Study Shows Massive Increase in Consumer Bankruptcy Costs

/PRNewswire/ -- People currently filing for Chapter 7 and Chapter 13 consumer bankruptcy protection are facing as much as a 55 percent cost increase as one result of the 2005 comprehensive bankruptcy reforms, according to a new study published in the American Bankruptcy Institute Law Review. In addition, as a direct result of these increased costs, unsecured creditors are being paid a smaller percentage on the dollar today than prior to the 2005 reform.

The study, authored by New York bankruptcy attorney Lois R. Lupica of Thompson & Knight LLP and funded by the American Bankruptcy Institute (ABI) and the National Conference of Bankruptcy Judges (NCBJ), reveals that consumer bankruptcy is a "far more complicated process than it was before the 2005 amendments" based on an increased number of conditions and calculations for filers in addition to a corresponding rise in expenses.

"The government's stated goal in passing bankruptcy reform was to eliminate abuse of the system and create a set of higher eligibility standards for consumers, but this is the first time that the financial impact of those standards has been quantified," says Ms. Lupica, who also serves as a Maine Law Foundation Professor of Law at the University of Maine School of Law in Portland.

The study examined data collected from consumer bankruptcy cases in judicial districts located in Florida, Illinois, Georgia, Maine, Utah, and West Virginia. The costs to consumers was defined as debtor's attorney fees and expenses, trustee fees and expenses, filing fees, credit counseling and debtor education fees, and any other professional fees.

For the sample of Chapter 13 cases, the study found that the median cost for consumers was $2,930 in 2003 and 2004, with an increase to $4,077 in 2007 and 2008. For Chapter 7 cases in the same periods, the costs increased from $900 to $1,399.

"Attorney fees are just part of the required administrative expenses that may have contributed to the overall decline of consumer bankruptcies, even in the face of the public's increased debt load, foreclosures, and loan defaults," Lupica says.

While the overall number of consumer bankruptcy filings has declined since passage of the 2005 reforms, the most recently available data reported by the ABI shows that the 149,268 consumer bankruptcies filed in March 2010 represented the highest monthly total of consumer filings since the reforms were enacted. The March filing total represented a 34 percent increase from the February filing total of 111,693 and a 23 percent increase from the March 2009 total of 121,413.

"Greater up-front costs may have hindered some consumers from filing bankruptcy, but there may be other factors at play," Lupica says. "There was a large volume of negative publicity in the aftermath of the 2005 amendments, as well as heightened efforts by aggressive debt collection and consolidation firms."

The publication of the study marks completion of the first phase of a two-part national survey to analyze how the consumer bankruptcy system has changed in the past five years. The full study is scheduled to be published in late 2011.

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Pew Report Finds Credit Cards More Transparent, Yet Problems Remain

/PRNewswire/ -- Most of the practices deemed "unfair" or "deceptive" by the Federal Reserve have disappeared from new credit card offers since federal passage of the Credit CARD Act last year, according to a new report by the Pew Health Group's Safe Credit Cards Project. Yet new trends have emerged that could cost cardholders significantly.

The report finds that issuers have eliminated practices such as "hair trigger" penalty rate increases (disproportionate charges for minor account violations), unfair payment allocation, and raising interest rates on existing balances. However, Pew's research also highlights a sharp rise in cash advance fees, continued widespread use of other penalty interest rates and an emerging trend of credit card companies failing to disclose penalty interest rates in their online terms and conditions.

"While it's been less than a year since passage of the Credit CARD Act, the new law appears to be working for millions of Americans who have credit cards," said Shelley A. Hearne, managing director of the Pew Health Group. "The elimination of most of the 'unfair' or 'deceptive' practices of the credit industry since we last surveyed the marketplace marks a major milestone in the move to make credit cards safer, transparent and more fair for consumers. Most of the news is good, but we are seeing the rise of new harmful behavior."

The study, Two Steps Forward: After the Credit CARD Act, Cards Are Safer and More Transparent--But Challenges Remain, is the latest in a series of reports from the Pew Safe Credit Cards Project that has examined all consumer credit cards offered online by the nation's 12 largest banks and 12 largest credit unions. Together these institutions control more than 90 percent of the nation's outstanding credit card debt. For this latest report, which measures how the industry has changed since the passage of the Credit CARD Act, Pew gathered data in March 2010 on nearly 450 cards. Full details, including previous research, can be found at www.pewtrusts.org/creditcards.

Key findings show:

-- Many of the most troublesome practices of the credit card industry
have been eliminated. A credit card issuer can no longer unilaterally
decide to raise interest rates on existing balances. Likewise,
practices including "hair trigger" penalty rate increases, unfair
payment allocation, and overlimit fees without prior consent are a
thing of the past. Earlier Pew research found that before the
implementation of the law, 100 percent of the credit cards surveyed
included at least one of these practices.
-- Beyond the requirements of the new law, there are new practices that
benefit consumers. Less than 25 percent of all cards examined had an
overlimit fee, which is down from more than 80 percent of cards in
July 2009. Additionally, mandatory arbitration clauses, which can
limit a consumer's right to settle disputes in court, are now found in
10 percent of cards compared to 68 percent in July 2009.
-- Predictions that legislation would spawn the growth of new fees have
yet to materialize. There was minimal change in the number of cards
that include an annual fee (down 1 percentage point from July 2009 to
March 2010). During that period, the median size of these fees
increased from $50 to $59 for banks and from $15 to $25 for credit
unions.
-- Some disclosures stopped including the size of penalty interest rates
even as issuers reserved the right to impose them. At least 94 percent
of bank cards and 46 percent of credit union cards came with interest
rates that could go up as a penalty for late payments or other
violations. But nearly half these warnings failed to inform the
consumer of the actual penalty interest rate or how high it could
climb.


"Although we applaud changes by the card industry to create a fairer and more transparent marketplace, our research shows that some challenges remain," said Nick Bourke, director of Pew's Safe Credit Cards Project and report co-author. "For the first time, we have seen credit card disclosures warning consumers that interest rates could go up as a penalty for certain actions, but not stating how high those rates could go. Federal regulators should pay attention to this problematic new trend. When issuers withhold vital pricing information, it leaves cardholders in the dark and puts their financial security at risk, which is why federal regulations have long required issuers to disclose their rates and fees up front."

Two Steps Forward includes a number of policy recommendations to address new challenges, including:

-- Federal bank regulators should enforce existing regulations that
require companies to disclose full and reliable credit card penalty
rate information.
-- The Federal Reserve should prohibit issuers from charging penalty
interest rates that are higher than initially disclosed when the
consumer opened the card account.


The report also shows that surcharge fees for cash advances rose sharply between July 2009 and March 2010. Bank cash advance and balance transfer fees increased on average by one-third during this period, from 3 percent of each transaction to 4 percent. Credit union cash advance fees went up by one quarter, from 2 percent to 2.5 percent.

Other pricing data is also included in the report, showing recent increases in a variety of credit card interest rates and fees.

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Duke: Treasury Action Should Work, But at High Cost to Taxpayers, Professor Says

The Treasury’s proposed action to use government money to purchase mortgage-backed securities held by financial institutions should work, but at an unnecessary cost to taxpayers, says Steven Schwarcz, the Stanley A. Star Professor of Law & Business at Duke University.

Schwarcz has studied systemic risk for more than a year and has suggested, in congressional testimony last October, that the government should consider acting as a market liquidity provider of last resort, but to do so at the outset of a financial market panic. His article, “Systemic Risk,” will be published next month in the Georgetown Law Journal.

“The focus from the outset should have been on treating loss of confidence in the financial markets, which is the underlying cause of problems in the financial system,” Schwarcz says. “While it may have been necessary under the circumstances for the Fed to act to prop up AIG and Bear Stearns, among others, preventing financial institution failure amounts to treating symptoms of the disease, not its underlying cause. By delaying, the government missed a vital opportunity to nip the problem in the bud at a much lower cost to the American taxpayer.”

The Treasury’s proposed bailout plan is a semi-strong version of Schwarcz’s proposal, which he said would work most effectively if used at the outset of a market panic. The current panic has become so entrenched, however, that financial institutions now distrust the creditworthiness of other financial institutions; they do not know how much in mortgage-backed securities those institutions hold or the value of those securities.

The Treasury, therefore, needs to address both this counterparty risk perception and the market collapse. It is proposing that government money be used to purchase, at a deep discount, mortgage-backed securities held by financial institutions, which would stabilize market prices and reduce counterparty risk.

'This should work," says Schwarcz, "but it will be much more expensive than if the government had stabilized the market at an earlier point."

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