What’s in Your Wallet Part II: Let’s Shop for Credit Cards
I have been enjoying talking to my UNM colleagues about Katie’s post on what’s in our wallets. There are different credit cards for every demographic imaginable. For example, there are cards with rights to all airport clubs and even the right to a personal shopper, for the truly rich and famous. There is plenty of free pizza to be had with the cards touted to college students.
While I fancy the Costco Amex, my colleague Peter Winograd suggests the US Bank VISA Travel Card (20,000 points qualifies for a $400 ticket on any airline, plus a 10,000-point bonus for first use plus double points for certain categories of purchases); the Compass Bank VISA (5% return on purchases at drugstores, supermarkets, gas stations, plus 1% on everything else); the CitiDividend MasterCard (5% on certain categories of purchases, with the categories changing every three months; 1% on everything else)…
I’d love to hear more about some of the other gems out there so, like Bob (I mean George Clooney), I’d relish some reader participation, particularly thoughts on which cards they love. You can also shop here if you currently have no favorite.
And, I have a question. When should a person actually pay an annual fee on a credit card? I usually (call that always) opt against annual fees, but I am sure there are times when it pays to pay them. Let’s hear it.
Debt Causes Bankruptcy (But Sometimes in Counter-Intuitive Ways)
I like NPR’s Marketplace, but stories like this drive me nuts: “Why bankruptcy claims aren’t as high as one would think.” The story repeats a premise I often hear in media calls that I receive. The conversation usually starts something like this: “Foreclosures are up, unemployment is high, the economy is a wreck: why have bankruptcies stopped climbing?”
Wrong question. But fair enough. I get called because I am supposed to know something about bankruptcy filing rates, and my caller often has just picked up the assignment for the day. If that is the wrong question, what should we be taking away from trends in bankruptcy filing rates?
Bankruptcy is a legal act with legal consequences. Bankruptcy filings are not a bellwether indicator of the economy’s health. Foreclosures, unemployment, and general economic conditions certainly play a role in determining the bankruptcy filing rate, but other factors are more important. At best, the bankruptcy filing rate is a weak and trailing economic indicator.
In trying to understand the bankruptcy filing rate, it is better to focus on the legal consequences and legal incentives for people who file bankruptcy. Specific legal rules mentioned in the NPR story–procedural requirements and rules on home mortgages–are also undoubtedly playing a part, but these rules are too specific to be playing a major role. The explanations are all trees and no forest.
People file bankruptcy to discharge debt (at least in the United States). No debt, no bankruptcy. In the long run, the overall bankruptcy filing rate will rise and fall with the amount of consumer debt. As people accumulate more debt, bankruptcy demand will grow. That is why we see countries often adopting American-style consumer bankruptcy laws featuring debt forgiveness as consumer debt in that country increases. Without lots of consumer debt, talking about bankruptcy filings rates is like talking about snow accumulations in Honolulu.
The long-term growth in U.S. consumer bankruptcies closely tracks the long-term growth in U.S. consumer debt. When the financial crisis hit, consumer credit dried up, and outstanding consumer debt experienced unprecedented declines. There are fewer reasons to file bankruptcy today because there was less borrowing two to three years ago.
Consumer debt also has a profound but perhaps counter-intuitive short-term effect on consumer bankruptcy rates. In the short-run, a decline in consumer credit will lead to a bump in consumer bankruptcy filings. As people run out of options–as they become less able to put this month’s grocery or utility bills on a credit card–bankruptcy becomes a more attractive option. People can and will continue to borrow to stave off the day of reckoning. If a lender is willing to extend credit, further borrowing is a rational decision. After all, the consumer can become “none more broke” by borrowing further but might see things turn around tomorrow if they can get by just one more day on a credit card. Students of option pricing should quickly grasp the point.
The numbers bear out these effects. The graph to the right shows a close relationship between total consumer debt and bankruptcy filings. As consumer debt goes down in a particular month, bankruptcy filings tend to rise. Clicking on the graph should bring up a larger image in a pop-up box, and at the bottom of the post is some information about how the graph was constructed. The correlation is not perfect, but my claim is not that the correlation is perfect. A clear, negative relationship does exist. The takeaway message is that focusing on current foreclosure rates and unemployment to explain bankruptcy filing rates misses more important features of the story.
Right now, both the long-term and short-term effects of consumer credit are working in the same direction to tamp down the bankruptcy filing rate. There are lower levels of consumer debt because of decreased borrowing two or three years ago and hence less overall reasons for people to file bankruptcy. Also, with a reported easing of the consumer credit market, consumer who are at the brink have a slightly easier time borrowing to put off a bankruptcy filing. Given these dynamics, it is not surprising that bankruptcy filings are leveling off or declining and that a mathematical model predicts a decline in the bankruptcy filing rate for 2011.
The macrodata will fail to explain any individual case. A foreclosure, a job loss, a medical problem, and many other problems will be the primary impetus for many consumers will find themselves in bankruptcy court. These reasons explain why someone ends up filing bankruptcy, but they do not provide much help in explaining when they end up in bankruptcy court. Looking at trends in bankruptcy filing rates is all about the “when” question, and here macrodata are very helpful. The ups and downs of consumer debt levels tell us much–not everything, but much–about these trends.
Using data from Epiq Systems on bankruptcy filings and from the Fed for consumer debt, the graph compares monthly changes in the daily bankruptcy filing rate to monthly changes in the total amount of consumer debt outstanding. The graph begins in 2008 because of the anomalous effects the 2007 financial crisis had on outstanding consumer debt. Using 2007 data does not qualitatively change the results. The same phenomenon also can be observed historically, before the 2005 changes to the bankruptcy law. Bankruptcy filings are graphed against the left axis, and total consumer debt is graphed against the right axis. Both axes use different scales to make for easier comparisons. Also, the right axis for consumer credit has been inverted.
Debtor’s Homestead Exemption does not Encompass Post-Petition Appreciation in Property Value.
In Chappell v. Klein No. 07-35704 (9th Cir. Sept, 14, 2010) the court found that value attributable to appreciation in the debtor’s residence is property of the estate even though the debtor’s equity in the property was claimed as exempt. Relying on Schwab v. Reilly, 130 S. Ct. 2652 (2010), the court said that when a debtor exercises a homestead exemption, “what is removed from the estate is an ‘interest’ in the property equal to the value of the exemption claimed at filing.” The value of the exemption is frozen at filing while the value of the asset is free to fluctuate according to the market. Therefore, since the claimed exemption was less than the fair market value of the asset, the residence remained part of the bankruptcy estate and the trustee was entitled to distribute the post-petition increase in the value over and above the total of the exemption and the encumbrances on the property. NACBA filed an amicus brief in this case.
NACBA Member David Shaev testifies in support of proposed changes to Bankruptcy Rules.
NACBA member David Shaev (NY) testified before the Advisory Committee on Bankruptcy Rules on Friday, February 5, 2010, on the subject of the proposed changes to Bankruptcy Rules 3001 and 3002. Shaev was the only witness who testified on behalf of consumer debtors and strongly supported the proposed changes, suggesting that, if anything, they should be strengthened.
In addition to submitting written testimony [linked], Shaev rebutted the testimony of other witnesses, including debt buyers and bank representatives, who focused on the fact that few objections to Proofs of Claim are typically filed. David stated that in general there is no incentive to file objections to claims because any money saved would be distributed to other creditors and because attorney’s fees are not awarded for successful objections.
He had the opportunity to expand on NACBA Member Professor Katherine Porter’s study on mortgage claims and was able to debunk the other witnesses’ basic argument on secured and unsecured claims, using as an example a proof of claim filed by PRA Receivables Management as agent for Portfolio Recovery Assets, which had filed an unsecured proof of claim for over $12,000 with no documentation. A summary page was annexed, but did not identify any creditor that the debtor could verify as a debt. David explained that he demanded documentation by letter prior to the filing of the objection but received none. The Judge expunged the entire claim at hearing as well as others, totaling approximately 60% of the total unsecured claims filed.
NACBA Board Member John Rao, a member of the Rules Committee, was also at the hearing.
Supreme Court Finds Attorneys are “Debt Relief Agencies” and Upholds Constitutionality of Disclosure Requirements.
The Supreme Court, in a unanimous opinion written by Justice Sotomayor, upheld the constitutionality of sections 526 and 528 of the BAPCPA. In Milavetz v. United States, 559 U.S. ____ (2010), the Court addressed three issues: 1) whether attorneys are “debt relief agencies,” 2) the appropriate scope of section 526(a)(4) which prohibits a debt relief agency from advising a debtor to incur more debt in contemplation of bankruptcy, and 3) whether the disclosure requirements of section 528 are unconstitutional as applied to attorneys.
After finding that the plain language of the BAPCPA mandates a finding that attorneys are “Debt Relief Agencies” the Court turned to the scope of section 526(a)(4), finding that the prohibition against advising a client to incur more debt was limited to “advice to ‘load up’ on debt with the expectation of obtaining its discharge—i.e, conduct that is abusive per se.” The Court did not interpret the provision to prohibit frank discussion between client and attorney about incurring debt. With respect to the disclosure requirement of section 528, the Court, applying a “reasonably related” standard of scrutiny, found that the requirements were reasonably related to the State’s interest in preventing deception of consumers.
Justices Scalia and Thomas each wrote separate opinions concurring in part and concurring in judgment.
Justice Scalia wrote to protest the allusion in the majority opinion to the congressional record which he found unhelpful and disingenuous.
Justice Thomas expressed the opinion that that as in other First Amendment contexts, there is no significant distinction between required disclosures and prohibited speech and that a lower standard of scrutiny should not be applied to disclosure requirements. Thomas interpreted the majority’s opinion to say that restrictions on commercial speech were permissible “only where the particular advertising is inherently likely to deceive or where the record indicates that a particular form or method of advertising has in fact been deceptive.” He agreed that where there is a facial challenge to a disclosure requirement, as in the case before the Court, it should be upheld if “there is any conceivable manner in which it can be enforced consistent with the First Amendment.”
Supreme Court Refuses to Void Confirmation of Plan Discharging Student Loan
On March 23, 2010, the United States Supreme Court issued its unanimous opinion affirming the Ninth Circuit’s finding for the debtor in the case of United Student Aid Funds, Inc. v. Espinosa, 559 U.S. ___ (2010).
In that case Espinosa, a chapter 13 debtor, sought to discharge the accrued interest on his student loan while paying the principle through the plan. He did not initiate an adversary proceeding to determine undue hardship, but included the student loan in his plan. Although the student loan creditor received actual notice of the plan, it did not object to the partial payment. The bankruptcy court confirmed the plan, the debtor complied with it, and the debtor was discharged in 1997. Several years later, USAF attempted to collect the unpaid interest on the loan. Espinosa sought to have the bankruptcy court enforce the discharge and USAF counterclaimed with a motion to void confirmation of the plan under Fed. R. Civ. P. 60(b)(4).
The Supreme Court found that Rule 60(b) relieves a party of a final judgment only in the rare circumstance that the “judgment is premised either on a certain type of jurisdictional error or on a violation of due process that deprives a party of notice or the opportunity to be heard.” The Court began its analysis with the finding that the statutory requirements of undue hardship and the initiation of an adversary proceeding are not jurisdictional. The issue then, was whether USAF received adequate notice to satisfy due process. The Court found that the existence of actual notice, albeit not the type of notice proscribed by the bankruptcy rules, was sufficient to satisfy due process.
The Court addressed USAF and the Amicus, U.S. government’s, argument that the bankruptcy court’s order is void because it went beyond the court’s power. Although the Court found the failure to comply with §§ 523(a)(8) and 1328(a) before confirming the plan was “legal error,” that error did not rise to the level necessary to void a final judgment. This was especially so as the creditor had actual notice and was not permitted to “sleep on its rights.”
The Court disagreed with the aspect of the Ninth Circuit’s decision, however, insofar as it held that a bankruptcy court could confirm a plan which would discharge a student loan without an adversary proceeding so long as the creditor did not object.
Same-Sex Couples and the Bankruptcy Dilemma
Published Monday, February 1, 2010 @ 10:48 am by: John t. Orcutt.
The decision to file for bankruptcy is never an easy one, especially where married couples are involved. Spouses must settle issues of dishonesty, mistrust, and frustration–and that’s even before any of the complex steps of collecting necessary documents and filing papers.
But the story for insolvent couples does have a caveat: joint bankruptcy protection. Married debtors can file their cases jointly with one trustee, one filing fee, and one total case. Debtors can bring to the table their joint debts as well as debts they hold only in their name. To be a joint case, the debtors need only be legally married. And they must be a man and a woman.
Sounds simple right?
Well, for thousands of individuals living in America today, the latter designation raises difficult questions—especially in the growing number of states that recognize same-sex marriage or its legal equivalent (“civil unions”). Yet, as the constitutionality of laws and amendments forbidding marriage equality continue to be litigated across the country, same-sex debtors seeking bankruptcy relief face even tougher challenges.
Because it is generally accepted that the Defense of Marriage Act (“DOMA”) would preclude the filing of a joint bankruptcy petition by a same sex married couple, these folks face two very different options: (1) make two separate bankruptcy filings, or (2) pursue the right to seek bankruptcy relief as would an opposite-sex married couple.
While the second option would be a precedent-setting endeavor, fulfilling the true meaning of marriage equality, in reality pursuing this groundbreaking goal is largely antithetical to the larger motivations of most bankruptcy bound individuals, gay or straight: getting out of debt.
In practice, a married same-sex couple will need, more than their heterosexual counterparts, the assistance of a qualified bankruptcy attorney to pull together all of their required financial information; ensure that it is complete and their disclosures accurate; and research and prepare a case that anticipates a variety of motions attacking the joint filing. Regardless of what “party-in-interest” files the case (as defined by the Bankruptcy Code and common law), the filing will likely be challenged, even before a judge reaches such substantive issues as income, assets, liabilities, and creditors.
In this case, like others for same-sex couples seeking right-giving precedents, while the Bankruptcy Code provides one standard, constitutional arguments will inevitably reveal others that need to be briefed and raised. Same-sex couples must expect that any decision in their favor will be appealed, perhaps more than once to a US District Court, a Bankruptcy Appellate Panel, a Circuit Court of Appeals, or maybe even the Supreme Court of the United States. For debtors, this type legal wrangling adds ,ore time, more fees and inevitably more stress to what is undoubtedly an already nerve-racking situation.
As a result, for a married same-sex couple facing the need to file bankruptcy, the next steps can mark a tough decision: file singly or fight the system; seek your family’s financial security or a denigrated group’s fundamental rights; moving forward for your family or moving your family forward. In the end, changing the current state of the law will take either an act of Congress or one or more very brave and very patient married same-sex couples who find themselves drowning in debt and who–in spite of these debts—also feel empowered to fight the good fight.
The state of marriage equality is not yet where it should be in the United States, and this seriously affects the legal rights of same-sex families. But until the law changes, same-sex couples need expertise in the handling of their cases.
