Bankruptcy attorney Mark S. Zuckerberg recently described the current state of his practice: “Nobody’s coming into my office; nobody’s calling me; nobody’s paying me.”
His loneliness can be tied to the drop in bankruptcy filings. In 2015, petitions nationally fell to 860,182, an 11 percent decline from 2014 and the lowest number of filings since 2007. Zuckerberg maintained the decline is not a sign the economy is improving from the Great Recession. Rather, he said, people are simply too broke. They have no home, no car and no job to protect, so they do not see the benefit of using rent and grocery money to file for bankruptcy.
However, the bankruptcy lawyer knows at some point the filings will start to increase. Financial troubles are often rooted in divorce, loss of income or medical bills and, as Zuckerberg noted, nobody’s fixed those problems.
Bankruptcy filings peaked in 2010 at just below 1.6 million, fueled mostly by mortgage foreclosures. The wild swings impacted the federal bankruptcy courts and bankruptcy attorneys like Zuckerberg. New hires were brought on to help with the workload and then, sometimes, let go when filings fell.
At the peak, Zuckerberg, who has offices around the state, was handling 200 to 300 cases a month. With the decline, he has laid off attorneys and staff members in 2014 and 2015.
Chief Judge Robyn Moberly of the U.S. Bankruptcy Court for the Southern District of Indiana remembered the high caseload required the court staff of about 75 to work at a maddening pace that could not be sustained long-term. Although the amount of work has fallen, none of the now 48 on staff is sitting around with nothing to do. Also, the four judges have used the breathing room in their calendars to undertake a review of the practices and procedures of the court to see if improvements need to be made.
The clients coming to Zuckerberg these days are not much different than those who came previously. Typically they are hardworking people who paid their bills and had good credit, but some unexpected misfortune ruined them financially.
For the people requesting bankruptcy help from Indiana Legal Services Inc., many are being crushed by “horrendous medical bills,” said staff attorney Rod Bohannan. The number of clients requesting bankruptcy assistance from the legal aid office has dropped by almost half to about two or three daily, but Bohannan and another attorney who handle bankruptcies are still busy, mostly filing for individuals who were unsuccessful at working things out with their creditors.
Instead of negotiating, lenders are hauling debtors into court and getting wage garnishments, Bohannan said. Anything above a weekly income of $217.50 can be taken, which leaves clients too strapped to cover basic expenses. The only option they have for relief is bankruptcy.
Trouble for creditors
The only category of filings to register a year-over-year increase in 2015 was Commercial Chapter 11, according to the American Bankruptcy Institute. The 5,309 filings last year represented a 2 percent increase over 2014 and was the first year-over-year bump since 2009.
Within the Southern District, Chapter 11 filings overall totaled 35 in 2015, down by nearly half from 67 recorded in 2014. In the Northern District of Indiana, Chapter 11 filings have fallen steadily from 43 in 2012 to 18 in 2014, the most recent year available. Moberly attributed the decline to the parties doing more to work out the situation between themselves and avoid court altogether.
Anthony Jost, partner at Riley Bennett & Egloff LLP, has noticed big lenders showing a greater willingness to try to reach an agreement with debtors outside of court. Creditors prefer to be lenders rather than owners of land, buildings and equipment.
Yet if a debtor proceeds with a bankruptcy filing, Jost, like Bohannan, sees creditors as being more aggressive in disputing which part of the debt gets discharged. Jost speculated that the volume of bankruptcies during the downturn may have overwhelmed creditors’ efforts to recover their money, but now they are paying much more attention.
“I just feel like there’s a heightened desire to pursue what you would not have pursued before,” Jost said.
Many of the disputes over discharges are related to the age of the debt, said James Carlberg, chair of the bankruptcy and creditors’ rights group at Bose McKinney & Evans LLP. Creditors are likely to argue against wiping out charges that were incurred several years before the bankruptcy was filed.
However, geography might be bigger problem for creditors. Increasingly companies are filing for bankruptcy protection in Delaware or New York, which can create a burden for creditors in Indiana since staking a claim will require hiring of out-of-state counsel and extensive traveling to attend a hearing.
“Here in the heartland, the venue rule creates significant hardship for Indiana businesses and Indiana lawyers,” said Andrew Ozete, partner at Bamberger Foreman Oswald & Hahn LLP in Evansville.
Ozete is a member of an ad hoc group of attorneys from around the country who are advocating for a change to the rule.
The high cost of litigating a bankruptcy in the eastern states is causing many creditors to settle instead of staking a claim. In addition, the move to distant venues is diluting the number of Indiana attorneys who have experience handling large Chapter 11 cases.
The next wave
The next round of bankruptcies is expected to come from the education and agricultural sectors with student loan debt overwhelming many adults and the drop in commodity prices squeezing many farmers.
Speaking of student loans, attorneys use the word “crisis” and equate the fallout from the looming trouble to the mortgage bubble bursting. Others predict the problem facing growers will mirror the devastating farm foreclosures of the early 1980s.
Middle-age adults struggling with education loans have been trickling into the Jeffersonville law office of Guilfoyle & Thomas. Attorneys James Charles Guilfoyle and his son Jimmy have clients who borrowed tens of thousands of dollars to return to school to get training for a job that (“on a good day,” Charles Guilfoyle said) may pay $15 an hour.
Currently, student loan debt cannot be discharged unless the borrower shows undue hardship. However, Jimmy Guilfoyle said a 2013 ruling from the 7th Circuit Court of Appeals in Susan M. Krieger v. Educational Credit Management Corp., 713 F. 3d 882, has opened a door by raising the hurdle lenders have to leap.
For one client, who has no other debt besides student loans that total more than $100,000, the Guilfoyles have convinced the United States Bankruptcy Court for the Western District of Kentucky to issue a temporary stay against garnishing wages. They are now working to get the stay permanent.
Lower prices for crops have started to hurt farmers, especially those who are now over-leveraged from having bought acreage when land prices were high. A few years ago, healthy commodity prices enticed farmers to expand their farms. Even though real estate was “ridiculously expensive,” reaching in excess of $10,000 per acre, the farmers had the income to buy, Ozete said. Now farmers do not have the return on their yields to cover their expenses.
Both the Northern and Southern District bankruptcy courts have recorded single digit Chapter 12 filings for the previous decade, the method typically used by farmers trying to discharge debt. However, an uptick could come as soon as this year, attorneys said.
Still, even those who have had their debts discharged through bankruptcy have pitfalls to avoid. Bohannan warns clients that once they file, credit card companies, car dealerships and other entities will swamp them with offers. These businesses believe the risk of being unable to collect is low because the borrowers will not be allowed to file for protection again for another eight years.
The bills from the new lines of credit could create a new round of financial hardship. Bohannan advises his clients to rebuild their credit by opening their wallets very carefully. Consistently paying basic living expenses like utilities and rent on time will raise credit scores to 500 or above, but the effort takes patience. As Bohannan pointed out, boosting a credit score could take four years or more.•