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NY Times on Katrina and Bankruptcy Reform:

The NY Times has another poorly-reasoned and sloppy editorial this morning criticizing the bankruptcy reform legislation, this time using Hurricane Katrina as the hook. The basic thrust is that in some unspecified way, the events of Hurricane Katrina should cause Congress to rethink the bankruptcy reform legislation.

And I do mean "unspecified"--the Editorial does not provide a single scintilla of evidence that the bankruptcy reform legislation would prevent any person affected by the hurricane from getting bankruptcy relief. None. The legislation simply requires high-income filers who can repay some or all of their debts to do so as a condition for filing bankruptcy. If a person has lost his job and income because of the hurricane, then the legislation permits that person to file bankruptcy just like under the current rules. The means-testing provisions of the legislation specifically allow for "special circumstances" that mean that those provisions of the legislation should not apply to a given bankruptcy filer--clearly the destruction of a person's house and job easily fit within those provisions of the legislation. Every relevant provision of which I am aware affords bankruptcy judges discretion to take into account circumstances that might arise in cases occasioned by Katrina. Although some potential problems have been identified (such as the question of where a person can file bankruptcy) these problems are not the result of the reform legislation at all. The NY Times makes no mention of any of this, just wrapping its charges in hoary and misleading charges of special interest politics and vague accusations.

Omitted from the Times's snarky editorial is the fact that Congressman Sensenbrenner, which the editorial singles out for special criticism, explained specifically why he thinks Katrina is a red herring and why the reform legislation is perfectly capable of dealing with the Katrina situation:

On the House side, Sensenbrenner has disputed the need for changes. He says lawmakers who opposed the new law and lost that fight "ought to get over it."

Backers of the bankruptcy law say it will cut down on abuse of the system by people who can afford to repay debts.

The American Bankers Association, a major backer of the law, opposes changing it for disaster victims. "We feel like the bill is flexible enough to take care of Katrina survivors," the group's spokeswoman, Laura Fisher, said Friday.

Sensenbrenner makes the same argument. He says the poorest bankruptcy filers, people who fall below the median income in their state, can wipe out their debts the same way they did before.

"For someone who is genuinely poor and down and out and doesn't have the ability to repay their debts, there is no change at all," Sensenbrenner said.

For people above the median income, the new law makes it harder to avoid debt repayment under bankruptcy. But Sensenbrenner and the bankers' association say a "special circumstance" clause in the law allows disaster victims to escape the means test, still file for bankruptcy and achieve a clean slate on their debts.

The Times misleadingly quotes Sensenbrenner saying that those who opposed the legislation should just "get over it" (the Times protests, "Sorry, Jim. We can't get over it."), but misleadingly fails to note that Sensenbrenner had quite a reasonable explanation for why the Katrina issue was a red-herring. And unlike the Times, he provides specifics to support his position.

Rather than supplying specifics, the Times seems to believe that it is enough to simply state that "most" bankruptcy filers file because of unanticipated financial hardship. Even if true, that hardly proves the point that we should continue to turn a blind eye to those who are cheating the system. "Most" people pay their taxes--does that mean we should abolish the IRS? "Most" people don't commit insurance or Medicare fraud--does that mean we shouldn't prosecute those crimes? Of course most of those who file bankruptcy are the unfortunate victims of financial mishap, which is precisely why it is crucial to preserve the fresh start for those who need it, which the reform legislation does. But that is no reason to turn a blind eye toward fraud and abuse by those who are cheating the system. Even if only 10% of bankruptcy filers are engaged in fraud (the FBI's estimate) then that means about 150,000 bankruptcy filers are committing fraud every year. I really wish that I could share the NY Times's uninformed optimism that the "honor system" for dealing with bankruptcy fraud and abuse could work. If the honor system actually worked, then we could get rid of the IRS, insurance fraud laws, etc. But experience has shown otherwise.

Nor does the Times explain how exactly the victims of Hurricane Katrina would be helped by having to pay more for goods, services, and credit, just to preserve the loopholes for opportunism and fraud under the current system. How exactly does it harm victims of Hurricane Katrina that the legislation increases the penalty for filing bankruptcy using a false or stolen Social Security Number? Or for permitting recidivists to file only once every eight years rather than every six years? Or for divorced women who no longer need to fear being sandbagged and thereby having property settlements discharged in bankruptcy? From making it more difficult for O.J. Simpson to stash money in a Florida mansion to evade his creditors? (For more, see my discussion here and here).

The NY Times can spin yarns all day about the "special interests" behind the bill (conveniently ignoring the special interests that oppose the legislation, of course) or attack Congressman Sensenbrenner's investment portfolio. None of this changes the fact that the Times has not provided a single shred of evidence to support the charge that Hurrican Katrina has anything to do with the bankruptcy reform legislation. The fact is that prudent, balanced bankruptcy laws should preserve the fresh start for those who need relief while cracking down on fraud and abuse by those who want to stick the rest of us with the bill. The NY Times has provided no evidence that Hurricane Katrina has upset this basic balance that is struck by the reform legislation.

Half-truths, ad hominem attacks, and unsupported accusations--if this is the best that the Times can come up with then maybe they really do need to just get over it.

janon (mail):
Prof. Zywicki, can you specifically respond to the following issues:

1. The means test is done through a "look-back" at the previous six months' income. If I had a high income pre-bankruptcy but now zero, how can the court take that into account? Don't I have to wait until my previous six months' income is below the median?

2. Explain why judges can waive documentation requirements, given the explicit waiver of those requirements only for certain disabled veterans.
10.3.2005 1:44pm
Justin Kee (mail):
Let's have some fun today.

"Half-truths, ad hominem attacks, and unsupported accusations" are:

A) Currently being directed at the President, Harriet Miers and Karl Rove by members of the conservative blogosphere.
B) The favorite excuse of Tom DeLay for the ethical inquiries against him.
C) The leading characteristic of the majority of reader posts on Volokh.com.
D) All of the above.

I'll think choose D for my final answer.
10.3.2005 2:12pm
Paul Gowder (mail) (www):
Do you really think that 10% of filers engaging in fraud justifies punitive measures against all filers, particularly the urban employed with few assets (i.e. the young) and the working poor (i.e. the young)? Think of the poor fool who just got out of college with massive credit card debt and now works in NYC for just over the statewide median income. A.k.a. the "sucker."

As I've argued again, and again, and again, the bankruptcy code had ample means to prevent "fraud." Trustees could bring motions and judges could grant them to convert or dismiss cases on grounds of fraud. If fraud was still going on nonetheless, it just means that those provisions were underenforced. There's an easy way to solve that: make the provisions enforced more. Increase funding to the U.S. Trustee's office and give them a mandate to catch fraud.

Instead, the Republicans choose to screw the 90% (or much more) of filers who didn't engage in any "fraud" and give a nice fat paycheck to the credit card companies.
10.3.2005 3:23pm
aswiren:
I'm not as doom-and-gloom on the new law as some, and I think the means test won't be as bad as most people do (all the statistics I've seen say it should only affect 15% of Chapter 7 filers), but I think the NYT's point about special interests is a good one: the law was drafted almost entirely by lobbyists (which laws aren't?), and is very poorly drafted. The law is filled with internal inconsistencies and contradictions, and all kinds of new filing deadlines. The worst (or best, depending on your perspective) part are the provisions calling for "automatic dismissal," and other similar penalties, for missing a deadline. It doesn't direct the judge to enter an order, or the clerk to close the file, etc, it simply deems a case dismissed -- which raises the possibility of getting to the end of a Chapter 13 plan, and finding out that your case was "automatically dismissed" 4 years ago.

Another example is the attempt to cap fradulent conversions of nonexempt assets into exempt homestead (aimed squarely at Havoco in my state of Florida), which was recently held to affect only MN and TX (McNabb, in AZ). It seems the section was so poorly drafted that the court couldn't find any way around that conclusion, even though its pretty ridiculous.

While the NYT's criticism regarding Hurricane Katrina may be out of line, I think its safe to say that BAPCA is a bad law.
10.3.2005 4:31pm
aswiren:
on Paul Gowder's comment:

A US Trustee I recently heard speak at a conference estimated the fraud rate at 1% or less.
10.3.2005 4:32pm
Dilan Esper (mail) (www):
Just to pile on where the other commenters have already gone, I think the problems with Zywicki's argument are manifold.

First, he does not discuss at all the most important provisions in the bankruptcy bill to Katrina victims-- the provisions requiring bankruptcy filers to provide much more documentation than was required in the past. The fact is, you have a whole group of people who have almost certainly lost their financial records in the storm. Why is it inappropriate to grant them a blanket exemption, especially since it isn't clear that the new statute provides for any discretion for judges to grant such an exemption?

Second, even if Zywicki is right that judges have the power to waive certain requirements of the new bill, that also means they have the power not to waive them. Why should a judge be given ANY discretion to deny bankruptcy relief to a Katrina victim? If the whole point of the "special circumstances" provision is to handle situations like this, why is it so wrong for Congress to come in and simply legislate that Katrina IS such a special circumstance? (Indeed, if some judges grant such waivers and others don't, you could have refugees in different regions of the country being treated unequally because of the ideologies of different bankruptcy judges, and you could even have forum shopping.)

Third, Zywicki's argument is inconsistent-- if denying bankruptcy relief is so important to control costs, then arguing that the "special circumstances" provision will catch all the Katrina victims means both that costs won't be controlled anyway (and indeed, there's no scenario other than the wholesale denial of discharges to legitimate claimants that will avoid imposing significant costs on the credit industry) and that legislation granting blanket relief for Katrina victims will do no harm whatsoever because it will simply grant relief to claimants who would receive it anyway.

Fourth, I would argue more generally that in humanitarian emergencies, while preventing fraud is not unimportant, it is certainly less important than it is normally. Zywicki's argument is reminiscent of the people who thought that the biggest issue in the aftermath of Katrina was preventing the looting of stores. When you had people baking on overpasses and stuck in the Superdome, looting wasn't priority number 1. Similarly, I'm less worried that some person will get a discharge that he or she should not have gotten than I am that numerous Katrina victims will have a harder time getting a discharge than they should, or may not get one at all.
10.3.2005 5:34pm
NickM (mail) (www):
Katrina-related destruction of records is a special circumstance that could easily be taken care of via new Congressional legislation or via a Fed. R. bankr. P. created for the occasion. That is not an argument for undoing the entire law.

As to the prevalence of fraud, I expect it's probably more than 10% - and in the Chapter 7 cases not filed by attorneys, much more. It is exceedingly easy for a filer to hide assets - no one checks the accuracy of a list of personal property. Even items like cars are easily hidden if they are not registered for operation.

In my experience dealing with debtors who went to non-attorney petition preparers (often unlicensed "paralegals"), at least a third admitted to having been advised to not list something which would be required for the schedules or statement of affairs to be truthful. This isn't just assets. One debtor, under questioning, admitted that the "paralegal" who charged her $150 to prepare the petition told her not to list her income tax debts, because those were not dischargeable!

Nick
10.3.2005 6:40pm
EddieP:
My guess is that when all is said and done, the MBNA's will do better with this than the little guys. Big guys can stick up for themselves, the little guys will most likely be beyond repair.

This bill will be used to whack Joe sixpack not Percy Dovetonsils.
10.3.2005 8:38pm
Paul Gowder (mail) (www):
NickM: there's a very easy solution to the "paralegal" problem, and one that I've been pushing for years. It's called punishment. Of the "paralegals." For unauthorized practice of law. Severe punishment.

That's what I don't understand about bankruptcy "reform" people. Why do they want to punish the innocent suckers who get mired in debt, go to "paralegals," etc., but not punish the paralegals and the predatory lenders? Why punish stupid but not evil?
10.4.2005 10:46am
PD Shaw (mail):
Industry anecdote: I was recently contacted by a Lexis rep., trying to sell due-diligence software to investigate our debtor clients. I told her that our firm has never done a lot of individual bankruptcy work and the partners had decided not to accept any more once the reforms are effective. The rep. told me that 90% of her contacts had similar stories and many were taking the opportunity to discontinue other bankruptcy products.

Conservatives are generally good at recognizing the indirect costs of regulations, but appear oblivious to those same concerns for the bankruptcy industry. More procedural requirements = higher costs. More liability = higher costs. Fewer bankruptcy attorneys = higher costs. More subjective tests ("special circumstances") = higher costs. These higher costs ultimately get transferred to the creditors one way or another.
10.4.2005 1:26pm
aswiren:
And: higher costs = fewer bankruptcies. I don't think this connection was lost on the bill or its sponsors.
10.4.2005 8:45pm
huh (mail):
I just read your essay on the Volokh Conspiracy Website and I have come to specific conclusions.

Conclusion One: You are an idiot. The fact that you hold as many degrees as you do speaks to the power of hard work and the failure of our educational system to require excellence. You have a degree in law? Yet you use as your sources of support the very people who benefit from a piece of legislation to prove its propriety. "Well sin and moral degradation are great! Just ask Satan." Furthermore you further sight meaningless statistics about fraud and abuse by a minority to support punishment of the majority? All of the examples you listed of other crimes are not punished by changing the law, they are punished by enforcing the law. You don't raise taxes on everyone because 80% cheat. You punish the 80% through law enforcement. Who did you blow to get your law degree?

Conclusion Two: You are an evil man. Through your support of this worthless, fascistic bankruptcy bill, you have truly earned your spot in the lowest levels of hell. Our forefathers placed requirements for bankruptcy laws within our constitution to protect the poor against the wealthy. You and your ilk have turned this on its head. The reason we need easy access to Bankruptcy is that the way capitalism works is for people to take chances. You try, you fail, you try again. Businesses like those represented by the American Banker's Association measure their risk when extending credit and adjust their rates to cover potential bad credit losses. This is why, even now, prior to the effectiveness of this piece of garbage legislation, the ABA members are making more money then ever. Further, these scumbags use deceptive advertising, miniscule print, and poor judgment in over extending credit and after they do, they jack rates to usurious levels if a creditor misses even one payment with another creditor. This is evil and your support of it is as well. This bill is just one more step on the road to turning America into a third rate, third world country. Along with prayer in schools, "intelligent design" "Judge" Miers, cutting housing assistance, Davis Bacon, food stamps, Wal-Mart etc. This country hasn't got long before it ends up licking China's boots. But maybe that's just what you want?

As far as judicial discretion is concerned, what discretion is required when a filer has had their home destroyed and their livelihood taken away by an act of God? What if the judge says no? Are you insane? Six months of income statements to get the vultures off their backs? And now you want to make sure that victims of natural disasters can't even a waiver on the insane financial records requirements? Are you trying to get an extra prong on your tail when you finally get "home" to Lucifer? How does his manhood taste Professor?

SHAME ON YOU. SHAME, SHAME, SHAME
10.5.2005 12:29pm
huh (mail):
I just read your essay on the Volokh Conspiracy Website and I have come to specific conclusions.

Conclusion One: You are an idiot. The fact that you hold as many degrees as you do speaks to the power of hard work and the failure of our educational system to require excellence. You have a degree in law? Yet you use as your sources of support the very people who benefit from a piece of legislation to prove its propriety. "Well sin and moral degradation are great! Just ask Satan." Furthermore you further sight meaningless statistics about fraud and abuse by a minority to support punishment of the majority? All of the examples you listed of other crimes are not punished by changing the law, they are punished by enforcing the law. You don't raise taxes on everyone because 80% cheat. You punish the 80% through law enforcement. Who did you blow to get your law degree?

Conclusion Two: You are an evil man. Through your support of this worthless, fascistic bankruptcy bill, you have truly earned your spot in the lowest levels of hell. Our forefathers placed requirements for bankruptcy laws within our constitution to protect the poor against the wealthy. You and your ilk have turned this on its head. The reason we need easy access to Bankruptcy is that the way capitalism works is for people to take chances. You try, you fail, you try again. Businesses like those represented by the American Banker's Association measure their risk when extending credit and adjust their rates to cover potential bad credit losses. This is why, even now, prior to the effectiveness of this piece of garbage legislation, the ABA members are making more money then ever. Further, these scumbags use deceptive advertising, miniscule print, and poor judgment in over extending credit and after they do, they jack rates to usurious levels if a creditor misses even one payment with another creditor. This is evil and your support of it is as well. This bill is just one more step on the road to turning America into a third rate, third world country. Along with prayer in schools, "intelligent design" "Judge" Miers, cutting housing assistance, Davis Bacon, food stamps, Wal-Mart etc. This country hasn't got long before it ends up licking China's boots. But maybe that's just what you want?

As far as judicial discretion is concerned, what discretion is required when a filer has had their home destroyed and their livelihood taken away by an act of God? What if the judge says no? Are you insane? Six months of income statements to get the vultures off their backs? And now you want to make sure that victims of natural disasters can't even a waiver on the insane financial records requirements? Are you trying to get an extra prong on your tail when you finally get "home" to Lucifer? How does his manhood taste Professor?

SHAME ON YOU. SHAME, SHAME, SHAME
10.5.2005 12:29pm
PD Shaw (mail):
And fewer bankruptcies doesn't necessarily mean more money in the hands of creditors. It can also mean more money in the hands of collection attorneys as individual creditors compete against each other to squeeze money from the debtor.
10.5.2005 6:58pm
yebby61 (mail):
The new bankruptcy reform law, limits the protections of homeowners who have refinanced their homes, and really broadens the definition of "nondischarable" debts, to include monies owed to "governmental units".

This could conceivably mean that Katrina and now Rita surviviors who receive emergency loans from FEMA might be liable to pay that back, even if they file for bankruptcy on all their other debts.
10.6.2005 12:35pm
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