Category: Consumer Bankruptcy

  • Small Borrowers Continue to Struggle Without Relief

    Posted by

    Jason Kilborn

    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.

  • What Is “Credit”? AfterPay, Earnin’, and ISAs

    Posted by

    Adam Levitin
    A major issue in consumer finance regulation in mid-20th century was what counted as “credit” and was therefore subject to state usury laws and (after 1968) to the federal Truth in Lending Act. Many states had a time-price differential doctrine that held that when a retailer sold goods for future payment, the differential between the price of a cash sale and that of credit sale was not interest for usury law purposes. State retail installment loan acts began to override the time-price doctrine, however, and the federal Truth in Lending Act and regulations thereunder eventually made clear that for its purposes the difference was a “finance charge” that had to be disclosed in a certain way. 
     
    Today, we seem to be coming back full circle to the question of what constitutes “credit.” We’re seeing this is three different product contexts: buy-now-pay-later products like Afterpay; and payday advance products like Bridgit, Dave, and Earnin’; and Income-Sharing Agreements or ISAs (used primarily for education financing). Each of these three product types has a business model that is based on it not being subject to some or all “credit” regulation. Whether those business models are well-founded legally is another matter.
     
    Let me briefly recap what is “credit” for different regulatory purposes and then turn to its application to the types of products.

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  • Seventh Circuit Smackdown of City of Chicago

    Posted by

    Jason Kilborn

    The Seventh Circuit Court of Appeals this week released its opinion in In re Fulton, the highly anticipated consolidated appeal of four Chapter 13 cases involving debtors whose cars had been impounded. The City of Chicago had refused to release them to the debtors (exercising the rights of trustee under section 1303) after the petition filings, as clearly required by section 542 and Seventh Circuit precedent, Thompson v. GMAC, 566 F3d 699 (7th Cir. 2009). The Court rejected the City's arguments in favor of repealing Thompson or recognizing a stay/turnover exception for the City to maintain its possessory lien on impounded cars by keeping, well, possession.

    The Court reached the right result here, in my view, and two things really jumped out at me. First, the Court explains several times that the case should be governed by "the purpose of bankruptcy – 'to allow the debtor to regain his financial foothold and repay his creditors.'" The Court's emphasis on the debtor-salutary purpose of bankruptcy is refreshing, even in cases where the repaying-creditors purpose is likely to be largely defeated.

    More striking were the first lines of the portion of the opinion recounting the facts of Fulton's case. She used the car "to commute to work, transport  her young daughter to day care, and care for her elderly parents on weekends." You can already anticipate where the Court is heading in the case, but then it gets better: "On December 24, 2017, three weeks after she purchased a 2015 Kia Soul, the City towed and impounded the vehicle for a prior citation of driving on a suspended license." Really??!! The City towed and impounded her new car on Christmas Eve!!?? It probably still had a temporary plate indicating it was new. And it got towed for what? A prior citation having nothing to do with the car at all. Note to self, City of Chicago: When the Court opens the fact section with a smackdown recounting @$$hole behavior like this, you can just skip to the end. You lose. Three cheers for the Seventh Circuit again!

  • Consumer Bankruptcy Reform … and American Xenophobia?

    Posted by

    Jason Kilborn

    I hope I'm not stepping on Bob's toes in announcing the public release of the long-awaited report of the ABI Commission on Consumer Bankruptcy. The Commission, with Credit Slips' own inimitable Bob Lawless as its reporter, was formed in December 2016 to explore revisions to the US consumer bankruptcy system that would improve the operation of its existing structure; that is, evolution, not revolution. With this explicitly limited charge, one would not necessarily expect to find much high-level discussion of how the US approach squares with or fits within the many recent global developments in consumer insolvency relief, and one would expect to see a concentration on local solutions for local stumbling blocks.

    That being said … and in no way to detract from the monumental amount and truly impressive nature of the work the Commission has done here … one might have expected to see a bit of discussion, if not even a touch of inspiration, from comparative sources. In 1970, the Bankruptcy Commission rejected any consideration of foreign developments in consumer bankruptcy, in part because there were few such developments, and in part because so little was known about the operation of non-US bankruptcy law at the time (for those younger than I, note that neither home computers nor the public Internet existed in 1970 …). Nearly 50 years later, we now have at our fingertips a mountain of comparative data and analysis on the development, operation, and revision of consumer insolvency systems around the world, much of it reported in English specifically to make it widely available to law reformers like the ABI Commission. Again, one would not have expected this comparative material to occupy center stage in a reform of largely US problems in the uniquely US consumer bankruptcy system. But in a bit part here and there, some comparative observations might have supported the Commission's already compelling recommendations.

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  • Arbitration in Bankruptcy — Discharge, the Easy Case

    Posted by

    Bob Lawless

    Now that the major work of the ABI Commission on Consumer Bankruptcy is done, I seem to have this thing called "time" again. One of the topics that I have been wanting to post about is arbitration in bankruptcy. If I follow through on my intentions, this will be the first of a few posts on arbitration in bankruptcy.

    Arbitration has come to the bankruptcy courts. In the coming years, how the Federal Arbitration Act intersects with the Bankruptcy Code will become an increasingly prominent issue. What I want to talk about in this post is arbitration of a violation of the discharge injunction itself. In the typical factual set-up, a debtor alleges a violation of the discharge injunction, and the creditor moves to send the question to an arbitrator under a predispute arbitration clause, almost always embedded in a form contract. Given the ubiquity of these form contracts in consumer transactions, the only thing at stake is the effectiveness of the consumer bankruptcy system.

    We can first exclude one approach to the topic that I occasionally see. It goes something like this. The Supreme Court keeps sending disputes to arbitration and thus has signaled repeatedly it favors arbitration. Therefore, the Court would hold that bankruptcy disputes can be arbitrated. This is not how law works. The Court's tendencies are not "law." One of the Supreme Court justices has famously declared he favors a certain malted beverage, but that hardly makes it the drink of the land (although I also would not be against making it so).

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  • ABI Consumer Commission Report Is Nearly Finished

    Posted by

    Bob Lawless

    For the past two years, the American Bankruptcy Institute's Commission on Consumer Bankruptcy has been hard at work. As the Commission's reporter, I am very happy to say that the work is nearly finished. All of the drafting is completed, and we are in the final stages of the editing process.

    The report will be released on April 11. If you want to learn about the report, come to the ABI's Annual Spring Meeting where there will be a number of sessions about the report.

    The Commission's charge was to recommend "improvements to the consumer bankruptcy system that can be implemented within its existing structure." The recommendations represent the work of a broad group of bankruptcy professionals across all types of roles and types of practice. The report will have forty-nine sections across five chapters, with multiple recommendations in many of the sections. Although the substance of the recommendations will not be released until April 11, the topic list is public. You can expect recommendations on student loans, attorney compensation, the means test, rights in repossessed collateral, chapter 13 plans as well as many other topics.

  • New (From the Archives) Paper on Determinants of Personal Bankruptcy

    Posted by

    Melissa Jacoby

    This working paper is a longitudinal empirical study of lower-income homeowners, including a subset of bankruptcy filers, produced with an interdisciplinary team of cross-campus colleagues, including Professor Roberto Quercia, director of UNC's Center for Community Capital. We just posted this version on SSRN for the first time yesterday in light of continued interest in its questions and findings. The abstract does not give too much detail (see the paper for that), but here it is:

    Personal Bankruptcy Decisions Before and After Bankruptcy Reform

    Abstract

    We examine the personal bankruptcy decisions of lower-income homeowners before and after the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). Econometric studies suggest that personal bankruptcy is explained by financial gain rather than adverse events, but data constraints have hindered tests of the adverse events hypothesis. Using household level panel data and controlling for the financial benefit of filing, we find that stressors related to cash flow, unexpected expenses, unemployment, health insurance coverage, medical bills, and mortgage delinquencies predict bankruptcy filings a year later. At the federal level, the 2005 Bankruptcy Reform explains a decrease in filings over time in counties that experienced lower filing rates.

  • Pets and Financial Distress

    Posted by

    Pamela Foohey

    Last weekend, The New York Times published an opinion piece about animal shelters, Are We Loving Shelter Dogs to Death? It highlighted the sad reality that nationwide shelters are horribly overcrowded. According to the piece, a "big part" of shelters' overcrowding "is poverty: An estimated one-quarter of shelter animals are there after their owners have surrendered them because of family dysfunction or financial pressure." For instance, a family might not have enough money for vet bills. Or a family must relocate to less expensive housing that does not accept pets. The example in the piece that stood out to me most was families' inability to pay fees and fines related to their pets being picked up by animal control.

    Reading the piece — particularly the parts about fines — led me to wonder more about pets and financial distress and bankruptcy. And to a broad question for Credit Slips readers. What have been your experiences regarding pets and financial distress, both pre-bankruptcy and in bankruptcy?

  • Older Americans’ Rising Bankruptcy Filings

    Posted by

    Pamela Foohey

    Older Americans (age 65 and over) are increasingly likely to file bankruptcy and now comprise a larger proportion of the people who file bankruptcy — and the effects are not small. Using data from the Consumer Bankruptcy Project, in a new working paper just posted to SSRN — Graying of U.S. Bankruptcy: Fallout from Life in a Risk Society — my co-authors (past Slipster Debb Thorne, Slipster Bob Lawless, and past Slipster Katie Porter) and I find a more than two-fold increase between 1991 and now in the rate at which older Americans file bankruptcy. We further find an almost five-fold increase in the percentage of older persons in the bankruptcy system. The magnitude of growth in older Americans in bankruptcy is so large that the broader trend of an aging U.S. population can explain only a small portion of the effect.

    In the paper, we link older Americans’ increased filing rates with the shrinking social safety net. A story published today in the New York Times (on actual paper and on the front page!) does an exceptional job of both describing our study and detailing the ways in which the risks of aging have been off-loaded onto older Americans: “vanishing pensions, soaring medical expenses, inadequate savings.” The story also highlights the financial and life travails of a few older Americans who filed bankruptcy. Their struggles stem from declining income, lost insurance, and unmanageable medical expenses.   

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  • Access to Justice, Consumer Bankruptcy Edition

    Posted by

    Pamela Foohey

    The Great Recession, the CFPB's creation, the rise of debt buying, changes in the debt collection industry, and advances in data collection have encouraged more research recently into issues of access to justice in the context of consumer law and consumer bankruptcy. This spring, the consumer bankruptcy portion of the Emory Bankruptcy Development Journal's annual symposium focused on access to justice and "vindicating the rights of all consumers." Professors Susan Block-Lieb, Kara Bruce, Alexander Sickler, and I spoke at the symposium about how a range of consumer law, finance, and bankruptcy topics converge as issues of access to justice.

    We recently posted our accompanying papers (detailed further below) to SSRN. My essay overviews what we know about the barriers people face entering the consumer bankruptcy system, identifies areas for further research, and proposes a couple ideas for improving access to bankruptcy. Susan Block-Lieb’s essay focuses on how cities can assist people dealing with financial troubles. And Kara Bruce’s and Alex Sickler’s co-authored essay reviews the state of FDCPA litigation in chapter 13 cases in light of Midland Funding v. Johnson and explores alternatives to combat the filing of proofs of claim for stale debts.

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