Unsanitized: How People Seeking Bankruptcy Will Suffer in the Pandemic

Also, cracks in the small business lending program and a self-interested inspector general. This is The COVID-19 Daily Report for April 4, 2020.

by

First Response

Max Gardner is one of America’s great bankruptcy attorneys. For years, he’s been running a “bankruptcy boot camp” for his fellow attorneys, in his wooded redoubt in the hills of North Carolina. Normally the event has a few dozen lawyers. He did his first webinar boot camp about a week ago: 776 attorneys signed up. “I really fear something worse than the Great Depression,” Gardner told me. “Every system is going to be overwhelmed.”

Bankruptcy has so far been spared this crush; new filings are kind of a lagging indicator, since it is a last resort for people at a low point. The cases aren’t likely to start piling up for a few months. But Rohan Pavuluri, CEO an co-founder of Upsolve, a large non-profit that assists bankruptcy filers, has already seen intense interest. Seven of the top ten referrals to Upsolve have the term “COVID” or “coronavirus” in them. There’s been ten times more interest in the group’s COVID-19 FAQ page than its homepage.

That page explains some of the realities of bankruptcy since the 2005 reform law (paging Joe Biden), particularly for those who can’t afford an attorney, the kind of people Upsolve assists. “If you cannot afford a lawyer, you cannot file electronically in the vast majority of districts, you have to mail or hand-deliver,” Pavuluri explains. Of course, most bankruptcy courts are closed, making hand-delivery impossible and mailed-in documents unlikely to reach anyone. Just printing the forms without access to a workplace could be prohibitively expensive and hard to do.

It’s not just pro se filers who are burdened. Gardner uses a pre-recorded YouTube video to explain the process to clients. But there are certain notices and disclosures that attorneys must make within a certain number of days; the pandemic makes this difficult. This is of course all by design; the bankruptcy bill made it nearly impossible for individuals to file for bankruptcy. The pandemic just raises the hurdles, particularly for those already in bankruptcy.

That includes people like Catarina Lopez. Her 341 meeting with creditors, a requirement for discharging debt, has been delayed a month. “It changed all my plans I had for the next year,” she told me. Lopez was planning to go back to school for a Master’s degree but owes money to the university where she got her bachelor’s. They won’t release her transcripts without being paid, and without the bankruptcy hearing advancing, that payment can’t be discharged. “Until then I have a financial bar on going to another school or getting a decent job,” she says. Lopez was planning to get married and move to Australia, where her partner is currently. Due to the pandemic, she’s stuck with her grandmother in Texas, waiting for the bankruptcy to resolve, “while my partner is on the other side of the world.”

The U.S. bankruptcy trustee could create standard rules that increase access in all bankruptcy courts, requiring options like videoconferencing. The Supreme Court could also enact an emergency rule. But that hasn’t happened yet. “One big issue, we require what we call wet signatures for every document,” says Gardner. “The debtor has to sign fifteen times. At the request of the bar, my court has waived that requirement. But it’s a big issue all over the country that has been done district by district. There’s no national policy or strategy.”

Another concern is that the $1,200 direct payments in the aid package passed last week will be treated as an asset in bankruptcy, and eligible for creditors to seize. “It’s not 100 percent clear to me that it’s exempt from the trustees trying to say it’s like you won a scratch-off card, and turn that money over to me,” says Gardner. Another part of the bill allows an extension of the bankruptcy timeline from 5 to 7 years, which would reduce people’s monthly payments. But that only applies to existing, not new cases. If you applied after the bill passed, when your financial life went into upheaval, you wouldn’t get the benefit.

Pavuluri, of Upsolve, explains that the system is discriminatory against those who need it the most. “It’s a huge injustice,” he says, “that people facing financial challenges can’t access specific laws that help them.”

Check this Out

I was on WORT-FM in Madison, Wisconsin for an hour discussing the crisis. You can listen here.

If you must pore over the statistics (I’ve explained why I’ve lost faith in the numbers here), you can find them at New York Times, Johns Hopkins University, the COVID-19 Tracker, this hospitalization tracker, and elsewhere.

Also, here’s an edition of Unsanitized translated into German, if that works for you.

Small Business Update

The Paycheck Protection Program (PPP) rolled out yesterday, if by “rolled out” you mean “kinda sorta got started amid mass confusion.” Most banks were simply unavailable to administer the program. Among large banks, only Bank of America was ready to take initial applications, and as I mentioned yesterday, they only accepted applicants with both a deposit and lending relationship with the bank. People with 20 years of history with BofA were turned down.

The reason for this is pretty simple: the rules of the program show that anyone with an existing lending relationship does not need to be tested again for compliance under the Bank Secrecy Act, really the only thing banks are liable for. JPMorgan Chase requires only an active checking account. But the lending relationship saves banks money and time on compliance, so I predict that will be the standard. If you run a cash business and didn’t need to go into debt with it, odds are you won’t get a PPP loan. Sen. Ben Cardin (D-MD), ranking member of the Small Business Committee, joined chair Marco Rubio (R-FL) in condemning banks for this, but this is what happens when you run a government program through self-interested private companies.

Meanwhile, BofA announced that on day one, they received 85,000 applications worth $22.2 billion. That’s about 6 percent of the total $350 billion in the fund. Do the math and you figure out a couple things. First, all this money will be gone as soon as the rest of the big banks open their application process, if just one big bank processed $22 billion in a day. I suspect it closes on Monday. Second, extrapolate out to $350 billion using these numbers and you get about 1.34 million applicants. The estimate is there are 30 million small businesses out there. About 4.5 percent of all of them will have a chance to get relief. Half of small businesses haven’t paid rent in April, which if I’m doing the math correctly is more than 4.5 percent. And millions of them will have no federal help, no customers, and really no hope.

Mitch McConnell has reluctantly signaled there will be a phase 4 bill, and refilling this program is atop the agenda. But it may be too late by then.

Federal Bailout Inspector

Last night, President Trump fired Michael Atkinson, the inspector general of the intelligence community, who accepted the whistleblower complaint that led to his impeachment. That’s a baseline example of what Trump thinks of oversight. The fact that he nominated a White House lawyer as inspector general for the pandemic bailout at roughly the same time fits the paradigm.

In 2008, on his way out the door, George W. Bush’s final appointment was the inspector general for the TARP bailout, and (because he faced a Democratic Senate and was termed out and wouldn’t have to deal with the guy anyway) he picked Neil Barofsky, a Democrat but a respected federal prosecutor. Here’s a great interview of Barofsky by Bill Moyers from this week. That’s who you would expect for this position: someone who can police fraud and ensure integrity. Trump has no integrity and approves of fraud, therefore he picked a crony for the same position. Brian Miller, the White House lawyer in question, responded to document requests during impeachment. He was also once an inspector general, for the General Services Administration, and if you read in Barofsky’s book Bailout about the careerist cowardice of the inspector general corps, that’s even worse.

Regardless of the personnel, the oversight of this bailout would be lacking. Barofsky and Elizabeth Warren ran oversight on the last bailout, and they were hamstrung because they only saw details after the money left the building. That’s the oversight structure adopted for this bailout. It borders on useless, and Trump is utterly committed to making it more useless. “Oversight” was a fig leaf from House Democrats to show they weren’t totally marginalized as corporate America rolled around in trillions of dollars. Trump is just showing how absurd and ineffective that fig leaf was.

Today I Learned