8/9/2011

Bankruptcy Myth Busters:

Bankruptcy Myths Put to the Test
Prof. Katherine M. Porter UC Irvine School of Law Prof. Jay Lawrence Westbrook University of Texas School of Law

Myth #1: BAPCPA permanently crippled consumer bankruptcy.

National Conference of Bankruptcy Judges 2011 Annual Meeting

Myth #1: BAPCPA permanently crippled consumer bankruptcy

Consumer bankruptcy filings are back up to pre-2005 pre 2005 levels.

Myth #1 : BAPCPA permanently crippled consumer bankruptcy

Income profiles of filers after BAPCPA are similar to those of filers before BAPCPA.

Source: CBP; Lawless et. al., Did Bankruptcy Reform Fail?

Myth #1: BAPCPA permanently crippled consumer bankruptcy.

Myth #2: For big businesses, reorganization in Chapter 11 really just means a 363 sale.

Why cant we bust this myth with confidence?

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Myth #2: For big businesses, reorganization in Chapter 11 really just means a 363 sale. Although substantial sales outside of a plan are more common in larger cases, two recent studies found them in less than 1/3 of Chapter 11 cases with total debt exceeding $50 million. Overall, among all chapter 11 cases, only 1015% included substantial sales.
Source: Warren & Westbrook, Business Bankruptcy Project (unpublished data from 627 cases filed in 2002 and 424 cases filed in 2006 in 9 districts, including SDNY and Del.)

Myth #2: For big businesses, reorganization in Chapter 11 really just means a 363 sale.

Myth #3: Young people are more likely to file bankruptcy because of a decline in stigma.

Myth #3 : Young people are more likely to file bankruptcy because of a decline in stigma.
The stigma against filing bankruptcy has remained strong.
In 2001, 84.3% of families that filed for bankruptcy reported that they would be embarrassed or very embarrassed if their family or friends found out about their bankruptcy. Filing bankruptcy was reported as more serious than the death of a close friend or separating from a spouse.
Source: Teresa Sullivan , Elizabeth Warren & Jay Lawrence Westbrook., Less Stigma or More Financial Distress: An Empirical Analysis of the Extraordinary Increase in Bankruptcy Filings, 59 Stan. L. Rev. 213, 241-46 (2006)

Myth #3: Young people are more likely to file bankruptcy because of a decline in stigma.
Available data is more consistent with an increase in stigma. Median debt-to-income ratio more than doubled between 1981 and 2001.

Myth #3: Young people are more likely to file bankruptcy because of a decline in stigma.

Young Americans were LESS likely to file in 2007 than in 1991.

Bankruptcy Filing Rates per 1,000 U.S. Population, by Age Category, 1991, 2001, 20 2007

Source: Deborah Thorne, Elizabeth Warren & Teresa A. Sullivan, The Increasing Vulnerability of Older Americans, 3 Harv. L. & Poly Rev. 87 (2009).

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Myth #3: Young people are more likely to file bankruptcy because of a decline in stigma.

Older Americans were MORE likely to file in 2007 than in 1991.

Relative Percentage Change in Filing Rates, 19912007, by Age Category

Myth #3: Young people are more likely to file bankruptcy because of a decline in stigma.
In fact, older Americans are fastgrowing group of filers! Stigma always difficult to measure, so hard to definitively bust this one!

Source: Deborah Thorne, Elizabeth Warren & Teresa A. Sullivan, The Increasing Vulnerability of Older Americans, 3 Harv. L. & Poly Rev. 87 (2009).

Myth #4: There is nothing important in business bankruptcy between Mom & Pop and WorldCom.

Myth #4: Small and midsize cases outnumber tiny and enormous cases by 3 to 1.
Assets of Bankrupt Businesses
6% 19%

15%

Less than $100,000 Between $100,000 and $5 million Between $5 million and $100 million More than $100 million

60%

Data Source: Elizabeth Warren & Jay Lawrence Westbrook, The Success of Chapter 11: A Challenge to the Critics, 107 Mich. L. Rev. 603, 609 (2009)

Myth #4: There is nothing important in business bankruptcy between Mom & Pop and WorldCom.

Myth #5: Small businesses linger endlessly in bankruptcy.

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Myth #5: Small businesses linger endlessly in bankruptcy.

Cases of all sizes are resolved quickly, especially those that will be dismissed or converted.
100% 80% 60% 40% 20% 0%

Myth #5 : Small businesses linger endlessly in bankruptcy. Smaller businesses take as long as big businesses to confirm plans. However, smaller businesses are dismissed or converted even faster than bigger businesses.
In 1994: 49 days faster In 2002: 107 days faster

6 mos

9 mos

12 mos

15 mos

18 mos

24 mos

1994 Dismissed/Converted 1994 Confirmed Plan

2002 Dismissed/Converted 2002 Confirmed Plan

Source: Elizabeth Warren and Jay Lawrence Westbrook, The Success of Chapter 11: A Challenge to the Critics, 107 Mich. L. Rev. 603, 637 (2009)

Myth #5 : Small businesses linger endlessly in bankruptcy.

If the 2005 times limits for small businesses had applied in 2002 (when Warren & Westbrook studied cases), more than 80% of successful small business reorganizations might have failed. Need more study after 2005 amendments
Source: Elizabeth Warren and Jay Lawrence Westbrook, The Success of Chapter 11: A Challenge to the Critics, 107 Mich. L. Rev. 603, 637 (2009)

Myth #5: Small businesses linger endlessly in bankruptcy.

Myth #6: The bankruptcy experience is race neutral.

Myth #6: The bankruptcy experience is race neutral.

The Ideal Debtor, who is benefitted most by bankruptcy, disproportionately shares characteristics with white people:
Beneficiary of an employer-provided retirement account or spendthrift trust High, but reasonable, living expenses; Provides financial support only to legal dependents; Little or no student loan or alimony/child support debt.
Source: Mechele Dickerson, Race Matters in Bankruptcy, 61 Wash. & Lee L. Rev. 1725, 1726 (2004)

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Myth #6: The bankruptcy experience is race neutral.

African American filers are much more likely to file Chapter 13 than debtors of other races.
Chapter 13 Filing by Race and Homeownership
All

Myth #6: The bankruptcy experience is race neutral.

After BAPCPA, Hispanics pay more for bankruptcy attorneys fees.
$1,250 Constant 2007 Dollars $1,000 $750 $500 $250

$1,212 $954
$962

$947

$971
$1,081

African-Americans Nonhomeowners All Others

Black White Hispanic

Homeowners

0%

20%

40%

60%

80%

$0

Source: Robert M. Lawless and Dov Cohen, Less Forgiven: Race and Chapter 13 Bankruptcy, in BROKE: HOW DEBT BANKRUPTS THE MIDDLE CLASS (Katherine Porter, ed.) (forthcoming 2011).

2001

2007

Source: Ana Lucia Hurtado, Paying More to Go Broke: Empirical Evidence of Racial Disparities in Bankruptcy Attorneys Fees 10-12 (July 8, 2010) (unpublished manuscript).

Myth #6: The bankruptcy experience is race neutral.

Myth #7: Forum shopping is all about getting to New York or Delaware.

Myth #7:Forum shopping is all about getting to New York or Delaware.

Of 409 large bankruptcy cases filed outside of SDNY and Delaware since 1980, 111 cases, or 27%, were forum shopped.

Myth #7:Forum shopping is all about getting to New York or Delaware.

Large cases shopped outside of SDNY and Delaware are not shopped for greater judicial expertise.
Percent of Forum-Shopped Cases
18 16 14 12 10 8 6 4 2 0 -20 -18 -16 -14 -12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 22

Experience Gained by Forum Shopping

Source: Jared Rinehimer, Judicial Experience as a Predictor for Chapter 11 Bankruptcy Forum Shopping Beyond Delaware and New York 7 (April 20, 2011) (unpublished manuscript).

Number of cases filed by date of debtor's filing in the forum the debtor chooses minus the number of cases filed by date of debtor's filing in the court of debtors main business

Source: Jared Rinehimer, Judicial Experience as a Predictor for Chapter 11 Bankruptcy Forum Shopping Beyond Delaware and New York 21 (April 20, 2011) (unpublished manuscript).

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Myth #7:Forum shopping is all about getting to New York or Delaware.

The reasons for non-SDNY and Delaware are unclear, but may include:
One-judge courts Courts actively recruiting large cases Geographical considerations, primarily distance to court house, but also perhaps airport access, etc.

Myth #7: Forum shopping is all about getting to New York or Delaware.

Source: Jared Rinehimer, Judicial Experience as a Predictor for Chapter 11 Bankruptcy Forum Shopping Beyond Delaware and New York 24-26 (April 20, 2011) (unpublished manuscript).

Myth #8: Bankruptcy Works for Pro Se Filers.

Myth #8: Bankruptcy Works for Pro Se Filers.

Chapter 7: Very good before BAPCPA, but trouble with technicalities after.
Consumer Bankruptcy Project (CBP) 2001 debtor sample: every single pro se debtor was able to obtain a discharge. In the CBPs 2007 sample, 17.6% of pro se cases were dismissed or converted, all because of technical deficiencies. Compare to dismissal/conversion rate of only 1.9% for represented debtor cases.
Source: Angela Littwin, The Affordability Paradox: How Consumer Bankruptcy s Greatest Weakness May Account for its Surprising Success, 52 Wm. & Mary L. Rev. 1933, 1971-72 (2011).

Myth #8: Bankruptcy Works for Pro Se Filers.

Chapter 13 discharge Almost most impossible before BAPCPA (filed 2 2004)

Myth #8: Bankruptcy Works for Pro Se Filers

Chapter 13: Rare before BAPCPA, now nearly impossible after.

Impossible bl after f BAPCPA? ? (f (filed l d 2006) )

Source: Administrative Office of U.S. Courts data; calculations by Katherine Porter

Source: Angela Littwin, The Do-It-Yourself Mirage: Complexity in the Bankruptcy System, in Broke: How Debt Bankrupts the Middle Class (forthcoming 2011, Stanford University Press).

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Myth #8: Bankruptcy Works for Pro Se Filers.

For chapter 7:

Myth #9: Many of the Chapter 13 cases that do not complete plans are actually successes.

For chapter 13:

Myth #9:Many of the Chapter 13 cases that do not complete plans are actually successes.
Chapter 13 improves a debtors situation in bankruptcy.
Prevented foreclosure for 81% of homeowners. Decreased reports of feeling very stressed about finances from 84% before filing to 35% after filing.

Myth #9: Many of the Chapter 13 cases that do not complete plans are actually successes.
However, after dismissal/conversion, the debtor is little better off than when she filed.
57.5% said that their financial situation was the same as, or worse than, when they filed.

Source: Katherine Porter, The Pretend Solution: An Empirical Study of Bankruptcy Outcomes (forthcoming 90 Tex. L. Rev. ___ (2011).

Source: Katherine Porter, The Pretend Solution: An Empirical Study of Bankruptcy Outcomes (forthcoming publication) (manuscript at 36).

Myth #9:Many of the Chapter 13 cases that do not complete plans are actually successes.

Large majority of chapter 13s do not end because debtors accomplish their goals or find better solutions.

Myth #9: Many of the Chapter 13 cases that do not complete plans are actually successes.
Debtors do not achieve top bankruptcy goals: (1) Keep house, (2) Get control of finances.
70% of homeowners face home loss or threatened home loss, including restarted foreclosure. 59% struggle to pay bills after a few months; 33% struggle to pay for food. Many begin to receive collection calls within two months.

Source: Katherine Porter, The Pretend Solution: An Empirical Study of Bankruptcy Outcomes (forthcoming 90 Tex. L. Rev. 2011).

Source: Katherine Porter, The Pretend Solution: An Empirical Study of Bankruptcy Outcomes (forthcoming 90 Tex. L. Rev.)

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Myth #9: Many of the Chapter 13 cases that do not complete plans are actually successes.

Myth #10: Lenders will maximize recoveries in each case.

Myth #10: Lenders will maximize recoveries in each case.

Sarah Woos study of banksroles in the bankruptcies of residential developers during the recession. Secured lenders acted, not to maximize recovery, but to increase short-term liquidity and accede to regulatory pressure.

Myth #10: Lenders will maximize recoveries in each case.

During the recession, residential developers were disproportionately liquidated.

Source: Sarah Pei Woo, Simultaneous Distress of Residential Developers and their Secured Lenders: An Analysis of Bankruptcy & Bank Regulation , 15 Fordham J. Corp. & Fin. L. 617 (2010).

Source: Sarah ah Pei Woo, Simultaneous Distress of Residential Developers and their Secured S Lenders: An Analysis of Bankruptcy & Bank Regulation , 15 Fordham J. Corp. & Fin. L. 617, 643-44 (2010).

Myth #10: Lenders do not always maximize recovery.

Liquidations were the fault of the secured lender banks.
In 72.5% of residential developer bankruptcies, a secured lender filed a lift-stay motion.

Myth #10: Lenders will maximize recoveries in each case.

Bank decisions to force liquidation were motivated by a need for short-term liquidity and regulatory pressure.
Banks in financial distress were 24.9%-28.6% more likely to file lift-stay motions.
Source: Sarah Pei Woo, Simultaneous Distress of Residential Developers and their Secured Lenders: An Analysis of Bankruptcy & Bank Regulation , 15 Fordham J. Corp. & Fin. L. 617, 650 (2010).

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Myth #11:
The biggest issue in Chapter 15 cases is the location of the debtors center of main interest (COMI).

Myth #11: The biggest issue in Chapter 15 cases is the location of the COMI.

A recent survey of all chapter 15 cases filed through June 2010 (around 400 cases total) found that fewer than 10% involved any serious dispute about the debtors COMI.
Source: Jay Lawrence Westbrook, An Empirical Look at Chapter 15 (unpublished)

Myth #11: The biggest issue in Chapter 15 cases is the location of the COMI.