Overcoming the Presumption of the Deceitful Debtor

JurisdictionUnited States,Federal
CitationVol. 39 No. 2
Publication year2023

Overcoming the Presumption of the Deceitful Debtor

Rebecca Rhym
rrhym1@student.gsu.edu

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OVERCOMING THE PRESUMPTION OF THE DECEITFUL DEBTOR


Rebecca Rhym*


Abstract

Congress codified presumed consumer debtor abuse into the Bankruptcy Code with the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Since then, distrust of low- and middle-class debtors has permeated the legal system, evidenced most visibly by how easily legislators are swayed by creditor lobbyists' rhetoric. This distrust has also reached our courts, where judges invoke the doctrine of judicial estoppel to bar debtor-plaintiffs from pursuing tort claims undisclosed in bankruptcy petitions. Instead of addressing societal problems underlying the high number of bankruptcy filings, like financial literacy and predatory lending, this Note argues that lawmakers and courts are perpetuating those same problems in the name of abuse prevention. This Note explores the circuit split regarding bankruptcy nondisclosure and judicial estoppel and proposes a shift away from applying judicial estoppel in post-bankruptcy civil claims.

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CONTENTS

Introduction.................................................................................523

I. Background.............................................................................525

A. An Overview of Consumer Bankruptcy..............................525
B. A Brief History of Bankruptcy Law in the United States ... 528
C. Judicial Estoppel and Nondisclosure................................529

II. Analysis...................................................................................533

A. Bankruptcy Abuse or Lack of Consumer Protection?.......533
B. Judicial Estoppel Post-Bankruptcy—The Split..................536
1. The Totality-of-the-Circumstances Approach..............536
2. The Formalistic Approach...........................................539

III. Proposal.................................................................................542

A. Stop the Estoppel............................................................543
B. . . . Or at Least Soften the Blow.........................................544
C. Holding Attorneys Accountable.........................................546

Conclusion....................................................................................547

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Introduction

Modern consumer bankruptcy, especially cases filed under Chapter 7 of Title 11 of the United States Code (the Bankruptcy Code), is widely viewed as being abused by debtors.1 Driven by the dramatic rise in consumer bankruptcy filings throughout the 1990s and early 2000s and the proliferation of so-called "opportunistic" debtors, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).2 The most contentious aspect of the Act imposed rigorous means-testing of current monthly income for individuals seeking to receive a discharge under Chapter 7 bankruptcy.3 In large part, Congress adopted the means test to determine whether an individual had the funds necessary to pay off the debts sought to be discharged and to push those with the means into filing Chapter 13 and repaying at least some of their debts.4

The purpose of this Note is not to argue that debtors do not abuse the bankruptcy process. Time and time again, audits conducted by the United States Trustee Program find evidence of underreporting and nondisclosure.5 The issues addressed by Congress and proponents of

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imposing stricter rules for debtors are not entirely unfounded.6 And as we creep closer to two decades of the means test's existence, any discussion regarding its appropriateness becomes increasingly moot.

Instead, this Note takes issue with the growing level of distrust and the presumption of deceit placed upon debtors who truly need bankruptcy.7 Congress and the courts have been dazzled by urgings from creditors (who ultimately hold more social and economic capital and sway than low- and middle-class filers) into viewing insolvent debtors as presumptively fraudulent and abusive.8 Specifically, since BAPCPA's passage, this distrust of debtors has permeated judicial discourse surrounding debtor-plaintiffs' failure to disclose certain information on their Voluntary Petition and schedules.9 As such, a circuit split has emerged regarding the approach for determining whether an individual should be judicially estopped from bringing a civil claim after failing to disclose the claim in a prior bankruptcy proceeding.10

This Note will discuss the effects of debtor distrust on the doctrine of judicial estoppel. Part I begins with a background of the relevant law, including the basics of Chapter 7 and Chapter 13 bankruptcies, an overview of the debates surrounding BAPCPA's passage, and an

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introduction to the circuit split regarding bankruptcy nondisclosure and judicial estoppel. Part II discusses the circuit split in depth, analyzing its place in the broader debate regarding adopting rules versus standards in resolving fact-based issues. Finally, Part III proposes a shift away from applying judicial estoppel to post-bankruptcy civil claims or, in the alternative, the adoption of the standards-based approach that considers each case's facts and circumstances when determining debtors' deceit, fraud, or abuse of the bankruptcy system. Instead of looking at low- and middle-class debtors with skeptical eyes, lawmakers must work to solve the societal problems underlying the high number of bankruptcy filings, such as financial and legal literacy and the problem of over-extending credit.11

I. Background

A. An Overview of Consumer Bankruptcy

Bankruptcy is a legal process through which a debtor may discard debts or make a plan to repay them through reorganization, thus giving the debtor a "fresh start."12 When a debtor commences a bankruptcy case by filing a Voluntary Petition and paying the associated filing fee, the court creates a bankruptcy estate containing all the debtor's assets and liabilities, which a trustee, either a private individual or corporation, administers.13 In a Chapter 7 case, a debtor must liquidate any non-exempt assets in exchange for complete discharge of most unsecured liabilities, though the trustee may abandon any property it deems "burdensome" or "of inconsequential value and benefit to the

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estate."14 Absent complications, the debtor receives discharge within months of commencing the case.15 In contrast, a Chapter 13 case requires the debtor to pay back at least a portion of the debt in a plan lasting three to five years.16 The debtor receives discharge only upon successful completion of the plan.17

In 2020, debtors in the U.S. filed a total of 544,463 bankruptcies.18 Of those, over half the debtors (381,217) filed under Chapter 7, supporting the premise that most consumers elect to seek relief under Chapter 7.19 An additional 154,341 debtors filed Chapter 13 cases in 2020; the remainder of debtors filed under Chapter 11 or "other."20

Post-BAPCPA, to commence any consumer bankruptcy case, a debtor must take a credit counseling course through an agency approved by the U.S. Trustee.21 The debtor also must submit a Voluntary Petition and accompanying schedules disclosing all assets, liabilities, income, and expenses under penalty of perjury with the federal bankruptcy district in which they reside.22 Included in the schedules is a Statement of Current Monthly Income, wherein the

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debtor discloses all household income from the preceding six months.23 If the resulting average income (current monthly income) is equal to or less than the median family income for the debtor's family size and state of residence, the debtor need not undergo the means test and automatically qualifies for a Chapter 7 discharge.24 However, if the debtor's income exceeds such median family income, the debtor must submit to the means test to determine if a Chapter 7 filing is "presumptively abusive."25 The means test calculates disposable monthly income by considering national collection standards, payments for secured debts (such as vehicles and mortgages), and priority debts (such as non-dischargeable income tax debt and domestic support obligations).26 If the total results in a disposable monthly income greater than $227.50, a presumption of abuse arises, and the debtor is disqualified from receiving a Chapter 7 discharge unless the debtor can prove "special circumstances" to rebut the presumption of abuse.27

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B. A Brief History of Bankruptcy Law in the United States

Congress has long attempted to adopt federal bankruptcy laws, passing its first bankruptcy act in 1800 in response to "the Depression of 1793."28 Congress enacted two additional uniform bankruptcy laws, each in response to a severe economic depression, but each enactment was short-lived and repealed soon after the economy improved.29 Finally, with the Nelson Act of 1898, "the clouds suddenly cleared."30 Lawmakers struck a balance between protecting creditors' interests and "protecting the 'honest but unfortunate' debtor."31 Nevertheless, the century following the passage of the Nelson Act "witnessed an unending parade of bankruptcy legislation" trying to balance the interests of pro-creditor and pro-debtor forces.32

The most recent overhaul of the Bankruptcy Code came in 2005 with BAPCPA.33 Pursuant to this Act, Congress amended 11 U.S.C. § 707(b) to remove the presumption that favored the debtor.34 The removal of this provision aligned with the zeitgeist of the

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late twentieth century—a distrust of debtors and desire to reduce the pool of individuals eligible to receive Chapter 7 discharges.35 BAPCPA also added a requirement for filers to take a credit counseling course before filing and a financial management course before receiving a discharge.36 Ideally, the pre-filing course deters potential filers from using bankruptcy as a first resort rather than attempting to settle...

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