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S. 4044, the Religious Liberty and Charitable Donation Clarification Act of 2006, was introduced on Sept. 29 and passed by unanimous consent on Sept. 30. For the story that led up to this, see here and here.
UPDATE: My link to the bill isn’t holding, so here’s the substantive content of the bill: "Section 1325(b)(3) of title 11, United States Code, is amended by inserting `, other than subparagraph (A)(ii) of paragraph (2),’ after `paragraph (2)’.
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Following up on Professor Porter’s excellent observations on the U.S. Trustee program, while she is interested in the normative power wielded by the UST, I am taken by the more tawdry matter of the expansion of institutional bureaucracy. BAPCPA has mandated a hugely invasive role for the UST office (certifying decisions not to bring means test challenges, etc.), which means that my taxpaying dollars are going to subsidize a government-run debt collection agency for the benefit of for-profit creditors. Yes, fees have been raised, but I’m not so sure how much they’ll cover. BAPCPA’s proponents must have been fans of an active, involved, and well-funded federal government! (I wrote about this in a piece for a Spanish commercial law journal, but I don’t have the link to the journal and, for that matter, only take it on good faith that they translated the piece instead of just inserting gibberish — at least random gibberish as opposed to my structured gibberish.)
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Recently a frequent reader of Credit Slips, a legal secetary of 30 years, shared an observation and made a request. Her observation: a marked increase in the number of seniors calling the office where she works seeking information about filing for bankruptcy. Her request: Would we be interested in blogging about the subject. I asked to respond to her request because this is one of the issues associated with bankruptcy that most dismays.
In 2001, I co-authored a paper, "Young, Old, and In Between: Who Files for Bankruptcy?" with Teresa Sullivan and Elizabeth Warren. One of the most interesting and disturbing findings was that the percent of filers 65 and over (seniors) had increased significantly since 1991. In 1991, seniors comprised right around 2.4 percent of the population of filers; by 2001, that had climbed to 5.1 percent. This represents more than a 200 percent increase in the rate at which seniors filed. Now, we must be cautious when we discuss these findings because the percent of senior filers is quite low to begin with. But so is the percent of filers under 25. They were 7.9 percent of filers in 1991, but only 5.5 percent in 2001–which demonstrates a decrease in the rate at which they filed. And consider folks in the 55-64 age range: in 1991, they were 6.8 percent of the bankruptcy population, while in 2001 they had increased only a very little to 7.6 percent. So my point is that while seniors may make up only a small portion of the filing population, they, unlike other "minority" age groups, experienced a serious spike in filings. Thus, I would suggest that we take the 200 percent increase quite seriously.
The reader also asked if we would speculate on why this was happening. For insight, I turned to an article by McGhee and Draut, "Retiring in the Red: The Growth of Debt Among Older Americans." First, the authors point out that while the number of seniors with credit cards has held relatively constant (1992-2001), the amount of credit card debt that they are carrying has increased 89 percent–to an average balance of just over $4,000. If they make minimum payments of 2%, it would take 42 years to pay off the balance. Thus, odds are, they will live out the rest of their lives making payments on this debt. The authors also point out that among those seniors who have annual incomes of less than $50,000 (which is 70 percent of the senior population), one in five of those with credit card debt spend more than 40 percent of their income servicing their debts!
Interviews that I’ve conducted with seniors have convinced me that few of them are making charges to their credit cards willy-nilly. So how to explain the increased balances? McGhee and Draut make the following observations: between 1992 and 2001, the retirement wealth of the majority of seniors declined; seniors became increasingly asset-poor; and the cost of health care and housing for seniors rose considerably.
When the basic costs of living rise, while income and assets decline, something has to give. And what has given is the ability of seniors to evade credit card debt. This cohort of Americans has historically been quite frugal and averse debt, but when there is no choice, they have few options but to turn to credit cards.
And so the cycle goes….And as the credit card debt piles up, and incomes remain inadequate to cover medical care and housing costs, eventually, bankruptcy is the only choice. I have talked the seniors who have filed for bankruptcy and they are humiliated about their situation. They often refuse to tell their friends or children because they are too ashamed. These are not deadbeats who are out to bilk the system. But until we do something to address the skyrocketing costs of health care and housing, we will continue to see increased bankruptcy rates among our seniors. This is a trend of which Americans should be ashamed.
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If most bankruptcy is induced by external factors — divorce, health problems, and job loss being the most commonly mentioned — we still don’t really know why people call lawyers when they do. Is it too many calls from a collection agent? Or perhaps a collection lawsuit is filed. I suspect that most families use the legal system only when they are already involved in it. This question of course can be addressed through surveys, but I am considering a project designed to shed some light on this question using quantitative data about bankruptcy filings.
Weekly bankruptcy filings over the last several years reveal several patterns. For example, at the end of each year, Chapter 7 filings fall steeply during December but rise shortly after the first of the year. Total filings fall sharply after the first week of the year and then increase steadily through the first quarter (until April 15). Chapter 13 filings, by contrast, are more evenly distributed throughout the year. Notably, both Chapter 7 and Chapter 13 filings show a monthly peak.
This led me to wonder what would cause bankruptcy filings to surge on a monthly basis. In Texas where I live the obvious answer is foreclosures. Because all foreclosures in Texas happen on the first Tuesday of the month, it might be possible to isolate the share of bankruptcy filings motivated by foreclosure avoidance. Georgia has a similar statute, so I plan to collect the number of Chapter 7 and Chapter 13 filings by individuals in Texas and Georgia on each date from January 1, 2004 through December 31, 2006. The statistical analysis might be tricky, especially if foreclosure-motivated filings are a small share of filings. And I don’t see any easy way to account for differences in state foreclosure law or practice. Still, a discernible rise in the last few days before the foreclosure date might quantify a share of filings attributable to foreclosures.
Looking forward, what would it tell us about bankruptcy filings if we know how many were filed to protect homes? Also, how can we quantify bankruptcy filings that might be attributable to other causes? Ultimately, I would be interested in trying to isolate the filings caused by informal collection practices — people trying to escape what they perceive as harassment. The policy initiative I would like to explore is the idea that borrowers would benefit if lenders were forced to initiate formal collection procedures more quickly. When I interviewed collection attorneys several years back, one of the things I learned is just how much information collection calls can produce. People are willing to give out bank account numbers and places of employment that enable the formal collection actions to proceed. If the caller can persuade the debtor to make even a single $10 payment, the collector then has access to the acccount information from that check. It is not clear how much of this activity is efficient. More fundamentally, as I argue elsewhere, procedures designed to push individuals into bankruptcy more rapidly might be beneficial.
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Bob recently posted about a court decision refusing a deduction for tithing in a chapter 13 case. That case has prompted Senators Grassley, Hatch, and Sessions to write a letter to the Attorney General asking the DOJ to direct chapter 13 trustees not to object to tithing that meets the requirements of the Religious Liberty and Charitable Donation Protection Act of 2005.
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There has been a heated press release and news coverage (Wash. Times, Salt Lake Tribune, Albany Times-Union) about a case called In re Diagostino. The bankruptcy court in Albany, New York, ruled that the Diagostinos could not make a charitable contribution of $100/month but instead had to pay that money to their creditors in chapter 13. This case has been cited as yet another example of the problems with the 2005 bankruptcy amendments. Your creditors now come before your church! No more tithing in chapter 13! What’s next? Didn’t the Republicans know they were taking money from churches and giving it to the credit card companies? For shame, Doc.
The hype on the Diagostino case seems a little overblown. I’m no fan of the 2005 bankruptcy amendments. Never have so many been bought by so few for so much. That act could be the poster child for campaign finance reform. On this one, however, I’ll give the 2005 amendments a pass.
First, the facts of the case do not support the rhetoric. The Statement of Financial Affairs, which is filed in every bankruptcy case, asks the debtor to list all charitable contributions made in the year before filing. The Diagostinos responded "None," making them not the first set of debtors to discover a sudden interest in charitable giving after filing bankruptcy. Also, the Diagostinos proposed to give $100/month in charitable contributions. There is no indication in the judicial opinion that the contributions were intended for a church. Indeed, the words "tithe" or "church" do not appear in the opinion, although the reasoning in the opinion would apply to tithes and church contributions. This is simply not a case of a couple with a long history of making charitable contributions to a church suddenly being deprived of this right in bankruptcy.
Second, I am not known for my sympathy toward unpaid consumer lenders, but when one donates to a church or charity at the expense of creditors, one is not giving. The ethic of charity is to give of oneself. One of my favorite law review pieces is an essay by Dan Keating about the ethics of charitable giving in bankruptcy. As he writes:
What has always puzzled me . . . is why debtors do not view their insistence on tithing while insolvent as simply trading one sin for another. I realize there is no "standard" Christian doctrine, but most Christian churches consider the Bible to be at least a primary source of moral and spiritual guidance. And just as the Bible supports the notion that its adherents ought to tithe, it also makes clear that repaying one’s legal debts is a significant moral obligation.
Daniel Keating, Bankruptcy, Tithing, and Pocket-Picking Paradigm of Free Exercise, 1996 U. Ill. L. Rev. 1041.
Third, on the doctrine, the judicial opinion is a plausible reading of the bankruptcy statute. It certainly is a literal reading of the statute. This is not the place to get into whether section 707(b)(2)(A)(ii)(I) incorporates section 707(b)(1) or what parts of section 1325(b)(2)(A)(ii) are covered by the income test in 1325(b)(3)(A). There are a lot of cross-referenced sections, and we have had a few posts suggesting the 2005 bankruptcy amendments were not the most artfully drafted provisions in the history of Western legal thought. (OK, there have been more than a few such posts.) For present purposes, suffice it to say that a reading of the statute that considered the Bankruptcy Code as a whole might have come to a different conclusion. For example, if the Diagostino opinion is correct, then high-income chapter 13 debtors no longer can pay the expenses of their business. That cannot possibly be what Congress intended as it would remove the ability of self-employed persons to fund a chapter 13 plan.
If you want to read the Diagostino opinion for yourself, I have made a copy through the Credit Slips site. I could not find the opinion posted on the New York bankruptcy court’s web site. Click below
UPDATE (9/22): For some reason, I am having trouble downloading the file with Mozilla Firefox, but I have no problems with Internet Explorer (sigh). Try Internet Explorer if you have trouble with the download.
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An August report by the Administrative Office of the U.S. Courts to the House and Senate Committees on Appropriations contains a few interesting data nuggets about how BAPCPA is affecting the bankruptcy judicial system. A few quick highlights: 1) Preliminary analysis indicates that BAPCPA caused a 10 percent increase in the staffing requirements of the bankruptcy courts. The report notes that while courts will work harder, the effect on judges remains unclear. 2) The AO apparently counted them up! The new law creates more than 35 different types of motions, objections and hearings that did not exist before. 3) The report offers that "most judges believe" that case filings will return to pre-BAPCPA levels.
The aggregate effect of these changes is that the entire bankruptcy system will likely be bigger, more complex, and more costly in the future. The report has no answers about how to pay for the changes BAPCPA is bringing about in the court system, but does express concern that if the number of in forma pauperis debtors climbs from the 2% rate that has been established in the months immediately after BAPCPA, that this loss of filing fees could be a significant hit on the revenue available to run the bankruptcy courts.
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One of the most contentious debates of the past two decades has been the argument over whether consumer debtors file for bankrutpcy largely because they have run out of other options following significant financial disruptions, such as job loss, medical problems and family break up. Teresa Sullivan, Jay Westbrook argued this position in Fragile Middle Class based on 1991 studies of the families that filed, and Tyagi and I add more data on the the point using 2001 data in Two-Income Trap. Fay, Hurst & White analyzed PSID data and concluded that debtors were more strategic, filing when it was economically rational to do so and not when triggered by other events. (Fay, Hurst, White, The Household Bankruptcy Decision, 92 American Economic Review 706 (2002))
Now comes Jonathan Fisher at the Bureau of Labor Statistics with a new paper that analyzes the same PSID data the earlier economist team used. Fisher has several interesting findings, but two are highly relevant to the negative-event/strategic debates. The first is that people do not file when they could best maximize their benefits. If debtors behaved like the rational maximizers beloved by all economists, then they would have filed for bankruptcy at least a year earlier. Instead, they held off, kept paying and filed only later. Fisher concludes that something else held these people back (could it be stigma?). He suggests that they filed only when it was clear that they were in a deep enough hole that things were never going to get better.
Fisher also noted that White has a problem with the fact that about 17% of the population would benefit from bankruptcy, but only about 1.5% actually file. But Fisher made an interesting observation about the benefit-but-not-file group: they were in a lot better financial shape than the benefit-and-file group. While Fisher doesn’t push any conclusions about this, the finding is consistent with a picture of debtors who do not want to file for bankruptcy, no matter how attractive bankruptcy might seem to an economist. Instead, these people file only when the pressure from their creditors are greater and the likelihood they can ever pay these debts off is smaller.
The PSID data pose substantial challenges. For example, there is gross under-reporting of bankruptcy filings (.42% in PSID when national rate was .89%). This means either the sample isn’t representative of Americans generally or people are concealing their bankruptcy filings even as they fill out PSID questionnaires. ("Bankruptcy? Me? No way!")
The paper has many nuggests, but the headline finding goes right to the question about who uses the bankruptcy system.
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According to an Associated Press report (yes, as published on ESPN.com), Ron Goldman’s father has asked to receive OJ’ Simpson’s rights of publicity because Simpson has never paid out on the multi-million dollar wrongful death claim. Seems to me that if the right of publicity is considered a property right under the relevant state laws that a judgment creditor should be able to reach it. After all, some sports figures create separate corporate entities that manage and own their rights of publicity. Of course, as Diane Zimmerman and I wrote here a few years ago, the issues may be just a bit more complicated than I’m now suggesting . . .
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There is no rest for those weary of heated and divisive debate about changing the bankruptcy laws. Congress is currently considering legislation to fund a hike in the no-asset fee for Chapter 7 panel trustees. There seems to be general support that the current no asset fee of $60 is too low. Since 95 percent or more of Chapter 7 cases result in no distributions to generate additional revenue for trustees, most trustees receive only the $60 per case. The problem is how Congress is proposing to generate the extra $40 per case–by raising the Chapter 7 filing fee. Groups like the National Associaton of Consumer Bankruptcy Attorneys are concerned about the affordability of bankruptcy relief. Since October 2005, the filing fee has already increased to $299 through a series of rate hikes in BAPCPA and in legislation that followed. Combined with the costs of credit counseling and financial education, the total costs of a Chapter 7 consumer bankruptcy filing now are $399. The National Association of Bankruptcy Trustees is pushing the fee hike on the basis that additional work is required of trustees under BAPCPA and a raise in fees is needed to ensure the recruitment and retention of quality trustees.
The tension over the fee hike illustrates the "law is not free" adage. Somebody has to pay for the law’s new requirements. Should it be consumers who are the "users" of the bankruptcy system? Don’t creditors (or at least certain types of creditors) benefit from bankruptcy as well? After all, isn’t that purpose of the meeting of creditors and the trustee’s work–to ensure that all available assets are identified and distributed to creditors.
This problem gets tougher to resolve when the fee increase issue is combined with BAPCPA’s addition of an in forma pauperis filing option for debtors. When a court waives the filing fee for a debtor, the Adminstrative Office of the U.S. Courts doesn’t collect any money. And it is this money that is supposed to fund the trustee’s fee. Who takes it on the chin in these situations? Why should the trustee work for free? Should taxpayers collectively have to bear the cost of a new bankruptcy system? If creditors wanted the means test and more trustee scrutiny, should they have to pay for it–for example, by making the distribution of assets to a trustee larger in asset cases to compensate for the work in all the no-asset cases? What should a court do that is concerned about ensuring that trustees do quality work but that also wants to ensure access to the bankruptcy system for the most needy debtors when evaluating whether to let a debtor proceed without paying the filing fee?