REPORT: MORE THAN ONE-THIRD OF AMERICANS DELINQUENT ON DEBT
A study released today by the Urban Institute found that 35 percent of Americans have debt in collections, USA Today reported today. The study, which analyzed the credit files of 7 million Americans, found that Southern states especially stand out with the highest concentration of people delinquent. In 13 states -- Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, South Carolina, Texas, Nevada, New Mexico and West Virginia -- and Washington, D.C., more than 40 percent of the population with a credit file has debt in collections. Nevada, one of the states hardest hit by the housing crisis and recession, has the highest share, at 46.9 percent. The 77 million Americans with debt in collections owe an average of $5,200. That includes debt from credit card bills, child support, medical bills, utility bills, parking tickets or membership fees. Among Americans with credit history, the average total debt load is nearly $54,000, but that number is not as significant as it includes debt from mortgages. Americans with a mortgage have an average overall debt of about $209,000 compared with about $11,600 for those without a mortgage. Twenty percent of Americans with a credit report have no debt. Read more.
COMMENTARY: CONTROLLING STUDENT LOAN DEFAULTS
New federal rules that penalize colleges for excessive student loan defaults offer a powerful incentive for schools to educate students on the complexities of the federal student loan program, including the crucial fact that they can delay or make partial payments if they get into financial trouble, according to a New York Times editorial on Friday. Colleges with default rates of 30 percent or higher in any given year are now required to develop a plan for keeping more students on track to repay their loans. Beginning in September, institutions that reach or exceed the 30 percent for three consecutive years will lose their eligibility for both the federal loan program and the Pell Grant program, subject to appeal. This places schools with runaway default rates at risk of having to shut down. The new rules, according to the editorial, provide important protection for students for whom default can mean a shredded credit history that makes it difficult for them to buy cars or homes and even shuts them out of jobs. The rules also protect taxpayers, who are on the hook when a loan goes bad. Read the full editorial.
In related news, the Senate Banking Committee will hold a hearing on July 31 at 10 a.m. ET titled "Financial Products for Students: Issues and Challenges." For the full witness list and additional hearing details, please click here.
REPORT: AOUSC FINDS FEWER DEBTOR ASSETS, MORE REPEAT BANKRUPTCY FILERS IN 2013
Individuals filing for bankruptcy in 2013 reported fewer assets, lower total liabilities and lower median income when compared to filers in the preceding year, according to a report filed on Thursday by the federal Judiciary with Congress. The report also found that in 2013 a greater proportion of debtors were repeat filers. The report, which the Judiciary is required to file annually under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), focuses on individuals with predominantly consumer debt. Among the data collected:
- In calendar year 2013, 1 million bankruptcy petitions were filed by individuals with predominantly consumer debt, down 12 percent from the 1.1 million bankruptcy petitions filed by individuals with consumer debt in 2012.
- Total assets reported by consumer debtors fell 22 percent below the comparable 2012 number. Of these assets, 69 percent were categorized as real property, and 31 percent as personal property.
- Total debtor liabilities fell 21 percent below the comparable data for 2012.
- Median average monthly income reported by all debtors was $2,667, down 3 percent from 2012.
- Median average reported monthly expenses were $2,674, also 3 percent lower than in 2012.
- In 33 percent of the 319,010 chapter 13 cases filed during 2013, debtors reported they had filed for bankruptcy protection during the previous eight years, 3 percent more than in 2012.
HOW ARGENTINA'S DEFAULT MAY TRIGGER $29 BILLION IN CLAIMS
By defaulting tomorrow, Argentina may trigger bondholder claims of as much as $29 billion -- equal to all its foreign-currency reserves, Bloomberg News reported yesterday. If the overdue interest on Argentina's dollar-denominated securities due in 2033 isn't paid by July 30, provisions in bond indentures known as cross-default clauses would allow the nation's other debt-holders to also demand their money back immediately. The amount corresponds to Argentina's debt issued in foreign currencies and governed by international laws. U.S. District Court Judge Thomas Griesa blocked Argentina's attempt last month to transfer the $539 million in interest after the nation didn't set aside money for holdout creditors that won a ruling that entitled them to full repayment of obligations that Argentina repudiated in 2001. While Citigroup Inc. says that there's little chance investors will invoke the pay-back clauses in coming weeks, potential claims are large enough to exhaust the country's reserves. Read more.
COMMENTARY: WE DON'T NEED TO END "TOO BIG TO FAIL"
While the Dodd-Frank Act celebrated its fourth birthday last week, the Republican staff of the House Committee on Financial Services on July 21 issued a report -- called "Failing to End 'Too Big to Fail'" -- saying that the act has sown the seeds for another round of bailouts by encouraging banks to grow too big to fail, according to a commentary on Slate.com yesterday. Despite the Dodd-Frank Act's imperfections, it was a significant achievement, and the House report's criticisms are seriously muddled, according to the commentary. The report's main complaint is that the Dodd-Frank Act institutionalizes a government commitment to rescue firms hit by financial panic. But a no-bailouts goal is foolish, according to the commentary, as the government's power to make emergency loans during a financial panic is essential. In the best case, the knowledge that the government will intervene can stop panics from starting in the first place. But if not, only government intervention can prevent a financial panic from shutting down the economy. It's true that the government backstop gives banks perverse incentives to take risks and grow too large, but that's why, according to the commentary, those hundreds of rules are necessary. Read more.
CFPB AND 13 STATE ATTORNEYS GENERAL OBTAIN NEARLY $92 MILLION IN DEBT RELIEF FOR SERVICE MEMBERS HARMED BY PREDATORY LENDING SCHEME
The Consumer Financial Protection Bureau (CFPB) and 13 state attorneys general obtained approximately $92 million in debt relief from Colfax Capital Corporation and Culver Capital, LLC, collectively known as "Rome Finance," for about 17,000 U.S. service members and other consumers harmed by the company's predatory lending scheme, according to a CFPB press release today. Rome Finance lured consumers with the promise of no money down and instant financing. Rome Finance then masked expensive finance charges by artificially inflating the disclosed price of the consumer goods being sold. Rome Finance also withheld information on billing statements and illegally collected on loans that were void. "Rome Finance's business model was built on fleecing service members," said CFPB Director Richard Cordray. "Rome Finance lured service members in with the promise of instant financing on expensive electronics, then masked the finance charges with inflated prices in marketing materials and later withheld key information on monthly bills." Colfax, formerly known as Rome Finance Co., Inc., is a California consumer lending company and Culver is its wholly owned subsidiary, formerly known as Rome Finance LLC. The companies offered credit to consumers purchasing computers, videogame consoles, televisions or other products. These products were typically sold at mall kiosks near military bases with the promise of instant financing with no money down. Read the full press release.
PAYMENT PROCESSING PUZZLE PERSISTS AT BANKS
Hundreds of small and regional banks are clinging to a practice that can cause consumers to incur multiple overdraft fees in the same day, even as the biggest lenders are backing away from it, the Wall Street Journal reported today. Roughly 16 percent of U.S. financial institutions process checking-account transactions on a "high to low" basis, according to a survey of more than 2,000 banks, thrifts and credit unions conducted for the Wall Street Journal by Moebs Services Inc. In high-to-low processing, banks deduct the day's largest withdrawal before they deduct smaller ones, depleting the account balance faster. That makes it more likely that multiple transactions will bounce, which in turn triggers overdraft fees for each transaction that average about $30, according to Moebs, a research and consulting firm in Lake Bluff, Ill. In the worst case, consumers can end up paying a fee greater than the cost of the purchase. Giant banks such as Bank of America Corp. and Wells Fargo & Co. have moved away from high-to-low processing in the past year as regulators stepped up criticism. Most big banks moved to a practice in which they deduct the payments in the order in which they are received. Of the top 10 banks ranked by assets, only TD Bank, a unit of Toronto-Dominion Bank, still processes the largest transactions first, according to Moebs. Read more. (Subscription required.)
LATEST ABI PODCAST FEATURES DISCUSSION OF UPCOMING SCOTUS CASE OF WELLNESS INTL'L. NETWORK V. SHARIF
The U.S. Supreme Court's surprising decision in Stern v. Marshall struck down as a violation of Article 3 the congressional statute permitting bankruptcy courts to issue final judgment as to certain state law counterclaims by the estate against creditors without the parties' consent. The decision created uncertainty throughout the bankruptcy court system as to bankruptcy courts' authority and left unanswered a key question: If the parties give their consent, can bankruptcy courts enter final judgment in matters that would otherwise require an Article 3 tribunal? The Supreme Court has agreed to take up this question by granting certiorari in a Seventh Circuit Court of Appeals case, Wellness Int'l Network v. Sharif. In the latest ABI podcast, Prof. Ralph Brubaker of the University of Illinois College of Law discusses the upcoming case and its possible implications for bankruptcy practice. Listen here.
NEW CASE SUMMARY ON VOLO: BERGER & ASSOCIATES ATTORNEYS V. KRAN (IN RE KRAN; 2D CIR.)
Summarized by Joel Levitin of Cahill Gordon & Reindel LLP
The U.S. Court of Appeals for the Second Circuit affirmed the lower courts' decisions that the debtor was entitled to a discharge because denial of discharge is an extreme penalty with exceptions to be narrowly construed, and plaintiffs had not met their burden of establishing the basis for the exception that any missing records were necessary to ascertain the debtor's financial condition during the applicable period, which it held should begin from a reasonable period of time before the bankruptcy filing through the end of the proceedings (not the earlier period when records were not properly maintained). The amount at issue in their claim had already been agreed upon, and the trustee had received sufficient documentation to conclude that the debtor did not have any material assets available for distribution.
There are more than 1,300 appellate opinions summarized on Volo, and summaries typically appear within 24 hours of the ruling. Click here regularly to view the latest case summaries on ABI's Volo website.
NEW ON ABI'S BANKRUPTCY BLOG EXCHANGE: SUPREME COURT ISSUES BANK FRAUD DECISION
A recent blog post examined the U.S. Supreme Court's decision on June 23 in Laughlin v. United States, which defined what type of fraudulent activity is punishable under the federal bank fraud statute.
Be sure to check the site several times each day; any time a contributing blog posts a new story, a link to the story will appear on the top. If you have a blog that deals with bankruptcy, or know of a good blog that should be part of the Bankruptcy Exchange, please contact the ABI Web team.
ABI Quick Poll
Consumer collateral should be valued at liquidation value in chapter 13 confirmations, even when the debtor retains the property.
Click here to vote on this week's Quick Poll. Click here to view the results of previous Quick Polls.
INSOL INTERNATIONAL
INSOL International is a worldwide federation of national associations for accountants and lawyers who specialize in turnaround and insolvency. There are currently 43 member associations worldwide with more than 9,000 professionals participating as members of INSOL International. As a member association of INSOL, ABI's members receive a discounted subscription rate. See ABI's enrollment page for details.
