§ 138.9     Claim Reduction under § 502(k) after BAPCPA
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 138.9, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

BAPCPA raises the possibility of reducing unsecured consumer debts in bankruptcy cases based on prepetition debt repayment negotiations in an intricate new section that, on careful examination, is all talk and no meat. New § 502(k) provides in full:

(k)(1) The court, on the motion of the debtor and after a hearing, may reduce a claim filed under this section based in whole on an unsecured consumer debt by not more than 20 percent of the claim, if—
(A) the claim was filed by a creditor who unreasonably refused to negotiate a reasonable alternative repayment schedule proposed on behalf of the debtor by an approved nonprofit budgeting and credit counseling agency described in section 111;
(B) the offer of the debtor under subparagraph (A)—
(i) was made at least 60 days before the date of the filing of the petition; and
(ii) provided for payment of at least 60 percent of the amount of the debt over a period not to exceed the repayment period of the loan, or a reasonable extension thereof; and
(C) no part of the debt under the alternative repayment schedule is nondischargeable.
(2) The debtor shall have the burden of proving, by clear and convincing evidence, that–
(A) the creditor unreasonably refused to consider the debtor’s proposal; and
(B) the proposed alternative repayment schedule was made prior to expiration of the 60-day period specified in paragraph (1)(B)(i).1
[2]

New § 502(k) was contained in a title of BAPCPA called “Enhanced Consumer Protection.” The subtitle was called “Penalties for Abusive Creditor Practices.” The section of BAPCPA that enacted this new provision was titled “Promotion of Alternative Dispute Resolution.” All of these sound bites produced a new Code section that contains a trap in nearly every phrase and sentence.

[3]

New § 502(k)(1) permits, but does not require, a bankruptcy court to reduce a claim on the motion of the debtor and after a hearing by up to (a maximum) 20 percent if all of the following conditions are met.

 
The claim must be based in whole on an unsecured consumer debt. “In whole” is a term new to the Bankruptcy Code but clearly conveys that only completely unsecured debts are subject to reduction. “Consumer debt” is a term of art defined by § 101(8) as a debt “incurred by an individual primarily for a personal, family or household purpose.”2
 

 

 
The claim must be filed by a creditor who “unreasonably refused to negotiate a reasonable alternative repayment schedule.” It is hard to imagine a single sentence fragment with more weasel words. Does anyone know what an unreasonable refusal to negotiate means in this context? Alternative repayment schedule is an undefined term that probably means repayment on a schedule that is different from the schedule required by contract. A “reasonable alternative repayment schedule” is as impenetrable as an unreasonable refusal to negotiate one of those.
 

 

 
The reasonable alternative repayment schedule must have been proposed on behalf of the debtor by an “approved nonprofit budget and credit counseling agency described in section 111.” A quick look at new § 111 of the Bankruptcy Code confirms that this is the same nonprofit budget and credit counseling agency that is approved by the Executive Office for U.S. Trustees (or the Bankruptcy Administrator) to provide prepetition briefings required for every individual debtor by new § 109(h).3
 

 

 
There are, of course, thousands of credit counseling agencies in the United States. At this writing, approximately 100 credit counseling agencies have been approved by the Executive Office for U.S. Trustees as nonprofit budget and credit counseling agencies (NBCCAs) to provide prebankruptcy briefing services under § 109(h) of the Bankruptcy Code. With time, there will be more approved NBCCAs. Debtors contemplating bankruptcy will find an approved NBCCA typically by referral from a debtors’ attorney who knows how to find one in a hurry to satisfy the new eligibility requirement in § 109(h).
 

 

 
Under new § 502(k)(1)(A), a reasonable alternative repayment schedule proposed by a credit counseling agency that is not an approved NBCCA would not satisfy the conditions for claim reduction. Debtors who haven’t consulted a bankruptcy attorney would find an approved NBCCA purely by accident, and a debtor in sufficient financial distress to be contemplating bankruptcy will be referred to an approved NBCCA at a time that is unlikely to be at least 60 days before the filing of a bankruptcy petition.
 

 

 
The reasonable alternative repayment schedule proposed by an approved NBCCA must have been made “at least 60 days before the date of the filing of the petition.” To satisfy this requirement, the debtor accidentally found an approved NBCCA more than 60 days before consulting bankruptcy counsel or the debtor’s financial distress was not so great that the debtor couldn’t delay filing a bankruptcy petition for more than 60 days after consulting the approved NBCCA to which the debtor was referred for a prebankruptcy briefing by bankruptcy counsel. Another likely combination of circumstances. In any case, the proposed reasonable alternative repayment schedule must have been offered at least 60 days before a bankruptcy petition was filed.
 

 

 
The proposed reasonable alternative repayment schedule must have provided for payment of at least 60 percent of the debt over a period not exceeding the repayment period of the loan or a reasonable extension of that repayment period. The reasonableness of any proposed extension will be one catch. The 60 percent minimum repayment requirement is simply beyond the means of most folks desperate enough to consider filing bankruptcy.
 

 

 
No part of the debt can be nondischargeable. Likely candidates for nondischargeability would be credit card debts that might fall within the presumptions of fraud in § 523(a)(2)(c)(i)(I) and (II).4 Ironically, the drafters of new § 502(k) probably didn’t notice that the minimum 60-day requirement in new § 502(k)(1)(B)(i) will almost exhaust the reach-back periods for the presumption of fraud with respect to luxury goods and cash advances in § 523(a)(2)(C)(i)(I) and (II).
 

 

 
The debtor has to prove by “clear and convincing evidence” that the creditor “unreasonably refused to consider the debtor’s proposal” and that the proposed alternative repayment schedule was made more than 60 days before the filing of the bankruptcy petition. Do you suppose that an unreasonable refusal “to consider the debtor’s proposal” is the same as an unreasonable refusal “to negotiate a reasonable alternative repayment schedule”? Are there two different conditions here? Must the debtor first prove—perhaps by the ordinary preponderance of the evidence—that the creditor unreasonably refused to negotiate a reasonable alternative repayment schedule and then prove—by clear and convincing evidence—that the creditor unreasonably refused to consider the debtor’s proposal? Or is it one condition described two different ways? Who knows.
 

 

[4]

Any debtor who can jump through all of the hoops in new § 502(k) deserves a medal, not just a claim reduction. To justify the attorneys’ fees necessary to clearly and convincingly prove a § 502(k) claim reduction, the unsecured consumer debt involved will have to be quite large and the percentage of unsecured debt to be paid through the Chapter 13 plan will have to be high. There will be very few debtors financially able to wait more than 60 days to file bankruptcy, after finding an approved NBCCA. Perhaps the debtor and/or debtor’s counsel will have to be particularly angry at a creditor to consider the § 502(k) line of attack. It just isn’t likely to happen much in Chapter 13 practice.


 

1  11 U.S.C. § 502(k).

 

2  11 U.S.C. § 101(8).

 

3  See 11 U.S.C. § 109(h), discussed in § 373.1 [ Briefing Requirement and Certificate ] § 36.25  Briefing Requirement and Certificate.

 

4  11 U.S.C. § 523(a)(2), discussed in § 549.1 [ False Representations and Fraud: § 523(a)(2) ] § 159.2  False Representations and Fraud: § 523(a)(2).