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Bankruptcy Filings Hit 18 Year Low

BAPCPA appears to have really taken its toll, at least temporarily.  According to CNN, the number Americans filing for bankruptcy fell to 1988 levels.

According to the Administrtive Office of the U.S. Courts, nearly 600,0000 individuals filed for bankruptcy last year, down 71 percent from 2005, according to statistics released Monday by the Administrative Office of the U.S. Courts.

The number of bankruptcy filings by businesses fell by nearly a half last year as well.

The interesting part of the statistics is that part of the biggest drop in individual filings included parts of Louisiana, which had been devastated by hurricane Katrina.

Samuel Gerdano, executive director of the American Bankruptcy Institute, a non-partisan research group, attributed the precipitous declines on a surge in bankruptcy filing at the end of 2005, when Americans rushed to file before the new law took effect.

But while bankruptcy filings took a significant dip last year, many industry experts estimate that number will be back on upswing in 2007 in light of the recent fallout in the mortgage industry and the rising use of credit by consumers.

The New Bankruptcy Law Is Impacting Creditors

Following up on my previous post, Credit Suisse Fixed Income Research has found that under bankruptcy reform (BAPCPA) a larger percentage of Chapter 13 filers are unable to complete their trustee payment plans.  This has proven to be a minus instead of a plus for the mortgage companies and the mortgage investment community.  Sure the mortgage companies get more houses back for foreclosure, but that has proven to be less profitable than someone completing their bankruptcy plan.  The Credit Suisse report states:

We believe that the new bankruptcy law introduced on October 17, 2005 has had a profound impact on subprime borrowers. Under the new law, we find that bankrupt borrowers are riskier. Under the new law, the means test is more difficult to pass for bankruptcy petitioners, and more subprime mortgagor filers are required to enter Chapter 13 rather than Chapter 7 bankruptcy, even though they might not be able to complete the repayment plan. Our analysis reveals that a higher percentage of borrowers are failing their bankruptcy repayment plans.

Bankruptcy Is Not Helping Homeowners?

Whether as a result of subprime and predatory lending, the inflexibility of the new bankruptcy laws, or the changing attitude of consumers, The Wall Street Journal's Real Estate Journal.Com is reporting that filing bankruptcy is not helping homeowners avoid foreclosure.

The Journal reports that a study released in March by Credit Suisse Group finds "more subprime borrowers are turning to bankruptcy court to stave off foreclosure, as softening housing prices make it harder for them to sell their homes to repay debts...At the same time, the study shows, the number of borrowers who are actually able to bring current their mortgage payments through bankruptcy is declining, and more filers are ultimately turning their homes over to the lenders. The finding means investors in high-yielding mortgage-backed securities should expect higher losses on the underlying collateral".

As the Journal recognizes, "At least part of the blame ... lies with a bankruptcy law passed in 2005. The law raised the bar for people to qualify for Chapter 7 "fresh start" bankruptcy proceedings. Chapter 7 can enable individual filers to wipe away debts such as credit-card and medical bills so they can continue to make their mortgage payments. With access limited, more subprime borrowers are forced into Chapter 13, where some can't maintain their payment schedules for more than a couple of months".

"It's become harder to file for Chapter 7 to release debt burdens," said Jay Guo, a director in Credit Suisse's asset-backed securities research group in New York and the lead author of the study. "Going forward," he added, "delinquent loans are more likely to go into foreclosure directly rather than into bankruptcy," resulting in higher losses for mortgage-bond investors.

What would be amusing, if it where not so serious, is that mortgage lenders are now worried that the bankruptcy reforms that they spent many millions of dollars to push through Congress are going to be the demise of the market and the investors that they represent.  The mortgage company back reforms that no longer made mortgage loans, and the savings of a family's home, a priority.  They did not wish to admit that bankruptcy was a benefit to them.  Somehow they did not believe when ordinary consumers said that they could not afford to pay for their home, catch up their back payments, and pay all of their other debt, they did not mean it.  Owning one's own home use to be a priority in the law.  The housing industry elected to side with those who said it should not be for no better reason than they had to wait for their catchup payments.

Also shocking in this article is the emphasis on the mortgage industry that is suffering.  The article fails, and we have all failed to see the tragedy this is causing ordinary people and families.

YOU CANNOT VIOLATED THE STAY AFTER THE COURT LIFTS IT

The interesting question raised before the United States Court of Appeals, 10th Circuit, in Duran vs. Americredit Financial Services is whether a creditor can violate the automatic stay by repossessing an automobile after the Court has order the lifting the automatic stay, but before the 10 day appeals period has run?

According to the Bankruptcy Court, the District Court and the 10th Circuit, the answer is no.

After review the matter, the 10th Circuit merely adopted the decision of the United States District Court as correct and supplanted that written decision in its decision.  (District Judge Robert Blackburn, who wrote the decision is pictured).

The problem involved what appeared to be a conflict between 11 U.S.C. § 362(e)(1) and Rule 4001(a)(3) of the Bankruptcy Rules of Procedure.  362(e)(1) requires the automatic stay to terminate after the expiration of 30 days, unless it is Court orders otherwise.  Bankruptcy Rule 4001(a)(3) states that an order entered by the Court lifting the stay pursuant to 4001(a)(1) is itself stayed for a period of 10 days, unless otherwise ordered by the Court.   Apparently, the Court did not "order otherwise" under either provision and the automobile on which the Court lifted the automatic stay was repossessed by AmeriCredit  on the 9th day after the Court's order lifting the stay was entered.

Reviewing the Bankruptcy Court's ruling the District Court stated:

The key question is whether the stay created under Bankruptcy Rule          4001(a)(3) suspends the automatic termination of the automatic stay when that          termination becomes effective 30 days after the filing of a motion for relief from          stay.  I conclude that the Rule 4001(a)(3) stay cannot have that effect.  The          United States Supreme Court has the power to prescribe rules for cases brought          under Title 11 of the United States Code.  28 U.S.C. § 2075.  Although Congress          has an opportunity to review new rules before they become effective, Congress'          explicit approval is not required before a new rule becomes effective.  Id.  To the          extent a rule adopted by the Supreme Court abridges, enlarges, or modifies a          substantive right, the rule is ineffective, because  2075 provides that such "rules          shall not abridge, enlarge, or modify any substantive right."  Id.  For          AmeriCredit, the termination of the automatic stay under  362(e) is a substantive          right.  A secured creditor's ability to recover its collateral, the property that is          security for the debt, is a substantive right.  "[T]o the extent Bankruptcy Rule          4001(a)(3) is read to be inconsistent with the Congressional thirty-day stay          duration mandate of Code § 362(e), it would exceed the rule making power given          the Supreme Court by Congress in 28 U.S.C. § 2075." 

New Century Files Bankruptcy . . . Many Of Its Customers To Follow?

According to CNNMoney, the high flying subprime mortgage lender, New Century, filed for bankruptcy protection and will immediately lay off 3,200 of its workers or 54% of its workforce.  Although CNNMoney calls New Century the "poster child of subprime lending" it is important to note that the industry made or extended $640 billion of such loans last year alone.  That is 20% of the nations lending (or about 1 in 5), which is an astonishing number when you think that 1 in 5 Americans have such bad credit that they have to resort to these lenders.  Financial firms and hedge funds likely own more than $1 trillion in securities backed by subprime mortgages.  Now 13% of these loans are delinquent.  This 5 times more than traditional mortgages.  Further still, 2% of these outstanding loans are now in active foreclosure proceedings.  The experts expect this percentage to rise.  It would only seem like a matter of time before many of New Century's customers, and those of other subprime lenders, follow New Century into bankruptcy.