The Relative Relevance of Bankruptcy: a Response to Professor Martin

• Citation: Vol. 36 No. 2
• Publication year: 2020

The Relative Relevance of Bankruptcy: A Response to Professor Martin

Daniel Keating

THE RELATIVE RELEVANCE OF BANKRUPTCY: A RESPONSE TO PROFESSOR MARTIN

Daniel Keating^*

Introduction

Professor Nathalie Martin has spent a good part of her academic career "helping consumers avoid the many traps and pitfalls created by the current consumer credit world . . . ."¹ Between her voluminous cutting-edge scholarship on consumer law issues² and her many years teaching courses such as Bankruptcy, Consumer Law, and Financial Literacy, she brings a rare combination of deep expertise in both bankruptcy and consumer law. Professor Martin's passion for and knowledge of the intersection of consumer law and bankruptcy law are each ably demonstrated in her excellent and thoughtful article, Bringing Relevance Back to Consumer Bankruptcy.

Although lacking Professor Martin's sophistication on the consumer law side of things, I nevertheless share her obvious frustration with the economic and income stratification that we both can see on full display in our society today. This widening gap between the haves and the have-nots seemingly worsens with each passing year.³ I also share Professor Martin's desire to find solutions to this crisis through some form of intervention, whether that be legislative, administrative, or market-based. Her article suggests that certain changes in the Bankruptcy Code (Code) might effectively address some of the ways that bankruptcy law has failed many economically marginalized debtors.

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Because my assignment is to be a commentator on Professor Martin's article, I am assuming that my role is primarily to highlight where my views might differ from hers or where I might add insights that she may have omitted. Having said that, I want to reiterate at the beginning of my comments that I learned many valuable new insights from her article, that I thoroughly enjoyed reading it, and that I agreed with much, if not most, of what she had to say.

Whether or not Professor Martin's prescriptions for bankruptcy reform will make bankruptcy more relevant depends a lot on the accuracy of empirical assumptions and predictions that underlie her article—assumptions about the characteristics of the current consumer debtor population as well as predictions about how her reforms would affect the future behavior of both debtors and creditors. Because I have had so little connection to the real world of consumer bankruptcy practice, I thought that in preparing my response it would probably be helpful to me (and ultimately to Professor Martin) to share Professor Martin's article with people I know who work in the consumer bankruptcy practice area.

The group from which I sought some "real world" perspective included: two federal bankruptcy judges, one chapter 7 and chapter 13 standing trustee, one career law clerk to a federal bankruptcy judge, one former attorney advisor for the Bankruptcy Court for the Eastern District of Missouri, one bankruptcy lawyer who does mostly business but some consumer bankruptcy, and four lawyers who do primarily or exclusively consumer bankruptcy work. I was fortunate to receive written responses from each member of this group except for one lawyer who responded to me by phone call. Collectively, these responses served as a "reality check" to my own reactions to the various proposals put forth in Professor Martin's article. Where appropriate, I will note (and even quote) some of the more insightful comments that I received from this group.

To be clear, I do not pretend that this very informal survey is in any sense an "empirical study." Even if I had been afforded much more time than the one month that I was given to prepare this response, it is highly doubtful that I could have designed and executed a meaningful empirical study that could have reliably tested some of the empirical questions raised by Professor Martin's article. Be that as it may, even these anecdotal insights that I received from very experienced professionals in the field proved quite useful to me as I pondered my own reactions to the proposals contained in the article by Professor Martin.

With those preliminary thoughts out of the way, let me now proceed by first outlining the two "big picture" concerns that I had with the article and then by sharing my thoughts and comments on some of Professor Martin's more specific proposals for reform.

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I. Some Thoughts on the Big Picture

Even the so-called "big picture" disagreements I have about the article may go more to the degree of Professor Martin's claims in the article than to the essence of what she is asserting. First, I have to quibble with Professor Martin's thesis, at least as it is stated in the opening sentence of her article, where she states, "Consumer bankruptcy has become . . . irrelevant."⁴ That is a bold statement indeed, and I appreciate that we both work in an industry—the legal academy—where we are taught from a young, professional age to be bold, even perhaps at the risk of over-claiming. After all, how many untenured professors write law review articles whose stated goal is to make merely some modest contribution to the existing literature at the margin rather than to offer an entirely novel "paradigm-shifting" insight?

While I cannot sign on to Professor Martin's thesis as stated above, I could easily be persuaded by a more nuanced statement of the same thesis, perhaps something along the lines of, "Consumer bankruptcy has become less relevant," or "Consumer bankruptcy has become irrelevant for a certain subset of debtors."⁵ What the statistics would show us is that consumer bankruptcy filings have clearly been on the decline following the passage of Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).⁶ What the numbers would also show us, however, is that in the most recent calendar year, consumer filings in this country well exceeded 500,000, which seems to me a number large enough to suggest that bankruptcy is still very relevant for at least a nontrivial number of consumer debtors.⁷

The cause of the decline in consumer filings may well be due to the features of the current bankruptcy law that Professor Martin's article proposes to remedy.

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I would suggest, however, that there are at least two other contributing factors to explain the significant drop in filings since BAPCPA. First, the added burdens to the debtor and the debtor's attorney of BAPCPA have so increased the cost of a basic consumer bankruptcy filing that many consumers who might have otherwise filed bankruptcy before BAPCPA have now been priced out of bankruptcy relief.⁸ Second, thanks to the Affordable Care Act (ACA),⁹ there are probably fewer debtors than before the ACA who must look to bankruptcy to discharge significant medical debt. I am not suggesting here that the ACA was a panacea in this regard, but only that it probably helped reduce the incidence of the so-called "medical bankruptcy" at the margins.¹⁰

In addition to my issue above with the scope of Professor Martin's thesis, my second "big picture" question that I have about the theme of Professor Martin's article is whether the bankruptcy system is best suited, or even well-suited, to address the systemic income and wealth inequality that clearly troubles many of us. My understanding of the role of bankruptcy law in the economy has always been that bankruptcy is designed to treat the case of a catastrophic economic disruption for the consumer debtor, with the traditional "big three" of these disruptions being medical debt, job loss, or divorce.¹¹ Bankruptcy and its discharge enable an individual who could otherwise be economically self-sustaining to wipe their slate clean with respect to whatever one-time financial catastrophe has left a sea of debt in its wake. The effect of such a large and sudden debt is that the individual's regular income is suddenly unable to keep up with both debt payments and living expenses each month. If bankruptcy, however, can discharge this large debt, then the individual is now able to create a personal budget that will finally leave them in the black financially.

Even though consumer bankruptcy and business bankruptcy are quite different in many respects, I believe that both types of bankruptcy share a common core with respect to their role in allowing either an individual or a business to overcome the effects of a non-recurring but major financial setback.

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In the chapter 11 casebook that I currently use for my seminar,¹² the co-authors at the very start of their book present the contrast of two different businesses as potential candidates for a chapter 11 reorganization. First, we have the Acme Shoe Company, which currently makes a pair of shoes at a cost of $10 and then sells each pair for $9.50. Then we have Ernestine and her Copy Shop, a start-up business that had been quite successful in its early months until a customer slipped and fell on the premises. The customer got a big tort judgment against Ernestine's business and Ernestine had failed to pay her liability insurance, which meant that the tort judgment was not covered by insurance. The authors of the casebook pose the question to the students, which of these two companies is an appropriate candidate for chapter 11 bankruptcy?¹³

The short answer to that question is of course supposed to be Ernestine and her Copy Shop. Ernestine's business has proven that, in the absence of this massive one-time debt, it can be self-sustaining and is worth more as a going-concern than it is if liquidated piecemeal. The deeper answer to this question is that perhaps Acme Shoe Company is also an appropriate candidate for chapter 11. However, in order for Acme Shoe Company to be a viable business even with the help of chapter 11, the company would need to change the way it does business so that it can become economically sustainable. Perhaps that would involve figuring out how to cut some needless...