Law Review: Hermann, Jonathan S.- Restoring Bankruptcy's Fresh Start

Abstract: The discharge injunction, which allows former debtors to be free from any efforts to collect former debt, is a primary feature of bankruptcy law in the United States. When creditors have systemically violated debtors’ discharge injunctions, some debtors have attempted to challenge those creditors through a class action lawsuit in bankruptcy court. However, the pervasiveness of class-waiving arbitration clauses likely prevents those debtors from disputing discharge injunction violations outside of binding, individual arbitration. This Note first discusses areas of disagreement regarding how former debtors may enforce their discharge injunctions. Then, it examines the types of disputes that allow debtors to collectivize in bankruptcy court. Without seeking to resolve either disagreement, this Note assumes debtors may collectivize in this context and employs an “inherent conflict” test that looks to whether disputes over discharge injunction violations are arbitrable. Because the “inherent conflict” test likely leads to the conclusion that courts must enforce class-waiving arbitration clauses, this Note argues that Congress should amend the Bankruptcy Code not only to provide debtors an explicit right of action under § 524 and the ability to collectivize, but also to prohibit the arbitration of these claims. Doing so will give full effect to the discharge injunction and fulfill the promise to debtors that they can truly begin anew after bankruptcy. Commentary: An option that is not mentioned in this paper for addressing arbitration of consumer bankruptcy issues is that a Chapter 13 debtor could provide in his or her plan that all arbitration provisions are hereafter void. Confirmation orders routinely adjust and redefine the debtor/creditor relationship with such being binding on all parties. (Pursuant to §1322(b)(2), this might not be a permissible modification of the rights in a consumer mortgage secured only by the debtor’s principal residence.) For a copy of the paper, please see: Restoring Bankruptcy's Fresh Start