Common sense consumer bankruptcy

American Bankruptcy Law Journal

Volumn 71, Issue 4, 1997, Pages 461-481

  LoPucki, Lynn M ^a,b  

^a MIT Sloan School of Management   (United States)

^b HARVARD LAW SCHOOL   (United States)

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EID: 0345731579     PISSN: 00279048     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (77)

1. Compare ADMIN. OFFICE OF THE U.S. COURTS, ANNUAL REPORT OF THE DIRECTOR OF THE ADMINISTRATIVE OFFICE OF THE UNITED STATES COURTS 129 tbl.VI (1977) (showing 214,399 cases filed during the twelve-month period ended June 30, 1977), with 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) (showing 1,042,110 cases filed during the twelve month period ended June 30, 1996).
2. See Patrice Apodaca, Bankruptcy Filers Have Photos Taken, L.A. TIMES, Apr. 27,1997, at 3 (describing prevalent scam in which the thief assumes the victim's identity to incur debt and then files bankruptcy in the victim's name).
3. Empirical studies of consumer bankruptcy that have failed to uncover significant fraud have not been designed to discover fraudulent overborrowing. Instead, these studies treat shockingly high debt to income ratios as evidence of the debtors' bona fides in seeking bankruptcy relief and use that evidence to counter the charge that debtors who could pay their debts were, instead, discharging them in bankruptcy. See, e.g., TERESA A. SULLIVAN, ELIZABETH WARREN & JAY LAWRENCE WESTBROOK, As WE FORGIVE OUR DEBTORS: BANKRUPTCY AND CONSUMER CREDIT IN AMERICA 205-07 (1989).
4. Thurlow v. Massachusetts, 46 U.S. 504 (1847) (upholding statute prohibiting the sale of alcohol to spendthrifts).
5. Jeff Jacoby, Bankruptcy Judge Forces Sears to Reward Deadbeats, DAYTON DAILY NEWS, Jun. 19, 1997, at 19A ("Once upon a time, it was understood that customers paid for their purchases and borrowers honored their debts. If you couldn't afford something, you didn't buy it. If you took out a loan, you found a way to pay it back. To go bankrupt was a humiliation; unless you were the victim of a natural disaster or were wiped out in a depression, you shunned bankruptcy at all costs."); A Society of Deadbeats, ROANOKE TIMES & WORLD NEWS, May 7, 1997, at A-18 ("But for too many people, bankruptcy has become just a lifestyle option: Live beyond your means. Get so deep in debt that there's no getting out. If collection agencies come knocking - no problem. Declare bankruptcy; wipe the slate clean; start over. Live beyond your means . . . .").
6. Jeff Jacoby, Bankruptcy Judge Forces Sears to Reward Deadbeats, DAYTON DAILY NEWS, Jun. 19, 1997, at 19A ("Once upon a time, it was understood that customers paid for their purchases and borrowers honored their debts. If you couldn't afford something, you didn't buy it. If you took out a loan, you found a way to pay it back. To go bankrupt was a humiliation; unless you were the victim of a natural disaster or were wiped out in a depression, you shunned bankruptcy at all costs."); A Society of Deadbeats, ROANOKE TIMES & WORLD NEWS, May 7, 1997, at A-18 ("But for too many people, bankruptcy has become just a lifestyle option: Live beyond your means. Get so deep in debt that there's no getting out. If collection agencies come knocking - no problem. Declare bankruptcy; wipe the slate clean; start over. Live beyond your means . . . .").
7. See Teresa A. Sullivan, Elizabeth Warren & Jay Lawrence Westbrook, Consumer Debtors Ten Years Later: A Financial Comparison of Consumer Bankrupts 1981-1991, 68 AM. BANKR. L.J. 121, 142 tbl.5 (1994) (finding mean nonmortgage debt to income ratios of 2.07 for Chapter 7 debtors and 1.01 for Chapter 13 debtors).
8. See, e.g., Honorable Robert D. Martin, A Riposte to Klee, 71 AM. BANKR. L.J. 453 (1997) (proposing a single chapter leading to the discharge of consumer debtors, under which the only mandatory repayment is to secured creditors in the amounts they would have received on the surrender of collateral the debtors have chosen to retain).
9. Not surprisingly, the leaders of this cadre are the lobbyists for the consumer credit industry. They seek a "means test" that would allow "[n]o more relief than the debtors need." See Elizabeth Warren, A Principled Approach to Consumer Bankruptcy, 71 AM. BANKR. L.J. 483, 496 (1997) (describing the lobbying position of the consumer credit industry before the National Bankruptcy Review Commission). While this cadre has little support among academics, it has considerable support in the judiciary. See, e.g., In re Walton, 866 F.2d 981 (8th Cir. 1989) (dismissing Chapter 7 case for "substantial abuse" because the debtor would have been able to pay two-thirds of his debts under a three-year plan and 100 percent of his debts under a five-year plan).
10. Both the Commission's working proposal and Ken Klee's proposal do essentially this. See Warren, supra note 8, at 514 (requiring that debtors propose plans that provide for payment to unsecured creditors based on a graduated percentage of the debtor's adjusted gross income, unless circumstances justify providing otherwise); Kenneth N. Klee, Restructuring Individual Debts, 71 AM. BANKR. L.J. 431, 438-39 (1997) (requiring that debtors propose plans that pay seventy-five percent of disposable income to unsecured creditors, but only if they have incomes in excess of $50,000 a year). Many, if not most, courts today require substantial repayment to unsecured creditors for confirmation of a Chapter 13 plan. See Jean Braucher, Lawyers and Consumer Bankruptcy: One Code, Many Cultures, 67 AM. BANKR. L.J. 501, 532 (1993) (reporting "floor percentages" of debt repayment required for confirmation of Chapter 13 plans in four districts). Both of these proposals would eliminate that requirement and permit zero payment plans. Either proposal would require debtors to pay only a fraction of their disposable income to unsecured creditors. Professor Klee's $50,000 threshold would leave only a tiny fraction of debtors subject to the payment requirement. See Sullivan et al., supra note 6, at 128-29 (showing mean debtor income of $20,535, median debtor income of $18,000, and only the top quarter of debtors with incomes in excess of $26,622).
11. Both the Commission's working proposal and Ken Klee's proposal do essentially this. See Warren, supra note 8, at 514 (requiring that debtors propose plans that provide for payment to unsecured creditors based on a graduated percentage of the debtor's adjusted gross income, unless circumstances justify providing otherwise); Kenneth N. Klee, Restructuring Individual Debts, 71 AM. BANKR. L.J. 431, 438-39 (1997) (requiring that debtors propose plans that pay seventy-five percent of disposable income to unsecured creditors, but only if they have incomes in excess of $50,000 a year). Many, if not most, courts today require substantial repayment to unsecured creditors for confirmation of a Chapter 13 plan. See Jean Braucher, Lawyers and Consumer Bankruptcy: One Code, Many Cultures, 67 AM. BANKR. L.J. 501, 532 (1993) (reporting "floor percentages" of debt repayment required for confirmation of Chapter 13 plans in four districts). Both of these proposals would eliminate that requirement and permit zero payment plans. Either proposal would require debtors to pay only a fraction of their disposable income to unsecured creditors. Professor Klee's $50,000 threshold would leave only a tiny fraction of debtors subject to the payment requirement. See Sullivan et al., supra note 6, at 128-29 (showing mean debtor income of $20,535, median debtor income of $18,000, and only the top quarter of debtors with incomes in excess of $26,622).
12. See, e.g., Karen Gullo, Banks Target Risky Borrowers, ROCKY MOUNTAIN NEWS, Apr. 1, 1996, at 2B ("Consumers least equipped to carry heavy debt loads - such as young people and those with low incomes - are among the fastest-growing segments of the credit card industry").
13. See Lawrence M. Ausubel, Credit Card Defaults, Credit Card Profits, and Bankruptcy, 71 AM. BANKR. L.J. 249, 251-53 (1997) (analyzing increases in the rate of credit card defaults over the past twenty-five years).
14. Id. at 257-60 (arguing that the high profitability of credit card lending contributes to the high levels of credit card defaults).
15. That there is more profit in lending to debtors who repay is obvious. The expenditure required to determine which debtors are more likely to repay deters lenders from making this determination, however. By making available high-quality information on significant numbers of debtors, the bankruptcy system could both reduce the cost and increase the accuracy of this determination. By using debtors' plan payments to generate high quality information rather than allowing the money to go to the creditors who contributed to the problem, the bankruptcy system can increase the cost of irresponsible lending decisions. Together, these changes would tend to make better lending practices more profitable and poor lending practices less so.
16. About 1.2 million debtors filed bankruptcy in the past year. Sullivan, Warren and Westbrook found a repeat filing rate of about eight percent in their sample from the early 1980s. See SULLIVAN ET AL., supra note 3, at 192. The rate is probably higher today. But even if the refiling rate has doubled, the stock of former bankrupts is growing at the rate of more than one million per year. Former bankrupts are active in the credit markets. See Braucher, supra note 9, at 537-40 (describing bankrupts' interest in reestablishing credit quickly and the ready availability of consumer credit to recent filers).
17. Only about four percent of credit card borrowers were in default at the peak of the recent crisis. See Saul Hansell, Credit Card Default Rate Is Climbing, N.Y. TIMES, Mar. 18, 1997, at D1 (reporting the default rate for credit card borrowers at 3.72 percent). Only a small percentage of these defaulters will file bankruptcy. By contrast, approximately eight percent of bankrupts will refile. See supra note 14.
18. See, e.g. State Bank v. Chalasani (In re Chalasani), 92 F.3d 1300, 1311 (2d Cir. 1996) (referring to "the public interest in allowing discharge for only the honest debtor").
19. See 11 U.S.C. § 704 (1994).
20. See id. §§ 330(a)(1), 503(b), 507(a).
21. See id. § 330(b).
22. If the nature of the dishonesty is the concealment of recoverable assets, the trustee can be paid a fee from those assets. The dishonesty with which I am concerned, however, warrants a denial of discharge, but involves no recoverable assets.
23. See Admin. Office of U.S. Courts, Tables of Bankruptcy Statistics, With Reference to the Bankruptcy Cases Commenced and Terminated in the United States District Courts During the Period July 1, 1976 Through June 30, 1977 A-6 (1978) (on file with the Administrative Office of the United States Courts, Washington, D.C.) (showing 163,506 straight bankruptcy cases concluded, of which 25,712 were nominal asset cases and 30,850 were asset cases).
24. See U.S. Gen. Accounting Office, Bankruptcy Administration, Case Receipts Paid to Creditors and Professionals 1-2 (1994) [hereinafter GAO Report] (on file with the United States General Accounting Office, Washington, D.C.) ("Of the 1.2 million Chapter 7 bankruptcy cases closed in statistical years 1991 and 1992, about 5 percent (56,994) generated some receipts for distribution to professionals and creditors.").
25. See 11 U.S.C. § 544(a).
26. See Lynn M. LoPucki, The Death of Liability, 106 YALE L.J. 1, 14-38 (1996) (describing strategies for rendering debtors judgment proof).
27. See 11 U.S.C. § 727(a).
28. See Douglass G. Boshkoff, Limited, Conditional, and Suspended Discharges in Anglo-American Bankruptcy Proceedings, 131 U. PA. L. REV. 69, 72-74 (1982) (describing the availability and use of partial discharges in English bankruptcy cases).
29. See FED. R. BANKR. P. 7041, Advisory Committee Note.
30. The Advisory Committee Note to Rule 7041 states that the voluntary dismissal of a complaint objecting to discharge raises special concerns because the plaintiff may have been induced to dismiss by an advantage given or promised by the debtor or someone acting in his interest. On this basis, several courts have concluded that the settlement of an objection to discharge complaint is inappropriate where the terms of the settlement benefit a private creditor rather than the bankruptcy estate as a whole. See, e.g., In re Bates, 211 B.R. 338, 347 (Bankr. D. Minn. 1997); Bank One v. Smith (In re Smith), 207 B.R. 177, 178 (Bankr. N.D. Ind. 1997). Moreover, some courts have held that allowing the trustee to compromise for the benefit of all creditors would also be objectionable because it would still permit the dishonest debtor to "buy" his discharge. See, e.g., Moister v. Vickers (In re Vickers), 176 B.R. 287, 290 (Bankr. N.D. Ga. 1994); In re Moore, 50 B.R. 661, 664 (Bankr. E.D. Tenn. 1985). But see Bates, 211 B.R. at 347-48 (holding that a proposed settlement of a revocation of discharge case may be approved where the trustee is plaintiff and the terms of the settlement are in the best interest of the estate).
31. See SULLIVAN ET AL., supra note 3, at 265-66 n.11.
32. With access to a national database showing no more than the fact of discharge and the contents of the estate, it would be possible to estimate a minimum number of debtors who should have been denied discharge. One need only determine the percentage of individual debtors denied discharge in asset cases, and then project that percentage to no-asset cases, while controlling for total income and total assets (to account for the fact that the opportunity for wrongdoing is greater when there is more money around). I predict that the percentage of discharges denied would increase with the amount of assets in the estate up to the point where the assets are fully sufficient for litigation and that the percentage would be substantially higher than for no-asset cases. Unfortunately, the data to conduct this study is not readily available.
33. An example would be debtors who simultaneously run up balances on several credit cards, so that the new debt swamps their ability to pay earlier debts to others. The debtor can only be denied a discharge of the runups, and only if the creditor who is a direct victim of a particular runup files an adversary proceeding. In the large majority of cases, individual runups will not be worth pursuing, even though the aggregate of the runups and the damage to other creditors often would be.
34. Bankruptcy Code § 523(a)(2)(A) excepts from discharge "any debt . . . for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by . . . false pretenses, a false representation, or actual fraud . . . ."
35. Sullivan, Warren and Westbrook found a mean nonmortgage debt to income ratio of 2.07 for Chapter 7 debtors and 1.01 for Chapter 13 debtors. That means Chapter 7 debtors on average owed nonmortgage debt in an amount more than double their annual incomes. The median Chapter 7 debtor in their study owed 1.37 times that debtor's annual income. Sullivan et al., supra note 6, at 142 tbl.5. With the exception of student loans, one does not accumulate debt of that magnitude with the knowledge and consent of one's creditors.
36. See infra note 48.
37. See 11 U.S.C. § 523 (1), (14) (1994).
38. See id. § 523(a)(8).
39. See id. § 523(a)(5).
40. See id.
41. See id. § 523(a)(2).
42. See Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 221, 108 Stat. 4106, 4129 (codified at 11 U.S.C. § 523(a)(14)).
43. S. REP. No. 103-168, at 154 (1993) ("This provision amends § 523(a) of the Bankruptcy Code to make nondischargeable the debts of individuals owed to private creditors such as credit card companies which arise out of the payment of tax.").
44. The National Bankruptcy Review Commission's proposal would correct this deficiency by moving to a sliding scale for the calculation of the amounts that debtors are required to pay unsecured creditors under Chapter 13. See NAT'L BANKR. REV. COMM'N, BANKRUPTCY: THE NEXT TWENTY YEARS, § 1.5.4, 262-72 (1997); Warren, supra note 8, at 514. By shifting the focus of the Chapter 13 plan confirmation process to the amounts the debtor can pay and away from the amounts the debtor owes, the Commission proposal avoids the disincentives to overspend that exist under the current system and tries to put debtors on the road toward good budgeting practices. Unfortunately, that shift moves the focus even further from the debtor's prefiling conduct, and thus exacerbates the problem of incentives prior to filing.
45. 11 U.S.C. § 1325(b)(1).
46. Id. § 1325(b)(2).
47. In 1996, there were 314 sitting bankruptcy judges in the United States. Thus, in 1996, each bankruptcy judge received over 3,000 cases, an average of about thirteen per day. Those numbers may preclude judges from giving consumer cases individual attention. In the system I propose, the numbers of cases filed would be lower because creditors would lend more responsibly. On average, the approximately 1,600 panel trustees each receive about 750 cases annually. With the increased resources and reduced caseload my proposal would provide to them, trustees would be able to give cases individual attention.
48. See, e.g., Scott Burns, Couple Can't Make Ends Meet On $129,000 a Year, MINN. STAR TRIB., Jul. 6, 1997, at 2D.
49. See Pop! Goes the Donald, PEOPLE MAGAZINE, Jul. 9, 1990, at 28 (noting that the $841,000 monthly upkeep of Trump's yacht and the $246,000 monthly expense of his private 727 jet were over and above the $450,000 limit).
50. See, e.g., In re Curtis, 2 B.R. 43, 45 (Bankr. W.D. Mo. 1979) (holding that "in the absence of exceptional circumstances, a debtor demonstrates his good faith by proposing to pay at least 10% of his takehome pay over the three year period"). By the time I arrived in Kansas City to begin my teaching career in the fall of 1980, the test was no longer in use in the Western District of Missouri because it was considered too harsh.
51. See Braucher, supra note 9, at 532 (reporting "floor percentages" of debt repayment required for confirmation of Chapter 13 plans in four districts).
52. See, e.g., In re Kasun, 186 B.R. 62, 64 (Bankr. E.D. Va. 1995) (refusing confirmation of a plan under which the debtor would retain a boat); In re Jones, 119 B.R. 996, 1000 (Bankr. N.D. Ind. 1990) ("Debtor's Chapter 13 plan fails the disposable income requirement . . . The Blazer is an 'obvious indulgence' if ever there was one."). The grounds for such refusals are that the cost of maintaining the luxury asset would absorb some of the debtor's disposable income, preventing the payment of all of it to unsecured creditors.
53. Given the impotence of means testing and the sophistication of the consumer credit industry, it is interesting to speculate on why the industry places means testing as their top legislative priority. See Warren, supra note 8, at 503-06. The answer may be that the money the industry is after is not money to be collected under plans, but money to be collected from debtors afraid to file bankruptcy because means testing will be part of the Code.
54. Sullivan, Warren and Westbrook found that approximately eight percent of the bankrupt debtors in their 1981 sample had filed bankruptcy petitions at some previous time. SULLIVAN ET AL., supra note 3, at 192.
55. See, e.g., id. at 215-17 (showing a two-thirds failure rate for Chapter 13 cases); William C. Whitford, The Ideal of Individualized Justice: Consumer Bankruptcy as Consumer Protection, and Consumer Protection in Consumer Bankruptcy, 68 AM. BANKR. L.J. 397, 411 tbl.2 (1994) (showing only thirty-one percent of Chapter 13 cases closed as completed); Michael Bork & Susan D. Tuck, Bankruptcy Statistical Trends: Chapter 13 Dispositions 5 (Admin. Office of the U.S. Courts Working Paper No. 2, 1994) (on file with the author) (showing 36.1 percent of Chapter 13 cases ending in Chapter 13 discharge).
56. See, e.g., id. at 215-17 (showing a two-thirds failure rate for Chapter 13 cases); William C. Whitford, The Ideal of Individualized Justice: Consumer Bankruptcy as Consumer Protection, and Consumer Protection in Consumer Bankruptcy, 68 AM. BANKR. L.J. 397, 411 tbl.2 (1994) (showing only thirty-one percent of Chapter 13 cases closed as completed); Michael Bork & Susan D. Tuck, Bankruptcy Statistical Trends: Chapter 13 Dispositions 5 (Admin. Office of the U.S. Courts Working Paper No. 2, 1994) (on file with the author) (showing 36.1 percent of Chapter 13 cases ending in Chapter 13 discharge).
57. 11 U.S.C. § 1325(a)(6) (1994).
58. In a review published a year after the publication of As We Forgive Our Debtors, Bankruptcy Judge Russell Eisenberg charged that Sullivan, Warren and Westbrook "erroneously believed that chapter 13 works in 1990 as they believe it worked in 1981," and stated that "there is no justification for [Sullivan, Warren and Westbrook's] statement, '[T]here are a lot of people in bankruptcy who bought a bill of goods when they filed chapter 13.'" Russell A. Eisenberg, From the Bench, NACTT QUARTERLY, July 1990, at 13-14. See also Marjorie L. Girth, The Role of Empirical Data in Developing Bankruptcy Legislation for Individuals, 65 IND. L. REV. 17, 41-42 tbl.A (1989) (criticizing Sullivan, Warren and Westbrook's methodology and presenting data showing a 65.2 percent success rate in Girth's own study of Chapter 13 cases in Buffalo, New York).
59. In a review published a year after the publication of As We Forgive Our Debtors, Bankruptcy Judge Russell Eisenberg charged that Sullivan, Warren and Westbrook "erroneously believed that chapter 13 works in 1990 as they believe it worked in 1981," and stated that "there is no justification for [Sullivan, Warren and Westbrook's] statement, '[T]here are a lot of people in bankruptcy who bought a bill of goods when they filed chapter 13.'" Russell A. Eisenberg, From the Bench, NACTT QUARTERLY, July 1990, at 13-14. See also Marjorie L. Girth, The Role of Empirical Data in Developing Bankruptcy Legislation for Individuals, 65 IND. L. REV. 17, 41-42 tbl.A (1989) (criticizing Sullivan, Warren and Westbrook's methodology and presenting data showing a 65.2 percent success rate in Girth's own study of Chapter 13 cases in Buffalo, New York).
60. Four years after Eisenberg's review, an independent study of Chapter 13 conducted by the National Association of Chapter 13 Trustees found a completion rate of 32.89%. See Henry E. Hildebrand, III, Administering Chapter 13 - At What Price?, 13-AUG AM. BANKR. INST. J. 16 (1994). Without citing Sullivan, Warren and Westbrook, Hildebrand referred to the finding as "consistent with the conventional wisdom." Other studies also confirmed the two-thirds failure rate. See Whitford, supra note 53, at 411 tbl.2; Bork & Tuck, supra note 53, at 5. The flap not only illustrates the adage that there are only two responses to empirical research: (1) it isn't true, and (2) we knew that already, but also demonstrates how quickly critics can switch between them.
61. At the recent meeting on bankruptcy data convened by the Executive Office of the United States Trustee and conducted by the Rand Corporation, I suggested that the establishment of a feedback loop that would apprise bankruptcy judges of the likelihood of whether particular kinds of debtors would be able to perform particular kinds of plans might be of help to the judges in their decisionmaking. Both of the judges who responded to my suggestion responded in the negative, saying such feedback would not be helpful because it was not the judges' job to determine whether the debtor would be able to make the payments under the plan. In my opinion, they misread Bankruptcy Code § 1325(a)(6).
62. 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, 839-53 (1994).
63. See id. at 828-30 tbl.3 (showing Chapter 13 filings as a proportion of all bankruptcy filings ranging from a high of eighty percent and a low of five percent); Michael Bork & Susan D. Tuck, Bankruptcy Statistical Trends: Chapter 13 Adjustment of Debts of an Individual with Regular Income 5 (Admin. Office of the U.S. Courts Working Paper No. 1, 1994) (on file with the author) (showing the average percentage of cases filed under Chapter 13 to be sixty-one percent in nine selected districts and 22.7 percent in the remaining eighty-one districts).
64. See, e.g., Braucher, supra note 9, at 556; Sullivan et al., supra note 58, at 839-53.
65. For example, under the credit industry's standard of "no more relief than the debtors need," every debtor would presumably be required to pay whatever that debtor could. Only a debtor who could pay absolutely nothing would be eligible for a Chapter 7 discharge. Such a debtor would always be eligible for a zero payment plan under Chapter 13, making Chapter 7 entirely irrelevant.
66. See 11 U.S.C. §§ 704(4), 1302(b)(1) (1994).
67. For example, the prohibitions contained in Bankruptcy Code § 525 against discrimination in private employment and against discrimination by governmental units should be retained. See id. § 525.
68. An information system is "transparent" when it requires the application of personal information to be structured in a manner understandable to the individuals reported on. An information system is "open" when the persons reported on have the opportunity to interact easily with the recordkeeper. See PAUL M. SCHWARTZ & JOEL R. REIDENBERG, DATA PRIVACY LAW § 5-3 (1996).
69. See, e.g., Up State Fed. Credit Union v. Carletta (In re Carletta), 189 B.R. 258, 262 n.4 (Bankr. N.D.N.Y. 1995) ("Because the complete denial of discharge under Code § 727 is a more severe remedy than that offered under Code §§ 548 or 523, the Court is particularly cautious when relying on inferences to prove actual fraud.").
70. Who would benefit from an educational program is an empirical question. To solve it, one need only set up some programs, let judges assign cases to the programs on whatever theories they believe most likely to work, provide computer analysis of the feedback, and require judges to assign later cases in accord with it. Such a system will crawl incrementally toward the correct solution.
71. The type of debts described in the text are dischargeable only in Chapter 13. Compare 11 U.S.C. § 523(a)(2), (4), (6), with id. § 1328(a). Bankruptcy courts are fond of repeating the maxim that "bankruptcy is for the honest debtor." Mocking critics respond with the pseudo-maxim that "Chapter 13 is for the dishonest debtor."
72. Under the current system he cannot obtain relief under Chapter 7 or 11 because the judgment is for a willful tort and he cannot obtain relief under Chapter 13 because he has noncontingent, liquidated unsecured debt in excess of $250,000. See id. §§ 109(e), 523(a)(6).
73. See id. § 704(4).
74. The amount of attention trustees would need to devote to cases would vary widely with the debtor's circumstances. Based on my experience as a former trustee, I would estimate that trustees could profitably do the analyses I describe here at an average cost of $500 a case. The total added cost to the system would be about $500 million per year. The most likely source of those funds would be the approximately $3 billion currently distributed to unsecured creditors each year. See GAO Report, supra note 22, at 1-2 (reporting that 1991 and 1992 Chapter 7 asset cases generated $2 billion in receipts); Prepared Testimony of George Paine, II, Chief Judge, U.S. Bankruptcy Court for the Middle District of Tennessee, FEDERAL NEWS SERVICE, Apr. 16, 1997 ("Over $2 billion passes through the Chapter 13 program annually nationwide."). However, a good argument could be made for requiring secured creditors to share in the costs.
75. The conventional wisdom holds that it is not possible to reconstruct the events that brought the debtor to bankruptcy and hold the debtor accountable for them. First, the conventional wisdom asserts, many debtors will not have records from which their finances can be reconstructed. Second, the task of reconstruction will be so formidable and time consuming that it will not be worth doing. The answer to the first point is that creditors will have the necessary records and can be required to produce them. The answer to the second point is that it will be worth doing even if the necessary commitment of resources is great because it is impossible to respond appropriately to debtor conduct without knowing the nature of that conduct. The added expense of the inquiry will be financed with payments from debtors that would otherwise have gone to creditors.
76. Bankruptcy courts could, for example, achieve nearly complete control over recalcitrant or irresponsible debtors by requiring their employers to pay wages and salaries directly to the trustee. See 11 U.S.C. § 1325(c) (authorizing orders for direct payment).
77. See supra notes 11-15 and accompanying text.