OK, bankruptcy mavens. What is this a map of? Answer below the fold.
Category: Consumer Bankruptcy
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For Your Bankruptcy Class or Presentation
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CARES Act “Rebates” and Bankruptcy
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Related to Pamela's last post and our article regarding garnishments and the CARES Act "rebates," the US Trustee issued a notice to Chapter 7 and Chapter 13 trustees giving them guidance on what to do about them in a bankruptcy case.
The top line: these payments should not be included in the statutory definitions of "current monthly income" or "disposable income" per the CARES Act itself. But the Act failed to discuss whether these payments are property of the estate, which typically would mean that they are. I know bankruptcy lawyers have been dealing with this already and many feared that some trustees would try to obtain these mounts. I was therefore very pleased to read this in the US Trustee notice, in particular the part in bold:
Regardless of whether the rebate is property of the estate, the United States Trustee expects that it is highly unlikely that the trustee would administer the payment after consideration of all relevant circumstances … Trustees are directed to notify the United States Trustee prior to taking any action to recover recovery rebates or objecting to a chapter 13 plan based on the treatment of recovery rebates.
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Debt Limits … and Poison Pills
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The Russian Duma last week adopted on first reading a bill that attempts to solve the biggest problem with the new Russian personal insolvency law, but the bill contains a poison pill provision that will all but kill its effectiveness if the bill makes it past the second and third readings and becomes law. The problem lawmakers are trying to solve is that far fewer than the anticipated (and desired) number of overindebted individuals are seeking relief. While policymakers estimate a stock of nearly 800,000 potential debtor-beneficiaries of the new bankruptcy relief, only a small fraction have applied, mostly due to the prohibitive cost of the procedure. The obvious solution? Make it less expensive by cutting out the needless and counterproductive formalism, especially the court process. Well, while that message is clearly reflected in the new bill and its proposed solution, the poison pill is in a different and easy-to-miss access restriction: The proposed out-of-court procedure (run and financed by self-regulating organizations of insolvency trustees, a clever and unique approach) is available only to debtors with no seizable income or assets and less than 50,000 rubles (US$2000 PPP) in all bank accounts over the past three months … and with a total debt burden of no more than 500,000 rubles (US$20,000 PPP, or about $10,000 using official exchange rates). The estimate of 800,000 expected debtors, by the way, includes only individuals with more than 500,000 rubles in debt, so this new bill will not make any headway at all toward solving the existing problem. The English bankruptcy system has struggled with a similar problem of overly complex and therefore expensive access, too, and the English have "solved" this problem in a similar way, by making light-admin Debt Relief Orders available only to debtors with debts below £20,000. English analysts have estimated that more than 75% of bankruptcy debtors meet the "no income, no asset" DRO restriction, like that in the new Russian law, but the debt ceiling excludes them from the cheaper and more efficient form of DRO relief. This is pernicious and counterproductive, as Joseph Spooner argues in his terrific new book (see pp. 122-30). What is the purpose of excluding no-income, no-asset debtors from an efficient bankruptcy procedure because they have too much debt? It is extremely disheartening that the otherwise very clever and progressive new Russian NINA procedure contains the seeds of its own undoing. The new clinic will not treat patients with anything more than a common cold.
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“Middle Class Faux”?
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I did some digging into Joe Biden's previously unexplored roll call vote on floor amendments to BAPCPA. They were ugly then and have not improved with age. My full take is in The American Prospect.
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Consumer Bankruptcy, Done Correctly, To Help Struggling Americans
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Today, Senator Elizabeth Warren unveiled her new plan to reform the consumer bankruptcy system. The plan is simple, yet elegant. It is based on actual data and research (including some of my own with Consumer Bankruptcy Project co-investigators Slipster Bob Lawless, former Slipster, now Congresswoman Katie Porter, and former Slipster Debb Thorne). Most importantly, I believe it will make the consumer bankruptcy system work for American families. And, as a bonus, it will tackle the bad behavior that big banks and corporations currently engage in once people file, like trying to collect already discharged debts, and some non-bankruptcy financial issues, such as "zombie" mortgages.
In short, the plan provides for one chapter that everyone files, combined with a menu of options to respond to each families' particular needs. It undoes some of the most detrimental amendments that came with the 2005 bankruptcy law, including the means test. In doing so, it sets new, undoubtedly more effective rules for the discharge of student loan debt, for modification of home mortgages, and for keeping cars. It also undoes "smaller" amendments that likely went unnoticed, but may have deleterious effects on people's lives. Warren's plan gets rid of the current prohibition on continuing to pay union dues, the payment of which may be critical to allowing people who file bankruptcy to keep their jobs and keep on their feet. Similarly, the plan eliminates problems debtors face paying rent during their bankruptcy cases, which can lead to eviction.
One chapter that everyone files means that the continued racial disparities in chapter choice my co-authors and I have documented will disappear. No means test, combined with less documentation, as provided by Warren's plan, means that the most time-consuming attorney tasks will go away. Attorney's fees should decrease. Warren's plan also provides for the payment of fees over time. People will not have to put off filing for bankruptcy for years while they struggle in the "sweatbox." Costly "no money down" bankruptcy options should disappear. People will have the chance to enter the bankruptcy system in time to save what little they have, which research has shown is key to people surviving and thriving post-bankruptcy.
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Supreme Court Grants Cert To Decide Fate of Repossessed Cars in Bankruptcy
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Yesterday, the SCOTUS granted certiorari in City of Chicago v. Fulton, 19-357, to resolve a circuit split about whether a creditor's inaction in not returning property repossessed pre-petition can violate the automatic stay. The split arises predominately from chapter 13 cases in which, pre-petition, creditors repossessed or cities impounded debtors' cars. As the petition for cert stated, this issue is of significant practical importance. As Slipster Bob Lawless, former Slipster Debb Thorne, and I set forth in our new paper based on Consumer Bankruptcy Project data, Driven to Bankruptcy (Wake Forest Law Review, forthcoming 2020), bankruptcy courts deal with more than a million cars in every year. Creditors will have repossessed, but not disposed of some of those cars, and cities (for instance, Chicago) and municipalities will have impounded some of those cars.
In our new paper, we note that bankruptcy seems to be an important tool for some people to keep their cars, including getting their cars back from creditors and impound yards. As will be decided by the Supreme Court in addressing the issues regarding the automatic stay raised by the circuit split, if debtors need to request that bankruptcy courts order creditors or cities to return their cars after they file bankruptcy, the usefulness of filing bankruptcy will decrease, potentially significantly. Stated differently, people need their cars now — to get to work, to get food, to get their kids to daycare, to get to the doctor. For some households, one of the biggest benefits of filing bankruptcy seems to be that their creditors must turn over repossessed and impounded cars as soon as the debtor files . The question now is — is that actually what the Code provides?
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Bankruptcy Filing Rate Remains Flat
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Every month I see stories about the bankruptcy rate moving up and down. The truth is that the U.S. bankruptcy filing rate has remained flat over about the past four years.
The table to the right shows the total number of bankruptcy filings, consumer and business, using data from Epiq. For 2019, the figure is an estimate. For each of the past two years, 85.3% of the yearly bankruptcy filings had occurred by October 31. Extrapolating from the 648,000 bankruptcy filings through October 31 of this year, the total number of bankruptcy filings by year end will be about 760,000. That is not much different than the 767,000 in 2017 or the 755,000 in 2018.
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There’s Still Time to Register for NCBJ 2019
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The National Conference of Bankruptcy Judges' annual conference is happening soon – Wednesday, October 30 through Saturday, November 2. I'm delighted to be part of this year's education committee. The 2019 conference features some panels that include Slipsters and touch on Slipsters' research. (If you're thinking of attending, "semi early bird" registration, with its lower costs, ends at the end of September.)
Particularly noteworthy is the American Bankruptcy Law Journal symposium, "Equitable Powers of the Bankruptcy Court 40 Years After the Enactment of the Bankruptcy Code," which will be framed as a mock-Senate Judiciary Committee hearing during which a panel of experts will discuss and debate bankruptcy courts' equitable powers. The symposium features Slipsters Jay Westbrook and Melissa Jacoby.
Also worthy of mention are two panels that deal with consumer bankruptcy hot topics, both of which happen to touch on issues that recent papers analyzing Consumer Bankruptcy Project data have considered in depth. First is a panel titled, "Porsches and Clunkers – A Road Trip Through Car Issues." The description for the panel asserts, "many consumers file chapter 13 petition to save their cars, which are essential to maintaining their jobs." In our latest article, Driven to Bankruptcy, Slipster Bob Lawless, past Slipster Debb Thorne, and I rely on Consumer Bankruptcy Project data to assess the veracity of that assertion (among other questions related to cars, car loans, and bankruptcy). As detailed in my recent post about that article, we find a subset of bankruptcy cases that may be labeled "car bankruptcies," in which the debtor owns a car (or cars) and little else. In these cases particularly, debtors may find themselves in chapter 13 to save their cars.
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Driven to Bankruptcy — New Research from the Consumer Bankruptcy Project
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In America, people drive — to work, to the doctor, to the grocery store, to their kids' daycare, to see their aging parents. Research shows that car ownership increases the probability of employment and number of hours worked; households without cars have lower incomes and are more likely to be in poverty. In short, cars are essential. Household financial distress can threaten people's cars, and with them, the day-to-day stability that car ownership brings. People thus may file bankruptcy, in part, to save their cars.
Although there is a substantial literature on financial distress and home ownership, the literature on car ownership, financial distress, and bankruptcy is thin. In Driven to Bankruptcy (available via SSRN, forthcoming in the Wake Forest Law Review), Slipster Bob Lawless, past Slipster Debb Thorne, and I document what happens to car owners and their car loans when they enter bankruptcy.
In brief, we find that people who file bankruptcy own automobiles at the same rate as the general population. This means that over the last ten years, 15.1 million people filed for bankruptcy owning 16.4 million cars. The majority of these cars, particularly a household's most valuable car, entered bankruptcy encumbered with a hefty loan. And most debtors want to keep their cars, particularly their most valuable and second most valuable cars.
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Small Borrowers Continue to Struggle Without Relief
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Several recent stories remind us that many, many ordinary people around the world continue to struggle with crushing debt with no access to legal relief, and when relief is introduced, it is vehemently opposed by lenders and often limited to the most destitute of debtors. These stories also reveal the dark underside of the much-heralded micro-finance industry.
In Cambodia, micro-finance debt has driven millions of borrowers to the the brink of family disaster, as micro-lenders have commonly taken homes and land as collateral for loans averaging only US$3370. When many of these loans inevitably tip into default, borrowers face deprivation of family land, at best, and homelessness at worst. Actually, in the absence of a personal bankruptcy law (which Cambodia still lacks), things can get much worse. If a firesale of the collateral leaves a deficiency, borrowers might be coerced into selling their children's labor or even migrating away to try to escape lender pursuit. In the past decade, the MFI loan portfolio in Cambodia has grown from US$300 million to US$8 billion, about one-third of the entire Cambodian GDP! People around the world have turned to micro-finance to sustain their lifestyles (or just to survive) in an era of increasing government austerity, with disastrous results for many borrowers.
In India, the government continues to delay the introduction of effective personal insolvency relief, and it seems concerned with the interests of only the lending sector in formulating a path to relief for "small distressed borrowers." In a story that fills only half a page, consideration of individual or national economic concerns is not mentioned, but it is noted four times that discussion/negotiation with the "microfinance industry" has occurred, whose satisfaction seems paramount to law reformers. Among the "safeguards" put in place to prevent "abuse" of this new relief are (1) the debtor's gross annual income must not exceed about US$450 ($70 per month), (2) the debtor's total debt must not exceed about US$500, and (3) the debtor's total assets must not exceed US$280. While this may well encompass many poor Indian borrowers in serious distress, it offers no relief to what are doubtless many, many "middle-class" Indians similarly pressed to the brink and straining to cope in a volatile economy.
In South Africa, a decades-long fight to implement effective discharge relief for individual debtors has culminated in a half-hearted revision of the National Credit Act (Bloomberg subscription likely required). The long-awaited revision still promises relief only to a small subset of severely distressed borrowers. The bill offers debt discharge only to "critically indebted" debtors with monthly income below US$500 and unsecured debts below US$3400. A step to be applauded, this still leaves many, many South Africans to contend with a complex web of insolvency-related laws that offers little or no relief to many if not most debtors. And still, banks engaged in the typical gnashing of teeth and shedding of crocodile tears, terribly worried that this new dispensation will "drive up the cost of loans for low-income earners, restrict lending and encourage bad behavior from borrowers." Where have we heard this before? To their credit, South African policymakers apparently "made no attempt to interact with the [lending] industry," though the compromise solution here still leaves much to be desired.
On a brighter note, the country of Georgia is on the verge of adopting major reforms to its laws on enforcement and business insolvency (story available only in the really neat Georgian language, check it out!). In an address to parliamentary committees, the Minister of Justice remarked that a new system of personal insolvency is also in development. Georgia suffers from many of the same problems of micro-finance as Cambodia, so perhaps Cambodia and other similarly situated countries will be able to learn from Georgia's example. We'll see what they come up with.