The Bankruptcy Lawyers Blog

Statistics have long told us that a significant percentage of personal bankruptcy filings in the United States stemmed from medical problems. A 2001 study indicated that medical problems were a contributing factor in at least 46.2% of personal bankruptcies.  By 2007 that number had climbed to 62.1%, and a separate study estimated about 70% in 2008. 

The importance and validity of those figures has been hotly debated, but at last week's White House health care summit a significant fact bubbled to the surface:  about 80% of those whose bankruptcy filings were triggered by medical bills actually had health insurance coverage.  That news--which isn't really news at all but hasn't been the focus of much coverage in the past--shifts the scope of the problem somewhat.

The approximately 47 million uninsured Americans have been mentioned liberally, but this statistic tells us that those without insurance are not the only people adversely affected by our current health care system.  In fact, many of those who believe the current system is working well for them may believe that only because they haven't faced the kind of catastrophic illness or injury that has forced their fellow insured Americans into bankruptcy. 

Whatever the solution to America's health care crisis might be, this data is key to understanding the extent of the challenge.

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Back in the summer of 2007, we reported on the upside to sliced, diced and flipped consumer mortgages:  the paper trail was hazy at best and in some cases non-existent, and attorneys like April Charney were seeing some success in stopping foreclosures based on lack of evidence.  Later that year, Professor Katherine Porter released a study indicating that the flaws in mortgage claims were even more significant and more prevalent than we'd known.  An overwhelming number of mortgage claimants didn't have the required documentation, didn't bother to file it, or had the numbers wrong. 

The possibilities seemed endless for bankruptcy attorneys and other consumer attorneys defending against mortgage claims.  But nearly three years later, the dust still hasn't settled.  In a recent post on the Credit Slips blog, Professor Porter shares her thoughts on the current state of mortgage proceedings with bad or missing paper--and there are many open questions.  Also interesting are the comments from attorneys and other professionals around the country, demonstrating that the treatment of these poorly documented mortgages varies greatly from jurisdiction to jurisdiction.

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Recently, I wrote about the significant reduction in consumer credit in the United States.  A large part of that reduction comes from tightening credit standards; credit card issuers are offering less credit and even cutting back on existing credit lines.  But that's not the only source of the decrease.

Disillusioned with credit card companies, whether through personal experience or because of the mounting public evidence of unfair practices, many Americans are simply choosing to operate on a cash basis.  At first glance, it seems like a great idea: no fees, no interest, no living beyond your means...but as consumer bankruptcy attorneys we know it's not quite that simple.  Paradoxically, the person who manages his money so well that he can live on an entirely cash basis can present prospective creditors with no evidence that he manages his money well.  That means higher interest rates when it comes time for a car loan or home mortgage. It might even mean no access to those big-ticket loans.  Even if the consumer never plans to use credit even for a major purchase, he may still pay higher insurance rates, have trouble renting apartments and be otherwise impacted by a lack of positive credit history.

What are you advising your clients in this changing consumer credit environment?  To join the movement toward eliminating fees and interest and reducing risk by cutting out credit cards, or to stick with the systematic effort to rebuild credit so it will be there when they need it for big-ticket items?

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For years consumer bankruptcy attorneys have been fighting misconceptions about the impact of bankruptcy on credit.  Consumers with abysmal credit scores and tens (or hundreds) of thousands of dollars in outstanding debt believed that they were somehow protecting their credit so long as they didn't file bankruptcy--and, conversely, that bankruptcy would "ruin" their credit.

Most of us watched the trends and developed some general responses based on what we'd seen happen with our clients: bankruptcy petitioners were likely to start getting new (albeit high-priced) credit offers soon after bankruptcy; starting out with a secured card and slowly building credit allowed many post-bankruptcy consumers to qualify for conventional credit in just a couple of years. 

Recently, the rules of the game have changed.  Anecdotal evidence indicates that it's harder for many consumers in bankruptcy or post-bankruptcy to get automobile loans and other credit that used to be more accessible.  And, of course, this is consistent with the state of the national economy and the shrinking availability of consumer credit across the board.  It's much more difficult to pin down a norm or general rule to share with clients.

That uncertainty may make it seem more difficult to respond to client concerns about credit, but in fact it's only the details that have changed.  The bottom line remains the same:  the client who is sitting in your office considering bankruptcy probably already has serious credit problems.  Consumer credit isn't just shrinking for bankruptcy filers, but for all high-risk borrowers--and it's a near-certainty that your prospective client is already one of those.

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The consumer bankruptcy business is booming, and that presents a dilemma for many solo and small firm consumer bankruptcy attorneys.  As we discussed recently, flexible solutions like LPO, virtual assistants or contract lawyers may be the answer for many small law firms. But working with outside attorneys and paralegals is new ground for many bankruptcy lawyers, and the options and possibilities may seem endless.  If contracting work out is going to benefit your firm and help you grow your practice, it's important that you understand exactly what benefits you'll be receiving from your assistant or LPO provider and what efforts will be required on your part.

As with any service or software, the right provider for you depends on your firm's needs and priorities.  Here are some questions to ask before selecting an outside attorney, paralegal, or LPO company:

-What, exactly, will this provider be taking off my plate?

-How much time will this save me?

-Is the price reasonable in terms of the amount of time it will free up for other work?

-What kind of training and experience do the people actually performing the work have in my particular area?

-How will I fulfill my obligation to supervise?

-How is information exchanged with my office?

-What is the time commitment for me or my staff in preparing files for the outside provider or coordinating with them?

-Whose time will be freed up in my office and how can I use it profitably?

-Is the provider flexible enough to meet your specific needs, or is it a one-size-must-fit-all service?

-Is the contract flexible enough to allow your usage to fluctuate with the demands of your business?

Some providers offer only petition preparation services, while others offer a broader range of services.  Some focus on consumer bankruptcy cases while others are jacks of many trades.  Some providers offer real-time online monitoring of case progress, while others simply present you with a completed file when their work is done.  Before making a decision about the right kind of support for your bankruptcy firm, take time to think through these questions and consider the concrete benefits to your firm.

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In 1997, when the first version of what would become BAPCPA was drafted, non-business bankruptcy filings reached 1,313,112.  The consumer credit industry fought for years and spent hundreds of millions of dollars to ensure that bankruptcy reform became law.  In 2005, it did, and non-business bankruptcy filings dropped...briefly.  Now, in BAPCPA's fifth year, non-business bankruptcy filings stand at 1,344,095 (FY 2009).

 

These numbers don't come as much of a surprise to most bankruptcy lawyers.  While Congress was apparently believed that complicating the bankruptcy process would make Americans better able to meet their financial obligations, we'd seen the reality in our offices.  Filings began to rise again almost immediately, and experts were predicting that we'd soon see pre-BAPCPA filing levels even before the worst of the economic crisis hit. 

 

Unfortunately, when Congress opted to shake up the bankruptcy process, it shook up the practice a bit, too.  Some general practice attorneys stopped taking bankruptcy cases altogether, unwilling to accept the added time investment and legal responsibility.  Some bankruptcy attorneys were forced to expand their practices into other areas of law, let associates and paralegals go, or even close their doors. 

 

Now, the National Bankruptcy Research Center is estimating that 1 in 80 U.S. households filed for bankruptcy protection during 2009.  With more than 110,000 new cases filed per month, many of those who remained in bankruptcy practice are seeing a tidal wave of new client inquiries.  While "more business than I can handle" is a good problem to have, it's still one that requires a solution. 

 

Many attorneys see the options as limited:  either turn away cases or increase your staff.  There are, of course, upsides and downsides to both.  Turning away cases means not having to make any changes, but limits revenues at a time when growth is at your fingertips.  Adding staff means you increase your capacity for revenue growth, but also your obligations and time investment.  You'll have to take time away from your already busy practice to recruit, interview, train and supervise.  You'll be committing to additional overhead in order to meet a demand that may or may not continue.  The open questions and up-and-downsides lead many lawyers to preserve the status quo, but there is another option.

 

Contract lawyers, contract paralegals and outsourcing of petition preparation and other tasks all provide an opportunity to increase volume and revenues without a significant investment of time or a commitment to increased overhead.  Working on a contract basis allows you to adapt your investment to demand, so that you can keep pace with new business while ensuring that you aren't paying people to sit in your office and wait for the phone to ring during quiet times.

 

Next week, we'll talk about how to choose the right virtual assistant, outsourcing company or contractor for your firm.  Until then, give some thought to how you could expand your practice and grow your revenues if you were able to free up some attorney and/or paralegal time in your office.

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Adam Levitin at Credit Slips takes an interesting look at some of the changes subprime credit card issuers are making in order to keep profits up while complying with the Credit CARD Act.  It's not surprising that lenders are already applying all the creativity they can hire to finding ways to work around the new law and keep profits high, but Levitin does turn up one piece of information that may come as a surprise to many of our clients (and maybe even many of us):  First Premier Bank's new 79.9% interest rate, combined with lower fees, actually makes the card cheaper to use than the old, 9.9% version.

It's an excellent illustration of just how misleading that bold print can be, and well worth a read.  While it appears that the high-risk, high-cost issuers are going to find a way to keep on doing what they do, perhaps this change will at least make the costs more obvious to consumers up front.

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Earlier today, the House Rules Committee agreed to allow the mortgage modification in bankruptcy provision to be considered as an amendment to the broader financial services reform bill.  The issue could reach the house floor as early as this afternoon, so please take a moment to contact your U.S. Representative.  It's simple and only takes a minute. Just:

1. Phone toll free at: 877.354.4958

2. Put in your zip code

3. When you reach the receptionist:

• State your name
• Say that you are a constituent
• Ask the Representative to vote FOR the Conyers-Turner-Lofgren amendment (#201) to the Financial Services Reform bill.
• This amendment will cost taxpayers NOTHING and will save millions of homes from foreclosure

(Thanks to NACBA for the quick and easy instructions)

The provision would allow bankruptcy judges to modify mortgages in bankruptcy, and could help millions of people facing foreclosure--and not just those who file bankruptcy.  The ability of bankruptcy judges to make such adjustments would finally provide motivation for mortgage holders to enter into good-faith voluntary modifications that would allow hardworking people to remain in their homes.

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Just weeks after the Bankruptcy Abuse Prevention and Consumer Protection Act took effect in 2005, the small Minnesota law firm of Milavetz, Gallop & Milavetz P.A. challenged the Constitutionality of the statute.

In April of 2007, the U.S. District Court for the District of Minnesota granted the plaintiffs' motion for summary judgment, finding:

1.  Sections 526 (a) (4), 528 (a) (4) and 528 (b) (2) are unconstitutional, "as applied to attorneys in the District of Minnesota".

2.  Attorneys in the District of Minnesota are excluded from the term "debt relief agency" as defined in 11 U.S.C. section 101 (12A) and, as such, are not subject to any of the duties relating to BAPCPA defined debt relief agencies.

Later  that year, the 8th Circuit Court of Appeals affirmed in part and reversed in part, finding that Congress did intend to include attorneys within the definition of "Debt Relief Agencies" for purposes of the statute, but that the restrictions set forth in 526(a)(4) were unconstitutional as applied to attorneys.  The provisions of 528(a)(4) and 528(b)(2), however, passed muster under the rational basis test. 

Earlier this week, more than four years after the law took effect and the initial challenges were filed, the United States Supreme Court heard arguments in the case. Anna Christensen at SCOTUS Blog provides an overview of the hearing, along with questions posed by each Justice.  The Court appears divided, with Chief Justice John Roberts focused on the conundrum presented to attorneys who are both required to (by state ethical canons) and prohibited from (by BAPCPA) giving certain advice.  Justice Scalia, according to both the New York Times and Washington Post, conceded that the law was stupid but asked "Where is the prohibition of stupid laws in the Constitution?"

The high court's ruling will finally lay to rest the conflicting application of the provisions, which have been struck down or partially struck down as applied to attorneys in some areas of the country but not others.

 

 

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