Restructuring individual debts

American Bankruptcy Law Journal

Volumn 71, Issue 4, 1997, Pages 431-451

  Klee, Kenneth N ^a  

^a UNIVERSITY OF CALIFORNIA   (United States)

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EID: 0040479003     PISSN: 00279048     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (31)

1. Bankruptcy Act of 1898, Pub. L. No. 55-171, 30 Stat. 544 (repealed 1978).
2. 11 U.S.C. §§ 101-1330 (1994).
3. Teresa A. Sullivan, Elizabeth Warren & Jay Lawrence Westbrook, The Persistence of Local Legal Culture: Twenty Years of Evidence from the Federal Bankruptcy Courts, 17 HARV. J.L. & PUB. POL'Y 801, 828-29 (1994).
4. Id. at 839, 841-53.
5. 28 U.S.C. §§ 1-3701 (1994 & Supp. II 1996).
6. Section 109(a) provides that "only a person that resides or has a domicile, a place of business, or property in the United States, or a municipality, may be a debtor under this title." 11 U.S.C. § 109(a).
7. See id. § 303.
8. See supra note 6 and accompanying text.
9. The Supreme Court has recognized that "Congress might have delegated the responsibility [over bankruptcy cases] to an administrative agency." United States v. Kras, 409 U.S. 434, 447 (1973).
10. Section 362(a) provides that the filing of a bankruptcy petition operates as a stay, applicable to all entities, of: (1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title; (2) the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title; (3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate; (4) any act to create, perfect, or enforce any lien against property of the estate; (5) any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title; (6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of a case under this title; (7) the setoff of any debt owing to the debtor that arose before the commencement of the case under this title against any claim against the debtor; and (8) the commencement or continuation of a proceeding before the United States Tax Court concerning the debtor. 11 U.S.C. § 362(a). Section 1301 provides, in part: a creditor may not act, or commence or continue any civil action, to collect all or any part of a consumer debt of the debtor from any individual that is liable on such debt with the debtor, or that secured such debt, unless - (1) such individual became liable on or secured such debt in the ordinary course of such individual's business; or (2) the case is closed, dismissed, or converted to a case under chapter 7 or 11 of this title. Id. § 1301(a).
11. See infra note 28 and accompanying text.
12. Section 1325(b) provides as follows: (b)(1) If the trustee or the holder of an allowed unsecured claim objects to the confirmation of the plan, then the court may not approve the plan unless, as of the effective date of the plan - (A) the value of the property to be distributed under the plan on account of such claim is not less than the amount of such claim; or (B) the plan provides that all of the debtor's projected disposable income to be received in the three-year period beginning on the date that the first payment is due under the plan will be applied to make payments under the plan. (2) For purposes of this subsection, "disposable income" means income which is received by the debtor and which is not reasonably necessary to be expended - (A) for the maintenance or support of the debtor or a dependent of the debtor; and (B) if the debtor is engaged in business, for the payment of expenditures necessary for the continuation, preservation, and operation of such business. 11 U.S.C. § 1325(b). Thus, under current § 1325(b), the determination whether a debtor's plan provides that all of the debtor's projected disposable income will be used to fund the plan depends on the bankruptcy judge's determination whether the debtor's projected expenses are "reasonably necessary" for the maintenance or support of the debtor or the debtor's dependents. Absent uniform federal guidelines, this determination necessarily depends on the judge's individual value judgment and will vary from case to case and in cases before different judges. For a comprehensive analysis of the benefits of uniform federal exemption levels, see generally Honorable William Houston Brown, Political and Ethical Considerations of Exemption Limitations: The "Opt-Out" as Child of the First and Parent of the Second, 71 AM. BANKR. L.J. 149 (1997).
13. See, e.g., Stuart v. Koch (In re Koch), 109 F.3d 1285 (8th Cir. 1997) (motion to dismiss Chapter 7 case for substantial abuse); Molitor v. Eidson (In re Molitor), 76 F.3d 218 (8th Cir. 1996) (motion to convert Chapter 13 case to Chapter 7); U.S. Trustee v. Joseph (In re Joseph), 208 B.R. 55 (B.A.P. 9th Cir. 1997) (motion to dismiss Chapter 7 case for substantial abuse); Beatty v. Traub (in re Beatty), 162 B.R. 853 (B.A.P. 9th Cir. 1994) (motion to convert Chapter 13 case to Chapter 7); In re Weber, 208 B.R. 575 (Bankr. M.D. Fla. 1997) (motion to dismiss Chapter 7 case for substantial abuse); In re Bicsak, 207 B.R. 657 (Bankr. W.D. Mo. 1997) (motion to dismiss Chapter 7 case for substantial abuse); In re Adams, 206 B.R. 456 (Bankr. M.D. Tenn. 1997) (motion to dismiss Chapter 7 case for substantial abuse); In re Eatman, 182 B.R. 386 (Bankr. S.D.N.Y. 1995) (conversion of Chapter 13 case to Chapter 7).
14. See Admin. Office of the U.S. Courts, U.S. Bankruptcy Courts Business and Nonbusiness Cases Commenced, by Chapter of the Bankruptcy Code During the Twelve-Month Period Ended June 30, 1997 (1997) (on file with the Administrative Office of the United States Courts, Washington, D.C.); U.S. Bankruptcy Courts Business and Non-Business Bankruptcy Cases Commenced, By Chapter of the Bankruptcy Code, During the Twelve-Month Period Ended June 30, 1996, 29 Bankr. Ct. Dec. (LRP) No. 13, at 8 (Sept. 17, 1996); ADMIN. OFFICE OF THE U.S. COURTS, JUDICIAL BUSINESS OF THE UNITED STATES COURTS 268 tbl.F-2 (1995). See also Admin. Office of the U.S. Courts, Bankruptcy Filings Continue Climb in 2nd Quarter 1997 (June 9, 1997) (showing that seventy percent of the individual bankruptcy petitions filed during the three-month period ended March 31, 1997 were Chapter 7 cases).
15. Teresa A. Sullivan, Elizabeth Warren & Jay Lawrence Westbrook Consumer Dekors Ten Tears Later: A Financial Comparison of Consumer Bankrupts 1981-1991, 68 AM. BANKR. L.J. 121, 128-29 tbl.1 (1994).
16. Id. at 130.
17. Id. at 128 tbl.1.
18. Id. at 140.
19. TERESA A. SULLIVAN, ELIZABETH WARREN & JAY LAWRENCE WESTBROOK, As WE FORGIVE OUR DEBTORS: BANKRUPTCY AND CONSUMER CREDIT IN AMERICA 215-17 (1989); Sullivan et al., supra note 15, at 143.
20. In the District of Rhode Island, for example, during the twelve-month period ended June 30, 1997 there were 4,673 individual Chapter 7 filings and 214 Chapter 13 filings out of 4,887 individual bankruptcy petitions. Assuming a one-third discharge rate for Chapter 13 cases, that means that approximately ninety-seven percent of the individual debtors received a discharge. In the Western District of Tennessee, on the other hand, during this same period there were 5,405 individual Chapter 7 filings and 18,129 Chapter 13 filings out of 23,546 individual bankruptcy petitions. These numbers translate into an approximate forty-six percent discharge rate.
21. See SULLIVAN ET AL., supra note 19, at 319.
22. See Admin. Office of the U.S. Courts, Chapter 7 Asset and No-Asset Cases (1995) (on file with the Administrative Office of the United States Courts, Washington, D.C.).
23. See American Bankruptcy Institute, American Bankruptcy Institute National Report On Professional Compensation in Bankruptcy Cases 173-74 (1991) (reporting a mean average fee of $761 charged for no-asset consumer Chapter 7 cases and a mean average fee of $902 charged for routine consumer Chapter 13 cases). See also Average Fees for Chapter 13 Cases, 4 Consumer Bankr. News (LRP) No. 17, at 3 (May 25, 1995) (indicating an average of $1,073 in fees charged in Chapter 13 cases).
24. Admin. Office of the U.S. Courts, Budgetary Information Compiled by the Administrative Office of the United States Courts (1997) (on file with the Administrative Office of the United States Courts, Washington, D.C.). According to the Administrative Office, the direct and indirect costs associated with each new bankruptcy judgeship total $731,802 in the first year, and $586,091 in each successive year. Thus, over a fourteen-year term, the average yearly cost of each judgeship is $596,498.93.
25. See supra notes 12, 13 and accompanying text.
26. See supra note 19 and accompanying text.
27. 27See supra note 21 and accompanying text.
28. The Thirteenth Amendment provides that "[n]either slavery nor involuntary servitude, except as a punishment for crime whereof the party shall have been duly convicted, shall exist within the United States, or any place subject to their jurisdiction." U.S. CONST, amend. XIII, § 1. It is well recognized that peonage - a condition in which a debtor is coerced by threat of legal sanction to work off a debt to a creditor - is a form of involuntary servitude prohibited by the Thirteenth Amendment. United States v. Kozminski, 487 U.S. 931, 943 (1988) (citing Clyatt v. United States, 197 U.S. 207, 215, 218 (1905)). In the bankruptcy context, the Thirteenth Amendment has been raised as justification for the Bankruptcy Code's prohibition against involuntary petitions in Chapter 13 cases. Since, in Chapter 13 cases, the debtor's future income is used to fund the plan to pay creditors, Congress was concerned that an involuntary petition in Chapter 13 would constitute involuntary servitude under the Thirteenth Amendment: As under current law, chapter 13 is completely voluntary. This Committee firmly rejected the idea of mandatory or involuntary chapter XIII in the 90th Congress. The thirteenth amendment prohibits involuntary servitude. Though it has never been tested in the wage earner context, it has been suggested that a mandatory chapter 13, by forcing an individual to work for creditors, would violate this prohibition. H.R. REP. No. 95-595, at 120-21 (1977), reprinted in 1978 U.S.C.CA.N. 5963,6080-81. Although involuntary petitions are permissible under the CIDR proposal, this provision does not violate the Thirteenth Amendment because an unwilling debtor can refuse to pay disposable income to creditors by electing not to receive a discharge. As the Supreme Court has held, "[t]here is no constitutional right to obtain a discharge of one's debts in bankruptcy." United States v. Kras, 409 U.S. 434, 440 (1973). Thus, the debtor always retains the ability to refuse to work for his creditors and the debtor's participation in the CIDR process is always voluntary. It has been suggested that a bankruptcy system that requires a debtor to work to repay his creditors as a condition on obtaining a discharge would be "strikingly close" to the condition of peonage, and thus violative of the Thirteenth Amendment. Karen Gross, The Debtor As a Modern Day Peon: A Problem of Unconstitutional Conditions, 65 NOTRE DAME L. REV. 165, 167 (1990). This assertion does not invalidate the CIDR proposal, however, because the debtor's service is not coerced within the meaning of the Thirteenth Amendment. In Kozminski, the Supreme Court stated that "our precedents clearly define a Thirteenth Amendment prohibition of involuntary servitude enforced by the use or threatened use of physical or legal coercion. The guarantee of freedom from involuntary servitude has never been interpreted specifically to prohibit compulsion of labor by other means, such a psychological coercion." 487 U.S. at 944. Conditioning a debtor's receipt of a discharge on the debtor's contribution of future income does not force the debtor to work through the use or threat of physical or legal coercion. A review of the Supreme Court jurisprudence on the subject demonstrates that, to constitute involuntary servitude, the consequences to the individual of refusing to work must involve the use or threat of physical force or legal imprisonment. See, e.g., Kozminski, 487 U.S. at 934 (physical force used to keep two mentally retarded men laboring on farm for no pay violated Thirteenth Amendment); Pollack v. Williams, 322 U.S. 4 (1944) (state law subjecting debtors to prosecution and criminal punishment for failing to perform labor after receiving an advance payment violated Thirteenth Amendment); Bailey v. Alabama, 219 U.S. 219 (1911) (same); United States v. Reynolds, 235 U.S. 133, 146 (1914) (criminal surety system whereby debtor contracted to work for a surety in exchange for surety's payment of debtor's fine, subject to criminal penalties should the debtor fail to fulfill the labor contract, violated Thirteenth Amendment). See also Gross, supra, at 184 ("It is not peonage when an individual chooses to work for his creditors, even if the choice is induced by somewhat disadvantageous consequences. To be peonage, the disadvantageous consequences must be dire. Specifically, the essence of peonage is an employment relationship that is enforced through a threat of imprisonment.") (citations omitted). Under the CIDR proposal, a debtor may simply refuse to work if the debtor wishes to do so. Although this choice will result in the loss of the debtor's discharge, no threat of physical violence or legal imprisonment exists to force the debtor to work against the debtor's will, and the Thirteenth Amendment is not violated.
29. Section 523(d) of the Bankruptcy Code provides that the bankruptcy court shall award costs and a reasonable attorney's fee to a debtor who prevails in a nondischargeability case commenced by a creditor under § 523(a)(2), where the debt deemed dischargeable is a consumer debt and the court finds that the position of the creditor was not "substantially justified." 11 U.S.C. § 523(d) (1994). The purpose of this provision is to discourage creditors from bringing frivolous nondischargeability complaints with the hope of obtaining a settlement from an honest debtor who is anxious to avoid paying attorney's fees to defend the action. S. REP. No. 95-989 at 80 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5866. In light of the high volume of frivolous nondischargeability complaints, however, "the desired effect of discouraging the creditor from bringing objections against the consumer debtor does not seem to have been achieved." RICHARD I. AARON, BANKRUPTCY LAW FUNDAMENTALS § 11.03 (1993). See, e.g., AT & T Universal Card Servs. Corp. v. Arroyo (In re Arroyo), 205 B.R. 984 (Bankr. S.D. Fla. 1997) (holding consumer debt to be dischargeable and awarding attorneys' fees under § 523(d)); AT & T Universal Card Servs. Corp. v. Duplante (In re Duplante), 204 B.R. 49 (Bankr. S.D. Cal. 1996) (same); AT & T Universal Card Servs. Corp. v. Stansel (in re Stansel), 203 B.R. 339 (Bankr. M.D. Fla. 1996) (same); AT & T Universal Card Servs. Corp. v. Chinchilla (In re Chinchilla), 202 B.R. 1010 (Bankr. S.D. Fla. 1996) (same); AT & T Universal Card Servs. Corp. v. Grayson (In re Grayson), 199 B.R. 397 (Bankr. W.D. Mo. 1996) (same).
30. Detailed development of this efficiency argument is beyond the scope of this Article. Suffice it to note that taxpayer-supported FDIC deposit insurance encourages banks to speculate in credit extension on a volume basis. If bank directors were personally liable for the bank's credit losses, a different result would obtain.
31. See supra note 30.