The Bankruptcy Lawyers Blog

In the November ABI Journal , Part I of Professor Charles Tabb's examination of consumer bankruptcy trends examined filing rates and the Chapter 7 / Chapter 13 balance.  In Part II this month, Professor Tabb makes a clear prediction:  Filing rates probably will soon return to the range of pre-BAPCPA levels.  Tabb doesn't expect, however, that those rates will continue to climb.  That's because his research shows a clear correlation between the level of revolving consumer debt (primarily credit card debt) and bankruptcy filings, and the revolving credit market seems to be largely saturated.

Tabb's analysis is full of interesting details, including the fact that the correlation of bankruptcy filings with revolving debt as a whole is much stronger than the correlation between bankruptcy filings and delinquencies, or between bankruptcy filings and debt-to-income ratios.  Overall debt correlates with bankruptcy filings, but not as closely as revolving debt.  The bottom line:  the level of credit card debt in America appears to be the clearest predictor of the bankruptcy filing rate.  Based on that correlation, we can expect filings to climb back to pre-BAPCPA levels in the near future.

For all its interesting data, the article is as worthy of a read for Tabb's delivery of stunning information such as "The evidence shows that debtors file bankruptcy in very predictable numbers, depending not on what the bankruptcy law provides, but on how burdened they are with debt."  This, Tabb suggests, shouldn't have come as a surprise to Congress.  Of course, those members of Congress who spearheaded the 2005 bankruptcy reforms have shown themselves to be quite easily surprised by the obvious.  Bob Lawless talks about a recent example--one that would be entertaining if real federal legislation hadn't sprung from this kind of ignorance--on the Credit Slips blog:  Senator Grassley Struggles to Understand the Means Testing Forms

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We talked back in July about the growing impact of ARMs reaching their "shock points" during 2006 and 2007.  Last week, a study released by the Center for Responsible Lending substantiated those fears with data collected through the study of 6,000,000 subprime mortgage loans. 

In a press conference held in conjunction with the National Association of Realtors and the Leadership Conference on Civil Rights, the Center for Responsible Lending announced dismal findings:

• 1 in 5 families who take out a subprime mortgage loan today will end up in foreclosure
• Nearly 1/4 of all mortgage loans made this year were subprime
• An Adjustable Rate Mortgage is 72% more likely to go into foreclosure than a fixed rate mortgage
• More than 50% of mortgage loans made to African Americans and more than 40% of those made to Latinos were high-cost loans, even though many of these borrowers could have qualified for more favorable mortgages
• Homeowners with multiple refinances (which are common in subprime lending) face a 36% chance of foreclosure

The full report is available here:  Losing Ground:  Foreclosures in the Subprime Market and Their Cost to Homeowners

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The Fifth Circuit recently entertained the pressing issue of a consumer’s debt right to maintain his cable television service after he filed bankruptcy.  Although the issue may not seem particularly momentous, consumer debtors often pose this question to their bankruptcy attorneys. 

In In re Darby,  No. 05-20931 (5th Cir. Nov. 14, 2006),  a Chapter 13 debtor tried to use the Bankruptcy Code to require the local cable television company to continue providing service.  After the debtor filed bankruptcy, the cable provider disconnected his service. The debtor then invoked Bankruptcy Code § 366, which states that a utility may not "alter, refuse, or discontinue service" solely because of the commencement of a bankruptcy case. That same section also provides that the utility can refuse to continue service unless the debtor gives adequate assurance of future payment.

The word “utility” as it is used in section 366 is not defined in the bankruptcy code.  The court then looked to the House Judiciary Report and Senate Report on the provision.  The report provides that section 366 gives debtors protection from a cut-off of service by the utility because of a bankruptcy filing.  The report goes on to state that “this section is intended to cover utilities that have some special position with respect to the debtor, such as an electric company, gas supplier, or telephone company that is a monopoly in the area so that the debtor cannot easily obtain comparable service from another utility.”   

In applying this language, the court reasoned that the necessity of the service underlies this provision.  The court held that the necessity of the service is what creates the “special” relationship between the debtor and the utility referenced in the Congressional report.  The court concluded that cable television is not a necessity.  The debtor testified that cable television is only a convenience, not a necessity.  Accordingly, the court held that cable service is not a utility covered by section 366 of the Bankruptcy Code.

Bob Lawless at The Credit Slips Blog discusses this case in detail and offers an interesting analysis as to why the court got it right, but for the wrong reason.

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After the Minnesota Court in Milavetz ruled that strict scrutiny must apply to the restrictions on attorney advice contained in BAPCPA's section 526(a)(4), the court turned its attention to the advertising disclosure requirements. 

Noting that the statute regulates not merely deceptive advertising but truthful advertising as well, the court determined that the regulations could stand only if

1) the regulation directly advances a
2) substantial government interest, and is
3) narrowly drawn.

The court found that section 528's advertising requirements failed to advance the government's purported substantial interest and were not narrowly drawn.  While the government advanced the theory that, without these disclosures, advertising might be confusing, the court determined that the public was more likely to be confused by the use of the "Congressionally-invented" term than by its absence.  In fact, the court suggested, the very merging of attorneys and non-attorneys, with their differing roles in the bankruptcy process, under the designation "Debt Relief Agency" was itself likely to confuse the public.

Having fully discussed and ruled on the Constitutionality of the advice restrictions and advertising requirements as applied to attorneys, the court turned to the issue of the designation of attorneys as debt relief agencies, and determined that attorneys did not fall within the statutory definition of "Debt Relief Agency".  We'll discuss that piece of the ruling in a future post.  Meanwhile, a number of bloggers are discussing the growing list of rulings on the Constitutionality of BAPCPA, including the  Cleveland  Law Library Weblog and this extensive review at the Georgia Bankruptcy Law Blog.

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The very day that BAPCPA took effect, Judge Lamar W. Davis, Jr., Chief Bankruptcy Judge for the Southern District of Georgia, entered a sua sponte ruling that attorneys practicing in his court were not Debt Relief Agencies under the provisions of BAPCPA.  Just two weeks later, another Georgia Judge declined to rule on a petition for a similar ruling, determining that there was no “case or controversy” before the Court.

Those disparate decisions kicked off a battle over the applicability of BAPCPA’s Debt Relief Agency provisions to attorneys and the Constitutionality of those restrictions, and that battle is still raging in Bankruptcy Courts and District Courts across the country.

Last week’s ruling in Milavetz, Gallop & Milavetz, P.A., et al v. United States of America may be the most comprehensive ruling to date on the Debt Relief Agency provisions of BAPCPA as they apply (or don’t) to bankruptcy attorneys.

First, the Court determined that strict scrutiny applied to the restrictions on attorney advice contained in 526(a)(4).  Just a few weeks earlier, the U.S. District Court for the District of Connecticut had declared the same provisions unconstitutional, but had avoided the question of the appropriate standard of review by determining that the outcome was the same under either test. 

The Minnesota Court, however, determined that 626(a)(4) amounted to a content-based regulation of attorney speech, and as such was subject to strict scrutiny.  Thus, the provision could stand only if it was narrowly tailored to achieve a compelling state interest.  The Court determined that section 526(a)(4) failed the first prong of that test.  Even if the Court accepted the compelling interests asserted by the government (protecting creditors and protecting debtors from attorneys who might lead them into abusive practices), the restrictions limited speech more than was necessary to accomplish those purposes because they prohibited advice that was wholly legal and might be in the best interests of the client.

The Court went on to discuss and rule on the issues of BAPCPA’s section 528 advertising requirements and the applicability of the Debt Relief Agency provisions to attorneys in general; those discussions will be the subject of additional posts later this week.

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University of Illinois Law Professor Bob Lawless had a lot of worthwhile things to say before the U.S. Senate this week, but his opening line pretty much says it all: 

"Although the new law was called the Bankruptcy Abuse Prevention and Consumer Protection Act or BAPCPA, it addressed abuses that did not exist and protected the credit industry instead of consumers."

Lawless's account of his Washington experience began today on the Credit Slips blog, and he's promised more specifics to come.  The full text of his testimony is available here:  BAPCPA Testimony of Professor Robert Lawless.

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The National Association of Consumer Bankruptcy Attorneys (NACBA) issued a press release yesterday calling the Republican witness line-up for the last minute hearings on the 2005 Bankruptcy reforms "the financial world equivalent of the Flat Earth Society." 

NACBA President Henry Sommer went on to say that "No credible person in the field seriously disputs the fact that the bankruptcy law changes have been a spectacular flop."

NACBA rightly points out that the financial services industry lobbied hard on the idea that bankruptcy abuses were costing the average American money, and that our cost of doing business would decline with the reforms.  Just two weeks ago, Steve Bartlett, President of Financial Services Roundtable, was quoted as saying the reforms were good for consumers, creditors, and the national economy.  Where, NACBA wants to know, are those declining fees and interest rates?

If there's anyone on the witness slate with even lower credibility than Bartlett, it must surely be Todd Zywicki, the law professor at George Mason University School of Law who suggested that the bankruptcy law was perfectly drafted.  Overlooking for the moment the three successful Constitutional challenges to the law thus far, NACBA points out a few minor flaws in the way this perfectly drafted statute has played out:

1.  A NACBA study of credit counseling agencies serving clients during the first few months after the law took effect indicated that credit counseling agencies had found 97% of pre-bankruptcy clients to be unable to repay any debts.

2.  More than 75% of consumer bankruptcy attorneys indicated that the time involving in preparing a bankruptcy petition had increased by 50% or more.

3. The U.S. Bankruptcy Court for the Northern District of New York reluctantly concluded that creditors be priorized over tithing in bankruptcy.  Leading sponsors of the reform were quick to say they'd never intended that outcome, and legislation was quickly drafted to correct it...but that legislation has not been enacted.

Full NACBA Press Release

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