By: Donald L Swanson
Bankruptcy laws in these United States need to be reformed.
For example:
- About a year ago, Congress allowed the $7,500,000 Subchapter V debt limit to expire, reducing that limit to an inflation-adjusted $3,024,725 and leaving many entrepreneurs without viable bankruptcy relief—this needs to be fixed!
- Also about a year ago, the American Bankruptcy Institute’s Subchapter V Task Force issued its Final Report, identifying “Key Recommendations” on statutory changes and best practices—those statutory changes need to be enacted!
- Harsh and punitive rules established by BAPCPA need to be corrected so that:
- honest-but-unfortunate middle class consumers can seek and obtain a fresh start under Chapter 7; and
- the certainty-of-hopelessness test on bankruptcy relief for student loans is replaced by a more-humane test!
Bankruptcy Reform—Elusive
But bankruptcy reform seems elusive and unavailable right now.
A year ago, for example, reports from Capitol Hill were that every single member of the U.S. House of Representatives and 49 of 50 U.S. Senators were all set to extend the $7,500,000 Subchapter V debt limit by an acclimation-type procedure. But there was opposition:
- a single U.S. Senator—just one—stopped the extension from happening.
How can that be?!
And every time I hear a public discussion of this “stopped-by-one-Senator” topic, everyone seems uneasy about naming that Senator publicly (although everyone seems to know the Senator’s identity). It’s like we have a Voldemort of Capitol Hill—i.e., the “One-Who-Must-Not-Be-Named.”
Bankruptcy Reform—Some History
So, I became curious about how bankruptcy reforms have been enacted in the past—i.e., what prodded Congress to pass those laws. I did some limited research, and here’s what I found:
- historically, the impetus behind enactment of a bankruptcy reform comes from one of two sources—either, (i) an extensive study arising from a perceived deficiency in the status quo, or (ii) immediate pressures arising from a financial crisis.
Here are examples.
–Extensive Study
A prime example of an extensive study enactment is the Bankruptcy Code of 1978.
That enactment resulted from extensive studies across a decade-long process—beginning with Congressional hearings in 1968.
–Pressure from a Financial Crisis
A prime example of the financial crisis cause is the first-ever bankruptcy law in these United States: the Federal Bankruptcy Act of 1800. The 1800 Act arose, in part, because prominent people from the American Revolutionary War days (e.g., Robert Morris) got into financial trouble after the War and were rotting in debtors’ prisons. The Act of 1800 got them discharged from debtors’ prisons, which relieved the immediate pressure and resulted in the repeal of that Act in 1803.
A more recent example of the financial crisis cause is the enactment of Chapter 12 in 1986. Congress enacted Chapter 12 to address bankruptcy problems arising from the 1980s Farm Crisis—those problems centered on the inability of farmers to get plans confirmed in Chapter 11 because of the absolute priority rule (see, e.g., Norwest Bank Worthington v. Ahlers, 485 U.S. 197 (1988).
–Combined Causes
A recent example of those two causes (study and crisis) working in tandem is the enactment, revision and extensions of Subchapter V:
- Subchapter V (enacted in 2019) is the result of extensive studies over more than a decade on the ineffectiveness of standard Chapter 11 to meet the bankruptcy needs of small businesses; but
- as soon as the Covid pandemic hit in early 2020, Congress revised Subchapter V by increasing its debt limit for eligibility from $2,750,000 to $7,500,000—Congress did so because of the expectation that the pandemic would wreak havoc on the U.S. economy in general and upon small business in particular, and then Congress extended that revision several times.
Non-Partisan & Apolitical
Here’s an observation about bankruptcy laws: they tend to be non-partisan and apolitical.
That’s because nobody likes bankruptcy. And it’s hard for political partisans to get worked up over issues like adequate protection, absolute priority and the automatic stay.
And that’s why we can have bankruptcy laws enacted and revised during times of hyper political partisanship. Consider this:
- as noted above, Subchapter V was enacted by Congress and then its debt limit increased by nearly $5 million—all during a time of intense political partisanship and with near-unanimous approval votes in both houses of Congress; and
- Subchapter V’s initial enactment and subsequent revisions and extensions would be signed by two different presidents from two different political parties.
Political Realities
One political reality for bankruptcy reforms is this: bankruptcy debtors have no lobbying voice in Congress. There is no such thing, for example, as a National Conference of Bankruptcy Debtors. Nor is there any aspirational group like Future Debtors of America.
But a corresponding political reality is this: during a time of financial crisis, nearly everyone in these United States becomes a potential bankruptcy debtor—and that puts pressure on the politicians to enact more favorable bankruptcy protections for their constituents.
- Chapter 12 is a prime example of this corresponding reality. Every state in these United States has farmers. And the 1980s Farm Crisis hit farmers everywhere—putting political pressure on all politicians everywhere to enact effective bankruptcy relief for farmers. And that’s why/how we have Chapter 12.
Conclusion
The next reform of bankruptcy laws in these United States is likely to occur in response to pressures from a future financial downturn.
So, preparations need to be made now for the time when Congress will be open to reforming bankruptcy laws.
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