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January 27, 2010

Top Ten Parts of BAPCPA Congress Needs to Fix

Musing on the subway. 

1.  Computation of the chapter 13 plan payment for the above-median debtor.  The mechanical test or "forward-looking test"?  See 1325(b).  Congress obviously intended a mechanical test but the language leads to an absurd result. 

2.  Post-petition earnings in an individual chapter 11.  BAPCPA says they are property of the estate. Section 1115.  This is especially a disaster when a chapter 11 trustee is appointed.  The trustee, in theory, gets the debtor's paycheck each month.  Who would work then?

3.  Eligibility for chapter 13.  What is a secured debt - unsecured debt for eligibility purposes?  The courts are all over the board.  Now we have to tell prospective debtors, "I don't know if you qualify or not - depends on the judge."

4.  Small Business chapter 11s.  The additions have not helped.  We badly need a streamlined small business chapter 11.   

5.  Credit counseling.  Get rid of credit counseling! - the requirement is a joke.  No one even pretends to be counseled, "just pay the 50 bucks and get your certificate!"

6.  Debt Relief Agencies.  Lawyers should not be debt relief agencies.  It is demeaning in my opinion and misleading to the public.  The restrictions on what we call tell our clients should be removed (and will probably be removed by the Supremes in Milavetz). 

7.  The Means Test.  Get rid of it.  We had totality of the circumstances before and that weeded out the abusive filers, i.e., those who have the ability to repay their debts.  I could not fillout the means test form myself without a computer program - how do we expect pro pers to ever do it?  And it is easy to manipulate, i.e., arrange the filing so that the current monthly income is below the median.  Allmost everyone qualifies i.e., "passes" the means test, or is below the median, so it is a complicated hurdle which accomplishes nothing. 

8.  Mandatory reaffirmations on vehicles.  One judge in the Central District says she never refuses to approve a requested reaff.  One judge I know denys most on the basis that the debtor can tell the lender that he tried but the judge would not agree.  Presumably then the lender will just let the debtor keep the car and keep making the payments. 

9.    The automatic stay.  In the second case when the automatic stay is automatically lifted after 30 days, is it lifted as to the debtor only (as the code says) or as to the property as well? 

10.  Hmm - still thinking.

A few of the screw ups above will be fixed, hopefully, by the Supreme Court.  What galls me is that Congress won't just fix the screwups that the courts are struggling with.  A Supreme Court case costs us about $1 million - and that's the Supreme Court cost - not the lower courts.  The Supreme Court budget is about $75 million and it will resolve about 75 cases this year. 

For whatever all that is worth. 

January 27, 2010 in Current Affairs | Permalink


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Posted by: Laura Westing | Jan 27, 2010 5:23:47 PM

Some responses:

#2 Chapter 11 wasn't designed for individual debtors. The intent of the earnings transfer rule was to prevent it from creating a loophole. Also, honestly, what is so bad about the trustee getting the debtor's paycheck? Wouldn't an allowance for living expenses be better. Indeed, in a fair share of bankruptcies with regular income present, financial management is the problem. In those cases, what the debtor really needs is a conservator or receiver to make sure that essentials are paid before non-essential spending takes place.

#1, #3 and #7 all go to Chapter 13 eligibility. From a drafting perceptive, its a mess. But, the percentage of case that are close calls under any interpretation of those tests is surprisingly small.

#4 is more of an substantive problem than a process problem. The typical small business Chapter 11 usually produces a liquidation, and usually produces a payment overwhelmingly towards taxes (either due to priority status or because taxes due have been reduced to blanket tax liens) when it doesn't produce a liquidation. Many small business petitioners also have blanket liens in favor of non-purchase money secured creditors whose claims are worth more than their assets at liquidation value. Chapter 11 was designed for publicly held companies with little secured debt and nearly current taxes. Unless and until it becomes possible to favor unsecured trade creditors necessary for the ongoing conduct of the business over tax and blanket secured creditors, or a deeper market for the refinancing of distress secured and tax debt arises, the means to the end won't matter.

#8 The solutions are cramdowns and valuations at liquidation rather than replacement value. Allowing a creditor to get a value more than liquidation value gives the creditor a windfall that would not have been available outside of bankruptcy. A key point of both exemptions from creditors and the bankruptcy process is to discourage creditors from using debtor motivation, as opposed to the availability of economical assets from which a judgment can be satisfied.

A big missing issue: The amount of the Chapter 13 payment. How much is a bigger problem than who qualifies. The pre-reform the effective requirement was that creditors come out better than in Chapter 7 after considering plan payments. Post-reform the requirement is "all available income." The "all available income" test is plausible at the margins, but effectively rules out bankruptcy, even when it would be a better option for many or most creditors, in any case where an out of court garnishment of the creditor's income would be significantly less burdensome than five years of Chapter 13 plan payments. One simple solution would be to exclude future income from the estate, but to give the Chapter 13 trustee the ability to garnish the post-petition debtor to the maximum extent allowed by law for three/five years.

Posted by: ohwilleke | Feb 16, 2010 3:58:10 PM

Small Business chapter 11s. This needs to be a lot more focussed.

Posted by: custom motorcycle parts | Aug 19, 2010 1:03:49 AM

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