Dodging a Bullet

Journal Issue

Nov 1998

Column Name

Dicta

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Well, it went right down to the wire. Bankruptcy reform legislation was proposed in September 1997, revised bills

were introduced in both the House and the Senate in January 1998, the House passed its version in June 1998, and

the Senate passed its version in September, shortly after returning from the August recess. A conference bill and

report was quickly crafted in early October, and, at what was to be the end of the legislative session (October 9th),

was approved by the House on Friday morning. The Senate failed to reach the bill, given the crush of business and

growing opposition. A last-minute effort to attach the bill as a rider to the budget bill died in the waning hours of

the legislative session.

The bankruptcy community hasn't seen this much excitement since 1984, when the system came to a crashing halt as a result of the Supreme Court's decision in Marathon. The stakes were high. Creditor organizations, through

their lobbying presences, spent a reported $40 million trying to push a major overhaul to the Bankruptcy Code, one

which would reverse what many perceive to be a debtor-favorable "tilt" and re-inject a moral "tone" into the

nation's bankruptcy laws (a change from the morally neutral note struck by the Bankruptcy Reform Act of 1978). Of

course, the credit industry did not spend all that money because of its sense of morality. They were most interested

in making changes that would hopefully improve their recovery from debtors who file—or perhaps to reduce the

percentage of people who file to improve recoveries outside bankruptcy. Still, morality sells, so the credit industry

used the morality angle to help sell their proposals to Congress. It almost worked.

All of us followed these developments with a great deal of interest. The debtor bar has vociferously objected to what

it believes to a be a mean-spirited attempt to transfer responsibility for creditor profligacy onto its victims, the

debtors. Their concerns have been echoed by a goodly portion of the academic community. Chapter 13 trustees have

expressed serious concern that features of the legislation would undermine their ability to operate successful chapter

13 programs—especially features that imposed unrealistic payment burdens on debtors and pushed back the date of

confirmation. Some bankruptcy judges (I think out of a sense of principle) also have opposed the reform

effort—though other judges think the changes proposed make some sense. Thoughtful commentators have expressed

concern that the reforms as drafted were internally inconsistent, and might cause more problems than they solved.

The President and the First Lady also expressed some real concern about the proposals, focusing on the impact on

single parent families, child support and working families.

Less visible in the debate have been some of the other features in the proposed bankruptcy legislation—such as

efforts to improve small business bankruptcy procedures, to refine the impact of bankruptcy on certain financial

transactions, to keep farm bankruptcy relief alive, to streamline bankruptcy appeals and to enact new provisions

affecting cross-border insolvencies. These issues have not attracted the press, nor the debate, that the consumer

bankruptcy provisions have generated, though they are nonetheless important issues.

Thanks to the resurgence in interest in bankruptcy, it seems that everybody has an opinion about bankruptcy

laws—what they are and what they should be. Perhaps that's healthy. Bankruptcy is both important and

misunderstood. It's important because market economies must have ordered systems in place to deal with debt and

default—the alternative is non-transparent ad hoc behavior that invites corruption. We can find uncomfortable

examples of those sorts of alternatives in other parts of the world.

And bankruptcy is misunderstood. There is, after all, something counterintuitive about the notion of a company

being able to hold off its creditors, yet still continue to do business. It is even more counterintuitive that an

individual should be able to walk away from his or her debts. Stated this way, bankruptcy too easily becomes the

stuff of demagogy, designed to stir lawmakers into a frenzy of righteous indignation. Now that the legislative session

has ended and the frenzy has died down, everyone has more time to consider the proposals that have been made

calmly and rationally. Counterintuitive as bankruptcy may seem, we know that bankruptcy does serve a valuable

function in our society—enabling working people who run into serious financial trouble to get on with their lives as

productive citizens, saving jobs, moving assets from unproductive to productive uses. The real debate is whether it

serves these functions well and fairly.

In the two or three months between now and the beginning of the 106th Congress, a variety of additional data

should be available to the members—including the results of a study by Professors White and Culhane, funded by

the ABI Endowment Fund, which examines the impact of a means-based test on payouts to creditors. Chapter 13

trustees should be able to articulate with greater specificity the changes that need to be made in order to preserve that

chapter as a successful device for repaying creditors and rehabilitating debtors. The Administrative Office of the U.S.

Courts and the Department of Justice will be able to furnish more accurate data about the cost of implementing some

of the monitoring proposals that were suggested in the legislation this last session. In short, calmer, more rational

voices may be able to come to the forefront and actually be heard. If that happens, then a more rational proposal is

likely to emerge from the next Congress.

We dodged a bullet this year. Pressed by strident demands to "curb abuse," Congress nearly passed a law that

would not have worked, and would only have created more problems than it solved. But more bullets are on the

way. The forces that pressed for bankruptcy reform in 1998 will press again in 1999. Some of the reforms that are

likely to be proposed again have appeal precisely because they have some merit. Others, as we know, are

ill-considered. Unfortunately, bankruptcy tends not to engender rational debate. It will thus be up to us, the people

who know how the system really works, how it can work, and how it should work to use these next few months to

do our homework, assemble our data and talk to our representatives in Congress. If we stand silently by, giving up

the field to the strident voice of demagogy, then the next bullet will not likely miss.

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Journal Authors

Leif M. Clark

Journal Date

Sunday, November 1, 1998 - 12:00