395 posts categorized "Bankruptcy Generally"

Turnover that Check

posted by Bob Lawless

A blog reader (Michael L. Gompertz) alerted me to a recent decision from the U.S. Court of Appeals for the Eighth Circuit, which sits in St. Louis. For the nonlawyers who read the blog, us legal types really care about decisions from the courts of appeals because they are just below the U.S. Supreme Court in the legal hierarchy and because the U.S. Supreme Court hears so few cases. Thus, the U.S. Courts of Appeal are really the final arbiter for many important legal issues.

This particular case (Brown v. Pyatt, No. 06-3404 (8th Cir. May 23, 2007)) struck me as interesting not so much for the decision itself but for the unintended consequences its legal strategy may suggest. Judging from the alignment of interests on the friend of the court briefs, consumer bankruptcy attorneys might view the decision as a win, but I wonder whether that is true. To understand, first I need to explain the facts.

Continue reading "Turnover that Check" »

Manipulating the Means Test

posted by Katie Porter

Several months ago, I wrote on Credit Slips about my instinct that BAPCPA effectively has empowered the US Trustee's office to expand its authority.   My suspicision hasn't gone away. The prior post noted that the US Trustee's office has promulgated the median income numbers from the Census (an act that requires the exercise of some discretion and is subject to multiple interpretations). More recently, the UST took it upon itself to promulgate the so-called "IRS Expense" standards for non-mortgage home expenses." (number 2a when you link). Debtors seem to be required to use these numbers or face an objection from the UST office. The US Trustee is basically breaking down what the IRS gives in its own Collection Standards as a single figure (housing) into two numbers--ownership (mortgage/rent) and non-ownership (repairs, insurance, utilities, etc). The UST seems to be using a figure of about 67% for the former and 33% for the latter, but in other counties it was closer to half and half. Where on earth did this come from? Does the US Trustee have any expertise in determining the costs of maintaining a residence? Where does the statute empower the UST to be the interpretative guide of the IRS Standards? Section 707 says "IRS Expenses", not IRS Expenses as souped up or split out by the UST. Is this overreaching? Shouldn't the IRS standards be interpreted by, well, the IRS? Obviously, if there is a dispute, someone needs to solve it. But isn't that what we have bankruptcy courts for? Or why Congress can amend statutes? Does this go too far beyond the boundaries of the UST's traditional role of "maintaining the integrity of the bankruptcy system" and become substantive law-making?

Spanish Bankruptcy Conference

posted by Bob Lawless

Hola! from Madrid. I am at the 1 Congress de Derecho Concursal, a conference offering comparative perspectives on the two-year anniversary of the adoption of the Spanish bankruptcy law. Professors at the University of King Juan Carlos and the University of Almeria organized this wonderful event. I would especially like to thank Professor Juana Pulgar Ezquerra for inviting me to speak, and Professor Francisco Javier Arias Varona for his kind hospitality and patience with my complete lack of Spanish language ability.

The Spanish bankruptcy law is primarily for businesses. This morning, we heard that of the 900 bankruptcy proceedings filed in Spain in 2006, only nine fifty-three were for individuals. As Professor Arias explained to me, the wonder was that there were even nine fifty-three. Spanish bankruptcy law offers no discharge and does not prevent or even stay a lender from retaking a personal residence when the home loan is in default. Consider that the home loan is the principal indebtedness for most Spainards, meaning that most individuals will be indebted to only one creditor or at least only one main creditor. For an individual, the Spanish bankruptcy law offers very little other than the chance to reach an agreement with one's creditors, a result that can be achieved outside bankruptcy court. Under these circumstances, it is not surprising that the filing rate is basically nonexistent.

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Entrepreneurial Studies

posted by Elizabeth Warren

Last week Bob Lawless posted Entrepreneurs Among the Bankrupt.  As his co-author (or co-conspirator) on a study of bankrupts who are self-employed, I paid particularly close attention to what he had to say.  My first thought was that publishing his doubting remarks about whether there is a coherent (even if incipient) field of entrepreneurial studies will probably not get him invited to more conferences on entrepreneurial studies.  My second thought was that he is probably right.

I was first struck by how loose is the definitiion of "entrepreneurial studies" when I talked with Stuart Gilson at Harvard Business School about our doing a joint study of failed entrepreneurs.  Stuart loved the topic, and over lunch we agreed that we should study only "small start-ups."  Just as the waitress brought the Gaucho Chicken with fries, Stuart asked, "Should we limit our sample to $5 to 10 million inital capitalization, or go to something like $50 million?"  When I explained that median debt (a good measure of size in bankruptcy) was about $153,430 in 1994 business bankruptcy cases, we just stared at each other.  While Stuart talked about angel investing and venture capital, I speculated that a lot of the failed entrepreneurs in bankruptices we financed on credit cards and the spouse's job at an insurance office.  We drifted apart.

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Executory Contracts & Puzzles of the Code

posted by Stephen Lubben

Tomorrow I'm going to be busy at the law school's graduation, so I think I'll make this my last post.  I really appreciate the chance to post here at Credit Slips.  I'll end with my musing about one of many puzzles I see in the Bankruptcy Code.

Courts and academics often proclaim, with little analysis, that the Bankruptcy Code prohibits non-debtor termination of contracts. Specifically, because section 362(b) of the Bankruptcy Code does not mention termination of contracts with the debtor, several courts have held that non-debtor parties are precluded from unilaterally terminating a contract or lease with the debtor, absent relief from the automatic stay. Why this should be so, especially in cases where the contract would be terminable outside of bankruptcy, is unclear. Arguably the automatic stay should not give the debtor greater contractual rights than it enjoys outside of bankruptcy.

Instead, I argue that careful reading of sections 362 and 365 shows that the Bankruptcy Code simply ensures that the non-debtor party will have to pay full breach damages if it terminates a contract solely because of the debtor’s bankruptcy filing. In most cases paying damages is an unattractive option, since the debtor will likely incur substantial costs to cover. In short, the Code often effectively precludes termination by the non-debtor party, by making it prohibitively expensive, but there may be instances in which a party could advance sufficient “cause” to lift the automatic stay for purposes of breaching a contract.

Am I wrong? What are some other puzzles you see in the Code?

Some that I wonder about are: (a) where does it say in the Code that administrative expenses come after secured claims (it was the other way around in receiverships with regard to "six month" claims) and (b) where exactly does it say that a chapter 11 debtor can’t pay prepetition debts in the ordinary course of business?

Professional Fees & Overhead

posted by Stephen Lubben

As some of you know, I spend a good deal of my time thinking about professional fees in chapter 11. One thing that has always puzzled me is the issue of "overhead." It is still common to find courts stating that certain items (e.g., secretarial overtime, attorney late night meals, word processing) are not recoverable in bankruptcy because they constitute "overhead." A variation on this same theme is those courts who announce that certain categories of expenses are not compensable "in this district."

Assuming these items are passed on to the client outside of chapter 11, the bankruptcy court that adopts this approach is essentially accusing the professional of double charging its clients.

More to the point, I wonder how the bankruptcy court knows that these items are overhead? Indeed, the fact that some law firms have two hourly rate structures, one with separate charges for expenses and one, higher hourly rate structure without these charges, suggests that these items are not part of overhead. And since law firm billing systems can easily assign these items to specific client and matter numbers, why assume they are overhead? 

In short, is it time for bankruptcy judges (and the U.S. Trustee) to drop the notion of "overhead"?

And Now for Something Completely Different

posted by Stephen Lubben

Dscn2003 For a person interested in the history of corporate bankruptcy, living in Northern New Jersey can be great fun, as every day provides reminders of the great bankruptcy cases of the past, particularly those involving the many railroads that once converged here, all of which were in receiverships and/or section 77 proceedings at various points in time. The sign pictured here is one I see every morning at the Newark's Pennsylvania Station, even though the last Penn Central train departed several decades ago. I'm sure this has confused more than a few tourists over the past few years!

Senate Thinks About the Middle Class

posted by Elizabeth Warren

For those of us who care about credit issues, yesterday's Senate Finance Committee hearing, called by Senator Baucus, was instructive.  The title: "Can the Middle Class Make Ends Meet?" I testified, along with a Brookings fellow, a social worker specializing in pediatric oncology, and the president of a tax-cut foundation.  Three of us thought the middle class was in trouble, and the fourth thought that thanks to tax cuts the middle class was doing great and the with more tax cuts they would be even better off.  (You can guess who took what positions.) 

While the senators focused mostly on specific issues like paying for college or the impact of a medical problem, everything said in that room (except maybe the tax cut stuff) was also about credit.  Rising debt, falling savings, bankruptcy, aggressive credit marketing, aggressive collection--it all plays out against the background of what's happening to the middle class.  If families could still afford to put away 11% of their incomes in savings, as they did in 1972, then the credit and bankruptcy issues we discuss would be very different.

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UPDATED: BAPCPA as Consumer Protection

posted by Katie Porter

A few weeks ago I posted about the bankruptcy of several subprime lenders and questioned whether or how consumers' potential actions against the lenders would be preserved after bankruptcy. New Century (Delaware Case No. 07-10416) has proposed to sell several of its assets, including pools of "bad" loans that it was forced to repurchase. The motion for an order approving bidding procedures specifically requested that the sale be "free and clear" under section 363(f). Conspicuously absent was any mention of 363(o), a BAPCPA provision that seems to limit "free and clear" sales of assets that are consumer credit transactions subject to the Truth in Lending Act or consumer credit contracts.

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The American Law & Economics Association Annual Meeting

posted by Angie Littwin

This weekend was the annual meeting of the American Law & Economics Association (ALEA).  It was a two-day conference at Harvard Law School, with five concurrent panels of three presenters for each time slot.  Although the topics ranged from plea bargains to family law to referees in the NBA, there was almost always a bankruptcy or contracts panel taking place.  (I knew I was on the right track because the sessions I wanted to see were all in the same room.  I got to know Pound 102 quite well.)

I saw too many presentations to recount all of them, so I’ll summarize briefly three papers I think will be of particular interest to Credit Slips readers. 

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203 N. LaSalle St -- The Photo

posted by Bob Lawless

203_n_lasalle_st_2 I figured we might as well make today photo day here at Credit Slips. It could have been somewhat like the days of my youth when we used to go to photo day at Busch Stadium. I could never get close enough to Lou Brock for a decent photo, so instead I have a stack of photos in my desk drawer at home of players like Ted Sizemore and Mike Tyson (the other Mike Tyson). Not all of us are that photogenic enough for that kind of photo day. You Credit Slips bloggers know who you are.

What I got instead is the photo to the left. I was teaching Bankruptcy Reorgs this semester and remembered I had a photo of 203 N. LaSalle St. sitting on my hard drive. And, yes! It is THAT 203 N. LaSalle St. from the U.S. Supreme Court case of the same name which ruled on the applicability of the fresh capital exception in chapter 11.

I thought others might have a use for this photo also. I took it one Sunday morning several years ago as we were driving out of Chicago. Feel welcome to use it for any noncommercial purposes such as for the classroom. Click on the photo for a larger version.

If you want to use this photo for commercial purposes, such as in a collection for publication, please contact me. You have bigger problems than just needing copyright permission.

E-mail Bankruptcy

posted by Bob Lawless

Internet_tubes_3 The Credit Slips set is never going to be accused of being overly technologically savvy or, for that matter, on top of the latest electronic trends. For example, we have previously expressed our astonishment when we fired up this web site, and the Internet tubes directed us to the right place. Our good friend, Buce, recently caught us up to 2004 when he introduced us to the idea of "e-mail bankruptcy." The dictionary definition of "e-mail bankruptcy" according to the Double-Tounged Word-Wrester Dictionary -- who knew? -- is:

n. choosing to delete, archive, or ignore a very large number of email messages without ever reading them, replying to each with a unique response, or otherwise acting individually on them.

The term is attributed to a Wired magazine column about Stanford cyberlaw guru Larry Lessig's decision to admit he would never possibly get through all of the e-mails that had accumulated in his inbox. Hence, Professor Lessig sent an e-mail to everyone, acknowledging his delinquency in responding, admitting he never would be able to respond, and apologizing for having failed to do so.

This concept raises all sorts of possible avenues of study. Does e-mail bankruptcy have an e-mail automatic stay? Are there e-mail exceptions to discharge? I will be happy to work on these questions for any paying client if e-mail bankruptcy includes e-mail administrative priority for attorneys' fees.

Actually, I find it interesting that Lessig used the term "bankruptcy" to describe his decision not to answer e-mails for which he would not possibly ever have time. Implicit in his use of the term was the notion that bankruptcy is about public acknowledgment of a failure to meet one's obligations. Interestingly, when one talks to people who have filed real-life bankruptcy, you hear stories about the bankruptcy filing being the "responsible" thing to do and tying the notion of responsibility to the public acknowledgment of failure. (I am indebted to fellow Credit Slips co-blogger Katie Porter for this point.) The reality is far different from the rhetoric of credit industry lobbyists and politicians who portray bankruptcy as an irresponsible and easy way out of one's obligations.

Stripping in Chapter 13

posted by Bob Lawless

We've been at this blogging thing for almost ten months now, and I'm finding the title to each blog post can be the most challenging. How about that one? Do I have your attention? We're actually not talking about that kind of stripping but lien stripping.

The concept of lien stripping is simple. A lender is owed, let's say, $150,000, but the collateral for the loan is only $130,000. Under U.S. bankruptcy law, lien stripping would reduce the lender's lien to $130,000 and leave the remaining $20,000 as unsecured debt. The idea is that outside of bankruptcy, the lender would have received the collateral worth $130,000 and be left chasing the debtor for the remaining $20,000. The bankruptcy result is thus a recontracting of the lender and debtor's relationship, consistent with the notion that the bankruptcy is a fresh start for the debtor. In other words, the bankruptcy result essentially gives the lender and debtor the terms of a new loan as if credit was extended at the moment of bankruptcy filing.

Unfortunately, the U.S. Supreme Court has issued a series of rulings that have sharply changed the concept of lien stripping that Congress laid out in 1978 when it passed the Bankruptcy Code. One of these decisions was a case called Nobelman v. American Savings Bank (1993) which interpreted language in chapter 13 that said a debtor could modify the rights of secured creditors except creditors with a claim "secured only by a security interest in real property that is the debtor's principal residence." The Court interpreted that language to mean that lien stripping was not allowed on a debtor's house.

At the hearings before the U.S. House of Representatives on Thursday, one witness (Shirley Jones Burroughs) described how she and her husband were struggling to save their house in chapter 13. To make matters worse, the bank larded up their claim against the couple with all kinds of fees and charges. Under current law, Ms. Burroughs and her husband will have to pay all these fees and charges to save their home. To make matters worse, the Burroughs are struggling to make ends meet on the reduced income that resulted from Mr. Burroughs's call to active military service in Iraq. This is not the fresh start Congress intended when it passed the 1978 Bankruptcy Code.

Both Ms. Burroughs and the next witness, Henry Sommer (president of the National Association of Consumer Bankruptcy Attorneys), proposed a simple solution -- Congress should restore the bankruptcy law to its original intent before the Supreme Court's decision in Nobelman. Although neither mentioned Nobelman by name, that was the clear result of their proposal to restore lien stripping of home mortgages in chapter 13. This proposal would merely put mortgage lenders in the same position they would occupy outside of bankruptcy court. It is not a gift to the debtor who must still pay the full value of the house over time or lose it to foreclosure. In a time of rising mortgage foreclosures, this would be a small change in the law that would provide enormous benefits.

(In his testimony, Mr. Sommer mentioned a more detailed appendix laying out the legislative proposals. That appendix did not make to the House web site. If someone has a copy and would send it along, I would be appreciative. My e-mail is rlawless-at-law-dot-uiuc-dot-edu.)

UPDATE (5/7/07): Mr. Sommer was kind enough to send me a copy of the legislative proposals and give me permission to make it available here.

House Hearings on 2005 Bankruptcy Law

posted by Bob Lawless

The Subcommittee on Commercial and Administrative Law of the U.S. House of Representatives Committee on the Judiciary held hearings this morning on the second anniversary of enactment of the 2005 bankruptcy law. There were four witness today:

  • Steve Bartlett, president and CEO of the Financial Services Roundtable
  • Shirley Jones Burroughs, a resident of Gastonia, North Carolina, who refinanced both a first and second mortgage three times with the Associates (now CitiFinancial)
  • Yvonne D. Jones, director, Financial Markets and Community Investment of the U.S. Government Accountability Office
  • Henry Sommer, attorney and president of the National Association of Consumer Bankruptcy Attorneys.

Guess which witness thought the 2005 law was just peachy? Isn't there anybody without strong industry or political ties that can be trotted out to defend this law at congressional hearings?

Undoubtedly, the other Credit Slips bloggers will have something to say about this hearing. Mainly, I wanted to note they had happened. The written statements are here and are worth the read. I especially commend Ms. Burroughs statement as evidence of what happens in a real world with predatory subprime lenders. Ms. Burroughs and her husband continually refinanced their mortgage debt in an attempt to be responsible and lower their monthly payments. The end result was more interest, more fees, and higher payments that ultimately became unbearable once her husband was called to active duty in Iraq.

Wife Beaters and Bankrupts

posted by Elizabeth Warren

A quarter page advertisement in the New York Times shows a young man and woman laughing, (a boyfriend-girlfriend sort of moment), under the headline "GET THE WHOLE STORY ON HIM, BEFORE IT IS TOO LATE."  The advertiser, Intelius, promises to check out two things:  1) Bankruptcy, and 2) Domestic Violence Convictions. 

At the same time, Katie Porter unearthed the CapitalOne 10-K warning investors that future business might not be so rosy if "social factors" such as "the stigma of personal bankruptcy" decline.

So there it is:  A huge credit card company says it may see spiraling losses if more people decide to abandon all moral conviction, and a background search company reminds America that guys who file bankruptcy and beat women are on par with each other--shoot, maybe they are the same guys.

Corporate America has a message:  bankruptcy is about moral depravity.  It isn't about medical debt and job loss, not about ex-spouses who die or who run off.  and it certainly isn't about anything the lenders might have done--like high fee mortgages with introductory teaser rates or credit cards with interest rates that quadruple when a customer is late paying another creditor. 

Continue reading "Wife Beaters and Bankrupts" »

Stories from the Front Lines

posted by Debb Thorne

Since February, I've been overseeing much of the data collection for the current Consumer Bankruptcy Project study. The process has been amazing, exciting, overwhelming, and often very depressing. (I frequently joke (only partially) with our interviewers that the cost of anti-depressants should have been included in the grant applications!) On a typical day, I talk with maybe half a dozen folks who have recently filed and want to explain their circumstances. Each is convinced that the circumstances behind their bankruptcies were unique--in fact, few of them were. Most have confronted a death, a job loss, or illness--and none of them ever thought this would happen to them. The story of a woman with whom I spoke on Wednesday is all-too common.

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From the Practitioners' Mouths (Worth Reading)

posted by Bob Lawless

Cathy Vance, the vice president of research and policy and associate general counsel at Development Specialists, Inc., and formerly national education coordinator at the Commercial Law League of American (CLLA) during the eight years the 2005 bankruptcy law wended its way through Congress, has reported on a CLLA survey of bankruptcy practitioners and their reactions to the 2005 bankruptcy law. The Bankruptcy Litigation Blog has Vance's summary here. If you have not seen it, the summary is worth reading. To whet your interests: 47% of respondents reported they had increased what they charge clients because of the 2005 law, and 23% said they had recommended an alternative to bankruptcy for their small-business clients because of the 2005 law's harsh treatment of small business debtors. To learn the rest of the findings, you'll have to read the summary.

Beyond Bankruptcy

posted by Katie Porter

As my semester-long bankruptcy class ends, I've started reflecting on coverage of topics. Bob Lawless inquired earlier this year whether many schools were going to a 4-credit bankruptcy course in part to accomodate the additional complications of BAPCPA. I have a different query. What law "beyond bankruptcy" or "besides bankruptcy" should students who want to be bankruptcy practitioners learn?

The standard answers are probably Corporations/Business Associations and Article 9. Indeed, the Honorable Bruce Markell's opinion in In re Schwalb, 347 B.R. 726 (2006) is a nice reminder that knowing Article 9 can be a substantial help to a consumer bankruptcy client who lives in a state that hasn't outlawed auto-title loans. What other laws do consumer or business bankruptcy attorneys need to know? In which law school courses, if at all, do they get taught? Should we be teaching more of these topics? In other words, has the broadening of bankruptcy coverage cut too far into coverage of state debtor-creditor law? Or has the rise of more federal regulatory regimes mean that attorneys need to know more "generally applicable non-bankruptcy law" to help financially distressed consumers or businesses? For example, the results of the empirical study on mortgage claims that I've been working on convince me that bankruptcy attorneys could do more for their home-owner clients if they were familiar with RESPA (real estate settlement procedures act) and TIL (truth in lending act.) Other ideas?

Get Last December's Figures Today!

posted by Bob Lawless

Only 107 days after the close of the calendar year, the Administrative Office of U.S. Courts (the "AO") has released bankruptcy filing statistics for 2006. The AO released the statistics in a press release under a headline stating "Bankruptcy Filings Plunge in the Calendar Year 2006" and contrasted the 617,660 filings in 2006 with the 2,078,415 filings in 2005. Thus, the AO's statistics conveniently match the conventional story told before passage of the 2005 bankruptcy law, namely that the system was plagued by filers who did not need it and who would be purged by a bankruptcy law that cracked down on abusive filings.

There are only two things wrong with the AO's press release. It is woefully outdated on the day of its release, and its comparisons are misleading.

First, let's explore the press release's old information. Two weeks ago, I posted about private data from AACER for the first quarter of 2007 that show U.S. bankruptcy filings on a trend to reach or perhaps top 1,000,000 in this calendar year. These same private data were the subject of an AP story. We are working our way back to the filing levels experienced before the 2005 law and much more quickly than I expected. Rather than bankruptcy filings plunging, the current view is that bankruptcy filings are on an upward trend.

One might ask why it is taking the AO so long to release filing data. Looking at the dates on the press releases from the AO's web site, it has released the previous calendar year's filing statistics on these dates:

  • February 19, 2002
  • February 14, 2003
  • February 26, 2004
  • March 1, 2005
  • March 24, 2006
  • April 17, 2007

It has been a long, slow steady progression of delay. This year, we did not receive the filing statistics for the last quarter of 2006 until after the first quarter of 2007 was already in the books. As my previous post on this year's filing trend indicates, receiving filing statistics that are over three months old can provide a misleading picture. I also posted about a data access issue--whether the AO is giving some persons access to their filing data before releasing them publicly. The AP story mentioned earlier suggested that some persons might already have seen the AO's statistics for the first quarter of 2007. If those statistics are available, they should be released to the general public.

Finally, I wanted to spend a moment on why the AO's press release is misleading where it compares 2006 filing data to the same data from 2005. As is well known, there was a huge number of persons who filed bankruptcy in the days and weeks leading up to the effective date of the 2005 bankruptcy law. Almost 550,000 people filed bankruptcy in the last quarter of 2005 and almost all of them just before the law went into effect on October 17, 2005. (See Charles J. Tabb, Consumer Bankruptcy Filing and Trends, available at http://ssrn.com/abstract=931172 for more details, especially at pp. 4-11). Those filings were done to avoid the harsh effects of the 2005 law, and thus the 2005 figures represent a large number of persons who would have filed later in 2006. Put another way, the 2005 law increased the number of filings in 2005 and decreased the number of filings in 2006. Although there is no question that filings declined in 2006, a direct comparison of the two years exaggerates the decline.

Oh, and the AO's data undercount business filers and overcount consumer filers (see here and Robert M. Lawless & Elizabeth Warren, The Myth of the Disappearing Business Bankruptcy, California Law Review, vol. 93, p. 745 (2005)), but you're probably all sick of hearing me say that.

Chapter 11 Textbooks

posted by Bob Lawless

After my last post about my Bankruptcy Reorgs class, I figured I might as well make it chapter 11 day on the blog. The other thing that is on my mind this morning are textbooks for chapter 11 courses or advanced bankruptcy courses. Again, for you nonbankruptcy types, law schools generally offer a course in bankruptcy that is a broad overview of the subject. Like many other schools, we also offer an advanced elective that focuses on chapter 11 bankruptcy for businesses. My law school decided to inflict me on the students this year for that advanced course.

To my knowledge, there are three textbooks that might be used for the course: Mark Roe's Corporate Reorganization and Bankruptcy from Foundation Press; Mark Scarberry, Ken Klee, Grant Newton, and Steve Nickles's Business Reorganization in Bankruptcy from West; and Michael A. Gerber, Marcia Goldstein, Lawrence Gottesman, and (Credit Slips guest blogger) Ted Janger's Business Reorganization from Lexis Publishing. I always have used my own materials for the course, but I was wondering whether others who teach such a course have had experience with these texts. Are these texts widely used? What are the strengths and weaknesses of these texts?

Looking Back at the Oldies (Cases)

posted by Bob Lawless

Sorry for the light blogging the past few days. This is what happens when you have six academics running a blog as an adjunct to their teaching and research and the end-of-the-semester crunch hits. We have not collectively fallen off the face of the Earth, although looking out my window right now makes me wonder. It was snowing when I woke up this morning. Snow in April? Whose idea was that? More to the point, whose idea was it to move from the University of Nevada, Las Vegas back to the Midwest?

Yesterday, I was teaching my Bankruptcy Reorgs class, and I had two of my students arguing a motion to confirm a chapter 11 plan. The question was whether the plan properly classified creditors. For the nonbankruptcy types, a brief digression is in order. Everyone else can skip below the jump . . . meaning that if you are a bankruptcy type you should not be reading these words. Stop it. I mean it. Skip below the jump.

Chapter 11 plans treat creditors by classes, and creditors vote on the plan by class. A class is considered to have accepted a plan if one-half of the number and two-thirds of the dollar amount of the claims in the class vote to accept. And, for the bankruptcy court to confirm a chapter 11 plan, at least one impaired class of claims has to have voted to accept the plan. Thus, the debtor has strong incentives to arrange the classes so there will be a relatively friendly class of creditors who will vote to accept the  plan. The Bankruptcy Code says the debtor cannot place dissimilar claims in the same class, but the Code is not clear on whether there are limits on the debtor's ability to place similar claims in different classes. Can the debtor gerrymander the classes so as to create a class that will vote to accept? It is an ambiguity in the statute or, as such a situation is known to lawyers, it is litigation happy-funtime. Now, we'll get back to stuff those nosy bankruptcy types can read.

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U.S. Bankruptcy Filings Back Over 1,000,000?

posted by Bob Lawless

Based on new data about filing trends in the first part of 2007, I have a prediction--there will be close to or even more than 1,000,000 U.S. bankruptcy filings in the 2007 calendar year. The folks at AACER have provided data showing that there were 72,945 bankruptcy filings during the month of March. That was 3,316 filings per day (measured by business days), a 7.3% increase from the previous month. That comes on the heels of a 17.6% increase in filings per day in February as discussed in a previous blog post. The per day filing figures for February and March 2007 are respectively 69.6% and 56.6% higher than one year previously. Bankruptcy filings are on the rise and dramatically so.

Extrapolating from these figures, we can make some guesses at where bankruptcy filings might end up for the 2007 calendar year. The AACER data show that there were 186,788 total bankruptcy filings from January - March 2007. If bankruptcy filings per day remain constant through the rest of the year, we will have 821,044 total filings. Of course, it is unlikely that filings per day will remain constant, especially when one considers the growth at the beginning of the year. If we assume that March's 7.3% growth rate will continue throughout the year, we will have 1,088,297 total bankruptcy filings in 2007. Neither assumption--no growth or a steady 7.3% growth--is likely to occur. For example, we know from a Credit Slips post by guest blogger Ronald Mann that bankruptcy filings historically hold steady or even slightly decline in the summer months. Perhaps the estimates are best viewed as outer boundaries with the expected outcome being just shy of 1,000,000 total filings. As a comparison, total bankruptcy filings were just shy of 1.6 million in for the twelve months ended June 30, 2005 (the last statistical year completely unaffected by the huge rush in filing) were 1,600,000.

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Hobson's Choice

posted by Tara Twomey

In my last post this week I wanted to thank everyone at Credit Slips for giving me the opportunity to “speak my mind.” It has been a full week when it comes to bankruptcy and foreclosure. The Senate Banking Committee held its hearing to examine the crisis in the subprime mortgage market, Judge Steen in Texas heard hours of testimony in the hearing to determine the appropriate sanctions for Countrywide’s counsel Barrett Burke, and the Bankruptcy Appellate Panel for the Eighth Circuit decided the case of In re Zahn, 2007 WL 817510 (B.A.P 8th Cir. Mar. 20, 2007). The Zahn case, while little noticed, shines a spotlight on the way chapter 13 debtors fighting to save their homes, must often battle the “system” first.

You see when creditors or trustees object to confirmation of a chapter 13 plan and lose, they may appeal immediately as of right. By contrast, when debtors lose and a plan is rejected, the order in most circuits is considered interlocutory. Debtors must request leave to appeal the interlocutory order and, at least in the Eighth Circuit, leave is rarely if ever granted. As a result debtors are left with two choices: 1) file an amended plan that contains provisions the debtor does not believe are required by the Code, or 2) elect not to file an amended plan and have the case dismissed. The dismissal results in a final appealable order, but also terminates the automatic stay. In addition, under BAPCPA dismissal now has significant consequences if the debtor must later refile.

Not wanting to suffer the consequences of dismissal, the debtor in Zahn tried a different approach—she filed an amended plan and objected to it. This procedure was referred to favorably in dicta from other Eighth Circuit cases. Unfortunately for the debtor, the BAP held that she had no standing to appeal confirmation of her own plan. According to the court, the debtor was not an “aggrieved party.” Despite the court's conclusion, the debtor was effectively left without a way to challenge the original denial of confirmation. With so many chapter 13 issues under BAPCPA unresolved many more debtors are likely to find themselves in this same situation.

Until the Courts of Appeals reconsider their position on this issue (as suggested by Judge Mahoney in concurrence) debtors will have to choose between submitting less favorable plans or having their cases dismissed. Sometimes a choice is no choice at all.

Urrgh! How Am I Going to Teach This?

posted by Bob Lawless

The United States Supreme Court today issued its decision in Travelers Casualty v. Pacific Gas & Elec. Co., and it's produced more-than-the-usual amount of head scratching. For the few of you who are not intimately familiar with this case--and by "few" I mean "those with a life"--here is the issue. You and I have a contract (and, so that we can rule out a specific exception, let's say I don't have collateral worth more than my claim against you). Like many other contracts, the contract says I can collect from you any attorneys' fees I incur in enforcing the contract. You file bankruptcy. I litigate some issue regarding the contract in your bankruptcy case. Can I now file a claim in your bankruptcy case for the attorneys' fees I ran up litigating in your bankruptcy case? The lower court said "no."

Actually, I thought that was the issue the Supreme Court also would decide. Instead, the Supreme Court merely ruled that the reason the lower court gave was not right, but the Supreme Court did not give its own answer to the issue. The U.S. Court of Appeals for the Ninth Circuit had relied on its own earlier decision where it had held there could be no claim for attorneys' fees in your bankruptcy case if the litigation involved matters solely arising under federal bankruptcy law. The Supreme Court said that was not sound reasoning, which is no surprise given that neither side defended the Ninth Circuit's reasoning. At the end of its opinion, the Supreme Court went out of its way to say it was not making any comment on the validity of other reasons to deny the claims for attorneys fees in the bankruptcy case.

What we got here is a judicial do-over. It reminds me of one my own professors who would sometimes respond to a student's flawed logic simply by saying, "No, try again." (Who says the Socratic method is out of style?) The Ninth Circuit gets another try at this, making the Supreme Court's decision a nonevent. We are no closer to an answer for the underlying issue than we were before the Supremes issued their opinion.

The stakes are raised now when the case gets back to the Ninth Circuit. Consumer credit policy wonks will want to pay attention. Let's see . . . contract creditors running up attorneys' fees in a bankruptcy case . . . holy cow, that could be every credit card company in America! One issue already has popped up on the Bankr-L list. Suppose a creditor accuses a debtor of fraud or some other conduct that would render a debt nondischargeable in bankruptcy. If the creditor can collect its attorneys' fees for litigating the issue of nondischargeability, won't creditors be more likely to bring such actions, and debtors more likely to settle them rather than incurring the risk of the attorneys' fees becoming a claim in the case and a nondischargeable claim at that?

How am I going to teach this case? Probably not at all. Let's see what happens in the lower courts.

Important Addendum from the Hall of Strange But True Facts: When one calls the highest court in the land, "the Supremes," the blog's spell-checker wants me to change it to "the Supremest." Are the Internet's tubes trying to tell me something?

Calling on Our Readers

posted by Bob Lawless

Does anybody know whether there were further developments to this story?

Bankruptcy, Utilities and the Poor

posted by David Yen

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.   

Bankruptcy Filings Up 18% in February 2007

posted by Bob Lawless

The folks at Automated Access to Court Electronic Records or AACER regularly collect data from all the bankruptcy courts for creditors and attorneys. They have a wealth of information that does not show up in the mainstream media. Most recently, they tell me that there were 58,640 total U.S. bankruptcy filings in February 2007 as compared to 55,088 total U.S. bankruptcy filings in January 2007. OK, that looks like a slight increase, but looks are deceiving. It's actually a fairly hefty increase. The February filings were spread over only nineteen business days while the January filings were spread over twenty-one days. On a daily basis, the February filings were up 17.7% as compared to January.

Certainly, one month's worth of filing data does not a trend make. Also, these number are for total bankruptcy filings, not consumer filings alone. Remember, however, that according to the government, business filings are a minuscule percentage of total bankruptcy filings, and that problems with the way the government counts business filings may make total bankruptcy filings are more reliable data point anyway, as I have discussed previously. With those quite important caveats about the data in mind, there are a few things that strike me about AACER's statistics.

First, the increasing numbers of filings are completely consistent with the "word on the street." Privately, bankruptcy attorneys have told me they have seen increased numbers of consumers seeking bankruptcy. Although the 2005 bankruptcy law substantially lowered the number of bankruptcy filers in its immediate wake, we know that filings have been on a steady increase since the law's effective date, and these latest numbers are further confirmation of that fact. I do not predict that filing levels soon will return to the same numbers as they were just before the 2005 bankruptcy law was enacted (about 1,500,000 per year).

Still, we are on a pace to see substantial increases in the number of annual bankruptcy filings. If we apply the daily filing figure from February throughout the remainder of the year, make the conservative (and likely unrealistic) assumption that there will be no further increases in the filing rate for the rest of the year, and then add the numbers we already know from January and February, there will be approximately 765,000 total bankruptcy filings in the U.S. during 2007. The AACER folks tell me there were approximately 585,000 total bankruptcy filings in 2006. (As of this writing, the government figures have not been released.) Thus, we are on a pace for a 30.7% increase in bankruptcy filings during the 2007 calendar year. If the bankruptcy filing rate continues to rise beyond the daily rate in February, U.S. bankruptcy filings for 2007 could come close to or top 1,000,000.

Tabb & McClelland on the Means Test

posted by Bob Lawless

A few weeks back, I made a few posts about the bankruptcy conference at Southern Illinois University, including a post about the presentation by my colleague, Charles Tabb. The paper on which that presentation was based in now available on the Social Science Research Network (SSRN) at http://ssrn.com/abstract=964460 and will eventually appear in the Southern Illinois University Law Journal. The paper is entitled "Living with the Means Test" and is co-authored with University of Illinois law student Jill McClelland. Tabb and McClelland do a great job of pulling together the materials on the means test, including an analysis of precedents since the 2005 bankruptcy law. As I explained in my previous post, I disagree with some of Tabb and McClelland's solutions to some of the most tricky statutory issues created by the 2005 law. Still, if I were having to deal with the means test on a daily basis, it's a paper I would want as a reference.

Cars and Bankruptcy Revisited

posted by David Yen

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?

Palindrome for a Silly Case? A Marrama

posted by John Pottow

The Supreme Court handed down the Marrama opinion, resolving the burning question of bad-faith debtors' conversion rights under 706(a) of the Code:  Marrama v. Citizens Bank

Those namby-pamby softies on debtors?  The Chief Justice, and Justices Scalia, Thomas, and Alito (in dissent, per Justice Alito).  The hard-assed debtor-bashers?  Justices Stevens (writing), Kennedy, Souter, Ginsburg, and Breyer.

Marrama was a badie in Chapter 7: among other transgressions, he tried to hide and fraudulently convey a house in Maine.  An angry trustee and creditor sought recovery, but Marrama schemed to divest the trustee of jurisdiction by converting, under section 706(a), to chapter 13 (which we all recall vests property of the estate under control of the debtor, not the trustee).

Trustee and Citizens cried foul and opposed the conversion.  All courts up the chain agreed, saying that Marrama's bad faith precluded him from converting to 13.  A recurring justification was that 706(d), which qualifies 707(a), says a debtor may not convert to a chapter if he's ineligible to be a debtor under that chapter.  Because Marrama's bad faith would preclude a confirmable plan under 1325(a)(3), he couldn't do anything in 13 (other than flail).  Accordingly, the courts held that because he couldn't be a "real" debtor in chapter 13, he was ineligible to convert thereto.  (I'm simplifying somewhat; also in there is the argument that if he did convert to 13, he could be quickly reconverted back to chapter 7 "for cause" due to his bad faith under section 1307(c).)

The dissenting Justices chafed at what they indirectly implied was yet another step of bankruptcy judge arrogation of power in the face of seemingly clear statutory text.  And they had a good point: if the limitation on who can be a debtor in 13 is supposed to be the true constraint on conversion power, per 706(d), then the proper place to look for those restrictions is 109(e), which defines the dollar amount, income regularity requirements, and other criteria for being a debtor under chapter 13.  So they were right that denying conversion because the debtor was ineligible for chapter 13 vis. section 1325(a)(3) was wrong (or hand-wavey).  Marrama COULD be a debtor under 13.  He wouldn't last long, but he could still be a debtor.  So the majority, at least in my view, bobbled this one.

The reason I think this case is so silly, however, is that this is really a case about section 105.  Everyone knows that bankruptcy judges have equitable powers to prevent an abuse of process.  Here, neither the majority nor dissent got the issue quite right.  It was not that the judge was using 105 to graft additional restrictions on conversion onto section 706 (as the dissent especially tries to suggest).  Rather, the judge was using 105 as an equitable vehicle of procedural economy.  If everyone agrees that a judge may dismiss a chapter 13 case "for cause" under 1307(c), and that "bad faith" may constitute cause, then what the bankruptcy judge decided was that rather than holding a conversion hearing under 706 and then the next day holding a dismissal (or conversion) hearing under 1307, he could collapse the two hearings into one for judicial economy, hearing and resolving the allegations of bad faith at one time.  Properly viewed, the judge was not expanding the scope of 706, he was entering a glorified scheduling order.  At such an omnibus hearing, there is nothing that would prevent (Justice Alito's confusion notwithstanding) a judge from entertaining evidence of what the debtor would propose to pay under a plan were he allowed into chapter 13.

Whatever one's belief on the proper scope of section 105, I find it difficult to begrudge a jurist the discretion to consolidate two redundant hearings for procedural efficiency into one session.  That is not aggrandizement; that is a common-sense lowering of my taxes.

The Second Part of Shredding the Safety Net

posted by Bob Lawless

OK, the "live blogging" thing did not work very well at the "Shredding the Safety Net" conference at the Southern Illinois University School of Law. It was too difficult to pay attention to what was being said and try to compose blog posts at the same time. I eventually settled on taking notes for a later post. "Later" became Saturday afternoon, which became Sunday, and now here it is Monday afternoon.

All of the conference papers will be published in the SIU Law Journal later this spring, which reminds me that I had better get to the point here because I owe the law journal revisions on my paper. Without further ado . . . .

Continue reading "The Second Part of Shredding the Safety Net" »

Interpreting USTP Help Wanted

posted by Katie Porter

I concede at the outset that I might be reading too much into one paragraph. However, the "Career Opportunites" section (otherwise known as "want ads") in the Wall Street Journal on Feb. 13, 2007 had a posting for an Assistant U.S. Trustee in Boise, Idaho that contained a job description that I found a bit troubling. Here it is:

Incumbent is responsible for the administrative and legal management of the Boise, ID, United States Trustee Office, including the supervision of personnel assigned to the office; the implementation of civil enforcement strategies to combat fraud and abuse in the bankruptcy system; as well as the new provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005; the administration of cases filed under Chapters 7, 11, 12, and 13 of the Bankruptcy Code; representing the United States Trustee in court; maintaining and supervising a panel of private trustees; supervising the conduct of debtors; and ensuring that violations of law are referred to the United States Attorneys for possible prosecution.

Two things about the description caught my eye. First, notice the second-to-last phrase "supervising the conduct of debtors." Um . . . what about supervising the conduct of CREDITORS? Are they not required to follow the Bankruptcy Code and Rules? Surely, they are. Think about the past role of the US Trustee in seek sanctions against creditors who obtained illegal "reaffirmation" agreements (See In re Lantanowich, 207 BR 326 Bankr. D. Mass. 1997) or who routinely violated the discharge injunction. Are new hires not required or permitted to undertake such tasks? Also, I'm a bit troubled by the phrase 'supervise the conduct' of debtors. What exactly does this mean--make sure that they don't pay with plastic? that they dress appropriately at the 341 meeting? Debtors are required to abide by the Bankruptcy Code, but nothing in the law says they need to have their conduct "supervised." They are debtors, not parolees. The second thing that I noted was the prominence of fraud/abuse/prosecution references in the advertisement. New hires are charged with "implementation of civil enforcement strategies" and "ensuring that violations of law are referred . . for possible prosecution." Obviously, this watchdog role is an important and legitimate part of a US Trustee's job but it seems like this ad has the same hint of "Big (Bad?) U.S. Trustee" that I blogged about a while back. One final note--the job pays a salary that I thought looked appealing on my academic salary ($104,826-$141,900) and will hopefully attract an excellent lawyer to the position. 

The First Part of Shredding the Safety Net

posted by Bob Lawless

As mentioned yesterday, I'm at a symposium sponsored by the Southern Illinois University School of Law's symposium on the 2005 bankruptcy laws called "Shredding the Safety Net," and I thought I would try a little "live blogging" I have never tried this before, so consider this an experiment. I'll try my best to summarize the papers, but I'm sure my summaries will only be able to capture the outline of the presentations. The papers will appear in an issue of the Southern Illinois University Law Journal later this spring.

The first speaker of the morning is Professor Nathalie Martin of the University of New Mexico School of Law. She is presenting a paper on debtor education after the 2005 bankruptcy law. As Credit Slips readers probably know, the 2005 bankruptcy law requires credit counseling for consumers prior to filing bankruptcy as well as a postfiling debtor education course as a condition for the discharge. In her paper, "Mind Games: Rethinking BAPCPA's Debtor Education Provisions," Professor Martin proposes that we eliminate the prebankruptcy credit counseling requirement. She argues that by the time debtors are ready to file bankruptcy, it is too late for credit counseling to be meaningful. The debtors are under a lot of stress. Moreover, the industry administering credit counseling has been under investigation from the IRS for possible loss of their tax-exempt status. The IRS Commissioner labeled the industry "a big business dominated by bad actors." Although I agree with this recommendation, I don't believe even the congressional opponents of the 2005 bankruptcy law the political will to propose repeal of the credit counseling requirement.

Continue reading "The First Part of Shredding the Safety Net" »

SIU Bankruptcy Conference

posted by Bob Lawless

Tomorrow, the Southern Illinois University School of Law is hosting a symposium "Shredding the Safety Net." The symposium will examine the effects of the 2005 bankruptcy law, and the papers will appear in a future issue of the Southern Illinois University Law Review. From the press release:

Top bankruptcy scholars from throughout the nation [as well as Bob Lawless] will participate in a daylong symposium at Southern Illinois University Carbondale. . . .

"Shredding the Safety Net" will examine the impacts of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. The symposium is from 8 a.m. to 4 p.m., Friday, Feb. 16, at the SIU School of Law, which is sponsoring the event.

OK, I added the "as well as Bob Lawless" part to the press release to enhance its accuracy. The dean of the SIU law school is Peter Alexander, a noted bankruptcy scholar in his own right and a good friend. He wouldn't have said that about me in the press release . . . probably.

Besides myself and Dean Alexander, the other speakers will be Margaret Howard (Washington & Lee) who is also the keynote speaker, Nathalie Martin (New Mexico), Judge Judith Fitzgerald (Western District of Pennsylvania), Charles Tabb (Illinois), Tom Plank (Tennessee), and Kelli Alces (currently at Richmond but soon Florida State). The full press release is here.

If I have an Internet connection, I'll try to make a few posts from the conference summarizing the papers.

The Bankruptcy Solution

posted by Elizabeth Warren

What problem does bankruptcy solve?  It gets rid of some debts.  It gives a debtor a chance to deaccelerate a home mortgage.  It provides a framework for renegotiating a car loan.  It stops collection calls.  But does it put the debtor back on her feet?  In other words, after we have performed the magic incantations of bankruptcy, what happens to the families that were in terrible trouble?

In the first-ever detailed, empirical study of post-bankrupt families, CreditSlips' own Katie Porter and Debb Thorne provide an answer to that question.  (Katie and Debb are much too modest to toot their own scholarly horns here, so I'll talk about the piece without their advance knowledge.) 

They ask how many families are managing their post-bankruptcy bills reasonably well, and the answer is not good.  A year after bankruptcy, about one in four families was struggling to pay basic expenses.  The likelihood of post-bankruptcy recovery was tied to reasons for filing.  When debtors had serious income problems from unemployment, medical problems or old age, they were far less likely to be among those successfully rehabilitated in bankruptcy. 

Continue reading "The Bankruptcy Solution" »

NOW on Bankruptcy Tomorrow

posted by Bob Lawless

Tomorrow night (Friday, February 9), the PBS show NOW will air a report about the United States bankruptcy laws. Here is their press release announcing the show:

Friday, February 9 at 8:30 p.m. on PBS (check local listings)

The average American owes an estimated $9,200 on credit cards. And while recent changes to bankruptcy laws may put a smile on the face of some banks and credit card companies, they're making it hard for average Americans to dig themselves out of debt. On February 9 at 8:30 pm (check local listings), NOW returns to Waterbury, Connecticut, where it first began reporting about these laws, and revisits a family struggling with their bankruptcy.

We also review the case of Anthony Graves and explore whether the justice system is condemning innocent men and women to death. Graves was sentenced to Texas' death row in 1994 mainly on the testimony of a lone eyewitness who later recanted. After six appeals, Graves has finally been granted a new trial. But will justice kick in for Graves as quickly as it turned against him? Next on NOW.

The NOW website at www.pbs.org/now will provide additional coverage starting Friday morning, February 9, including useful advice on keeping your personal finances in check, and a look at high-profile death row exonerations.

Credit Slips will find the first report of particular interest. If you miss the broadcast, it will be available for free in its entirety starting Monday at  http://www.pbs.org/now.

Income Volatility

posted by Katie Porter

A relatively new book, The Great Risk Shift, by Yale political scientist Jacob Hacker, may be of interest to CreditSlips readers. Hacker's principal finding is that on average Americans have a 17% chance of seeing their family income drop by more than half from one year to the next year, and that this income volatility risk is substantially higher than in the 1970s. This research ties in nicely with the findings of Warren, Westbrook & Sullivan in Fragile Middle Class about how the income aspects of job problems, medical problems, and family break-up contribute to the financial distress of families in bankruptcy. It also aligns with the recent piece, The Failure of Bankruptcy's Fresh Start, that Debb Thorne and I authored about how income volatility continues to plague families even after bankruptcy.

Illustrating the adage that where you stand depends on where you sit, the Economist had a story about a month ago (subscription required or use Lexis to retrieve it) that dismissed the consequences of the increasing income volatility that Americans face. The article critiques The Great Risk Shift and argues that Americans are coping fine with rising income instability. The Economist points to plunging savings rates as evidence that Americans aren't worried about income shortages and notes that home equity remains a safety net for families (Of course, this latter protection only applies to the 65% of families that own a home and only those who have equity in their homes--an increasingly scarce commodity).

Any thoughts on The Great Risk Shift by those who have read it? Were you convinced by Hacker's evidence? Apparently, he relies significantly on the rising bankruptcy rate as evidence of the problems created by income volatility. What about The Economist's take on Hacker's work? Are there any positive sides to income instability?

Going to Texas for a Discharge?

posted by Bob Lawless

Yesterday, a practicing attorney left a note on a December post from Elizabeth Warren, "Bankruptcy Reform and Credit Card Losses." He wrote:

[A]s a consumer practitioner I have noticed a tendency among debtors to suffer the indignities of bottom feeding debt collectors rather than the indignities imposed by Congress. True creditors are not any better off, because they still write off debt, but now it is now bought up at deeply discounted rates by a developing cottage industry of bottom feeders who attempt to collect by being obnoxious. I have actually had clients move and leave no forwarding address to escape such practitioners as Collect America.

If this one report has captured a more general phenomenon, we have come full circle as a society. The United States did not have a permanent bankruptcy law until 1898, and there were various bankruptcy laws in effect for only 16 of the first 109 of this republic. That did not mean there was no discharge from your debts. Many debtors would simply move west, beyond the reach of their creditors. The phrase "G.T.T." or "Gone to Texas" was shorthand for a debtor who had moved to escape creditors. It is no coincidence that the United States enacted a permanent bankruptcy law about the same time as the frontier closed. Is history repeating itself? Debtors cannot move to the frontier anymore to escape their creditors, but is going underground the new "Gone to Texas?"

This comment also made me think about some of the concerns that were raised about the harsh 2005 bankruptcy law. Its proponents even admitted that the goal was to get fewer people to file bankruptcy. Of course, shutting the door to the bankruptcy courthouse does not solve hopeless financial problems. It just leaves consumers with hopeless financial problems with one less place to turn for a solution. I like to analogize the law and its proponents to shutting down a hospital and claiming to have cured disease.

There were concerns raised that the 2005 bankruptcy law might create a permanent underclass of debtors, perpetually hounded by creditors with no hope of being restored to financial health. It was not uncommon to hear the term "debt peonage" thrown around or to hear predictions that consumers in hopeless financial straits simply might go underground. We don't know whether that is happening, and one person's experiences does not tell us whether a general trend is afoot. The comments are open here, however. Does the comment represent a more general phenomenon? Are there debtors going underground, so to speak, to avoid their creditors? If so, has this behavior increased after the 2005 bankruptcy law?

Sound Familiar?

posted by Bob Lawless

From a recent newspaper story:

Thousands of women who are in desperate debt are shying away from bankruptcy because of the social stigma.

Refusal to take this difficult decision is piling on misery and creating even greater debt problems, according to a study from the Consumer Credit Counselling Service.(CCCS)

The CCCS says that 61 per cent of the people it recommends to go bankrupt are women - three quarters of these are single.

Yeah, yeah . . . you've heard it before. But, this is from the UK's Evening Standard about problems in the UK. The full story is worth a read and is further evidence that booming consumer credit and bankruptcy filings is becoming more than just a U.S. issue.

Another hat tip to Buce for pointing out the story.

Because a Minute Is More Than Enough

posted by Bob Lawless

The University of Illinois decided to feature yours truly on the main university web site, raising the question of exactly what someone thought they were doing. My guess is that there is someone in  the university public relations office looking for a job. There is nothing more certain to attract prospective students than to have a professor on your web site discussing bankruptcy law. In a feature called, "A Minute With . . .," I was given four questions:

(1) Congress passed the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act because of widespread concern that the bankruptcy system was too lenient and was being abused. Has the new law curtailed the number of personal bankruptcy filings?

(2) Given the reduction in filings, do you consider the law a success?

(3) What are the most common reasons behind personal bankruptcy?

(4) Do you foresee an increase in bankruptcy filing rates?

In no particular order, I gave the following short answers "no," "a little bit," "urrggh!," and "many." If you're interested in the full answers, the university posted them here. If you're a student interested in attending the University of Illinois, be aware that the university has many fine qualities despite what you read on that web page. They really don't let me teach all that many students and then only law students at that.

On the Nature of Bankruptcy Litigation

posted by Bob Lawless

This semester I am teaching a class in Bankruptcy Reorganizations, which is principally a class in chapter 11. This is an advanced upper-level elective that draws many students in their last semester of law school. Consequently, in teaching the class, I like to emphasize not only the details of this complex topic but also help along the process of transitioning these students to practicing legal professionals.

One of my themes is the issue of being an advocate in complex business and commercial law cases like those presented by a chapter 11 filing. Law schools generally focus their moot court training on easily understood cases such as a simple slip-and-fall or on esoteric constitutional law questions. My belief is that skills learned in these sorts of exercises do not transfer easily to the business and commercial law environment. Although everyone can understand that the negligent tortfeasor should pay for his wrong, few people come to law school with an innate sense of whether a secured creditor should receive the time value of its collateral during the pendency of a bankruptcy case. Without experience in the business world, students can see the facts in a commercial dispute as dry and abstract, about money only and having little to do with right and wrong. My belief is that commercial disputes are won or lost for the same reasons that most any dispute is won or lost.

Continue reading "On the Nature of Bankruptcy Litigation" »

Coalition for Debtor Education

posted by Ted Janger & Susan Block-Lieb

Ted and I share more than having co-authored the Texas piece. We also both sit on the board of directors for a non-profit corporation, the Coalition for Debtor Education. The Coalition, the brain-child of Karen Gross (formerly a professor of law at New York Law School and now president of Southern Vermont College), was established in 1998 to improve consumers' understanding and management of their own financial affairs. Over the years, the Coalition has:

  • Produced, published and evaluated a financial literacy curriculum.
  • Designed, implemented, and empirically assessed a pilot financial literacy program that education more than 600 consumer debtors pre-BAPCPA.
  • Licensed our financial education curriculum as a means of assisting the low-cost, high-quality provision of financial literacy education post-BAPCPA; our licensed curriculum has reached more than 18,000 bankruptcy filers nationwide to date.
  • Trained more than 175 debtor educators from around the New York metropolitan area, around the country and abroad.
  • Created and administered a pilot pro se assistance program in the U.S. Bankruptcy Court for the Eastern District on New York that streamlined bankruptcy procedures for approximately 1,700 individual filers. This program was adopted into the Court’s FY’07 annual budget.

Currently the Coalition is undertaking a number of new initiatives, including a pilot program to bring financial education workshops to unbanked (or underbanked) populations in New York City. The pilot combines training the staff of various financial institutions to conduct financial literacy workshops at New York City Housing Authority Community Centers. The initial workshops will be held in the South Bronx and will target seniors and teens.

What have we learned from these experiences?  A couple of things: First, we find an enormous satisfaction in helping real people with their real-life problems. Both of us have advised in litigation in big reorganization cases, but this is completely different. Yes, it's exhausting and there are never enough hours in the day...but it's all about how you allocate your time. Second, it has been incredibly important to focus on institutionalizing the non-profit. People float on and off the board and other positions, but the Coalition has continued to do good work. Third, BAPCPA has complicated our ability to provide financial literacy courses to debtors.  We're confused about the interraction between pre-filing counseling (which we hate), and pre-discharge counseling which might, in a different form (more about that later) hold some promise.  We haven't figured out how to become "approved providers" and still retain our day jobs, so we have had to back into a behind-the-scenes training role.  For now, this suits us, but we wonder if debtors are well served by the mandate and all this regulation.  Finally, we can always use help. Look us up at www.debtoreducation.org or shoot us an email.....

Lee & Parrish in Today's NY Times

posted by Bob Lawless

In today's New York Times (reg. req'd), Judge Joe Lee and author Thomas Parrish have an op-ed entitled, "Banks Gone Wild." This passage gives a flavor of the piece:

"As for the morality involved in lending money at exorbitant rates, the word 'usury' itself has taken on a quaint, archaic sound, like 'jousting' or 'necromancy.' What happened?"

If you're interested in the sorts of things we talk about on Credit Slips, you will want to read the entire op-ed.

Judge Lee has been a federal bankruptcy judge since 1961 and is a well-respected judge (see here for an announcement about Judge Lee being named to receive the William B. Norton, Jr., Award for Judicial Excellence). He is precisely the type of person with precisely the type of experience to whom Congress should be listening but isn't. I'm sorry to say that I don't know Mr. Parrish, but I'll try to make amends by linking to his Amazon.com author page with his eclectic list of publications. His Grouchy Grammarian book looks interesting. Maybe I need to consider a book called the Grouchy Law Professor, or is that redundant?

More Yiddish, and Remembering Conrad Duberstein

posted by Buce

Judge Conrad Duberstein died back in 2005 at the age of 90, having long since established himself as the grand old man of the bankruptcy bench. I first met him when he was about 70. The best way to capture the experience is to say that he is about the only garrulous old coot that my wife ever found charming—he delighted her as he delighted so many people, and now that I am 70, I try to profit from his example.

Responding to my earlier post, Alan Halperin has favored me with a copy of a one-page typescript where Judge Duberstein tried to introduce the neophytes to the subtleties of the alte language. It's a fascinating read, not least because it suggests just how much of what we once thought of as specialized trade-talk has passed into common speech. Does Nudge count as Yiddish any more (if ever it did?—what about noodge?). Maven (Mayven?)—it doesn't even sound exotic, does it? Others are perhaps borderline: Speakers know these terms are "special," somehow, even if they are a little hazy on just how. I would include Chutzpah, Kvetch,  Megillah,, Nebbish (but perhaps mainstreamed by the late Herb Gardner, whose father, if I remember right, ran a tavern on Canal Street), Nudnick, Schlemiehl, and Shtick—oh, and nu, as in so, nu? And I confess I never realized cackamaymee (many alternate spellings) was Yiddish at all; evidently it is.

Tzimmes which Judge Duberstein defines as "a creditors' meeting," probably does belong on the bankruptcy list, narrowly defined. I would have defined it more generally as "hullabaloo," (which, I think, is not Yiddish). But Google it and you find that most of the hits trace it to its beginnings as a "vegetable stew"—a pretty good suggestion that all these terms arise in a rich cultural stew, belonging as much to Isaac Bashevis Singer, or Cynthia Ozick, or Bernard Malamud (or, perhaps best, the Contract with God graphics of Will Eisner) as it does to bankruptcy. Still, it's a world of which Judge Duberstein was a living monument and I am grateful to Alan for renewing the memory.

I'll try to post Judge D's paper here (it's a one-page Adobe file) but I'm not sure I know how.  Anyway, this may be the link:

Download yiddish_for_bankruptcy_lawyers.pdf

History for Bankruptcy Scholars

posted by Buce

A few years ago, there wasn’t much of any good bankruptcy history. Now we have David Skeel and Bruce Mann—a big improvement. But there is still plenty to be done. And in particular, bankruptcy doesn’t seem to have worked its way into mainstream historical writing just yet. Skim the table of contents to standard histories and you will find little or nothing that addresses debt problem sin any substantial way. 

One distinguished exception is Charles Sellers’ The Market Revolution: Jacksonian America, 1815-1846.(1991). Sellers writes the history of Jacksonian America in what you might call “the Karl Polanyi mode”—as a history of creatures coming to understand themselves as commodities, part of emerging dominant pattern of commerce in the young Republic.   

Sellers is a professor at Berkeley (emeritus), and the book is apparently still in print, but best way I can tell, it is perhaps a bit of an orphan in history circles—perhaps too old-fashioned in both subject and style. Apparently it was commissioned to be part of a multi-volume Oxford History of the United   States—the series in process for nearly half a century now, still only half done (link). It is said that editor found it “too economic,” though a saucy backstory says he “was put off by some pages on public panic about masturbation” (the topic does not appear in the index—but see p. 255).   

 In any event, Sellers might well remain the history of choice for inquirers with a bankruptcy bent. Here are some of his thoughts on Sturges v. Crowninshield:

The Constitution’s contract clause struck down state laws passed in the 1780s easing creditor pressure on small debtors. In some places, a third of the householders were still being hauled into court as defaulting debtors every year; and for those who could not pay, the penalty was jail. Although imprisonment for debt was alleviated by prison-bound laws releasing debtors during the day to follow their occupations, and although most were held only briefly, thousands were still being arrested, often for small sums. … The Constitution’s framers demonstrated their class bias most clearly by coupling the contract clause’s inflexibility toward small debtors with a bankruptcy clause mandating relief for large debtors. … In Sturgis v. Crowninshield … a New Yorklaw was challenged, on the double grounds that the Constitution gave Congress the exclusive right to pass bankruptcy laws and that such laws by the states impaired “the obligation of contracts.”   

Marshall obtained a unanimous judgment against the New York law only by surrendering his own view that the bankruptcy clause preempted the field and prevented any state action on the subject even if Congress failed to exercise its bankruptcy powers. He also had to concede that he states could abolish imprisonment for debt.  Thus he induced several justices to agree that the New York law impaired the obligation of contracts. Even then several justices remained convinced that states could pass laws relieving debts contracted subsequent to the legislation. The opinion the Chief Justice drafted for an ostensibly unanimous Court was ambiguous on the point, but it clearly forbade states to relieve debts already contracted. (87-89)   

 Sellers does a nice job of putting bankruptcy in the context of the larger debates over economic law and constitutional doctrine. Thus he points out that Sturges succeed by just a few weeks the decision in Dartmouth College v. Woodward, and preceded McCulloch v. Maryland.  Thus within six weeks, Sellers points out, the court “forbade the states to interfere with the chartered privileges of corporations, to relieve existing debts, or to impede in any fashion the constitutional functions or instrumentalities of the federal government.” (89)

[Afterthought: with my record, it will turn out that Bob already has this guy signed up as a guest blogger...]

The (Belated) AALS Report

posted by Bob Lawless

Contrary to popular belief, the regular Credit Slips bloggers are not being held for ransom by guest blogger Jack Ayer. When we set this up, Ayer kindly offered to start last week when law school academics tend to have their attention turned elsewhere. And, where else are law school professors the first week in January except the annual meeting of the Association of American Law Schools (a/k/a "the AALS") in Washington, DC? I had promised to report in from the event, but the Internet connection in my room did not want to work. Other than that and the small fire at 2:15 AM in the morning that caused an evacuation of my part of the building, the hotel was great.

For those fortunate enough never to have known the AALS meeting, a little background is in order. It meets over three and a half days. The first day is typically turned over to a plenary event that would be of interest to all--this year it was law school rankings--and the rest of the meeting is dominated by small section meetings organized by subject-matter specialty. For Credit Slips readers, the most germane section is the one on Creditors' and Debtors' Rights. (I've seen others refer to it as the Section on Debtors' and Creditors' Rights--all depends on your perspective.) There were four papers presented at the section meeting from Ed Morrison (Columbia), Robert Chapman (visitor, Baltimore), Cre Johnson (Ohio State), and Adam Feibelman (North Carolina). So what is on the minds of bankruptcy academics?

Continue reading "The (Belated) AALS Report" »

(Re)introducing David A. Moss

posted by Buce

Allow me to showcase a book here that deserves more attention than it gets from bankruptcy scholars. It came out back in 2002 but for whatever reason, it passed more or less unnoticed in our corner of academe. The book is When All Else Fails by David A. Moss.  The subtitle is: Government as the Ultimate Risk Manager. It's a fascinating study of what Moss calls "a potent and pervasive form of public policy in the United States." Moss discusses obvious risk management devices like worker's insurance and social security, but also others you might not think of at first blush like products liability law and management of the money supply.

I emailed Moss last year while I was resident scholar at the American Bankruptcy Institute, inviting him to join us for one of our podcast interviews. He politely begged off. Too bad: it would have been fun to introduce him to the bankruptcy sodality. In any event, for our purposes, the most directly relevant chapters of his book are one on the history of the bankruptcy discharge, bracketed in parallel with another on the rise of the limited liability company. Moss shows how 19th-century public policy debate treated both bankruptcy and limited liability as protection for entrepreneurs (duh!)--but how the arguments were never really the same.

Students of the recent uproar over bankruptcy reform might be intersted in Moss's long view of the matter (which, concededly, long preceded the 2005 Amendments to the Bankruptcy Code).

Even before the enactment of the first federal bankrautpcy statutes in 1800 and 1841, Americans had long displayed a penchant for forgiving or otherwise relieving distressed debtors, particulaly in the midst of economic crisis. Although the motivations and mechanisms of debtor protection have evolved considerably over the years, the American tradition of shifting default risk away from borrowers has exceptionally deep roots. Indeed, the United States has long distinguished itself as a nation with a special fondness for debtors. (126)

I always tell my students that I have lived through at least nine of the last four recessions.  As a regular reader of the Housing Bubble Blog, it often occurs to me to wonder whether our current (relatively) severe view of debtor protection will survive the day when the economy gets thrown under a bus.

Here's a book link.

Yiddish for Bankruptcy Lawyers

posted by Buce

In a previous post I discussed "blivik" which I understood, perhaps erroneously, to be Yiddish.  The discussion triggered memories of all sorts of specialized argot I got familiar with only in the bankruptcy court.  Yiddish words or phrases were still fairly common around there when I showed up in the 70s.  I was a latecomer: I didn't grow up with this stuff and I found it highly entertaining to try to learn to deal with it.  Some of it was hardly specific to bankruptcy, and some barely even Yiddish any more:  schmuck, for example, is more or less universal (but what of "guarantor"= "schmuck with a fountain pen"--?).   Schnorrer and gonif may not be universal, but we wouldn't want to claim them. And what of

Rachmunis, as in "writ of rachmunis," as in "judge, we got nothin', and we are throwing ourselves on your mercy."

Schmatta, rag, as in "the schmatta business," aka "the rag trade," textiles--the industry in which (in the lower east side of Manhattan) so much of old Chapter XI was crafted (aka, perhaps, The Pajama Game?).

Schlepperman, for the hewer of wood or drawer of water who did the hard work while somebody else got the big bucks, as in "we sent our schlepperman over to clean out the warehouse."  Not a made guy, only a connected guy (yeh, sorry, wrong argot).

Chazeri, as in one of the things that drove me out of law practice back to teaching--all that stuff on my desk that I never seemed to get to the bottom of, all those phone messages, all those screwed-up orders, all those headaches, all those--oy, I'm thinking of them all over again.

Are there other candidates?


posted by Buce

Re the K Street theory, our good friend Bruce (well known to all at CreditSlips) weighs in:

You used the word "blivik;" didn't you mean "blivit"?  For what it's worth, the OED 2d defines blivit as:

Blivit:  [Etym. unkn.; cf. BLIP n., WIDGET, and phonosymbolic force of bl- with repeated minimal vowel to indicate inconsequence, rejection, etc.]

A pseudo-term for something useless, unnecessary, annoying, etc.; hence, = THINGAMAJIG (see quots.).

1967 WENTWORTH & FLEXNER Dict. Amer. Slang Suppl. 673/2 Blivit, n., anything unnecessary, confused, or annoying. Lit. defined as ‘10 pounds of shit in a 5-pound bag’. Orig. W.W. II Army use. The word is seldom heard except when the speaker uses it in order to define it; hence the word is actually a joke. 1980 Aviation Week & Space Technol. 15 Sept. 61 Refueling of helicopters..surfaced as an alternative to air dropping fuel blivits. 1981 N.Y. Times 27 Mar. C25/1 The main ingredient of this charm is a facility for saying it before you can, for calling ‘Palm Sunday’ a ‘blivet’ before you can call it a piece of junk. 1981 Sci. Amer. Dec. 28/2 This little book for grade school psychologists and philosophers presents a few dozen of these interesting but less familiar illusions, along with the arrow lengths, outline cubes, Eschers and three-pronged blivits of the standard optical-illusion list. 1982 Industr. Robots Internat. 22 Mar. 8 ‘Single station machines for assembly’, he says, ‘are blivets. Anybody who wants a definition can call me up.’ 1983 Washington Post 26 Aug. D1 For such tasks, you obviously need a magic tool that lets you get 10 pounds into a five-pound bag. Such a heaven-sent, makeshift magic part is called a ‘blivit’.

Response: every syllable of that is wonderful, but I meant "blivik," a word I learned in bankruptcy practice as denoting that thing I give to the other party in a negotiation which he thinks of great value but which I know is really worthless (an economist would say we simply have different utility functions).  I had assumed it was Yiddish; I first learned it from the renowned kabbalist, Alan Pedlar of the California bankruptcy bar.   Google did not confirm, although I guess it will now, and it did recognize Phillippe de Blivek, who sounds like he must have had a walk-on part in a Mel Brooks movie.

Meanwhile, On the Other Side of the Planet

posted by Buce

We tend to think of the United States as the bankruptcy capital of the galaxy.  Here's a story from the Korea Times reporting that bankruptcy petitions hit 380,000 in Korea in 2005.

Do the math.  Korea has a population of about 48 million.  That's a petitions/population ratio of about 0.79 percent.  Figure the pre-BAPCPA United States rate at 1.6 million to 300 million.  That's about 0.53 percent.  So Korea is about 50 percent ahead of the pre-BAPCPA United States.  Apparently the Koreans have had their own bout with “bankruptcy reform:”

Last year’s figure is 90 times that of 2002, the year the system was adopted.

The bankruptcy system allows people to get their debt written off by the court. The number of those who filed for bankruptcy has increased year by year, especially since 2003, when many people accumulated credit card debt.

Fn:  I had a couple of Korean grad students a few years back, who described themselves as “bankruptcy judges.”  Nice kids, spoken English not so hot, writing just fine.  One of them gave me a weird mask which still presides over my office.  Neither one, I suspect, had reached his 30th birthday.  I wonder if they are presiding over this revolution?

Technical Meta-Fn: Doesn't it make your head spin when you type "United States population" into the Firefox subject line and get bopped right over to the Census bureau poulation calculator?


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