• The Next Medical Bankruptcy Candidate

    Posted by

    Elizabeth Warren

    I noted a small blip in a story by Rick Lyman at the New York Times about the newly released census data.  It seems that another 1.3 million people lost health insurance between 2004 and 2005.  That brings the 2005 total to 46.6 million Americans without health insurance.

    I figure that pretty much all the poorest Americans already had no health insurance.  The latest 1.6 million most likely represent a continuing expansion of the uninsured middle class.

    With "medical bankruptcy" having entered the lexicon in the past year, this new stat makes me pause to think about risk.  I just did an interview about this with Karen Springen at Newsweek.  On the research side, papers with Melissa Jacoby and Debb Thorne (both on this blog) and David Himmelstein and Steffie Woolhandler (both Harvard Medical School) show that health insurance is no guarantee that someone won’t end up in financial collapse following a serious medical problem.  But insurance makes a difference on where the tipping point occurs.  For the uninsured, the $11,000 hospital bill following a slightly dodgy appendectomy spells financial doom.  For the insured, it may take a more serious round of surgery and rehab after a bad fall to hit that same $11,000 in uninured costs out of a total bill of $50,000.  Of course, either group can be beaten up financially by time lost from work.  This is all just a question of vulnerability by degrees.

    With the changes in the bankruptcy law making many people feel that the option has become too expensive or too difficult to accomplish, what will happen to the 1.6 million newly uninsured?   Many won’t get sick, and others who get sick won’t seek medical care.  But for some, modest medical problem will put them in a financial hole from which they can never recover.  If they don’t go to the bankruptcy courts, what will happen to them? 

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  • Job Security Polling Data

    Posted by

    Melissa Jacoby

    Employment problems figure prominently in discussions about personal bankruptcy filings, so both the perception and reality of job security are relevant to those of us who study or work in the debtor-creditor system or who are trying to figure out whether people adequately recognize and prepare for adverse events.  Karlyn Bowman, a resident fellow of the American Enterprise Institute, has just posted a very useful updated set of major polling data on work and workers’ perceptions — see here for the press release and here for the report containing the polling data. 

    It is particularly interesting to compare responses to questions about events that actually have happened (in the past to themselves or to other people) with questions about perceptions of their own job security risk.  For example, in a 2005 poll that asked whether their employer had laid off any employees in the past six months, 27% reported that there had been layoffs.  And 22% in a 2005 poll reported having been personally laid off or fired in the past five years (I can’t tell from the report whether these 2005 results are from the same or different polls – check out pages 10-12 of the report).  But in April 2006, only 10% said it was very likely or fairly likely that they would lose their jobs (15% said they were worried about being laid off in a 2005 poll, in response to a differently worded question).  Readers also may want to check out the results of the questions about wage and benefit reductions.  Although interpreting the job loss findings together should be undertaken with care, they appear to present an interesting contrast to polling respondents’ worries about falling deeply into medical debt that I wrote about when Credit Slips first began. 

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  • Commissions, Specialized Courts, and Business Law

    Posted by

    Melissa Jacoby

    At the end of a forthcoming Columbia Law Review article, Lucian Bebchuk and Assaf Hamdani propose that Congress establish a National Corporate Law Commission to comprehensively review corporate law and — not surprisingly given their prior work — determine which aspects should be federalized.  Bebchuk and Hamdani mention in a footnote (fn 184 to be exact) that their preferred model for the corporate commission is . . . the National Bankruptcy Review Commission. 

    Putting aside whether corporate law should be federalized, I’m wondering whether the bankruptcy commission is the right model.  For one thing, the bankruptcy commission had a limited existence (I remain hopeful that the provision in a recent Senate bill proposing to forcibly reconvene the bankruptcy commission will never become law).  But Bebchuk and Hamdani suggest in the article that they think a standing commission is preferable.  I’ll leave to the public choice scholars to discern the implications of the distinction here for purposes of turning commission recommendations into law.    In addition, the bankruptcy commission’s members were selected not only by Congress, as the authors indicate they desire for the corporate commission, but by the President and by the Chief Justice.  I suspect it was well understood that the late Chief Justice Rehnquist would choose federal judges for the bankruptcy commission (he chose one circuit judge and one bankruptcy judge). Given the underlying federalization mission that Bebchuk and Hamdani advocate for this commission, identifying the right judicial members of such a commission could be delicate. 

    In any event, Bebchuk and Hamdani would like the corporate commission to consider the creation of a specialized federal corporate law court (they don’t advocate for the specialized court but note its possibility as a response to those who like the idea of the Delaware Chancery Court).  Here’s another place where the bankruptcy experience might be useful.  Bankruptcy cases are part litigation, part transactional, part administrative.  Assuming a specialized federal forum is justified at all, it seems that this is a better reason than in-depth knowledge of a substantive legal field.   Notably, the recently-created "business courts" in states like Nevada are far broader in jurisdictional scope than the Delaware Chancery Court (admittedly, the new courts would probably go out of business quickly if their jurisdiction was limited to corporate disputes as traditionally defined).  Even the Delaware Chancery Court is getting a bit more generalist; the state of Delaware has given the court jurisdiction over money damage technology disputes and mediation-only business disputes.   All this being said, one federalization possibility — certainly controversial — would be to expand the bankruptcy court to include corporate and related matters.  Greater legal integration of shareholders and creditors would be a good development, and perhaps more exposure to the governance of financially healthy corporations would aid courts in presiding over the bankruptcy cases of insolvent corporations.      

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  • Blondie Is a Critical Vendor

    Posted by

    Bob Lawless

    Any comic strip that has the term "chapter 22" in it is alright by me. Today (August 29), Blondie becomes a critical vendor. For the uninitiated, a "critical vendor" is a supplier whose goodwill is so necessary to the debtor’s business that the court will authorize full payment of prebankruptcy debts, circumventing the normal distribution scheme in bankruptcy court. A special thanks to the not-so-little bird that brought this to my attention.

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  • Cycling Through Chapter 13

    Posted by

    Melissa Jacoby

    Scott Norberg and Andrew Velkey’s seven district longitudinal study on chapter 13 has just been published in the Creighton Law Review (volume 39, p. 473).   It contains too many interesting findings for just one post, so I will focus for now on repeat filings.  In Norberg and Velkey’s words, "Among the most remarkable findings of the Project is that at least half of all of the Chapter 13 debtors in the sample had filed one or more bankruptcy cases in addition to the sample case."  (p. 497, emphasis added).  The percentage could be higher because of limits of the PACER system.  Most of the prior or subsequent filings that Norberg and Velkey found also were in chapter 13, and most took place within a year of the sample case. The Norberg and Velkey sample precedes the screening of repeat filers implemented by the 2005 bankruptcy bill, so it is possible — although no foregone conclusion — that the timing patterns could change.  Nonetheless, if the project sample is representative of all chapter 13 filers, the filing rates reported by the government (see Bob’s recent post) have overstated the number of actual households in bankruptcy because each new filing gets a different case number. In any event, those who believe that chapter 13 is an ideal form of bankruptcy and thus praise districts that report higher proportions of chapter 13 cases should take a closer look.   

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  • How Many People Filed Bankruptcy?

    Posted by

    Bob Lawless

    It’s bankruptcy filing statistics day! The Administrative Office of U.S. Courts ("AO") released new bankruptcy statistics today (August 28). On their face, these data show that there 155,583 bankruptcy filings for the three months ended June 30, 2006 (compared to 467,333 for the three months ended June 30, 2005). There were 1,164,815 1,484,570 total bankruptcy filings for the twelve months ended June 30, 2006 (compared to 1,196,212 1,637,254 for the twelve months ended June 30, 2005). Thus, the AO numbers show bankruptcy filings decreasing substantially in the second quarter of 2006 as compared to the second quarter of 2005. The numbers show a smaller decline when looking at a twelve-month period.

    Any way one slices the data, bankruptcy filings clearly are down since the 2005 bankruptcy law. If one annualizes the most recent quarterly data, the filing rate would be 620,000 per year. Monthly data from the AO shows 55,000 filings in June 2006. Annualized, that would be a filing rate of 660,000 per year. That would be far less than the 1.6 million annual bankruptcy filings before the 2005 bankruptcy law.

    Monthlyfilings

    The filing trend is moving upward. Monthly AO data show the following since October 2005 as captured in the table to the right. After the initial surge, bankruptcy filings increased steadily, but the growth appears to have stabilized. If the figures since March represent a plateau, then bankruptcy filings will annualize at somewhere around 40% of what they were before the 2005 bankruptcy law. CardWeb.com reports monthly filings increased to almost 63,000 in July 2006, the highest of any month since the 2005 bankruptcy law. Doing data analysis in "real time" can be problematic. Are the July 2006 filings a one-time blip or the beginning of a long-term increase to a new filing level?

    Persons who follow bankruptcy policy closely will note that the twelve-month statistics overlap with the October 17, 2005, effective date of the new bankruptcy law. In the few weeks before the law became effective, filings surged. The AO reports that there were 630,000 filings in the month of October 2005, presumably most all of which occurred before October 17. The surge makes it difficult, if not impossible, to understand what the twelve month statistics mean. On the one hand, many persons who filed in October 2005 undoubtedly represent persons who accelerated a filing that would have occurred later in 2005 or in 2006. In contrast, some of these filings may have been filings that would not have occurred at all. There is no way to know how many filings were accelerated and how many were ones that would not have occurred.

    Finally, I have to comment on the AO’s quarterly figures showing that 3.1% of all filings were business filings for the most recent quarter. In The Myth of the Disappearing Business Bankruptcy, 93 Cal. L. Rev. 745 (2005), fellow Credit Slips blogger Elizabeth Warren and I reported data showing that about one in seven bankruptcy filers either was self-employed at the time of bankruptcy or recently before bankruptcy, data strongly suggestive that business filers are a much higher percentage of filings than the official AO data indicate. Although the newest AO figures seem low (3.1% of all filings), they are about 50% higher than the rate that the AO was reporting prior to the 2005 bankruptcy law (about 2.0% of all filings). The 2005 bankruptcy law likely was a bigger deterrent to consumer than business filers. Moreover, one strategy to avoid means testing under the 2005 bankruptcy law is to have the case classified as a business case, meaning debtors have more incentives to make sure the case is counted as a business filing.

    UPDATE (9/21/2006): Mea culpa. I wrote down the chapter 7 numbers instead of the total filings for the twelve months ended June 30, 2005 and 2006. I have made corrections above. The main points are unchanged.

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  • Disclose, Disclose, Hide

    Posted by

    Elizabeth Warren

    All my professional life, I have heard that there are three rules of bankruptcy:  "disclose, disclose, disclose."  Worried about a conflict?  Disclose it. Want to make a payment? Disclose it.  Starting a new business initiative? Disclose it.  In fact, I thought disclosure was the quo for the quid of the automatic stay and other bankruptcy-induced protection.  Evidently I was misinformed.

    Gretchen Morgensen reported in the New York Times yesterday that Delaware bankruptcy judge Kevin Carey ruled that the Werner Company, a ladder maker, wouldn’t have to disclose the bonsues it was handing out to the executives as part of the reorganization plan.  The reason?  Such disclosure ""may create low morale and an unhealthy work environment." Just to drive home the point, the hearing itself was closed to the public.

    What can this mean except that the employees are asked to take a hit while the executives are taking home sacks of money?  And if keeping it a secret is supposed to help morale, then is it fair to assume that the amount of money the executives are keeping is more even than the rank-and-file employees could possibly imagine?

    So the new rule is "discose, disclose, and keep it a secret if the big boys want it that way"?  I just want to be sure that I have it right before I try to teach it to a new generation of students.

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  • Phony Numbers

    Posted by

    Elizabeth Warren

    In today’s New York Times, Vikas Bajaj and David Leonhardt offered a creative explanation for how home sales could be slowing and inventories building while home prices continued to nudge upwards:  incentives.  They report that in a weakening market sellers are giving rebates on prices, either in goods, services or outright cash.  In other words, the records may show that the house sold for $350,000, but the effective price was $343,000. 

    The reasons for this ruse are partly psychological (individual sellers who think: "I don’t want to lower the price!") and partly economic (builders who think:  "I don’t want the people who already signed contracts for homes in this subdivision to know that the new guys can get in for lower prices.") 

    Back in the day (say, 1972) when the median first-time home buyer coughed up an 18% downpayment, a few bucks of incentives probably wouldn’t have mattered.  But with the median first time homebuyer today making a ZERO down payment, a little rebate means the mortgage starts out in the red.  Bajaj and Leonhardt note at the end of the article that the mortgage companies try to police the rebates, but c’mon, does anyone think that really happens?  Besides, by keeping the prices high, the comparables stay high as well, giving everyone an inflated appraisal on which to base that 100% financing. 

    Here’s one more little piece of evidence why everyone on this list should be selling their mortgage-backed securities (if anyone on this list ever had any mortgage-backed securities):  The valuation numbers are phony.  Maybe just a little phony in this case, but at 100% financing, a even a little bit phony is going to come out of the investor’s hide. 

    As housing values continue to deflate, those of us who teach mortgage foreclosure law will have many attentive students. 

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  • Small Business or Consumer?

    Posted by

    Bob Lawless

    Leslie Eaton of the N.Y. Times today reports on the state of small business in New Orleans, one year after Hurricane Katrina. It is a great article, exploring the relationship of small business both to the social fabric and economic health of a community. In the article are stories about the financial decisions small-business owners have made in recovering from Katrina’s devastation. A restaurateur expresses hope that he has not made a "foolish decision" by using all of his savings to reopen his restaurant. To cover losses stemming from months when her store was closed and slow sales since reopening, a shopkeeper has "mortgaged her house to the hilt" and borrowed from in-laws.

    Whether these are reasonable risks or foolish decisions, these stories illustrate that "consumer" credit policy presents subtle and highly textured issues. First, I highlight "consumer" because one wonders how to classify the financial decisions of these business owners. Are these consumer debts or business debts? If the restaurateur now begins to rack up credit card debts for his daily living expenses because his savings are sunk into the business, how do we count that? Is the shopkeeper’s home mortgage a business debt? For a significant segment of the public, their financial affairs are in a gray area between consumer and business. About one out of every seven bankruptcies, for example, is someone that is or recently was self-employed. Most every small-business owner’s personal and business affairs are intertwined and interdependent.

    One might wonder why these small-business do not incorporate or form a limited liability company, to separate business and personal affairs. The answer is that they may have done do so, but why does it matter if they have put their personal credit at risk to finance the business? Even if they have not, that can be a rational decision. With the press of all the other demands of a small business, the time and expense it takes to incorporate may not seem worth it if you have put your personal credit on the line anyway. Regardless of the fiction of legal separateness, small-business owners cannot financially walk away from a failed business.

    When we think about "consumer" credit policy, we are thinking about different groups, and small-business owners comprise one of these groups. Often, however, consumer credit policy thinks about consumers monolithically. The monolithic image that often results is the irresponsible, overspending, unsophisticated consumer, and we end up with rules that are unsuitable for large portions of the public. An example is the new bankruptcy requirement that all individual filers undergo consumer credit counseling. If the New Orleans business owners mentioned in the N.Y. Times article later end up in bankruptcy court, query what credit counseling would tell them. Don’t take business risks? The credit counseling requirement is just one example. Last year, I taught a seminar where looked at a host rules that looked great for consumers or looked great for big businesses but did not work well for small business owners.

    Credit and bankruptcy laws directed at consumers will sweep in small-business owners. At that point, another law may come into play–the law of unintended consequences.

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  • A Real Live Involuntary Bankruptcy

    Posted by

    Melissa Jacoby

    Involuntary bankruptcy petitions are a fascinating and a fundamental part of our bankruptcy system.  They are quite rare overall, although somewhat less so in the biggest chapter 11 cases, according to LoPucki and Whitford’s early research.   But the disappearance of a Chapel Hill lawyer has prompted the filing of an involuntary petition – – a media report here.   Pursuing a bankruptcy case against a missing person will be a challenge worth watching.

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