Debt’s Grip: Risk and Consumer Bankruptcy provides a thick description of what it means to live in financial precarity in the United States. It draws on data from the Consumer Bankruptcy Project to tell people's stories of financial distress before and in bankruptcy. This piece responds to two reviews of Debt’s Grip published in the same issue of the American Bankruptcy Law Journal by Professors Alexandra Sickler and Ted Janger. This response summarizes important aspects of Debt's Grip and expands on insights in Professors Sickler’s and Janger’s reviews.
In November 2022, the Department of Justice and Department of Education announced sweeping reforms designed to make student loan bankruptcy discharge more accessible to struggling borrowers. Drawing upon an original (hand collected) dataset of more than six hundred adversary proceedings filed during the first year of implementation, this article presents the first empirical analysis of whether these reforms have achieved their goal and bridged the "Student Loan Bankruptcy Gap"-the chasm between those who could benefit from bankruptcy discharge and those who actually pursue it. The results are mixed but suggest the gap, although narrowed, remains wide. On the positive side, success rates have reached 87% in the post-reform period. But on the negative side, filings remain remarkably low. This article evaluates the reforms along four key metrics of success and proposes solutions to make bankruptcy relief more accessible to struggling borrowers.
Parenthood is difficult-especially for women participating in the chapter 13 bankruptcy process. Using a novel dataset comprising 102,952 bankruptcy cases across sixty-four districts, we find that debtors with dependents are not only more likely to choose chapter 13 over the quicker and simpler chapter 7 bankruptcy but are also eight percentage points more likely to have a bankruptcy court dismiss their cases without the discharge of their debt within three years, compared to other individuals in chapter 13 bankruptcy. This effect is persistent even after we control for gender, marital status, financial information (assets, liabilities, income, expenses, etc.), and districtand year-fixed effects. The effect of raising children is particularly acute for women in chapter 13, whose cases are dismissed within three years at a rate that is 10.2 percentage points higher if they have dependents. Further, although joint filers are about 6.7 percentage points less likely to have their cases dismissed, the overall effect of marriage is not statistically significant and does not reduce the negative effect of parental obligations. Overall, this article shows that currently, bankruptcy law inadequately protects children from the impact of bankruptcy. We propose legal changes that might alleviate these disparities.
Over half a dozen cryptocurrency exchanges filed insolvency proceedings in the United States and Canada during 2022. Many of these bankruptcies were the result of systemic and fraudulent activity by bad actors who used ambiguity in the law to avoid regulation and reporting and misrepresented the risks to investors. In many instances, investors who bought and traded cryptocurrency on these failed exchanges have been treated not as owners, and not as secured creditors, but as general unsecured creditors. This article advocates that persons trading on exchanges need to be classified either as owners, or if that is not possible, then as secured creditors, with respect to their individual cryptocurrency. Article 12 of the Uniform Commercial Code adopts control as the method for establishing status as a secured creditor with cryptocurrency as the collateral. This article further proposes that the United States should create a comprehensive national filing system for cryptocurrency. Article 12 should be further amended to recognize that filing system as a method for perfecting security interests in cryptocurrency, to legitimize cryptocurrency, and to uniformly assure investor protections.
In Bartenwerfer v. Buckley, the Supreme Court held that 11 U.S.C. 523(a)(2) barred a spouse who did not commit fraud from discharging a debt that her husband obtained by fraud. This holding raises concerns that coerced debts forced on an abused partner will become nondischargeable. Coerced debt occurs when the abusive partner in a relationship characterized by domestic violence uses fraud or coercion to incur debt in an intimate partner's name. The Supreme Court's holding that " 523(a)(2)(A) turns on how the money was obtained, not who committed fraud to obtain it" is particularly concerning because each coerced debt actually has two victims: the victim whose credit was used to incur the debt and the creditor who provided funds or services. Bartenwerfer thus raises the possibility that creditors could prevent victims of coerced debt from discharging these debts due to the abusive partner's fraud. A close reading of Bartenwerfer, however, reveals crucial limits that may protect spousal victims of coerced debt. In sum, the innocent spouse and the fraudster must have a business relationship that can impute fraud under applicable non-bankruptcy law. This article argues that barring discharge is not mandatory under Bartenwerfer and the precedent it embraced. It also makes the normative case for allowing discharge of coerced debts using data from the first in-depth study of coerced debt.
In 1978 Congress decided that all corporate debtors, of whatever size, would reorganize under a single chapter 11. The new reorganization provision adopted the model of the old chapter XI, with a "debtor in possession" of its own bankruptcy estate. Among other things, this replaced chapter X, which had applied to primarily publicly traded debtors, and required an independent trustee and oversight by the U.S. Securities and Exchange Commission. But in recent years, Congress has changed direction yet again and abandoned the single chapter model to provide special reorganization provisions for small businesses. In this context, and the reality of an increasingly rough and tumble chapter 11 notable for its "creditor-oncreditor violence," I suggest it might be time to return to something like old chapter X. Large corporate debtors might be more efficiently reorganized under the oversight of an independent, neutral party.
Although federal bankruptcy law, epitomized by chapter 11, has a pro-debtor-or at least, anti-liquidation-bias, no scholarship analyzes whether that bias creates net value or merely results in a zero-sum game that redistributes value from creditors to debtors. This article shows that the bias is due more to accidents of history, path dependence, and self-interested lobbying than to any reasoned analysis of value creation. The bias also is inconsistent with many foreign insolvency laws. The article analyzes whether bankruptcy law should have such a pro-debtor bias. An empirical analysis of that question is not generally feasible because debtor and creditor costs and benefits in bankruptcy cannot be accurately quantified and compared. The article therefore engages in a second-best methodology: it builds on the pro-debtor shareholder-primacy model of corporate governance, which is widely viewed as maximizing value, by stressing that model under the circumstances of bankruptcy. This reveals two critical differences. First, creditors become the primary residual claimants of the firm, whereas shareholders are relegated to secondary residual claimant status. That changes the identity of the beneficiary of the "shareholder" primacy model, whose goal is to favor the firm's primary residual claimants. Second, the covenants that normally protect creditors become unenforceable in bankruptcy, suggesting the need for additional creditor protection. Utilizing these differences, the article proposes and assesses a "creditor-primacy" governance model for debtors in bankruptcy. It also examines how such a model could be applied to maximize bankruptcy value by increasing creditor recovery without unnecessarily jeopardizing shareholder return. The article recommends, for example, a threshold viability test that would require debtors that are unlikely to successfully reorganize, and therefore likely ultimately to liquidate, to be liquidated at the outset of a chapter 11 case. That test would save the considerable expenses of proceeding through bankruptcy, which can severely reduce creditor recovery. Such a test also should reduce agency costs and moral hazard. Furthermore, it should help to avoid the sunk-cost fallacy that leads to a disproportionately high number of supposedly reorganized debtors having to subsequently refile chapter 11 cases.
One in eleven Americans have filed bankruptcy at some point during their lives. Based on the number ofconsumer bankruptcy cases initiated during the past several decades, about one million individuals will file every year. This makes bankruptcy courts the leading federal courts with which people have contact. Embedded in peoples' cases are a host oflegal issues that do not directly implicate bankruptcy law, such as the interpretation of states'exemptions laws and Article 9 of the Uniform Commercial Code, the avoidance of liens, and defenses to contract claims. Consumer bankruptcy law, via its process, is intertwined with the broader development oflaws and the larger United States legal system. In raising these legal issues, people may want to explain the broader circumstances surrounding the claims, their need to file bankruptcy, or why they are asking for particular relief.Procedurally, bankruptcy courts can offer people an occasion to speak about their financial journeys. Debtors similarly may want to tell their stories to bankruptcy attorneys, and attorneys likely will be called upon to counsel people about ifandhow to pose legal issues and background stories during their cases. By highlighting the range ofnon-bankruptcy law issues that may be raised in consumer bankruptcy cases, this Essay affirms that bankruptcy can continue to offer effective solutions for peoples' financiallegal problems that theymaynothave the resources to handle elsewhere. It also contends that a valuable role of bankruptcy attorneys, trustees, and judges is to identify and consider these non- bankruptcy law issues, as well as peoples'potential desire to have a voice, and that doing so should be woven into the expected structure ofa consumer bankruptcy proceeding. Indeed, this will enhance litigants'and the publics' perception of the bankruptcy system. Overall, this Essay draws out how the broader values of the United States legal system can be supported by the consumer bankruptcy system.
Over the course of a few days, Judge Christopher M. Klein agreed to sit down, figuratively speaking, with Professor Nancy Rapoport and answer a few questions about how he approaches his job as a bankruptcy judge. By way of background, Judge Klein was appointed to the bench in 1998 as a 1988 United States Bankruptcy Judge for the Eastern District of California. He was a member of the Bankruptcy Appellate Panel of the Ninth Circuit from 1998 through August 2008, serving as Chief Judge from 2007 to 2008. Prior to 1988, after service in the Marine Corps as an artillery officer in Vietnam and judge advocate, Judge Klein was a trial attorney in the United States Department of Justice; in private practice with Cleary, Gottlieb, Steen & Hamilton; and deputy general counsel-litigation of the National Railroad Passenger Corporation. During his time on the bankruptcy bench, Judge Klein has presided over thousands of bankruptcy cases-both individual and business-and interacted with countless debtors, creditors, and professionals. He also was a member of the Advisory Committee on the Federal Rules of Bankruptcy Procedure and the Advisory Committee on the Federal Rules of Evidence; he has spoken on many panels and participated in likely as many roundtables; and he has written articles on bankruptcy law and practice. His vast experience, including his time as a nonbankruptcy attorney and in public and private practice, offers unique insights and food for thought for the bankruptcy community.
fChapter 11 has a history as the gold standard for corporate reorganizations. Although still relevant and vibrant, chapter 11 is facing increased competition from revised foreign laws that authorize reorganization tools not available in the United States, and at a cost many think is far less than if the debtor chose chapter 11 as its reorganization regime. The choice between domestic chapter 11 and foreign regimes may not be as stark as it might seem. The United States Bankruptcy Code contains provisions regarding recognition of foreign insolvency proceedings. In particular, chapter 15 ofthe United States Bankruptcy Code directs United States courts to "recognize" qualifying foreign insolvency proceedings. Recognition, in turn, is intended to give local effect to reliefgranted abroad, essentially deputizing United States courts as auxiliaries offoreign courts, empowered to enforce these foreign decrees. This enforcement takes place even ifthe foreign proceeding adversely affects domestic creditors and even if the foreign proceeding employed restructuring methods not generally permitted by United States law. Now that other nations' laws may be more attractive to debtors, a conundrum arises: Should United States courts permit domestic debtors to restructure abroad and then use chapter 15 to enforce that foreign decree in the United States, thus serving the internationalistgoals ofchapter 15? Or should courts insist that domestic entities can only restructure locally, thus privileging the policies behind the remainder of the United States Bankruptcy Code? Although the latter might be the most natural policy to some (why allow local entities to evade local law bygoingabroad?), nothing in the United States Bankruptcy Code either excludes domestic entities from chapter 15 or requires domestic entities to use United States law to reorganize. This article will explore how a United States company could utilize a foreign proceeding and enforce it in the United States in two steps. The first is to file an insolvency proceeding for an affiliate of the debtor which is properly situated in a jurisdiction that offers more favorable insolvencyrelief to a debtor and its affiliates, such as might be the case under United Kingdom, German, or Netherlands law. After confirming that plan, the next step would be for the foreign affiliate to file a chapter 15proceedingin the United States, which would extend the relief obtained abroad to the corporate group.
