CHAPTER 1, C. Too Broke for a Fresh Start

• Jurisdiction: United States

C. Too Broke for a Fresh Start

ABI Journal

February 2019

Hon. Henry Callaway

U.S. Bankruptcy Court (S.D. Ala.)

Mobile, Ala.

Jonathan Petts

Upsolve

New York

Consumer bankruptcy was designed to provide a "new opportunity in life and a clear field for future effort."¹ In addition to erasing unsecured debt and stopping wage garnishment, chapter 7 increases debtors' employment outcomes by 12 percent,² and often improves access to credit after discharge.³ In short, the fresh start is a powerful poverty-fighting tool.

However, over the last decade, chapter 7's fresh start has become steadily less accessible for low-income Americans. Since the financial crisis, the number of individual chapter 7 filings has steadily decreased.⁴ While many factors account for this drop, one of the most significant factors is also among the least discussed: the rising cost of filing. Since 2005, added regulations have significantly increased the costs of providing legal services to chapter 7 debtors. In many markets, the cost of filing has more than doubled, putting a chapter 7 discharge outside the reach of many low-income debtors.⁵

Debtors who cannot afford a chapter 7 attorney might file a deficient pro se petition, fall prey to an unscrupulous bankruptcy petition preparer, or file a "no-money-down" chapter 13 case that is (in some jurisdictions) likely to be dismissed without any lasting debt relief. Lacking funds for the filing and attorney fees, these financially stressed debtors might not be able to file at all in some cases. In turn, they suffer from the lack of housing, food and basic utilities that often accompany severe debt.

Attorneys' fees are only likely to increase in the coming years, leading to a worsening of the problem. While the goal of finding a pro bono attorney to represent indigent debtors is laudable, history has shown that there are never enough pro bono attorneys to meet the demand. In this article, the current "too broke for a fresh start" problem will be discussed, and two experiments to increase access to chapter 7 using technology, electronic self-representation and online legal aid will be explored.

The Rising Costs of Chapter 7

In 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), which made a number of changes to bankruptcy law that were intended to prevent abuse of the bankruptcy system. Under BAPCPA, Congress significantly increased the amount of documentation that a debtor must provide their trustee to obtain a discharge, imposed personal liability on debtors' counsel for the accuracy of a debtor's bankruptcy forms, and required debtors to attend paid financial counseling sessions before and after filing in order to obtain a discharge (among other things).⁶

These new requirements significantly increased the cost of providing chapter 7 representation.⁷ Obtaining financial documents from debtors and fact-checking the provided information are both a challenging and time-consuming process. Because attorneys "have nothing to sell besides their time," the cost of the additional time incurred was necessarily passed on to debtors, as was the cost of the new bankruptcy courses.

As a result, between 2003 and 2009, the national mean attorneys' fee in no-asset chapter 7 cases increased 48 percent from $654 to $968.⁸ This increase is likely underestimated for 2018, as the cost of chapter 7 now often reaches $2,000 in some markets. This rise in filing costs has priced many debtors out of the bankruptcy system and, in the view of some scholars, has generated a permanent drop in the chapter 7 filing rate.⁹

Consequences of Increased Costs

Low-income debtors who cannot afford to pay chapter 7 attorneys' fees up front often face one of four negative outcomes: (1) remaining stuck in debt outside bankruptcy protection; (2) filing deficient pro se petitions; (3) falling prey to fraudulent petition-preparers; or (4) filing a no-money-down chapter 13 case that is likely to result in dismissal without any lasting debt relief.

Living in Debt

The most common approach to the unaffordability of chapter 7 is simply "doing nothing." This approach avoids the cost of attorneys' and court fees, but is not without other costs. Debtors who need a fresh start but live outside bankruptcy protection often go without health care, food and utilities, and lose homes and other property.¹⁰

The costs of remaining in debt are not just financial. Research indicates that living in a state of financial scarcity impedes the ability to lead a productive life because simply determining how one will survive day to day depletes mental resources for dealing with anything else, including one's job.¹¹

Deficient Pro Se Petitions

Many debtors who cannot afford chapter 7 counsel attempt to file pro se by downloading forms from court websites and completing them on their own. The results are often poor, with missing forms, "chicken-scratch" schedules and incomplete creditor-counseling courses. These and other mistakes often lead to cases being dismissed for routine mistakes that could have been easily avoided with the assistance of counsel.

Unscrupulous Petition-Preparers

Steep attorney and court fees for chapter 7 also lead many debtors to bankruptcy petition-preparers, who promise a fresh start at rock-bottom prices. Although there are many competent petition-preparers,¹² too many provide debtors with inaccurate and incomplete schedules. Pro Publica recently documented an industry of petition-pre-parers in Los Angeles who violate bankruptcy law regulations and skirt enforcement by having multiple related individuals acquire a fractional interest in a property subject to foreclosure before filing a chapter 13 case for each individual, thereby delaying the foreclosure process for days or months.¹³

Bankruptcy courts in other parts of the nation with high numbers of pro se filings — such as Phoenix, Atlanta, Detroit and Milwaukee — also have similar fraud problems with unscrupulous petition-preparers who flout the...