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Law Review: Ponoroff, Lawrence- Chapter 13: Let’s Call the Whole Thing Off

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By Ed Boltz, 9 March, 2024

Abstract:
Courts cannot agree on much of anything about chapter 13, and legislators cannot agree and are confused over what to do about it. This state of affairs benefits no one and shows no signs of abating. So, in this Article, I propose to throw in the towel by imagining a world without chapter 13. Spoiler alert: although I am not superstitious, with just a few tweaks and tucks to chapter 7, I think the Bankruptcy Code might just be better off operating like a high-rise elevator that goes directly from floor twelve to floor fourteen. I will lay it out and readers can decide for themselves if they are prepared to become anti-choice. For me, in the words of the legendary Louis Armstrong, “and I think to myself what a wonderful world” it would be without chapter 13.

Commentary:

Perhaps the most glib (it's ever so  fun to quote  the lyrics of jazz standards!) and uninformed dismissal of Chapter 13 that I have  read.  The author, naive to the point of foolishness, suggests that debtors could save homes from foreclin Chapter 7   "by reaffirming the debt so long as the bank is amenable", but if banks were amenable  the debtor could have avoided foreclosure.  

Further,  to the extent that my commentary might seem unnecessarily insulting,  the comments that "consumer bankruptcy attorneys may rush to the barricades to resist"  because of  their "avarice"  seem  to perpetuate the irrational and knee jerk hostitly all too common in the ivory tower.  Perhaps that arises because consumer debtor attorneys do not,  unlike their $2500 hour Chapter 11 colleagues,  endow positions at law schools,  underwrite self-serving scholarship,  or pay for lavish cocktail parties at bankruptcy conferences.  

That disregard inaccurately persists with the statements in this article that Chapter 11 cases can "bear the overhead of litigating [bankruptcy] issues",  when in fact far more bankruptcy issues (impacting all chapters) are raised and litigated, including on appeal as far as the Supreme Court, by  consumer attorneys,  almost always without charge,  than by corporate debtor attorneys.  See,  e.g., Bankruptcy and the US Supreme Court by Ronald J. Mann.

Lastly,  for those fixated on the  discharge being the sole gauge of the success of any bankruptcy,  leaving aside unlikely changes such as the adoption of Senator Warren's Consumer Bankruptcy Reform Act or Prof.  Ponoroff's myopic suggestion to simply "scrap"  Chapter 13,  there are immediate options that bankruptcy courts,  trustees and the USTP (and Bankruptcy Administrator)  could take to increase that metric,  perhaps without any legislation.

Most Chapter 13 cases fail due to delinquencies in  plan payments, with Trustees moving, pursuant to  11 U.S. Code § 1307,   to dismiss.  That section,  however,  also  provides that any party in interest can move to  convert a case  if that  "is in the best interests of creditors and the estate".  Obviously,  liquidating an estate if there are non-exempt assets is in the best interest of creditors,  but arguably the discharge of debts is also in the interest of creditors when there are neither assets or income that could be obtained outside of bankruptcy.  Stopping creditors from expending their resources in pointless debt collection is to their benefit.  (Except perhaps for those mythical "amenable"  banks mentioned  elsewhere by Prof. Ponoroff.)  Further,  by reducing the need for the debtor to refile another bankruptcy,  paying the avaricious consumer debtor attorneys again,  that preserves their ability to pay secured creditors.  (11 U.S. Code § 1307 does not show a preference for secured or unsecured creditors.)

Now obviously,  many Chapter 13 debtors  do convert their failing plans to Chapter 7,  but a simple logistical fact,  that many academics seem unaware of, is that a debtor must affirmatively convert their case to Chapter 7 and, absent the specific instruction,  their attorney cannot take that action,  no matter how advisable,  unilaterally.  In the face of a failing plan,  many, many consumer debtors simply disappear and become non-responsive.   But just as a consumer debtor's attorney cannot seek conversion absent instruction,  the attorney also cannot oppose  conversion absent instruction.

So if instead  Chapter 13 trustees and the USTP (and Bankruptcy Administrators)  more uniformly and routinely sought conversion of cases to Chapter 7 (still subject to the debtor's absolute right to voluntarily dismiss a Chapter 13 case)  those debtors would actually get a discharge.  (A generous reading of 11 U.S. Code § 341 would even find no requirement for a second First Meeting of Creditors.  What questions was the Chapter 13 Trustee derelict in failing to ask previously?)

The author here does admittedly draw attention to one of the largest issues with conversion as a solution,  viz. whether the post-petition appreciation in value in assets,  particularly homes,   can be sold by a Chapter 7 trustee.  This problem arises   only because of unmentioned avarice of  Chapter 7 Trustees  (as always,  I stand in favor of finding ways to pay Chapter 7 Trustees more for "No Asset" cases) and because it's  under the nose of the bankruptcy court.  

But how often does anyone care when a debtor  sells their house for more money after receiving a discharge and closure of their case?  Never.  But Chapter 13 debtors,  who had the temerity to take this "honorable" alternative,  are punished for this  under a draconian interpretation of § 348 and an overly broad reading of the difference from Schwab v. Reilly between exemptions for dollar amounts and those for a Ding an Sich  (to get all Kantian here).

 

The likelihood of any of these alternatives,  however,  is vanishingly small, especially compared with the certainty that ill-informed academics will continue to write unhelpful screeds about the failures of Chapter 13.

 

To read a copy of the transcript, please see:

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