The Myth

Once upon a time, a benevolent government passed a law to help poor but honest debtors protect their homes from foreclosure and their encumbered personal property from repossession. The law intervened in the private bargains that the debtors had made with their creditors. It decreed that many of these bargains could be changed, allowing debtors to repay some or all of their debts on timetables and terms that the debtors could feasibly meet. So long as debtors performed according to the conditions of these repayment plans, creditors were forbidden from putting any repayment pressure on their debtors. Judges and fiduciaries were empowered to establish and oversee the compliance of debtors and creditors with these conditions. Should the debtors falter in performance, however, bad things happened to them: Creditors could pursue them under the harsher terms of local laws, or their possessions might be quickly liquidated by the same governmental apparatus that had previously been protecting them as they moved toward successful completion of their three- to five-year journeys of repayment. But the idea was for debtors to be able to complete their plans successfully, then all could live happily ever after: Debtors repaid debts, retained their possessions, and avoided stigma and shame. Creditors received steady if somewhat diminished income streams and saved the costs of foreclosure and repossession. Judges and trustees acquired respect and satisfaction by engaging in work under law that was commercially wise and socially compassionate.

The Reality

That, more or less, is the myth of chapter 13. Reality matches the myth in some respects. Bankruptcy judges and trustees are significant contributors to the public interest. They deserve respect and satisfaction from their efforts in chapter 13. They are, however, laboring under some difficult burdens. This is where reality departs from myth. The legislature, however benevolent it may have been, first created then repeatedly amended a law of debt adjustment that is ambiguous and convoluted.³ Attempting to parse its language has challenged lawyers and judges for more than 60 years and has led to case law that varies widely in jurisdictions across the country.⁴ It is relatively rare that parties in interest have stakes large enough and pockets deep enough to pursue results through several layers of appeal. The Supreme Court has weighed in on several occasions, though one Justice once remarked that the Court's members really knew little about bankruptcy.⁵ The lack of clarity and specificity has led to "local legal culture," becoming the primary cause of consumer debtors' choice of chapter and numerous features of case and estate administration. It is quite clear that a debtor's entrance into chapter 7 or chapter 13 is often due more to the debtor's location or naïve choice of attorney than it is to a close fit between the debtor's financial circumstances and the different benefits of the two chapters.⁶ Differences among local practices across states, judicial districts, divisions within districts and chambers within divisions create a legal/administrative patchwork of bewildering variety that mocks efforts to compare the operations of chapter 13 programs from place to place or to manage a national credit practice. Creditors and their agents complain about diverse and opaque local practices, while trustees complain that creditors are too often inattentive, inaccurate and insensitive to the nuances of local practices.⁷ When trustees are pressed to the wall by creditors complaining that there is no predictability from place to place about how to get their jobs done, trustees have little choice but to point to the idiosyncratic preferences of their judges. The result is a cycle of complaint, with each component laying responsibility off on the others.

The Irony

These disparities are by-and-large not perceived as a problem at the local level. Local legal cultures operate by creating accommodations among judges, trustees and attorneys to allow cases and estates to be administered without undue friction. There is great reluctance to rock the procedural boat that has been floating quietly in the district for years. Whether cases are confirmed at the time of the §341 hearing or not until six months later when the last claims bar date has passed; whether unsecured creditors begin to receive payments after 4 months or 48 months; whether the trustee acts as the conduit for post-petition mortgage payments or debtors make these payments themselves; whether there are bursts of lift-stay activity when cases terminate because of disagreements about the currency of mortgage payments; whether attorneys routinely place debtors into chapter 13 (or chapter 7) because that's the way it's always been done in that district; whether "chapter 20"⁸ is approved routinely or is subject to intense scrutiny; whether the district follows the estate termination, estate preservation or estate transformation approach to property of the estate upon confirmation; whether §707(b) motions are a serious threat in the district, inclining debtors' attorneys to counsel clients to choose chapter 13; whether the chapter 13 trustee and the court actively police compliance with the requirements of §1325 or expects unsecured creditors to take that responsibility; whether debtors frequently move for dismissal or conversion when they have cleared secured arrearages though their plans imply a promise to continue beyond that point—all of these and other practices flower in profusion throughout the country, defended by those who are accustomed to them.

The Problem

The presence of great differences in practice is not necessarily a problem. There may be many ways to rig and tend the sails on a voyage of debt adjustment lasting three to five years. When the destination is well-defined, the means of reaching it may be chosen expediently and checked for effectiveness with accumulated experience. But that is not the chapter 13 reality. The destination, that is the definition of success in the chapter, is partially obscured and unacknowledged and frequently disputed. As a result, there is no rational way to curb the proliferation or evaluate the effectiveness of the many practices established across the country. Without a clear, and ideally simple, definition of success, there is insufficient incentive to develop an empirical foundation for evaluating the effectiveness of different practices. Judges, trustees, regulators and legislators base decisions on unnecessarily limited information and plot their own courses without the benefit of comparable experiences from other jurisdictions.

Measures of Success

Isn't case completion, the debtor's receipt of a chapter 13 discharge, a clear criterion of success? It may be for the fortunate (and relatively rare)⁹ debtor, but in the opinions of some judges, trustees and attorneys who have spoken with me (I have not seen the viewpoints expressed in print), that is not the whole story. Arguments are made that completion is neither necessary nor sufficient for success. It isn't necessary for secured creditors, because the arrearage they are owed may be paid in full before the plan craters. It isn't sufficient for the unsecured creditors, because completed plans may be giving debtors too easy a ride through the disposable-income test. It isn't necessary for some debtors, because they have small enough unsecured debt that, once secured arrearages and priority debt are cleared, they can file for dismissal and take their chances with their unsecured creditors. Debtors' attorneys have little stake in plan completion because they are paid early on, and some will admit that their business depends on repeat filers. The system tends to front-load the standing trustee's costs, with case set-up and confirmation. Once those costs are recouped, the ongoing costs to the trustee are not large, and in any case are eliminated by any form of termination.¹⁰ Judges may not look to plan completion as the goal, but rest contently with the aspiration, modest yet noble, of providing debtors with an opportunity to avoid shame and stigma by making their honorable best efforts at repayment. Plan feasibility thus becomes a matter of hope and trust rather than analysis and predictability. And regulators may view their role as limited to overseeing the financial efficiency and integrity of the standing trustees' operations, without becoming entangled in thorny policy questions of success and failure.

Plan completion is, in any event, a debtor-centered measure of chapter 13 performance. Other results within the chapter might be useful measures of value for both debtors and creditors: homes saved from foreclosure, for example, and autos or other collateral saved from repossession. Assuming that creditors would rather have the continuing income stream than the inventory of foreclosed and repossessed properties, and debtors want to keep their stuff, measures of success in chapter 13 could be derived from counting these events. At present, however, no one seems to keep track of them in the chapter 13 context. Even as simple a measurement as refiling rates, not now tracked anywhere systematically, could be a useful inverse measure of system success that benefits both debtors and creditors.

One possible measure of success that is squarely creditor-oriented is "dollars returned to commerce," which would include returns to unsecured and priority creditors as well as secured creditors.

Pie in the Sky?

No doubt many people with stakes in the operation of chapter 13 can think of other, better measures than the brief list I have included here. Several of the measures (completions/discharges, repaid priority and non-dischargeable debt, dollars returned to commerce), could be easily synthesized from readily available reports already being made by the standing trustees. Others (refiling rates, homes and personal property saved by the debtor) would require synthetic data work not now being done, with essential data sharing between courts, trustees and perhaps debtors themselves. In general, the courts, trustees and U.S. Trustees collect and sift tidal waves of data every year, but data are never further reduced and collected into a national database where essential information could guide reasoned, empirically grounded policy analysis. This is an important missed opportunity in the national consumer bankruptcy system that can and should be remedied.¹¹ This is not pie in the sky. It is sound public administration.

To extend the culinary metaphor, the proof of the pudding would ultimately be the proven effectiveness of some, but not all, of the bewildering variety of practices now used by judge/trustee pairs around the country. This variety could be tested against measures of success and the results made widely known, so that all the parties in interest could agree on what works well and therefore what should be adopted.

The First Step

It would be quite healthy to begin a wide-ranging debate on these matters, whether sponsored by the National Conference of Bankruptcy Judges, the Administrative Office of U.S. Courts and/or the Federal Judicial Center, the Executive Office for U.S. Trustees, the National Association of Chapter 13 Trustees, ABI or any combination of these groups plus others. There really is nothing to lose and quite a lot to gain. Chapter 13 is already a multi-billion dollar business, and recent efforts at legislative changes,¹² should they ever bear their fruit, would swell the filings and cash flow considerably. The game is worth the candle. With success, the reality can become the myth.

Footnotes

¹ I thank Amrane Cohen for very helpful insights and corrections, not all of which are included here. Return to article

² A legendary story concerning an event, with or without a basis in fact, that explains some practice. Random House Dictionary of the English Language, Second Edition Unabridged. Return to article

³ The locus of property post-confirmation is one example in chapter 13. See, e.g. Telfair v. First Union Mortgage, CITE (11th Cir. 2000). Another example that may be influential in determining the choice between chapter 7 and chapter 13 rests in the conflicted readings of 11 U.S.C §521(2) with respect to the disposition of personal property serving as collateral. Young, Gary, "Does the ‘Fourth Option' Exist?," National Law Journal, June 21, 2004, at 15. Return to article

⁴ The complex legal landscape is captured in the five volumes of Judge Keith Lundin's treatise. Return to article

⁵ Lundin, Keith M., Chapter 13 Bankruptcy, 3d Ed. (2000 & Supp. 2002). Return to article

⁶ Sullivan, Teresa A., Warren, Elizabeth, and Westbrook, Jay Lawrence, As We Forgive Our Debtors (1989). Return to article

⁷ Efforts to remedy this problem are underway in a cooperative spirit between trustees and creditors. Mann, Leslie, "Improving Communication Between Mortgage Servicers and Chapter 13 Trustees: Bankruptcy Roundtable Held in Little Rock." NACTT Quarterly, April/May/June 2004 at 21. Return to article

⁸ "Chapter 20" refers to a consumer debtor's filing a chapter 13 case very quickly after receiving a discharge in chapter 7. See Lundin, supra n. 4, at §§4.1, 19.2 and 179.1. Return to article

⁹ So far as we know, the completion rate of all chapter 13 filings, accumulated across the nation, is approximately one-third. The completion rate of confirmed cases is of course higher, but that statistic is not reported directly by the standing trustees, the U.S. Trustees or the courts. There are reasons to believe, but no proof, that completions of confirmed cases vary widely from district to district. Is it okay that the completion rate is one-third of filings? No one knows how to answer that question. Return to article

¹⁰ An exception to this generality is the work associated with lift-stay motions at termination filed by mortgage creditors who argue that debtors are delinquent in post-petition mortgage payments. Return to article

¹¹ Critics who would dismiss the idea of this national database because of risks to individual debtor's privacy rights should know that there is no need for traceable individual identifiers for the research and policy analysis purposes contemplated here. Inclusion of traceable identifiers for regulatory or prosecutorial purposes (identifying abusive repeat filers, tracking fraudulent filers across districts, etc.) could be handled separately if the policy decision in favor of debtor anonymity in the research database were important enough. Return to article

¹² During Fiscal Year 2002, chapter 13 trustees in the districts overseen by the U.S. Trustee Program disbursed almost $4 billion. Return to article