Available at SSRN: https://ssrn.com/abstract=7413418 or http://dx.doi.org/10.2139/ssrn.7413418
Abstract:
Large-case chapter 11 practice has become an increasingly complex endeavor. In recent years especially, bankruptcy has become a popular mechanism for tackling larger problems with significant societal ramifications. These trends have led to various concerns about the bankruptcy process. For example, scholars and policymakers have worried about bad faith filings, threats to due process, abuse of the system, and the voices of smaller creditors being silenced.
To rectify these problems, scholars and practitioners alike have frequently proposed appointing additional actors in a bankruptcy case to serve one or more “guardian” roles. A “guardian” provides oversight, advocacy, and/or expertise to the bankruptcy case. Although guardians may be used in any number of ways in a bankruptcy case, they primarily address three concerns with large-case chapter 11 practice: the concern that the bankruptcy process is being “captured” by one or more powerful players, the concern that some interests are not adequately represented, and the concern that bankruptcy has become overly complex and technical.
Numerous actors already serve a guardian role in bankruptcy. Thus, are there truly “guardian gaps” in complex chapter 11 cases, and if so, how should those gaps be filled? This Article seeks to resolve these questions through an examination of bankruptcy’s existing guardians. By studying who fills a guardian role in bankruptcy and how and why they can fall short of expectations, this Article reveals bankruptcy’s guardian gaps and offers a novel proposal to fill them.
Summary:
In Bankruptcy's Guardian Gaps, Professor Laura N. Coordes of Arizona State University's Sandra Day O'Connor College of Law examines whether the existing oversight mechanisms in large Chapter 11 bankruptcies are adequate to protect the integrity of the bankruptcy system, particularly as increasingly complex cases are used to address matters extending well beyond ordinary financial reorganization.
Coordes identifies three principal reasons for introducing additional bankruptcy "guardians":
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Institutional capture: The bankruptcy process may be dominated by powerful parties, including debtors, their attorneys, and influential creditors, whose interests may not align with those of other stakeholders or the integrity of the bankruptcy system.
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Inadequate representation: Certain parties, particularly smaller creditors, mass tort victims, future claimants, and others with limited resources, may be effectively excluded from negotiations or lack meaningful opportunities to protect their interests.
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Technical complexity: Modern bankruptcies increasingly present specialized financial, regulatory, scientific, and other questions beyond the expertise or practical capacity of judges and existing bankruptcy participants.
A guardian, as Coordes uses the term, may therefore serve as an independent overseer, an advocate for otherwise unrepresented interests, or a technical expert.
The Existing Guardians and Their Limitations
Coordes traces the historical development of bankruptcy oversight, including the recurring tension between advocates for greater supervision and bankruptcy professionals who resist additional oversight on grounds of expense, delay, and efficiency.
The Bankruptcy Code ultimately established a system relying principally on bankruptcy judges and the United States Trustee Program, supplemented in appropriate cases by case trustees, creditors' committees, examiners, mediators, and other participants.
Coordes concludes that these mechanisms, while valuable, do not consistently address all the problems arising in complex Chapter 11 cases.
Bankruptcy judges must maintain impartiality, cannot independently investigate every issue, and may lack specialized expertise. United States Trustees have broad administrative and oversight responsibilities but also face limitations of resources, institutional priorities, and statutory authority.
Other guardians, including examiners, committees, and court-appointed neutrals, are appointed inconsistently, may have narrowly defined authority, and can encounter opposition from the parties they are expected to oversee.
The result is that even a system containing numerous safeguards may have significant gaps between the oversight needed and the oversight actually provided.
Special Masters and Bankruptcy Rule 9031
One potential solution is greater use of special masters, who are commonly employed in complex federal litigation to investigate particular issues, review evidence, supervise compliance, and make recommendations to the court.
However, Federal Rule of Bankruptcy Procedure 9031 prohibits the appointment of special masters in bankruptcy cases, notwithstanding the availability of such appointments in ordinary federal civil litigation under Rule 53.
Coordes reviews proposals to repeal or amend this prohibition, observing that its original justification is uncertain and that the growing complexity of bankruptcy cases strengthens the argument for permitting bankruptcy judges to obtain specialized assistance.
The article does not itself endorse unrestricted use of special masters or take a definitive position on repealing Rule 9031. Rather, it treats their potential appointment as one of several ways additional oversight might be provided.
Coordes's Proposal: A Guardian for Complex Chapter 11 Cases
Instead of requiring additional oversight in every bankruptcy, Coordes proposes a two-step statutory reform.
First, Congress should establish a definition of a "complex Chapter 11 case," recognizing that complexity cannot be measured solely by the debtor's size or total liabilities. The definition should consider other features that make a bankruptcy particularly challenging.
Second, bankruptcy cases meeting that definition should receive a mandatory guardian appointed at the outset of the case, somewhat analogous to the Subchapter V trustee.
That guardian would have a flexible role, potentially including facilitating discovery, sharing information among stakeholders, addressing issues of inadequate representation, and appearing and being heard on matters specified in the appointment order.
Appointment at the beginning of the case is particularly important because significant agreements may already have been negotiated before the bankruptcy petition is filed, leaving smaller or less sophisticated parties with little meaningful influence over the proceeding.
Coordes recognizes that compensation, independence, qualifications, and appointment procedures would require careful consideration. She discusses estate-funded compensation and appointment systems that would reduce favoritism or dependence upon particular judges or repeat participants.
The essential proposal is to make additional oversight a regular feature of cases where existing guardians are predictably inadequate, rather than relying on ad hoc appointments after problems have already developed.
Coordes closes by emphasizing the importance of periodically reassessing bankruptcy's existing safeguards as bankruptcy practice evolves.
Commentary: Consumer Bankruptcy Has Guardian Gaps Too
While Professor Coordes focuses on complex Chapter 11 proceedings, her analysis raises an equally important question:
Who is guarding the integrity of the consumer bankruptcy system against creditor misconduct?
Consumer bankruptcy cases are rarely as individually large or prominent as mass tort Chapter 11 proceedings. Nonetheless, many involve the same problems of institutional capture, inadequate representation, and technical complexity identified by Coordes.
Indeed, with appropriate substitutions, her three justifications for additional guardians apply remarkably well to Chapters 7 and 13:
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Capture by powerful creditors and their attorneys, particularly repeat institutional creditors, mortgage servicers, debt purchasers, and collection firms.
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Inadequate representation of debtors, especially where individual attorneys cannot economically investigate systemic problems, or where debtors are unrepresented or lack the resources to challenge creditor misconduct.
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Increasingly technical issues, including mortgage servicing, escrow accounting, loan modifications, student loans, claims documentation, electronic servicing systems, and the interaction between bankruptcy and other consumer protection laws.
There is, however, an important difference.
In large Chapter 11 cases, the concern often centers on powerful debtors and their professionals using bankruptcy to disadvantage less powerful creditors.
In consumer bankruptcy, the more typical concern is the reverse: powerful institutional creditors, together with sophisticated servicing and collection systems, may enjoy substantial advantages over individual debtors.
These creditors participate in thousands of bankruptcy cases, often across multiple judicial districts, and can develop extensive institutional knowledge about bankruptcy procedures, trustees, local practices, and judges.
Individual consumer debtors generally participate in bankruptcy only once, or perhaps a few times, during their lives.
That asymmetry alone suggests a need to examine whether consumer bankruptcy has guardian gaps of its own.
The United States Trustee and Bankruptcy Administrator: Who Watches the Creditors?
The United States Trustee Program (USTP), and in North Carolina and Alabama the Bankruptcy Administrator (BA) Program, already provide oversight of bankruptcy proceedings.
But there is a significant imbalance between the explicit duties relating to debtor conduct and the comparatively less defined responsibility to investigate creditor misconduct.
The USTP and BAs routinely examine debtor eligibility, schedules, statements of financial affairs, means tests, potential concealment of assets, improper exemptions, and potential abuses of the bankruptcy process.
The USTP certainly has broad supervisory authority under 28 U.S.C. § 586, and neither that statute nor the Bankruptcy Code categorically prevents intervention when creditors engage in misconduct.
Indeed, the USTP has undertaken significant enforcement efforts involving creditor conduct, including mortgage servicing violations.
Nevertheless, the statutory and institutional emphasis remains principally on bankruptcy administration and debtor compliance, rather than comprehensive regulation of creditor behavior.
There is no comparably explicit, systematic obligation for the USTP or BAs to investigate whether mortgage servicers are misapplying payments across hundreds of Chapter 13 cases, whether debt purchasers are routinely submitting defective claims, or whether lenders are improperly assessing postpetition fees.
This is not necessarily criticism of the USTP or Bankruptcy Administrators. Rather, it raises the institutional question of whether a system designed primarily to administer bankruptcies can also adequately regulate the conduct of the sophisticated creditors participating in those bankruptcies.
The absence of an express prohibition against creditor oversight is not the same as an affirmative obligation to conduct that oversight.
Coordes's analysis suggests that the critical inquiry is not simply whether someone has theoretical authority to intervene, but whether any institution actually has the responsibility, resources, expertise, and incentives to do so.
Chapter 13 Trustees: Guardians, But Not Necessarily of Systemic Consumer Rights
Chapter 13 trustees are perhaps the strongest candidates among existing bankruptcy actors to serve a consumer guardian function.
Many excellent Chapter 13 trustees actively review creditor claims, investigate mortgage accounting problems, challenge improper fees, and seek to ensure that creditors comply with the requirements of confirmed plans.
Some have developed substantial expertise in detecting servicing irregularities and have taken important steps to protect debtors and maintain the integrity of Chapter 13 administration.
However, this activity is neither universal nor necessarily understood as an affirmative statutory obligation to investigate creditor misconduct beyond its consequences for the individual estate.
Indeed, some trustees appear to take positions that favor creditors, whether because of their interpretations of the Bankruptcy Code, their administrative priorities, or their perceptions of their duties.
The relevant statutory language illustrates the problem.
Under 11 U.S.C. § 1302(b)(1), a Chapter 13 trustee must perform several duties of a Chapter 7 trustee, including those contained in § 704(a)(5).
That provision requires a trustee to:
"if a purpose would be served, examine proofs of claims and object to the allowance of any claim that is improper."
The critical qualification is "if a purpose would be served."
This language gives trustees substantial discretion to decide whether investigating or objecting to a particular claim is worthwhile.
In many circumstances, a trustee may reasonably conclude that an objection would not produce meaningful additional distributions, would impose disproportionate administrative costs, or would not materially benefit the estate.
For example, where the debtor proposes to pay little or nothing to unsecured creditors, the trustee may see no practical purpose in challenging a questionable unsecured claim.
Yet that same claim could be one of hundreds or thousands submitted by a debt purchaser using the same deficient documentation or questionable collection practices.
An objection in one case might recover only a few hundred dollars—or might have no immediate economic effect at all—but identifying the broader pattern could be enormously valuable to debtors and the bankruptcy system collectively.
Similarly, a Chapter 13 trustee may have little financial incentive to investigate whether a mortgage servicer has improperly applied payments if the immediate consequences will be borne by the debtor after discharge rather than by creditors receiving distributions under the plan. This is exacerbated by what appears to be an opposition at the USTP/BA level to Chapter 13 Trustees seeking compensation from creditors under various statutes that provide for fee shifting.
The economic benefit to an individual bankruptcy estate is not necessarily the same as the benefit to the bankruptcy system of correcting systemic creditor misconduct.
This creates precisely the sort of guardian gap that Coordes identifies.
Chapter 13 trustees can and frequently do act as effective guardians, but neither the structure of their compensation nor the language of § 704(a)(5) necessarily encourages them to undertake investigations whose benefits extend beyond their particular caseloads.
A related consideration is that Chapter 13 trustees are themselves repeat participants in the bankruptcy system. Their offices must routinely interact with the same mortgage servicers, creditors, and collection firms.
Those working relationships can facilitate cooperation and efficient administration. They may also create institutional pressures against aggressively pursuing certain forms of misconduct.
The answer is not necessarily to remove creditor oversight from Chapter 13 trustees, but to recognize that they should not be expected to serve as the sole guardians of creditor compliance.
Mortgage Servicing: A Particularly Clear Example of a Guardian Gap
Mortgage servicing in Chapter 13 may provide the most compelling example of the need for independent technical oversight.
The financial and legal issues involved can be extraordinarily complex, including:
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Misapplication of ongoing mortgage payments and prepetition arrearage payments.
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Improper assessment or capitalization of fees and charges.
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Escrow accounting errors, including deficiencies caused by a servicer's own payment allocation practices.
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Failure to provide accurate periodic mortgage statements.
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Improper reporting of payment defaults or amounts due under a confirmed plan.
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Errors arising from loan modifications, payment deferrals, and COVID-era forbearances.
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Improper demands for substantial additional payments after Chapter 13 discharge.
These issues involve the interaction of the Bankruptcy Code, Federal Rule of Bankruptcy Procedure 3002.1, RESPA, Regulation X, TILA, Regulation Z, and often specialized mortgage servicing software and accounting systems.
For example, 12 C.F.R. § 1026.41(e)(5) and (f) establish requirements and exceptions for periodic mortgage statements to borrowers in bankruptcy. Rule 3002.1 separately provides mechanisms for disclosing and resolving certain postpetition mortgage payment changes, fees, and final cure disputes.
Yet compliance is generally examined in the context of individual cases and particular disputes.
Even experienced consumer bankruptcy attorneys may require substantial assistance from forensic mortgage auditors to identify the source of improper balances.
The cost of those audits can be disproportionate to the amount immediately at issue, particularly where establishing the violation requires a review of years of payment histories, suspense accounts, escrow analyses, and loan modification documents.
More importantly, an individual debtor's attorney may establish that a particular servicer made an error without having the information or resources necessary to determine whether the same error is occurring in hundreds of other cases.
This is another distinction between individual representation and systemic guardianship.
A debtor's attorney has an obligation to protect that debtor's interests. The attorney does not necessarily have the resources, authority, or client authorization to conduct a broader investigation for the benefit of unrelated debtors.
Special Masters for Mortgage Servicing and Loan Modification Programs
One potential solution would be to permit bankruptcy courts to appoint special masters with expertise in mortgage servicing, accounting, and consumer financial regulation.
Such an appointment need not involve general oversight of every issue in a bankruptcy case.
Instead, a special master could be given clearly delineated authority to review particular problems, including mortgage servicers' compliance with confirmed plans, Rule 3002.1, and applicable nonbankruptcy servicing requirements.
A special master might be particularly useful when several cases involving the same servicer reveal similar issues, suggesting that the problems may be systemic rather than isolated.
The special master could review servicing records, identify recurring irregularities, facilitate production of relevant information, provide technical findings, and recommend corrective action to the bankruptcy court.
This approach could also be used in mortgage modification programs.
Many bankruptcy courts already employ loan modification management (LMM) programs, frequently involving facilitators or mediators who assist debtors and servicers in negotiating modifications.
Those programs serve important purposes, but a facilitator or mediator generally does not undertake an independent forensic investigation into the servicer's accounting, determine whether a modification calculation is accurate, or examine whether a servicer has systematically failed to comply with program requirements.
A special master with appropriate authority could perform those additional functions.
For example, where a debtor's modification application is rejected because of allegedly unpaid arrearages, an independent reviewer could determine whether the claimed arrears actually exist or resulted from improper payment application.
Similarly, an expert could examine whether servicers consistently calculate trial payments, escrow amounts, or modification terms correctly.
The purpose would not be to replace mediation with another layer of bureaucracy, but to recognize that mediation cannot necessarily resolve a dispute where one party controls all of the relevant financial information and that information may be incorrect.
The difficulties include the current prohibition of traditional special-master appointments under Bankruptcy Rule 9031, as well as questions about statutory authority, compensation, access to information, and the scope of any investigative powers.
Moreover, an appointee functioning as a neutral technical expert should be distinguished from an enforcement advocate. The former assists the court in understanding disputed facts; the latter investigates potential violations and may seek remedies.
Both functions may be valuable, but their roles, procedural safeguards, and sources of authority should be clearly established.
Even if Rule 9031 were amended, bankruptcy courts would need to consider how to compensate such experts without imposing costs that consumer debtors could not afford.
A model allowing one expert to review similar servicing problems across multiple cases, potentially across several districts, might be considerably more economical than requiring individual expert testimony in each case.
The CFPB: A Potential Institutional Guardian for Consumer Bankruptcy
Perhaps the more comprehensive solution would be to expand the authority and responsibilities of the Consumer Financial Protection Bureau (CFPB) to include express oversight of creditor conduct within the consumer bankruptcy system.
The CFPB already possesses expertise in mortgage servicing, consumer lending, debt collection, credit reporting, and federal consumer financial protection laws.
It also has experience examining financial institutions and identifying patterns of misconduct that may not be apparent from individual consumer complaints.
Importantly, this would not require the CFPB to become a bankruptcy trustee or to supervise ordinary case administration.
Rather, Congress could establish a more explicit division of oversight responsibilities:
The United States Trustee Program and Bankruptcy Administrators would remain primarily responsible for debtor compliance and bankruptcy administration, while the CFPB would have an expressly defined mandate to oversee creditor conduct affecting consumer bankruptcy cases.
This would represent a form of institutional bifurcation—a word with which bankruptcy practitioners are already quite comfortable.
Such a division could preserve independence by ensuring that the governmental actor responsible for investigating creditor misconduct is not the same agency principally responsible for overseeing debtors, trustees, and case administration.
It could also avoid expecting Chapter 13 trustees to initiate investigations that extend beyond their statutory responsibilities and individual caseloads.
The CFPB's existing jurisdiction provides a starting point, but a meaningful reform would require Congress to address its authority within bankruptcy proceedings, including the interaction between federal consumer financial protection laws and the Bankruptcy Code.
The CFPB already regulates certain servicing and collection activities that continue during bankruptcy. What is missing is a comprehensive and express mandate to examine creditors' compliance with bankruptcy-specific obligations.
Legislation might authorize the CFPB to investigate recurring problems involving proofs of claim, mortgage payment application, bankruptcy servicing platforms, collection of discharged debts, and other creditor conduct affecting consumer debtors.
It might also establish formal mechanisms for bankruptcy courts, trustees, Bankruptcy Administrators, the USTP, and consumer debtor attorneys to refer patterns of suspected creditor misconduct to the CFPB.
For example, if three bankruptcy courts in different districts encounter similar problems involving the same mortgage servicer, the CFPB could investigate the servicer's nationwide practices rather than requiring each debtor to separately establish the same pattern of misconduct.
This would also permit the agency to develop expertise across judicial districts and to distinguish isolated mistakes from systemic failures.
There is a useful historical parallel in Coordes's article.
Prior to the enactment of the modern Bankruptcy Code, the Securities and Exchange Commission played an important oversight role in certain large corporate reorganizations, particularly under Chapter X of the Chandler Act.
The SEC's involvement reflected the recognition that protecting investors could require an agency with specialized expertise and an institutional perspective distinct from that of ordinary bankruptcy participants.
A CFPB role in consumer bankruptcy could serve an analogous function.
Of course, such a proposal must be considered in light of the current political and regulatory environment. Under the Trump administration, the CFPB has experienced substantial reductions in its supervisory and enforcement activities, including the suspension of investigations, termination of enforcement proceedings, and efforts to significantly reduce its workforce. These actions reflect an administration that has expressly favored a narrower federal role in regulating consumer financial services.
Accordingly, while the CFPB may be institutionally well suited to serve as a guardian of creditor compliance in bankruptcy, it is difficult to envision the current administration undertaking meaningful additional oversight or enforcement in this area, even if Congress were to provide express statutory authority. In that respect, expanding the CFPB's responsibilities would be more of a longer-term structural reform than an immediately practical solution.
This illustrates an additional concern that Coordes's analysis raises: a guardian's effectiveness depends not only on its statutory powers and expertise, but also on the willingness of those directing the institution to exercise those powers.
To be durable, any reform should therefore seek to minimize the extent to which creditor oversight depends entirely on the enforcement priorities of a particular administration.
Congress would need to define the CFPB's duties, provide dedicated funding, establish mechanisms for referrals and reporting, and address coordination with the USTP, Bankruptcy Administrators, and bankruptcy courts. An affirmative statutory obligation to investigate specified categories of systemic creditor misconduct could also provide greater continuity than a purely discretionary enforcement program.
Even these safeguards could not guarantee vigorous enforcement under every administration. Nevertheless, they could establish a more durable institutional framework than relying exclusively on individual litigants, varying trustee practices, or discretionary governmental enforcement.
The longer-term objective should be an oversight structure that remains effective regardless of whether a particular administration favors more aggressive or more restrained financial regulation. After all, the integrity of the bankruptcy system, and creditors' obligation to comply with the law, should not depend on which political party controls the executive branch.
The Problem of Scale: Small Cases, Large Consequences
One of the most important differences between complex Chapter 11 and consumer bankruptcy is that the latter's complexity frequently arises not from the size of an individual case, but from the repetition of similar problems across thousands of cases.
A $500 improper charge in one Chapter 13 case might not justify extensive litigation.
The same improper charge imposed in 10,000 cases represents $5 million in potentially improper collections.
A mortgage servicing error that threatens one debtor with foreclosure may be traceable to accounting procedures affecting borrowers nationwide.
An inadequately documented unsecured claim may appear insignificant in a single case while reflecting a much larger defect in a debt purchaser's portfolio.
That is why Coordes's proposal for mandatory guardians in designated complex Chapter 11 cases may require adaptation for consumer bankruptcies.
Rather than appointing a guardian in every Chapter 13 case—which would almost certainly be prohibitively expensive—the better approach may be to designate particular categories of recurring problems, creditors, or servicing practices for enhanced oversight.
A guardian could then be authorized to examine those problems across multiple cases, reducing duplicative costs and permitting investigations whose scope would be impractical for any individual debtor.
This could include referrals by bankruptcy judges, trustees, Bankruptcy Administrators, or debtor attorneys, as well as investigations initiated when recurring problems become apparent through claims data or other publicly available bankruptcy records.
There should also be appropriate procedural safeguards to ensure that findings are not automatically binding on creditors or debtors in unrelated cases without notice and an opportunity to be heard.
The advantage of this model is that it recognizes the reality that systemic creditor misconduct may be economically invisible when viewed one bankruptcy case at a time.
Funding and Independence: Could Small Assessments Support Nationwide Oversight?
Any proposal for additional guardians must confront questions of cost and institutional independence.
Coordes recognizes that bankruptcy professionals have historically resisted additional guardians in part because increased oversight may create expense and delay. Those concerns are particularly important in consumer bankruptcy, where additional administrative expenses may reduce distributions to creditors or increase the burden on debtors.
But funding meaningful oversight may not be nearly as difficult as it initially appears.
For the twelve months ending September 30, 2026, approximately 219,000 Chapter 13 cases were filed nationwide. A $100 assessment per Chapter 13 case would generate approximately $22 million annually at that filing rate, assuming full collection. Even at an 80% collection rate, the assessment would ultimately yield approximately $17.5 million per annual filing cohort.
Rather than increasing filing fees, this assessment could be collected through Chapter 13 plan payments—approximately $1.67 per month over a 60-month plan—and remitted to a national consumer bankruptcy oversight fund. Annual receipts would phase in as successive cohorts of cases began making payments.
Alternatively, creditors could pay a nominal fee for filing proofs of claim, perhaps $1 to $5 per claim, with exemptions for governmental creditors and creditors filing fewer than 100 proofs of claim annually.
Assuming approximately 20 claims per Chapter 13 case, 50 per Chapter 11 case, and no claims in Chapter 7 cases (most being no-asset cases), the roughly 219,000 Chapter 13 and 10,000 Chapter 11 filings annually would produce an estimated 4.9 million proofs of claim.
That would generate approximately $4.9 million annually at $1 per claim, or $24.4 million at $5 per claim, before exemptions. Even if 30% of claims were exempt, a $3 fee would produce approximately $10.3 million annually.
These estimates are necessarily rough, but they demonstrate that relatively modest assessments could fund significant nationwide oversight.
A creditor-funded assessment has the additional virtue of requiring the institutional creditors that regularly use and benefit from the bankruptcy claims process to contribute to protecting its integrity. Legislation should prohibit those creditors from simply adding the fee to their claims against debtors.
The approaches could also be combined. For example, a $100 Chapter 13 assessment collected at 90%, together with a $3 claim fee assessed on 70% of estimated claims, could eventually generate approximately $30 million annually.
Such funding could support regional or national specialists in mortgage servicing, claims review, forensic accounting, student lending, and other areas requiring expertise that individual debtor attorneys and trustees cannot economically develop for each case.
Oversight funded through congressionally authorized assessments could also reduce dependence on particular bankruptcy judges, trustees, or repeat professional appointments.
Of course, any such program would require safeguards concerning appointment procedures, independence, conflicts of interest, compensation, and the proper expenditure of funds.
But the cost of effective bankruptcy oversight might be measured in a few dollars per case or claim, while the cost of leaving systemic creditor misconduct unaddressed could be measured in millions of dollars.
Conclusion: Guardian Gaps Should Not Stop at Chapter 11
Professor Coordes concludes that:
"The time is particularly ripe to assess and address bankruptcy’s guardian gaps."
That observation should apply to consumer bankruptcy no less than to large Chapter 11 reorganizations.
The guardian gaps may actually be less visible in consumer bankruptcy because they are dispersed across hundreds of thousands of comparatively small cases rather than concentrated in a handful of highly publicized corporate bankruptcies.
But the concerns are substantially the same.
Powerful repeat participants may exert disproportionate influence. Individual debtors may lack meaningful opportunities to challenge improper conduct. Highly technical issues may exceed the resources or expertise available in individual cases.
Bankruptcy judges, U.S. Trustees, Bankruptcy Administrators, Chapter 13 trustees, and consumer debtor attorneys all provide important safeguards.
But their duties, authority, resources, and incentives do not always align with the need to identify and correct systemic creditor misconduct.
Additional guardians might take the form of specialized mortgage servicing reviewers, court-appointed experts or special masters where permitted, expanded trustee responsibilities, or independent agency oversight.
The most promising longer-term solution may be an express congressional expansion of the CFPB's authority over creditor conduct in bankruptcy, supplementing rather than displacing the existing bankruptcy oversight structure.
Such a reform could create a meaningful institutional separation between the oversight of debtors and the oversight of creditors, while bringing specialized expertise and nationwide investigative capacity to problems that individual bankruptcy courts and attorneys necessarily encounter only in fragments.
And, as the rough funding estimates suggest, that oversight could be financed through comparatively small assessments on Chapter 13 cases or institutional creditor claims, rather than requiring substantial expenditures from already financially distressed debtors.
The challenge is not simply to identify misconduct after it has harmed an individual debtor, but to develop mechanisms for recognizing and correcting practices before they harm thousands more.
If the bankruptcy system needs guardians to protect less powerful creditors from sophisticated Chapter 11 debtors, it should also consider whether consumer debtors need guardians to protect them from sophisticated institutional creditors.
The complexity of a case should not be measured solely by the amount of money involved. Sometimes the greatest complexity—and the greatest need for oversight—comes from a relatively small abuse repeated thousands of times.
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