Professional Fees and Other Direct Costs in Chapter 7 Business Liquidations

Here we provide a comprehensive look at direct costs associated with chapter 7 business bankruptcy liquidations by examining cases from five geographically dispersed judicial districts. This Article measures chapter 7 direct costs, which are essentially out-of-pocket administrative costs associated with chapter 7 proceedings. Examples of direct costs include attorneys\u27 fees, filing fees, and other professional fees. Part II describes the procedures we followed in gathering data. Part II also sets forth several assumptions we made when describing direct costs. Each time an assumption needed to be made, we took the assumption that produced the lowest bankruptcy costs. Accordingly, the data in this Article is a conservative estimate of chapter 7 costs. Part III describes the characteristics of the debtors and cases in our sample. Part IV discusses the actual cost measurements and quantifies the costs of chapter 7 business bankruptcy. Part V uses statistical analysis to identify determinants of chapter 7 costs. Part VI summarizes our major conclusions

Driven to Bankruptcy

Over the last ten years, 15.1 million people owning 16.4 million cars filed for bankruptcy. These cars provided access to work, education, medical care, childcare, food, and other life necessities. They were also major household investments, the most expensive asset most bankruptcy filers owned other than a house. Using original data from the Consumer Bankruptcy Project, we document what happens to car owners and their car loans when they enter bankruptcy. In brief, we find that people who file bankruptcy own automobiles at the same rate as the general population and that they overwhelmingly indicate they want to use bankruptcy as a tool to keep their automobiles. We further identify a subset of debtors, constituting about a third of bankruptcy filers, who come to bankruptcy owning automobiles and little else. These cases are the most likely to be filed by people driven to bankruptcy. We detail what our results show about how people use consumer bankruptcy and where the system appears to falter. We conclude with recommendations on how to remedy these systemic issues as well as what the future of the automobile marketplace, particularly subprime auto loans, means for people\u27s continued use of bankruptcy

Life in the Sweatbox

The time before a person files bankruptcy is sometimes called the financial “sweatbox.” Using original data from the Consumer Bankruptcy Project, we find that people are living longer in the sweatbox before filing bankruptcy than they have in the past. We also describe the depletion of wealth and well-being that defines people’s time in the sweatbox. For those people who struggle for more than two years before filing bankruptcy—the “long strugglers”—their time in the sweatbox is particularly damaging. During their years in the sweatbox, long strugglers deal with persistent collection calls, go without healthcare, food, and utilities, lose homes and other property, and yet remain ashamed of needing to file. For these people in particular, though time in the sweatbox undermines their ability to realize bankruptcy’s “fresh start,” they do not file until long after the costs outweigh the benefits. This Article’s findings challenge longstanding narratives about who files bankruptcy and why. These narratives underlie our laws, influence how judges rule in individual cases, and affect how attorneys interact with their clients

No Money Down Bankruptcy

This Article reports on a breakdown in access to justice in bankruptcy, a system from which one million Americans will seek help this year. A crucial decision for these consumers will be whether to file a chapter 7 or chapter 13 bankruptcy. Nearly every aspect of their bankruptcies — both the benefits and the burdens of debt relief — will be different in chapter 7 versus chapter 13. Almost all consumers will hire a bankruptcy attorney. Because they must pay their attorneys, many consumers will file chapter 13 to finance their access to the law, rather than because they prefer the law of chapter 13 over chapter 7. Attorneys charge about $1,200 to file a chapter 7 bankruptcy; their debt-laden clients must pay this amount upfront. Attorneys charge about$3,200 to file a chapter 13 bankruptcy, but clients can pay attorney fees over time as part of their cases. Chapter 7 and 13 bankruptcies also differ in the relief achieved. Almost all chapter 7 cases end with the debtor receiving a discharge of debts. In contrast, only around one-third of chapter 13 cases end in discharge. This Article exposes the increasingly prevalent phenomenon of debtors paying nothing in attorneys’ fees to file chapter 13. New data from the Consumer Bankruptcy Project, our original empirical national study, suggest that these “no money down” consumers are similar to those who use chapter 7. However, because they cannot afford to pay their attorneys up front, these “no money down” bankruptcy debtors suffer. They pay $2,000 more and have their cases dismissed at a rate 18 times higher than if they had filed chapter 7. The two most significant predictors of whether a consumer files a “no money down” bankruptcy are a person’s place of residence and a person’s race. We could not identify legitimate ways that these factors correlate with debtors’ needs for the substantive legal benefits of chapter 13. “No money down” bankruptcy can be a distortion in the delivery of legal help. We suggest reforms to how attorneys collect fees from consumer debtors that will reduce the potential conflict between clients’ interests and attorneys’ interests. The reforms will deliver access to justice and improve the functioning of the bankruptcy system

Life in the Sweatbox

The time before a person files bankruptcy is sometimes called the financial “sweatbox.” Using original data from the Consumer Bankruptcy Project, we find that people are living longer in the sweatbox before filing bankruptcy than they have in the past. We also describe the depletion of wealth and well-being that defines people’s time in the sweatbox. For those people who struggle for more than two years before filing bankruptcy—the “long strugglers”—their time in the sweatbox is particularly damaging. During their years in the sweatbox, long strugglers deal with persistent collection calls, go without healthcare, food, and utilities, lose homes and other property, and yet remain ashamed of needing to file. For these people in particular, though time in the sweatbox undermines their ability to realize bankruptcy’s “fresh start,” they do not file until long after the costs outweigh the benefits. This Article’s findings challenge longstanding narratives about who files bankruptcy and why. These narratives underlie our laws, influence how judges rule in individual cases, and affect how attorneys interact with their clients

Did Bankruptcy Reform Fail? An Empirical Study of Consumer Debtors

Just three years ago, Congress enacted controversial amendments to the Bankruptcy Code. The proponents claimed that the changes would drive the can pay debtors (of which there were supposedly many) from the bankruptcy courts with tough new income-based eligibility requirements. And indeed, after the enactment of the amendments, the number of people filing for bankruptcy plunged. In this Article - the initial report of the 2007 Consumer Bankruptcy Project - the authors analyze the first national, random sample of post-amendments bankruptcy filers. Contrary to the advocates\u27 claim that high-income filers would be driven from the system and, by implication, that those remaining would have more modest incomes, the data show no change in the income levels of bankruptcy filers after the amendments. These findings thus cast doubt on the suggestion that those purged from the bankruptcy courts - approximately 800,000 in 2007 alone based on trend extrapolation - were high-income deadbeats; they instead appear to have been ordinary American families in serious financial distress. The data also show that debtors filing for bankruptcy in 2007 have even greater debt loads than their counterparts from 2001, a development that seems to track a national trend of increasing consumer debt. The findings thus align with at least two predictions of some legal scholars. The first is that the bankruptcy reform bill was not aimed at high-income abusers but was instead a general assault on all debtors, regardless of their financial circumstances. The second is that debtors are waiting longer - and incurring more debt - before ultimately seeking bankruptcy relief, consistent with the so-called sweat box theory of credit card lending

Interpreting Data: A Reply to Professor Pardo

Professor Pardo has published a pointed critique to our Report, raising three major complaints. First, he claims that we make two predicating assumptions in our study that are flawed. Second, he contends that we misunderstand the means test and fail to appreciate with sufficient nuance its operative effect. Third, he maintains that our Report suffers from methodological problems. We can address the two impugned assumptions quickly. The first one - that BAPCPA\u27s means test is the sole causal agent driving 800,000 putative filers from the bankruptcy courts - is not one we make. The second - regarding the income profiles of the missing 800,000 bankruptcy filers - is actually somewhat consistent with predictions Professor Pardo himself makes elsewhere in his critique. The thrust of Professor Pardo\u27s commentary, however, is his second point - that we simply don\u27t get the means test - and so we begin our response by addressing this contention. We then discuss our methodology, which we believe is quite robust, before finally elaborating on why we are sanguine in dismissing his complaints with the two assumptions he claims we make

The hedonics of debt

Psychologists and economists often discuss the “pain” of paying for our purchases. Four experiments examine how people evaluate prospective debt payments, analyzing how different features of a loan (down payment, final payment, duration, monthly payments) affect willingness to accept the loan. Akin to previous findings on physical pain, participants exhibited duration neglect and overweighted final moments. However, participants also focused heavily on the monthly or average payment (unlike in retrospective studies of physical pain where only peak-end moments seem to count). In Experiment 2, participants’ willingness to accept the loan was not significantly diminished by making it more expensive through keeping the same monthly payment but extending the length of the loan by 40% (evincing duration neglect). Further, in Experiments 3 and 4, we show that participants increased their willingness to buy if loans were made longer and more expensive by adding smaller, less “painful” payments to the end