Part XI of XI
Written by Beckett Cantley and Geoffrey C. Dietrich
This article follows the outline contained in Part I, which can be read at www.cantleydietrich.com.
As noted above, studies show that some unscrupulous attorneys have steered financially illiterate debtors into Chapter 13, even when a Chapter 13 filing is clearly not in the debtors’ best interest, in order for the attorney to maximize its own profit. Poor debtors are disproportionately vulnerable to these practices, due to their higher rates of financially illiteracy. Poor debtors are also much more harmed by being pushed into a Chapter 13 filing, relative to debtors with average income, assets, and liabilities—a middle class debtor. This is because typical median income, middle class Chapter 13 debtors can offset otherwise disposable income with high mortgage and car payments, thereby lowering the monthly amount such debtor would have to pay over the course of a 5 year Chapter 13 repayment plan. A debtor who operates a business may also offset otherwise disposable income by amounts which are necessary for ordinary operating expenses for the business—an allowance generally of little use to someone living in cyclical poverty. A debtor who was mired in poverty, prior to filing Chapter 13, also would typically not have a mortgage and/or car note since debtors in poverty rent and use public transportation in disproportionate rates. Therefore, since a poor debtor does not have these high offsetting expenses, a poor debtor will typically pay a greater percentage of their post-filing income to pre-filing creditors, relative to a typical middle class Chapter 13 debtor. The disparate impact of Chapter 13 repayment plan monthly payment amount calculation provisions puts many poor Chapter 13 debtors in repayment plans that they cannot afford and which do not support their best interests—a sort of modern day debtors’ prison of cyclical poverty.
The BAPCPA extended the allowable length of Chapter 13 repayment plans, by up to two years, for debtors whose current monthly income is greater than the state median income for a family of the same size. The extension of Chapter 13 repayment plan terms has a disparate effect upon some young, poorer median-income debtors who have not yet started businesses, purchased homes, or financed the purchase of luxury cars. These disparately impacted debtors must spend 5 years in the “modern day debtors’ prison” described above.
The prolonging of the waiting period mandated between filings that obtain a successful discharge, from 6 to 8 years, would have a disproportionate impact upon those debtors mired in cyclical poverty, particularly low-income debtors who were subjected to predatory lending practices soon after discharging a prior bankruptcy case, thereby becoming greater in debt and more likely to re-file, due to the structure of the bankruptcy system itself.
In Chapter 7 cases, § 327 of the Bankruptcy Code provides that a debtor’s attorney must be appointed by the trustee and approved by the court, in order to receive fees post-petition or post-conversion. Therefore, attorneys for debtors in Chapter 7 cases are typically paid in full pre-petition. As noted above, the creation of extended Chapter 13 repayment plans may also prevent some Chapter 13 attorneys from receiving any compensation for their services for up to 5 years, absent an up-front retainer. Individuals in poverty, who are truly in need of bankruptcy, are also more unlikely to have the cash needed to pre-pay or retain counsel, file with the court, and complete other requirements to obtaining discharge. Lowering the cash advance amount that would give rise to a presumption of fraud could have a major chilling effect on the filing rates of debtors who can only afford the cost of filing bankruptcy through cash advances on credit cards.
Individuals in poverty rent and use controlled substances at disproportionate rates; therefore, provisions that limit the automatic stay in eviction proceedings, upon a showing that the debtor used and/or allowed the use of controlled substances on the property, result in poor debtors facing disproportionate and asymmetric dispossession of their places of residence in bankruptcy proceedings, as compared to wealthier homeowners.
Congress, in enacting the BAPCPA, unintentionally created numerous barriers and
hardships for low-income individuals to file for bankruptcy. Congress’s intent was to prevent abuse of the bankruptcy system and to combat poor personal financial accountability by adding additional procedural and substantive barriers to the Bankruptcy Code. The procedural barriers included an increased administrative burden, attorney due diligence requirements, increased filing fees, and the personal financial management course requirement. In regard to substantive barriers, the main addition to the BAPCPA was the means test, which is used to determine whether a debtor’s Chapter 7 filing is considered a presumptive “abuse” of the bankruptcy system. Additionally, the BAPCPA has limited the protections offered through the automatic stay in some re-filed cases and also expanded certain exceptions to discharge, meaning some debtors may owe more to debtors than under the previous Bankruptcy Code. These procedural and substantive barriers have had an unintended effect on the poor because in turn attorney fees have increased, pro bono representation has declined, and the increased likelihood poor debtors must represent themselves, which is even more difficult with these new hurdles in place. Additionally, the initial goal of the BAPCPA to reduce loss to creditors, who would in turn pass the savings to consumers, ultimately seems to have failed. In fact, credit card companies have seen record high profit numbers, while the cost to consumers has also increased over the same time. Although these new provisions may have been enacted in order to address serial filers who abused the bankruptcy system, poor filers will have increased hardship in filing for bankruptcy due to increased procedural and substantive barriers, along with increased attorney fees these individuals will be unable to pay.
This is the last of eleven installments of this article. The entire article may be found at www.cantleydietrich.com.
