ABI Bankruptcy Blog Exchange » Items by Bob Lawless

Items by Bob Lawless

October Bankruptcy Filings Set New Post-2005 Record

Posted: November 3rd, 2009, 11:16am PST by Bob Lawless

The daily bankruptcy filing rate in October hit 6,200, setting a new record since the 2005 changes to the U.S. bankruptcy law. There were about 130,200 total filings spread over the 21 business days in October. The October filing rate is a 3.7% increase from September and a year-over-year increase of 25.3%. As always, these data are courtesy of Automated Access to Court Electronic Records (AACER) There are two ways to receive this news, both of which have some validity.

First is the "glass is all the way empty" approach, that the rise in the bankruptcy rate reflects the poor health of the economy, results from rising unemployment, and is a sign that the U.S. consumer is not as healthy as recent figures showing GDP growth might suggest. Although I continue to think that the primary short-term driver of ups and downs in the filing rate is the availability of consumer credit, there is no way to look at record bankruptcy filing rates and not see problems for the U.S. consumer.

It also right to look at these data as saying the "glass is only half empty." This is not the same as saying the most recent data should be interpreted optimistically, that is the glass is half full. Rather, it is a subtle and complex story trying to draw a distinction between "dire" and "not good."

The graph to the right shows the month-to-month change for the past three years. (I have omitted 2006 because, and especially for the early months that year, its bankruptcy filing trends were greatly affected by the 2005 changes to the bankruptcy law.). The graph shows seasonality in the bankruptcy filing data -- sharp rises early in the year and a decline toward the end of the year. Part of the seasonality has been an increase in the fall of each year, and the October 2009 figures fit that pattern.

Another data point is to consider the 25.3% year-over-year increase that the October 2009 data represents the second smallest year-over-year increase in the monthly filing data over the past three years. (The smallest is 21.3% in January 2008.) Yes, bankruptcy filings went up as compared to the same time last year, but they have been on a steady trend back toward their pre-2005 levels ever since the changes to the bankruptcy law. In fact, the rate of increase in that trend appears to be slowing.

Again, I feel compelled to reiterate that I am not saying everything is peachy-keen. It's just that if you are looking for "sky is falling" economic indicators, then you are looking in the wrong place if you are using the bankruptcy filing numbers. What would be really meaningful are bankruptcy filing statistics that do not follow the season patterns of the past few years. Watch to see whether bankruptcy filings drop in November and December and then rise sharply in January and February. That will tell us whether the bankruptcy filing rates are extraordinary or part of the usual patterns.

With only two months left in the calendar year, the projected 2009 total bankruptcy filings is starting to look like it will come in right around 1.45 million. Back in December 2008, I predicted total 2009 bankruptcy filings would be a little under 1.4 million with an upper bound of around 1.6 million. That was not too bad as far as predictions go. For 2010, I think 1.6 million bankruptcy filings might be a good lower boundary of an estimate for projected total bankruptcy filings--more on that later. In the meantime and for the record, here is where the 2009 projections stand:

1,448,000 filings if bankruptcy filings continue for the rest of the year at the same daily rate (5,769 per day) as they have averaged for the first ten months of 2009
1,455,000 filings if bankruptcy filings continue at the same daily rate (6,200 per day) as they have averaged for October
1,461,000 filings if bankruptcy filings for the remaining two months of 2009 constitute the same proportion of total filings as the last two months of 2008 constituted for total filings that year (about 17.1%)

Looking Forward in the Supreme Court

Posted: November 2nd, 2009, 9:56am PST by Bob Lawless

This just in from our Washington, DC, bureau: the Supreme Court has granted certiorari in Hamilton v. Lanning, No. 08-3009 (10th Cir. Nov. 13, 2008), where the Tenth Circuit adopted the "forward-looking test" for how much a chapter 13 debtor has to pay creditors. The alternative is the "mechanical test" adopted by the Ninth Circuit in an often-discussed and often-criticized decision called Kagenveama.

The forward-looking test allows for a more flexible consideration of the debtor's circumstances in the future. The mechanical test, as the name implies, requires only the application of the amounts fixed in the statute. As the Tenth Circuit said, reasonable people could read the Bankruptcy Code to reach either result. The forward-looking test can account for changed circumstances of the debtor, such as a decline in income that often precedes a bankruptcy filing.

Of the four bankruptcy cases the Supreme Court has on its docket right now, Hamilton may have the greatest practical effect on real people. It will not only determine the rules for those who file chapter 13 but, as a result, also play a big role in whether chapter 13 will be a good solution for many persons with financial problems, especially homeowners facing foreclosure.

How to Fail My Secured Credit Exam Two Different Ways

Posted: November 2nd, 2009, 8:43am PST by Bob Lawless

By way of Underbelly comes this story from the Seattle Times chronicling the many failures at the now defunct WaMu. Among the stories was that a WaMu banker gave O.J. Simpson a second mortgage on his Florida home despite the existence of a huge judgment lien against Simpson arising out of his civil trial for killing his wife and her friend. Why did WaMu think it could collect the second mortgage? According to the news story, Simpson had put a note in the file saying he did not do it, and therefore the judgment was "no good." OK, that's pretty dumb and, for my students who read the blog, would not be a passing answer in my secured credit class.

What the reporter (but hopefully not my students) missed is that the second mortgage was likely collectible anyway. Florida has an unlimited homestead exemption that would prevent enforcement of the judgment lien against the home, assuming it otherwise met the definition of a homestead. Voluntary transfers, like a second mortgage, are not protected by the homestead statute. (If you're wondering why that is, consider how much mortgage lending there would be if the mortgage could not be enforced because of a homestead statute.) A comment on the Daily Weekly blog (hosted by the Seattle Times) picked up on the point about the homestead exemption and the role it should have played in this lending decision.

The "note in the file" story sounds too funny to be true, and in this case, I think it probably is. Florida (and every other state) law is the reason some WaMu Florida banker thought they could enforce the second mortgage. Of course, this is just the legal part of the lending decision. As the Daily Weekly blog story asked, why was WaMu so willing to give Simpson the benefit of the doubt and extend a loan?

Things That Have Piled Up

Posted: October 23rd, 2009, 3:11pm PDT by Bob Lawless

Long time readers of Credit Slips may have noticed that my blogging has flagged the past few months. That is because my colleagues, Jennifer Robbennolt and Tom Ulen, and I have been working on a text entitled Empirical Methods in Law. It is intended to be a user-friendly guide to the topic, useful (we hope) as both a deskbook and a textbook. It should be out later this year, and I'll try to say more about it.

In the early part of this past week, I was at the annual meeting for the National Conference of Bankruptcy Judges (NCBJ). It was in Las Vegas, which is always fun, but for me I got to meet up with many of my former colleagues at UNLV. The NCBJ meeting is always great. The panels are a good mixture of day-to-day practicalities and the big picture. Plus, you often get to hear what is on the judges' minds. There were about 1800 attendees this year--so I understand--if you're a bankruptcy lawyer it's worth going if you never had a chance. Next year, it's in New Orleans.

Between our book and my trip--oh, and I had to do a faculty workshop on Thursday--a few things piled up.

First, I got an e-mail reminder about Consumer Credit, Debt and Bankruptcy, a book edited by Johanna Niemi Iain Ramsay, and Bill Whitford. It first came out in July. The book has chapters from many of the leading scholars thinking about bankruptcy and consumer debt from around the world, including many past Credit Slips guests such as Susan Block-Lieb, Ronald Mann, Jason Kilborn, and Jean Braucher. The book is from Hart Publishing. I had just had occasion to revisit several of the chapters and was reminded of the book's overall quality. It's a good collection of work and is a good entry way into the literature for anyone wanting to think about these issues from a global perspective.

Second, my colleague, Andy Morriss, sent me an e-mail about the seventy-degree weather he is currently enjoying in whatever exotic locale he currently has landed in. If you are in the U.S. Midwest right now, you'll know that it's been cold and rainy. Despite Andy's (largely successful) attempt to produce weather envy, I wanted to pass along another interesting factoid he sent to me from Credit Karma. Apparently, persons from different Internet domains enter vastly different credit scores on this web site. Personally, I think it says more about the domains than anything about credit scores, but I'll let our readers ponder that in the comments.

Have a great weekend.

Tightening the Bankruptcy Laws in the Midst of a Deep Recession

Posted: October 14th, 2009, 6:58am PDT by Bob Lawless

Beginning on November 1, some people might suddenly find they are now ineligible for chapter 7 bankruptcy. Making it harder to file bankruptcy in the middle of our financial crisis may not be the best policy idea to come down the pike, but it is exactly what Congress set in motion in 2005. Here is why.

The U.S. bankruptcy law has a means test that is meant to filter "can pay" debtors into chapter 13. It's a test that was not needed--there was no evidence of widespread abuse of the bankruptcy system--and the test is not having its intended effect--the income distribution of filers has not changed. The means test begins with an inquiry that asks whether a debtor is above or below the state median income for a household of the same size in the debtor's state.

The state median income figures are periodically updated by the U.S. Census and the Executive Office for U.S. Trustees (EOUST) publishes a table that is used in the bankruptcy courts. Don't blame either the Census or the EOUST for this one. They are just doing what Congress directed. These changes happen automatically.

With the recession, incomes are going down. Thus, in half of the data points on the table, the median income that will subject a debtor to the means test has decreased. In Illinois, for example, right now a filer from a 1-person household goes through the means test if he or she has median income above $47,355. On November 1, that will change to $46,105. Also, the changes are not consistent across different sizes of households in a state. For example, in New Hampshire, the median income figures drop for 1- and 2-person households (making it harder to file chapter 7 bankruptcy) but rise for 3- and 4-person households.

Some might object that this problem is more fictitious than real. How many persons are really going to be caught out by a change of a few thousand dollars in the means test's median income figures? Well, maybe not a lot, but with us headed toward at least 1.5 million bankruptcy in 2010, also not just a few. Regardless of the number of people who are affected by the change, what concerns me more is the symbolism of making personal bankruptcy less available during a time of economic crisis. These sorts of changes feed the perception that the government will help out large financial institutions but the average Joe or Jane.

There is a lot of misinformation out there for persons contemplating bankruptcy, and I would not want this post to add to that problem. If you are thinking about filing bankruptcy and found this post, there is no reason to panic. If you are well below the state median income, this change will not affect you. Even debtors who are above the state median income often are eligible for chapter 7 because the expenses are high enough to qualify. But, if you have an income near your state's median, you might want to visit an attorney before this change goes into effect. You can find the post-November 1 median income figures here.

And a hat tip to the Credit Slips reader who wrote me and reminded me that these changes were coming.

Debt Collectors Are Not Always "Debt Collectors"

Posted: October 14th, 2009, 6:17am PDT by Bob Lawless

This just in from our Tampa bureau: a debt collector threatens a debtor and his family, including the lovely threat "I'm going to f*** you up" if you don't pay. Abusive debt collection practices seem to be pretty widespread but are rarely the subject of much enforcement or litigation. This time it might be different because the debtor recorded the call. The debtor has filed a lawsuit against the creditor, Jacksonville Check Cashers. The Consumerist was all over this story as well as a local TV news channel which has the original audio.

Here's the catch -- it is not clear that this particular situation violated the federal Fair Debt Collection Practices Act (FDCPA). Although that law prohibits abusive phone calls and threats, it also defines a "debt collector" as someone who collects debts on behalf of another. In this case, it was an employee of the creditor, which the FDCPA specifically says is not considered collecting debts on behalf of another. Florida has its own state law, but it seems to have the same definition. Because the creditor was acting on its behalf, these laws do not apply. The bottom line is that a debt collector is not always a "debt collector" for purposes of the law.

That is not to say the debt collector and his employer will avoid any penalties. The actions might constitute an assault (but probably not) or intentional infliction of emotional distress (but what are the damages?). Maybe there are other causes of action under Florida state law? Similarly, there may be regulatory consequences from the state licensing authorities. It would be much better, however, if the debtor could enforce his rights under the debt collection laws. The whole episode is another reminder that it is time to revisit the FDCPA and bring it up-to-date with modern commercial reality.

How Many Bankruptcy Filigns Were There in September?

Posted: October 7th, 2009, 5:45am PDT by Bob Lawless

In a post yesterday, I used bankruptcy filing figures from Automated Access to Court Electronic Records (AACER) that showed just over 125,500 total filings in the month of September. A large number of news stories reported there were 124,790 consumer filings in September (e.g., here, here, and here). In turn, these stories were sourced to the American Bankruptcy Institute (ABI), which in turn attributed its data to the National Bankruptcy Research Center. This is too small a difference (about 0.5%) to be explained by a discrepancy between consumer versus total filings.

Both of these figures cannot be right. I have posted about how I have beaten on the AACER data and found them accurate. Also, I wrote to AACER, and they verified their September 2009 number. For these reasons, I believe the AACER report on September bankruptcy filings is accurate. I wonder whether the ABI release did not confuse total filings and consumer filings. It's not that I feel the need to call out a mistake by the media or the ABI on the September figures. Goodness knows that I make a lot of mistakes, and I may be mistaken here. Rather, my attempt to reconcile the two figures reminded me again that the line between consumer and business cases is so thin that it often is not profitable to make the distinction.

First, why do I think the ABI figure might have been for total filings and not consumer filings in September 2009? The ABI press release also reports there were 88,663 consumer filings one year before, in September 2008. The historical AACER data reports 96,138 total filings for the same month. That difference, about 8.4%, is about the right amount to represent the difference between counting consumer filings and business filings, with business filings defined to include individual business owners filing because of a failed business. And, each month the ABI data for consumer filings usually shows a similar difference as compared to AACER's data for total filings. Most importantly, the ABI figures compute out to a year-over-year increase of 41% for September 2008 where AACER's data show a year-over-year increase of only 31%. If I "gross up" AACER's September 2009 filing figures by 8.4%, then I match the ABI's year-over-year increase of 41%.

All I have is supposition, and main point anyway is the distinction between "business" and "consumer." This whole exercise would be helpful if we understood what the ABI counts as a "consumer" bankruptcy. If it is the U.S. courts' definition, then it is an overcount because it is sweeping up business owners who are filing for bankruptcy. Broader definitions, such as AACER's count of commercial bankruptcies using employer identification numbers and "d/b/a" designations, are better but have their own drawbacks. If what we are most interested in knowing are long-term trends, we can avoid these complications by focusing on the total bankruptcy filing figure.

Bankruptcy Filings Maintain a Steady State

Posted: October 6th, 2009, 10:06am PDT by Bob Lawless

The good folks at Automated Access to Court Electronic Records (AACER) report there were over 125,500 total bankruptcy filings in September. The daily bankruptcy filing rate was 5,980 for an increase from August of only 0.5%.

Recent media reports and blog posts like to comment on how monthly bankruptcy filings have surged, soared, and skyrocketed. The reality is not as dramatic. The bankruptcy filing rate remains pretty much where it was in March when it was 6,000 filings per day. In fact, from March to September the daily bankruptcy filing rate has been 6,000 filings per day. (Those are not rounded-off figures.) From month-to-month the rate has moved up and down a few percentage points, but that is what monthly rates do.

The dramatic comparisons (and news stories and blog posts) come from year-over-year increases. September 2009 did show a 31% year-over-year increase as compared to September 2008. Guess what? That is the lowest year-over-year increase since September 2008, which showed a year-over-year increase to September 2007 of 28.9%. In turn, September 2007 had a year-over-year increase of 27.9% as compared to 2006. In fact, the average monthly year-over-year increase since January 2007 has been 37.6%. If you want a big headline, all you have to do is report the year-over-year increase. By that measure, however, September 2009 had a lower-than-average year-over-year increase.

What has been happening since January 2007 to account for the large year-over-year increases? Bankruptcy filings plummeted immediately after the 2005 bankruptcy law was adopted. Since then, bankruptcy filings have been climbing back to the level they were before the 2005 bankruptcy law was adopted. Long-time readers of this blog will be familiar with my posts making that point, the latest of which was just over a month ago. Indeed, I feel like I'm probably just preaching to the choir by posting these comments here. Focusing on year-over-year increases is going to produce dramatic, if not misleading, stories.

By the way, I'm not claiming the U.S. economy is not playing a role in the current bankruptcy filing rate. The economy, however, is by far from the only thing driving bankruptcy filing rates. A lot of people are at the end of their financial string, but that is different from from filing bankruptcy. The media often equates "broke" and "bankrupt," but one is a financial status and the other represents a decision to initiate a costly legal proceeding with certain benefits and consequences. There is some relationship between the economy and the bankruptcy filing rate, but it is hardly a 1:1 effect.

Also, I'm not trivializing a bankruptcy filing rate of 6,000 bankruptcy per day. That is 1.5 million bankruptcy filings per year for a bankruptcy rate of about 4.9 filings per 1,000 population. The divorce rate, by way of comparison, is estimated to be only 3.5 per 1,000 population. Every divorce involves two persons for a rate of 7.0 persons per 1,000 population involved in a divorce each year. About one-third of bankruptcy filings, however, formally involve a husband-and-wife for an implied rate of about 6.5 persons in bankruptcy per 1,000 population. Also, in some cases only one person in a couple files the bankruptcy petition, meaning it does not formally count as a joint case, but the bankruptcy clearly affects the household. With 1.5 million bankruptcy filings per year, as many persons will go through the bankruptcy system each year as go through the divorce courts. (True, my figures are using total bankruptcy filings, but filings by corporations, LLCs, and the like count for only a small part of total bankruptcy filings, about 1.5%. Most all bankruptcy cases are filed by individuals.)

I'm also not claiming that bankruptcy filing rates won't climb again in the future. I don't expect them to increase dramatically before the end of the year because, historically, the big increases have come in January, February, and March. The early part of 2010 will give us a big indication of whether the daily bankruptcy filing rate will climb above 6,000 or whether this figure represents a new plateau going forward.

I have made it traditional in these monthly posts to project total bankruptcy filings for the calendar year. With only three months to left in 2009, here are the projections:

1,435,000 filings if bankruptcy filings continue for the rest of the year at the same daily rate (5,720 per day) as they have averaged for the first nine months of 2009
1,450,000 filings if bankruptcy filings continue at the same daily rate (5,980 per day) as they averaged for September
1,481,000 filings if bankruptcy filings for the remaining three months of 2009 constitute the same proportion of total filings as the last three months of 2008 constituted for total filings that year (about 27.0%)

Because of the seasonality in the bankruptcy filing rate, I always like the last number as the best prediction. Looking back to 2007, we only had 24.7% of all filings in the last three months of that year. For this reason, the 2008 comparison might produce a figure that is a little high. If I average our experience from 2007 and 2008, I get a projection of 1,450,000 bankruptcy filings for the 2009 calendar year, and that is the same result we get if bankruptcy filings continue at 6,000 per day. Thus, I think 1,450,000 is about where we'll end up for 2009.

Schwab v. Reilly -- The Amicus Brief

Posted: September 30th, 2009, 10:06am PDT by Bob Lawless

Last week, I agreed to join an amicus brief in the pending U.S. Supreme Court case of Schwab v. Reilly. This case will not receive a lot of medial attention, but it could have a big practical effect on the approximately 1.5 million bankruptcy cases that it looks like the U.S. will be experiencing each year. The amicus brief was filed on behalf of the National Association of Consumer Bankruptcy Attorneys (NACBA) and four law professors (Ken Klee of UCLA, Richard Lieb of St. John's, Michael D. Sousa of Denver, and myself).

The amicus brief supports a debtor, Nadejda Reilly, who claimed an exemption in her bankruptcy for tools of the trade, namely kitchen equipment for her restaurant. On the schedule where she was to claim her exemptions, Reilly listed the value of the equipment as $10,718 and claimed an exemption in the equipment of the same amount, combining the federal $1,850 tools-of-the-trade exemption with $8,868 of her federal "wild-card exemption." More than 30 days after the meeting of creditors, the trustee filed a motion to sell the equipment because, based on an appraisal, he believed it to be worth more than $17,000.

Nobody disputes that the equipment is eligible for the exemption. Rather, the question is whether the trustee procedurally defaulted by not acting more promptly. Federal Rule of Bankruptcy Procedure (FRBP) 4003(b) requires that any objection to an exemption be made within 30 days after the meeting of creditors, and section 522(l) of the Bankruptcy Code states that absent an exemption, the property claimed on the list of exemptions "is exempt." Despite these clear rules, my initial instinct was that the trustee should win. The more I thought about the case, however, the more I became convinced the debtor is right.

My initial mistake was to make a distinction only a lawyer would make, namely that there is a distinction between the value of the thing and the thing itself. Thus--and this is exactly the trustee's position--Reilly's exemption is vindicated by selling the property and giving her the amount of her exemption, namely $10,718. Lawyers often like to talk about value as if it was some objective measuring stick, albeit a measuring stick with a lot of uncertainty but still objective. Of course, that conception is wrong. For example, there is plenty of literature to show that Reilly likely would value the equipment much higher, simply because she currently owns it (the endowment effect), than anyone else. Slapping a value on the asset is to make a bunch of normative judgments about the asset. Granted, the law makes normative judgments all over the place, but we should not pretend that we are not making normative judgments when we use the language of valuation.

Once I got beyond the idea that this case is merely about a dispute over the value of the asset in question, it became much easier for me. Debtors usually claim exemptions to protect the thing claimed in the exemption. That is certainly true here as Reilly said she wanted to dismiss the bankruptcy case rather than turn over the equipment to the trustee. I don't like the idea of the creditors--represented by the trustee--to lose a recovery simply because a deadline passed, but some deadline has to be set. Otherwise, bankruptcy debtors always would be at risk of losing a claimed exemption long after a bankruptcy case passed.

Imagine this conversation as a bankruptcy lawyer: "You know that car you protected in your bankruptcy last year? The trustee now wants to sell it because it's market value is higher." There has to be a deadline. The rules committee might have picked a year or seven days or a three months. Any choice of a deadline is arbitrary. The rules committee chose thirty days. The statute cuts off any further objections past that date. End of analysis.

For the debtor to lose, I think the Supreme Court would have to make the technical distinction between value and the thing itself. That is a lawyer's distinction, not a plain and ordinary interpretation of the statutory scheme. In addition to all the usual reasons to prefer the plain and ordinary meaning, this meaning is also the one that best effectuates the purpose of the bankruptcy law.

Help Me Decide -- Is a "Replacement" New Collateral

Posted: September 29th, 2009, 9:17pm PDT by Bob Lawless

This semester, I have been teaching secured credit from Lynn LoPucki and Elizabeth Warren's wonderful textbook. One of the problems from the book was, I believe, inspired by my former colleague at UNLV and current bankruptcy judge, Bruce Markell, who requires his students to draft a security agreement taking a security interest in an object he brought to class. A student's agreement has presented an interpretive issue with the problem, and I told him I would get the input of our readership on Credit Slips. One thing the assignment allowed me to do is to talk about boilerplate. There is nothing necessarily wrong with boilerplate, but we should understand what it is doing when we use it.

The object I brought to class was a baseball signed by the great Lou Brock, a Hall of Fame outfielder for the St. Louis Cardinals. The instructions specifically state that the students are to draft a security agreement taking a security interest in this object--the baseball--and nothing else. If the students comply with the instructions, they get a pass on the assignment, and if not, they get a fail. As Markell always said to me--in the real world there is no such thing as a security agreement that is almost valid.

The student's security agreement took a security interest in all “Property described in this agreement” and defined "property" as the baseball and "all parts, accessories, repairs, replacements, improvements, and accessions to the property; any original evidence of title or ownership; and all obligations that support the payment or performance of the Property." The student has persuaded me that most of this clause does not raise any practical possibility that he would get a security interest in something other than the baseball. For example, what would be an "accession" to the baseball? I'm willing to buy that, but the word "replacements" bothers me. Suppose I lose this baseball and buy a new baseball signed by Lou Brock. That would arguably be a "replacement" and thereby extra collateral that violates the instructions of the assignment.

Does my student get a "pass" on this assignment?

Thank You to Stephanie Ben-Ishai

Posted: September 28th, 2009, 7:23am PDT by Bob Lawless

Credit Slips would like to thank Professor Stephanie Ben-Ishai of the Osgoode Hall Law School at York University for joining us last week. Professor Ben-Ishai gave us a fairly comprehensive overview of the changes to the Canadian bankruptcy law that took effect in September (and earlier this year). Regardless of where you sit when you read Credit Slips, it is important to take a global perspective on bankruptcy issues, even consumer bankruptcy issues. With the globalization of consumer credit, all consumer bankruptcy is no longer local. Thank you, Stephanie, for giving us a valuable perspective on what is happening in Canada.

Minimum Payments Help the Credit Card Industry

Posted: September 22nd, 2009, 7:11am PDT by Bob Lawless

If you make only the monthly minimum payment on your credit card account, the debt has a fair chance of outlasting the expected life of the plastic used to manufacture the credit card. That may be hyperbole but not by much. Paying only the monthly minimum is a sure way into debt trouble. Credit Slips readers know that.

But, at least suggesting a minimum payment is better than no payment. Maybe not. According to an experiment by Professor Neil Stewart of the University of Warwick, the presence of a monthly minimum payment on a credit card statement caused people to pay 43% less toward the credit card debt than they otherwise would. The article is in an academic journal called Psychological Science. More accessible descriptions appear in a press release and in an article from The Economist.

The reason for this counterintuitive result is a phenomenon known as anchoring. In a famous experiment, researchers asked persons to estimate the percentage of African countries in the United Nations. The estimates varied depending on whether the person was first asked to guess whether the percentage was higher than 45% or higher than 65%. Just like the results in the experiment, looking at a number on a credit card statement anchors the estimate of what is a reasonable amount to pay. Anchoring is a powerful heuristic that affects how we all make decisions. (Note to you lawyers out there -- it also explains why you'll do better on average if you make the first offer in a negotiation.) I find that my students are often resistant to the notion about just how powerful an influence anchoring can have, but experiment after experiment shows what it can do. This latest experiment is another example.

Hat tip to Frank Venis of the University of Illinois College of Law staff for pointing the way to this.

Ten Years of Corporate Bankruptcy from The Deal

Posted: September 21st, 2009, 8:29am PDT by Bob Lawless

Transactional tracker The Deal magazine has been celebrating its tenth anniversary (hard to believe). As part of that, the magazine has been reviewing how the last ten years have treated different parts of the deal-making scene. Matt Miller has written the bird's eye view of what has happened to corporate bankruptcy over the past ten years. In Miller's diagnosis, easy liquidity led to leverage ratios that were unsustainable, which I think is undisputable. The financial crash dried up liquidity and with more and more companies having a single dominant creditor who could call the shots at the time of financial distress, the result has been more liquidations rather than reorganizations. That all sounds right to me (and, full disclosure, Miller talked to me about the dominant creditor point). Here at Credit Slips, we're into the bird's eye view. The article is worth a read.

Welcome to Stephanie Ben-Ishai

Posted: September 21st, 2009, 4:03am PDT by Bob Lawless

Credit Slips is excited to welcome Professor Stephanie Ben-Ishai of Osgoode Hall Law School at York University. Ben-Ishai has published widely on bankruptcy and commercial law and has several studies on how Canadian bankruptcy laws affect low-income consumers in Canada. With Canadian bankruptcy reforms taking effect last Friday (September 18) as well as earlier in the summer, Ben-Ishai has kindly agreed to discuss these changes with our readers as well as her perspectives on consumer indebtedness in Canada and around the world. Thank you, so much, Professor Ben-Ishai, for agreeing to join us for a while.

August Filings Hold Steady

Posted: September 8th, 2009, 9:50am PDT by Bob Lawless

It is September 8, and I never did my monthly post about the latest U.S. bankruptcy filing figures. Hopefully, late is better than never. According to data from Automated Access to Court Electronic Records (AACER), there were slightly more than 124,000 bankruptcy filings in August. Spread over the twenty-one business days in August, there were 5,914 filings per day. That represents a negligible 0.6 decline from the July rate of 5,948 filings per day.

The bankruptcy filing rate has moved sideways since March when the filing rate was 6,000 filings per day. Since then, May and July showed increases, while April, June, and now August showed declines. The gains have offset the declines such that we are only 1.4% lower than the bankruptcy filing rate in March. None of this is out of the ordinary. In recent years, the bankruptcy filing rate holds steady over the summer months. The real indication of whether we have reached a new equilibrium in bankruptcy filings rates will come in the winter and then especially again after the start of the new year.

In terms of projections and with only four months left in the year, it looks like the U.S. will not go over 1.5 million bankruptcy filings for the 2009 calendar year. The projections now look like the final number will be somewhere between 1.45 and 1.50 million bankruptcy filings. For the record, 2009 bankruptcy filings will be:

1,426,000 filings if bankruptcy filings continue for the rest of the year at the same daily rate (5,684 per day) as they have averaged for the first eight months of 2009
1,449,000 filings if bankruptcy filings continue at the same daily rate (5,914 per day) as they averaged for August
1,488,000 filings if bankruptcy filings for the remaining four months of 2009 constitute the same proportion of total filings as the last four months of 2008 constituted for total filings that year (about 35.8%)

Are You a Work Horse?

Posted: September 2nd, 2009, 11:38am PDT by Bob Lawless

Two items of interest . . . .

First, from West's "headnote of the day" service on a case interpreting what it meant for a horse to a "work horse" within the meaning of an exemption statute. Given the holding, I wonder how many modern-day householders might fit the description! I, for one, vow never to be broken to gear.

To entitle a poor debtor to the benefit of the act which declares "one work horse," etc., shall be retained for the use of every family in this state "free and exempt from levy or sale by virtue of any execution or other legal process," it is not necessary to prove that the horse had been broken to gear, or used in harness; but it is enough if he performed the common drudgery of the homestead, either by hauling wood, drawing the plow, carrying the family to church, etc., under the saddle or in traces. And he need not have performed all these services. If he is intended to be used in any or all of them, or in others of a kindred character, he comes within the exemption. Noland v. Wickham, 9 Ala. 169 (1846).

The second item -- there is a headnote of the day service? Who knew?

By the way, I mainly wanted to post this for the benefit of our resident horse expert, Debb Thorne, who I am sure will chastise me for my cavalier attitude toward the comparisons between humans and horses.

Hat tip to Bob Hiller for pointing the way to this.

Another Sign of the Futility of the 2005 Bankruptcy Law

Posted: August 25th, 2009, 12:24pm PDT by Bob Lawless

A big feature of the 2005 changes to the U.S. bankruptcy law was supposed to be a means test that would get people into chapter 13 instead of chapter 7. Because a chapter 13 requires a 3- or 5-year repayment plan, the law's advocates pitched it as an attempt to force "can pay" debtors to repay a portion of their debts. Initially, chapter 13 rates did go up, but that was a statistical artifact of the huge surge in filings just before the 2005 law. As I have noted previously, the chapter 13 rate has been declining ever since.

I am now officially going to call it ....

Anyway you measure it, chapter 13s have returned to their historical level. In fact, one could even interpret the data to show that chapter 13s are slightly below their historical norms. As a percentage of all filings, the chapter 13 rate for July 2009 was 28.1%, and the chapter 13 rate for the first seven months of 2009 was even less--27.6%. In 2004, chapter 13s were 28.1% (the red line in the graph) and from 1999 - 004 they were 29.0%. The 2005 bankruptcy law accomplished nothing about chapter choice.

This is just another sign of the futility of the 2005 bankruptcy law. As I've said on numerous occasions, it did nothing to change the underlying economic reality for consumers in deep financial distress. It's not a surprise that the supposedly central goal of the law--more chapter 13s--has not come to pass. Of course, the unstated goal of the 2005 bankruptcy law was to raise the cost of filing and lower the benefit of doing so that consumers would wait longer to file bankruptcy while paying huge default interest rates and penalty fees. In a paper that my colleagues and I published out of the Consumer Bankruptcy Project data, we found the effect was exactly that--consumers are waiting longer to file bankruptcy.

Private Tax Collection

Posted: August 18th, 2009, 9:26am PDT by Bob Lawless

The New York Times has a story today that Credit Slips readers will want to check out. It catalogs the growing trend of local governments to sell their real estate tax debts to private investors. The reporter, Jack Healy, succinctly states the opposing policy points:

Investors say the arrangement actually benefits everyone. School districts, fire departments and public parks get an infusion of cash. The investors take on a risky but potentially high-yielding investment. And taxpayers do not have to pick up the slack from scofflaw landlords or tax evaders.

Governments, of course, can charge interest and penalties too, and they foreclose on properties for back taxes. But governments charge interest rates that are half what private investors charge — often offering no-interest payment plans — and are also more likely to be concerned about the long-term prospects of neighborhoods.

All good points, but there is nothing that the ivory tower can't make more confusing.

First, private investors buying tax liens is not a new business, but the article suggests it is a rapidly growing business. Tax liens are given priorities over other types of debt for several reasons. One is that the tax debt creates an involuntary creditor. By "involuntary," we mean the taxing entity was not intending to create a creditor-debtor relationship. (Of course, one might ask why other involuntary creditors, such as tort creditors, do not also get priority, but that is a problem for another time.) The investor has bought the tax lien voluntarily, creating a different type of debtor-creditor relationship. Yes, the price the investor pays for the debt reflects the collection advantages it carries. If, however, investor purchase of tax debt becomes routine, then the involuntary nature of the debt no longer is a justification for its collection advantages. We would have to justify the priority for tax debt on other grounds. Perhaps that justification is just that we like tax debts to be collected for the public fisc more than we like other debts to be collected?

The more troubling part of this trend is that collection practices by governmental entities are subject to the same democratic processes that surround all governmental decisions. Tax collectors have powerful collection tools, but these tools have to be exercised with the political ramifications in mind. These political checks are another reason we entrust tax collectors with powerful collection tools. Local officials with overly aggressive tax policies have to answer to the electorate. Private investors do not.

Countrywide Sanctioned by Ohio Court Citing Porter & Twomey

Posted: August 12th, 2009, 1:36pm PDT by Bob Lawless

As many Credit Slips readers may be aware, Countrywide Home Loans (which is now part of Bank of America) has been the subject of proceedings in several bankruptcy courts because of the shoddy recordkeeping behind their claims in bankruptcy cases. Judge Marilyn Shea-Stonum of the U.S. Bankruptcy Court for the Northern District of Ohio recently sanctioned Countrywide for its conduct in these cases. Having previously found Countrywide to have committed sanctionable conduct, the question for Judge Shea-Stonum was the appropriate penalty.

The resulting opinion makes extensive reference to Credit Slips regular blogger Katie Porter and guest blogger Tara Twomey's excellent Mortgage Study that documented the extent to which bankruptcy claims by mortgage servicers were often erroneous and not supported by evidence. Specifically, the court adopted Porter's recommendation from a Texas Law Review article that mortgage servicers should disclose the amounts they are owed based on a standard form. Judge Shea-Stonum found that such a requirement would prevent future misconduct by Countrywide. All of Countrywide's claims now or hereafter pending in this court have to be supported by the form attached to the end of the opinion.

If you look at the form and wonder "Weren't mortgage servicers disclosing this information anyway?" The answer is that they often were not. Hence the need for such a form. Although the issue before the court was only what do to with Countrywide, we should move toward this sort of form as a requirement nationally for all mortgage servicers. (Hat-tip to Professor Marianne Culhane for pointing me toward this opinion.)

How to Count Medical Debt in Bankruptcy

Posted: August 7th, 2009, 2:27pm PDT by Bob Lawless

Most Credit Slips readers will be familiar with the debate about the role medical debt plays in consumer bankruptcy. A big part of that debate is one about methodology with disputes about how to count "medical debt." Personally, I've always thought one of the most damning accounts of the role medical debt plays in bankruptcy came from Aparna Mathur, a scholar from the American Enterprise Institute (AEI). In a paper that heavily criticizes the other accounts, such as co-blogger Elizabeth Warren and Debb Thorne's work with David Himmelstein and Steffie Woolhandler, Mathur concluded "nearly 27 percent of filings are a consequence of primarily medical debt." If you do not like Himmelstein, Thorne, Warren & Woolhandler's count that more than 1 in 2 of all bankruptcies have a connection to medical debt, an AEI-affiliated scholar says it's 1 in 4. Either figure is a disgrace for a country with the wealth and resources of the United States.

An important new paper on the topic of medical debt now comes from Melissa Jacoby at the University of North Carolina (who helped us to found Credit Slips) and Mirya Holman at Duke University. They looked both at court records and survey responses from the Consumer Bankruptcy Project. (Disclosure: I am affiliated with the CBP.) They conclude, "By combining the methods, we find that nearly four out of five respondents had some financial obligation for medical care not covered by insurance in the two years prior to filing, but only about half of the court records contain identifiable medical debt, and of substantially more modest amounts." As someone who has just spent a lot of time thinking about research methods, these findings are a ringing endorsement for a multimethod approach to solving difficult research problems.

Credit Slips readers, however, are people who spend a lot of time thinking about credit and bankruptcy. If that describes you, this paper is a must read. Jacoby and Holman also have a couple of blog posts (here, here, and here) over at The Faculty Lounge discussing their findings

Bankruptcy Filings Rise in July, Set Off Most of June's Decline

Posted: August 7th, 2009, 1:02pm PDT by Bob Lawless

My blogging has been a little light lately. Two of my University of Illinois colleagues (Jen Robbennolt and Tom Ulen) and I have been finishing our forthcoming text, Empirical Methods in Law. I am glad to say that we now have a complete manuscript and are looking at a publication date in December. (If you are an academic who might want to teach out of the materials and would like to see them, shoot me an e-mail.)

Among the posts that did not get done was my monthly update on U.S. bankruptcy filings. Earlier this week, Automated Access to Court Electronic Records ("AACER") sent me the statistics through July. The figures show 130,530 total bankruptcy filings over 22 business days in July for a daily filing rate of 5,933. The daily filing rate is a 4.0% increase from the previous month and a 35.4% increase for the same time period one year ago. The 4.0% increase in July comes on the heels of a 5.5% decline in June. The pattern for this year has been the same as in the past few years. The late spring and summer months have seen monthly ups and downs in the bankruptcy filing rate, but the variations tend to cancel each other out. The July bankruptcy filing rate is virtually the same as it was in March.

One question I often get is why bankruptcy filings are not going up. Usually, this question is connected to rising unemployment which would seem naturally connected to the bankruptcy filing rate. There are several answers to that. First, bankruptcy filings are going up. I've updated the filing trend graph, which appears to the right. Until advances in information technology made it possible, we were not able to follow the monthly bankruptcy filing. The most information was available only quarterly and was released usually a few months after the end of the quarter. Although I post on the filing rate each month (and sometimes I wonder if I should), I think we need to be very cautious about drawing too many inferences from the monthly ups and downs of the bankruptcy filing rate. As the graph clearly shows, bankruptcy filings have been on an upward trend and very near the rates they were before the 2005 bankruptcy law.

The second answer to that question is the fact that unemployment is not the bellwether indicator of bankruptcy filings as it is often assumed. Certainly, unemployment is a contributing factor to many bankruptcies. Unemployment alone, however, is not a sufficient reason. Bankruptcy discharges your past debts; it does not find you a job. No debt, no bankruptcy. The best indicator of increases or decreases in the bankruptcy filing rate is the rise and fall of household debt (i.e., consumer debt such as credit cards plus mortgage debt). Historically, bankruptcy filings fell when household debt did not rise as rapidly as it had in the past. Since the last quarter of 2008, household debt has actually fallen. I think it is likely the fall in household debt is tempering the number of bankruptcy filings we are seeing.

Because my points on this topic often are misunderstood, I should make clear two things that I am NOT saying. I am not saying that unemployment is not a contributing factor in many bankruptcies. And, I am not saying that bankruptcy filings are not on the increase. What I am saying is that I believe the bankruptcy filing rate would be even higher had household debt not been falling since late 2008.

Looking toward the rest of the year, my estimate is that we will end up above 1,450,000 (and maybe close to 1,500,000) bankruptcy filings for calendar year 2009. That projection is based on the following extrapolations:

1,418,000 filings if bankruptcy filings continue for the rest of the year at the same daily rate (5,649 per day) as they have averaged for the first seven months of 2009
1,423,000 filings if bankruptcy filings continue at the same daily rate (5,933 per day) as they averaged for July
1,493,000 filings if bankruptcy filings for the remaining five months of 2009 constitute the same proportion of total filings as the last five months of 2008 constituted for total filings that year (about 44.4%)

Although the first two calculations suggest an amount below 1,450,000, I like the last estimate as the most reliable. Bankruptcy filings have a lot of seasonality, meaning the first part of the year might not be predictive of the last part of the year but year-to-year comparisons may be better. Bankruptcy filings for the first seven months of 2007 and 2008 were almost exactly the same percentage of filings for the total year (55.8% and 55.6% respectively). Even in 2006, when filings were depressed in the early part of the year because of the surge in filings during late 2005, saw 52.0% of its filings in the first seven months. Based on this history, it seems likely that we have yet to see around 45% of the filings for 2009, and that assumption gets us well above 1,450,000 filings as a projection for the year.

(P.S.--For formatting purposes, I put in small versions of the graph and table. Clicking on them should open up a larger version in a pop-up window.)

After Notice and a Hearing -- One Out of Two Ain't Bad?

Posted: July 26th, 2009, 8:50am PDT by Bob Lawless

Wow. I missed this one last week. New York Attorney General Andrew Cuomo has brought civil and criminal charges against lawyers and process servers who were abusing the debt collection system. From the New York Times article:

According to a lawsuit filed on Tuesday in New York Supreme Court in Buffalo, lawyers and debt collectors obtained more than 101,000 court orders that were improperly issued, allowing them to seize, on average, $5,474 from each consumer.

The lawsuit asserts that consumers were never properly notified and were not given a chance to defend themselves in court; creditors won default judgments. The total amount of money seized exceeded $500 million, according to the attorney general’s office.

The cornerstones of due process are notice and a hearing. It sounds like these consumers were only getting half of that, and without notice that it is going to occur, the hearing does not do much good. From the press release, it sounds like the problem was with the process servers who are alleged to have knowingly failed to serve process. After serving process, the process server files an affidavit swearing that it was done. A false affidavit is akin to perjury, hence the criminal charges against some participants.

Hat tip to Brian Wolfman and Jeff Sovern over at the Consumer Law & Policy Blog for pointing the way to the story.

We're Three Years Old!

Posted: July 24th, 2009, 8:55am PDT by Bob Lawless

Today is the third anniversary of the launch of Credit Slips. Happy Birthday to us! (And, Happy Birthday to my daughter who turns 10 tomorrow.)

Sitemeter says that we have had 783,463 visits during that time (which doesn't count people who read us through a news aggregator like Google Reader). Maybe the 1,000,000th visitor ought to get a prize -- something like a free subscription to our RSS feed. The average visitor stays on our web site for 1 minute and 11 seconds, which at first seemed a disappointingly low amount of time. I am told, however, that by Internet standards it is pretty good and an indication that visitors actually are reading the content on the site. We should all shudder for the future when 1:11 is considered a long attention span.

In the past year, we had a breakthrough with the first time (to my knowledge) that Credit Slips was cited in a court opinion. In approving the sale of General Motors's assets, the judge cited to several of Stephen Lubben's posts. Lubben was a new regular blogger this year, and his insightful posts on Chrysler, GM, and other corporate bankruptcies principally raised the question of why we were not smart enough to have him on board from the start.

It is very rewarding to get a call from a government policymaker or from someone in the media who starts with "I was reading Credit Slips and . . . ." Just yesterday, a local business owner told me he had changed some of his practices because of information on our blog. We started the blog to share our views about credit and bankruptcy policy, and it is wondrous (at least to me) that anyone pays any attention to what I have to say. As I mentioned in the previous post, one of the things that really makes Credit Slips work is our readers. The comments on the blog come from experts who add new insights to what is already in the blog and call us out where they disagree. The debates always remain professional and add to the blog's goals. Thanks to our readers and commenters, thanks to our guest bloggers, and thanks to our regular bloggers for making Credit Slips work so well.

(Thanks to soapylovedeb for the photo, CC BY 2.0)

Can You Judge an Industry By a Few Blog Comments?

Posted: July 24th, 2009, 8:18am PDT by Bob Lawless

I'm annoyed this morning. OK, for those of you who know me, I'll make the necessary correction -- I'm annoyed more than usual. And, yes, I've had my morning cup of coffee.

It seems that we are getting more and more of these sorts of comments on the blog: "Very informative post." /s/ Friendly Mortgage Modifiers.com. Of course, the signature is always hyperlinked to a web page where someone purports to want to help people save their homes. These comments are a transparent attempt to draw traffic to these sites and always will be deleted pursuant to our policy against commercial marketing in the comments.

This blog is devoted to discussions of credit and bankruptcy matters at a policy level and by persons who have some professional expertise in the area. Consumers often find the blog when they are looking for answers to their problems. We have deliberately avoided taking any commercial advertising lest it be misconstrued as our endorsement of the product or service. Using the comments for nothing more than commercial marketing and piggybacking on our bloggers' credibility is wrong and misleading. The frequency and brazenness of these sorts of comments raises the question of whether an industry that has to stoop to such tactics has any legitimate service to offer.

P.S. to our regular readers and commenters -- I was reluctant to post this lest our regular readers and commenters become concerned about violating our policy. One of the things that makes this blog work is our readers are pretty expert in the matters we discuss. Links to professional web sites or similar identifying links are not a problem. Indeed, I'm a fan of non-anonymous comments whenever possible. The sort of comments that are the subject of this post do not try to engage with the substantive discussion and are clearly abusive.

A Big Win for Consumers: NAF Leaves Arbitration Business

Posted: July 23rd, 2009, 8:26am PDT by Bob Lawless

Credit Slips bloggers have written a number of posts about the National Arbitration Forum (NAF) (here, here, here, here, here and here). NAF was a business friendly--and especially a credit card company friendly--arbitration forum, but that looks to be a thing of the past. Last week, after a lawsuit was filed by the Minnesota attorney general NAF agreed in a consent decree to stop taking any consumer arbitrations. Deepak Gupta over at the always insightful Consumer Law & Public Policy Blog has has an informative summary on the story. NAF exiting consumer arbitration is great news.

Earlier this week, the not-for-profit American Arbitration Association (AAA) also announced it would stop accepting arbitrations in consumer debt-collection cases until standards or safeguards are established. Big changes appear to be afoot.

Is Bankruptcy Mortgage Modification Back?

Posted: July 23rd, 2009, 8:06am PDT by Bob Lawless

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

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

Does This Mean We Will Be Getting a Pepper Spray Fee?

Posted: July 19th, 2009, 5:35pm PDT by Bob Lawless

ATM theft in South Africa has gotten so bad that some ATMs are being weaponized with pepper spray to deter thieves. If the ATM detects someone trying to tamper with it, the spray is released. These ATMs apparently can spray not only would-be bad guys but also hapless ATM technicians who are just trying to fix the darn thing. In the technician incident, the spray spread through the shopping mall where the ATM was located.

Pepper spray in ATMs -- what could go wrong there? If this idea comes to the United States, I can just see it now on my bank statement: "$20.00 -- Pepper Spray Fee."

Hat tip to my colleague, Andy Morriss, for pointing me toward this story.

Highly Questionable Medical Bankruptcy Figures from Fraser Institute

Posted: July 9th, 2009, 1:08pm PDT by Bob Lawless

The National Center for Policy Analysis (NCPA) is flogging a study from the Fraser Institute in Canada that purports to show U.S. medical bankruptcies are a "myth" because the Canadian bankruptcy rate is higher than in the United States. Reuters and BusinessWire have run the NCPA's press release as a story on their news services. Before anyone takes this study seriously, a few important facts are needed to place the Fraser Institute findings in context. To be as charitable as possible, the study's use of the bankruptcy data is extremely selective.

First, the Fraser Institute study begins by observing that advocates of a single-payor U.S. health care system use the assumption that such a system would prevent many U.S. bankruptcies because of the medical debt found among many U.S. consumers filing for bankruptcy. The study states, "We should expect to observe a lower rate of bankruptcy in Canada compared to the United States, all else being equal." First, I'm not sure that is an assumption made by advocates of a single-payor system (and I don't count myself as one of them). Second, the qualifier "all else being equal" is the whole point. There is a lot that is not equal between the U.S. and Canada, and there is no reason to expect bankruptcy rates to be precisely similar. Even on its own terms, however, the Frasier Institute study is highly suspect because of the narrow window it uses for its bankruptcy data.

The Fraser Institute study, which is really just a three-page report of existing data from government sources, used bankruptcy filing data for the calendar years 2006 and 2007 as the "most recent data." Both the Office of the Superintendent of Bankruptcy Canada and the U.S. courts have 2008 data available. For a report that carries a July 2009 date, the years 2006 and 2007 would not seem to be the most recent data available. Authors have to prepare publications in advance of their appearance, but the U.S. data were available in a press release dated March 5, 2009, and the Canadian data appear on a web page that states "modified March 11, 2009." There was surely plenty of time to use the 2008 data for a 3-page paper that has fewer data than this blog post. By limiting the data to 2006 and 2007, however, the report is able to support that the anti-health care reform agenda that the NCPA and the Fraser Institute seem to further.

For both 2006 and 2007, the Fraser Institute study reports a Canadian bankruptcy filing rate of 0.30% of total population or 3.0 for every 1,000 persons. As the table to the right verifies, the Canadian bankruptcy rate for those two years is lower than in the United States, hardly a surprising result given the draconian 2005 U.S. bankruptcy law and the artificial dip in U.S. bankruptcy filings at that time. Here is the thing: for any other year in the past ten years, the U.S. bankruptcy rate is higher than 3.0. Examining the most recent data, as the Fraser Institute study purported to do, would have shown a higher 2008 rate for the United States. For 2009, my projection (approx 1.45 million bankruptcy filings) suggest a U.S. bankruptcy filing rate of about 4.7 per 1,000 total population.

The Office of the Superintendent of Bankruptcy Canada has data on the Canadian consumer insolvency rate based on the population aged 18 and over. Using the adult population as a base certainly makes more sense than using the total population as the Fraser Institute study does, but in fairness, I do not think their substantive results would have differed had they used the adult population to calculate a bankruptcy rate. Combining the Canadian data with data from the U.S. courts and the U.S. Census, the table to the right shows the bankruptcy filing rate for the adult population for both countries. Again, in all years but the two that the Fraser Institute study happened to pick, the U.S. bankruptcy filing rate is higher.

I'll stop there. The facts speak pretty clearly for themselves. Hat tip to Credit Slips reader and commenter AMC for bringing this matter to my attention in a comment to a blog post.

The Tabb-ed Second Edition Is Out

Posted: July 8th, 2009, 4:33am PDT by Bob Lawless

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

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

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

Bankruptcy Filings Decline 6% in June

Posted: July 3rd, 2009, 11:21am PDT by Bob Lawless

The most recent bankruptcy filing data from Automated Access to Court Electronic Records (AACER) show a 6.1% decline in the U.S. daily bankruptcy filing rate. The were about 124,800 bankruptcy filings in June which, spread over the 22 business days in the month, is a daily bankruptcy filing rate of 5,672. In May, the daily bankruptcy filing rate was 6,038.

I do not take the dip in bankruptcy filings as strong evidence that the end of the recession is just around the corner. First, there is the usual caution against reading too much into the ups and downs of a monthly indicator. Over the past eight months, the bankruptcy filing rate went up four time and down four times, although cumulatively the increases have been more than the decreases. (The daily filing rate is 11.7% higher than eight months ago.) Second, although the month-over-month figure is a decline, bankruptcy filings are up sharply on an annual basis. The June 2009 figure is a 32.5% increase over 2008. Over the entire year, projections show that 2009 bankruptcy filings will be 28.2% - 36.4% greater than 2008. As I discussed last month, the long-term trend is toward the same filing rate as before the 2005 bankruptcy law was adopted. Third, bankruptcy filings lag macroeconomic bad news. Yesterday's news about the jump in unemployment shows the U.S. recession is far from over, and those unemployed may show up in the bankruptcy courts much later. People do not run into bankruptcy court the day they are laid off. in our most recent empirical work from the Consumer Bankruptcy Project, more than 50% of bankruptcy filers told us they struggled for more than two years before filing bankruptcy.

Projecting forward, total 2009 U.S. bankruptcy filings will be:

1,404,000 filings if bankruptcy filings continue for the rest of the year at the same daily rate (5,593 per day) as they have averaged for the first six months of 2009
1,414,000 filings if bankruptcy filings continue at the same daily rate (5,672 per day) as they have averaged for June
1,494,000 filings if bankruptcy filings for the remaining six months of 2009 constitute the same proportion of total filings as the last six months of 2008 constituted for total filings that year (about 53.2%)

Bankruptcy as a Disqualifying Factor for Child Custody?

Posted: July 2nd, 2009, 8:21am PDT by Bob Lawless

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

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

Sure enough, Ms. Kaufman is right--there are cases where a family law court cites a party's inability to engage in sound financial management as a factor in a child custody decision. In some of those cases, the family law court refers to a bankruptcy filing as evidence of the party's financial instability. It seems clear from these cases that it is not the bankruptcy filing that causes the problem, but the general inability to manage one's financial affairs that concerns the courts. A ten-year old bankruptcy filing, standing alone and without more evidence of recent financial problems, would not fit this description.

All of this reminds me of an important point that often can be overlooked when talking about bankruptcy. When thinking about a person's financial well-being, a bankruptcy filing is not the problem. Rather, it is a manifestation of other underlying problems. If you don't fix the underlying problems, a bankruptcy filing is not going to help in the long-run. Applied to the child custody situation, it is not the bankruptcy filing but the underlying financial problems that should concern a family law court. Someone who has used bankruptcy to help put their financial problems behind them should not have to fear the bankruptcy filing will be used against them in a child custody case several years later.

In the Home Stretch

Posted: July 1st, 2009, 11:43am PDT by Bob Lawless

Note: The following was just sent from Credit Slips blogger Stephen Lubben: "At the GM hearing, although closing arguments may run over to tomorrow. I don't think there has been anything thus far that would prevent the sale from going forward."

Health Insurance to Go Broke With

Posted: July 1st, 2009, 7:17am PDT by Bob Lawless

An article in today;s New York Times chronicles how medical debt can financially ruin U.S. citizens even with health insurance. Policies with limits, often hidden from the consumer, quickly run out and leave the insured with mounds of debt. This story comes on the heels of an academic study by Credit Slips bloggers Debb Thorne and Elizabeth Warren and their co-authors, David Himmelstein and Steffie Woolhandler, showing an increase between 2001 and 2007 in the number percentage of medically related bankruptcies. I sometimes wonder how persons reading from outside the U.S. react to these sorts of stories.

Who Loses in Cuomo v. Clearing House?

Posted: June 30th, 2009, 12:08pm PDT by Bob Lawless

Adam Levitin already posted on this week's decision in Cuomo v. Clearing House Association where the U.S. Supreme Court struck down a regulation from the Office of the Comptroller of the Currency's (OCC). The regulation preempted state enforcement of consumer protection laws against national banks and grew out of subpoenas issued by the New York attorney general. At first blush, the opinion seems to be a big victory for consumers, and it certainly is a victory. As alluded in the comments to Levitin's post, the opinion might not be as big of a victory as it seems.

The Court struck down the regulation but also refused to enforce the subpoenas issued by the New York AG because of the particular wording of the National Bank Act. I'll leave out the details. The Court seems to be laying down a bright line rule: a state attorney general can file a lawsuit to enforce consumer protection laws but can't issue subpoenas under its own administrative powers. That seems to cut back a lot on what state attorneys general can do. Without the ability to force the turnover of information during their own investigations, the power that Cuomo returns to state attorneys general might not help a whole lot. The only recourse the state attorneys general have is to file a lawsuit.

I wonder whether this bright-line rule might not backfire against the national banks. Might the default position of the state attorneys general not have to be "sue first, subpoena later?" Sure, a subpoena from the state attorney general is a giant pain in the posterior, but it certainly is better than a lawsuit from the state attorney general. If the effect of Cuomo is to compel the state attorneys general to sue in order to enforce state consumer law against the national banks, the banks might come to regret what they asked for.

The Supreme Court and What Attorneys Can Say

Posted: June 30th, 2009, 10:37am PDT by Bob Lawless

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

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

These rules might seem to make a lot of sense. Why should attorneys be able to advise clients to incur debts that they intend to have immediately discharged in a bankruptcy case? The answer is simple--they shouldn't. Incurring debts that you have no intention of repaying is at best civil fraud and might even constitute criminal theft. Long before section 526(a)(4) was ever around, an attorney who advised clients to incur debts they had no intention of repaying was a party to fraud and a possible co-conspirator in a criminal act. In addition to possible professional disciplinary actions, numerous civil and criminal sanctions might have been imposed. Section 526(a)(4) was not really necessary and was part of the package of punitive provisions in the 2005 bankruptcy law against consumer debtors and their attorneys.

As a rule that tries to regulate what attorneys can and cannot say, section 526(a)(4) touches upon First Amendment free speech issues as well as due process considerations about access to legal counsel. Those are the issues the Supreme Court will consider. There are legitimate situations where an attorney might need to counsel a debtor to incur secured debt or nondischargeable unsecured debt before a bankruptcy case. It would seem beyond question that the First Amendment prohibits the government from passing laws that ban legitimate legal advice. A constitutional scholar once told me that her opinion was that section 526(a)(4) was "way unconstitutional" if applied in that way. I've always liked the "way unconstitutional" standard and wish it could be incorporated into our formal jurisprudence. I will be amazed if the Supreme Court lets section 526(a)(4) stand without cutting back on its scope.

One possibility is that the Court will interpret section 526(a)(4) only to ban advice that already was illegal. That is the route urged by the Solicitor General, the Department of Justice official who represents the United States before the Supreme Court and to whose opinion the Court often gives special weight. This is the outcome that I think is the most likely. There is no First Amendment right to commit fraud, and so construed, the statute should be constitutional. So construed, the statute also makes no practical changes to the law that came before it. Finally, the Court might strike down section 526(a)(4) entirely, on the theory that it is overbroad and might have a chilling effect on speech, an outcome that I think is possible but less likely.

Thus, I do not think Milavetz will have a very big practical effect on the advice given in bankruptcy lawyers' offices. Attorneys will not be entitled to give advice to commit civil fraud before or after the decision comes down. If others with a closer connection to the daily tribulations of a consumer bankruptcy practice see that point differently, the comments are open.

I am watching Milavetz for more symbolic reasons. The Supreme Court has not had a case that revolved around the harsher provisions of the 2005 bankruptcy law. Milavetz interests me not so much for the legal arguments in the case but because it might provide a window into how the Court perceives the 2005 bankruptcy law. Will the Court treat the law as just another congressional statute it has to interpret? Or will the Court see the law for the special interest legislation it was and interpret it with skepticism for its public-regarding claims? How the Court casts its opinion could be an important signal of how it will handle future issues that involve the 2005 law as well as an important signal to the lower courts on how to approach that particular statute.

Feeds