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President Biden has renewed the eviction moratorium for another two months, but millions of Americans behind on their rent or mortgage payments still face the prospect of financial insolvency when those two months are up—or sooner, if the moratorium is struck down by the courts.
Many of those households may eventually file for bankruptcy, which could relieve them of certain financial obligations. Bankruptcy is wrenching, humiliating, and traumatic under the best of circumstances. But absent immediate action, decisions made by a tiny office in the Department of Justice may strand millions in a less effective and more costly form of bankruptcy.
For consumer debtors (the majority of whom go bankrupt after experiencing sudden and unforeseen changes in their financial circumstances), the two primary forms of bankruptcy are those laid out in Chapter 7 and Chapter 13. The majority of individual bankruptcy cases are adjudicated under Chapter 7, in which individuals give up the majority of their assets to immediately erase their debts. Other individual debtors opt to file under Chapter 13, which allows individuals to keep their assets and eventually erase their debts through a repayment plan for the next three to five years. However, most debtors who file for bankruptcy under Chapter 13 do not succeed in completing their repayment plan, leaving them even worse off.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) exacerbated problems in the system. For one, it increased filing fees for Chapter 7 bankruptcy petitions. As individuals filing for bankruptcy are cash-strapped, even minor increases in fees can have devastating effects on whether an individual can even file for bankruptcy in the first place.
And up-front fees are immensely consequential when deciding whether to file under Chapter 7 or Chapter 13. Only one-third of Chapter 13 bankruptcies end in discharge. Chapter 7 bankruptcies are almost always successful, but they also have higher up-front filing costs.
One of the biggest components to those costs is legal fees: Since Chapter 7 discharges all debts immediately, Chapter 7 attorneys generally require all their fees up front—as does BAPCPA in regard to the filing fees. Chapter 13 filers, by contrast, are obligated to repay creditors for a lengthy period after filing, so Chapter 13 attorneys may collect their fees in smaller sums before and after filing.
Because of this difference in up-front costs, lower-income individuals often choose to file under Chapter 13. In these circumstances, only those who have—ironically—saved up sufficiently to file for bankruptcy are likely to ultimately successfully discharge their debts. But while filing fees impact all who file for bankruptcy, they are more impactful for Black filers, a quarter of whom have only $5 in financial assets. Moreover, Black Americans file for bankruptcy at more than twice the rate of the general population. Several studies have found strong racial disparities in types of bankruptcy filings; Chapter 13 debtors are twice as likely to be Black than are Chapter 7 debtors. Worse still, many bankruptcy attorneys, even those with extensive experience, have been found to purposefully direct Black filers toward filing under Chapter 13, which is both more expensive and less effective overall.
In a 2012 study, attorneys presented with a couple coded as Black were 15 percent more likely to recommend a Chapter 13 bankruptcy than those presented with a couple coded as white. Attorneys also rated the Black couple as more competent if they expressed a preference for a Chapter 13 bankruptcy, while the opposite held true for assessments of the white couple. Further, attorneys were more likely to agree to the perceived chapter preference of the white couple than they were for the Black couple. The study concluded that discriminatory decisions by attorneys could account for as much as two-thirds of the racial discrepancy in type of bankruptcy chapter filing.
For Black filers, post-petition payment arrangements may be part of the solution. Some Chapter 7 lawyers have worked out agreements with debtors to pay their fees in installments or to pay up front using postdated checks. Others have agreed to accept payment post-filing based on an honor system, whereby attorneys simply trust that their clients will eventually pay the full fee and do 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), housed in the Department of Justice. The EOUST and the 21 regional U.S. trustees in the U.S. Trustee Program ensure that judges, lawyers, creditors, and debtors abide by bankruptcy laws. They also oversee the activities of private trustees who work at the court level to administer bankruptcy estates and can refer to the attorney general suspected cases of bankruptcy fraud or other crimes. Ultimately, the role of the EOUST and the U.S. Trustee Program is to ensure the fairness and efficacy of the bankruptcy process in all states (except Alabama and North Carolina, which are not under the U.S. Trustee Program’s jurisdiction).
One official working to make the ordeal of bankruptcy more difficult, unfortunately, is the current director of the EOUST, Clifford J. White III. Along with some regional U.S. trustees, White has pursued legal action against lawyers who split their fees into a pre- and post-petition payment. A Bush-era appointee who has served as director since 2006, White has criticized the practice as dangerous to competition among attorneys.
While bifurcated payment arrangements can be predatory, some attorneys are truly looking out for the best interests of their clients. In a 2015 ruling upholding postdated check payment plans as legal, Judge C. Ray Mullins remarked that “[t]o deprive struggling debtors of willing counsel in such a time of need is markedly opposite of the intentions of the Bankruptcy Code” and that rejecting postdated checks as legal “would likely force attorneys to either take on chapter 7 clients on a pro bono basis or to commit fraud by encouraging their clients to file chapter 13 petitions just so they can be paid, even if those clients should rightfully be filing under chapter 7.”
Without the best thing—express statutory authority allowing Chapter 7 attorneys to collect fees post-petition and the undoing of BAPCPA’s harmful increase to Chapter 7 filing fees—many courts have blessed post-petition fee arrangements. As the chief overseer of the bankruptcy system, the U.S. 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, permit attorneys to enter into an honor system for post-payment agreements with their clients. As long as debtors are not harmed by the payment arrangements, those arrangements should be permissible.
Further, the EOUST should focus its enforcement efforts on racial discrimination by bankruptcy attorneys who force Black debtors into Chapter 13 bankruptcies. Trustees and other parties within the bankruptcy system must be advised to be on the lookout for potential systematic racial discrimination by bankruptcy attorneys, along with other forms of abuse of the bankruptcy system.
The unprecedented level of government support through the COVID-19 pandemic has led to a massive decrease in consumer bankruptcy filings even as unemployment soared. But as assistance programs and policies expire, households that fell behind on major payments may soon need to resort to bankruptcy for financial relief. Consumer bankruptcies during the Great Recession only reached their height in 2010 after the economy had begun to recover, as debtors ran out of other options and, ironically, saved enough money to afford an attorney and the filing fees. Now that the economy is starting to recover from the pandemic-induced recession, we are likely to see that same pattern.
Thankfully, some members of Congress have recognized these problems and proposed much-needed changes to our bankruptcy system, such as those in Sen. Elizabeth Warren’s Consumer Bankruptcy Reform Act. But legislation moves slowly, Warren has yet to reintroduce the bill this Congress, and bankruptcy petitioners need immediate help. To assist the hundreds of thousands of Americans who may potentially file for bankruptcy, the EOUST must do everything in its power to ensure the system works.