Professor Elizabeth Warren challenges my criticism of the ill-informed New York Times Editorial the other day. Unfortunately, it appears that she falls into much of the same confusion as the New York Times itself did.
First, Warren takes issue with my insistence that the "special circumstances" exception in the legislation will protect the victims of Hurricane Katrina from the means-testing provision of the bill. This seems to be the Times's concern, although the Editorial is so vague, confused, and lacking in specificity it is not clear what precisely are the provisions to which the Times is objecting. She writes:
[Continue Reading Warren Defends Times Editorial on Bankruptcy Reform and Hurricane Katrina under hidden text]:
But Professor Z reserves special wrath for the NYT's failure to give full credence to Congressman Sensenbrenner's vague assurance that a "special circumstances" provision in the means test will protect all the Katrina victims. Try reading the provision; I sincerely hope the bankruptcy judges find a way to stretch the language of the new amendments to provide some relief for hurricane victims, but I don't see how they will manage. Take the example of people who don't have the documentation required by the new amendments.
Well, what I actually criticize the Times for on this count is that it criticizes Sensenbrenner for telling critics of the legislaiton to "get over it" while failing to provide the context where Sensenbrenner explains that the reason for that comment is that the reform legislation is perfectly capable of dealing with the hurricane issues by providing sufficient discretion for bankruptcy judges at all stages of the process. Thus, the hurricane issue about which the Times is ostensibly concerned turns out to be a red-herring. The "special circumstances" provision that I (and Sensenbrenner) referred to was in addressing the application of the means-test, which is what the Times seems to have in mind, not paperwork requirements, to which the "special circumstances" does not apply and does not refer (there are other provisions that cover those issues). Professor Warren doesn't seem to defending the Times here, as she does not seem to disagree that with respect to the substance of the means-test, as she quickly moves onto the supposed insurmountable paperwork burdens imposed by the legislation.
The "special circumstances" exception, in fact, is adequately suited to deal with the person who has suffered an extraordinary change in income or expenses as a result of a hurricane. As stated in the means-testing provisions of the legislation (section 707(b)(2)(B)): "In any proceeding brought under this subsection, the presumption of abuse may only be rebutted by demonstrating special circumstances, such as a serious medical condition or a call or order to active duty in the Armed Forces, to the extent such special circumstances that justify additional expenses or adjustments of current monthly income for which there is no reasonable alternative." Destruction of a home and business by a hurricane certainly qualifies as a "special circumstance," as the Department of Justice made clear in its letter to Congressman Sensenbrenner yesterday. There, DOJ states that the General Counsel of the Executive Office of the United States Trustee has issued guidance, that for purposes of applying the means test the United States Trustee "will consider income loss, expense increase, and other adverse impacts of a natural disaster to constitute 'special circumstances' in determining whether to file an enforcement motion on grounds of presumed abuse." So the Times's central allegation seems to lack foundation.
Professor Warren, unlike the Times, focuses on the new paperwork requirements imposed by the new legislation, generally requiring the debtor to file income taxes, paystubs, and other verification documentation. Now it seems unlikely that new paperwork obligations was what animated the Times to rail against this "draconian new law [that] is hard to swallow" and that "raises the question of whether anyone at all should be punished by this unfortunate piece of legislation." Be that as it may, however, is it possible that the law inadvertently requires bankruptcy filers to produce documentation even though their documentation has been destroyed by flood or fire?
Of course not. As Section 521(a)(1)(B) provides, "The debtor shall file" the required paperwork, "unless the court orders otherwise." When might the "court order[ ] otherwise"? Well--for a situation such as a hurricane. As sec. 521(e)(2)(B)) states, the Court can waived the filing requirements if "the debtor demostrates that the failure to so comply is due to circumstances beyond the control of the debtor," a standard that seems to be plainly met in the situation of a hurricane. The DOJ clarifies what is obviously contemplated by this discretion, "Program attorneys wil not file motions to compel or seek other relief against debtors who are unable to produce documents requied under 11 U.S.C. section 521(a)(1)(B), but who are otherwise eligible for relief. Such documents include payment advices and statements of income."
Warren also cites the examples of "hundreds of other blows inflicted by the bankruptcy amendments such as the increased rights of landlords to toss out tenants or the new risks facing someone who has drawn down a cash advance on a credit card." As Professor Warren surely knows but doesn't state, Section 362(b)(22), by its own terms, exempts from the automatic stay, "the continuation of any eviction, unlawful detainer action, or similar proceeding by a lessor against a debtor involving residential property in which the debtor resides as a tenant under a lease or rental agreement and with respect to which the lessor has obtained before the date of the filing of the bankruptcy petition, a judgment for possession of such property against the debtor." Thus, the "increased rights of landlords to toss out tenants" is nothing more than new provisions that enable landlords to evict tenants who have already exhausted all of their nonbankruptcy rights and remedies under state landlord-tenant law and simply use bankruptcy to stave off a rightful eviction (leaving aside her central assumption that a landlord, also impacted by a hurricane, should be required to lease rent-free to its tenants for an indefinite period).
And with respect to the supposed "increased risks" facing someone who takes a cash advance on a credit card, current law already creates a rebuttable presumption that those advances are nondischargeable as fraudulently-incurred, the reform legislation simply increases the relevant time period from 60 to 70 days and reduces the aggregate amount from $1225 to $750, but leaves the substantive standard unchanged. The presumption itself and the standards for rebutting it are identical under both current law and the reform legislation. If Professor Warren thinks this standard too strict and places undue risk on the debtor of finding a debt to be nondischargeable because fraudulently incurred, her quarrel is properly with the law as it always has been, not the reform legislation. I haven't surveyed the caselaw on this, but my guess is that a Court would find the presumption of fraud to be rebutted in the case of an individual who took a cash advance on a credit card to deal with the disaster of a hurricane (thereby permitting discharge), but with respect to this substantive standard, it would be no more or less dischargeable as a result of the bankruptcy reform legislation. To suggest that there is some fundamental change in the law is simply misleading.
Professor Warren does not charge, but I have read elsewhere, the claim that individuals in the hurricane zone will be unable to file bankruptcy because they will be unable to comply with the requirements of consumer credit counseling before filing. Under section 109(h)(2), however, the United States Trustee has the discretion to not require prepetition credit counseling if it is determined that the approved nonprofit budget and credit counseling agencies for the district "are not reasonably able to provide adequate services". The DOJ has announced that the United States Trustee for Region 5 has exercised that explict authority and has excepted from the credit counseling requirements the Eastern, Middle, and Western Districts of Louisiana; and the Southern District of Mississippi.
Finally, failing to identify any specific provisions of the legislation that would apply here, Professor Warren falls back on the tired and desperate argument that the bankruptcy bill is bad simply because it was supported by the consumer credit industry and thus somehow it must be bad for consumers generally. Left explained, of course, is how honest and innocent consumers would be benefited by preserving existing loopholes for bankruptcy fraud and abuse. Nonetheless, Professor Warren simply seems convinced that only those who disagree with her about the merits of the legislation are special interests, and that those that agree with her are as pure as the driven snow. In fact, there were special interests on both sides of the legislation, creditors in favor and bankruptcy lawyers and professionals opposed. Professor Warren, who has received numerous research grants through the years from the various associations of bankruptcy lawyers and judges such as the National Conference of Bankruptcy Judges that have opposed the legislation, simply doesn't consider bankruptcy professionals to be a special interest, notwithstanding the substantial financial interest they have in preserving a higher rate of bankruptcy filings. Indeed, she apparently would have preferred that bankruptcy lawyers write the current legislation, as they have all bankruptcy legislation in the past and who finally devised the system the very system that now needs to be fixed (see my discussion of the history of the political economy of bankruptcy reform here here).
To remind ourselves yet again--the bill passed Congress with a bipartisan majority of over 70% support, including every Republican, roughly 40% of Democrats, and even one-quarter of the Congressional Black Caucus voting in favor (the latter primarily because they recognized that a runaway consumer bankruptcy system harms small businesses and raises credit costs disproportionately for higher-risk borrowers who actually pay their bills and don't cheat the system). The vote is available here. This level of support remained constant for about eight years, during which every possible objection was thrown at the bill, only to have it tripped up on extraneous issues such as abortion that had nothing to do with the central merits of the bill.
I have argued that the effect of special interests on both sides (creditors versus lawyers) largely canceled one another out, leaving the large majorities to be best explained by ideology and sincere voting. Of course consumer creditors are an influential lobbying force on Capitol Hill, but it is equally obvious that lawyers are also influential, especially with the Judiciary Committees in both Houses. Unsurprisingly, for instance, Democrats on the Senate Judiciary Committee who have received a large amount of campaign contributions from lawyers generally opposed the legislation. In the end, only the far left Kennedy-Boxer wing of the Democratic Party opposed the legislation in Congress and did so on ideological grounds--an ideological position that was rejected by overwhelming majorities in Congress. Whatever impact one sees of special interests on politics, as an analytical matter all special interests must be considered consistently--you can't just arbitrarily categorize a group as a special interest only if you disagree with its opinions.
The only empirical study of special interest influence that I have seen is a study by Nunez and Rosenthal of the 2001 vote in the House, concluded that about 15 out of the 306 votes in favor of the bill could be reasonably attributed to special-interest politics, or about five percent out of the 74% support in favor of the legislation. Nunez and Rosenthal conclude that ideology, not interest-group politics, provide the primary explanation for the support for the legislation. Nunez and Rosenthal did not test the influence of lawyers and other interest groups on the other side, but we know it is not trivial.
I must confess that it is getting a bit old simply correcting misstatements about what this legislation does. If you don't like the legislation, then simply say what you don't like about it. But let's talk about the actual legislation itself, rather than making up misleading horror stories or simply selectively criticizing special interest influence. Different people can have different opinions about the balance that Congress struck or should strike between preserving the fresh start and cracking down on fraud and abuse. There is no science to drawing these lines as to such questions of whether a debtor should be allowed to file bankruptcy every 6 versus 8 years. Drawing these lines is a matter of our individual assessments of morality and sound economic policy. Professor Karen Gross, for instance, has argued that there should be no requirement for high-income debtors to repay their debts even if they can, and others have argued that there should be no limits on the frequency of serial filings. Tom Blumer at Bizzyblog has similarly raised some trenchant critiques of the details and drafting of the legislation, but he has critiqued the legislation as it actually exists. Those are perfectly honest and reasonable positions, and ones with which I disagree and with which an overwhelming majority of Congress disagreed.
But it simply seems more fruitful to me to talk about what the legislation actually does than to try to mislead the public about the basic facts. Congress understood perfectly well the balance that was being struck, and on an up-or-down vote over 70% of Congress supported it (consistent with other votes over the previous eight years). I think it was the correct decision (obviously) and I'm willing to defend the actual provisions of the legislation as they exist and not simply change them to suit my argument. It would be helpful if critics would similarly stick to the actual terms of the legislation as well--or, to coin a phrase, just "get over it".
Update:I have corrected a small editorial comment in the original post in light of the following email received from a CPA:
As to your note, I thought I’d let you know that they most likely DOJ mean payment “advice.” The “advice” is the data that appears on a payroll stub. Presumably because it advises people of the gross pay, amounts withheld, and year-to-date numbers. The information on an employee’s final advice for the year is often used as a substitute for an employees W-2s to substantiate their income when the W-2 has been misplaced. However, in situations like this, I presume, they are saying that they would not require the payroll advice because it’s probably no more available than any other records people normally have to substantiate their income.Thanks for the correction.