Bankruptcy Reform - An Analysis

So, here we are. Six months after the BARF (bankruptcy reform) went into effect and the results so far have to be heartening to those millionaire card company CEO's. Todd Zywicki sure is impressed:

From Bankrate.com

In addition to stopping the abuse, Zywicki says the law protects consumers.

"It's got a number of consumer-protection provisions, such as greater restrictions of debtors to reaffirm debts and penalty provisions for creditors that don't accept good-faith efforts for debtors to repay voluntary payment plans."

However, some of the people that have to suffer from Professor Zywicki's love child have a different opinion:

Judge opinion (quoted by Todd Zwyicki in a post on the subject):

Here's what Judge Markell wrote in his opinion in In re Kane, 336 B.R. 477 (Bankr. D. Nev. 2006) (I couldn't find the opinion on-line other than in Westlaw) at page 481:

This court concurs with Judges Mark and Riegle--the cap applies to all debtors who do not satisfy the 1,215-day rule--but for different reasons than either of them advanced. Whether the text is ambiguous or not, it is still possible to consider and implement what Congress unambiguously intended and to overcome the drafters' unfortunate choice of words. [FN7]

FN7. Section 522(p) is one of many examples of poor drafting in the new bankruptcy law, which Professor Todd Zywicki assured the Senate Judiciary Committee was "fine as it is," adding, "There is no word that I would change in this particular piece of legislation." SEN. JUD. COMMITTEE, Hearing on S. 256: Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, 109th Cong., unofficial transcript (March 10, 2005).

Professor Zywicki whined:

Much to my surprise and dismay, it appears that I have been badly misquoted by Federal Bankruptcy Judge (and former law professor) Bruce Markell regarding my testimony before the Senate Judiciary Committee regarding BAPCPA. Not only did Judge Markell grossly take my words out of context in a published judicial opinion but I understand that he did the same thing in a recent speech to the a local bankruptcy lawyers association

Oh, poor baby. Of the 48 comments on Zywicki's post, about 45 of them said that the Professor WAS NOT TAKEN out of context. The remainder only suggested that the Judge's opinion was a valid opinion even if they disagreed with it. However, in fact, it was clear from a reading that Professor Zywicki did in fact endorse the bill as written without any need whatsoever for amendment.

That said, I went after the dear Professor in this post. One of my peeves was with the issue of fraud:

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?

Professor Zywicki's claim is recalled again in the Bankrate piece:

Supporters of the law frequently cite fraud as the catalyst for change and point to findings by the Federal Bureau of Investigation, which estimated that 10 percent of bankruptcies have involved fraud, with "hiding of assets" as the most common type. Feldstein believes, based on bankruptcy petitions his researchers have examined, that the percentage is an understatement.

Bullshit. Pure and simple. If 10% of the cases involved fraud, there would be 1,500,000 people facing federal prison over the last 10 years. In fact, the FBI has prosecuted less than 1000 cases in the last 10 years! Far from widespread, the issue is practically non-existent. Bankruptcy fraud cases are so rare, the FBI issues PRESS RELEASES when they get a case!

Professor Zywicki cited in his testimony and it was reported again in the Bankrate piece, a report produced by "SMR Research Corp., a market research firm". Does anyone know who the clients of SMR are? Why it is the banks and credit card companies. This is the same firm that helps credit card companies TARGET consumers for pre-bankruptcy cards .... sorry, credit cards. Do you think a company that helps credit card companies increase the number of active cards is going to suggest...they are promoting bad risks? Nahhh.

I went after SMR's report in this post also.

So, we have SMR and Professor Zywicki rehashing their position from the pre-signing days, claiming two things in the Bankrate piece: 1) it is too early to tell if the law has had much impact; and two, it has brought much needed relief to the credit card industry.

First, the impact: Filings are down 80% nationwide in the first 6 months of the new law. Even allowing for the idea that people that would have filed over the last six months rushed to be the law, filings should have rebounded by now. Roughly speaking, an additional 400,000 cases were filed in September and October over the previous years average. That is roughly 25% of the annual rate over the previous 3 years. If we had spread those 400,000 cases over the last 6 months, filing rates would still be down 45%.

Worse, one factor that drives people to bankruptcy is a threatened foreclosure. Foreclosures are up 50-60% so far this year. These people, previously a reasonable bankruptcy candidate, are just walking away in droves.

Second the credit card industry. On average, the credit card companies reported between a 1 and 2 percent reduction in PROFIT for the third quarter last year. (the period of heaviest pre-law filings). There has been of course NO reduction in interest rates. There has been an increase in the minimum monthly payments however.

Other factors. The fee to file bankruptcy changed with the new law. Chapter 13 went down - to encourage more chapter 13's we were told, and Chapter 7 fees were raised 30%. That lasted less than 6 months. On April 9th, fees for chapter 7 went up, again and Chapter 13 fees were increased 30%.

Let us look at a few other items in the Bankrate piece:

Financial organizations and researchers have listed 10 ways they believe the bankruptcy law combats consumer fraud:

• A petitioner's lawyer must agree to review all financial claims and must sign off on the accuracy of the claims. Lawyers and petitioners can be penalized for fraud.

Sounds good right? Now think about a criminal attorney swearing that the client s/he represents is telling the truth. Now imagine what happens to the attorney when the client is found guilty. Why the court can demand payment from the attorney for court costs and potentially find him/her guilty of lying to a court! THAT is what the bankruptcy law has done to attorneys. Can you imagine attorneys quitting the practice? Don't imagine, it is happening.

• Petitioners must file copies of their recent tax forms. This filing eliminates falsification of income and rids the bankruptcy system of criminals and other persons who don't file income tax returns.

Because of course, only criminals fail to file tax returns.

• The U.S. Trustee program, which regulates bankruptcy laws, will contract with a third party to conduct audits for at least one out of every 250 bankruptcy filings in each federal judicial district.

A demand of a previous policy. Can you imagine an attorney that would risk their livelihood for a $750 fee from a bankruptcy client?

• Mandatory bankruptcy credit counseling before filing provides debtors with alternatives to bankruptcy. It's designed to deal with "bad-apple debtors' attorneys" and "bankruptcy mills" that push people into bankruptcy without telling consumers all their options. The required counseling after a debtor files is intended to cut down on repeat filers. In addition, the counseling provision adds an additional paper trail for fraud investigators.

Here is a good one. A report on credit counseling results for the last quarter of 2005 (after the law went into effect) was discussed by me here. Primary result: 97% of people taking the pre-bankruptcy filing counseling, could not afford $100 a month towards their unsecured debts. This is 10 percentage points ABOVE the number of chapter 7 filers pre-law. Average of 13% of all filers were Chapter 13 repayment plans.

One final comment on Professor Zywicki. He commented back in 2005 that only 10-15% of filers would be affected by the new law. I said bull shit then, I say bullshit now. First, everyone has to pay the $50 for the credit counseling; everyone has to pay $90 more in filing fees, and attorneys (with their license and livelihood on the chopping block for every case) have raised their fees (almost every district we have heard from - about 1/3 of them) about 100%. That's right. Doubled. Why? Bankruptcy mills have undercut every attorney out there. The cost to file a bankruptcy in 2005 was virtually the same as in 1990. The mills are folding up and attorney's that 'dabbled' in bankruptcy have left. Fees have responded. The ones most hurt by all of the above? The least able to afford it.

The Bankruptcy Law does have a lot of supporters, unfortunately for consumers, none of them have to suffer. Judges, trustees, and attorneys have all reported the same: the law added much to the confusion surrounding filings, added expensive burdens to the courts and consumers and in the end, did nothing to fix the problems.

But the Banks and Credit Card Companies are happy!