An empirical examination of the direct access costs to chapter 7 consumer bankruptcy: A pilot study in the Northern District of Alabama

American Bankruptcy Law Journal

Volumn 82, Issue 2, 2008, Pages 331-347

  Landry III, Robert J ^a,b,c   Yarbrough, Amy K ^d  

^a Northern District of Alabama ^*

^b JACKSONVILLE STATE UNIVERSITY   (United States)

^c UNIVERSITY OF ALABAMA   (United States)

^d UNIVERSITY OF FLORIDA   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 46749114524     PISSN: 00279048     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (89)

1. Katherine A. Porter and Deborah Thorne, The Failure of Bankruptcy's Fresh Start, 92 CORNELL L. REV. 67, 122 (November 2006).
2. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, 119 Stat. 23 (2005).
3. 11 U.S.C. gg 101-1527 (2005). Unless otherwise noted, all references to Bankruptcy Code, code, or section are to Title 11 of the United States Code, including amendments made by the Reform Act that will be codified.
4. Bankruptcy Reform Act of 1978, Pub. L. No. 95-598, 92 Stat. 2549 (1978). The Bankruptcy Reform Act of 1978 took effect on October 1, 1979. Id. g 402(a), 92 Stat, at 2682.
5. The changes to the Code became effective, with limited exceptions, on October 17, 2005. Some provisions of the Reform Act were effective immediately upon enactment. For example, several amendments to the homestead exemptions and delay in granting a discharge in limited situations were effective immediately. See 11 U.S.C. §§ 522(o), (p), (q), 727(a)(12), 1141(d), 1228(f), 1328(0- For a complete list of the effective dates, see WILLIAM HOUSTON BROWN & LAWRENCE AHERN Ill, 2005 BANKRUPTCY REFORM LEGISLATION WITH ANALYSIS (2005), Section U.C.
6. For example, one of the primary purposes of the Reform Act was to reduce the chapter 7 filing rate. See Robert J. Landry, III, An Empirical Analysis of the Causes of Consumer Bankruptcy: Will Bankruptcy Reform Really Change Anything?, 3 RUTGERS BUS. L.J. 2, 15 (March 2006). The "means test" as an eligibility requirement was expected to shift some chapter 7 debtors to chapter 13.
7. Robert J. Landry, III and Nancy Hisey Mardis, Consumer Bankruptcy Reform: Debtors' Prison Without Bars or "Just Deserts" for Deadbeats?, 36 GOLDEN GATE U. L. REV. 91, 92 (Spring 2006). Judge Randall Newsome recognized that "[g]iven the dearth of filings experienced since BAPCPA became effective on October 17, 2005, and the lack of any empirical data, there is no way to determine whether the new provisions have steered debtors into chapter 13 who otherwise would have not filed a chapter 13." Testimony of Honorable Randall Newsome at the "Oversight of the Implementation of the Bankruptcy Abuse Prevention and Consumer Protection Act" Hearings Before the Subcommittee on Administrative Oversight and the Courts of the Senate Judiciary Committee, 110th Cong. (Dec. 6, 2006), available at: http://judiciary.senate.gov/testimony.cfm?id= 2442&wit_id=5939 (hereafter "Newsome").
8. For an example of two very different ways to view the same law, see Jonathan Alter, A Bankrupt Way to do Business They Put Huge Deficits on Plastic for Our Grandkids to Pay. They Sell Us Out to Predatory Lenders. They're the Credit Card Congress, NEWSWEEK, April 25, 2005, at 29 ("this bill, like so many others moving through Congress, comforts the comfortable and afflicts the afflicted. Worse, it provides for no distinction between those who get unlucky in Las Vegas and those who get cancer. . . . [C]redit-card companies . . . insist the point of the bill is to restore the stigma of bankruptcy. That's just what a seriously ill, jobless or abandoned person needs-more stigma").
9. Catherine Porter, Going Broke the Hard Way: The Economics of Rural Failure, 2005 WIS. L. REV. 969, 1021 (2005) ("Jean Braucher and others asserted that the pending consumer bankruptcy legislation 'would make access to bankruptcy more difficult for all, imposing new costs and hurdles and thus pricing the worst off out of the system.'")
10. (citing, e.g., Jean Braucher, Means Testing Consumer Bankruptcy: The problem of Means, 7 FORDHAM J. CORP. & FIN. L. 407, 408 (2002);
11. see also Charles Jordan Tabb, The Death of Consumer Bankruptcy in the United States? 18 BANKR. DEV. J. 1, 34 (2001)("The Reform Bill contains additional provisions that also will create entry barriers [to bankruptcy].")).
12. See, e.g., Jean Braucher, Response to Eric Posner, 7 FORDHAM J. CORP. & FIN. L. 463, 468 (2002)(While debating the pending reform legislation, Professor Braucher implies that the legislation will make access to bankruptcy more difficult.).
13. See, eg, Richard M. Hynes, Why (Consumer) Bankruptcy? 56 ALA. L. REV. 121, 125 (Fall 2004)(Recognizing that scholars argue that "the proposed reforms . . . will raise the cost of filing for bankruptcy to a price beyond the reach of consumers who truly need bankruptcy relief.").
14. See Melissa B. Jacoby, Ripple or Revolution? The Indeterminacy of Statutory Bankruptcy Reform, 79 AM. BANKR. L. J. 169, 186 (Spring 2005)(recognizing that legal fees and other "access costs" should be included in a framework making a comparative analysis of consumer bankruptcy).
15. ARNOLD COHEN AND MITCHELL MILLER, CONSUMER BANKRUPTCY MANUAL, 2D § 15:7 (Sep-tember 2006).
16. David A. Lander, Essay: A Snapshot of Two Systems that Are Trying to Help People in Financial Trouble, 7 AM. BANKR. INST. L. REV. 161, 172 (Spring 1999)(citations omitted).
17. COHEN AND MILLER, supra note 11, at § 15:7.
18. Id.
19. Lander, supra note 12, at 171-72 (citations omitted).
20. Id. at 172.
21. Id. at 171. ("[T]he primary component of costs in a consumer bankruptcy proceeding are attorney's fees.").
22. In re Murray, 330 B.R. 732, 733 n.2 (Bankr. E.D. Wis. 2005)("The flat fee is expected to increase for cases filed under the Bankruptcy Abuse Prevention and Consumer Protection Act 2005.").
23. See Jean Braucher, A Fresh Start for Personal Bankruptcy Reform: The Need for Simplification and a Single Portal, 55 AM. U. L. REV. 1295, 1308-1311 (June 2006).
24. See also, Jean Braucher and Charles W. Mooney, Jr., Means Measurement Rather Than Means-Testing: Using the Tax System to Collect from Can Pay Consumer Debtors After Bankruptcy, 22 AM. BANKR. INST. J. 6 (February 2003) (recognizing means testing is more complex and time consuming which may lead to higher legal fees). Increased attorneys' fees in typical consumer cases in light of additional work requirements was seen with the 1984 amendments to the Code which required more detailed explanation of relief available, and an acknowledgement by the debtor of the differences in the chapters available for relief. This resulted in more time spent with debtors and increased costs.
25. See COHEN AND MILLER, supra note 11, at g 15:3.
26. Testimony of Professor Robert M. Lawless at the "Oversight of the Implementation of the Bank-ruptcy Abuse Prevention and Consumer Protection Act" Hearings before the Subcommittee on Administrative Oversight and the Courts of the Senate Judiciary Committee, 110th Cong. (Dec. 6, 2006), available at: http://judiciary.senate.gov/print_testimony.cfm?id=2442&wit_id=5936 (hereafter "Lawless").
27. Braucher, supra note 19, at 1311 n.65 (citations omitted).
28. Testimony of Professor Todd Zywicki at the "Oversight of the Implementation of the Bankruptcy Abuse Prevention and Consumer Protection Act" Hearings before the Subcommittee on Administrative Oversight and the Courts of the Senate Judiciary Committee, 110th Cong. (Dec. 6, 2006), available at http://judiciary.senate.gov/print_testimony.cfm?id=2442&wit_id=5934 (hereafter "Zywicki").
29. Lawless, supra note 20.
30. See also Newsome, supra note 6.
31. Braucher, supra note 19, at 1311.
32. U.S. Courts Website, Fee Issues in Bankruptcy Courts, available at http://www.uscourts.gov/fedcourtfees/bankruptcyfee2006a.pdf.
33. The Bureau of Labor Statistics' Consumer Price Index (CPI-U-RS) is 166.6 for 1999 and 201.6 for 2006. To adjust the 1999 filing fee to 2006 constant dollars, multiply the 1999 value by 201.6/166.6, or 1.210084. The Consumer Price Index data is available at ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai. txt.
34. Mary-Beth McLaughlin, 4th Boost Sought for Bankruptcy Filing Fee, available at http://toledoblade. com/apps/pbcs.dll/article?AID=/20060719/ BUSINESS04/607190400/-1/BUSINESS July 19, 2006).
35. 11 U.S.C. §§ 109(h), 521(b) (2005).
36. 11 U.S.C. g 109(h)(1) (2005).
37. The legislative history clearly states the intended purpose of the pre-petition credit counseling: The legislation's credit counseling provisions are intended to give consumers in financial distress an opportunity to learn about the consequences of bankruptcy such as the potentially devastating effect it can have on their credit rating (citation omitted) before they decide to file for bankruptcy relief. H.R.Rep. No. 109-31, Part 1 at 18 (2005), U.S. Code Cong. & Admin. News 2005, p. 104.
38. Landry and Mardis, supra note 6, at 107-
39. Id.
40. 11 U.S.C. gg 111(b) (2005). For a discussion of the U.S. Trustee and U.S. Bankruptcy Administrator programs, see Robert J. Landry, III, Individual Chapter 11 Reorganizations: Big Problems with the New "Big" Chapter 13, 29 U. ARK. LITTLE ROCK L. Rev. 251, 255 n.18 (2007).
41. 11 U.S.C. gg 111(c) and 111(d)(1)(E) (2005).
42. The statute requires the service be provided "without regard to ability to pay the fee." 11 U.S.C. g 111(c)(2)(B) (2005). Early evidence indicates that the fee is being waived for clients unable to pay, but the extent and standard applied for the waiver is not clear. See GAO, Bankruptcy Reform: Value of Credit Counseling Requirement Is Not Clear, GAO-07-203, at 28-32 (Apr. 6, 2007) (hereafter "GAO Report").
43. Braucher, supra note 19, at 1311-12.
44. As discussed in Part V, the mean total direct access cost in 2006 was $1232.53, and the credit counseling fee was approximately 4% of the total direct access costs. When the debtor education fees are considered along with the credit counseling fee, these account for about 8% of the direct access costs in 2006.
45. GAO Report, supra note 36, at 4.
46. Landry and Mardis, supra note 6, at 113 n.120. This study does not include a measure of the opportunity cost as development of a valid measure would require information solicited directly from debtors through an interview or questionnaire. This study relies solely on data collected from the case filings for direct cost information from debtors. As a practical matter, based on anecdotal evidence in the NDAL, the opportunity cost may be very small because it seems that most debtors obtain the credit counseling certificate without ever talking directly to a credit counselor. It is conducted via fax or internet through their attorney.
47. 11 U.S.C. § 727(a)(11) (2005). See also Landry and Mardis, supra note 6, at 112-113.
48. Braucher, supra note 19, at 1312-13.
49. 11 U.S.C. g 727(a)(11) (2005). See also Landry and Mardis, supra note 6, at 112-113. Future research should attempt to measure the opportunity cost of obtaining debtor education. As with credit counseling costs, we do not include a measure of the opportunity cost. Anecdotal evidence would indicate that the opportunity cost is relatively small as it seems to be largely done over the internet or on a computer program, without any direct interaction or travel required by the debtors.
50. See Arturo Bris, Ivo Welch and Ning Zhu, The Costs of Bankruptcy: Chapter 7 Cash Auctions vs. Chapter 11 Bargaining (EFA 2004 Maastricht Meetings Paper No. 5155, 2004), available at http://ssrn. com/abstract=556930 (Empirically examines the direct and indirect costs of both small and large corporate chapter 7 and 11 bankruptcies from 1995-2001 in two states: Arizona and New York.)
51. There have been several studies on the costs associated with chapter 11. For a through review of these studies to date, see Stephen J. Lubben, The Microeconomics of Chapter 11 6-15 (Seton Hall Public Law Research Paper No. 47), available at http://ssrn.com/abstract=869817.
52. Professor Lubben has recently completed the largest empirical examination of attorneys' fees in chapter 11 cases. Stephen J. Lubben, Corporate Reorganization & Professional Fees, 82 AM. BANKR. L.J. 77, 79 (2008). These studies and others are useful in the chapter 11 area, but are not useful regarding consumer chapter 7 cases.
53. DAVID STANLEY AND MARJORIE GIRTH, BANKRUPTCY: PROBLEM, PROCESS REFORM (1971).
54. Ii at 185.
55. See Porter and Thorne, supra note 1, at 81 and 122.
56. Id. at 81. The sample also included an additional 470 chapter 13 bankruptcy filings; however, the focus of this research is on chapter 7 costs.
57. Id. at 122] n.245.
58. Id.
59. Id. n.244 (citing 28 U.S.C. § 1930(a)(1) (2000)).
60. It is worth noting that in Phase I of the Consumer Bankruptcy Project, with data collection in the early 1980s, data was collected on attorneys' fees. Detailed information on that data is not published, but the study does report that the average fee, without any breakdown between chapter 7 or 13, was $500, with a range of $60 to $5000. TERESA A SULLIVAN, ELIZABETH WARREN AND JAY LAWRENCE WESTBROOK, AS WE FORGIVE OUR DEBTORS 23 (1989).
61. COHEN AND MILLER, supra note 11, at § 15:7.
62. Hon. Geraldine Mund, Paralegals: The Good. The Bad and The Ugly, 2 AM. BANKR. INST. L. REV. 337, 344 (1994).
63. In re Murray, 330 B.R. 732, 733 (Bankr. E.D. Wis. 2005).
64. American Law Center PC v. Ekstrom (In re Jastrem), 253 F.3d 438, 443 (9th Cir. 2001).
65. Jn re Sturgeon, 242 B.R. 724, 727 (Bankr. E.D. Okla. 1999).
66. In re Wyslak, 94 B.R. 540, 541 (Bankr. N.D. Ill. 1988).
67. Id.
68. Id. at 541-42.
69. PACER is an acronym for Pubic Access to Court Electronic Records. PACER is an electronic public access service which contains the case filing information. It was also used to collect data from the actual case files which are available in electronic format through PACER. For more information regarding PACER, see John Golmant and Tom Ulrich, Bankruptcy Repeat Filings, 14 AM. BANKR. INST. L. REV. 169, 174 n.26-27 (2006).
70. Page 1 of Official Form 1 (Voluntary Petition) includes a box titled: "Type of Debtor." The debtor(s) check one of four options: Individual (include joint Debtors), Corporations (includes LLC and LLP), Partnership and Other (If debtor is not one of the above entities, check this box and state type of entity below). Only those cases in which the debtor(s) checked "Individual" are included in the sample.
71. Page 1 of Official Form I (Voluntary Petition) includes a box titled: "Nature of Debts." The debtor(s) check one of two options: Debts are primarily consumer debts, defined in 11 U.S.C. 101(8) as "incurred by an individual primarily for personal, family, or household purpose"; or Debts are primarily business debts. Only those cases in which the debtors) checked the box indicating the debts were consumer debts were included in the sample.
72. A Codebook was developed to collect and code the data from the petition and schedules. The Codebook was developed using the instrument Phase III of the Consumer Bankruptcy Project as a model. The authors are grateful to the willingness of Professor Katherine Porter, and the other scholars involved in the Consumer Bankruptcy Project, for their willingness to share their coding instruments. For more information regarding the Consumer Bankruptcy Project generally, see SULLIVAN, ET AL., supra note 53, at 342-354;
73. TERESA A. SULLIVAN, ELIZABETH WARRANT AND JAY LAWRENCE WESTBROOK, THE FRAGILE MIDDLE CLASS 263-287 (2000).
74. See also Porter and Thorne, supra note 1 at 80-83;
75. Elizabeth Warren, Bankrupt Children, 86 MINN. L. REV. 1003 (2002).
76. The credit counseling and debtor education data was coded based on type of class/course and the nonprofit organization providing the services. Once the data was collected and coded, the results were then converted to dollars based on the type of class/course and nonprofit organization providing the services. There were five nonprofit organizations that provided these services in the sample. Each organization was consulted to determine the fee charged for each type of service.
77. Data on a panoply of attributes of the debtors and cases was collected, but these characteristics were expected to impact attorneys' fees charged in a typical chapter 7 case.
78. The data for both dependent variables were screened for normality. Five cases that are outliers were removed from the analysis. These cases were beyond three standard deviations of the mean. The data was then re-screened for normality and the distribution was normal. The variables were also screened for multicollinearity, and although a mild correlation exists between total assets and total liabilities, this was not judged to be a problem.
79. Analysis was performed using SPSS 14.
80. Zywicki, supra note 22. An additional question to empirically examine is the magnitude (if any in the long-run) of the shift in filings from chapter 7 to chapter 13 and how direct access costs to chapter 13 have changed.
81. For a discussion of some of the problems associated with the Reform Act's credit counseling and debtor education requirements, see generally GAO Report, supra note 36;
82. Nathalie Martin and Ocean Tama y Sweet, Mind Games: Rethinking BAPCPA'S Debtor Education Provisions, 31 S. ILL. U.L. J. 517 (Spring 2007);
83. Karen Gross and Susan Block-Lieb, Empty Mandate or Opportunity for Innovation? Pre-Petition Credit Counseling and Post-Petition Financial Management Education, 13 AM. BANKR. INST. L. REV. 549 (2005);
84. Jean Braucher, The Challenge to the Bench and Bar Presented by the 2005 Bankruptcy Act: Resistance Need Not Be Futile, 2007 U. ILL. L. REV. 93, 101-110 (2007);
85. Jeffery A. Deller and Nicholas E. Meriwether, Putting Order to The Madness: BAPCPA and the Contours of the New Prebankruptcy Credit Counseling Requirements, 16 J. BANKR. L. SC PRAC. 1 ART. 5 (February 2007).
86. For a discussion of problems associated with prior reform efforts that have attempted to include mandatory credit counseling and debtor education requirements, see generally Richard L. Stehl, The Failings of the Credit Counseling and Debtor Education Requirements of the Proposed Consumer Bankruptcy Reform Legislation of 1998, 7 AM. BANKR. INST. L. REV. 133 (1999);
87. A. Mechele Dickerson, Can Shame, Guilt, or Stigma Be Taught? Why Credit-Focused Debtor Education May Not Work, 32 LOY. L.A. L. REV. 945 (1999).
88. See eg., Katherine Porter, The Potential and Peril of BAPCPA for Empirical Research, 71 MO. L. REV. 963, 1078 (2006)(The author recognizes a whole host of policy areas that intersect with the bankruptcy system and the importance of empirical research on the relationship between those areas and consumer bankruptcy.).
89. See also Robert J. Landry, III and Amy K. Yarbrough, Global Lessons from Consumer Bankruptcy and Healthcare Reforms in the United States: A Struggling Social Safety Net, 16 MICH. ST. J. INT'L L. 343 (2007)(The authors recognize the important interaction of the panoply of policies, including consumer bankruptcy, that comprise the social safety net system. They show, through a comparative analysis, the need to consider these intersection policy domains when making decisions in any segment of the social safety net, particularly consumer bankruptcy).