Tackling Soaring Bankruptcy Filings
Cocheo, Steve, ABA Banking Journal
Congress never passed them. You won't read about them in any law book. And you won't see them explicitly in the figures released each year by the Administrative Office of the U.S. Courts.
But they exist-the new bankruptcy sections called "chapter 26" and "chapter 20. "
The new "chapters" are actually two new gambits in bankruptcy lawyers' playbook, according to L.V. "Gus" Patterson, a Michigan banker who has carved out a specialty in fighting bankruptcy filings and teaching other lenders how to do the same.
A "chapter 26" is actually the filing of two chapter 13 cases, according to Patterson.
Typically in this game plan, a consumer debtor is in trouble and files a chapter 13 as holding action to stop a lender from foreclosing on his house or seizing some other valued collateral. The emergency avoided, the debtor lets the first filing lapse, according to Patterson. (Alternatively, a hardnosed trustee objects to the quickie plan as unreasonable and the debtor responds by dropping the case.) Soon afterward-with time to get his act together-the same debtor files another chapter 13 in earnest to obtain relief from creditors. Two 13s make 26.
The chapter 20 case arises in a similar manner, says Patterson, assistant vice-president in the installment loan department of Second National Bank, Saginaw, Mich. The cause in this case, he maintains, is debtor attorneys' hunger for fees.
In Patterson's area, chapter 7 filings generally cost around $500. Typically, chapter 7s are bread and butter work for a debtor attorney; the consumer's debts and assets are listed to demonstrate that he is insolvent, and unless a creditor objects, the judicial crank turns and, presto, the debtor emerges with a clean slate. This excepts certain debts, such as federal student loans and alimony, that are not dischargeable in such straight liquidation bankruptcies.)
For many debtor lawyers, chapter 13 plans involve too much sweat. A three-to-five year plan for full or partial payment must be drawn up and then approved by the court. If the debtor falls behind or fails to make payments at all, the lawyer and client may be hauled into court again. So 13s cost more-in Patterson's area, lawyers typically charge 1,000.
But the advent of personal computer packages for attorneys that automate many aspects of chapter 13 plans has reduced the time and cost of the related paperwork, according to Patterson. Mis, he charges, leads some attorneys to steer debtors who are unsuited to 13 into this more expensive type of filing.
When a creditor who is paying attention to the documents received from court objects to the plan, Patterson continues, and if the plan is demonstrated to be unworkable, the debtor switches to chapter 7. Of course, the debtor's attorney requires another fee for handling the "new" case. A 13" and a 7" equal a " 20. " Growing trend. Such new shenanigans are arising among the run-of-the-bankruptcy-mill as consumer filings.
Patterson handled 270 cases for his $600-million-assets bank in calendar 1990. This represented the highest level of filings involving the bank since 1982. Patterson reports that he saw more 13s filed in 1990 than ever before. In late January, he said he was receiving an average of two notices of bankruptcy filings a day.
Patterson is hardly alone. Nonbusiness filings for the year ended June 30, 1990, came to 660,796-nearly 14% over the year ended June 30, 1989, and more than 120% above filings for 1985, the lowest year for filings since the Bankruptcy Reform Act of 1978 went into effect.
Prevention is part of the answer to this crisis.
But the challenge still remains: What can banks do when consumers file for bankruptcy? Attitude shift. "Nothing" has been the answer from many institutions in recent years. Bill Mapother, a bankruptcy consultant to creditors and head of the Louisville, Ky., law firm Mapother & Mapother, blames this attitude on several factors. …