February 3, 2010
Great New Article from Ronald Mann and Katie Porter
Saving Up for Bankruptcy, Georgetown Law Journal, Jan. 10, 2010
This is a great article, especially since it agrees with what I have been saying forever. Most consumers who file chapter 7 are driven to it by credit card collectors. Chapter 13s of course are driven by foreclosure sales.
This Article looks beneath the raw bankruptcy numbers and examines the mystery of why so few of the consumers for whom bankruptcy would be economically valuable actually choose to file. What prompts the few who seek bankruptcy relief at any given moment to separate themselves from the mass who do not?
From the abstract:
This paper probes the puzzle of why only a few of those for whom bankruptcy would be economically valuable ever choose to file. We use empirical evidence about the patterns of bankruptcy filings to understand what drives the point in time at which the filings occur, and to generate policy recommendations about how the bankruptcy and debt-collection system sorts those that need relief from those that do not.
The paper combines three kinds of data. First, quantitative data collected from judicial filing records that show the weekly, monthly, and annual patterns of bankruptcy filings. Second, 40 interviews with industry professionals (consumer and creditor attorneys, trustees, and judges) from five states (Georgia, Iowa, Massachusetts, Nevada, and Texas). The interviews probe why people file when they do and what distinguishes those that choose to file from those that hold off. Third, survey data from the 2007 Consumer Bankruptcy Project, the first nationally representative sample of bankrupt households. The survey data explores the struggles families endure before they choose to file.
The data support two empirical findings. The first is about the role of aggressive collection in motivating bankruptcy filings. Generally, apart from foreclosure-related filings, the emergency bankruptcy filing is largely a myth. Creditor collection activity does not force people into an immediate bankruptcy. On the contrary, it wears them down slowly but ineluctably, like water dripping on a stone. Second, the primary factor that affects the date on which people actually file is their ability to save up the money to pay their attorneys and filing fees. Thus, among other things, we see an annual peak shortly after families receive their tax refunds, and a semi-monthly peak related to the receipt of paychecks.
Finally, we build two important policy recommendations on those findings. First, we argue that the existing collection process is flawed by a prisoner’s dilemma that leads to excessive and wasteful “dunning” by creditors. Because each creditor has an incentive to be first in line to collect, and because the creditors can dun their debtors at little or no cost to themselves, creditors as a group naturally engage in dunning activities that debtors find intolerable – a level of activities from which a rational single creditor would refrain. We recommend a variety of solutions to strengthen the FDCPA. Some are at the level of detail (extending it to in-house collection, increasing the statutory damages, and the like). But the most important is a “do-not-call” rule modeled on the do-not-call list for telemarketers. Specifically, we recommend a low-transaction-cost mechanism (activated by telephone call or Internet site) that would automatically and immediately stop all creditor collection activity.
Second, corollary to our argument that excessive collection causes inappropriate filings, we also believe that the excessive filing costs deter socially valuable filings. To respond to that problem, building on earlier work, we argue that low-income low-asset filers should have access to a simplified administrative process that provides prompt relief without the costs and delay of judicial process.
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I thought that the authors understanding of the collection business was rather naive. First, while it is true that technology has allowed greater "drum beat" of collection activity than before I think it's also allowed debtors greater defenses than before. Google voice, caller ID, etc. Dunning is largely a fight between computers today. I agree that this fight is silly but I don't think the social costs are as punitive on consumers as the authors suggest. Certainly it isn't as punitive on the technologically sophisticated.
Second, the collectors lobby is fairly strong. A DNC list for BK I think is DOA. It's taking away their livelihood. After all, one of the reasons that industry survives at all is the confusion between correlation and causation. Many people who experience "episodic" distress would have avoided BK anyway. Currently collectors can credit their harassment activities for that result.
At the end of the day I don't think the real social problems are at the BK end. I think they are at the job creation/credit extension end. If Wall Street was forced to loan more wisely, and policies put in place that emphaize employment over capital creation, the problem with BK and collections would largely disappear.
Posted by: Daniel | Feb 4, 2010 8:10:33 PM