By: Donald L Swanson
A new, bipartisan bankruptcy bill in the U.S. Senate purports, according to an official document, to:
- “deter the Texas Two-Step”; and
- “ensure injury victims have a chance to be heard in court.”
In my lexicon, this bill already has three strikes against it and should be rejected. Here’s why.
Three Strikes—Background
Back in the day (2005) Congress enacted one of the worst anti-bankruptcy laws ever. That law (the Bankruptcy Abuse Prevention and Consumer Protection Act—“BAPCPA”) was designed to do this:
- to keep middle-class folks out of Chapter 7 bankruptcy;
- to push those middle-class folks into Chapter 13 bankruptcy instead; and
- to make the Chapter 13 process as long (5 years) and as hard for them as possible.
The purpose behind such a design was this: so that credit card solicitations could continue:
- on a daily basis;
- directed at those same middle-class folks and
- without the risk of a meaningful bankruptcy remedy for those middle-class folks.
To get BAPCPA enacted, Congress utilized the following techniques—which I now call the “three strikes” for rejecting a bill:
- Strike One—calling a bankruptcy-eligibility bill an “Abuse Prevention” act;
- Strike Two—establishing a irrebuttable “presumption of abuse”; and
- Strike Three—using highly technical and complicated language that is nearly incomprehensible.
Strike One – “Abuse”
Bankruptcy eligibility has a gatekeeping function: it allows certain types of persons to access each type of bankruptcy relief. Here are examples of eligibility limitations:
- only individuals with certain economic characteristics are eligible for Chapter 13 relief;
- only specifically defined small businesses are eligible for relief under Subchapter V of Chapter 11;
- only municipalities are eligible for Chapter 9 relief; and
- all corporations and individuals with business debts, but only the most-impoverished individuals with consumer debts, are eligible for Chapter 7.
Each of the eligibility limitations on a particular type of bankruptcy relief represents a policy choice made by Congress.
But in BAPCPA, Congress didn’t believe that keeping middle class folks out of Chapter 7 and making Chapter 13 hard for them would impress voters. So, Congress avoided using an accurately descriptive title like:
- the “Chapter 7 Eligibility Act”; or
- the “Keep Middle-Class Folks Out of Chapter 7 Act.”
Instead, Congress opted to go with a morally-charged title: the “Bankruptcy Abuse Prevention” Act. Such words paint individuals with consumer debts as bad people when they file Chapter 7. Heck, they are right up there, in morally-fraught certitude, with such folks as:
- child abusers;
- spouse abusers; and
- sexual abusers.
Yep! Those middle-class consumers who file Chapter 7 are really, really bad people—at least, according to Congress.
So . . . Strike One, in my lexicon, for any bankruptcy eligibility bill in Congress is this: describing the purpose of the bill as preventing “bankruptcy abuse.” And the “Ending Corporate Bankruptcy Abuse Act” is and does precisely that.
Strike Two – “Irrebuttable Presumption” of Abuse or Bad Faith
BAPCPA directs that, when a middle class debtor files a Chapter 7 petition, “the court shall presume abuse exists” (§ 707(b), emphasis added).
Such BAPCPA presumption can be rebutted—but only when special circumstances reduce a previously middle-class debtor’s financial circumstances below the defined poverty level (id.).
- In other words, the BAPCPA presumption of abuse is irrebuttable for an individual with a middle-class history and middle-class prospects.
Similarly, the proposed “Ending Corporate Bankruptcy Abuse Act” contains this provision in Sec. 2(h)(1):
- “the court shall conclusively presume that a petition has been filed . . . in subjective bad faith” (emphasis added).
Such proposed Act could have said the same thing in normal eligibility language, without the morally-charged terms of “abuse” and “bad faith.” Examples of eligibility language without morally-charged terms are:
- “A person may be a debtor under chapter 7 of this title only if such person is not . . .” (§ 109(b));
- “An entity may be a debtor under chapter 9 of this title if and only if such entity . . .” (§ 109(c));
- “Only an individual with regular income . . . may be a debtor under chapter 13 of this title” (§ 109(e));
- “Only a family farmer . . . with regular annual income may be a debtor under chapter 12 of this title” (§ 109(f)), and “The term ‘family farmer’ means—(A) individual or individual and spouse engaged in a farming operation . . .” (§ 101(18)); and
- “The term ‘debtor’ [for purposes of Subchapter V]—(A) . . . means a person engaged in commercial or business activities . . .” (§ 118/2(1))
So . . . Strike Two, in my lexicon, is when Congress abandons normal-type eligibility language in favor of an “irrebuttable presumption” of morally-bad “abuse” or “bad faith.” That abandonment signifies this:
- Congress is not confident in the actual merits of the bill and feels compelled to demagogue the bill toward enactment.
And the “Ending Corporate Bankruptcy Abuse Act” does precisely that.
Strike Three – Highly Technical and Complicated Language
Try reading and understanding BAPCPA provisions for excluding middle class debtors from Chapter 7 eligibility. Such language is nearly incomprehensible.[Fn. 1]
The language of the “Ending Corporate Bankruptcy Abuse Act,” is also nearly incomprehensible,[Fn. 2] and here’s guessing that very few bankruptcy professionals, let alone members of Congress, even know what the details of a Texas Two Step might be or how it actually works or what it’s designed to accomplish.
And here’s suggesting that competing views can exist on whether the use of a Texas Two Step is always a bad thing:
- some courts have held that the Texas Two Step can be utilized in a good and effective and positive manner in some circumstances.
Before Congress goes off labeling something as always and irrebutably “bankruptcy abuse” and “bad faith,” Congress ought to have a clear understanding of what is actually involved and how it can never be a good thing.
So . . . Strike Three, in my lexicon, is when Congress addresses a highly technical circumstance with complicated and nearly-incomprehensible language to label something as always bad.
And that’s precisely what’s happening with the “Ending Corporate Bankruptcy Abuse Act.”
Conclusion
The “Ending Corporate Bankruptcy Abuse Act” hits all three strikes in my lexicon of bad bill indicators.
So, I strongly advise against enacting it.
- And that’s even before getting to the actual merits of the bill.
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Footnote 1. Here, for example, is a portion of BAPCPA’s § 707(b)(2)(A)(II): “The debtor’s monthly expenses shall be the debtor’s applicable monthly expense amounts specified under the National Standards and Local Standards, and the debtor’s actual monthly expenses for the categories specified as Other Necessary Expenses issued by the Internal Revenue Service for the area in which the debtor resides, as in effect on the date of the order for relief, for the debtor, the dependents of the debtor, and the spouse of the debtor in a joint case, if the spouse is not otherwise a dependent. Such expenses shall include reasonably necessary health insurance, disability insurance, and health savings account expenses for the debtor, the spouse of the debtor, or the dependents of the debtor. Notwithstanding any other provision of this clause, the monthly expenses of the debtor shall not include any payments for debts. In addition, the debtor’s monthly expenses shall include the debtor’s reasonably necessary expenses incurred to maintain the safety of the debtor and the family of the debtor from family violence as identified under section 302 of the Family Violence Prevention and Services Act, or other applicable Federal law. The expenses included in the debtor’s monthly expenses described in the preceding sentence shall be kept confidential by the court. In addition, if it is demonstrated that it is reasonable and necessary, the debtor’s monthly expenses may also include an additional allowance for food and clothing of up to 5 percent of the food and clothing categories as specified by the National Standards issued by the Internal Revenue Service.”
Footnote 2. Here, for example is a portion of the Ending Corporate Bankruptcy Abuse Act’s subpart (h)(1): “the court shall conclusively presume that a petition has been filed or that a case under this title that is continuing in subjective bad faith if the court determines that—(A) a purpose or effect of the filing or continuation is to—(i) gain a tactical litigation advantage; (ii) impose undue delay upon creditors; or (iii) cap the total amount of the liability of the debtor to 2 or more creditors holding protected claims (as defined in section 362(p)(1)) that the debtor or any affiliate has property of value sufficient to pay in full as those claims would come due; (B) during the 4-year period preceding the date of the filing of the petition, the debtor was the subject of, or was formed or organized in connection with, a divisional merger or similar transaction changing the corporate structure of and affecting the financial condition of the debtor or an affiliate; (C) during the 4-year period preceding the date of the filing of the petition, the debtor engaged in a transfer of substantial assets to or for benefit of or incurred substantial obligations from or for the benefit of any insider or affiliate that, notwithstanding subsections (e) through (g) and (j) of section 546, is avoidable under section 544(b) or subsection (a)(1) or (e) of section 548; or (D) the debtor does not have a valid reorganizational purpose.”
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