Bankruptcy Article of the Week
Bankruptcy Crisis a Self-Fulfilling Prophecy
An editorial in The New Yorker this week made an interesting point about the "bankruptcy crisis" we've been hearing the consumer credit industry fret about for the past fifteen years or so: it may finally be upon us, and it seems to have been triggered by the industry's push to fix what wasn't broken.
We all know that the consumer credit industry spent a decade and hundreds of millions of dollars pushing for the legislation that ultimately became BAPCPA. We also know that those companies weren't hurting for profits in the days before BAPCPA, and that they made and continue to make conscious decisions to lend to high-risk borrowers because there's a greater potential for interest and fees. In short, we knew all along that the credit industry was blowing the "crisis" out of proportion, and that BAPCPA would create serious hardships for honest debtors.
But as dire as the situation appeared when BAPCPA was enacted, it would have been difficult to predict the full scope of its impact on the economy as a whole in just a few short years.
Though the going got tough for many honest debtors in bad circumstances, BAPCPA didn't necessarily create the same hardships for opportunistic and relatively well-to-do debtors. In fact, a Columbia Law Journal note recently posited that BAPCPA's major failure wasn't that it was designed to fix a non-existent problem or that it was foreclosing the only option available to debtors in truly dire straits, but that it had failed to do much—if anything—to ensure that debtors paid up. That, of course, was the theoretical basis for the law change: make it harder for debtors to discharge their debts in bankruptcy, and then they'll be more likely to pay.
But Elijah M. Alper concludes that those debtors who had no intention of paying aren't necessarily any more likely to do so under BAPCPA—they're just more likely to protect their assets in other ways, outside of bankruptcy.
Now, it seems, we're all in a bit of a bind. The credit industry has continued to extend and overextend credit to the poorest credit risks in the nation; recent bankruptcy filers receive more than three times as many credit card solicitations as households in which there has been no recent bankruptcy filing. Parallel behaviors in the mortgage industry have contributed to a collapse that has millions of people facing foreclosure.
In our failing economy, we may truly be beginning to see the "bankruptcy crisis" that got so much press a dozen years ago. Congress has done its worst in an effort to stave off the crisis, and instead managed to create an environment in which honest debtors can't discharge debts and get on with their lives, prospective entrepreneurs are discouraged from taking risks, and those who never intended to pay their debts at all still don't have to.
Once upon a time it appeared that only the credit card industry stood to benefit from BAPCPA. Now, with credit card default rates climbing, bankruptcy filings building steadily toward pre-BAPCPA rates, and an economy desperately in need of stimulus, it appears that in the long run even creditors will be the worse for the change. But then, they were never thinking about the long run, were they?
Presidential Candidates Address the Foreclosure Crisis in More Detail
In the two weeks since our last newsletter, the presidential candidates offered interesting insights into what they would or would not do when it comes to addressing the mortgage foreclosure crisis.
- On March 25th, Senator John McCain (R-AZ) made it clear that that he would oppose government intervention to solve the mortgage crisis by specifically saying that "it is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers," as detailed in a New York Times story.
While McCain criticized mortgage lenders for lowering lending standards and having a "false sense of security" prior to this current crisis, he also suggested that borrowers were at fault for engaging in dangerous practices like taking on too much debt, leaving us to wonder about those homeowners who were misled by lenders offering loans that appeared to be one thing on the surface but were something much different underneath the fine details.
Is this mortgage crisis necessarily their fault?
In a March 27th NYT editorial entitled "How Not to Prevent Foreclosures," McCain's stance on the mortgage crisis is seriously questioned.
- Also speaking on the mortgage crisis, Democratic presidential hopefuls Hilary Clinton and Barack Obama differentiated from McCain by saying that they would both pump $30 billion into the economy to help families avoid the worst effects of the housing market collapse.
On March 25th, Senator Clinton (D-NY) offered various suggestions to help restructure at-risk mortgages, including creating a special task force consisting of Alan Greenspan, Paul A. Volcker and Robert E. Rubin to examine this issue and introducing federal legislation that would expand the government's ability to offer restructured mortgages.
On March 27th, Senator Obama (D-IL) called for tighter regulations on the mortgage industry and took both Republican and Democrat politicians to task for fostering a financially manipulative market that favors "Wall Street over Main Street, but ends up hurting both," as detailed in the New York Times.
Um, do the words "Bear Stearns" come to mind?
Schooled by the Credit Crunch?
The SFT Newsletter has reported in the past on the expected effects of the credit crunch on student loans. New developments suggest that the problem remains unsolved.
According to a report in the Wall Street Journal, worries about student loan availability for the 2008-2009 school year are mounting. Apparently, the Department of Education has yet to announce plans for emergency financial aid sources for those students unable to get loans from traditional sources, prompting Congress to call for a "lender of last resort" plan from the DOE.
Traditionally, college acceptance letters are accompanied by referrals to one of 2,000 banks that provide federally guaranteed student loans. But turmoil in the credit market has left many investors reluctant to purchase student debt, and many are evidently shying away from even federally backed loans.
As a result, many universities are reportedly moving to federal direct programs, which allow students to borrow from the government directly through their schools, effectively removing private lenders from the mix. But WSJ reports that the elimination of private lenders could end up costing students more money, since private lender rebates will no longer be offered.
Unless the Department of Education takes action soon, many are expecting disruptions in the student loan market, particularly if more private lenders drop out of government lending programs before the start of the school year.
A Debtor World
Despite what the weather in the Midwest may indicate, it is April, meaning that "A Debtor World: Interdisciplinary Academic Symposium on Debt from the University of Illinois and the American Bankruptcy Institute" is just around the corner.
Taking place on May 2-3 at the University of Illinois in Champaign, Illinois, "A Debtor World" will examine the phenomenon of debt in great detail.
Harvard Law Professor Elizabeth Warren and "Maxed Out" Director James Scurlock are just two of the many speakers scheduled to appear at the conference.
If you haven't already done so, register for "A Debtor World" now before it's too late.
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Kevin's Corner
Practice Management Tip:
The Power of Blogging
"Most law firms maintain websites, but many don't know how to take full advantage of the opportunities those sites create for reaching out to prospective clients. One relatively easy and inexpensive way to effectively market yourself online is with a blog in your area of legal practice.
"From an administrative standpoint, blogs offer one tremendous advantage: they're easy to work with. In fact, if you don't have a firm website on which to host your blog, there are free services available that require virtually no set-up and will allow you to start posting immediately. If you do incorporate a blog into your firm site, it will allow quick, easy updating by anyone you designate.
"That ease of use allows you to post commentary on newsworthy legal events in your area as they occur, so that you reach your audience while they're interested. It also allows you to post articles, commentary, links to relevant information and other updates on a much more regular basis than most firms can update their websites.
"But what does all this mean to you in terms of potential clients?
"Blogging about bankruptcy law and the economy gives you the opportunity to show your expertise. It allows you to begin building a connection with prospective clients before you ever speak with them, by making it clear that you understand the problems they face, the difficulties of the economy and the circumstances that drive people to bankruptcy.
"In addition to building credibility and connection, blogs provide a practical advantage as well: people who have questions or legal needs relating to a topic you're posting about are likely to seek more information by leaving a comment or filling out your contact form. Monitoring those contacts may provide a whole new stream of prospects who have already "heard your voice" and determined that you might be just the resource they need."
- Kevin Chern
President, Start Fresh Today
Consumer Bankruptcy Filings' Update
U.S. consumer bankruptcy filings were up 15.2 percent nationwide in February as compared to the month before, according to data from the National Bankruptcy Research Center (NBKRC) as detailed by the American Bankruptcy Institute.
There were 76,120 consumer bankruptcy filings in February as compared to 66,050 consumer filings in January. While accounting for 36.4 percent of all consumer filings in February, Chapter 13 bankruptcy filings were slightly down from January.
In comparison to February 2007, consumer bankruptcy filings from this past February were up 37.3 percent.
The Numbers Game on Subprime Mortgages
On March 25th, Fitch Ratings updated an earlier report on projected foreclosure totals, and the estimations don't bode well for the future they're accurate!
According to the Fitch projections, 44 to 50 percent of 2006 subprime mortgages and 40 to 45 percent of 2007 subprime mortgages will end in foreclosure and sale.
The updated Fitch Ratings report also indicates that efforts by the HOPE NOW alliance to help distressed homeowners are not helping to mitigate foreclosure rates
Did You Know.
that the Federal Trade Commission (FTC) logged 2.4 percent more complaints of violations of the Fair Debt Collection Practices Act by third-party collectors last year as compared to 2006?
There were 70,951 such complaints last year as compared to 69,249 complaints of violations in 2006, as recently reported by CreditandCollectionsWorld.com.
The most common complaints included collectors trying to collect debts that people did not owe or debts that were actually larger than what consumers owed.
Geez, who would imagine debt collectors ever doing such a thing!
Read more about the issue of "Zombie Debt" in the following article:
SFT Final Four Predictions
National Semifinals (April 5th)
- UCLA 64, Memphis 59
- North Carolina 79, Kansas 78
Championship Game (April 7th)
- UCLA 69, North Carolina 64