Available at: https://uknowledge.uky.edu/klj/vol114/iss2/5
Abstract:
"BANKRUPTCY IS THE GREAT AMERICAN STORY REWRITTEN.” It is a powerful area of the law designed to offer individuals a “fresh start”— the chance for a person to live free from most, if not all, of their previous debts. The bankruptcy system “gives to the honest but unfortunate debtor . . . a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of pre-existing debt.” While the goals of bankruptcy are noble, the reality of the process does not always produce a just result. Congress’s enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) in made filing for consumer bankruptcy more complex and expensive. As a result, individuals need to take on more debt to get through the process––leaving some individuals too broke to file bankruptcy.
Individuals turn to bankruptcy because of overwhelming debt—yet ironically, bankruptcy comes with its own costs. These expenses include filing fees, mandatory credit counseling, and attorney fees. Even with the potential to waive some fees, it does not make up for the cost of hiring an attorney, which most individuals filing for bankruptcy do. The United States Courts’ website even “strongly” recommends an attorney for bankruptcy due to the complex nature of the subject area. Nonetheless, this is not an option available for everyone––especially low-income individuals who are in enough debt that they need to file for bankruptcy. In addition, many individuals believe that if they had enough money to pay attorney fees, they would not need to file for bankruptcy in the first place. Although filing pro se is still an option, the outcome of these cases is usually not as successful, leaving the individual in the same position they started or without the full benefits they could have obtained. A less complex and simplified system is needed, so individuals can get through the bankruptcy process without needing to obtain an attorney and take on more debt to navigate the system successfully.
In re Brown illustrates how the bankruptcy system can be difficult for debtors to navigate, especially when attorney fees are added. Brown was a bankruptcy case involving Lerin Brown, a debtor, who was seeking confirmation of his Chapter 13 plan. Brown filed under Chapter 13 instead of Chapter 7 liquidation solely to be able to pay his attorney in installments. However, the court found a Chapter 7 would be more beneficial for Brown’s situation because he did not have any non-exempt assets that would be liquidated, and he would have gotten a full discharge. The Chapter 13 trustee stated that Brown would have needed an attorney to “successfully navigate both Chapter 7 and Chapter 13 proceedings.” While the court considered the trustee’s comments, the judge ultimately held that Brown could not file under a Chapter 13 plan just to be able to pay off his attorney’s fees. Although judges disagree on whether attorney’s fees should factor into bankruptcy decisions, Brown, nonetheless, highlights the necessity of legal representation in Chapter 7 or 13 cases and the financial burden of hiring such representation.
Due to the structure of current consumer bankruptcy rules, individuals must consider the cost and complexity of filing and how they will cover those costs and successfully get a discharge––an issue that is especially problematic for low income individuals. This Note argues that the most effective solution is to create a new subchapter that is a less expensive and more streamlined pathway for individuals with small debts and low income. As a result, these individuals would be able to file without the burden of legal fees and obtain the fresh start they need. To fully address the issue and its solution, this Note is broken down into five parts. Part I provides background on consumer bankruptcy and how it is possible for a person to be too broke to file for bankruptcy. Part II explains Bankruptcy Code changes and the recent attempts to reform consumer bankruptcy. Part III presents the policy rationale for the needed reform. Part IV proposes the solution of a new Chapter 7 subchapter and why it is the most viable option. Finally, Part V addresses potential criticisms and concerns surrounding the proposed solution.
Commentary: Consumer Bankruptcy: A “Gem” of the Legal Profession, But Is Eliminating Lawyers the Right Way to Polish It?
Tori Harris’s Consumer Bankruptcy: A “Gem” of the Legal Profession but a Diamond in the Rough starts with a problem consumer bankruptcy attorneys have understood since at least BAPCPA: It is entirely possible to be too poor to afford bankruptcy.
That is not merely ironic. It should be embarrassing for a legal system whose central promise is a fresh start.
Harris describes consumer bankruptcy as a “gem” because few areas of law can provide such immediate and sweeping relief. The automatic stay can stop garnishments, repossessions and foreclosures; the discharge can eliminate years of accumulated debt; and bankruptcy can give families a genuine opportunity to reset their financial lives. But BAPCPA added complexity, paperwork, counseling requirements, attorney responsibilities and costs that can make accessing those protections substantially harder.
That diagnosis is largely correct.
I am less persuaded by the prescription.
The Brown Problem: Chapter 13 as the Poor Person’s Chapter 7
Harris appropriately focuses on Brown v. Gore (In re Brown), where the debtor filed Chapter 13 rather than Chapter 7 because Chapter 13 allowed him to pay his lawyer over time.
That circumstance remains one of the stranger—and often misunderstood—features of consumer bankruptcy.
A debtor who has enough money to pay a Chapter 7 lawyer before filing can obtain a relatively quick discharge. A poorer debtor who cannot scrape together that retainer may instead file Chapter 13 because attorney fees can be paid through the plan. As Harris recognizes, the Chapter 13 trustee in Brown acknowledged that the debtor needed counsel to successfully navigate either chapter, yet the court concluded that Chapter 13 could not be used solely as a mechanism for paying those attorney fees.
But describing such a case as merely an “Attorney Fee Only” Chapter 13 obscures an important point: Chapter 13, just like a no-asset Chapter 7, can legitimately pay nothing at all to general unsecured creditors.
There is no Bankruptcy Code requirement that every Chapter 13 debtor pay some minimum percentage to credit cards, medical bills, personal loans or other general unsecured creditors. Instead, the amount is principally constrained by disposable-income requirements and the “best interests of creditors” test under 11 U.S.C. § 1325(a)(4)—which generally requires unsecured creditors to receive at least what they would receive in a hypothetical Chapter 7 liquidation.
For a debtor who would have a no-asset Chapter 7, that number can quite properly be zero.
Indeed, Chapter 13 can sometimes provide even greater room for a zero-percent plan than a superficial comparison with Chapter 7 might suggest. The disposable-income calculation available in Chapter 13 recognizes deductions that are unavailable or treated differently under the Chapter 7 Means Test, importantly including qualified retirement contributions such as 401(k) contributions. Those differences can reduce or eliminate the amount that must be devoted to unsecured creditors.
The § 1325(a)(4) liquidation analysis also does not simply take the debtor’s theoretically non-exempt property and require that gross amount to be paid to unsecured creditors. The comparison is what unsecured creditors would actually receive in a hypothetical Chapter 7. That means accounting for the hypothetical Chapter 7 trustee’s commission and the costs and expenses that would accompany liquidation. Those expenses can substantially reduce—and sometimes eliminate—the amount that would otherwise appear to be available for unsecured creditors.
Consequently, there is nothing inherently improper about a Chapter 13 in which the debtor pays the filing fee, trustee commission and attorney fees while general unsecured creditors receive nothing. If those same creditors would receive nothing in Chapter 7 and the debtor otherwise satisfies Chapter 13’s requirements, the absence of a dividend does not by itself make Chapter 13 abusive.
And focusing solely on attorney fees overlooks other protections Chapter 13 gives a debtor that Chapter 7 does not.
One of the most significant is the ability to convert later to Chapter 7. Under 11 U.S.C. § 348(d), claims arising after the Chapter 13 petition but before conversion are generally treated, with specified exceptions, as though they arose immediately before the original bankruptcy filing. As a practical matter, that can allow a debtor who suffers new financial calamities during the Chapter 13—new medical bills being the obvious example—to convert and potentially discharge debts that would have been wholly outside a Chapter 7 filed on the original petition date.
That is a potentially enormous benefit. A debtor who files Chapter 7 today generally gets one snapshot of the debtor’s financial problems. A debtor who begins in Chapter 13 may have a longer runway during which subsequent financial problems can, upon conversion, become part of the ultimate Chapter 7 discharge.
Chapter 13 also preserves something Chapter 7 largely does not: the debtor’s ability to get out.
Subject to the statutory qualifications and case-law limitations, 11 U.S.C. § 1307(b) gives a Chapter 13 debtor a powerful right of voluntary dismissal. Chapter 7 ordinarily provides no comparable unilateral escape hatch. Once a debtor files Chapter 7 and a trustee discovers a valuable non-exempt asset, the debtor generally cannot simply announce that bankruptcy was a bad idea and demand the case back.
A Chapter 13 debtor encountering an unexpected problem may have options: amend the plan, modify the plan, convert to Chapter 7 or seek voluntary dismissal. Those alternatives provide flexibility that a debtor who immediately files Chapter 7 may surrender.
None of this means every debtor who cannot afford an upfront Chapter 7 fee should be placed in Chapter 13. Chapter 13 lasts longer, requires plan payments, imposes additional obligations and creates its own risks. Chapter choice must be based upon the debtor’s circumstances rather than the lawyer’s compensation.
But it does mean that Brown and the broader debate over “fee-only” Chapter 13 cases should not start from the assumption that Chapter 7 is substantive bankruptcy relief while a zero-percent Chapter 13 is merely an expensive financing device for attorney fees.
Both can provide a debtor with a discharge while paying general unsecured creditors nothing. Chapter 13 may additionally offer broader budgeting deductions, recognition of the actual costs of a hypothetical Chapter 7 liquidation, the possibility of discharging qualifying postpetition debts following conversion, and the considerable strategic protection of voluntary dismissal.
For some debtors, then, Chapter 13 is not simply the poor person’s Chapter 7.
It can be the more flexible Chapter 7—with the attorney fee paid over time.
Harris’s Proposed Chapter 7 Subchapter VI
Harris proposes something deliberately narrower than sweeping proposals to replace the existing consumer bankruptcy system.
Her model is Subchapter V.
Congress recognized that traditional Chapter 11 was too expensive and cumbersome for many small businesses, so rather than entirely rewriting business bankruptcy, it created a simplified Subchapter V. Harris proposes doing essentially the same thing for the poorest consumer debtors.
Her proposed Chapter 7, Subchapter VI would apply to debtors below specified income and debt thresholds. She does not attempt to set the final numbers, but points to Professor Chrystin Ondersma’s earlier suggestion of a fast-track process for debtors at or below the poverty line with less than $5,000 of debt as an example. Harris would dispense with the Means Test for qualifying debtors and instead allow them simply to disclose income and expenses and proceed through a simplified Chapter 7.
The new subchapter would simplify forms, deadlines and procedures. Harris also contemplates assistance from court or trustee personnel, or volunteer attorneys receiving CLE credit, to help debtors understand forms and basic bankruptcy concepts.
She would also attack smaller costs. Credit counseling and debtor education fees would be automatically waived for qualifying debtors, or the government could provide the required courses itself.
Those are sensible ideas.
But “Eliminate the Need to Obtain a Lawyer” Is Where I Part Company
Harris describes the central cost-saving mechanism quite candidly: “The way to achieve the goal of reducing legal fees is simple––eliminate the need to obtain a lawyer.”
There is a substantial difference between making bankruptcy simple enough that some debtors can safely proceed without attorneys and constructing access to justice around the assumption that poor debtors should receive less legal representation.
The attorney is not merely there because bankruptcy forms are confusing.
Consumer bankruptcy attorneys identify exemptions, determine whether property is actually at risk, analyze liens, evaluate transfers and preferences, deal with tax debts, recognize dischargeability problems, protect co-debtors, address mortgage servicing errors, determine whether repossessed property can be recovered, identify consumer protection claims, evaluate student loans and decide whether bankruptcy—or Chapter 7 in particular—is even the right choice.
Sometimes the most valuable advice a bankruptcy attorney gives is: Do not file bankruptcy.
A simplified form cannot provide that advice.
Everyone Else Will Still Have a Lawyer
More fundamentally, simplifying bankruptcy does not transform it from an adversarial legal system into an administrative benefits program.
Creditors will still have lawyers. Trustees will still have lawyers. The United States Trustee or Bankruptcy Administrator will have lawyers.
Mortgage companies and servicers routinely appear through sophisticated bankruptcy counsel. Automobile lenders have counsel. Credit-card companies and debt buyers have counsel. Student-loan creditors have counsel. Chapter 7 trustees are themselves experienced bankruptcy lawyers in many districts and, when litigation becomes necessary, can retain separate counsel at estate expense.
Against all of that, the policy response should not be: the poorest participant is the one person who should go without a lawyer.
The imbalance becomes particularly troubling because many bankruptcy problems are not obvious on the petition date.
A debtor may believe a transfer to a family member was harmless until a trustee raises an avoidance claim. A debtor may believe the house is fully exempt until a valuation dispute appears. A debtor may not understand that an inherited interest, tax refund, lawsuit, business interest or expected payment is property of the estate. A secured creditor may seek stay relief. Someone may file an objection to discharge or dischargeability. A trustee may demand turnover of property the debtor assumed was protected.
By then, the debtor who was encouraged to navigate bankruptcy alone suddenly needs a lawyer.
And finding counsel only after the problem has arisen can be exponentially more expensive than having competent counsel from the beginning.
The lawyer is no longer reviewing schedules and preparing a routine Chapter 7. The lawyer may instead be defending a contested exemption, responding to a turnover demand, unwinding an incorrect disclosure, negotiating with a trustee, defending a Rule 2004 examination or adversary proceeding, or attempting to prevent the loss of a house, vehicle, tax refund or discharge.
Worse, those problems arrive with deadlines.
Bankruptcy litigation does not wait while a frightened pro se debtor shops for an affordable lawyer. Objection periods expire. Discovery is due. Hearings are scheduled. Responses to motions may be required within days. Missing the wrong deadline can transform a manageable problem into a potentially catastrophic one.
That is an odd version of access to justice: save a debtor $1,500 at the beginning by encouraging self-representation, only to leave that person searching desperately for several thousand dollars in litigation fees when something goes wrong.
Preventive legal representation is almost always cheaper than emergency legal rescue.
Trustees Should Not Become Debtors’ Lawyers Either
Harris floats the possibility that a separate Subchapter VI trustee might help debtors understand the process while remaining neutral.
That creates its own difficulties.
A Chapter 7 trustee is not the debtor’s advocate. The trustee represents the bankruptcy estate and has statutory duties that can place the trustee directly opposite the debtor—including investigating assets, pursuing avoidance actions, seeking turnover and objecting to exemptions or discharge where appropriate.
It is therefore particularly awkward to suggest that the trustee might substitute for debtor’s counsel.
There is nothing wrong with trustees explaining procedure. Many already do. But there is an unavoidable line between neutral procedural assistance and individualized legal advice. The moment the debtor’s interests and the estate’s interests diverge, the problem becomes obvious.
The trustee has a lawyer. The debtor should too.
Another Possible Solution: Proposed 11 U.S.C. § 708
Harris actually recognizes an alternative that deserves considerably more attention: change the rules governing attorney compensation rather than remove attorneys from the system.
That is also the purpose behind the National Bankruptcy Conference’s proposal for a new 11 U.S.C. § 708, which seeks to address the longstanding Chapter 7 attorney-fee problem. The proposal responds directly to the reality that many people cannot afford Chapter 7 because current law effectively requires their attorney fees to be paid upfront.
Under current law, including Lamie v. United States Trustee and the discharge of unpaid prepetition attorney fees, Chapter 7 counsel generally must collect fees before filing. For the debtor who needs the automatic stay today, telling her to save money for several months so she can afford bankruptcy rather misses the point.
Proposed § 708 would legitimize postpetition fee arrangements under court supervision, providing a statutory alternative to some of the uncertain workarounds that have developed, including bifurcated engagements, third-party financing and factoring arrangements.
I have reservations, however, about treating § 708 as a universal answer.
Bankruptcy remains intensely local. Exemptions, wage garnishment and creditor remedies differ dramatically from state to state. In North Carolina, for example, a debtor may need Chapter 13 not because Chapter 7 attorney fees are unaffordable but because appreciation in a home has created non-exempt equity that makes Chapter 7 affirmatively dangerous. In those circumstances, an Attorney Fee Only Chapter 13 may be an entirely appropriate solution rather than an abuse of the system.
Other jurisdictions present different pressures. Where garnishment is readily available, debtors may have an urgent need to file before they could possibly save a traditional Chapter 7 retainer, making regulated bifurcated arrangements or a § 708 mechanism much more important.
The better approach may therefore permit several options: Attorney Fee Only Chapter 13 where appropriate, carefully regulated bifurcated Chapter 7 arrangements, co-signed attorney-fee obligations, assignments of identifiable cash assets and a statutory mechanism such as § 708 for payment after filing.
The important principle is the same:
Fix how lawyers can be paid rather than assuming poor people do not need lawyers.
Consumer Bankruptcy Lawyers Cannot Be the Unfunded Legal-Aid System
There is another economic reality lurking underneath this debate.
Consumer bankruptcy lawyers represent people who, almost by definition, have difficulty paying lawyers.
At the same time, Legal Aid funding and actual bankruptcy representation through civil legal-services organizations have declined in many places. The need has not disappeared. Instead, much of that responsibility has effectively been shifted onto private consumer bankruptcy attorneys without funding or formal acknowledgment.
Compare that with Chapter 11.
Lawyers for debtors, creditors’ committees and secured creditors are routinely compensated at market rates because everyone understands that competent lawyers are necessary in complicated financial proceedings.
Consumer bankruptcy can involve equally complicated statutory, procedural and financial questions, but debtor’s counsel is simultaneously expected to provide those services to the financially distressed while bearing the risk of nonpayment. Meanwhile, the banks, servicers, debt buyers and government agencies on the other side remain represented by well-funded counsel.
A sustainable consumer bankruptcy bar is therefore itself an access-to-justice issue.
If experienced attorneys leave consumer practice because the economics become impossible—and newer attorneys decide never to enter it—simplifying a few forms will not fill the gap.
When competent consumer lawyers cease to be available, access to justice does not improve. It deteriorates.
Simplification Is Still Worth Pursuing
None of this detracts from Harris’s strongest point.
Bankruptcy has become too complicated.
The official instructions for individual bankruptcy forms themselves run dozens of pages. Harris correctly recognizes the absurdity of expecting financially distressed people—often facing garnishment, foreclosure, repossession or utility termination—to master a specialized federal statutory scheme merely to obtain the relief Congress supposedly intended them to receive.
There is plenty that could be simplified without eliminating lawyers: shorter forms for genuinely simple cases, automatic fee waivers, elimination of unnecessary credit counseling expenses, fewer BAPCPA certifications, simplified Means Test rules and procedures proportionate to the actual complexity of the debtor’s financial affairs.
A debtor with $4,000 of credit-card debt, no real estate, an old car and income below the poverty line should not require the same procedural machinery as a debtor with multiple businesses, investment properties and complicated tax liabilities.
Harris is also politically pragmatic. Rather than rewriting all consumer bankruptcy law, she proposes a limited experiment modeled on Congress’s creation of Subchapter V. The existing Chapters 7 and 13 would remain intact.
That may make reform substantially more achievable.
Do Not Design Consumer Bankruptcy Around the Imaginary Abusive Debtor
Harris also pushes back against the premise underlying much of BAPCPA—that consumer bankruptcy must primarily be designed around preventing abuse.
She notes that bankruptcy fraud is comparatively uncommon and argues that low-income debtors eligible for her Subchapter VI are particularly unlikely to possess substantial assets they could conceal. More fundamentally, no statutory system can eliminate every dishonest participant, and honest debtors should not be forced to bear excessive costs merely because a few people might cheat.
That point deserves emphasis.
Twenty-one years after BAPCPA, consumer bankruptcy still carries layers of “abuse prevention” requirements imposed on hundreds of thousands of ordinary debtors whose financial histories generally involve much more mundane explanations: job losses, medical expenses, divorce, failed businesses, unaffordable cars, credit cards and simply not enough income.
Designing the entire system around the hypothetical dishonest debtor inevitably makes bankruptcy more expensive for the honest one.
A Diamond Worth Polishing
Harris concludes that consumer bankruptcy remains a “gem” because of its extraordinary ability to provide desperately needed relief, but a diamond in the rough because complexity prevents some of the people who most need that relief from obtaining it.
That is an apt description.
Her proposed Subchapter VI deserves serious consideration, particularly its focus on proportionality. A $5,000 no-asset consumer bankruptcy should not require procedures approaching those imposed on cases involving hundreds of thousands—or millions—of dollars.
But I would polish this diamond somewhat differently.
Simplify the bankruptcy system, absolutely. Reduce filing costs. Eliminate pointless procedural hurdles. Make the Means Test less absurd. Automatically waive fees for genuinely indigent debtors. And through § 708 or another carefully designed mechanism, find a workable way for Chapter 7 attorney fees to be paid over time.
But do not confuse access to justice with access to forms.
And do not forget the basic asymmetry of the system: creditors will have lawyers, trustees will have lawyers, and the government will have lawyers.
The answer to the inability of poor debtors to afford counsel should not be to decide that they are the participants who can do without one.
For many debtors, particularly the most economically vulnerable, a competent consumer bankruptcy attorney is not another unnecessary transaction cost standing between the debtor and a discharge.
The attorney is preventive protection against a seemingly routine bankruptcy becoming an expensive—or even catastrophic—problem.
More importantly, the attorney is often the person who ensures the debtor actually receives the fresh start that bankruptcy promised in the first place.
To read a copy of the transcript, please see:
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