Prof. Jay Westbrook and Prof. Katie Porter presented a delightful tour de force of empirical research titled Mythbusters. They compared ten statements of conventional wisdom to the results of empirical research. As Jay said, “There are all kinds of things that everyone thinks are true but we don’t know whether they are really true.” (For this post, I will refer to the speakers as Jay and Katie since these two professors go out of their way to be accessible so that it just seems appropriate).
1. BAPCPA permanently crippled consumer bankruptcy.
The answer is not necessarily. Filings today are very similar to what was seen before BAPCPA. Today’s filing levels of 1.5 million cases per year are about equal to filings during 2001-2004. The income profiles today are similar with chapter 7 debtors averaging $24,000 per year and chapter 13 debtors averaging $34-35,000. The only thing that can’t be measured is what filings would have been like if BAPCPA had not been passed. Given the weak economy, filings might have been much higher without the legislation.
2. For big business, reorganization in Chapter 11 really just means a 363 sale.
While 363 sales are more common in large cases, they are not the norm. Cases with above $50 million in assets resulted in 363 sales in less than 33% of the cases while in chapter 11 cases of all sizes only 10-15% resulted in 363 sales.
3.Young people are more likely to file bankruptcy because of a decline in stigma.
Research shows two things: survey respondents report mortifyingly high rates of stigma and bankruptcy is increasing among the elderly and declining among the young. A study in 2001 showed that 84.3% of persons filing bankruptcy said they would be embarrassed or very embarrassed if their families or friends found out. Another survey showed that bankruptcy was more traumatic than the death of a friend or separation from a spouse.
Another study showed that people are waiting longer before they file bankruptcy. In 1981, people filed bankruptcy when their debt to income ratio was 1.41 while in 2001 that number had more than doubled to 3,04. Of persons surveyed, most had been struggling with debt for more than two years before filing.
Bankruptcy filings for those aged 75-84 increased by 433.3% from 1999-2007 and rates for those aged 65-74 increased 125%. Meanwhile the overall rate of filing decreased 29.2% and the filing rate for those aged 18-24 fell by 64.1%. The unfortunate fact is that bankruptcy is becoming a reality for the Greatest Generation.
4. There is nothing important in business bankruptcy between Mom & Pop and WorldCom.
Among some academics, there are two categories of chapter 11 cases, important (more than $100mm) and not important (everyone else). In the real world, 60% of chapter 11 cases fall into the range of $100,000 - $5 million in assets, while only 6% had $100 million in assets or more. Additionally, 20% of all chapter 11 cases were filed by individuals. The professors opined that this shows the difficulty of trying to construct a one size fits all chapter 11 model.
5. Small businesses linger endlessly in chapter 11.
A study done prior to BAPCPA showed that 50% of small business cases that ultimately failed were dismissed or converted within six months while 50% of successful cases took 15 months to confirm. The professors noted that small business cases take just as long to confirm as big business cases, although small business cases were dismissed or converted much faster than their larger counterparts (107 days faster in 2002).
According to Jay, if the 2005 time limits had been in effect in 2002, 80% of the successful small business cases might have failed. He added that the effect of the 2005 small business amendments may have been to “maim cases that could have succeeded.”
6. The bankruptcy experience is race neutral.
While the Bankruptcy Code is race neutral on its face, the “Ideal Debtor” for chapter 7 is one who holds retirement accounts, has high but reasonable expenses, financially supports only legal dependents and has little or no child support of student loan obligations. This is more likely to describe a white debtor than a minority debtor.
The most accurate predictor of whether someone will file chapter 13 is whether they are African American. African Americans file for chapter 13 at twice the rate of other debtors.
In 2007, Hispanics were likely to pay 25% more in attorney’s fees than white or African American debtors.
The professors were quick to say that they can’t say why this is happening, only that this is what the numbers show.
7. Forum shopping is all about getting to Delaware or New York.
It turns out that forum shopping happens in other parts of the country as well. Of 409 large cases filed outside of Delaware and New York since 1980, 27% were forum shopped
According to Katie, large cases should file in Jay and Kate’s districts because they would have easy access to academics and cheap beer. Jay noted that Austin had live music as well.
8. Bankruptcy works for pro se filers.
Chapter 7 works reasonably well for pro se filers, while chapter 13 is a complete disaster. Among pro se chapter 7 debtors, 17.6% of debtors had their cases dismissed for technical reasons compared to 1.9% of those with counsel.
Among pro se chapter 13 debtors filing since 2006, only 4% had their cases pending or discharged at the four year mark compared to 45% of those represented by counsel. 90% of pro se chapter 13 cases are dismissed prior to confirmation compared to just 15% of those represented by counsel.
According to Katie, pro se debtors are playing Las Vegas odds in chapter 13 and might do better taking their filing fee to Las Vegas. She said we have “constructed a complex machine that most of the time may require a lawyer.”
9. Many of the chapter 13 cases that do not complete plans are actually successes.
When Warren, Westbrook and Sullivan released their study that only 33% of chapter 13 cases result in discharge, they were treated as heretics. Now this success rate is conventional wisdom, but a new narrative has arisen that failed chapter 13 cases may actually be successes. The data says no.
While the debtor remained in bankruptcy, chapter 13 avoided foreclosure for 81% of debtors while 70% faced loss of their home within 2-3 months after dismissal.
Once their cases were dismissed, 57.5% of debtors reported that their situation was the same or worse than when they filed. 60% of debtors very much disagreed with the statement that they exited bankruptcy because they had accomplished their goals or found another solution compared to 20% who agreed or agreed very much with the statement.
In a chilling statistic, 33% of debtors whose chapter 13 cases were dismissed reported that they struggle to pay for food.
10. Lenders maximize recoveries in each case.
Sarah Pei Woo conducted a study of chapter 11 bankruptcies of residential real estate developers during the recession. Tragically, she passed away after a brief illness after her study was completed.
She found that banks acted not to maximize recovery but to increase short-term liquidity and accede to regulatory pressure. The question was not how much they would recover but when.
Among residential real estate developers, 81.7% were liquidated, 11.1% were sold in 363 sales and just 4.6% reorganized. Secured lenders filed a motion for relief from stay in 72.5% of the cases. Banks who were in financial distress were 24.9% to 28.6% more likely to seek relief from the automatic stay.