Tuesday, April 12, 2005

Rebuttal - Todd Zywicki (The Volokh Conspiracy)

Mr. Zywicki,

You won't see this, probably won't care what I have to say, but your position on Bankruptcy Reform has obviously been influenced by your long career in the field....three years was it? or less...Obviously you worked on the creditor side...

I work for an attorney, one that has been practicing in the area of bankruptcy for almost 15 years. She has worked for creditors and debtors, although the vast majority of her time has been serving debtors. I have worked for her for the last 7 years.

We see many clients and everyone of them has an inaccuracy on their petition. Some might consider it fraud, but the courts know better. Further, 'fraud' as you put it is not the exclusive territory of the debtors. In one memorable exchange with a mortgage lender and the Court, the mortgage lender exclaimed, "if we did that for everyone we would have to change the way we do business!". The Judge replied, "change the way you do business." The issue was in accounting for payments made by debtors within a Chapter 13, the lender was applying post petition payments to pre-petition arrears and accumulating late charges that of course would be demanded upon completion of the Chapter 13. That lender is being sued by numerous State's Attorneys.

Yet, you reference a claim by the FBI that as many as 10% of bankruptcy filings are fraudulent. We are not aware of any debtors being arrested in the two districts we work in at any time in the last 7 years. The total number of filings during that time is over 150,000. A case from this week is illustrative of the scrutiny the trustees in this district use: a client appeared at the 341 wearing a single earring (a man). The trustee noted no jewelry was listed on the schedules and required amendments to be filed. Does this constitute fraud?

The study you referenced - from SMR Research, (the one that you didn't buy but reference anyway) lists a number of egregious examples of 'fraud'. One point made was that many filings seemed to indicate that the debtors spent their last dime paying for their bankruptcy filing. Two points: first, most debtors scrape together the money to pay for a bankruptcy filing by selling something, borrowing from a friend or family member or buying groceries, filing the gas tank and using what is left to file...hoping to hold out to the next paycheck. Second, and if you had any REAL experience with bankruptcy and were an honest proponent of reform, you would tell your readers the following truth: a bankruptcy is a snapshot in time, one day in the financial life of the debtor. They might get a paycheck the next day, their refund in a week, but the petition is their financial condition on the day of filing, not the day before, not the day after. The current law recognizes this point and allows the trustee to 'look back' and see what brought the debtors to the point of filing and to look forward.

Every debtor must file a budget under the current law. They must list their income and expenses. The trustee considers the information and makes determinations. If they feel something is amiss, they question more and it can eventually lead to a court hearing in front of the Judge. I have seen the US Trustee for this region (Region 11: Ira Bodenstein) appear in a 341 hearing and question a debtor. Any suggestion that petitions are given a cursory glance is the position of someone that has never attended 341 hearings.

SMR Research MAY have found examples of abuse, but let me do a little analysis on their summary: Their sample was 327 cases. In those 327 cases, they found 30 case studies, roughly 10%. Yet, their sample was from 24 different districts...or about 13 cases per state! A representative sample? Statistically significant? 327 cases to represent almost 1.07 million cases....I like statistics too but come on. .0003% of filings? That is like calling the Presidential election after only 1,300 people vote....in 24 different states.

But let us see: 8 people had significant medical debt; 31 showed no cash on hand (although they might have had money in a checking account or savings account); 92 showed income greater than living expenses - but we don't know if their income was greater than their living expenses plus payments on secured and priority debt; but 235 of them showed income less than living expenses; the average unsecured debt was $21,576 which at 18% and minimum payments would take 38 years to pay off;

Questions: the average credit card debt is inflated by late fees, over- limit fees and the interest accumulating on those fees...how much of the $21,576 is that? Reports I have seen suggests that earnings from fees on credit cards has risen from 1.3 billion to 9.7 billion in the last 4 years.

From their website:

SMR offers Predictive Scoring Services as well for loan marketing and credit card collections.

Clients for various SMR products and services have included executives at a majority of the nation’s largest banks, thrifts, mortgage companies, life insurance companies, consumer finance companies, nonblank financial companies, retailers, and oil companies. More than 4,000 executives at more than 800 companies have been clients.

Gee, do you think they are going to find examples where credit card companies, loan companies, banks and consumer finance companies maybe had bad lending practices based on the products and services SMR provides to them???

Finally, the summary suggests...credit card debts are the most common BUT THEY ARE NOT THE LARGEST DEBT BY FAR (my emphasis)! Gee, no?! How about MORTGAGES! Cars? Boats!? SECURED DEBT!!! Almost all of which is usually reaffirmed!

Finally, Mr. Zywicki, the entire idea that 250 people each day are filing fraudulent bankruptcy petitions in the sense that it will have ANY impact on the outcome of a bankruptcy filing is on it's face, a lie.

Continue in your belief that debtors are scum and lenders are hapless victims. Because if every debtor is an irresponsible user of credit, every lender is an irresponsible provider of it....and using the bankruptcy law to protect the lender - you know, the one with 30 billion dollars to buy academics, senators and congressmen and creditor attorneys - while going after the ones with no net worth and less than $100 is the greatest INJUSTICE this President is likely to be remembered for.

1 comment:

David said...

SMR wonders what happened to all the other stuff the recent bankrupts charged, since their average recent charges were $21,576, but the average value of household assets was only $2,009.

As I've blogged at http://home.comcast.net/~chesler/Blog/2005/04/cat-handcuffs-and-bankruptcy-reform, I'm reminded of Steve Martin's old Cat Handcuffs routine. He had to buy a pair of cat handcuffs because his cat had charged $3,000 of cat toys under his name, and he couldn't return them because they had cat spit all over them.

(Much as I generally agree with the Volokh co-Conspirators, including Todd Zywecki's analyses of medical expenses and whether credit cards cause insolvency, your and BizzyBlog's critiques of the recently enacted BR seem quite true. I couldn't find "email author" on this blog, but please contact me: your descriptions of what it means to be broke and living paycheck to paycheck are accurate.)