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%)

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.

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?

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.

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.

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.

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.

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.

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.

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?

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.

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%)

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.

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.

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.

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.

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.)

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

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.)

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.

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)

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.

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.

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.

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.

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.

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.

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%)

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.

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.

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.