March 17, 2005

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

Filed under: Bankruptcy & Reform,News from Other Sites — Tom @ 10:10 am

Professor Todd Zywicki, whose work I have written about here, here, and here, “owes” me an e-mail relating to his weekend posts (here and here) at, and graciously (I mean that) e-mailed last night and suggested I go ahead with my critique, which will be posted later today.

I can see why he’s had a hard time getting back to me: He’s posted two National Review Online columns in the meantime: “Bankrupt Criticisms” (Tuesday) and “Credit Worthy” (Wednesday). He’s also posting frequently at; in the interest of time, I’m probably not going to deal with those.

The Tuesday column is supposed to reassure us that the bankruptcy “reform” bill will only ferret out fraud and abuse and essentially not otherwise hurt anybody. The Wednesday piece tells us that financial industry lobbying really didn’t make that much difference in the outcome, and besides, the anti-”reform” lobby is powerful too.

My quick responses to the two columns are: Baloney, and Horse Manure.

I’ll spend two posts on Tuesday’s column and one on Wednesday’s. I will also post a summary of talking points that summarize the two detailed posts on Tuesday’s columnHERE.

So, regarding “Bankrupt Criticisms,” my first four points of contention are these:

1. Zywicki uses a guilt by association ploy to encourage the reader to ignore his critics.

Among all who have criticized the bill, the Prof cleverly picks a dubious enemy (Paul Krugman), and then tells the “many (of us) who usually do not agree with Paul Krugman” that we must be on the wrong side of this because we do agree with him. For the record, I agree with Krugman’s contention that the bill is bad, but not with the “sky is falling” rant that follows it. But the good professor wants the reader to know that anyone who agrees with Krugman on this one must have gone off the reservation. Nice try, sir-no sale.

2. Zywicki’s contention that “the bill is designed to rein in the small minority of fraudulent bankruptcy filers who are having an outsized effect on credit markets” is at best partially correct.

The bill does not address the asset-protection trusts used by the very well-off to wall off their stash from the bankruptcy process. More should also be done about the wide variance in homestead exemptions between the states (more on that later).

3. His claim that the bill “will not prevent any innocent, good-faith filers from filing bankruptcy and getting a discharge,” and that “It preserves the fresh start for those who need it” ignores the bill’s failure to prevent the lending industry from continuing to contribute to more bankruptcy filings.

It falsely assumes, in the face of much anecdotal and statistical evidence to the contrary, that the lending industry has had no role in creating the bankruptcy explosion. The bill simply does nothing to prevent lending-industry abuse that is causing many of these people to have to file in the first place; in fact, it may encourage more egregious abuse. Also, I guess anyone whose earnings is above the state median must be “guilty,” because they will be nearly automatically cast into the 3-5 year payment purgatory of Chapter 13.

4. The popular law-enforcement claim that “The FBI estimates that roughly ten percent of bankruptcy filings have some amount of fraud in them, usually outright lying and concealment about the amount of assets and income that a debtor has to pay his creditors” is either easily debunked, or we need to clean out the FBI Bankruptcy Fraud unit and start over.

Note that the FBI cleverly uses the term “some fraud” in the estimate. Since there are about 1.5 million filings per year, the FBI is estimating that 150,000 involve “some fraud.”

Well, with SOOOO many cases of fraud to supposedly go after, how’s the government doing?

    - The IRS, which says it’s a party to 40% of the filings, has initiated a whopping 158 bankruptcy fraud investigations resulting in 50 indictments and convictions in the past THREE years.
    - The FBI claims that fewer than 0.1% of filers are convicted (If you buy the FBI’s 10% fraud rate). For those of you keeping score at home, that’s less than 150 convictions per year.

Maybe the problem is that not enough law-enforcement resources are being devoted to bankruptcy fraud. If that were so, you would expect the cases the government pursued would be ones involving high dollar amounts and particularly bold or grandiose schemes.

That simply isn’t so. Here’s a self-congratulatory narrative from the Department of Justice regarding “Operation Silver Screen” from October 2004 that on the surface looks pretty impressive:

Operation SILVER SCREEN spotlights the indictment of 21 individuals in 17 separate prosecutions and demonstrates the breadth of enforcement actions taken by the Department of Justice in combating bankruptcy fraud and protecting the integrity of the bankruptcy system. These cases collectively involve: the concealment of more than $7 million in assets; illegal conduct by an attorney and a certified public accountant; use of false Social Security numbers and false identities; submission of forged documents; false statements; and various fraudulent acts.

Wow. $7 million. Not bad. But when you look at the detail in the announcement (same link), you find that 5 or 6 of the cases accounted for almost all of the asset concealment and major abuse. Among the other cases were individuals who allegedly:

    - Concealed several firearms, a car, a snowmobile, and a tax refund (insert Second Amendment joke here).
    - Created $6,500 in counterfeit checks.
    - Sold a car for $20,000 and kept $12,500 for himself.
    - Transferred $16,000 to an acquaintance to hold on their behalf.

Now of course I think these people should be prosecuted and punished. But if there are so many cases of fraud, why does the FBI have to spend its precious resources on matters involving less than $20,000 just to get their bankruptcy prosecution numbers into double digits? If they had more money to do all these mythical investigations involving “some fraud,” what would they do? Go after people who forgot to declare the kid’s piggy bank, the loose change under the car seats, the flannel pajamas, or the half-empty bottle of shampoo? Is this what “some fraud” is?

Either bankruptcy fraud is nowhere near what is claimed, or we have an FBI fraud unit that doesn’t have the first clue as to how to set priorities. I go with the former. The claim of widespread fraud is a canard.

More on Zywicki’s “Bankrupt Criticisms” column in the next post.

I will also create a summary post of talking points.


1 Comment

  1. How Much Bankruptcy Fraud is There?

    Although most of the debate over the bankruptcy reform legislation has focused on the means-test and the problem of bankruptcy abuse, the bulk of the consumer provisions are dedicated to the much more mundane, uncontroversial, an…

    Trackback by The Volokh Conspiracy — April 12, 2005 @ 8:58 pm

RSS feed for comments on this post.

Sorry, the comment form is closed at this time.