October 13, 2008

Although I agree, generally, with Prof. Warren's advocacy against the 2005 BARF Act, there seems to be a real world perspective missing from her analysis, at least as it applies to the actual practice of bankruptcy law, that causes a blind spot in her writing. Here, she seems to argue that the 2005 law has exacerbated the meltdown of the housing market by making it harder for debtors to file Chapter 7, which enables a person to get a quick discharge of his unsecured debts (ie., credit cards).

I haven't seen much a decline, frankly; most of the people who want to file under Chapter 7 do so anyway, even if their income exceeds the state median, and most of the potential clients I meet who happen to own homes are looking to do a Chapter 13 repayment, not a straight Chapter 7. The reason why there was an initial precipitous decline in bankruptcy filings was due to the YBK panic on the eve of the new law in October, 2005. Everyone who ever thought about filing bankruptcy did so because they were led to believe that the new law would handicap them at the expense of their creditors. If anything impacted the currect credit crunch, it was the panic caused by the pending new law causing tens of thousands of people to file bankruptcy, and discharge debt, at the same time, not that those people can't file Chapter 7 cases now.

Of course, debtors have to jump through more hoops nowadays, thanks to the new law. If a filer's income exceeds the state median income, he is viewed as having presumptively filed in bad faith, which typically means...nothing. In some instances, the attorney will be sent an audit letter from the US Trustee, requiring him to produce certain financial statements and tax returns, as well as justifying certain monthly expenditures. But in most cases, debtors who make more than the median income who need to file Chapter 7 don't have a surplus income, once reasonable expenses are taken into account, and the present-day nightmare of skyrocketing adjustable rate mortgages is making the whole issue moot. According to the local US Trustee, less than one percent of all Chapter 7 filings that fall into this category are ultimately dismissed.

Moreover, Chapter 13 cases have become more routine, in large part because it is a more effective way to deal with secured debt, such as mortgages and car payments. Under Chapter 13, if the value of the home is less than the amount owed on the first trust deed, all deeds of trust that are junior to the first can be treated as unsecured debts, and potentially discharged completely at the end of the plan. Where I practice, this can be done with little more than a motion to the court seeking declaratory relief as to the value of the property; at a time when the housing market has been in free fall, such motions are infrequently opposed by lenders.

And that aspect of bankruptcy was unaffected by the passage of the 2005 BARF Act. That law has proved nothing more than an inconvenience to the experienced practitioner, since it only tangentially impacts a fraction of cases. In large part, that is due to the fact that it was drafted by lobbyists for the credit card industry, not attorneys with actual hands-on experience in the trenches of consumer bankruptcy.

Sure, there are more forms to fill out, but almost every practitioner has electronic forms that can be prepared within minutes. Potential filers have to take a pre-petition credit counseling course, but this step has proved to be ineffectual at providing debtors with non-bankruptcy alternatives, and the suspicion that many of these outfits have a conflict of interest in remaining on the good side of consumer attorneys is not unwarranted. And due to incompetent drafting, some of the more worthwhile provisions of the 2005 legislation, such as the attempt to terminate the automatic stay for repeat filers (which has proved to be illusory in Chapter 7 cases, since the law only halts the stay against debtors, not against the estate itself, which means that creditors still have to waste time seeking judicial relief), have been nullified.

The big winners of the 2005 BARF act, were, not surprisingly, bankruptcy lawyers. Its convoluted provisions took what was one of the few areas of the law that a smart, cost-conscious layperson could do by himself, and necessitated the hiring of licensed professionals at a much higher cost (try to fill out a Statement of Current Monthly Income at home if you don't believe me). And as I noted above, it hasn't done much to stem abusive filings, or check any of the shady abuses that existed before. But one thing the 2005 law didn't do was change how people could use Chapter 7 filings to save their homes, since it simply isn't an effective legal strategy, either before or after the law went into effect.

No comments: