A nonprofit startup is tackling what consumer advocates say is the biggest hurdle financially challenged people face in their efforts to get a fresh start: the surprisingly high cost of bankruptcy.
The founders of Upsolve created a TurboTax equivalent for bankruptcy designed to help people with basic financial issues, such as growing medical or credit card debt, gather information for a Chapter 7 filing. without having to pay a lawyer. The idea, says Rohan Pavuluri, a student at Harvard University and one of the founders of Upsolve, is to “make one of the greatest 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 if the freeware 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 seek Chapter 7 protection, a process nearly 500,000 consumers used last year to sell valuables and cancel unpaid debts.
Many bankruptcy cases are so simple that people don’t need an attorney, which can add more than $1,000 to even the most basic Chapter 7 cases, says Jonathan Petts, another Upsolve founder. . The expense, he and others say, may deter people from filing even if they would benefit from such a decision.
Although filing for Chapter 7 protection is the easiest way for indebted consumers to get a fresh start, the cost of such cases jumped when Congress in 2005 passed legislation to reduce perceived fraud. The law added red tape and required filers to take credit counseling courses at their own expense. The result, according to a 2012 study from the University of Maine to studywas that the overall cost of an average successful Chapter 7 filing went from $868 to about $1,300.
The law caused a “permanent decline in the rate of Chapter 7 bankruptcy” and an increase in the rate of insolvency and foreclosure, according to a 2015 study by the Federal Reserve Bank of New York.
A “significant group of individuals…do not file for bankruptcy but appear unable to repay their debts,” according to the study, resulting in poorer credit scores and poorer financial outcomes for these individuals. Indeed, those who file for bankruptcy have a better chance of finding a job, qualifying for a rental home and getting a loan than those who are still struggling financially, Petts says, citing other research.
Some people who can’t afford a Chapter 7 filing are turning to a riskier type of bankruptcy: Chapter 13 protection, which is designed for those with homes or other important 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, a member of the Upsolve advisory board, said he couldn’t understand after his appointment in May 2015 why some of the state’s poorest counties had the lowest rate. higher Chapter 13 cases, which require up to five years of monthly payments before any unpaid debt can be forgiven. Local attorneys told him the people didn’t have the money for a Chapter 7 filing.
“People usually wait to file for bankruptcy until the very last minute,” he says, which is why the upfront cost of a Chapter 7 filing is a hurdle. “It’s a last-ditch effort,” prompted by a wage garnishment or threat of foreclosure.
A recent study published at the University of California at Irvine found that only 37% of people who filed for Chapter 13 bankruptcy in 2007 were able to meet monthly payments for up to five years.
Some bankruptcy attorneys oppose Upsolve, saying the bankruptcy process is too complex for the average person to navigate on their own.
“Houses and cars complicate things,” and filers who make mistakes risk having their cases thrown out without debt relief, says Edward Boltz, a North Carolina bankruptcy attorney and board member of the National Association of Consumer Bankruptcy Attorneys, which says it has joined Upsolve’s advisory board to warn of such dangers.
But some legal experts who were initially skeptical of Upsolve are warming to the idea. They praise the startup’s new plan to offer its software through legal aid nonprofits, which could give advice to users and review their documents for errors.
“For low-income debtors, [Upsolve] could definitely be a way to cut costs,” says Henry Sommer, a longtime consumer bankruptcy expert who has written several books on the subject.
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 has volunteered to help people file for bankruptcy, says they were mutually baffled by how long it was taking to enter data from routine for each case.
“I figured there had to be a way to automate this,” says Mr Petts, 37, who later quit his $200,000-a-year job to help start the nonprofit .
The duo then met Kevin Moore, 33, who worked for a bankruptcy judge before becoming a computer programmer for Silicon Valley startups.
Together, they developed software that extracts financial information from a person’s pay stubs, tax returns and spending habits to fill out official forms filed with the bankruptcy court.
The program was designed with cartoons and carefully phrased questions modeled on a self-help legal guide created as part of Harvard Law School’s Financial Distress Research Project, an experiment conducted to help people to 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 in October, says the program has helped him get rid of old medical bills and mounting credit card debt.
“I didn’t feel like I was being judged by the way the questions were asked,” Taylor said.
After testing, Upsolve officials decided the program would be more widely used if they partnered with legal aid nonprofits, which have historically been reluctant to help consumers file for bankruptcy due to time and effort required. The goal, according to Upsolve, 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 lawyers have to do,” says Jim Sandman, president of Legal Services Corp., which distributes grants to more than 130 civil legal aid groups.
A Philadelphia-based nonprofit funded by Legal Services has won a $160,000 grant that it will use to partner with Upsolve.
So far, one Maine legal aid group is using Upsolve’s program and two others are testing it. The developers are fine-tuning the software and plan to make it publicly available again around January. The founders say they are applying for grants and plan to charge license fees to legal aid groups for revenue, but have no plans to live off the software.
In response to bankruptcy attorneys who say Upsolve’s program could lead to botched bankruptcy filings, Mr. Petts points out that the company only targets people with basic problems; more complicated cases will always require the assistance of a lawyer.
“I think consumer bankruptcy lawyers understand that the people we help 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 contacted at [email protected]
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