What Is Success in Chapter 13 Why Should We Care

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Sep 2004

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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.

<h4>The Reality</h4>

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.<a href="#3" name="3a">3</a>
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.<a href="#4" name="4a">4</a> 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.<a href="#5" name="5a">5</a> 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.<a href="#6" name="6a">6</a> 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.<a href="#7" name="7a">7</a> 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.

<h4>The Irony</h4>

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"<a href="#8" name="8a">8</a>
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.

<h4>The Problem</h4>

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.

<h4>Measures of Success</h4>

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)<a href="#9" name="9a">9</a> 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.<a href="#10" name="10a">10</a> 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.

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.<a href="#11" name="11a">11</a> 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.

<h4>The First Step</h4>

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,<a href="#12" name="12a">12</a> 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.

<hr>
<h3>Footnotes</h3>

<a name="1">1</a> I thank
Amrane Cohen for very helpful insights and corrections, not all of
which
are included here. <a href="#1a">Return to article</a>

<a name="2">2</a> 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. <a href="#2a">Return to article</a>

<a name="3">3</a> 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. <a href="#3a">Return to article</a>

<a name="4">4</a> The complex
legal landscape is captured in the five volumes of Judge Keith
Lundin's treatise. <a href="#4a">Return to article</a>

<a name="5">5</a> Lundin,
Keith M., Chapter 13 Bankruptcy, 3d Ed. (2000 & Supp.
2002). <a href="#5a">Return to article</a>

<a name="6">6</a> Sullivan,
Teresa A., Warren, Elizabeth, and Westbrook, Jay Lawrence, As We
Forgive Our Debtors (1989). <a href="#6a">Return to article</a>

<a name="7">7</a> 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. <a href="#7a">Return to article</a>

<a name="8">8</a> "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. <a href="#8a">Return to article</a>

<a name="9">9</a> 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. <a href="#9a">Return to article</a>

<a name="10">10</a> 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. <a href="#10a">Return
to article</a>

<a name="11">11</a> 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. <a href="#11a">Return to
article</a>

<a name="12">12</a> During
Fiscal Year 2002, chapter 13 trustees in the districts overseen by
the U.S.
Trustee Program disbursed almost $4 billion. <a href="#12a">Return
to article</a>

Journal Authors

Gordon Bermant

Journal Date

Wednesday, September 1, 2004 - 12:00

Bankruptcy Rule

2004