Available at: When Chapter 11 Meets Consumer Protection: Navigating the Limits of § 363(o) (ABI Membership Required)
When Chapter 11 Meets Consumer Protection: Is § 363(o) Becoming an Empty Promise?
The American Bankruptcy Institute's June 2026 Consumer Corner examines an obscure but increasingly important provision of the Bankruptcy Code—11 U.S.C. § 363(o)—and argues that modern Chapter 11 practice has significantly weakened the consumer protections Congress intended when it enacted the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).
Summary:
Section 363(f) generally allows bankruptcy estates to sell assets "free and clear" of competing interests. Recognizing that this power could be abused when consumer loans are sold, Congress enacted § 363(o) as part of BAPCPA.
The legislative history is unusually clear. Senator Chuck Schumer explained that predatory lenders were using bankruptcy sales to argue that purchasers acquired consumer loans free of Truth in Lending Act (TILA) claims and other consumer defenses. Congress viewed that result as fundamentally unfair and enacted § 363(o) to ensure that buyers of consumer credit transactions remain subject to the same claims and defenses that would have existed outside bankruptcy.
The article explains that § 363(o) preserves protections under:
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The Truth in Lending Act (TILA);
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The FTC Holder Rule, which allows consumers to assert seller misconduct against assignees of consumer credit contracts; and
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Other consumer defenses that otherwise would survive assignment of the loan.
The problem, however, is procedural rather than substantive.
The leading decision, In re Ditech Holding Corp., held that § 363(o) applies only to sales conducted under § 363—not to sales implemented through a confirmed Chapter 11 plan under § 1123. Other courts have followed the same reasoning. As a result, sophisticated debtors increasingly can avoid § 363(o) simply by structuring transactions through a plan rather than a traditional § 363 sale.
The authors note that this distinction has become increasingly important because modern Chapter 11 practice often relies on:
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prepackaged plans,
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pre-negotiated plans,
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expedited going-concern sales,
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sale "toggles" allowing debtors to choose later between a § 363 sale and a plan transaction.
Each of these procedural choices may determine whether consumers retain Congress's intended protections.
The article therefore urges state attorneys general and consumer advocates to scrutinize first-day motions, sale procedures, plan provisions, releases, injunctions, and confirmation requirements to ensure that consumer rights are not inadvertently extinguished during the bankruptcy process.
Commentary:
This is an excellent example of why bankruptcy lawyers should never dismiss legislative history as irrelevant.
Congress's intent here could hardly have been clearer.
Section 363(o) was enacted because Congress believed bankruptcy should not become a vehicle for laundering predatory loans into "clean" assets that stripped consumers of defenses they unquestionably possessed before bankruptcy.
Yet twenty years later, the practical effect appears to depend largely on how clever bankruptcy counsel structures the transaction.
If the debtor conducts a § 363 sale, § 363(o) protects consumers.
If substantially the same transaction occurs through a Chapter 11 plan, Ditech suggests those protections may disappear.
That result is difficult to reconcile with the policy Congress expressly adopted.
One can certainly defend Ditech as faithful to the statutory text. Section 363(o) literally refers to sales under § 363. Courts are understandably reluctant to rewrite statutes.
But if the same transaction produces dramatically different consumer rights solely because it is implemented under § 1123 rather than § 363, then the distinction begins to look more like a drafting gap than a deliberate congressional policy choice.
The article also highlights something consumer bankruptcy attorneys have observed for years: sophisticated financial institutions often devote extraordinary effort to finding procedural mechanisms that eliminate substantive liability.
Whether through expansive third-party releases, "free and clear" sales, arbitration clauses, the Texas Two-Step, receiverships, or now the strategic use of Chapter 11 plan sales instead of § 363 sales, the objective frequently appears to be the same—preserving the economic value of financial assets while minimizing accountability for the underlying conduct.
Congress enacted § 363(o) precisely because it concluded that bankruptcy should not become a haven for that sort of liability cleansing.
If courts continue to conclude that § 363(o) does not apply whenever debtors package essentially identical transactions inside a Chapter 11 plan, Congress may ultimately need to revisit the statute. A simple amendment extending the same protections to sales under § 1123 would appear to accomplish what Congress thought it had already done in 2005.
Until then, the article serves as a useful reminder that in modern Chapter 11 practice, procedure often determines substance. Consumer advocates and state attorneys general cannot simply assume that Congress's protections will automatically apply. They must pay close attention to how the debtor proposes to exit bankruptcy because that choice alone may determine whether consumers keep—or lose—the rights Congress intended to preserve.
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