Utah Bar Journal

Poverty and Income
Poverty is a comparative term. We are all poor compared to Oprah Winfrey, who is poor compared to Bill Gates. Poverty is measured by statistics that usually compare the income levels of households, rather than individuals. There are five accepted standards employed to measure poverty, charted above. The incomes reported are gross incomes. The data in this chart come from the U.S. Department of Health and Human Resources by way of a local organization called Utah Issues that publishes an annual Poverty Report.1

Moving down the chart from least gross income to greatest, these standards are: (1) the U.S. Department of Health and Human Services standard, (2) the Federal Poverty Level (ÒFPLÓ) standard, (3) the Shelter Method, (4) the 200% of FPL standard, and (5) the Self-Sufficiency standard. These standards are generally presented for a household of four persons, as set forth in column 1. The average Utah household, however, consists of 3 persons Ð 3.12 persons to be exact, set forth in column 2. (Utah At-A-Glance, p. 10). This is a surprising statistic considering that Utahns are noted for large families.

The poverty income levels under these five standard measurements, adjusted for a household of 3 persons, vary between $14,680 and $40,443 a year. The lower income figures in rows 1 and 2 are not realistic: The Federal Poverty Level has not been adjusted since 1964, at the beginning of Lyndon Johnson's Great Society's "War On Poverty." The Shelter Method in row 3 sets the poverty line at three times the average housing cost, even though most of the poor spend more than one-third of their income on shelter. The cost of a two-bedroom apartment in Utah averages $671 per month. The standards in rows 1, 2, and 3 are really measures of abject poverty because, according to Utah Issues, these income levels are grossly inadequate to cover basic expenses such as food, clothing, shelter, transportation, and utilities. They would not begin to cover the costs of health care or education. For this reason, State welfare agencies report poverty at 200% of the outdated FPL.

Applying the 200% of FPL measuring rod, a Utah household of 3 is poor if its combined annual income is $871 per person per month (or $29 per person per day). Using that standard, 10.6% of Utah's population (i.e., 203,000 individual Utahns) lived in poverty in 2004 - up from 9.4% in 2003. (Utah Issues, Poverty Report 2004, p.10). As we shall see presently, 200% of the FPL represents an income that is only 77% of what a family of 3 needs to cover basic, necessary expenses. To put this in perspective, 203,000 Utahns live annually on less than a person with average income living in Poland, Hungary, the Czech Republic, Mexico, St. Kitts and Nevis, Trinidad and Tobago, the Seychelles, Palau, or Oman and less than one-half that of the average income of an individual living in Saudi Arabia, Antigua, Barbados, Malta, Slovenia, Portugal, Bahrain, Korea, or Greece.

The most realistic measure of poverty is the Self-Sufficiency standard, which employs income levels actually required to cover basic necessities, adjusted to account for inflation. Utah Issues reports that the average Utah household of 3 persons lives in poverty if its combined income is $40,443 or less - i.e., $1,123 per person per month, or $37.40 per person per day. That income level represents 255% of the 1964 Federal Poverty Level. In year 2003, Utah Issues' Poverty Report (p.14) stated that 42% of Utah households lived on less than $37,919 a year, about $2,500 less than the Self-Sufficiency StandardÕs functional poverty level. That means that, at 3.12 persons per household, an estimated 918,959 Utahns live in functional poverty. Keep in mind, too, that an additional percentage of the population lives on the edge of this measurement, flirting with functional poverty.

In a May 25, 2005, front-page article entitled "Poverty Still On The Rise In Utah," the Salt Lake Tribune reported:

* Utah as first in the nation in personal bankruptcy filings;

* Utahns as carrying the 14th highest tax burden in the country;

* Nearly 7900 Utah children as being homeless in years 2003-2004;

* 80,000 Utah children as living without health care;

* 470,000 Utah students as qualifying for free or discounted school lunch; and

* The average wait for public housing in Davis County as being 36 months.

Poverty and Consumer Debt
Poverty in Utah must be understood in light of rising credit card debt, which for Utahns must be adduced in part from national statistics. Between 1989 and 2001, the nationÕs credit card debt increased from $238 billion to $692 billion.4 During this period, the credit card industry instituted a number of innovative, sharp practices to generate additional revenues, including:

* Setting inadequate minimum payment amounts (between 2% and 3% of the principal balance) to allow card holders to borrow more money while extending the term that the debt will accrue interest;

* Assessing excessive late charges and penalty rates of between 29% and 34%;

* Eliminating grace periods;

* Triggering default interest rates and late charges within nanoseconds after the expiration of due date and time;

* Employing exploitive practices marketing to the young and uncreditworthy, including the mailing of 5 billion credit card solicitations in 2001 - about 21 solicitations for every living American;

* Aggressively soliciting unaffordable credit limits;

* Mounting a sustained, 10-year, multi-million dollar attack on the 1978 Bankruptcy Code to restrict access to bankruptcy relief for the poorest segments of society; and

* Automatically and without notice, raising interest rates on all credit cards held by an individual if a payment was late on just one card.5

In 1978, 37 states had usury laws to prevent the lending industry from overcharging for the use of borrowed money. These laws were rendered largely ineffective by two U.S. Supreme Court cases: Marquette v. First Omaha Service Corporation, 439 U.S. 299 (1978) and Smiley v. Citibank, 517 U.S. 735 (1996). Marquette held that national banks could charge the highest interest rate allowed in the bank's home state. The credit card industry relocated their home offices to states such as Delaware and South Dakota - states without usury laws - thereby rendering impotent the usury laws in the cardholders' states. Smiley upheld the same principal when applied to finance fees and charges, which thereafter jumped from an average of $16 to an average of $32 per account per year. One survey reports that about 60% of card users are charged late fees.6 The effect of this change on credit card industry revenues was not insignificant. These companies earned in 1996 $1.7 billion in late fees, but in year 2001, $7.3 billion Ð a 430% increase. Annual fees have disappeared and been replaced by balance transfer fees, over-limit fees, cash advance fees, and foreign exchange fees. Credit card industry revenues from fees increased from $8.3 billion in 1995 to $24 billion in 2004 Ð a 282% increase.7

Let's bring this home. Utah Issues estimates that 55% of Utah households carried credit card debt in year 2001, and that that the average credit card debt for each such household was $4,126. (Poverty Report, p.9). In year 2001, Utahns carried approximately $1.6 billion in debt, which earned the credit card industry by year 2002 approximately $239 million in interest income (at an average APR interest rate of 15%).

Online Debt Smart, however, reporting higher estimates, states that in 2001 the average credit card debt for an American household was $7,500, while the Consumer Federation of America estimates that the average American household uses 6 credit cards and carries an average of $10,000 in debt.

Credit Card Debt Estimates for Utahns (Year 2002)
UT HH - 701,281
42% UT HH - 294,538
Low Estimate - $4,126
High Estimate - $10,000
Middle Estimate - $7500
Debt Carried By 42% UT HH - $2.2 billion
Interest 15% APR - $331.36 million
Total Yearly Revenues - $400 million

Multiplying 42% of Utah households living in functional poverty times $7,500 of credit card debt per household, yields $2.2 billion in credit card debt probably carried by poor Utahns in 2001. At a 15% APR, this principal sum generated about $331 million in interest revenues alone. These figures are, consequently, greater for subsequent years because credit card debt principal is increasing on average at the rate of 4% per year based on the annual rate increase that occurred nationally between 1997 and 2002.8

These revenue figures do not include principal amounts owed on payday or overdraft loans or loans made against individual retirement accounts, nor revenue from late charges, default interest rates, various fees, account charges assessed against merchants, or interest earned on the investment of these revenues. The income earned by the credit card industry from citizens of Utah in interest, fees and charges could approach $400 million a year with net increases of 4% annually.

Estimated Annual Effect on Credit Card ROIs of Utah Chapter 7 Discharges in 2004
Ch. 7 Filings - 14,948
Individuals Filing - 18,068
Average Debt - $7,500
% Of Poor Utah BK Filers - 2.3%
Estimated Discharges 14,559 (97.4%) - $109,192,500
Estimated Annual ROI - $400,000,000
Annual Growth ROI - Unknown
% Net Loss in ROI - 0%
Loss in Dollars - Unknown
Unaccounted Factors - Unknown

In Utah in year 2003, there were 14,948 Chapter 7 cases filed; of these, 6,240 were joint filings of husband and wife. This means that 18,068 individuals (that is, 14,948 + 6240/2) filed Chapter 7 cases that year. Of these 14,559 households (97.4%) received discharges of credit card debt of approximately $7500 each or $109,192,500. That estimated $109,192,500 represents a 27% decrease in the credit card industryÕs estimated annual revenues of $400,000,000 from interest alone at 15% APR.

These losses to the credit card industry are offset by interest earned on increased principal and other fees and charges thus reducing the credit card industry's losses due to discharges. These offsets are unknown. But, in my view, they are irrelevant for the reasons that the conservative 15% APR rate used to achieve these estimates of credit card industry earnings already includes a component intended to generate income to compensate the credit card company for its risk of loss on anticipated uncollectible accounts receivable, which include unpaid accounts due to bankruptcy discharges. It is arguable that the unknown net losses are, in fact, zero because the claims discharged in bankruptcy have been compensated by income generated by that portion of the interest percentage included to offset actual losses.

Chapter 7 discharges have some positive effect on the credit card industry. Chapter 7 discharges clear the open negatives balances on the credit reports of discharged debtors, thereby allowing those individuals to rebuild their credit scores to acceptable levels, often within 18 to 24 months. Discharges allow individuals to borrow again. The annual increase in the nation's credit card debt is due in part to the rehabilitative effect of Chapter 7 discharges on credit scores. Chapter 13 cases do not have this same effect. While Chapter 13 debtors are attempting to repay creditors, their credit scores continue to decline. The credit industry does not recognize a confirmed Chapter 13 Plan as a contract novation; therefore, a Chapter 13 debtor's credit scores are docked throughout the term of the Chapter 13 plan because the trustee's payments to creditors continue to be treated as delinquent and inadequate. Only Chapter 13 debtors who consummate their 3 to 5 year plans can commence the 18 to 24 month process of rebuilding credit scores.

The cost of consumer debt borne by Utahns living in functional poverty is not reflected in the credit industryÕs profits or credit reporting tactics alone. The average credit card debt of $7,500 represents about 20% of the annual income of a Utah poverty household measured by the 200% FPL standard. The interest alone on that debt at 15% APR results is an annual cost of $1,125, which is the amount needed to sustain 1 person in the household for a month. This is a household that by the Self-Sufficiency standard is already $1003 per month short of covering its basic necessities Ð all in a state whose poverty rate is increasing, whose credit card debt is increasing, 43% of whose residents cannot afford fair market rent for a 2-bedroom apartment, which ranks 3rd in the nation in food insecurity, and where in year 2003 about 7900 children experienced homelessness. (Poverty Report, p.10).9

Bankruptcy
It is in this context that we must understand Utah's ranking as the number one bankruptcy filer in the nation. Will the new Bankruptcy Code amendments (effective October 17, 2005, the anniversary of the Bolshevik revolution) make it harder for Utahns to file? Yes, but perhaps not significantly once consumer bankruptcy lawyers in the state learn to read the charts that explain how the new eligibility rules, median income "safe harbor test," and "means test" work. Those new amendments are intended to make bankruptcy protection more difficult for debtors and to force debtors with "means" to repay debts under Chapter 13, rather than to discharge them under Chapter 7. What follows is only a sketch of some of the obstacles to debt relief Congress has mandated by way of the Bankruptcy Code amendments signed into law by President Bush on April 20, 2005.

The Median Income "Safe Harbor" Test
Under the new amendments, a Chapter 7 filing is not presumptively abusive if a Utah debtor's household income falls below Utah's median income for a household the size of the debtor's. The filing, however, may be abusive if the debtor's household income exceeds that median income, in which case the means test must be applied to determine if the filing under Chapter 7 by that debtor would be an abuse. Utah's median income figures are scheduled to be released before October 17, 2005, but are currently estimated as follows:

Utah Median Income Levels
Persons In Household Median Income For Utah
1 Person $41,103
2 Persons $45,374
3 Persons $51,219
4 Persons $57,916

For households of more than four, $6,300 annually, or $525 per month, must be added for each additional household member.

The New Bankruptcy Means Test
The means test is difficult and curious. It consists of two major parts: the "current monthly income" calculation and the formula for determining if a debtor has the means to repay unsecured creditors in a Chapter 13 case. In summary, here's how it works:

The debtor's CMI is determined by averaging the debtor's total income from all sources over the six months prior to bankruptcy filing (not including benefits under the Social Security Act or payments received as a victim of a war crime, of crime against humanity, or of international or domestic terrorism).

If the debtor's CMI is less that the state's median income for the debtor's household size, the filing of a Chapter 7 case by debtor eligible therefor is not presumptively abusive. If such a debtor must file a Chapter 13 case, the monthly expenses allowed to a less-than-median-income debtor are that debtor's actual expenses.

If the debtor's CMI is greater than the state's median income for the debtor's household size, the means test must be applied to determine if such debtor's Chapter 7 filing is abusive. If a greater-than-median-income debtor is otherwise eligible for and files a Chapter 13 case, the means test allows that debtor to deduct from the CMI the more generous monthly expenses set forth in Bankruptcy Code Section 707(b)(2)(A) & (B), namely:

(i) The estimated allowable expenses established as IRS National Standards for food, clothing, household supplies, personal care, and miscellany and the IRS Local Standards (see www.usdoj.gov/ust) for housing and utilities and for transportation (with different amounts for different areas of the country, depending on the debtor's family size and the number of the debtor's vehicles);

(ii) Certain allowed actual expenses, including income taxes, FICA, Medicare, child care and medical expenses, certain insurance premiums, some education costs, expenses for the care of household members, repayments of retirement loans, and charitable contributions to tax-exempt charities up to 15% of the debtorÕs gross income; and

(iii) Deductions for monthly payments to secured and priority creditors over sixty months divided by 60.

The result is the monthly amount available to pay unsecured creditors.

From this available amount, Chapter 13 filers are also allowed to deduct any monthly income received as child support, foster care payments, and disability payments for a dependent child (11 U.S.C. Section 1325(b)(2)) in reaching the "net disposable income" to be paid under the debtor's Chapter 13 Plan.

If the resulting monthly amount (i.e., CMI minus allowed expenses and income deductions) exceeds $166.67, then the filing of a Chapter 7 case by a debtor with greater than applicable state median income is an abuse under the means test. If the resulting monthly amount is less than $100, then a Chapter 7 filing by such a debtor is not an abuse under the means test. If the resulting monthly amount for that debtor falls between $100 and $166.67, a Chapter 7 filing is not an abuse if that monthly amount multiplied by 60 totals a sum less than 25% of the debtor's scheduled unsecured debts. If such a monthly amount exceeds 25% of the debtor's scheduled unsecured debts, then a Chapter 7 filing for such a debtor is an abuse. Notwithstanding all this, a bankruptcy case may be still dismissed as abusive if it is not filed in good faith.

In Utah, given the low median incomes for households and the generous IRS standards for expenses in the cases of wealthier Chapter 13 debtors, the number of Chapter 7 case filings, though decreasing in the short run, may not drop off significantly over time. However, the additional potential liabilities placed by the amendments on consumer bankruptcy attorneys will undoubtedly alter processing procedures and probably result in increased fees.

Some Other Restrictive Provisions of the Bankruptcy Amendments
The new amendments contain additional obstacles to bankruptcy filing. For example, a discharge cannot be granted in a Chapter 7 case filed within 8 years of the Petition Date of a prior Chapter 11 or Chapter 7 case in which a discharge was granted or within 6 years of the Petition Date of a prior Chapter 12 or Chapter 13 case in which a discharge was granted. A discharge cannot be granted in a Chapter 13 case within 4 years of the Petition Date of a prior Chapter 7, Chapter 11, or Chapter12 case in which a discharge was granted or within 2 years of the Petition Date of a prior Chapter 13 case in which a discharge was granted.

The automatic stay provisions are more restrictive. Debtors who file a case but do not receive a discharge, but then file another case within a year of the original, will have the benefit of the automatic stay for only 30 days unless the court orders after a hearing that the current case was filed in good faith. I refer to this a the Òsemi-automatic stay.Ó If a debtor files two cases within a year of the original case, no stay comes into effect in the third case unless within 30 days the court finds that the case was filed in good faith.

The amendments increase to 2 years the reach-back period for trustees to avoid fraudulent transfers, while at the same time further protecting creditors from trustees' powers to avoid preferential transfers.

The amendments require more thorough documentation prior to filing a new case and prior to appearing at a first meeting of creditors. Bankruptcy lawyers are required to certify at the time of filing that they have made a reasonable inquiry and know of nothing contrary to what the debtors report in bankruptcy schedules. As a result, conscientious lawyers will require complete documentation from clients, which will be difficult to acquire from clients not famous for their record keeping skills.

Under the amendments, documents evidencing the debtor's gross income and expenses for the prior 6-month period will have to be acquired and analyzed before a determination can be made (under the median income and means tests) whether a filing under Chapter 7 or Chapter 13 is or is not presumptively abusive. This process will greatly decrease the willingness of bankruptcy lawyers to file cases on an emergency basis.

The most draconian of the new provisions creates a class of untouchable debtors denominated "assisted persons." These are consumer debtors who own less than $150,000 of non-exempt property. There are no special restrictions placed on "assisted persons" themselves, but severe controls govern any non-creditor who assists them. Any party, including a lawyer, who provides help, legal counsel, or debt or bankruptcy services to an assisted person is automatically classified as a "debt relief agency" and falls under the disclosure and practice requirements of newly enacted Bankruptcy Code sections 526, 527, and 528, which greatly increase the liabilities and work load of those who assist the poorest elements of the lower class.

Some of the new amendments also negatively affect some creditors. Chapter 13 debtors will have to pay the full replacement value of automobiles less than 2.5 years old (where under the old law they had only to pay 100% plus interest of the depreciated value of such collateral, leaving the unsecured portion of the claim to be paid a dividend in the unsecured class). Also, debtors may not be allowed to exceed the allowed IRS estimated housing expense on mortgages. If stipulations that relax these requirements are not agreed to by creditors and allowed by the courts, a great many automobiles and houses may be surrendered to the detriment of auto lenders and mortgagees.

The following appeared on line in an April 14, 2005, Bloomberg report:

"The credit-card industry bought and paid for this legislation," said Massachusetts Democrat William Delahunt. "They spent north of $40 million to make sure they got what they wanted."

"This bill seeks to squeeze even more money for credit-card companies from the most hard-pressed Americans" and turn bankrupt consumers into "modern-day indentured servants," said Democratic Leader Nancy Pelosi.10

In lobbying for the new amendments, however, the credit card industry gave short shrift to the law of unforeseen consequences. Just before it became law, the secured creditor industry hijacked the bill. The new amendments were tweaked so they now do not favor unsecured creditors. Instead, the "current monthly income," the means test deductions, the reductions of certain income under the disposable income test, and the collateral valuation rules favor secured over unsecured creditors, while the eligibility rules and pre-bankruptcy briefing and documentation requirements that make bankruptcy generally more inaccessible appear to favor unsecured creditors attempting to collect from debtors now rendered ineligible for bankruptcy protection. Debtors, of course, do not need to file bankruptcy to avoid debt. They can stop paying, abandon their equities, and settle down to a life at the bottom of the food chain. In extreme cases, they can just leave the country Ð an approach referred to as Chapter 747. Further discussion of the bankruptcy amendments is beyond the scope of this presentation, but it will be the subject of many CLE presentations planned for the near future.

Heresy
More disquieting to me than all the statistics on poverty and all the effective lobbying that resulted in a creditor-skewed bankruptcy law is the absence of opposition to the amendments from religious organizations. Where were all the Jewish leagues, the Christian coalitions, the Muslim committees, or even the secular action groups when it came to the defense of the nation's poor? The Lord may have given the word, but where was the company of the preachers? (Psalms 68:11).

The silence of the nation's spiritual leaders is particularly troubling in light of the admonitions of their scriptures: the Old Testament prophet Amos warned those who oppress the poor, who crush the needy and prayed that "justice roll down like waters and righteousness like an ever-flowing stream" (Amos 4:1; 5:21-24). St. Luke's gospel presents Jesus as telling his followers to invite to their tables not their friends who will repay them with return invitations, but "the poor, the maimed, the lame, the blind, and you will be blessed, because they cannot repay you. You will be repaid at the resurrection of the just." (Luke 14:12-14). The prophet of Allah taught Islam to "give away wealth out of love for Him to . . . the needy and the wayfarer and the beggars and (for the emancipation of) captives, and to keep up prayer and pay the poor-rate . . ." (Koran, "The Cow," 2:177).

And where were Utah's ethical guardians and moral opinion leaders? What would be the religious response here if 42% of the state were growing marijuana, were pro-choice Democrats, or were gay? Why don't Utahns see poverty as a threat to the family greater and more immediate than abortion, drug abuse, or same sex marriage? Where are the champions of family values? Where is the outrage?11 Is it possible that Utahns see poverty as a consequence of ignorance, irresponsibility, or sin and, therefore, dismiss it as deserved, inevitable, or temporary?

And what about the secular concept of fundamental fairness? The promise implicit in the foundational documents of this country that power should be enumerated, limited, divided, and balanced, and that the playing fields of power and money should by law be rendered as level as possible? Or that governmental power to protect life, liberty and property should not be subverted to oppress, deceive, disenfranchise, or plunder? Is it not a form of constitutional heresy - a departure from the principles on which the nation is predicated - to legally relegate the least powerful and the poorest citizens of the nation to a class the assistance of which triggers increased liabilities and expenses for those who attempt to provide them with debt relief?

Certainly, there are affluent and faithful Utahns who give needed service and generous donations to the poor. But individual benevolence toward the have-nots can be and too often is subverted by institutional favoritism toward the haves. We can strain at gnats by doing good service to the few while swallowing camels by supporting policies that do harm to the many. We can allow ourselves to be offended more by sins of lust in plain sight than by sins of greed hidden from view. It is possible for the rich sometimes to ignore the poor, "to notice them not." (Book of Mormon, Mormon 8:39). And sometimes, when the have-nots become impossible to ignore (as they do when they file petitions in bankruptcy), it is possible for poverty to be dismissed as the fruit of irresponsibility, inefficiency, self-indulgence, laziness, stupidity, or sin. This, however, is prejudice, not unlike racism, misogyny, homophobia, or religious intolerance.

Prejudice is the mother of oppression. Coercion is its father. These are not phenomena of history or mere artifacts of the past, but current events menacing the present. They are in our midst. A society that entertains prejudice enables oppression. A state that ignores its poor is an army that abandons its wounded. This is true for America, whose pilgrim founders idealized it for the world as a City on the Hill. It true for Utah, whose Mormon founders envisioned it as the American Zion. But with 42% of its citizens in functional poverty and with the highest rate of bankruptcy filings in the nation, clearly Utah is not Zion for everyone.

1. Poverty In Utah 2004: Annual report on Poverty, Economic Insecurity and Work (Utah Issues: Center for Poverty Research & Action), Table 1.1: 2003 Poverty Thresholds, pp. 11-14.

2. Id. This figure is for a household of three with two adults and one child.

3. Id. This figure is for a household of three with one adult and two children.

4. Center For Responsible Lending, www.responsiblelending.org/practice/ccabuses.cfm

5. Demos, "Credit Card Industry Practices In Brief," http://www.demos-usa.org/pubs/ IndustryPractices_WEB.pdf

6. Card Web. "Late Fee Bug," Card Trak, May 17 2002: Cad Web. "Free Revenues," Card Trak, July 9, 1999: Card Web. "Free Escalation," June 18, 2003. www.cardweb.com

7. Demos, "Credit Card Industry Practices In Brief," http://www.demos-usa.org/pubs/ IndustryPractices_WEB.pdf

8. Federal Reserve Bulletin, July 2002

9. Poverty Report 2004, p. 10

10. http://www.bloomberg.com/apps/news?pid=10000103&sid=anhMOK9sGaUA&refer=us

11. Dr James Dobson, the founder of Focus on the Family, a conservative Christian action group in Denver, Colorado, opposed the original language of the bankruptcy amendments because it denied pro-life demonstrators relief from debts for damages resulting from pro-life demonstrations. http://www.family.org/welcome/press/ a0023284.cfm; http://www.family.org/cforum/ feature/a0023281.cfm; Dr. Dobson attributed bankruptcy filing increases to gambling. http://www.family.org/cforum/ fosi/gambling/facts/a0029159.cfm. At the time of writing, the Focus on the Family contained no statements opposing the Bankruptcy Abuse Prevention and Consumer Protect Act based on its effect on poor families or individuals - only its effect on pro-life demonstrators.