Cite as: Keith M. Lundin, Lundin On Chapter 13, § 3.2, at ¶ ____, LundinOnChapter13.com (last visited __________).
Bruce Mann in his wonderful account of bankruptcy in America during the early years of the republic1 recounts the ambivalence of the Founders with respect to whether economic failure equates to a failure of character. Through more than two centuries of ever-increasing commercialization of borrowing and lending, there have been periods in our bankruptcy history when debt was relatively de-moralized—these periods characterized by less retribution in the handling of debtors by the legal system—and periods of “re-moralization” like the one that birthed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).2
As quoted in the House Judiciary Committee Report that accompanies BAPCPA: “Shoplifting is wrong; bankruptcy is also a moral act. Bankruptcy is a moral as well as an economic act. There is a conscious decision not to keep one’s promises.”3 No matter that debtors in bankruptcy in 2005 were worse off economically than debtors in 19854—the “explosive” growth of bankruptcy filings demonstrates that un-needy, bad people were flocking to the bankruptcy courts. No matter that most debtors in bankruptcy are broke because of job loss, health events, marital problems or a failed business5—bankruptcy should be punishment for the financial sins of profligate spenders.
The Make ‘em Pay Principle manifested itself in BAPCPA in three major areas: a new “abuse” test (the so-called “means” test) to get into Chapter 7;6 many new exceptions to discharge;7 and caps on exemptions.8
The admissions test for Chapter 7—the abuse test in § 707(b)—will make debtors pay more . . . to their lawyers.9 BAPCPA requires much new paperwork and several obscure new calculations.10 BAPCPA has caused delays and complications in processing Chapter 7 and Chapter 13 cases and higher attorney fees were the inevitable result.11
But first, somebody needs to say this: the idea that sifting for a few “abusive” Chapter 7 cases would cause debtors to pay their creditors is a pipe dream. Debtors aren’t broke because they can file Chapter 7. The abuse test in § 707(b)—or, more likely, the additional expense of dealing with it—has undoubtedly deterred many debtors from filing bankruptcy altogether.12 What portion of those denied bankruptcy relief have paid their creditors? How many have disappeared? Is there any return to creditors for the millions of dollars that millions of potential debtors pay to run the § 707(b) gauntlet? No such return shows in the distribution data for post-BAPCPA bankruptcy cases.13
And take a look at how BAPCPA turned the abuse test on its head in Chapter 13 cases. In § 1325(b), BAPCPA substituted the abuse test from § 707(b) for the “reasonably necessary” test to determine disposable income with respect to over-median-income debtors.14 Because contractually scheduled secured debt payments automatically become reasonable and necessary expenses under the abuse test,15 BAPCPA generates less money for unsecured creditors in Chapter 13 cases.16 Perversely, this use of the abuse test in Chapter 13 cases requires the wealthiest debtors to pay less than under pre-BAPCPA law.
There were many new § 523(a) exceptions to discharge in BAPCPA, but no lobbyist or lender representative offered any evidence that enlarging the class of nondischargeable consumer debts makes those pay who can pay. Is there an undocumented correlation between ability to pay and nondischargeable debt? More likely, the proliferation of nondischargeable debt was punishment, not debt collection.
This suspicion is confirmed elsewhere in BAPCPA. Many of the new exceptions to discharge in § 523(a) were also added to § 1328(a).17 Increasing the debt that is nondischargeable in a Chapter 13 case removed a major incentive for debtors to file Chapter 13 rather than Chapter 7. This is not what the proponents of BAPCPA promised.18 There is no dispute that more debt gets paid by distributions in Chapter 13 cases than in Chapter 7 cases.19 Barring the door to Chapter 7 with an abuse test, then neutering the Chapter 13 alternative with exceptions to discharge did not increase what creditors get from debtors and did not limit bankruptcy relief to those who are neediest. As documented in The Consumer Bankruptcy Creditor Distribution Study in 2013:20
The means test was designed to shift “can pay” filers from chapter 7 to chapter 13, where there likely would be a distribution to unsecured creditors. . . . By 2006, however, the number of chapter 7 cases filed steadily increased each year while the number of chapter 13 cases filed decreased. By 2009, the number of chapter 7 cases filed, as a percent of all consumer cases, returned to pre-BAPCPA levels. . . . [A]lthough in 2007, the ratio of chapter 7 to chapter 13 filers was higher than it was pre-BAPCPA, median income among both chapter 7 and chapter 13 debtors in 2007 was virtually identical to the incomes of debtors that filed under each respective chapter in the pre-BAPCPA period. Thus, the means test did not block supposed higher-income “can-pay” consumers’ access to chapter 7 . . . and steer these debtors into chapter 13 . . . . [C]reditors have done worse under BAPCPA. In chapter 13 cases, unsecured distributions as a percentage of unsecured claims declined nationally by a statistically significant 3.2 percentage points in the post-BAPCPA time period. Even in the few chapter 7 consumer cases where there were assets to distribute, unsecured distribution as a share of unsecured claims declined by 8.9 percent. Thus, creditors received lower distributions as a percentage of their claims under both chapter 13 and in chapter 7 asset-cases post-BAPCPA. . . . BAPCPA adversely impacted the efficient operation of the consumer bankruptcy system. . . . [T]here were no winners under BAPCPA. No matter how you examine the question, unsecured creditors did worse under BAPCPA. Unsecured distributions declined nationally as a share of total distributions in both chapter 13 and chapter 7 asset cases. Under both chapters, administrative expenses increased significantly, eating up a greater share of the pie. . . . The Congressional goal of transforming the bankruptcy system so that consumers would no longer be able to use it to discharge the debts that they could purportedly afford to pay was based upon the false premise that there were consumers discharging debts that they were, in the absence of chapter 7, able to pay. . . . [T]he consumer bankruptcy system under BAPCPA is more difficult to access, less efficient, more cumbersome, more expensive, provides debtors with less effective relief, and is a less effective mechanism for debt repayment.21
The new domiciliary rules and caps on exemptions in BAPCPA22 were advertised parts of the Make ‘em Pay strategy. The new exemption rules were so poorly drafted they actually increased exemptions for many debtors by making federal exemptions available notwithstanding that the state of the debtor’s current residence had opted out of the federal exemptions.23 This has reduced the assets available for distribution to creditors in some bankruptcy cases.
The new exemption caps affect only a few states that have homestead exemptions in excess of $146,450,24 and then only with respect to recent homesteaders who have elected state exemptions. An exemption cap that applies only in bankruptcy could convince a few folks not to file bankruptcy in order to retain the higher exemptions available under state law. Limiting the exemptions available in bankruptcy may encourage involuntary bankruptcies in states with larger homestead exemptions. Twisted irony encourages debtors not to file bankruptcy so they can keep more exempt property from their creditors; increase (involuntary) bankruptcy filings to make those pay who can pay. Such is the misguided logic of BAPCPA.
1 Bruce H. Mann, Republic of Debtors (Harvard Univ. Press 2002).
2 Pub. L. No. 109-8, 119 Stat. 23 (2005).
3 H.R. Rep. No. 109-31, at 3–4 n.1.
4 Teresa A. Sullivan, Elizabeth Warren & Jay Lawrence Westbrook, The Fragile Middle Class 65 (Yale Univ. Press 2002).
5 Teresa A. Sullivan, Elizabeth Warren & Jay Lawrence Westbrook, The Fragile Middle Class chs. 2, 3, 5, 6.
6 See 11 U.S.C. § 707(b), discussed in § 94.1 Big Picture: Too Many Issues.
7 The exceptions to discharge in Chapter 13 cases are discussed in § 159.1 Taxes, § 159.2 False Representations and Fraud: § 523(a)(2), § 159.3 Fraud and Defalcation: § 523(a)(4), § 159.4 Unscheduled Creditors: § 523(a)(3), § 159.5 Domestic Support Obligations: § 523(a)(5), § 159.6 Student Loans: § 523(a)(8), § 159.7 Willful or Malicious Injury: § 1328(a)(4), § 159.8 Boating or Flying while Intoxicated: § 523(a)(9) and § 159.9 Chapter 7 Trustee Compensation: § 1326(d).
9 See Lois R. Lupica, The Consumer Bankruptcy Fee Study: Final Report, 20 Am. Bankr. Inst. L. Rev. 17 (2012) [hereinafter Lupica, Fee Study].
10 Similar new calculations are required by BAPCPA at confirmation in a Chapter 13 case with respect to a debtor with current monthly income greater than applicable median family income because of changes by BAPCPA to the disposable income test in § 1325(b). See § 94.1 Big Picture: Too Many Issues, § 94.2 Netting Issues, Including Exclusion of Payments for Debts, § 94.3 Accounting for Spouses, § 95.1 In General, § 95.2 National Standards, § 95.3 Local Standards: Housing and Transportation, § 95.4 Other [Necessary] Expenses—In General; All Categories, § 95.4 Other [Necessary] Expenses—In General; All Categories, § 95.6 Other [Necessary] Expenses—Charitable Contributions, § 95.7 Other [Necessary] Expenses—Child Care, § 95.8 Other [Necessary] Expenses—Court-Ordered Payments, § 95.9 Other [Necessary] Expenses—Dependent Care, § 95.10 Other [Necessary] Expenses—Education, § 95.11 Other [Necessary] Expenses—Health Care, § 95.12 Other [Necessary] Expenses—Involuntary Deductions, § 95.13 Other [Necessary] Expenses—Life Insurance, § 95.14 Other [Necessary] Expenses—Secured or Legally Perfected Debts, § 95.15 Other [Necessary] Expenses—Unsecured Debts, § 95.16 Other [Necessary] Expenses—Taxes, § 95.17 Other [Necessary] Expenses—Optional Telephones and Services, § 95.18 Other [Necessary] Expenses—Student Loans, § 95.19 Other [Necessary] Expenses—Internet Provider/E-mail, § 95.20 Other [Necessary] Expenses—Repayment of Loans to Pay Federal Taxes, § 95.21 Health and Disability Insurance, § 95.22 Family Violence Expenses, § 95.23 Five Percent More Food and Clothing, § 95.24 Elderly, Ill or Disabled, § 95.25 Administrative Expenses, Sorta, § 95.26 Education Expenses, § 95.27 Home Energy Costs, § 95.28 ABLE Program Contributions, § 96.1 Average Monthly Payments on Account of Secured Debts, § 97.1 Total Priority Debts and Divide by 60, § 98.1 Additional Expenses or Adjustments to CMI, § 99.1 In General, § 99.2 Amounts Paid by Others under § 101(10A)(B), § 99.3 Child Support, Foster Care and Disability Payments, § 99.4 Pension Loan Repayments, § 99.5 Employee Benefit Plan Contributions, § 99.6 § 1325(b)(2)(A)(ii): Charitable Contributions (Again?) and § 100.1 Applicable Commitment Period Calculation.
11 See Lupica, Fee Study. See also Lois R. Lupica, Am. Bankr. Inst., The Consumer Bankruptcy Creditor Distribution Study Final Report (2013) [hereinafter Lupica, Distribution Study].
12 See Ed Flynn, Bankruptcy by the Numbers—BAPCPA: The Mystery of the 5 Million Missing Cases, 33 Am. Bankr. Inst. J. 32 (2014).
13 See Lupica, Distribution Study.
14 See 11 U.S.C. § 1325(b)(3), discussed in § 94.1 Big Picture: Too Many Issues.
16 See Lupica, Distribution Study.
17 The new exceptions to discharge in Chapter 13 cases are discussed in § 159.1 Taxes, § 159.2 False Representations and Fraud: § 523(a)(2), § 159.3 Fraud and Defalcation: § 523(a)(4), § 159.4 Unscheduled Creditors: § 523(a)(3), § 159.5 Domestic Support Obligations: § 523(a)(5), § 159.6 Student Loans: § 523(a)(8), § 159.7 Willful or Malicious Injury: § 1328(a)(4), § 159.8 Boating or Flying while Intoxicated: § 523(a)(9) and § 159.9 Chapter 7 Trustee Compensation: § 1326(d).
18 H.R. Rep. No. 109-31, at 18 (“[I]f needs-based reforms and other measures were implemented, the rate of repayment to creditors would increase as more debtors were shifted into Chapter 13.”). See Darrohn v. Hildebrand (In re Darrohn), 615 F.3d 470, 473 (6th Cir. July 22, 2010) (Suhrheinrich, McKeague, Griffin) (“The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 revised the Bankruptcy Code in part by requiring above-median income debtors to file for bankruptcy under the reorganization provisions in Chapter 13. . . . This revision meant that above-median income debtors would be required to make more payments to unsecured creditors under their bankruptcy plans. . . . [T]he Darrohns’ income fell above the median income for a family of four in Tennessee; they were therefore required to file under the reorganization provisions of Chapter 13.”).
19 Ed Flynn, Gordon Bermant & Karen Blakewell, A Tale of Two Chapters, 10 Am. Bankr. Inst. L.J. 20 (2002), available at http://www.usdoj.gov/ust/press/articles/abi82002.htm (“[T]he amount of money collected by trustees and disbursed to creditors in Chapter 13 cases is much higher than the amount collected in Chapter 7 cases.”).
20 Lupica, Distribution Study.
21 Lupica, Distribution Study, at 45–51.
23 See 11 U.S.C. § 522(b), discussed in § 48.6 Domicile Rules after BAPCPA.
24 See § 48.3 Exemptions and Exemption Limitations Added by BAPCPA. See, e.g., In re McNabb, 326 B.R. 785 (Bankr. D. Ariz. 2005) (The cap on exemptions described in 11 U.S.C. § 522(p) applies only in states that permit a debtor to “elect” state or federal exemptions and then only when the state homestead exemption exceeds $125,000.).