Oxstones Investment Club™A nonprofit startup is tackling what consumer advocates say is the biggest barrier that financially struggling people face in their efforts to get a fresh start: the surprisingly steep cost of bankruptcy.
The founders of Upsolve have created a TurboTax equivalent for bankruptcy designed to help people with basic financial problems—such as mounting medical or credit-card debt—pull together information for a chapter 7 filing without having to pay for a lawyer. The idea, says Rohan Pavuluri, a Harvard University student and one of Upsolve’s founders, is to “make one of the biggest safety nets in America more accessible.”
The online project, which won $75,000 in funding in a Harvard-sponsored competition in May, has left some consumer advocates wondering whether this free software could disrupt this sleepy sector of the legal industry. Upsolve’s program turns a person’s answers to a questionnaire into court documents that can be used to file for chapter 7 protection, a process that almost 500,000 consumers used last year to sell valuables and cancel unpaid debts.
Many bankruptcy cases are so simple that people don’t need a lawyer, which can add more than $1,000 to even the most basic chapter 7 cases, says Jonathan Petts, another Upsolve founder. That expense, he and others say, can deter people from filing even if they would benefit from such a move.
Riskier route
While filing for chapter 7 protection is the simplest way for debt-laden consumers to get a fresh start, the cost of such cases jumped when Congress in 2005 passed a law designed to reduce perceived fraud. The law added paperwork and required filers to attend credit-counseling classes at their own expense. The result, according to a 2012 University of Maine study, was that the overall cost of an average successful chapter 7 filing rose to about $1,300 from $868.
The law caused a “permanent drop in the chapter 7 bankruptcy rate” and a rise in the rate of insolvency and foreclosure, a 2015 Federal Reserve Bank of New York study found.
A “sizable group of individuals…does not file for bankruptcy but seems unable to pay off their debts,” the study said, leading to worse credit scores and worse financial outcomes for those individuals. Indeed, those who file for bankruptcy have a better chance of getting a job, qualifying for a rental home and getting a loan than those still in financial trouble, says Mr. Petts, citing other research.
Some people who can’t afford a chapter 7 filing turn to a riskier type of bankruptcy: chapter 13 protection, which is designed for those with homes or other major assets to protect. The fees associated with a chapter 13 case can be paid over time, unlike chapter 7 fees, which generally must be paid upfront.
Alabama bankruptcy judge Henry Callaway, an Upsolve advisory board member, says he couldn’t figure out after his May 2015 appointment why some of the state’s poorest counties had the highest rate of chapter 13 cases, which require up to five years of monthly payments before any unpaid debt can be canceled. Local lawyers told him that people didn’t have the money for a chapter 7 filing.
“People commonly wait to file bankruptcy until the very last minute,” he says, which is why the upfront cost of a chapter 7 filing is a barrier. “It’s a last-ditch effort,” prompted by a wage garnishment or foreclosure threat.
A recent study published at the University of California Irvine found that only 37% of people who filed for chapter 13 bankruptcy in 2007 were able to keep up with monthly payments for up to five years.
User-friendly program
Some bankruptcy lawyers are pushing back against Upsolve, saying the bankruptcy process is too complex for the average person to navigate alone.
“Houses and cars make things complicated,” and filers who make mistakes risk having their cases dismissed without debt relief, says Edward Boltz, a North Carolina bankruptcy lawyer and National Association of Consumer Bankruptcy Attorneys board member who says he has joined Upsolve’s advisory board to warn of such dangers.
But some legal experts who initially were skeptical about Upsolve are warming to the idea. They praise the startup’s new plan to offer its software through legal-aid nonprofits, which could give users advice and review their documents for errors.
Upsolve was founded in June 2016 shortly after Mr. Petts met Mr. Pavuluri at a legal-aid luncheon in Brooklyn.
Mr. Pavuluri, now 21, was preparing to interview bankrupt people about the most confusing parts of the process for a school project. Mr. Petts, a corporate bankruptcy lawyer at Morrison & Foerster who on the side volunteered to help people file for bankruptcy, says they were mutually baffled at how much time the routine data entry for each case took.
“I thought, ‘There had to be a way to automate this,’ ” says Mr. Petts, 37, who later left his $200,000-a-year job to help start the nonprofit.
The duo later connected with Kevin Moore, 33, who worked for a bankruptcy judge before becoming a computer programmer for Silicon Valley startups.
Together, they came up with a software program that takes financial information from pay stubs, tax returns and a person’s own spending habits to populate the official forms filed with the bankruptcy court.
The program was designed with cartoons and carefully worded questions modeled after a self-help legal guide created as part of Harvard Law School’s Financial Distress Research Project, an experiment being conducted to help people fight debt-collection lawsuits.
A group of more than 40 New York residents began testing Upsolve’s software last year. Rashad Taylor, a makeup artist from Brooklyn who used it to file for bankruptcy protection in October, says the program helped him get rid of old medical bills and growing credit-card debt.
“I didn’t feel like I was judged, the way the questions were asked,” says Mr. Taylor.
After the testing, Upsolve officials decided that the program would be more widely used if they formed partnerships with legal-aid nonprofits, which historically have shied away from helping consumers with bankruptcy filings due to the time and effort involved. The goal, Upsolve says, is to make the software available to nonprofits in every state by the end of 2019.
“This is a resource that can reduce the amount of work attorneys have to do,” says Jim Sandman, the president of Legal Services Corp., which distributes grants to more than 130 civil legal-aid groups.
A Philadelphia-based nonprofit funded by Legal Services won a $160,000 grant that it will use to partner with Upsolve.
For now, one legal aid group in Maine is using Upsolve’s program and two more are testing it. Developers are completing tweaks to the software and plan to make it available to the public again around January. The founders say they are applying for grants and plan to charge a licensing fee to legal-aid groups for revenue, but have no plans to make a living from the software.
In response to bankruptcy lawyers who say Upsolve’s program could lead to botched bankruptcy filings, Mr. Petts emphasizes that the company is only targeting people with basic problems; more complicated cases will still require a lawyer’s help.
“I think consumer-bankruptcy lawyers understand the people we’re helping are people who would never hire a lawyer because they don’t have the money,” he says.
Ms. Ferek is a reporter for The Wall Street Journal in Washington. She can be reached atkatherine.stech@wsj.com.
Appeared in the September 11, 2017, print edition as ‘A Startup Targets the High Cost of Bankruptcy.’
https://www.wsj.com/articles/for-struggling-consumers-a-cheaper-way-to-file-for-bankruptcy-1505096071
Tags: chapter 13 case, chapter 7 filing, chapter 7 protection, cost of bankruptcy, credit-card debt, disrupt legal industry, financial problems, foreclosure threat, legal fees, medical debt., Upsolve