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Members of the last three Congresses came close to passing a bankruptcy bill, and the current 108th Congress may try to do the same. According to proponents’ standard account, current law is lax in coaxing debt repayment from individual bankruptcy filers and has encouraged irresponsibility. Thus, say the proponents, the bankruptcy system should apply a means test to higher-income Chapter 7 filers who have overspent to determine if they should be required to repay debts under a Chapter 13 payment plan. This common assertion does not justify the enactment of the bankruptcy bill or even accurately describe what is an immensely complex bill. The current version is a dense thicket of 200 provisions, spanning 500 pages. Far from making only one change that would affect high-income individual filers, the bill would change all types of bankruptcy cases, including large and small business reorganizations, municipal bankruptcies, family farmer bankruptcies and transnational insolvencies. It proposes voluminous amendments to clarify the treatment of derivatives and taxes. It alters Truth in Lending laws. It regulates lawyers and their dealings with the debtors they represent. The provisions and their effects are complex-often more than they need to be. To unpack them takes time and patience. The standard account of the need for the bill-conditioning bankruptcy relief on some unsecured debt repayment-is largely unobjectionable. In furtherance of this goal, numerous commercial law scholars have articulated reasonable proposals. Or, one might consider the Canadian system, which focuses repayment plans on unsecured obligations. Yet, since the 105th Congress, lawmakers have been wedded to only one proposal. Most lawyers, judges and academics familiar with the system believe that proposal will not work well. The proposed means test purportedly identifies can-pay Chapter 7 filers who have spent irresponsibly and sends them to Chapter 13 (or, presumably, deters them from filing altogether). More likely, the proposed change would not send high income debtors with repayment ability to Chapter 13. The means test uses Internal Revenue Service collection financial standards, which are more generous to small-household, high-income debtors than large-household, low-income debtors. The means test also permits a debtor to deduct secured debts off the top, even if those debts are secured by expensive items. Big spenders or unfortunates? The means test puts profligate spenders on equal footing with individuals who have faced serious health problems and job loss. Politicians rely on images of profligate spenders to justify the legislation, but one must recognize that the bill does not target debtors based on culpability. Culpability for financial problems is irrelevant under the actual means test. The proposal also presumes that Chapter 13 repayment plans inherently result in higher yields for creditors than do Chapter 7 liquidations. But consider: Most Chapter 7 filers quickly discharge personal liability for many debts but afterward continue to pay the mortgage, car loan and old taxes, as well as any other financial obligations. Unsecured creditors, such as credit card companies, most often leave empty-handed. Chapter 13 produces several billion dollars in returns each year, but about 80% of the payments go to everyone but general unsecured creditors. Most funds go toward home mortgages, car loans and priority debts such as taxes-debts that would be paid after Chapter 7 anyway. Repayment plans also dedicate considerable sums to lawyers and trustees administering Chapter 13. Chapter 13 as a whole sends more money back to unsecured lenders than Chapter 7, but the distributions are highly variable and dependent on other obligations. The bankruptcy bill probably will not increase unsecured creditor payment in Chapter 13, and, in fact, may make it harder for debtors to confirm Chapter 13 plans. For example, the bill increases secured creditors’ entitlements in Chapter 13, which generally decreases the money available for unsecured creditors, unless Congress anticipates a more flush group of filers. It is possible that the bankruptcy bill would increase the ability to collect unsecured debts by reducing the likelihood of completing Chapter 13 plans and getting a discharge. If this is the real goal of the bill, proponents should say so forthrightly. Of course, we don’t know if those debtors actually can and will pay when pressed, or whether they will flee. Congress should consider more effective proposals. But if it remains wedded to this one, it should move forward only on the means test (20 out of 500 pages) and deal with other aspects later. Federal bankruptcy law offers extraordinary benefits and warrants careful limits. Yet without proper implementation and thorough understanding, the system is at best worthless and expensive and at worst harmful. Individual filers overwhelmingly are dealing with the aftermath of job problems, medical problems and family breakup. Business bankruptcies of all sizes involve millions of parties-in-interest and billions of dollars. There are real consequences if Congress gets this wrong. Melissa B. Jacoby is an associate professor at the James E. Beasley School of Law at Temple University.

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