June 25, 2018

Has “Financial Repression” Stopped You from Filing Bankruptcy?

paperworkpileEditors note:  In this compelling post, Charleston bankruptcy lawyer Russ DeMott describes what he calls “financial repression” – the tendency of honest, hardworking men and women to delay or forego bankruptcy protection because of the administrative and expense burdens added to the bankruptcy filing process by the 2005 BAPCPA changes to the bankruptcy laws.

When you meet with your bankruptcy lawyer, you’ll be given a lot of information.  You’ll also be given many tasks to complete before you file your bankruptcy case.

Our new bankruptcy law, BAPCPA (Bankruptcy Abuse Prevention and Consumer Protection Act), created a tremendous amount of busy work for debtors.  You must complete a credit counseling session prior to filing your case, you must provide the trustee with the last tax return you filed, and you must give your bankruptcy lawyer six months’ worth of pay stubs, just to get started.  There’s lots of work to be done.

Debtors are already stressed out when they come to their lawyer’s office.  The law is often confusing.  There are many new terms thrown around: CMI, DMI, discharge, First Meeting of Creditors, 341, 362, median income, means test, trustee, and on and on.  Even if they have a lawyer who explains things well, there’s a large amount of new information to absorb.

On top of all this, they must provide their lawyer with numerous documents.  Some of these are easily accessible; some are not.

In my Charleston, South Carolina bankruptcy practice, I have noticed that many clients seem worn down by this process.  We regularly check on open files to notify the clients of the information we need to file their cases.  Sometimes they respond, but sometimes they don’t.  It’s as if they believe that if they ignore the financial mess they are in, the problems will magically disappear.  They won’t, of course.  In fact, they’ll continue to get worse.

I call this financial repression.  Like any other repression, it delays a resolution.  Whatever the problem is, it doesn’t get solved. [Read more…]

BAPCPA at 4 Years – Has It Solved Anything?

paperworkI have been representing debtors in bankruptcy cases filed in the Northern District of Georgia for over 20 years. Until the law changed in 2005, filing bankruptcy was a fairly straightforward process – often I would meet with a client, decide whether to file and select Chapter 7 or Chapter 13, collect information about creditors, develop a budget, then file that day.

Attorney’s fees and filing fees in those days were relatively low and relatively hassle free. Most Chapter 7 cases processed through to discharge, and Chapter 13 cases worked as long as the debtor remained employed and committed to making his case work.

Fast forward to October, 2005 – the time that the BAPCPA amendment to the Bankruptcy Code went into effect. The system became significantly more complicated. Clients were expected to gather page after page of documents, lawyers were charged with performing extensive budget calculations (the median income and means test).

Fees went up because both the attorney’s liability and the amount of work required increased greatly. And what is the end result? Many people with limited income and no hope of paying it back are filing Chapter 7. Others who would have fit into Chapter 7 sometimes do not qualify immediately and end up having to delay their filing for a few months. Folks with some capacity to pay end up in Chapter 13, but trustees are more demanding and Chapter 13 plans that would have worked under the old law do not always work now. [Read more…]

Bankruptcy Law Changes Less Likely With Joe Biden on the Ticket

Ever since the passage of the BAPCPA changes to the bankruptcy laws in 2005, consumer advocates have held out hope that a new presidential administration might roll back some of the more hard line changes to the Bankruptcy Code.   Although support for the BAPCPA laws was bi-partisan, some Democrats have attempted to tie the nation’s housing crisis in with the changes to the Code.  You may remember that earlier this year Democratic leadership attempted to push through legislation that would permit bankruptcy judges to change the terms of mortgages.

Senator Obama’s selection of Senator Joe Biden of Delaware would seem to dim the hopes of consumer advocates hoping for consumer friendly changes to the bankruptcy laws.  Delaware, as you may know, is the home to corporate headquarters of many large and small corporations.  According to StreetDirectory.com, businesses choose Delaware simply because of their flexible corporate laws, highly respected Court of Chancery, a business-friendly State Government, and a customer service oriented Staff of the Delaware Division of Corporations.

Given that most of the large credit card banks are incorporated in Delaware, it should be no surprise that Senator Biden was one of only three Democrats who voted for the BAPCPA changes to the bankruptcy law and that he supported it enthusiastically.  My colleague Carmen Dellutri, writing in the Bankruptcy Law Network blog, comments that when reflecting on the Senate debate about the BAPCPA laws, “the first thing that comes to mind is the passion that Senator MBNA (Biden) put into getting the bill passed.  He was a staunch supporter of the bill.  He was also very instrumental in getting many of the amendments stricken [that would have benefited consumers over lenders]. ”

The Associated Press reports that during the time the BAPCPA laws were being debated in the Senate, credit card lender MBNA paid a consulting fee to Hunter Biden, Senator Biden’s son.  Further, the AP reports that “MBNA employees have poured more than $200,000 into Biden’s Senate campaigns over the past two decades, making donors working for the credit card company the senator’s largest source of campaign money.”

It is, of course, unclear how much influence a vice president Biden would have on Barack Obama or his policies.  However, it would certainly not be surprising if bankruptcy reform is not at the top of the list should Mr. Obama find himself in the White House.

What is the “New Bankruptcy Law”

Bankruptcy attorneys like me will frequently refer to something called the “new bankruptcy law.” The “new” law is now 3 years old and not really so new. Officially named (or misnamed) the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 or “BAPCPA,” this law has been the subject of many posts on my blog, on bankruptcy lawyer blogs all over the country and on multi-author blogs like the Bankruptcy Law Network Blog and the Credit Slips blog, which is written by law professors and other academics.

Although the commentary about BAPCPA is not likely to stop soon, I thought it might be helpful to take a break from the analysis in order to review the history. With important elections on the horizon, this might be a good time to let your elected representatives know what you think. In case you were wondering, I think BAPCPA is an awful law, punitive in nature, and causing the cost and complexity of consumer bankruptcy filings to increase unnecessarily. If there is any “consumer protection” in this law, I have yet to find it!

Attorney Mark Neis, the husband and law partner of my Bankruptcy Law Network colleague Jill Michaux, has written an informative post about the history of BAPCPA. If you were ever of the opinion that our laws were crafted by diligent lawmakers concerned only for the public good, you will be disappointed to find out that is not how it works.

New Median Income Numbers for Georgia Bankruptcy Filers on February 1, 2008

The United States Trustee has released the new median income table for Georgia debtors, applicable to cases filed February 1, 2008 and thereafter:

 

February, 2008 Median Income Numbers for Georgia

 

1 person household2 person  household3 person household4 person household
$39,171$51,425$58,885$68,611

Financial Managment Course Requirement – Filing Deadline

The bankruptcy law requires debtors to attend two educational courses.  The first requirement calls for a "debt management course" and must be completed prior to filing – your certificate of completion is your "ticket in" to the bankruptcy process.

The second course, which is the subject of this post, is the "ticket out."  Known as the "financial management course," this educational requirement involves education about budgeting, interest rates and other financial managment tools that will, hopefully, keep you out of bankrutpcy in the future.

In a Chapter 7 case, you are supposed to complete your financial  management course within 45 days from the 1st date set for your  Section 341 meeting of creditors hearing.  In a Chapter 13 case, you must complete the financial managment course prior to making your last Chapter 13 payment or prior to the closing of your case.

If you do not complete your financial managment course requirment and file your certificate of completion (your attorney will file this for you), you will not be eligible for a discharge.

In my practice I recently represented a Chapter 7 debtor who did not complete her course prior to her case being closed and we had to reopen her case for the sole purpose of filing the financial  management course certificate.  So far, it appears that most bankruptcy judges will permit such reopenings, but be aware that there is a filing fee to do this as well as an attorney’s fee for the time involved.

Most of the vendors who provide pre-filing debt counseling will also provide financial managment courses as well.  The list of vendors that I provide to my clients can be found on my BankruptcyWorksheet web site.

I always advise my clients to get the Financial Management course out of the way.  You are not likely to think about this requirement 4 years into your Chapter 13 and the only notice set out by the clerks’ office is done a couple of months into your case.

The Financial  Managment course can be taken by phone or over the Internet and it will last only a few hours.  I would be interested to hear from anyone who has taken this course to get your observations and thoughts about its value.

Weakening of Consumer Bankruptcy Protections Based on Faulty Assumptions

One of the consequences of the new bankruptcy law (BAPCPA law) has to do with erosion of protections offered by bankruptcy in various situations.  For example, the automatic stay provisions, which previously offered a comprehensive, no-questions-asked protection from any creditor action, no longer provides absolute protection in all circumstances.  Under BAPCPA, the automatic stay terminates in 30 days (unless you go to Court to renew it) in certain repeat filing situations and it does not exist at all in the third case filed within a year.

While the policy considerations that underlie this erosion of the automatic stay may be valid, my concerns are (1) when you create complicated exceptions to core concepts, the system loses predictability and public confidence and (2) the stage is set to undermine the entire bankruptcy system with exceptions that swallow the rules, i.e. the “slippery slope” argument.

I find the reduction in bankruptcy protection that applies to repeat filers especially troublesome.  There seems to be an underlying assumption that a debtor who seeks bankruptcy protection  – usually under Chapter 13 – more than once within a year is acting with less than honorable purposes.  In my experience, at least half of the second filers I see have to file a second case because they did not fully understand the process and their obligations thereunder the first time around.

In most jurisdictions, one or two high volume consumer bankruptcy firms account for a majority of the Chapter 7 and Chapter 13 filings.  These high volume firms are a product of the Bankruptcy Courts’ paternalistic attitude towards debtors and consumer bankruptcy counsel.  In most jurisdictions, the Judges set out “no look fee” provisions for Chapter 13 that essentially set the market rate for legal fees in that jurisdiction.  Although the standing court orders that set out these provisions are careful to state that the judges are not setting a fee, the practical effect is, in fact, to set a fee for services.

Because it is hardly practical for a small firm to spend three or four hours of non-billable time to present a fee application, most consumer bankruptcy attorneys accept the no look fee as a flat fee for services.  In the northern district of Georgia, for example, the no-look fee for Chapter 13 is around $4,500.  If a Chapter 13 lasts five years, that amounts to $500 per year to prepare, file and manage a case. Until just a few years ago, that no look fee was $1,500 for five years’ worth of work (that amounted to $300 for five years’ worth of work).

By contrast, in Chapter 11 cases, where the financial stakes may be in the millions of dollars, bankruptcy attorneys may bill at $500 or $600 per hour without any significant judicial interference.

Is it any wonder, therefore, that high volume consumer bankruptcy firms spend so little time with their clients to walk them through the filing and case management process.  Actually face to face attorney time in a high volume firm may amount to 30 minutes or less.  Further, because the business model dictates that costs must be kept down, the high volume firms have no choice but to rely on inexperienced, young lawyers who stay for a year or two then move on.

In simple consumer cases, a paralegal driven model may be fine and I personally have no issue with operating a law firm according to a profitable business model, especially when that model is driven by judicial control of attorney compensation.  In more complex cases, however, it may take a second or third filing for the debtor to find a lawyer who is equipped to deal with that debtor’s complicated problem.

The automatic stay issue discussed above is but one of the many erosions and exceptions to full relief now contained in the Code.  A 2005 article in the ABA Journal entitled “Debts that Will Follow You to the Grave” by Marc S. Stern and Larry B. Feinstein offers an excellent summary of other exceptions to bankruptcy relief.

The prevalence of high volume, limited service bankruptcy mill firms in every large jurisdiction is clearly the product of judicial control of bankruptcy fee payments in Chapter 13 cases.  Yet BAPCPA incorporates a simplistic formula to punish repeat filers, even those who have to seek repeat protection because they ended up in the wrong attorney’s office for their particular case.

New Bankruptcy Law

Well, October 17 has come and gone and I have now filed four (4) cases under the new law. Business has been extremely slow – I suspect that everyone who had been considering filing did file prior to October 17. My new cases have mainly been homeowners who want to file Chapter 13 to stop foreclosures.

My observations so far:

  1. client interviews now take two to three hours, as opposed to 60 to 90 minutes before. There is a lot more paper we have to see and, frankly, the client’s options are limited.
  2. clients have been less than enthusiastic about the pre-filing credit counseling. The ones who have taken the counseling generally like it, but clients facing emergencies have been less than cooperative.
  3. from my end, the requirement that we gather information is a good thing. I am finding all kinds of judgments and lawsuits that my clients did not know about and never would have known but for my investigation.
  4. this new bankruptcy law is not going to change human nature – people who are financially strapped are going to continue to be desperate and disorganized.
  5. the new Chapter 13 plan in the Northern District of Georgia is a major pain. When the numbers pick up again, I will be very selective and I am afraid that debtors with challenging cases will have a hard time finding experienced lawyers.

New law – should you file before October 17?

October 17, 2005 is the day the new bankruptcy law takes effect.  Over the past few months, ever since this date has been announced, my office has been receiving an ever-increasing flow of new client questionnaires from potential clients. Most everyone assumes that they should file prior to the effective date of the new law. Is this correct thinking?

For the most part, it probably is. After thorough reviewing the new law in preparation for a seminar I am teaching at the end of September, I have the following observations about the new bankruptcy law:

1. the “means test” is very restrictive. If your household income exceeds the average household income for your State (i.e. Georgia), the Bankruptcy Court will presume “abuse” and require you to file a Chapter 13 repayment plan. There are some “special circumstances” exceptions but don’t count on those.

Currently, the Courts ask whether your case has been filed in “good faith.” I predict about 30% to 40% of people who can file a Ch. 7 today will not be able to file after October 17.

2. the tone of the new law reflects an attitude that debtors filing bankruptcy are abusing the system. It also reflects an attitude that debtor’s lawyers are contributing to that abuse.

3. the new law is designed to make filing bankruptcy more intrusive and painful. For example, post-October 17 filers will have to enroll (at your expense) credit counseling and budget counseling courses. Bankruptcy petitions will have to include extensive supplementary documentation such as tax returns and proof of income.

4. the new law appears to have been written without much input from bankruptcy lawyers or bankruptcy judges. There are numerous omissions and unknowns. For example, the means test applies if your income exceeds “the median income” for a like sized family in your State. However, the law does not tell us where to find the necessary statistics. The census bureau statistics describe median income for a family of four, but what if your family is smaller or larger. The census bureau also differentiates between income in rural areas and city areas, although the new bankruptcy law does not make such a differentiation.

My sense is that the bankruptcy judges in our district will help us understand how this new law will be applied. But it may take 6 months to a year before we really know. In the meantime, do you want to be a test case for some provision of the new law?

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