn to a true bankruptcy nerd topic tonight—corporate bankruptcy claims trading. Bankruptcy claims trading is the buying and selling of claims against a bankrupt corporate debtor. (Trading in consumer bankruptcy claims is an issue that has not been academically explored to the best of my knowledge.)

Bankruptcy claims trading is virtually unregulated in the U.S. Although claims trades can effect changes in corporate control, they are not subject to securities or mergers and acquisitions regulation. There is also little case law on bankruptcy claims trades; my next post will address a very recent decision in the Enron bankruptcy that is the most significant to date.

So who on earth would want to buy a bankruptcy claim?

Continue reading "Bankruptcy Claims Trading: Part I" »

Watching TV for the Commercials

posted by Adam Levitin

I recently saw an amazing commercial on CNN Headline News for an operation called 1-800-Credit Card Debt. It appears to be some sort of debt adjustment agency. The CEO, a guy named, Tom Cooke, I think, was speaking and said "Don't let bankruptcy even enter your thoughts." I sure hope these guys are not allowed to serve as a BAPCPA credit counselor. (What I believe to be their website is a bit more balanced.) The commercial, though, raises the question of whether there are any ethical guidelines for credit counselors? What about liability? Malpractice? I would think that a credit counselor should be obligated to neutrally inform people of their full range of options under the law. For some folks, filing for bankruptcy is a wise decision.

Continue reading "Watching TV for the Commercials" »


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