Cite as: Keith M. Lundin, Lundin On Chapter 13, § 3.8, at ¶ ____, LundinOnChapter13.com (last visited __________).
The powerful coalition of lenders that assembled in 1997 to push bankruptcy reform1 couldn’t resist taking advantage of each other when the opportunity presented. Somewhere around 2002, the car lenders turned on the Great Unwashed and the outcome is that unsecured creditors were a lot better off under the former Bankruptcy Code than they are under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).2
If you don’t believe it, take a quick look at §§ 506, 1325(a)(5) and 1325(b). Three or four hundred thousand cars are crammed down each year in Chapter 13 cases.3 Multiply that number by the typical unsecured claim that cramdown produces. The resulting amount is north of a billion dollars a year that used to be squeezed out of undersecured car claims, freeing income for distribution to other creditors in Chapter 13 cases. After BAPCPA, much of that money stays with the car lenders4 and it comes right out of the pockets of the hospitals and credit card companies that sat at the same table all those years. No tears here; just wonder at the lack of honor among members of the coalition. Perhaps this was a conscious choice by some within the coalition to pass BAPCPA at all costs.5
Then there are new preconfirmation direct-payment requirements to secured claim holders in § 1326,6 perfection changes in the defenses to preference recovery in § 547 and assets that invisibly leave the bankruptcy estate in § 521—lots of “little” changes that improved the position of secured claim holders in bankruptcy cases. For Chapter 13 debtors with current monthly income7 greater than applicable median family income, the test that determines the entitlement of unsecured creditors—the projected disposable income test in § 1325(b)8—permits higher-income debtors to deduct payments to all secured creditors without regard to reasonableness or necessity.9 The money has to come from someplace. You can bet that distributions to unsecured creditors in consumer bankruptcy cases would go down under BAPCPA.
If you still don’t believe it, look at the data collected by Professor Lupica in 2013 for The Consumer Bankruptcy Creditor Distribution Study10:
[C]ontrary to the intent of the proponents of BAPCPA, unsecured distributions have declined nationally in a statistically significant fashion post-BAPCPA both as a share of unsecured creditor claims and as a share of total distributions in the case of both Chapter 13 and Chapter 7 filings. . . . [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. . . . [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. This decline is statistically significant.11
Some of the money unsecured creditors are losing as a result of reduced distributions since BAPCPA probably pays for the increased administrative cost of consumer bankruptcy cases.12 BAPCPA was a double whammy for general unsecured creditors: the pool for distribution to unsecured creditors shrank and the share taken to create and administer the pool grew.
2 Pub. L. No. 109-8, 119 Stat. 23 (2005).
3 Cramdown at confirmation in Chapter 13 cases is explained in § 74.11 The Power to Modify.
4 This is especially true for many car-secured claims in Chapter 13 cases that will fall in the special class of car claim described in the “hanging sentence” BAPCPA inserted at the end of 11 U.S.C. § 1325(a). See § 75.1 In General: Modification Without § 506, § 75.2 Motor Vehicles and Any Other Thing of Value, § 75.3 Only PMSIs Need Apply, § 75.4 Acquired for Personal Use of Debtor, § 75.5 Surrender in Full Satisfaction? and § 75.6 Procedure and Miscellaneous Hanging-Sentence Issues.
5 As Bruce Mann put it, “[h]onor is no substitute for a good security interest.” Bruce H. Mann, Republic of Debtors 260 (Harvard Univ. Press 2002). The unsecured members of the credit coalition may have found enough in BAPCPA to be happy with that they conceded a billion here or there to the car lenders as the price of success.
8 See § 92.1 In General, § 92.2 Projected Disposable Income: All Debtors, § 92.3 Current Monthly Income: The Baseline, § 92.4 Household Size and Comparison of CMI to Median Family Income: § 1325(b)(3), § 93.1 Section 1325(b)(2)(A) and (B): “Amounts Reasonably Necessary to Be Expended—” When CMI Is Less Than Median Family Income, § 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.
9 See § 96.1 Average Monthly Payments on Account of Secured Debts. See, e.g., Milavetz, Gallop & Milavetz, P.A. v. United States, 559 U.S. 229, 244, 130 S. Ct. 1324, 1336, 176 L. Ed. 2d 79 (Mar. 8, 2010) (“The [means] test promotes debtor accountability but also enhances incentives to incur additional debt prior to filing, as payments on secured debts offset a debtor’s monthly income under the formula.”).
10 Lois R. Lupica, Am. Bankr. Inst., The Consumer Bankruptcy Creditor Distribution Study Final Report (2013) [hereinafter Lupica, Distribution Study].
11 Lupica, Distribution Study, at 38–49.
12 Lupica, Distribution Study, at 49 (“Under both [Chapter 7 and Chapter 13], administrative expenses increased significantly, eating up a greater share of the pie.”).