Episode Transcript
[00:00:00] Speaker A: Imagine a justice system built on rigorous evidence, not gut instincts or educated guesses about what works and what doesn't.
More people could access the civil justice they deserve.
The criminal justice system could be smaller, more effective and more humane.
The Access to Justice Lab here at Harvard Law School is producing that needed evidence. And this podcast is about the challenge of transforming law into an evidence based field.
I'm your host, Jim Griner, and this is Proof Over Precedent.
This week we're bringing you a student voice.
[00:00:37] Speaker B: Hi everyone, my name is Andrew and I'm a 2L at Harvard Law School. And today we're going to be talking about the intersection of access to justice and bankruptcy law. I'm here with my friend Joe, who's going to take it away and give us an overview of what we're going to be talking about today.
[00:00:57] Speaker C: Thanks, Andrew.
Yeah, my name is Joe Lieberman, also a 2L at Harvard Law School, and I'm here to talk to you today about the issue of no money down bankruptcies and like you said, how that intersects with access to justice.
I think to start with, to explain what a no money down bankruptcy is, I'll walk through what bankruptcy is. First for individuals, obviously there's bankruptcy for businesses and other entities, but right now we're talking about consumer bankruptcy.
This is for, you know, everyday folks.
So basically, individual bankruptcy is broken up into two chapters, chapter seven and chapter 13.
The quick summary of each is that chapter seven is pretty quick and relatively easy.
Basically what happens is you file for bankruptcy, you know, you go through the process and what you do is you end up selling off a chunk of your assets and then you use the money that that yielded, or rather the trustee handles this for you, but they use the money that that yielded to then pay down your debts owed to creditors. Once that process is done, your debts, remaining debts, most of them at least, are discharged and the bankruptcy process is complete.
There are reasonably high success rates. It usually takes less than six months, and it is slightly the preferred route for individuals to go. The majority of individual bankruptcies that are filed are chapter seven, but we also have chapter 13, which is a more complicated path to go, but can have some pretty beneficial financial effects if you're able to complete it. But that's a big if. Chapter 13 requires you to not sell off any of your assets, but you have to enter into a three to five year payment plan.
What that requires is that you pay a portion of your debts down slowly over time.
You know, this usually works better for people who have a steady income and at the end of that process, your debts are discharged. It discharges more debts than Chapter 7 bankruptcy, which is something that I'll come back to later.
But the failure rates for chapter 13 are significantly higher.
So it is more difficult essentially to complete Chapter seven.
And when I'm comparing these two, this is assuming that, you know, you're not getting tripped up by any of the legal paperwork or making mistakes like not showing up to court when you're supposed to, or missing a filing deadline, something like that. That's a big if. And I'll come back to that later. But assuming you're actually navigating the process in a legally sound manner, it is far more difficult to actually complete a Chapter 13 bankruptcy successfully because you need to abide by your payment plan, which, given the financial situations of a lot of people who have to file for bankruptcy, isn't always possible.
Imagine you enter into a payment plan saying, I'm going to pay down X percentage of my debts using a chunk of my income that I earn every month. And then you get laid off or a child gets sick or some other unexpected expense arises. Well, then you're no longer abiding by the payment plan and you might not be able to complete it and get the discharge of your debts that you're seeking.
It really requires, you know, things to go fairly well for a long stretch of time. Like I said, it takes three to five years to complete.
And so it can be tricky. But, you know, studies have found, including by Professor Yang here at Harvard Law school, that chapter 13 does have, you know, financial benefits for the people who are able to complete it. But again, the failure rates are pretty high because of that difficulty. So as you might imagine, there really is something of a difference of the people who might be best equipped to navigate a chapter 13 versus people who might be better served by going the simpler route and filing Chapter seven. And this is where no money down bankruptcies come into play.
Why, you know, you might be wondering, would somebody who doesn't have a steady income and, you know, likely chapter 13 wouldn't be a great route for them? Why, why, why would they go chapter 13 anyways, as we, as we see in some places?
Well, it's because of a fee issue, basically. Lawyer's fees.
Yeah. Attorney's fees. Exactly right. Oh, okay, got it. Yeah, that's a, That's a good. That's a good distinction. So, you know, I'll. I'll preface this by saying that it's pretty critical to have a lawyer as, you know, you're navigating bankruptcy success often hinges on having a lawyer.
I think the numbers are something like failure rates are something like 17 to 18 times higher for people navigating the system pro se, you know, meaning by themselves versus people who are represented by a lawyer. So it's critical to have a lawyer and lawyers need to get paid. The issue is with Chapter seven, all of the debts or, sorry, I should say, there's a, there's a court case, Lemi versus United States trustee. This is from the early 2000s. And it basically held that based on the way the bankruptcy code is written, attorney's fees, you know, money that you owe to your lawyer is dischargeable through chapter seven. So imagine somebody with no money or, you know, very little money, who can't afford to pay a lawyer, wants to go through chapter seven. They talk to a lawyer and, you know, the attorney's fees required to navigate that processor X amount, and they're like, I can pay you back, but I can't pay you back. You know, right now I could pay you back over the next year. Well, six months from now, they're going to finish the Chapter 7 bankruptcy and the debt they owe to their lawyer is going to get discharged. So the lawyer is not going to get any money out of that or, you know, less than they're owed.
So the way lawyers have responded to that is they've started requiring for chapter seven all the payment up front. But chapter 13 contemplates, because of this three to five year payment plan, it contemplates the idea that people might be paying these debts down over time. And so attorneys can, you know, enter into payment plans with their clients where they don't pay the money up front. Maybe they pay a portion and go through the process and pay down the rest. Or as we're seeing in what is called no money down bankruptcies. For this reason, attorneys are advertising Chapter 13 bankruptcies for no money up front, which, as you might imagine, is an extremely attractive option for folks in dire financial straits.
[00:07:45] Speaker B: Okay, so basically what you're saying is that there's this massive perverse incentive on behalf of the lawyers themselves to push individuals into the type of bankruptcy that might not actually be particularly suitable for them solely because the other type of bankruptcy might mean that the lawyer themselves doesn't get paid in the end.
[00:08:10] Speaker C: Yeah, Andrew, you've hit the nail on the head. That's exactly right. It really is, at its core, an incentive problem. What you have is a situation where, like you said, somebody who's in the most dire financial straits is oftentimes best suited for a chapter seven and, you know, would likely have a tough time completing a chapter 13.
But the attorney's incentives are to get paid and the person who's in debts incentives are to file some type of bankruptcy.
And if they're not able to pay the money required for a Chapter 7 upfront, Chapter 13 becomes the only option. Then you might be wondering, well, why would, you know, knowing that it's a difficult pathway that often results in an unsuccessful process and only taking on more debt to your attorney, why would someone go down the Chapter 13 route? Well, there are some benefits to just filing bankruptcy. For one thing, folks who are in debt are often being hounded by, you know, debt collection agencies, which is, you know, extremely troubling. And, you know, it's a difficult situation to be in. And for another thing, certain types of debt, like unpaid parking tickets can result in, you know, a license being suspended.
Maybe you're behind on your utility bills and, you know, the power is cut off and you need quick relief. You need, you know, the, the, the, the automatic stay which kicks in when you file for bankruptcy. And if the only route to file is chapter 13, well, you know, it makes sense why we see so many people, you know, finding their way into chapter 13.
But that isn't, you know, it's a big problem with incentives. But, you know, there are other elements to this as well that indicate that it goes beyond just, you know, both parties following their incentives and ending up in a bad outcome. We actually do see some racial imbalance in no money down bankruptcies.
The only states where Chapter 13 bankruptcies predominate over Chapter 7 are in the south where the practice of no money down bankruptcies is, is more widespread. And we also see this phenomenon in some cities, including Chicago, that have large black residents, where, you know, for example, from 2011 to 2015, Chapter 13 filings by black residents in Chicago rose 88%.
So race is predictive of who's going to end up filing no money down bankruptcies and the outcomes that they're going to see at the back end, you know, with black filers being largely less successful than white filers. So, you know, we have a couple of different issues going on here. We have this incentive problem.
You know, we have a racial imbalance, which of course is to some extent tied to, you know, the structural and systemic imbalances underlying the bankruptcy system. You know, who's more likely to be poor, who's more likely to, you know, have fines and fees owed to their government.
You know, that, that Certainly feeds into the system. But we also have the bankruptcy system itself exacerbating these differences.
Yeah.
[00:11:16] Speaker B: And it sounds like there's a massive transparency problem. You know, maybe it's somewhat aligned with the incentive problem that we were talking about. But you know, you have lawyers who like you say, are offering these quote unquote, no money down bankruptcies, which sounds really good, you know, who wants to put money down. Right. But what they don't realize, and what I'm sure you can tell me this, but, but I would imagine is the case is that, you know, the lawyers aren't really telling them, hey, this is the no money down option, but it's actually not the best option.
[00:11:54] Speaker C: Yeah, that's exactly right. There's, there's certainly, you know, transparency problems with, you know, filers who are in a desperate situation and they're looking for somebody who will take their case and handle their bankruptcy. And somebody says, I can do it for free.
You know, they're not thinking three years down the line, maybe this is the bad route for me. And that's extremely understandable. And in some cases, like I talked about with the, you know, certain fines and fees, you know, relating to parking tickets and other things, where just filing that bankruptcy is in and of itself beneficial in the short term.
But this no money down bankruptcy issue does create a space for some attorneys to act potentially against their clients best interests. And I think I might pivot now to talking about what are the potential solutions that we might see out there.
In the blog post that accompanies this podcast, I talk about a recent paper by a group of professors, including former Congresswoman Katie Porter, who are analyzing a few potential solutions.
There's the obvious one to start with. You know, I mentioned that case Le ME versus United States Trustee, the one that basically created this, this imbalance in the first place by saying that Chapter seven, you know, attorneys fees are going to be discharged in chapter seven.
That would require a statutory fix to the bankruptcy code. That's something Congress could do.
But the real focus of the paper is getting back to this core incentives issue.
You know, how do we make it so that attorneys incentives and filers incentives are better aligned and you know, getting them to the right place. And there's potentially a role for courts here. So what the paper talks about is a couple of different practices that courts could potentially engage in to help curb some of the abuses that come with no money down bankruptcies. There are two situations that they talk about. So for one thing, almost all bankruptcy courts issue what are called standing Orders that set what is referred to in the, in the space as no, look, attorneys fees. This means that if the attorney's fees that the attorney is charging the client are below a certain threshold, it's basically a rubber stamp. The court will say, yes, we approve this with, with virtually no scrutiny.
Scrutiny. But certainly there's. Given this, you know, increasing practice that has these negative effects, we might want some more scrutiny from the courts to help steer the incentives back in, in favor of the debtor. So what the authors propose, at least one of their proposals is, is that if somebody files for chapter 13 and they're unable to even make their first payment, the court will then take take a closer look at the attorney's fees. Because what that might indicate is this is really somebody who was not suited for chapter 13. If they can't even make the first payment in a three to five year payment plan, they might have gotten bad legal advice from their attorney. And if attorneys know that, you know, if, if you steer somebody in the wrong direction, you might get some more scrutiny on your fees, well, then that just increases the, you know, the cost that they face or rather decreases maybe the expected value that they get from steering somebody in, you know, potentially the wrong direction. On the same lines, the authors also talk about a proposal where courts would only, you know, no, look, chapter 13 plans that contemplate what's called substantial repayment to creditors. What's what? You know, some of what we're seeing in these cases is that not only is somebody filing, you know, a no money down bankruptcy, but the only payment that is contemplated in the payment plan is repaying the attorney's fees.
Which I think on its face, you know, sounds pretty crazy.
But again, this is a setup that really indicates that if somebody is filing for chapter 13 and all they're doing is paying their lawyer, maybe they weren't really suited for chapter 13 in the first place. And you know, we should, courts should take a closer look at this. Both of these are changes that courts would have to implement. And different jurisdictions, you know, have run their bankruptcy systems, you know, differently. It's all, you know, federal, but each, each circuit has different rules and, and so forth. But, you know, this is something that courts could do.
[00:16:23] Speaker B: So beyond just these proposals, have there been any efforts to, to study whether they might actually work in practice?
[00:16:30] Speaker C: You know, not that I've seen so far in the, in the paper, you know, was just proposing them, but, you know, I think some other studies that have, you know, in the bankruptcy field could provide a model by which to study some of these, some of these policy proposals, I referenced the paper by Professor Yang, which, to briefly explain its methodology, basically estimated how Chapter 13, you know, successfully completing Chapter 13 affected, you know, the people who actually filed and completed it by, you know, randomizing, using the different leniencies the judges have, you know, how likely they are to dismiss somebody's bankruptcy.
And we're able to compare people who are in similar, you know, similar financial circumstances, some of whom got dismissed and some of whom, you know, successfully completed bankruptcy based on the random leniency of their judges who are randomly assigned and were able to know, make some conclusions that way. I think given the proposals that the authors of the paper that I mentioned articulate, you could see a similar sort of random leniency, or in this case, how closely the judges scrutinize the Chapter 13 fee structures and Chapter 13 payment plans. If, you know, you're able to randomize because bankruptcy judges being randomly assigned, you could theoretically start to see, you know, those variations producing different results. Obviously, this is contingent on a court or multiple courts actually going down this pathway of, you know, increasing their scrutiny towards those, you know, fee structures that I mentioned.
But that's one way that we could start to see some more rigorous empirics around these policy solutions.
[00:18:14] Speaker B: Yeah, that makes a lot of sense. This seems like a super high stakes issue, and hopefully at some point there'll be some concrete moves to change or at least to study potential changes.
[00:18:28] Speaker C: Yeah, absolutely.
I think there's definitely room for policy changes. Obviously, Congress could step in and fix the statute issue that led to this Chapter 7 fee issue in the first place, and courts could take various steps to intervene and scrutinize the situation further. But I think, you know, at its core, this can be tied back to the fact that bankruptcy is maybe just too difficult.
You know, I worked when I was in college for a legal aid organization in Chicago, and one of the things it did was run a help desk for people who were filing bankruptcy. This was my job, was to work at this desk only for a summer, but, you know, I got to know the process reasonably well. And the takeaway that I had was this is so complicated that I don't understand how anybody without a lawyer completes bankruptcy. Of course it is possible, but the fact that it is so difficult to do on your own and that a lawyer is so necessary and lawyers are expensive, leads us to this problem in the first place. It's so ironic. People who are in such debt that they have to file for bankruptcy are taking on more debt to do it because they have to pay their lawyer this much money. If the bankruptcy system could be streamlined even a little bit, we could see the need for attorneys decrease slightly.
And at the very least, that would mean we'd see fewer people steered into no money down bankruptcies that they can't afford and can sometimes be prove very detrimental for them. So I think there's a broader point here about just how difficult we make this system that's supposed to be a financial reset button for folks and we're making it pretty inaccessible. And that I think underlies this entire problem.
[00:20:22] Speaker B: Yeah, no, that makes a lot of sense.
Well, thank you for taking the time to explain that to me, Joe. Hopefully there's some movement on this issue in the future.
[00:20:30] Speaker C: Absolutely. Thanks, Andrew.
[00:20:32] Speaker A: Proof Over Precedent is a production of the Access to Justice Lab at Harvard Law School.
Views expressed in student podcasts are not necessarily those of the A J Lab.
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Here's a sneak preview of what we'll bring you next week.
[00:20:57] Speaker C: Judges who are overseeing each bankruptcy could put some more scrutiny on the attorney fee structures that are being proposed in these Chapter 13 filings, which the courts have to approve. The idea being that if the court is sensing that these attorneys are steering folks unnecessarily into chapter 13s, they might not approve their fee structures. If that's the case, then the risk to attorneys maybe not acting in the best interest of their clients increases, the expected return on this practice decreases, and we might hopefully see some curbing of this practice.
