The hidden life of consumer bankruptcy reform: danger signs for the new U.S. law from unexpected parallels in the Netherlands.

• Author: Kilborn, Jason J.

ABSTRACT

This Article offers a unique perspective on the heavily revised U.S. consumer bankruptcy law, which went effect on October 17, 2005, in light of a surprising discovery: It turns out that the U.S. consumer bankruptcy system as "reformed" resembles in many critical respects the consumer bankruptcy system in place for the past six years in the Netherlands. As a result of this serendipitous U.S.-Dutch convergence, years of experience under the Dutch consumer debt relief system can provide a rare glimpse into the future of the new U.S. system. The Dutch law in practice has diverged in significant ways from legislative expectations, and such divergences might well be repeated--for better or worse--in the United States. In particular, comparisons between the Dutch and U.S. systems reveal latent weaknesses and portend an impending breakdown in the "credit counseling" and "means testing" parts of our new system. A comparative view of recent Dutch developments offers not only cause for concern, however, but also hope for some effective solutions.

Every self-respecting person will surely exert himself to the utmost to repay debts in full whenever contracted. At the same time, it seems sensible--indeed pedagogically responsible--not to pursue people their whole lives for debts. (1)

TABLE OF CONTENTS I. BANKRUPTCY IN THE UNITED STATES AND THE NETHERLANDS BEFORE 1979 II. REFORM IN 1979 AND THE CHALLENGES OF THE 1990S: THE ORIGINS OF CONVERGENCE A. The U.S. Bankruptcy Code and the Rise and Fall of Credit Counseling 1. The Bankruptcy Code and Chapters 7 and 13 2. DMPs and Credit Counseling in Crisis B. Credit Counseling in the Netherlands: Municipal Banks and the NVVK Voluntary Debt Adjustment Model 1. A Different Approach to Organizing Credit Counseling 2. Rising Debt-to-Income Ratios and the Voluntary Process In Decline III. CONVERGENCE: DUTCH EXPANSION AND U.S. RESTRICTION OF CONSUMER BANKRUPTCY A. The Netherlands Amends Its Bankruptcy Law To Add Consumer Relief 1. The Voluntary Plan Process: Trouble at the Gates to the WSNP 2. The In-Court Process and Payment Plans--How Much? 3. Payment Plans Part II--How Long? 4. Self-Financing the Trustee's Fee or Avoiding It In Simplified Proceedings: The Real "Stick Behind the Door". 5. Getting Comfortable With the WSNP: Rising Filings Year After Year B. Consumer Bankruptcy Reform (Restriction) in the United States 1. Required Pre-Bankruptcy Credit Counseling--Out-of- Court Negotiations in Sheep's Clothing a. An Impending Spike in Waiting Periods b. Gloomy Outlook for DMPs In Light of Comparable Dutch Success Rates: a Cost-Benefit Imbalance? c. The Miniature New U.S. "Stick Behind the Door" 2. The Means Test, Restricted Payment-Plan Budgets, and an Intense Monitoring Burden for Trustees a. Means Testing: Many Apply, Few Are Selected b. The Comparative Burdens On the Few Who Pay c. Saved by the Judge? IV. CONCLUSION In U.S. legal discourse, the notions of "legal transplants" and "globalization" more often than not seem to refer to the one-way dissemination of U.S. norms to other countries. (2) Seldom does one see any discussion of U.S. importation of foreign legal ideas. Indeed, most lawmakers in the United States seem generally hostile to foreign influences on U.S, law. (3) Nonetheless, it turns out that one of the most significant modern U.S. legal reforms has imported--quite inadvertently (4)--a framework strikingly similar to that of one particular foreign legal system.

This Article takes advantage of a rare double opportunity to break new ground in commercial, consumer, and comparative law. First, it offers one of the first detailed analyses of key elements of a recent overhaul of U.S. consumer bankruptcy law, effective since October 17, 2005. (5) Undoubtedly, many analyses of the new reform law will follow, but this Article offers a unique perspective in light of a curious and surprising second discovery: it turns out that the new U.S. consumer bankruptcy law represents globalization in a more balanced sense. This Article reveals that Congress has in many respects adopted the consumer bankruptcy system that has been in place for the past six years in the Netherlands. (6) Since the late 1800s, the Netherlands and the United States have developed distinct but surprisingly parallel responses to consumer financial distress. This Article explores how the two systems have converged at the beginning of the twenty-first century. To complete the globalization picture, this Article also notes key similarities and differences between the Dutch system and the new consumer debt relief systems in neighboring European states, primarily Germany and France.

As a result of this serendipitous U.S.-Dutch convergence, years of experience under the Dutch consumer debt relief system can act as a sort of crystal ball, providing a rare glimpse into the future of the new U.S. system. The Dutch law "on the ground" has diverged from legislative expectations in significant ways, and such divergences might well be repeated--for better or worse--in the United States in coming years. In particular, comparison with Dutch experience reveals latent weaknesses and portends an impending breakdown in the credit counseling and "means testing" parts of our new system. In particular, the new U.S. system will likely face serious challenges due to mandatory participation by the financially troubled credit counseling industry and due to mandatory payment plans that hold some debtors to quite restrictive household budgets for five long years. Credit counseling will likely delay but not avoid bankruptcy, and many of those forced into payment plans face likely failure in their steep climb out of financial distress. Luckily, a final parallel with Dutch law suggests that enlightened application of judicial discretion might assuage some of these concerns.

Part I situates the discussion by briefly noting the theoretical similarities and fundamental differences between the bankruptcy systems in the United States and the Netherlands from the late 1800s to 1979. Part II traces how the two systems began to converge in 1979 by adopting parallel but essentially opposite systems of consumer credit (debt) counseling. Finally, Part III describes how the two systems have finally arrived on largely common ground. Part III.A explores the development and early implementation of the new Dutch consumer bankruptcy system, focusing on how the law has actually applied in the real world of consumer financial distress. This Part continues a larger project to chart recent developments in consumer debt relief law in Europe. (7) Part III.B introduces several key elements of the revised U.S. consumer bankruptcy system and compares them with similar elements in the Netherlands. Drawing on the preceding analysis of Dutch experience, this final Part paints a fuller picture of what is likely to come--both good and bad--under the new U.S. law.

1. BANKRUPTCY IN THE UNITED STATES AND THE NETHERLANDS BEFORE 1979

   In both the United States and the Netherlands, a legal system of bankruptcy has been available to consumers--that is, individuals not engaged in entrepreneurial activity--since the late 1800s. The U.S. Bankruptcy Act of 1898 arose, as several predecessor laws had, after a period of speculation in securities that led to the financial collapse of scores of individuals, some rather prominent. (8) Although consumerism and the great democratization of credit would not really get underway until the early 1900s, (9) the stage was set early in the United States for open access to a system of debt relief for all corners. Moreover, the 1898 Act firmly established the principle that bankruptcy in the United States would mean immediate and unconditional elimination of prior indebtedness (discharge) and a "fresh start" for debtors to begin a new economic life. (10)

   Bankruptcy in the Netherlands, as in other European countries, has always carried an entirely different meaning. The Dutch Bankruptcy Law (Faillissementswet) has been in force since 1896, and like its U.S. analogue, it applies to individuals of all vocations, eliminating a prior restriction to merchant debtors. (11) To this day, though, bankruptcy in the Netherlands offers not relief for debtors, but a general collection device for creditors. (12) Dutch bankruptcy proceedings conclude with unpaid creditors retaining their right to pursue the debtor for life, seizing any property beyond the small modicum of assets shielded as exempt from creditors' claims. (13) The guiding principle is not the U.S. fresh start, but the old Roman maxim pacta sunt servanda--contracts must be fulfilled. Only through a new agreement with creditors to replace the old defaulted obligations could debtors escape lifelong liability. (14)

2. REFORM IN 1979 AND THE CHALLENGES OF THE 1990s: THE ORIGINS OF CONVERGENCE

   The rise of consumerism and an expansion of credit to ordinary consumers in the 1950s and 1960s placed great stress on both nations' bankruptcy systems. As a result, the Netherlands and the United States both enacted reforms in 1979. Although these reforms took very different forms, the parallel in timing is striking. How these two systems changed in 1979 would powerfully influence the way they further developed toward the end of the century.

   1. The U.S. Bankruptcy Code and the Rise and Fall of Credit Counseling

      No great economic crisis prompted the eventual overhaul of the 1898 U.S. Bankruptcy Act. (15) The structure of the Act, however, proved ill-suited to the burgeoning bankruptcy practice in the United States after World War II. As spending and borrowing expanded rapidly among the new class of consumers, (16) members of this group began to overwhelm the bankruptcy system. Annual bankruptcy filings grew from about 10,000 in 1946 to over 200,000 in 1967, with the consumer share of these filings rising from 84% to 92%. (17) This avalanche of filings taxed the inefficient administrative structure...