A report from the Administrative Office of the U.S. Courts highlights a disturbing trend: since the adoption of the Bankruptcy Abuse Prevention and Consumer Protection Act in 2005, pro se filings have grown dramatically. You can read the report here. In the past five years, filings by attorneys have increased by 98%, while pro se filings increased by 187% over the same period. During the twelve months ending June 30, 2011, there were 130,086 pro se cases filed accounting for 9% of the total filings in bankruptcy. During 2011, pro se filings accounted for 8% of chapter 7 cases and 10% of chapter 13 filings.Pro se filings were most common in the Western United States, Florida and Georgia. In the Central District of California, pro se cases made up a staggering 27.1% of the total filings. Pro se filings were more modest in Texas. The Northern, Eastern and Western Districts of Texas had pro se filing levels in the range of 2.1% to 4.0% while the Southern District fell in the range of 4.1% to 8.0%. The surge in pro se filings has two important consequences for the court system. One is that pro se filings are much less likely to succeed than filings by represented debtors. According to data presented by Professors Katie Porter and Jay Westbrook at the National Conference of Bankruptcy Judges, nearly 90% of pro se chapter 13 debtors had their cases dismissed prior to confirmation of a plan and only 4% still had a case pending after four years. Among pro se chapter 7 debtors, a 2001 sample showed that 100% received a discharge. A 2007 sample showed that 17.6% of pro se chapter 7 debtors had their cases dismissed for technical problems as compared to just 1.9% of represented debtors. When people file for bankruptcy but are unable to obtain relief from the court system, they are likely to become angry, frustrated and cynical. It would not be surprising to see unhappy pro se debtors manning the barricades of the Occupy movement or acting out their frustrations in court.Another problem identified by the Administrative Office is that pro se filings are frequently accompanied by filing fee waivers. According to the report:Filing fees supply a significant amount of revenue to the courts, so a decline in bankruptcy fees collected will affect the resources available to the Judiciary at a time when they are needed to address an increase in workload.While the Administrative Office report did not specifically identify the cause of the rise in pro se filings (other than noting a rise in districts where the foreclosure crisis is acute), one answer seems to be that BAPCPA has created a class of debtors who are too broke to file bankruptcy. By increasing the complexity of bankruptcy, Congress both increased the cost to file and made it more difficult to file pro se. This is a cause for concern.

When a layoff or catastrophic, unmanageable debt begins to pile on, many people look to extreme or knee-jerk reactions in finding solutions to manage their financial situation without first consulting an attorney or financial advisor. Here are five common conundrums to keep yourself from acting on when you owe more than you can afford and are facing bankruptcy. 1. Borrowing from your retirement to pay off debt. Retirement funds and nest eggs sitting within 401k's and IRA's are protected from both creditors and bankruptcy trustees. Most people will need this money upon retirement, and therefore it is categorized as a protected asset that cannot be touched during the bankruptcy process. There is only one way creditors can grab cash from these coffers, when individuals voluntarily withdraw it to pay debt. Unfortunately, while this may handle minimum payments for a period of time, it usually is not a final solution and on top of the liquidation of the retirement assets, the individual is now responsible for the taxes associated with the premature withdrawals. 2. Do not pay off debt to family members. While most people sitting in debt would prefer to pay off debt to the people closest to them rather than creditors, it could put family members in peril. This could be considered "insider preferences", and any repayment or transfer of assets to family could be recouped by the bankruptcy trustee and land a lawsuit in the hands of a family member. 3. Don't borrow from retirement to pay off family members. A combination of these two could leave you without a retirement, responsibility for taxes owed from borrowing from your retirement, and trouble for the recipient of the transfer for insider preferences. This combination can be caustic. 4. Do not transfer away assets before bankruptcy. Under the bankruptcy code, a transfer of assets can be deemed fraudulent conveyance, which can have severe consequences, and may even restrict or disqualify the bankruptcy relief one is seeking. With the advice of an attorney, certain assets can be exempt which creditors cannot touch. However, if these assets are transferred, they are no longer protected. 5. Don't exhaust your short term savings. If one is facing an uncertain future, such as a layoff or change in income, it is important to keep short term savings on hand to cover the important human needs of shelter and food before paying off creditors. Seeking advice from a financial advisor or an attorney can better protect your relief fund.(rn/tl)

As if the economy was not bringing enough bad news to debtors, recent developments in the Southern District of New York (which covers New York (Manhattan), Bronx, Westchester, Putnam, Rockland,Orange, Dutchess, and Sullivan counties) are making it more difficult to file for personal bankruptcy. A recent case, In re Goldman, Case No. 11-11371 (SHL), involved an attempt by a Bankruptcy Trustee to sell the rent stabilized co-op unit of a long-time resident at 420 Riverside Drive in the Morningside Heights neighborhood of Manhattan. The case was a Chapter 7 bankruptcy filing assigned to Judge Lane, who recently entered a consent order permitting the Bankruptcy Trustee to have the U.S. Marshals Service evict Mr. Goldman from his apartment, and then the rights to the lease on the co-op unit would be sold back to the landlord, who would pay the Bankruptcy Trustee $60,000 when the apartment was delivered free and clear of all tenancies, including that of Mr. Goldman, the rent-stabilized tenant.In the way of background, this is the third decision permitting a rent-stabilized apartment to be sold by a Bankruptcy Trustee to a landlord in the Southern District of New York. The other two cases are In re Stein, 281 B.R. 845 (Bankr. S.D.N.Y. 2002) and In re Toledano, 299 B.R. 284 (Bankr. S.D.N.Y. 2003). In both of these cases, the debtors lived in luxury apartments just south of Central Park–171 West 57th Street, Apartment 3C and 230 Central Park South, Apartment 9/10B.Many people will be surprised by these decisions, however the Bankruptcy Code and Rules seem to allow the result. Section 541 of the Bankruptcy Code states that when a debtor files for bankruptcy, a hypothetical estate is created, and all property of the debtor (with certain exemptions created by state and federal statute) is owned by the Bankruptcy Trustee. Section 365 of the Bankruptcy Code allows a debtor or a Bankruptcy Trustee to assume and assign (sell) a lease to a third party. Additionally, bankruptcy is federal law, and federal law generally primes (supersedes) state law. When you put this all together, the transaction looks as follows:A Bankruptcy Trustee will review a bankruptcy petition and determine how many years the debtor has lived in the apartment, the rent that the debtor is presently paying under the rent-stabilized lease and the market value rent if the apartment was not rent-stabilized. The Bankruptcy Trustee will then contact the landlord or owner of the unit and offer to evict the tenant and deliver the apartment broom clean for a certain sum of money. In the Goldman case, the landlord and the Bankruptcy Trustee entered into a stipulation that was “so ordered” by the Bankruptcy Court, which provided that the landlord would pay the Bankruptcy Trustee $60,000, which would be held in escrow until the Bankruptcy Trustee had the U.S. Marshals Service evict or remove the debtor from the apartment and delivered possession of the apartment to the landlord. The Bankruptcy Trustee receives a commission and legal fees are paid to the Bankruptcy Trustee’s counsel. The balance of the monies is distributed to the debtor’s unsecured creditors. While the result may seem harsh and surprising to many, three Bankruptcy Judges have ruled that these sales are allowed. None of these cases have been appealed to the Second Circuit Court of Appeals or the Supreme Court.An individual who is contemplating filing for bankruptcy and lives in a rent-stabilized unit must go through the following analysis:1. How many years has the debtor lived in the apartment?2. What rent are they paying under the rent-stabilized lease and what is the market value rent if the apartment was vacant and not rent-stabilized?3. Is the apartment in a gentrifying area or a high income area, such as the Upper East Side, Central Park West or Central Park South?4. Has the apartment building recently undergone a condo or co-op conversion? And did the debtor decline to buy the unit, and therefore become a non-purchasing tenant?There is one recourse for the debtor. The Bankruptcy Code allows the debtor to match the offer (in this case, $60,000) and pay that money to the Bankruptcy trustee to keep the apartment unit. Few individuals filing for bankruptcy have that type of money, however they may be able to borrow that money from friends or family to keep the unit. Additionally, if a husband and wife are married and only one elects to file for bankruptcy, or two people who are unmarried live in the apartment and both names are on the lease, since the Bankruptcy Trustee would only be able to assign the unit for the individual who filed for bankruptcy, the result may be that a landlord would be unwilling to pay a significant sum of money in that scenario, because the other party remaining in the unit would still be rent-stabilized. However, other than those two scenarios, this situation is a significant risk, and we are seeing more and more of these cases.It would seem that either the New York State legislature or Congress needs to address this issue, and create some type of a safe harbor. Again, debtors in rent stabilized apartments must proceed with caution and consult an experienced bankruptcy attorney before filing for bankruptcy. Any individuals who are contemplating bankruptcy and live in rent-stabilized or rent-controlled apartments or unsold rental units in buildings that are being converted to condo or co-op ownership should feel free to contact Shenwick & Associates for an analysis of their situation.

While many associate the word "bankruptcy" with "epic failure", history shows us that through the adversity of life one must use knowledge and tenacity to turn "epic failure" into, just, "epic". In 1923, Walt Disney's creditors forced bankruptcy upon him and assumed his assets to settle his debts. Likewise, after many ups and downs, including being fired from the company he created, Steve Jobs returned to Apple in the mid 90's while it was on the verge of bankruptcy. Today, Apple sits as one of the most powerful and highly valued companies in the world, with a net worth over 65 billion dollars. Walt Disney was reportedly worth over $1 billion when he passed, and Disney continues to be a household name in places across the world. So, what happened? Both men did not allow failure as an option. Rather, they accepted their failure and used it as a learning experience to catapult them to the next level. Through their struggle, they both discovered valuable lessons and let their mistakes serve as springboards to correcting their paths in achieving their ultimate dreams. Bankruptcy can serve as a springboard for many who have made mistakes in a difficult economy under difficult circumstances. Rather than the perception of bankruptcy as a failure in our lives, it can serve as a new beginning and learning experience to protect and educate us towards a brighter future. Inaction results in nothing, and through the examples of champions in business and innovation in both Steve Jobs and Walt Disney, action and tenacity through tough times has been proven to be successful. The more knowledge one has about bankruptcy, the more power one has over their future. With the help and guidance of an attorney, a strong team can navigate the path towards future success. (RN/tl)

When debt comes back from the past to attack living debtors, many debtors are unclear on their rights and the statute of limitations in regards to "zombie" debt, or debt typically purchased by debt buyers in which the window of collections has expired. In general, "zombie" debt refers to debt over 10 years old that has been deemed unclaimable to collection agencies by credit card companies and health care providers. However, debt buyers are rounding up zombie debt for pennies on the dollar, using scare tactics ranging from phone calls to lawsuits, primarily because of the significant margin they receive if collected. In the process of this aggressive collection, zombie debt can actually revive itself into legitimate debt to the chagrin of the collectors, often because individuals are unclear about their rights in regards to it. In the event you are sued for an old debt that is beyond the statute of limitations and do not respond, the collector may render a default judgement in court, thereby resurrecting the dead debt into valid current debt that can be used to garnish wages and bank accounts. Additionally, with incessant phone calls the debt buyer may coerce the debtor into making a small, symbolic payment on the debt, therefore acknowledging the debt and making it once again valid. How can you ward off zombie debt? With the guidance of an attorney, the potential savings depending on the dollar amount of the claim against the debtor can save big money and big headaches. It is also critical to not sign anything or make a payment without first contacting an attorney. It is important to know the difference between valid debt and "zombie" debt that is past the statute of limitations for collection, and the professional guidance of an attorney in these matters can better represent your rights and pocketbook. More information at www.mobankruptcyblog.com (10.24.11, RN/tl)

Credit counseling most often involves consolidating outstanding debts as much as possible and then developing a negotiated repayment plan for a reduced payment over time to all of your creditors. Credit counseling is often a first step taken by those who have significant debt due to varying unforeseen circumstances. Each creditor has a different idea of what should be in the repayment plan and therefore will have different requirements. The catch is that a repayment plan must be approved by all the creditors, which takes time.What you may not know is that credit counselor staff is often working for the major credit card companies, in their best interests not yours. This is because the credit consolidation agencies get a cut of all the funds they recover that are owned to the creditor. You probably would not want to buy a house from a realtor that was listing the property and was representing the seller. So it follows that credit counselors are not working in your best interests. This is a plain and simple conflict of interest on the part of the credit counseling agencies. In addition, although you are working hard to try to preserve your credit rating by being responsible and developing a repayment plan, creditors will put a notice on your account that there is a repayment plan in place for your account. In reality this actually further damages your credit rating; hindering your situation rather than helping it. Developing a workable repayment plan may be difficult. A recent Consumer Federation of America and the National Consumer Law Center report has shown that there is approximately a seventy-five percent rate of failure in completing repayment plans. This means that there is a fairly high failure rate. Why start a process that may statistically not work?Another common problem is that you may be working with a counseling agency for six months or longer and only then you find out that one of the creditors is unwilling to negotiate a repayment plan. In this case there are a couple of options, you can retain the services of a bankruptcy attorney to negotiate a payment term or to file bankruptcy or find another credit counselor. Then there is the not all that uncommon practice by credit counselors of paying their fees first. The unwitting client pays their first consolidated bill only to find out they are even further in the hole because they first payment is going towards the agency fees and not their debt. In summary, there are credit counselors out there that provide a valuable service. However, each person has to choose what is right for their own particular situation at the given moment in time. (sk/tl 10.20.11)

The National Conference of Bankruptcy Judges concluded with an interview of Supreme Court Justice Elena Kagan by Third Circuit Judge Marjorie Rendell and Bankruptcy Judge Randall Dunn. Justice Kagan was very humble and self-effacing, but was not overly forthcoming. In an ironic twist, Justice Kagan took the Supreme Court bench with no expertise in bankruptcy, but her maiden opinion was in that area. She said she enjoyed her work on Ransom v. FIA Card Services. She said, “Everything is new. You learn a lot. I would be glad to do more (bankruptcy cases).”She said that her service as Solicitor General was good preparation for the court because “the whole job is focused on the court.” However, she did admit that she felt funny being referred to as “General Kagan” during her prior job. She said, “It’s an embarrassing thing because you’re not a General.”Justice Kagan acknowledged that despite having four law clerks and hearing only about 80 cases a year, the job was challenging. “All of the cases we get are hard. It’s such a different kind of judging.” She also said, “The whole thing’s difficult. It should be difficult. If you thought it was easy, you shouldn’t be doing it.”She said that she had not yet developed a judicial philosophy. “I’m not a grand theoretical thinker, especially at this stage in my judicial career. I’m ready to take it a case at a time.”Justice Kagan distinguished Constitutional interpretation from statutory interpretation. She said, “Statutory interpretation is frequently different from Constitutional interpretation because the Constitution is written so much more broadly and is so open-ended so it’s hard to approach it like you would the Bankruptcy Code.” In statutory interpretation, she said, “Start with the text, the particular provision in context, its purpose. Sometimes when the text is uncertain you move to more general purposive principles and legislative history. Congress wrote what it wrote and you have to follow that.”When asked about the fact that there are three women on the court, she stated that “there are women’s faces and women’s voices coming from all over. We’re not shrinking violets.” However, she said that the female presence on the court “makes a world of difference in the perception of the court,” but “doesn’t make much difference in deliberations.” She said that she was surprised that technology had passed the internal workings of the court by. She said that the justices do not email each other. She said that “coming back to the court after twenty-five years after being a clerk, they communicate in exactly the same way.” She spoke about memos written on heavy paper transmitted by messengers. However, she saw advantages in not using email. “How many times have you written an email, pressed send and then thought better of it. . . . The way we communicate, even though it’s less modern, there’s a certain deliberateness and thoughtfulness to it.” Justice Kagan compared writing an opinion to teaching a class. She said, “”I’ve become aware that when I sit down to write an opinion it is the same as when I tried to prepare for a class. You explain something complicated to someone who doesn’t know much about it. You try to convey complex ideas so they understand it and it sticks with them.”When it comes to questions in oral argument, she said, “We are an incredibly hot bench now. We have a lot to say. Odds that you will get no more than two or three sentences out are not great.” She said that she tries to “ask questions that they can actually answer.” She said that in asking questions, she looks at “what are the hang-ups in the person’s case for me. I want to give someone a chance to convince me.” Other times she asks questions to “convey views to the other people on the bench.”Justice Kagan said that briefs are more important than oral argument, although oral argument “can crystallize things for you.” Despite the ideological divide on the court, she said, “We all really like each other very much. We have lunch together every day we have argument or conference.” She pointed out that the closest friends on the court were Justices Ruth Bader Ginsburg and Antonin Scalia. She said, “Disagreements about how to do law shouldn’t carry over into the next case or into general relationships.” She said “I have eight great friends that I didn’t have before.”On a completely random note, putting spellchecker in text messaging is not helpful. When my dad called me during this presentation, I texted him back to let him know that I couldn’t talk because I was listening to Supreme Court Justice Kagan. After I hit send, I realized to my horror that I had referred to Justice Pagan. I don’t think that Android has a right wing bias. I just think its artificial intelligence doesn’t know when to shut up

The National Conference of Bankruptcy Judges concluded with an interview of Supreme Court Justice Elena Kagan by Third Circuit Judge Marjorie Rendell and Bankruptcy Judge Randall Dunn. Justice Kagan was very humble and self-effacing, but was not overly forthcoming. In an ironic twist, Justice Kagan took the Supreme Court bench with no expertise in bankruptcy, but her maiden opinion was in that area. She said she enjoyed her work on Ransom v. FIA Card Services. She said, “Everything is new. You learn a lot. I would be glad to do more (bankruptcy cases).”She said that her service as Solicitor General was good preparation for the court because “the whole job is focused on the court.” However, she did admit that she felt funny being referred to as “General Kagan” during her prior job. She said, “It’s an embarrassing thing because you’re not a General.”Justice Kagan acknowledged that despite having four law clerks and hearing only about 80 cases a year, the job was challenging. “All of the cases we get are hard. It’s such a different kind of judging.” She also said, “The whole thing’s difficult. It should be difficult. If you thought it was easy, you shouldn’t be doing it.”She said that she had not yet developed a judicial philosophy. “I’m not a grand theoretical thinker, especially at this stage in my judicial career. I’m ready to take it a case at a time.”Justice Kagan distinguished Constitutional interpretation from statutory interpretation. She said, “Statutory interpretation is frequently different from Constitutional interpretation because the Constitution is written so much more broadly and is so open-ended so it’s hard to approach it like you would the Bankruptcy Code.” In statutory interpretation, she said, “Start with the text, the particular provision in context, its purpose. Sometimes when the text is uncertain you move to more general purposive principles and legislative history. Congress wrote what it wrote and you have to follow that.”When asked about the fact that there are three women on the court, she stated that “there are women’s faces and women’s voices coming from all over. We’re not shrinking violets.” However, she said that the female presence on the court “makes a world of difference in the perception of the court,” but “doesn’t make much difference in deliberations.” She said that she was surprised that technology had passed the internal workings of the court by. She said that the justices do not email each other. She said that “coming back to the court after twenty-five years after being a clerk, they communicate in exactly the same way.” She spoke about memos written on heavy paper transmitted by messengers. However, she saw advantages in not using email. “How many times have you written an email, pressed send and then thought better of it. . . . The way we communicate, even though it’s less modern, there’s a certain deliberateness and thoughtfulness to it.” Justice Kagan compared writing an opinion to teaching a class. She said, “”I’ve become aware that when I sit down to write an opinion it is the same as when I tried to prepare for a class. You explain something complicated to someone who doesn’t know much about it. You try to convey complex ideas so they understand it and it sticks with them.”When it comes to questions in oral argument, she said, “We are an incredibly hot bench now. We have a lot to say. Odds that you will get no more than two or three sentences out are not great.” She said that she tries to “ask questions that they can actually answer.” She said that in asking questions, she looks at “what are the hang-ups in the person’s case for me. I want to give someone a chance to convince me.” Other times she asks questions to “convey views to the other people on the bench.”Justice Kagan said that briefs are more important than oral argument, although oral argument “can crystallize things for you.” Despite the ideological divide on the court, she said, “We all really like each other very much. We have lunch together every day we have argument or conference.” She pointed out that the closest friends on the court were Justices Ruth Bader Ginsburg and Antonin Scalia. She said, “Disagreements about how to do law shouldn’t carry over into the next case or into general relationships.” She said “I have eight great friends that I didn’t have before.”On a completely random note, putting spellchecker in text messaging is not helpful. When my dad called me during this presentation, I texted him back to let him know that I couldn’t talk because I was listening to Supreme Court Justice Kagan. After I hit send, I realized to my horror that I had referred to Justice Pagan. I don’t think that Android has a right wing bias. I just think its artificial intelligence doesn’t know when to shut up

Prof. Jay Westbrook and Prof. Katie Porter presented a delightful tour de force of empirical research titled Mythbusters. They compared ten statements of conventional wisdom to the results of empirical research. As Jay said, “There are all kinds of things that everyone thinks are true but we don’t know whether they are really true.” (For this post, I will refer to the speakers as Jay and Katie since these two professors go out of their way to be accessible so that it just seems appropriate). 1.1. BAPCPA permanently crippled consumer bankruptcy.The answer is not necessarily. Filings today are very similar to what was seen before BAPCPA. Today’s filing levels of 1.5 million cases per year are about equal to filings during 2001-2004. The income profiles today are similar with chapter 7 debtors averaging $24,000 per year and chapter 13 debtors averaging $34-35,000. The only thing that can’t be measured is what filings would have been like if BAPCPA had not been passed. Given the weak economy, filings might have been much higher without the legislation. 2. For big business, reorganization in Chapter 11 really just means a 363 sale. While 363 sales are more common in large cases, they are not the norm. Cases with above $50 million in assets resulted in 363 sales in less than 33% of the cases while in chapter 11 cases of all sizes only 10-15% resulted in 363 sales. 3. Young people are more likely to file bankruptcy because of a decline in stigma. Research shows two things: survey respondents report mortifyingly high rates of stigma and bankruptcy is increasing among the elderly and declining among the young. A study in 2001 showed that 84.3% of persons filing bankruptcy said they would be embarrassed or very embarrassed if their families or friends found out. Another survey showed that bankruptcy was more traumatic than the death of a friend or separation from a spouse. Another study showed that people are waiting longer before they file bankruptcy. In 1981, people filed bankruptcy when their debt to income ratio was 1.41 while in 2001 that number had more than doubled to 3,04. Of persons surveyed, most had been struggling with debt for more than two years before filing. Bankruptcy filings for those aged 75-84 increased by 433.3% from 1999-2007 and rates for those aged 65-74 increased 125%. Meanwhile the overall rate of filing decreased 29.2% and the filing rate for those aged 18-24 fell by 64.1%. The unfortunate fact is that bankruptcy is becoming a reality for the Greatest Generation. 4. There is nothing important in business bankruptcy between Mom & Pop and WorldCom. Among some academics, there are two categories of chapter 11 cases, important (more than $100mm) and not important (everyone else). In the real world, 60% of chapter 11 cases fall into the range of $100,000 - $5 million in assets, while only 6% had $100 million in assets or more. Additionally, 20% of all chapter 11 cases were filed by individuals. The professors opined that this shows the difficulty of trying to construct a one size fits all chapter 11 model. 5. Small businesses linger endlessly in chapter 11. A study done prior to BAPCPA showed that 50% of small business cases that ultimately failed were dismissed or converted within six months while 50% of successful cases took 15 months to confirm. The professors noted that small business cases take just as long to confirm as big business cases, although small business cases were dismissed or converted much faster than their larger counterparts (107 days faster in 2002). According to Jay, if the 2005 time limits had been in effect in 2002, 80% of the successful small business cases might have failed. He added that the effect of the 2005 small business amendments may have been to “maim cases that could have succeeded.” 6. The bankruptcy experience is race neutral. While the Bankruptcy Code is race neutral on its face, the “Ideal Debtor” for chapter 7 is one who holds retirement accounts, has high but reasonable expenses, financially supports only legal dependents and has little or no child support of student loan obligations. This is more likely to describe a white debtor than a minority debtor. The most accurate predictor of whether someone will file chapter 13 is whether they are African American. African Americans file for chapter 13 at twice the rate of other debtors. In 2007, Hispanics were likely to pay 25% more in attorney’s fees than white or African American debtors. The professors were quick to say that they can’t say why this is happening, only that this is what the numbers show. 7. Forum shopping is all about getting to Delaware or New York. It turns out that forum shopping happens in other parts of the country as well. Of 409 large cases filed outside of Delaware and New York since 1980, 27% were forum shopped According to Katie, large cases should file in Jay and Kate’s districts because they would have easy access to academics and cheap beer. Jay noted that Austin had live music as well. 8. Bankruptcy works for pro se filers. Chapter 7 works reasonably well for pro se filers, while chapter 13 is a complete disaster. Among pro se chapter 7 debtors, 17.6% of debtors had their cases dismissed for technical reasons compared to 1.9% of those with counsel. Among pro se chapter 13 debtors filing since 2006, only 4% had their cases pending or discharged at the four year mark compared to 45% of those represented by counsel. 90% of pro se chapter 13 cases are dismissed prior to confirmation compared to just 15% of those represented by counsel. According to Katie, pro se debtors are playing Las Vegas odds in chapter 13 and might do better taking their filing fee to Las Vegas. She said we have “constructed a complex machine that most of the time may require a lawyer.” 9. Many of the chapter 13 cases that do not complete plans are actually successes. When Warren, Westbrook and Sullivan released their study that only 33% of chapter 13 cases result in discharge, they were treated as heretics. Now this success rate is conventional wisdom, but a new narrative has arisen that failed chapter 13 cases may actually be successes. The data says no. While the debtor remained in bankruptcy, chapter 13 avoided foreclosure for 81% of debtors while 70% faced loss of their home within 2-3 months after dismissal. Once their cases were dismissed, 57.5% of debtors reported that their situation was the same or worse than when they filed. 60% of debtors very much disagreed with the statement that they exited bankruptcy because they had accomplished their goals or found another solution compared to 20% who agreed or agreed very much with the statement. In a chilling statistic, 33% of debtors whose chapter 13 cases were dismissed reported that they struggle to pay for food. 10. Lenders maximize recoveries in each case. Sarah Pei Woo conducted a study of chapter 11 bankruptcies of residential real estate developers during the recession. Tragically, she passed away after a brief illness after her study was completed. She found that banks acted not to maximize recovery but to increase short-term liquidity and accede to regulatory pressure. The question was not how much they would recover but when. Among residential real estate developers, 81.7% were liquidated, 11.1% were sold in 363 sales and just 4.6% reorganized. Secured lenders filed a motion for relief from stay in 72.5% of the cases. Banks who were in financial distress were 24.9% to 28.6% more likely to seek relief from the automatic stay.

Dr. Thomas Hoenig was the Friday luncheon speaker. He served for twenty-five years as President and CEO of the Federal Reserve Bank of Kansas City. He said that he “wanted to get you on board that Too Big to Fail is bad policy.” He warned that the crisis brought about by Too Big to Fail in 2008 was likely to recur. He said that “unless you acknowledge the problems that brought about the crisis, it would happen again. He identified some of the factors as distorted incentives, not allowing the market to function and subsidizing favored groups. Dr. Hoenig identified three pieces of legislation as creating the climate for Too Big to Fail. The Glass-Steagall Act extended protections to commercial banks in the form of deposit insurance in return for separating out their risk-based activities. He described Glass-Steagall as “a covenant between government and the private sector” to “extend protection around you because of your role in society.” He said that “in return for special protection, we will limit (the activities of commercial banks) to payment systems and financial intermediation systems because these are the purposes we want to protect.” He said that if commercial banks wanted to engage in risk-based activities, they would have to do so with their own capital in a separately chartered entity. He said that Glass-Steagall was the system in place until the 1980s and “worked reasonably well.” According to Hoenig, “with stability comes its own sources of weaknesses.” The demand to take down the wall between commercial banking and other activities led to the Gramm-Leach-Bliley Act of 1979. The effect of GLB was to allow banks to invest in risk with a federal backstop. The risk of this was predicted by Adam Smith who noted that merchants would seek to widen the market and narrow their competition. While widening the market is desirable, narrowing competition is not. GLB narrowed competition by allowing some players an artificial subsidy. By eliminating Glass-Steagall, the market share of the largest banks was increased from 14% in 1979 to 60% in 2007. “Thus was born too big to fail.” The Dodd-Frank legislation was supposed to fix Too Big to Fail. He said, “I am concerned that it won’t” because “the incentives haven’t changed.” The largest institutions are now 20-30% bigger and the cost of capital is being kept artificially low. Under Dodd-Frank, if a TBTF institution finds itself on the ropes, the regulators must make a decision about whether the institution is solvent but illiquid or insolvent. This decision must be made on a Friday afternoon and must be approved by the Secretary of the Treasury and the Chairman of the Federal Reserve with possible involvement by the courts. He asked, “Who can take an institution of $2.2 trillion into receivership over the weekend?” As a result, he predicted that regulators would be inclined to find that the entity was solvent but illiquid and inject federal dollars to keep it afloat. As a result, he said, “the market doesn’t function” and “there is no cleansing of the market.” Dr. Hoenig said that anything this large cannot be allowed to fail. As a result, the incentives must be changed. He noted that in the current system, profits are privatized and losses are socialized. He recommended that investment banking, trading and other risk-based activities be moved into separate entities with private capital. He also called for making the competitive market more fair. He said that regional banks cannot compete with the twenty largest entities because they are not subsidized. Dr. Hoenig said that he disagreed with those who said that current capital requirements for commercial banks are too stiff. He disagreed, noting that before there was a federal safety net, financial institutions maintained capital of 15-20% compared to the current 7%. He said that (15-20% capital) is “what the market called for.” He also disagreed with those who said that such measures would place U.S. financial institutions at a competitive disadvantage compared to institutions in other parts of the world. Dr. Hoenig said that foreign banks were not a good model to follow. He said “look at their banks.” He said, we are “not in a competitive process to excellence, but a competitive process to the bottom.” He also warned that the country was too leveraged. He said that consumer debt as a percentage of GDP had grown from 80-90% to a high of 125% before dropping to the current level of 114%. At the same time the savings rate fell from 8% to 0% although it has risen back to 5%. Dr. Hoenig described the federal government as being in crisis. He said that government debt had increased from 40% of GDP in 1990 to 100%. Currently interest rates average 2.5%. He asked what if market interest rates began to apply? He said that monetary policy has been captured by Too Big to Fail. (I apologize in advance if I incorrectly transcribed any of Dr. Hoenig’s statistics or their units of measurement. I was taking notes as quickly as I could but possibly not quickly enough. Any statements that do not make sense are the result of my reporting rather than the content of the speaker).