The news events of the past couple of days have definitely had an impact on the energy level here, and definitely not in the upward direction. Additionally, as I learn more, the facts, figures and grey areas of Bankruptcy “reform” seem to get more difficult instead of easier to navigate, so the comprehensive takedown is STILL in progress after all this time (ugh).

So, for now, I’ll provide quick links to a number of interesting developments and call it a day here:

- The Wall Street Journal (link requires paid subscription) reports that unscrupulous software vendors are selling source code for creating viruses. It’s legal, and law enforcement says it is powerless to stop it. Great, now anyone can send viruses. Beef up that firewall now (for those without WSJ, Google “virus writing information” and you’ll get the general idea).

- USA Today does a piece on outrageous executive pay, and it’s more outrageous than ever. What is especially maddening is the disconnect between pay and performance; all too often CEOs get paid whether they perform or not, and if they don’t perform they get paid outrageous sums to go away. The difference between how shareholder governance is supposed to work and how it does work is truly the Achilles heel of capitalism. (April 11 update: The WSJ’s CEO Comp Survey Special Section, not linked since it requires a paid subscription, claims that there is a “nascent trend’ of companies getting serious about pay for performance and low pay for non-performance. We’ll be watching for beyond-nascence evidence, which would be welcome.)

- VOIP “leader” Vonage is catching well-deserved fury for not automatically including some form of 911 calling capability. Customers essentially had to “opt in” to get 911 service (it’s not clear whether there is a charge for this). This is unfortunately another example of companies being forced to do what anyone ethical would have done without hesitation in the first place.

This was just another day that showed us that the proliferation of identity theft attempts and growth in potential exposures continue unabated:

- A laptop with 100,000 Social Security numbers was stolen earlier this month from The University of California at Berkeley. In case you are wondering if you are affected, “University officials say the stolen computer contained information on most individuals who applied to graduate school between fall 2001 and spring 2004, graduate students who enrolled between fall 1989 and fall 2003, and recipients of doctoral degrees from 1976 through 1999.”

- A self-serving but still valid point-making piece tells us that Instant Messaging, since it’s essentially a P2P network, has many of the same exposures to virus attacks and identity theft attempts that have been noted previously in the popular file-swapping P2Ps. Ignore the bogus claims at the end that VOIP is the answer to all the world’s problems.

It was a day that also gave an inkling that there is finally some serious energy behind attempts to prevent ID theft and help victims:

- The article about the Berkeley heist quotes California Senator Dianne Feinstein: “It clearly demonstrates the need for a comprehensive approach to identity theft in order to give Americans more control over their personal information.”

- Meanwhile in a sign that companies are getting a clue, MetLife Home and Auto, pending regulatory approval, is planning to offer free identity theft help to all of its existing and future homeowners, rental and condo insurance policy holders (apparently it’s not available to life policy customers). It’s the first program of its kind, and is being launched in New York and Florida. So if you live in those two states and are a customer, heads up.

To work through my bankruptcy posts, I would like to learn the following from anyone who might happen to know:

What percentage of charged dollars does a credit-card company’s affinity partner typically get?

An English translation of the question:
If you charge $100 using a co-branded credit card, such as the Ebay MasterCard or the American Airlines Visa, the merchant usually has to pay about 2% (so let’s call it $2) to the credit card issuer. How much of that $2 does the affinity partner (the one that isn’t Visa or MasterCard) typically get? $1? 50 cents?

Getting a handle on this could go a long way towards explaining why certain groups you would expect to be opposed to Bankruptcy Reform are totally missing in action. Attempts to get this information from credit card issuers have been futile thus far (no surprise there).

If you know a general answer, or have a specific answer about a credit-card program you are familiar with, I would appreciate hearing from you at biz@bizzyblog.com.

UPDATE: Without getting anything tied to a specific card program, I have learned from one of the major card issuer’s call centers that affinity partners can get up to 1% of the amounts charged (i.e., up to $1 for every $100 spent on the card). I hope to learn about a specific affinity program or two shortly.

UPDATE 2: I just got the broad outline of a school-related program and feel comfortable that a typical arrangement is anywhere from 0.8%-1.0%. Let’s just say: That’s a lot of moolah. I’ll be commenting about this in the coming days.

One of the more interesting and almost unnoticed developments in privacy and identity protection is the “credit freeze.” It’s currently available in California (link is to CA’s Office of Privacy Protection explanation page) and Texas, and will be in place in Louisiana, and Vermont in July. Texas and Vermont limit or will limit freezes to victims of identity theft.

What is a credit freeze? It’s a blanket prohibition on access to your credit file by anyone besides you. You can still get your own credit report for the purpose of reviewing them.

Why you might consider it:

- It’s a great weapon against ID theft. A thief who steals your info won’t be able to get credit or open accounts in your name. It’s not the be-all-end-all, but it’s clearly very powerful.

- If you never, or very rarely, apply for credit, services requiring a credit check, or employment. You would be a good candidate for a freeze if you are in a paid-off house or have a mortgage with a very low rate, pay cash for your cars, have 1-2 credit cards you seldom use, aren’t shopping for insurance or other services that generate an inquiry, and don’t expect to be in the job market for some time. Even though that seems like a long list of qualifiers, millions of Americans would fit this description.

- (Don’t take this wrong) To control yourself. In other words, you know that you’ll be tempted by credit offers, so rather than risk giving in, you freeze your credit. This would also seem to be a good idea for a parent to consider for a teenager who is just learning the financial ropes.

Fightidentitytheft.com has the lowdown and FAQs on the California freeze, including link pages to the specific procedures required by each credit bureau to put a freeze in place, and to temporarily unfreeze your file with a PIN number.

Here are starting-point links for the other states:

- Louisiana

- Texas

- Vermont

In general, the costs per credit bureau is $8-$10 for a freeze and $8-$10 for an unfreeze, but freezing is free for victims of ID theft who provide a police report as proof.

The credit bureaus and the financial services industry ABSOLUTELY DESPISE credit freezes. The bureaus complain that it’s very inconvenient for them to have to flag files, that fraud alerts (where you have to be contacted before a credit inquiry can be completed) provide sufficient protection, and that it restricts their potential income from credit inquiries. Lenders and other gripe that it slows down the loan process when they have applicants who have to temporarily unfreeze their files to complete an application. Freeze opponents also claim that consumers don’t want it–As of last summer, only 2,000 Californians and 150 Texans have taken advantage of the freeze, according to Experian.

My response: Too bad, so sad, guys. I don’t see anything better for fighting ID theft, especially because many of the best freeze candidates are those who would be unlikely to detect an ID theft in progress until several months, or even years, have passed.

Usage of the freeze option is low simply because the credit bureaus don’t publicize it. Here’s hoping the freeze gains momentum in more states. One of the things to watch for in the current privacy/ID theft debate in Washington is that by nationalizing laws in this area, Congress might take the freeze opportunity away from the states–a VERY bad move. I would go in the opposite direction–at a minimum, a freeze should be available to any victim of identity theft in any state; then let each state decide whether it should be an option available to everyone else.

If you think a freeze is a good idea, lobby in your state for one, and encourage Congress not to close off the opportunity with national legislation.

Business Week (link requires subscription) had a troubling sidebar piece a week ago that, despite its age, needs exposure. In effect, it claims that we can no longer automatically assume that banks will reimburse account holders for debit-card and other account-related fraud or unauthorized-use losses.

The money paras:

Banks still absolve consumers of any losses from the fraudulent use of credit cards — even months later. Most also now waive even that modest $50 payment. That’s not the case for business cards, though. Federal laws that limit user liability apply only to consumers — and most banks make corporate customers assume far more liability for cards issued to their employees. Their reasoning: Employees may not treat a business card with the same care as their own, since it isn’t their money.

What’s more, while many banks indemnify consumers from fraud involving debit-cards and electronic funds transfers, that’s far from universal. Under federal law, banks can hold consumers liable for the first $50 of losses from cases reported within two days, and up to $500 in losses going back 60 days. And consumers who wait more than two months after receiving a statement to report fraud may be out of luck. Banks are under no obligation to reimburse them.

Two thoughts:

1. This is one more reason, if you needed one, to check your bank balances and activity regularly, to review statements as soon as you get them, and to complain to your bank immediately if you see unauthorized transactions.

2. Banks had better be careful at how aggressive they are at denying reimbursement. Besides the likelihood that they’ll be sued (somebody written up in the article is doing so–the bank doesn’t want to pay because the person’s virus protection was inadequate!), nothing will keep people from transacting business online like the knowledge that they’re exposing themselves to unreimbursed losses that are less likely if they keep doing everything offline.

Lots of news today about this, especially in McPaper (USA Today), which actually does a nice job on it:

- The core article leads with the Betamax case 20 years ago, when the Supremes (the ones in black robes) said Sony couldn’t be liable for copyright infringement because VCRs have substantial uses other than for illegal movie copying. That meant that law enforcement would have to go against individual VCR owners, which of course has almost never happened. Grokster and Morpheus, the file-swapping enablers who are defendants, are trying to get the Betamax approach applied to them. So far, to the astonishment of many, they have prevailed. Today the Supremes will hear arguments in the case.

- The interview piece quotes veteran artist Janis Ian, who supports file-sharing as a way to develop new buyers, and opponent Sheryl Crow. References are made to other notable supporters (Phish, Dave Matthews) and vocal opponents (Springsteen, Eagles).

- There’s a sidebar at the interview piece about two file-swapping startups that will be legit from day one: Snocap, which has Napster pioneer Shawn Fanning involved; and Peer Impact, which in addition to charging for songs directly, will enable enterprising users to earn commissions for convincing their friends to buy songs they bought. These are certainly worth watching.

- An interview with Andrew Lack, the head of Sony BMG Entertainment, which has dumped an average of 3 spams a day on me for the last 2 years despite several unsubscribe requests (I know that’s a dumb idea, but as part of my business I have to do these types of things from time to time), talking about the “morality” involved. I’ll start listening to him when the spam stops.

Missing from the piece is my big gripe: the acts that don’t make their music available in digital form, and who still moan about illegal downloads. A partial list of brain-dead artists who feel they’re too good for iTunes: Beatles, Led Zepellin, Jethro Tull, Metallica (y’know, the guys who complained the loudest about the original Napster), Paul McCartney, Wings, and old Rolling Stones (I mean pre-1968 or so; I know, it’s ALL old). Now what do you think a lot of people do when they can’t find the songs they’re perfectly willing to pay for legally? Even if the industry wins, the columns note that file sharing through instant messaging, iPod transfer, and other apparently untraceable means is growing.

Until the industry gets virtually all of its content online, it will run the risk of people going to the “dark side” when what users want isn’t available legally (including many users who would never have considered it if the content had been there when requested), no matter what tune the Supremes sing when they rule later this year.

UPDATE: Sony’s hypocrisy is almost too much to handle. Besides the obvious inconsistency between their position on Betamax as a defendant vs. today as music-industry plaintiff, it’s clear that this is a company that runs with other people’s ideas and dares people to catch them. This court ruling today is a perfect example:

TOKYO (Reuters) - Sony Corp. said Monday it was ordered by a U.S. court to halt sales of its blockbuster PlayStation consoles in the key U.S. market and pay $90 million in damages to a small U.S. tech company, Immersion Corp.

Sony Computer Entertainment (SCE), Sony’s gaming unit, said it would appeal the decision by a California federal court in the patent infringement case.

For the time being, Sony will keep selling PlayStations because the order — which covers the PlayStation and PlayStation 2, two game controllers and 47 software titles — will not go into effect before the appeal, an SCE spokeswoman said. Sony will be paying compulsory license fees to Immersion, she added.

……. Immersion, a California-based developer of digital touch technologies, claimed Sony Computer Entertainment infringed on its technology that makes a game controller vibrate in sync with actions in games, the Japanese game maker said.

And I’m supposed to give a rip (so to speak) when Sony cries “foul” over filesharing?

UPDATE 2: Politology has some interesting points and links on the topic.

Click “more” to read:
(more…)

Sometimes we’re our own worst enemy when it comes to privacy. The cavalier use of Peer-to-Peer (P2P) programs like Kazaa and LimeWire is one such instance.

Michelle Malkin links to a disturbing story that is not about identity theft, but about inadvertent Identity Giveaway (bolds added):

Don Bodiker uses a popular file sharing program to swap music and other information over the internet. He also uses his computer to prepare his taxes.

He never thought the two had anything to do with each other, until he got a call. “I had no idea who he was or what he was. I just thought he was a typical telemarketer,” Bodiker said of the call. “And he wanted to inform me that my tax returns were being posted out on the internet. I was very skeptical but he then proceeded to tell me some very specific details about my tax return.”

File sharing software allows you to download files stored in certain shared folders on other users’ computers. The flipside is they can also download files from your shared folder. There’s a folder on their computer the Bodikers use store the music files they wanted to share. What they didn’t realize is that their tax return software saved their returns in the very same place.

“Oh my God, I thought everybody and anybody knows exactly what my social security number is, my address, you know, anything that I had that was pertinent on there that could be used as an identity theft process,” said Bodiker.

And he’s not alone. A simple search on the file sharing network for the word “tax” turned up hundreds of returns. “It’s made me more aware of the possibilities of programs that you attach to your computer,” said Bodiker. “Ultimately, if you don’t have to keep it on your computer, make a hard copy, and file it away. And that’s always the best thing.”

That last idea of taking all sensitive files off of your hard drive is nice but IMHO impractical advice, simply because if you take it off your hard drive, you have to back it up TWICE in case one of the backup media fail. In the case of taxes, the current year return relies on info from the previous year’s return, and depending on how you do backup, this year’s program may not be able to read in last year’s info.

Two better ideas:
- Purge ALL P2P from all of your computers (Kazaa, Limewire, Bit Torrent, etc.).
- If you must do P2P, turn off all sharing from your computers to the outside world. Purists might say you’re being “selfish,” but I say you’re practicing self-defense.

Also, be aware that anyone who uses P2P, especially on a Windows-based machine, opens themselves up to any virus, spyware, or malware that a mischievous file-sharer might incorporate into an innocent-looking music or other file.

THE PREVIOUS POST showed, based on the Federal Reserve graph from this Marketwatch column (link requires registration), that interest costs have gone up substantially in the past 10 years despite falling interest rates:

I concluded that this shows that “amounts borrowed have simply gone through the roof in the past 10-plus years…..more than offsetting the impact of interest-rate reductions, meaning that households ARE NOT in about the same position as they always have been, as proponents claim.

A quick example will show you why this is so:

The above uses a person or family with annual disposable income of $40,000 in 1994. A disposable income with roughly the same purchasing power would be $50,000 in 2004.

I multiplied each disposable income by the related interest expense percentages on the Federal Reserve/Marketwatch graph. I then divided each interest expense amount by a rough estimate of what average interest rates would have been at the time, assuming only a 2-point differential between 2004 and 1994 rates, to arrive at Estimated Debt Balances. What this tells us is how much debt a person had to be carrying in each year to have the indicated amount of interest expense.

NOTE: I suspect that the interest rate differential is closer to 3%, but wanted to be conservative. I’m very confident that the differential is NOT less than 2%, because the average rate on 30-year mortgages was 7.75% at the end of 1994 and 5.71% at the end of 1994, rates on installment loans have dropped like a rock because of car-dealer incentive rates, and overall credit card interest rates have dropped a bit (with the lower rates mostly going to “desirable” cardholders).

The Estimated Debt Balance in 2004 is not too far from double that of 1994 (50% or so after adjusting for inflation, for those who wish to quibble).

As noted in the previous post, we can debate whether the increase constitutes a “drowning in debt” scenario (and the research on that continues). You could also dispute the average interest rates I used, but if anything they’re high–If I had used 9% and 7%, the results would have shown an even bigger percentage jump in the Estimated Debt Balance. But the proponents of bankruptcy “reform” should at least stop promoting the fantasy that the average person or family is in about the same shape as they were 10 years ago. They just aren’t.

The comprehensive takedown of the bankruptcy “reform” arguments that “debt is not the problem, stupid lending is not the problem, bankruptcy is just too easy” will have to wait until early next week. This post, though, should give you a taste of what’s to come. It is the first of many debunkings to come of the inaccurate and misleading core statistical and economic arguments proponents are using to place undue burdens on borrowers in trouble and give a free ride to lenders.

___________

Todd Zywicki, the academic face of the proponents of bankruptcy “reform,” said THIS at volokh.com on March 14:

(last paragraph)
Two lessons are clear. First, Americans are not “drowning in debt.” Rather, once you adjust for the record-low interest rates of recent years, it is clear that American households are roughly in the same position as they always have been.

Uh, NO (actually, HECK NO), as Marketwatch’s Peter Brimelow and Edwin Rubenstein report (link requires registration):

Americans are devoting a larger share of their disposable income to interest payments today than at the start of any tightening cycle over the past quarter-century.

….American households are leveraged to the hilt — or at least (do households have hilts?) more than they’ve ever been.
Credit card interest rates haven’t come down much, yet this type of debt has risen more than mortgages.

Just to be crystal clear, this graph only charts interest expense and ignores principal, and reflects monthly interest expense divided by monthly disposable income.

Interest rates are lower, but interest expense keeps going up. How can this be? The most likely explanation is that amounts borrowed have simply gone through the roof in the past 10-plus years (you will see proof in THIS POST that they have), more than offsetting the impact of interest-rate reductions, meaning that households ARE NOT “roughly in the same position as they always have been.” The other explanation, which I think can be quickly discarded (ya think?), is that consumers are making billions of dollars in contributions to lenders just for the heck of it.

In spite of this clear data, which has clearly been available for years, Zywicki contends that LOWER interest expense is offsetting the impact of higher debt on family budgets. As you can see, that claim is Grade A baloney (or to be a bit kinder, simply not true). The only open question to me is whether the dramatic debt-level increases and the just-demonstrated higher interest costs have caused an inordinate number of people to reach the “drowning” point. We’ll see in future posts.

Back to Professor Zywicki:

Second, make sure you have the correct data to do the job you are trying to do.

Heh. Indeed.

So, what’s more important, a cash-flow problem that is likely to occur in 12 years or a insolvency problem that will happen in 37 years?

If you’re AP, you talk about the latter, more distant problem first (4th and 5th paragraphs in story):

The Social Security trust fund will exhaust its assets in 2041 instead of 2042 as forecast last year….

Social Security outlays would outstrip tax income in 2017 instead of 2018 as previously forecast, the report said.

Those who think nothing needs to be done to address Social Security’s problems, or even that we can afford to dither for a few more years, need to realize that in 12 years, when benefits exceed collections, something will have to done. Because the “Trust Fund” only has government bonds in it, not some mythical stash of cash, the choices then, in 2017, will be:

- raise taxes

- cut benefits

- borrow money

By that time, it will be way too late to even consider private accounts.

Or, something can be done in this Congressional session. Those who are saying “we won’t talk about solutions until the idea of private accounts are taken off the table” are really saying “we want to run out the clock until we get to the point where the current system is the only choice.”

Trouble is, the current system is not sustainable without dramatic increases in the retirement age (remember when Alan Greenspan proposed continually raising the Social Security retirement age for full benefits?), equally dramatic cuts in benefits, or economy-stifling tax increases (see: Germany, France).

_________

UPDATE 1: Interesting headline comparisons (on of course the SAME news):

- Reuters (on Yahoo Finance): “Social Security Outlook Unchanged-Trustees”

- Marketwatch.com (link requires registration after 24 hours): “Social Security Outlook Worsens Slightly”

- USA Today: “Report Paints Tough Future for Social Security, Medicare”

- Forbes.com (home page as of 6:15 pm): “Social Security to Go Broke Earlier”

UPDATE 2 (suppressing giggles): Kevin Drum with a little help from another graphically challenged blogger, says not to worry, the outlook is improved–for 2080, because the projected ANNUAL shortfall then will “only” be 5.75% of all payroll vs. the 6% projected in last year’s report. Zheesh. You guys do realize that anything below 0% is negative (a shortfall, a deficit, a black hole because it gets worse and worse in every year on the graph), right? Y’all sure you didn’t run some long-gone Internet start-ups in the late 90s?

UPDATE 3: Kiplinger has a nice balanced overview of the key features and issues of Social Security here. Money quote: “Eventually, someone must touch the third rail, or the entire social security train will come to a screeching halt.” Ya hear that, Kevin?

The Schiavo drama and the Northern Minnesota shootings have for the moment made detailed postings on business topics seem a bit superfluous. I’ll probably get back to detailed posting tomorrow afternoon (or perhaps earlier).

In the meantime, you shouldn’t miss these stories on business and personal finance that on a normal day would have received nearly top billing:

• The Fed raised rates again, but more importantly is telegraphing worries about inflation which will probably mean more hikes, and sooner.
• This awesome economic marvel, one of the few Internet companies that has been “real” since its inception, celebrates its 10th anniversary (and makes me feel old).
• Apple’s somewhat deserved but mostly lucky status as a nearly attack-free operating system is about to change, according to (admittedly self-interested) Symantec, the Norton Internet Security people. Full disclosure, I’m a Mac user, but, unlike certain other Mac users, I don’t think it’s the only computer worth using (in fact, don’t tell anyone but I sometimes use Virtual PC with Windows XP on my Mac).

UPDATE:
This writer believes Mac security software is a complete waste of time, and that Symantec is hyping a non-existent threat. I have looked in the recent past at the logs of outside access attempts on my Norton Personal Firewall for Mac before I turned detailed notification off. There were hundreds and hundreds of access attempts, and they almost certainly include attempts to read or copy files from my hard drive or attempts to co-opt system resources for denial-of-service attacks. I’ll keep my Norton Internet Security running, thank you very much. There’s more to worry about than viruses.

Todd,

Thanks for you thoughtful responses throughout all of this.

I believe the political analysis in your March 16 National Review column “Credit Worthy” ignores the obvious. When you look comprehensively at the voting record of Senators like Biden (D, MBNA-DE), Stabenow (D, GMAC-MI), and a few others on the left, and even some Senators on the right, it’s clear that in this case they voted either their campaign wallets or their party-line loyalty and not their core beliefs (presupposing they have any). Financial industry contributions to the House aren’t really relevant, because the House didn’t need to get bought; they have clearly been on board in large numbers from past votes, so why throw money at them?

Sometime a bill benefits from the bubbleheaded thinking of its opponents, and this is one of those times. Though it is relevant, you have to do more than cry “women and children” without substantiation to expect to make headway in an argument. The opposition’s abortion gambit (trying to add an amendment to keep abortion protesters who lose civil suits from filing) was a clear failure to count heads and, though it worked two years ago, really backfired this year. Its result was a misdirection that has kept religious and other grass-roots conservatives so relieved about the abortion business not being in the bill that they haven’t taken the time to understand the effects of the bill at the detail level (one exception is Christian financial planner Dave Ramsey, who ripped the bill from head to toe on CNBC and left it in little pieces on the ground about 10 days ago). If they understood its apparent full impact and lack of proportionality on the creditor side (and if they understood the system at the level Ramsey appears to from personal and professional experience), I believe there’d be thousands of Dave Ramseys denouncing this bill.

Though you claim people chronically don’t tell the truth about their assets in filing for bankruptcy, it appears to me that the asset valuation methods and the reduced scope of assets to be protected in the new law are draconian, and will encourage otherwise honest people outraged at the naked greed of their creditors and the newly-legislated rigging of the bankruptcy system to lie when they wouldn’t have otherwise. Expect the storage business to spike. It may force fully honest people to sell most of their “stuff” on Ebay or at yard sales. My understanding is that you get to “keep” one TV and one VCR (you have to list all others, regardless of age, perhaps at their original cost), and that there are other similar examples of foolish micromanagement. While it’s obviously necessary to make filers list anything readily marketable that’s worth a few thousand or more, I don’t see the public-policy benefits of forcing people to always list and therefore often sell “stuff” down to this level.

Your comparison to the IRS not taking our word for things is interesting, because tax preparation and filing is largely self-reporting, especially for the self-employed, and frequently lets taxpayers use estimates. For example, the IRS lets every taxpayer assume this year that their car costs 40.5 cents a mile to drive unless the taxpayer wants to claim more. The IRS lets people out of town on business assume that meals and entertainment are certain amounts per day without asking for proof. So to be analagous, other than craven creditor avarice, why wouldn’t the bankruptcy courts simply force people to specifically identify all individual items currently worth a few grand and leave everything else alone?

There is not a great deal of love lost between me and certain lawyers, but it seems that an unreasonable level of potential liability (Item 3 at link) is being imposed on the bankruptcy bar that almost no other lawyer has to contend with, namely that if a client “lies” or “forgets” to disclose something, the lawyer is liable, even if the lawyer was diligent, and will be hit with sanctions, civil liability, and criminal liability (this may be overwrought-I’m still investigating). I’m being told the effects of the legislation on the bankruptcy bar will be harsh, and that many will just close up, find better areas to practice in, or leave the profession. The people who get out are well-educated and will probably do fine in whatever they do, but I am concerned that the cost structure for those lawyers who remain will be much higher, both because of the level of verification that will be expected of them (often involving outside appraisals and the help of outside accountants), and because of the insurance they will have to carry for potential liability. Because these costs will of course translate into higher fees, a lot of individuals and familites who really should file for bankruptcy won’t because of the legal fees, or will delay filing and make things worse then they ultimately do. Or maybe that’s what the financial industry wants to see.

On balance, there’s a lot in the bill that looks like overreach, the kind of overreach that you see when one group has undue influence over the legislative process:

- “80-20 logic” and the need to see how procedural changes work out would have led me to set the income threshold at 150%-175% of the median, so that the $80-$100K person you were so concerned about in your March 15 NRO column would be “captured” and there would be enough experience after a year or two to do a cost-benefit analysis and identify matters needing correction before deciding whether to continue, discontinue, or extend its reach to lower incomes. But I suppose the financial industry couldn’t wait for that.

- It appears to impose enormous costs and inefficiencies on the debtor side while letting all of the benefits accrue to creditors (small on a per-person level, but big to them) but doing nothing to restrain them. It doesn’t, just as one example, seem equitable, reasonable, or even humane for all creditor penalty fees and penalty-rate charges to go into the debt pool as if they’re totally legitimate balances to be repaid (sorry, they simply aren’t). If a debtor files and goes to 13, fine, set them up to pay principal plus some reasonable accrued interest (like maybe 12%), and THEN figure out a repayment schedule. You may think creditors should be entitled to collect penalty rates and fees in bankruptcy; I think it borders on (no, it IS) cruel, and is a complete distortion of what going through a bankruptcy and emerging from it are supposed to be about. The way it is, EVERY creditor feels they must pile on the interest and the fees, because if they don’t, they won’t collect as much in 13 as their competitor who does.

- It also imposes significant costs on the bankruptcy court system and the government with no visible compensation from the creditors who are its sole beneficiaries. It could be that competitive pressures will cause them to have to pass the $3 billion extra ($10 per person) they will in theory collect on to consumers (if “reform” proves the 10% fraud estimate to be correct, which I sincerely doubt). Industry consolidation, where as one example the top 10 card issuers have about 85% of the market, makes me think that at best it will be a 50-50 split between creditors and consumers. I also feel, based on my quick look at the Congressional Budget Office cost projections, that these estimated costs are significantly understated.

- One other valid but unquantifiable point: I know from what I do for a living that people who solve their debt problens are more productive workers than when they were up to their ears in debt and didn’t know what to do. Similarly, I would expect those who get a “fresh start” by emerging from Chapter 7 are more productive people in the years after filing than those who endure years of Chapter 13 (and often fail). The obvious counterargument is that this is “funny money,” but if 100,000 “fresh-start” people making $50,000 a year (the people who will be “captured” by the bill) are even 5% more productive than the same number of people who are either trying to deal with incurable debt or struggling through Chapter 13s (the 5% is a low estimate, based on some research I have seen), they will produce $250 million more in economic value. This isn’t to say that everyone should go Chapter 7, but it’s a compelling consideration that has been totally ignored in the current debate, and perhaps partially explains why the bankruptcy explosion hasn’t brought down the economy like many people thought it would. By the time you tote everything up, the ultimate net benefits of the bill appear so small that I’m left wondering, other than to enrich a special interest, why we’re wasting our time.

I have also been told that thanks to the bill, many creditors will be begin to challenge Chapter 7 filings of those who are below median income and ask that they be made into 13s (and even though below-median filers are supposed to be automatic Chapter 7 filers) using asset-based arguments (i.e., going after the furniture, etc.). If true, this makes the claim that nothing changes for Chapter 7s below the median patently false. These are also the types of 13s most likely to fail under the inflexible formulas of the new Chapter 13 regime in the bill, and will add to the already scandalous 50%-plus failure rate we see in Chapter 13 filings.

Finally (and I’m sure you totally disagree), passing this bill is a potentially dangerous political calculation for the GOP majority (especially Senators), the minority of Democrats who supported it, and the next GOP candidate for president. This isn’t welfare reform, though I’m sure attempts at a comparison will be made. No matter what one thinks of it, taxpayers have been the direct beneficiaries of the cost savings from welfare reform. Creditors are the direct beneficiaries of bankruptcy “reform,” and maybe the taxpayers will ultimately pick up a miniscule and virtually invisible benefit. Meanwhile, the creditor side of the bankruptcy equation hasn’t been dealt with and should be dealt with simultaneously (or perhaps, given the status of the legislation barring a miracle or a presidential veto, I ought to say “should have been”). If the creditor abuse stories both in and out of bankruptcy ever percolate up to national visibility, the bill’s proponents and the next GOP candidate will rue the day it was passed.

Regards,

Tom Blumer

If the subject weren’t so serious, the argument would be hysterical.

The argument is typified HERE in an article about The 2005 Identity Fraud Survey Report, a joint effort of the Better Business Bureau and Javelin Strategy & Research:

New research shows that identity theft is more prevalent offline than online

“Our numbers show that fears about online identity fraud may be out of proportion to the relative risk, causing consumers to ignore the most glaring issues,” says James Van Dyke, Javelin’s founder and principal analyst. “Indeed, most instances of identity fraud occur through traditional channels and are paper-based, not Internet-based.”

The updated research project - supported by CheckFree, Visa and Wells Fargo & Company and based on 4,000 telephone interviews with consumers - makes four key points:

- The most frequently reported source of information used to commit fraud was a lost or stolen wallet or checkbook. Computer crimes accounted for just 11.6 percent of all known-cause identity fraud in 2004; and half of these digitally-driven crimes stem from spyware, software the computer user unknowingly installs to make ads pop-up when the consumer is online. Consumers can protect their financial data by using updated spyware, virus and firewall protection software and not responding to bogus “phishing” emails that request personal data.

- Among cases where the perpetrator’s identity is known, half of all identity fraud is committed by a friend, family member, relative, neighbor or in-home employee - someone known by the victim.

- A wide variety of metrics confirm that identity fraud problems are NOT worsening, with the total number of victims in decline.
— The annual dollar volume of identity fraud is highly similar to 2003 figures (adjusted for inflation) at $52.6 billion.
— The number of identity fraud victims dropped from 10.1 million to 9.3 million in 2004 versus 2003.
— The median value of identity fraud crimes remained unchanged at $750; however most identity fraud victims incurred no out-of-pocket costs.
— The average time to resolve an identity fraud crime dropped by 15%- from 33 hours in 2003 to 28 hours in 2004.

- The majority of identity fraud crimes are self-detected. This reinforces the benefits of activity monitoring through electronic review of transactions, statements, and credit reports allowing consumers to check their account activities quickly and efficiently - without waiting for a paper bill or statement.

The author makes a very good point that being online and checking your accounts frequently will likely help you minimize your losses if an ID theft occurs because you’ll probably detect it earlier. Fine.

But the article, as do most that deal with ID theft, fails to distinguish between HOW identity thieves steal your information (yes, mostly using “offline” methods) versus what they do once they have your information. Once they have it, they’re very likely to open accounts and conduct business online, where the fraudulent nature of what they are doing is not normally detectable with today’s controls (actually, the lack thereof).

According to the logic of the report, if someone steals my wallet and uses my Social Security Number and other identifying information to go online and opens up a credit card with a $5,000 limit, and then burns through the credit line buying stuff online, the whole thing is considered an “offline” event, even though all of the actual stealing (the financial loss to the victim) occurred online! The nearly-effortless ability of people to do business online once they have my information is part of the whole problem of ONLINE security.

To me, it’s really a distinction without a difference. Our personal information is too available (and yes, a lot of times it’s our own fault because we’re careless), but it’s also too easily used once obtained. I just wish the report’s authors and their banking-system underwriters weren’t so disingenuous about how and where actual ID-theft losses take place.

My look into the bankruptcy “reform” legislation has been revealing, to say the least. The more I learn, the more I’m convinced that this bill should not become law.

SmartMoney.com has looked into it too (bolds within main points are mine), and like me, has come to conclusions about the bill’s effects that are vastly different from the stated claims of its proponents:

1. More people forced into Chapter 13.
Once the law is in place, however, most people will be forced into Chapter 13 even if they can’t afford it……because of the new Means test, which will require a filer’s income to be lower than the median for the state (as determined by the IRS) in order to qualify for Chapter 7 filing. This will affect many middle-income individuals or families who earn above their state’s median, but are forced into bankruptcy after accruing large debts, often because of divorce or medical emergencies. (Ed. Note: State median income figures will come from the Census Bureau, not the IRS.)

2. Chapter 13 repayment schedules become unaffordable for many.
……Under the new law — and by applying the Means test — the courts will determine the amount to be repaid to creditors based on the basic living expenses in your state or county as determined by the IRS. The catch here is that your actual expenses are often higher than what the IRS says they should be in its Collection Financial Standards.
(Ed. note: In its collection efforts, The IRS’s Collection Financial Standards “home page” says that it uses uniform National Standards for basic living expenses that are based on the nationwide Bureau of Labor Statistics [BLS] Consumer Expenditure Survey, and BLS data for specific Metropolitan Statistical Areas [MSAs] for other items, specifically utilities and transportation. So the new bankruptcy law will use the BLS’s national and MSA-specific standards just as the IRS does. The bill also mentions “Other Necessary Expenses,” which I can’t find a definition of. I am still investigating and will try to nail this down.)

Note: It therefore appears that the new law’s allowances for basic living expenses and other items will be the same regardless of income AND, in most cases, regardless of where you live. The uniform treatment based on income may seem intuitively appealing at first, but doesn’t square with reality. The geographic uniformity is simply absurd on its face. All of this appears to be deliberately restrictive and designed to tie the hands of bankruptcy trustees in favor of the bill’s lending industry underwriters (I am soooooo surprised).

As an example, I don’t see where assuming that a professional person making $80,000 in a New York city spends the same on clothing as a blue-collar person earnings $40,000 in the middle of Kansas is even remotely equitable (or true, even after a measly 5% increase in the allowance permitted by law). It would obviously be inequitable even if these two people were in the same town. And I don’t see where effectively forcing that higher-income person into a Chapter 13 with a calculated monthly payment that essentially mandates reduced spending on clothing (and probably other items, unless all the other allowances are somehow miraculously correct) serves a public-policy purpose, unless hurting a person professionally is one of the goals (it does make you wonder).

Plus, despite the new law’s alleged flexibility in adjusting these allowances, I would be concerned that trustees will feel very reluctant, either due to extra paperwork or fear of second-guessing by beancounting auditors, to try to adjust these allowances to reflect a person’s or family’s real living situation. And all of this of course assumes that the person or family is astute enough and comptetent enough to complete all the documents needed to prove different expenditures. Otherwise, they will need professional help to do so, which gets to the next point.

Back to SmartMoney.com:

3. The cost of filing bankruptcy increases.
The new law will also make the disclosure of the debtor’s assets a lot more detailed…. Think of it as a court audit of every bankruptcy filing: If any mistakes or omissions are found, the case will be dismissed and the attorney will be held legally responsible for all costs, fees and sanctions. That doesn’t come out of the debtor’s pocket directly … but the overall costs of filing would still go up as a necessity. That’s because rather than risk being sanctioned and fined by the court, attorneys will start requiring their clients to obtain full professional appraisals of all of their household’s goods and furnishings. By initial estimates, that may cost as much as an additional $500 to $1,500.
……The lawyers themselves may also increase their fees because of the additional workload……

The first two paragraphs in this final point essentially tell us that bankruptcy lawyers are going to have to practice “defensive lawyering” to avoid sanctions and maybe even jail. They may have to hire accountants just to satisfy themselves that a given filing will be sufficiently accurate before it takes place.

Those who saw this post earlier on Saturday, March 19 saw a paragraph from the article about a mandatory 180 days of credit counseling before filing. I have learned from an experienced bankruptcy attorney who responded to my request for e-mail clarification that the article is incorrect (unrestricted and unconditional THANKS!). A “briefing” with a credit counselor has to take place before filing, but there apparently is no waiting period after the briefing takes place. I would think there would be a good possibility of a bottleneck if swamped credit counselors (which I expect) build up lengthy backlogs of unseen clients. Perhaps that’s why the bill allows phone and Internet briefings, as ineffective as they are likely to be. The mandatory financial training takes place between the time of filing and discharge.

In sum, add SmartMoney.com to the list of reviewers of this bill who are telling financially troubled consumers that there’s a high chance they’ll be forced into Chapter 13; when they are, they will be forced to pay workout amounts that are unrealistic; and that the whole thing will cost a lot more in legal, asset appraisal, and other professional fees. In other words: “You are so screwed.”

Seems I’m not the only one going after Todd Zywicki, who appears to have become the face of the pro-bankruptcy “reform” effort.

Harvard Law professor Elizabeth Warren faced off with Zywicki in a “Lou Dobbs Tonight” segment Thursday night. Warren’s case was presented much more effectively (and of course accurately), and Zywicki seemed on the defensive.

I give the decision to Warren on points. (Hat Tip: Politology).

The weblog video resource of choice, Jackson’s Junction, has the video HERE.

March 19, 5PM UPDATE: Welcome Politology readers (or is that “Politologists”?). The Talking Points you are looking for start below.

Two previous posts provide the details that support these talking points:

Deconstructing Todd Zywicki’s “Bankrupt Criticisms”
(Part 1)
Deconstructing Todd Zywicki’s “Bankrupt Criticisms”
(Part 2)

Here are those talking points.

1. Proponents are using guilt by association to encourage those on the grass-roots right who would ordinarily oppose this legislation to “trust them,” while at the same time pointing to bought-off liberal senators who supported it to convince the left that “it’s not all that bad.”

“Conservatives–if Paul Krugman and Ted Kennedy are against it, it must be a good thing.”

“Liberals–If Harry Reid and Joe Biden supported it, it must not be that bad.”

Baloney. Let’s debate the bill, both what’s in it and what’s not in it, on its merits.

2. The bill does not do enough to rein in the big-dollar fraudulent filers and dodgers.

It does not address the asset-protection trust dodges used by the very well-off and it doesn’t address the vast homestead exemption inequities between states.

3. The bill does nothing to prevent continuation of the lending industry abuses that have driven many consumers who have fallen behind on their bills, and who in an ethical lending environment might very likely have regained their footing, from having to file.

Lending industry penalty-fee and penalty-rate abuses keep consumers who get into financial trouble from every digging out, and make bankruptcy a nearly self-fulfilling prophecy.

4. The claim that 10% of bankruptcies have “some fraud” is not supported by the number or dollar amounts of successful investigations and prosecutions carried out by FBI and IRS units dedicated solely to the task.

How can there be so much fraud and abuse when at most 100 cases per year are filed, and when some of those involve amounts as low as $10,000 to $20,000?

5. The legislation lengthens the minimum required period between bankruptcy filings from 6 to 8 years, but does nothing to prevent potential lender abuse of post-bankrupt individuals and families.

If the minimum period is to be lengthened, the lending industry must be barred from direct marketing to post-bankrupts.

6. Instead of controlling homestead exemption abuse with the awkward residency requirement tool, the homestead exemption needs to be standardized nationally.

There should be a homestead exemption that is uniform nationwide after adjustment for regional house-price differences. The exemption should be set high enough to enable the large majority of filers to keep their homes.

7. The arbitrary means-testing measurements (“the standardized slate of expenses”) under the new law will unreasonably force many filers who should go into Chapter 7 into Chapter 13.

The discretionary system used by trustees today works reasonably well. The new regime would impose a nearly one-size-fits all solution despite the wide variance in family circumstances and expenses.

8. Expectations that the law will move over 100,000 filers per year into Chapter 13 who would have gone into Chapter 7 under the current law presuppose that Chapter 13 bankruptcies today usually result in a successful discharge of a portion of the debt balances owed at the time of filing. This is false.

The fact is that the majority of Chapter 13 filers who put together a plan of partial repayment do not carry through with the plan, meaning that they once again become “fair game” for creditors. Since Chapter 13 filers in today’s system usually enter it with the intention of completing the repayment plan, the fact that they fail means that many of them should really have filed Chapter 7. Many actually end up in Chapter 7 after two or three unsuccessful attempts at Chapter 13.

9. Adding even more Chapter 13 filings into a system that doesn’t work for the majority of people who currently enter it will only make things worse.

The new chapter 13s will largely be people with incomes barely above the state-specific median income threshold, and are the very people with the lowest likelihood of being able to carry out a Chapter 13 repayment plan successfully.

10. The bill’s requirements for prefiling credit counselor “briefing” and financial counseling between filing and discharge come too late in the consumer downward debt spiral for those who need it, presupposes that there are enough reputable and ethical counselors to meet the need (which isn’t the case), allows ineffective and cut-rate education to take place, and does nothing to ensure that lenders make sufficient “fair share” payments to counseling agencies.

Credit counselors should be engaged when individuals and families are headed for trouble, not when they’re already in so deep that filing for bankruptcy is often the only reasonable alternative. The requirements for financial training after filing and before discharge are a waste of time for large percentage of people whose bankruptcies were not due to financial mismanagement.

11. Finally, the comprehensive changes to the bankruptcy system envisioned, even if they identify the level of fraud and abuse supporters claim exist, will only collect an extra $10 per year per citizen, before considering the extra implementation and ongoing costs imposed on the government by this legislation.

Proponents expect to weed out 100,000 to 150,000 abusive filings, and realize $3 billion. If fraud is only 10% of that (which appears likely, given that less than 100 successful prosecutions for bankruptcy fraud have taken place annually), the extra money realized ($300 million) will be almost offset by extra costs to the taxpayer imposed by the bill.

The previous post listed four criticisms of Professor Todd Zywicki’s “Bankrupt Criticisms” column that appeared Tuesday at National Review Online. This post resumes from there.

A talking-points summary of the two-part deconstruction is HERE.

So, here we go again.

5. Zywicki thinks that bankruptcy shouldn’t be refiled more than once every 8 years, instead of the current 6 years.

Surprise: I agree, but not unconditionally. That’s because credit card issuer abuse of post-bankrupts was once rampant (it may still be), simply because the issuers KNOW that the cardholder can’t refile for another six years (or eight). Anybody they manage to hook again can spend years in penalty-fee and penalty-rate hell (obviously, two more years under the new bill) with no recourse.

It is a sad but true fact that many who come out of bankruptcy are no wiser than they were before they filed. Yes, it’s primarily their fault if they dig a hole again, but they don’t need any “help” from the credit vultures.

So, to prevent lender abuse or potential abuse of post-bankupts:

- Bankruptcy filers should be automatically placed on the credit bureau solicitation opt-out lists and the FTC’s National Do-Not-Call Registry for at least a couple of years after discharge.

- Lenders should be prohibited from ANY proactive direct-mail or telemarketing contact with those who emerge from bankruptcy for at least as long as the no-refiling period.

- Issuers of any new credit cards the post-bankrupt person obtains should not be allowed to raise their credit limit unless the person requests it, and must not raise the limit, or for that matter have an initial limit that is higher than they would grant to a person in otherwise similar circumstances who hasn’t had a bankruptcy.

- Issuers of any new credit cards to post-bankrupts whose credit deteriorates should only have the recourse of closing the cardholder’s account at its current rate, or perhaps a maximum rate allowed by law of, say 15% (no obscene penalty rates on post-bankrupts, period).

With these very easily doable controls in place (yes they ARE easily doable), and other controls I’ll talk about in a later post, if people dig themselves a hole a second time, it will be obvious that they deliberately set out to do it.

6. Zywicki gives too much credit (so to speak) to the bill’s homestead exemption reforms, which should be more comprehensive.

True, the homestead exemption doesn’t kick in unless under the new law until you have been in your home for 3 years and 4 months; this is an improvement. But what we need is a homestead exemption that is uniform nationwide after adjustment for regional house-price differences. This would largely eliminate the need for the 40-month qualification period, because there would be no meaningful benefit to homestead shopping.

The exemption should be set high enough to enable the large majority of filers to keep their homes. I’d have to study the issue to arrive at appropriate amounts; I would suppose that it should be somewhat above the equity a typical person might have in their home. But to elaborate, the exemption in a low-cost Midwestern state like Iowa would likely need to be three times higher in states like California and Massachusetts.

7. The arbitrary means-testing measurements (“the standardized slate of expenses”) will force many filers who should go into Chapter 7 into Chapter 13, and will only rarely move someone who today would have to file Chapter 13 into Chapter 7.

Not that I have been looking for it, but I have never seen or heard of a complaint about how, to quote Zywicki, “judges (use their) own subjective preference to determine the debtor’s allowed living expenses” (By the way, Professor, Zywicki, I’m told that it’s trustees, not judges, who do this). I doubt there are many complaints, from either debtors or creditors. It’s hard to believe that the “error rate” of trustees who work in the system every day is greater than the error rate that will result from arbitrary measurements and removal of trustee discretion. I also am concerned that many totally broke but above middle-income debtors will have a difficult time demonstrating that they have the so-called “special circumstances” that would enable them to avoid Chapter 13, and that “special circumstance” rerouting into Chapter 7 will be more rare than it should be.

What the micromanagement mandated by the law betrays is a total lack of confidence in the professionals that run the bankruptcy system. Nobody’s saying that there shouldn’t be oversight, and there already appears to be plenty of it. In fact I’ve been told that fairly specific guidance has been provided to trustees by the Director of the Trustee Program as to how to go about determining the reasonableness of claimed living expenses. I also have seen that the Office of the Inspector General (OIG) reports semiannually to Congress on the results of their audits of trustees.

If Zywicki and the bill’s proponents think trustees and their judicial overseers are currently abusing their discretion to give debtors a free ride, I would like to see them come right out and say so. And if he thinks trustees are colluding with debtors to release them from their obligations, it would be nice to know that too.

8. Zywicki makes a major factual error in estimating the number of people affected by the law.

He states: “Roughly 80% of filers….will get tossed out of the means test immediately. For that 80%–roughly 1.2 million of the 1.5 million bankruptcy filers last year—the means-test will be completely irrelevant.”

Well, let’s look at individual filings in the past 4 years ending September 30 (in thousands; the Chapter 13 figure also includes about 1,000 individual Chapter 11s each year; also, forgive me for not having this in a table-I’ll try to do that after I complete posting, because this post is long overdue):

Ch. 7 Ch. 13 Total 80% of Total
2004 1134 450 1584 1267
2003 1156 470 1626 1301
2002 1062 447 1509 1207
2001 991 408 1399 1119

If, as Zywicki states, 80% of ALL filers were to go to Chapter 7, we wouldn’t be having this debate, because more people would be going into Chapter 7 than are doing so currently, because in all four cases, the 80% of total figure is greater than the number that actually filed Chatper 7. The law would be more generous than it is today.

Fine, let’s go home…..but (OOPS) that’s not what he means.

What Zywicki presumably MEANT to say was “80% of those who would file for Chapter 7 under the current law will still be able to do so under the new law.”

This obviously leads to a vastly different result. What would the impact have been?

Ch. 7 20% to Ch. 13
2004 1134 227
2003 1156 231
2002 1062 212
2001 991 198

So, correcting for his error, one assumes Zywicki believes that if the new law had been in place on October 1, 2000, a total of 868,000 people who filed Chapter 7 in the next four years would have, and “should have,” preliminarily been tagged as candidates for Chapter 13. He then appears to opine (it’s not clear because of the error I have just described) that about half (434,000) of these intial Chapter 13s “won’t be able to meet the repayment criteria,” and would be dropped into Chapter 7.

So now that we think we have our arms around what Zywicki meant and his beliefs about the impact of the new law on Chapter 13 filings, we can look at how feasible this shift from Chapter 7 to Chapter 13 might be.

9. Zywicki totally fails to communicate how Chapter 13 bankruptcies turn out today, and because of that misleads readers into thinking it’s a satisfactory solution.

You might think that moving more people into Chapter 13 a desirable thing to do. A quick look at how Chapter 13 works now will disabuse you of that notion. In fact, I believe it’s fair to say that Chapter 13 is not a good choice for many who use it, and that the results achieved in Chapter 13 filings would argue that more and not fewer people belong in Chapter 7.

Here are the facts, as communicated to me by someone who works within the bankruptcy system in Washington:

- Roughly 15% of Chapter 13 filings are converted into Chapter 7s before a plan is put into place, because it quickly becomes clear that a Chapter 13 is unrealistic.

- Roughly 40% are “discharged,” which in the vast majority of cases means that the creditors were fully paid what they were promised in the original Chapter 13 plan. In a small number of cases, discharge occurs because of hardship conditions.

- The remainder (45%) are “dismissed.” This means that the debtor has stopped making payments. When the case is dismissed, the person becomes “fair game”–the creditors can sue for payment and conduct other collection efforts.

What does this mean? To me it shows, contrary to what Zywicki and the bill’s proponents claim, that too many people currently file Chapter 13 when they should file Chapter 7! This happens for two reasons. First, many people do have a sense of honor and want to pay part of what they owe if they can, but are unrealistic as to their ability to actually do it. Second, since legal fees for Chapter 13 filings are much higher than those for Chapter 7s, many bankruptcy lawyers take advantage of that sense of honor and file Chapter 13 when they know darn well that their client would be better served by a Chapter 7. Then, if the client is moved to Chapter 7, they collect those fees too. A majority of those who begin a Chapter 13 aren’t able to carry through with what they intended to do, and when their cases are dismissed they are once again at the mercy of their creditors.

Does anyone think that more than a small percentage of Chapter 13 dismissals are from those who are trying to dodge their debts? If that were the case, they wouldn’t have filed Chapter 13 in the first place! Because their court protection is gone, these people are more than a little likely to face the “endless treadmill of payments” that Paul Krugman of the New York Times cited, and which Professor Zywicki mercilessly ridiculed. Imagine that; Paul Krugman appears to have nailed it. I would also add judgments, garnishments, and creditor harrassment to Krugman’s “endless treadmill.”

One unresolved question on Chapter 13s is what percentage of unsecured debt at the time of filing is typically scheduled for repayment in a Chapter 13 plan in the new law vs. the old law. Zywicki says that the bill will mandate that anyone who has “prequalified” for Chapter 13 based on income would stay in Chapter 13 if they can pay $10,000 or 25% of what is owed (I presume whichever is less, but I can’t tell for sure). I have read guidance about the current system indicating that many trustees won’t mandate a Chapter 13 unless the debtor can pay more than 50-75% of what is owed. It therefore appears that the new law’s version of Chapter 13 will require more initially “prequalified” Chapter 13 debtors to (try to) carry through with a repayment plan. That would be fine if Chapter 13s typically led to a discharge–The trouble is, they obviously don’t. So based on what I see, adding more filers to the broken Chapter 13 system, especially those just above the income thresholds in the new law that mandate Chapter 13, will only make it worse.

10. The preemptive credit-counseling provisions have potential, but should take place before bankruptcy looms.

Who can argue with a mandate that a person or family go through credit counseling before filing for bankruptcy? I will, because the law has taken a good idea and ruined it.

Section 106 as passed by the Senate states that “an individual may not… (file for bankruptcy) …. unless such individual has, during the 180-day period preceding the date of filing of the petition by such individual, received from an approved nonprofit budget and credit counseling agency …. an individual or group briefing (including a briefing conducted by telephone or on the Internet) that outlined the opportunities for available credit counseling and assisted such individual in performing a related budget analysis.

First, it appears that finding enough “approvable” credit counseling agencies will be difficult:

But recent Senate hearings describe the credit counseling industry as “a network of not for profit companies linked to for-profit conglomerates. The industry is plagued with consumer complaints about excessive fees, pressure tactics, nonexistent counseling and education, promised results that never come about, ruined credit ratings, poor service, in many cases being left in worse debt than before they initiated their debt management plan.”

Second, the law allows for ineffective group briefings in a situation where only individual or family counseling that works with a person’s or family’s actual finances is effective. The law even allows for “group briefings” over the telephone or Internet, where an instructor can only guess as to whether any learning is taking place, and leads to the possibility that a lot of so-called counseling agencies will merely be workshop mills with no followthrough.

Third, by not addressing how counselors are paid, the law will encourage the financial industry to continue to reduce their “fair share” payments to counselors who attempt to help their clients through payment plans, straining the ability of the agencies that indeed attempt to do a conscientious job to meet their clients’ needs.

Fourth, counselors need to get involved sooner. If they do they should have better success at preventing potential bankruptcies and should be able to avoid having to be the paymaster. How? I’ll get to that when I propose solutions in a later post.

11. Finally, Zywicki taunts his critics by insolently asking “Is there someplace where I can send you my part of the bill so that you can allow bankruptcy fraud and abuse to go unchecked?”

OK, Professor, here’s how I calculated your share:

- The Christian Science Monitor reports that the bill’s GOP sponsors believe that “If the means test only weeds out 100,000 to 150,000 abusive filings, as much as $3 billion could be recovered and passed through to other consumers…”

- We’ll give you a humongous benefit of the doubt and ignore the evidence in the previous post at Point 4 that the FBI, based on its long-term anemic rate of investigation and prosecution, appears to be wildly exaggerating the extent of bankruptcy fraud and abuse, and stick with the $3 billion.

- That $3 billion represents a whopping $10 for every man, woman, and child in America.

- So, where do I send the $10?

- Is there any chance that you might cease your pity-party for the financial industry if I send the money?

Oh, and finally, do you take Visa?