Monday, October 30, 2006

Once more, with enthusiasm!

After extensive comments regarding BARF (to those familiar with the Bankruptcy Reform Act of 2005), a year of dealing with the consequences and reading written judicial opinions thereof, I have had the displeasure of reading analyses by those given a platform by which they can spew their lack of knowledge.

Unfortunately, another such analysis has seen the light of a fog-covered, dreary October morning.

What's our review of BR law on its 1st B-Day

Martin Segal has started his review with this clear point:

Like any new law of such importance, it was controversial and the reviews are mixed. Credit card companies and other business supporters say it has been a success because it reduced allowable debt cancellation under Chapter 7 liquidation bankruptcy and increased the number of debtors who had to repay creditors under a Chapter 13 payment plan.


Ignorance is bliss. Few laws are written and passed in this country that so
completely ignore all the professional opinions of those likely to have to deal with such laws. Professors that teach law, especially bankruptcy law, opposed this abomination by a huge margin. Trustees that would have to implement the law, opposed it almost unanimously. Bankruptcy judges opposed it. NONE of these groups would benefit from the passage of the law, or by it's demise. Strictly on the merits and
the likely consequences was it opposed and that opposition was IGNORED by the Congress and the press.

And given the opinions being written by judges that have to deal with this "law", there have been no mixed reviews, at all.

Of course, one of the preferred outcomes of the enactment was the drastic reduction in bankruptcy filings. And to say it was a success in this regard ignores all the signs and statistics. Filings have already returned to levels seen just 7 or 8 years ago.

Take the number of filings that occurred last year and subtract the average of the
previous two years and you will find almost 700,000 filings that could be attributed to the new law. Those 700,000 filings, assuming they were spread out over a 2006 without the law would have resulted in approximately 1.2m filings. A figure not far below the 1.35 million estimated for 2006 had the 2003-2004 trend continued.

Another "consequence" hoped for, predicted and claimed by the pro-BARF lobby was the reduction in cost to the average American consumer. It was estimated that bankruptcy was adding $400 to every Americans interest burden. Well. With the implementation of the law and the 'vast' reduction in filings....has ANYONE seen a reduction in interest rates by credit lenders???

Opponents argue the law fails consumers for these same reasons. A true evaluation probably lies somewhere in between.


No. And a true evaluation you are not going to get from Mr. Segal.

Formerly, a judge would determine if a case qualified for Chapter 7 based on a petition filed by the debtor asserting insolvency. Now debtors must
qualify their income under a complicated ''means'' income test based on their state's median income level. If they don't qualify, Chapter 13 repayment is required.


Spoken like a true academic. Having never sat through bankruptcy hearings (I'll bet - but hey, I could be wrong, I don't actually KNOW Mr.Segal....wonder if he is friends with Todd Zwyicki?) Mr. Segal doesn't even know how filings are handled. Judges seldom get involved in the vast majority of cases. The trustee assigned the case makes any initial determination that there is an issue regarding the
appropriateness of a filing. And the 'complicated means test' only comes into play when the debtor household earns over the state median income. But we have found that 97% of filers do NOT earn over the state median.

Of course proponents of the law felt judicial discretion was inappropriate and therefore mandated a means test to eliminate any pesky application of ...you know...fairness.

Chapter 13 filers must repay amounts for five years based on stricter IRS living standards. Before a judge set three-year repayment schedules based on what a debtor could reasonably afford to pay.


Mr. Segal compounds his obvious ignorance with a flat out distortion. If 97% of filers do not meet the state median income and chapter 13 filings are about 40% of the filings, then 97% of the chapter 13's are by people that CAN file a chapter 7, are below the state median and DO NOT have to repay for 5 years or use the 'stricter' IRS guidelines. And the ignorance of the "Before a judge set..." is just astounding. Plans were proposed by the debtors and if no one objected, confirmed. In our district and in many others, 80-85% of all cases were routinely confirmed. Those proposed by experienced bankruptcy attorneys were often confirmed at a 95% or
better rate.

Attorneys for debtors can be personally fined for inaccurate filing information in schedules of assets and liabilities.


This is just so false it borders on malpractice...oh wait...Mr. Segal is a legal academic...he doesn't actually PRACTICE law. There are no fines for attorneys. There are however new liability issues for attorneys. If a trustee or creditor makes a motion in the bankruptcy case and it is determined that a debtor provided false information and a court determines a reasonable inquiry by the debtor's attorney should have found the false information, THEN the debtor's attorney is liable for the trustee or creditors expenses including court costs, without limit.

What Mr. Segal and the supporters of this little provision envisioned was debtor attorneys, so used to flagrant abuses of the law and living large, would flee in abject terror of the prospect of such unlimited liability. If a criminal retains an attorney and tells the attorney he is innocent and it is determined that the criminal was in fact guilty - he was caught on tape committing the crime - might some legislator decide that the attorney should be held accountable for the court costs and the legal costs of the state for the trial? Wouldn't a reasonable attorney, upon investigating the information provided by their client, determine his true guilt and force the criminal to a plea....to avoid the litigation?

Don't bother them with details.

Formerly,Chapter 7 homestead exempt property was determined by state law. Florida allowed a ''millionaire's exemption'' of unlimited value even if the property was bought shortly before a bankruptcy filing. Now debtors can only exempt a maximum $125,000 of homestead value if the property was bought within 40 months before filing.


I am not going to spend a lot of time on this. It affects only a couple of states but what is interesting is that it affects retired people more than any other group. How? You see, most retired people sell their paid for homes in the states they lived and worked in for years and then moved to states like...Florida. For whatever reason....say their former employer goes bankrupt and voids the retirement plan....the retirees face bankruptcy. That newly purchased Florida real estate is
no longer protected in bankruptcy...but you didn't hear that possibility in Senate debate...

Before secured auto loan debts were repaid based on the full unpaid loan balance. Now repayments are reduced to actual vehicle value.


If previous points were misleading or distorted, this is a flat out lie. Prior to BARF fair market value was the maximum for auto loan repayment. There was considerable legal wrangling about what was fair market value, but under the new law, if the auto was purchased in the previous 910 days, the full loan must be repaid (or vehicle redeemed/surrendered). If purchased more than 910 days prior to filing, replacement value applies.

So much for the legal analysis....let's get to his analysis of the consequences:

As predicted, the number of Chapter 7 filings has greatly decreased
because of stricter requirements and Chapter 13 filings have correspondingly increased.


There is NO research to indicate that the 'stricter requirements' have caused a
decrease. As indicated above, it is likely that the rush to file prior to the law's enactment had a direct impact on the decline. As 97% of those that have taken credit counseling (and some 40% have not yet filed) qualified for chapter 7, it would seem some other factor(s) have had an impact on the number of filings. Could it have been the 43% increase in the court costs? Could it have been the $100 cost to do credit counseling and credit management mandated by the law? Could it have been the 50 to 100% increase in attorney fees caused by the increased liability, extensive new requirements for documentation and verification? Could it have been the press (and attorneys) that relentlessly pounded home the idea that "you better file now before the law changes" that left a lasting impression of the 'impossibility' for filing now? Nah....

Also, we must note this "...Chapter 13 filings have correspondingly increased." As a percentage of filings, chapter 13s are up. In actual numbers, way below the previous 2003-2004 average. But if 97% of filers qualify for chapter 7, why are 40% of them filing chapter 13? There must be a reason...

Primarily, people file chapter 13 to save an asset such as their home from foreclosure. And lo and behold, nationwide, foreclosures are up 50% this year. Maybe, just maybe, the increase in foreclosures are driving more people to file chapter 13...could be...ya know... (ps, foreclosures are likely to exceed 1 million for the first time ever this year...)

Chapter 7 applicants are permitted to tithe up to 15 percent of their income to charity as an expense. Some suggest this opens a loophole that allows
people who are otherwise over the means income limit to lower their net income under the allowed ceiling and preserve their filing. Many people have done this to stay in Chapter 7.


IF a debtor is below the median, there is no means test and the amount they tithe is basically irrelevant. If they are above the median though, they can't tithe in a chapter 13...per a recent ruling in NY. This so put Senator Hatch, the leading cheerleader of bankruptcy reform, in such a bad place (being from Utah, many, most of his constituents tithe) that he has introduced AN AMENDMENT to the reform. Something he opposed stridently during debate.

Mr. Segal's claim that "Many people have done this.." lacks ANY support. There have been NO studies done yet on such a claim.

Applicants who couldn't technically qualify for Chapter 7 debt liquidation have had some success claiming ''special circumstances'' beyond their
control forced the filing. Hurricane Katrina victims were given this privilege.


I am uncertain where this comes from. I am unaware of any "special circumstances" that prevent above the median income filers from being forced into chapter 13. There have been some allowances made for Katrina victims but I believe they applied to deadlines and documentation requirements. And to suggest ANY privilege was obtained just because a hurricane DESTROYED YOUR HOME AND EMPLOYER...well, there ya go!

New credit counseling requirements, originally thought to be oppressive, have worked fairly well. There are approved agencies that charge reasonable fees of $50 to $100 for the requiredprefiling and post-filing services, and judges can waive payment for lowincome debtors.


Yea, so well. Judges can waive court filing fees for low income debtors (generally only those that are not represented by an attorney - filing pro se - not a good choice given the complexities built into the new law). The agencies can waive their own fees, judges have no say in them....stupid.

The old law allowed a discretionary ''hardship discharge'' to Chapter 13 debtors before their completion of their five-year payment term. They had to prove that income problems were caused by unforeseen difficulties such as job downsizing, illness and accident, and that creditors had already received as much as they would have been paid under Chapter 7. Now many debtors are testing the time limits of early discharge by broadening their claims of payment difficulty.


The law is one year old....how much testing of the time limits do you think could be going on? The average plan pays secured and priority debts in the first years and unsecured debts in later years....plans started this year haven't had a chance to even begin paying ANYTHING towards unsecured debts. And where is the support for his "...many debtors are testing..." claim? WHERE?

Some experts have pointed out an inherent flaw in the current law. Debtors who can't qualify for Chapter 7 because their income is too high may also be
barred from Chapter 13 relief due to its eligibility ceilings of $307,675 for unsecured debts and $922,975 for secured debts. Critics suggest the new law should have either greatly increased or totally eliminated these Chapter 13 limits.


This is just stupid too. We call these clients chapter 11 clients. You know...like Donald Trump...serial filer....practically untouched under the new law. Do you want to waste some time to calculate the approximate percentage of the population with sufficient income to fund a 900,000 mortgage and 300,000 in credit cards? Less than 1 percent? And how many of them have filed this year, 1, 2?

Mr. Segal. No where on your website do you claim any particular knowledge with regard to bankruptcy so maybe you should avoid answering questions outside your legal specialty.

Disclaimer: I am not an attorney and nothing posted here should be considered legal advice. Seek knowledgeable legal counsel if you are considering bankruptcy and take no referrals from Mr. Segal!

1 comment:

tblumer said...

That was great. I feel guilty for making you work so hard......

The average plan pays secured and priority debts in the first years and unsecured debts in later years.

I did NOT know that. I thought that old monthly payment amounts were restored, or something along those lines, and that at least SOME unsecureds got paid back from the get-go. Silly me, of course the secured get their bite first.