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President Biden renewed the moratorium on evictions for another two months, but millions of Americans in arrears on rent or mortgage payments still face the prospect of financial insolvency at the end of those two months – or earlier, if the moratorium is overturned by the courts.
Many of these households could eventually file for bankruptcy, which could relieve them of some financial obligations. Bankruptcy is heartbreaking, humiliating and traumatic at the best of times. But in the absence of immediate action, decisions made by a small Justice Department office can lock millions of people into a less effective and costly form of bankruptcy.
For consumer debtors (the majority of whom go bankrupt after having suffered sudden and unexpected changes in their financial situation), the two main forms of bankruptcy are those set out in Chapter 7 and Chapter 13. The majority of individual bankruptcy cases are tried under Chapter 7, in which individuals give up the majority of their assets to immediately clear their debts. . Other individual debtors choose to file under Chapter 13, which allows individuals to keep their assets and potentially write off their debts through a repayment plan for the next three to five years. However, most debtors who file for Chapter 13 bankruptcy do not succeed in completing their repayment plan, leaving them even worse off.
The Bankruptcy Abuse Prevention and Consumer Protection Act 2005 (BAPCPA) exacerbated the system’s problems. On the one hand, it has increased the filing fees for Chapter 7 bankruptcy petitions. Since people filing for bankruptcy are strapped for cash, even minor fee increases can have devastating effects on the ability to file. ‘a person even file for bankruptcy in the first place.
And the upfront fees are extremely important when deciding whether to file under Chapter 7 or Chapter 13. Only one third of Chapter 13, bankruptcies are discharging. Chapter 7 bankruptcies are almost always successful, but they also have higher upfront filing costs.
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Legal fees are one of the most important parts of these costs: since Chapter 7 pays all debts immediately, Chapter 7 lawyers usually charge all of their fees up front, as does the BAPCPA with regard to concerns the administration fees. Chapter 13 depositors, on the other hand, are required to repay creditors for a long time after filing, so Chapter 13 attorneys can collect their fees in small amounts before and after filing.
Because of this difference in upfront costs, low-income people often choose to file a Chapter 13 claim. Under these circumstances, only those who have – ironically – saved enough to file for bankruptcy are likely to fail. pay off their debts successfully. But if the filing fees have an impact on all those who file for bankruptcy, they are more impactful for black filers, of which a quarter have only $ 5 in financial assets. In addition, black Americans are filing for bankruptcy at more than double the rate of the general population. Many studies to have found strong racial disparities in the types of bankruptcy filings; Chapter 13 debtors are twice as likely to be black than Chapter 7 debtors. Worse yet, many bankruptcy attorneys, even those with extensive experience, have been found to deliberately steer black filers into Chapter 13 filing, which is both more expensive and more expensive. less effective overall.
In a 2012 study, lawyers presented with a couple coded as black were 15% more likely to recommend Chapter 13 bankruptcy than those presented with a couple coded as white. Lawyers also rated the black couple as more competent if they expressed a preference for Chapter 13 bankruptcy, while the opposite was true for the white couple’s ratings. Additionally, lawyers were more likely to agree with the white couple’s perceived chapter preference than they were for the black couple. The study concluded that discriminatory decisions by lawyers could amount to up to two-thirds of the racial difference in the type of bankruptcy filing.
For black filers, post-petition payment terms may be part of the solution. Some Chapter 7 attorneys have made agreements with debtors to pay their fees in installments or in advance using post-dated checks. Others have agreed to accept payment after filing based on an honor system, whereby lawyers simply trust that their clients will end up paying the full fee and not sue their clients if they do not.
The executive agency responsible for overseeing the bankruptcy process is the Executive Office for United States Trustees (EOUST), hosted by the Department of Justice. The EOUST and the 21 US regional trustees of the US Trustee Program ensure that judges, lawyers, creditors and debtors comply with bankruptcy laws. They also oversee the activities of private trustees who work at the court level to administer bankruptcy assets and can refer suspected cases of bankruptcy fraud or other crimes to the Attorney General. Ultimately, the role of the EOUST and the US Trustee Program is to ensure the fairness and efficiency of the bankruptcy process in all states (except Alabama and North Carolina , which do not fall under the jurisdiction of the US Trustee Program).
Discriminatory decisions by lawyers could represent as much two-thirds of the racial difference in the type of bankruptcy filing.
One of the officials working to make bankruptcy more difficult, unfortunately, is the current director of EOUST, Clifford J. White III. Along with some US regional administrators, White a sued against lawyers who divide their fees into a payment before and after the petition. A person named in the Bush era who has served as a director since 2006, White has criticized the practice as dangerous for competition among attorneys.
While forked payment terms can be predatory, some lawyers really look out for their clients’ best interests. In a 2015 ruling upholding post-dated check payment plans as legal, Judge C. Ray Mullins remark this “[t]o depriving troubled debtors of a voluntary lawyer in such a period of need is clearly contrary to the intentions of the Bankruptcy Code “and that rejecting post-dated checks as legal” would likely force lawyers to take on Chapter 7 clients through ex gratia or to commit fraud by encouraging their clients to file Chapter 13 claims just so that they can be paid, even though those clients should legitimately file under Chapter 7. â€
Without the best thing – the express legal permission for Chapter 7 attorneys to collect fees after the petition and the reversal of BAPCPA’s nefarious increase in Chapter 7 filing fees – many courts have blessed the agreements on costs subsequent to the request. As the chief supervisor of the bankruptcy system, the US trustee program should do the same with the requirement that attorneys cannot abandon their clients for unpaid fees. The program should, at the very least, allow lawyers to enter into an honor system for postpayment agreements with their clients. As long as debtors are not prejudiced by the terms of payment, those terms should be allowed.
In addition, EOUST should focus its enforcement efforts on racial discrimination by bankruptcy lawyers who force black debtors into Chapter 13 bankruptcy. Trustees and other parties within the bankruptcy system should be notified. to be on the lookout for potential systematic racial discrimination by bankruptcy lawyers, as well as other forms of abuse of the bankruptcy system.
The unprecedented level of government support during the COVID-19 pandemic has resulted in a massive decrease in consumer bankruptcy filings even as unemployment skyrocketed. But as assistance programs and policies expire, households that have fallen behind on large payments may soon have to file for bankruptcy for financial relief. Consumer bankruptcies during the Great Recession did not peak in 2010 after the economy began to recover, with debtors running out of options and, ironically, saving enough money to afford a lawyer and filing fees. Now that the economy is starting to recover from the pandemic-induced recession, we are likely to see the same pattern.
Fortunately, some members of Congress have recognized these problems and have proposed much-needed changes to our bankruptcy system, such as those of Senator Elizabeth Warren. Consumer Bankruptcy Reform Act. But legislation is moving slowly, Warren has yet to reintroduce the bill in Congress, and bankruptcy applicants need immediate help. To help the hundreds of thousands of Americans who may file for bankruptcy, EOUST must do everything in its power to make sure the system works.
