Congress Decided to Punish Consumer Debtors and Failed Entrepreneurs in BAPCPA — This is Terrible Policy!

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Tower of London — A place of punishment (Photo by Marilyn Swanson)

By: Donald L. Swanson

U.S. politicians love to talk about helping poor people—unless, that is, the poor owe money that can’t be repaid.

U.S. politicians also love to talk about helping small businesses and entrepreneurs—unless, that is, the small business or entrepreneur owes money that can’t be repaid.

When uncollectible debts are involved, politicians turn surly and antagonistic.

And since Congress can’t provide for hanging or flogging debtors (the last bankrupt hanged was in England in 1813) or putting them in debtors’ prison anymore (that was outlawed in the U.S. in the 1830s), they decide to go for “abuse prevention” instead.

And so it is that Congress adopted the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, aka “BAPCPA.”

And here’s a quick translation of what that title means: it’s heavy on “abuse prevention” and light on protecting consumers.

Keep in mind two things about the BAPCPA context:

1. Bankruptcy Code. The Bankruptcy Code existed for two-and-a-half decades before BAPCPA’s enactment, during which time Chapter 7 and Chapter 13 worked fine—a consumer usually filed Chapter 7, unless there was a specific need for Chapter 13, like retaining assets that would be lost in a Chapter 7 or paying attorneys fees for the bankruptcy case over time or gaining special discharge benefits [I practiced bankruptcy throughout such time, representing all sides]; and

2. Easy Credit. A hallmark of the current millennium in these United States, so far, is easy consumer credit—“Sign up for this credit card” solicitations are frequent arrivals in consumer mailboxes everywhere, and easy credit for high-price colleges is a virtual constitutional right for every young person who can’t afford an expensive education.

And how does Congress decide to deal with easy credit realities? Well . . . it’s certainly not by putting greater risks on credit card companies or on those who grant unaffordable student loans. No, no, no. It’s by making sure that bankruptcy relief is difficult for consumers and entrepreneurs—if not impossible—and by assuring that unaffordable student loans cannot be discharged. That’s how.

BAPCPA Features Designed to Punish Debtors

Here are some features of BAPCPA designed to punish consumer and entrepreneur debtors.

–Consumers

Chapter 7 is, commonly, a few-months process resulting in a discharge, where debtors retain basic assets through exemptions and reaffirmations.  Congress decided that was too easy. So, it declared in BAPCPA that Chapter 7 is available only to the very-poor. If you have any type of income, debtor, you must file Chapter 13.

Chapter 13 takes the few months involved in a Chapter 7 and adds on five-years of successful payments on a tight budget before the debtor can get a discharge. That makes bankruptcy relief exponentially more difficult — and unlikely — for financially-strapped consumers.

Never mind that Chapter 13 rarely provides meaningful funds to unsecured creditors—BAPCPA’s Chapter 13 requirements simply punish consumers for failing to pay their debts. And that’s a terrible policy—especially for the large numbers of consumers in bankruptcy who are good people down-on-luck.

–Entreprenuers

Even more than insolvent consumers, politicians truly abhor previously-successful entrepreneurs.

Entrepreneurs who get caught in an economic downturn or product obsolescence or an ill-timed expansion or other financial tragedies are in trouble under our bankruptcy laws.  For our politicians, these entrepreneurs are our true villains. After all, they might have a capacity to earn money in the future.

And never mind that these entrepreneurs have probably exhausted their entire savings and pledged their homestead and incurred non-dischargeable tax debts and guaranteed debts they can never hope repay—all to keep their previously successful business afloat as long as possible.

Congress’s antipathy for such people is demonstrated in the following four provisions of BAPCPA:

1. BAPCPA left eligibility debt limits for Chapter 13 so low that owners of failed businesses cannot qualify. Congress declared its bias against failed entrepreneurs, in legislative history on Chapter 13 from 1978, like this:

The Bankruptcy Code “places dollar limitations on . . . who may use chapter 13” to “prevent sole proprietors with large businesses from abusing creditors by avoiding chapter 11.” Such limits “create an irrebuttable presumption that chapter 13 is inappropriate” for entrepreneurs.

There you have it: Congress actually declared that entrepreneurs (unlike consumer debtors) are unworthy of Chapter 13 relief.

2. BAPCPA left in place § 706(b), which allows for involuntary conversion of failed-entrepreneur cases from Chapter 7 to Chapter 11 when the entrepreneur is capable of making money in the future. This provision isn’t a problem in itself, but when combined with other provisions, it can leave failed entrepreneurs without any bankruptcy relief whatever.

3. BAPCPA fiddled with the absolute priority rule in Chapter 11 for individual debtors but, ultimately, left that rule in place. Absolute priority is a plan confirmation rule requiring a debtor to either, (i) pay unsecured creditors in full, or (ii) get their consent to something less. This rule makes Chapter 11 unworkable for the vast majority of individual cases—creditors simply won’t agree to whatever plan is proposed.

4. Under BAPCPA, an individual in Chapter 11 must commit five years of disposable earnings to creditors and can’t get a discharge (absent special circumstances) until those five years of payments are successfully completed—this rule makes Chapter 11 relief (in the rare instance when a plan is confirmed) exceedingly difficult.

Conclusion

So . . . the combination of all the foregoing (and other BAPCPA provisions) is this: insolvent consumers and failed entrepreneurs are frequently excluded from effective bankruptcy relief.

This is terrible policy.

** If you find this article of value, please feel free to share. If you’d like to discuss, let me know.

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