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Sousa on Bankruptcy Stigma

posted by Bob Lawless

If you are looking for trite and oversimplified assertions about bankruptcy stigma, then stay away from the latest issue of the American Bankruptcy Law Journal. In those pages, Professor Michael Sousa from the University of Denver has a wonderful paper reporting on his interviews with consumer bankruptcy debtors in Colorado. You can find a preprint version of the paper on SSRN. I had the pleasure of commenting on the paper at a conference earlier in the spring. Sousa is a new voice in the area of consumer debt who demonstrates with this paper the potential to make important contributions in the field.

Sousa treats bankruptcy stigma as the complex and nuanced topic it is. Methodologically, the paper is very careful. The interviews are presented for what they are, without trying to make them tsupport claims they cannot. Sousa is careful not to make claims about generalizability. Instead, the interviews provide insights about how the debtors perceived their bankruptcies and suggest hypotheses to for future work that will take us toward more generalizable conclusions. Sousa's findings on the relative lack of stigma among the self-employed are new and specifically suggest profitable areas of research. Overall, the debtors interviewed for the paper express feelings of stigma toward their bankruptcy.

Impressively, all of this research comes in a readable and concise paper that focuses primarily only on describing the world as it is. As a relatively new scholar, Sousa is to be commended for resisting the prolixity and vague normativity that characterize too much of today's legal scholarship. I look forward to following his work.

BIBLIOGRAPHY:

Sousa, Michael E (2012). "Bankruptcy Stigma: A Socio-Legal Study," American Bankruptcy Law Journal, 87:435-82.

Comments


While this is an interesting study it understates the dysfunctional system which is not designed to repay creditors but to line the pockets of trustees and their hired attorneys that fee crank the revenue, if any, from the bankrupt's estate.

Administrative fees are paid before creditors. Judges, who are merely magistrates and not Article III courts, go along with the well-oiled scheme as they may need a job after their short term tenure is completed.

The system is not designed to allow the debtor to reorganize because Chapter 11 is extremely costly and Chapter 13 adds another 14% in administrative fees to the trustee many times making monthly payments prohibitive. Even if the debtor can sustain a Chapter 11 or 13, creditors and the US Trustee can push the debtor into a Chapter 7 to liquidate the assets rather than confirm the plan. Creditors foolishly think they will get a piece of the liquidation, but alas, they might see a pittance of a penny or two if they are lucky - fore the rest will surely be sucked up by the administrative fees and taxes.

Bankruptcy is another government sanctioned racket with so many loopholes that nearly every statute can be overcome by a competing rule or procedure. Corruption is a common occurrence that usually stems from an unbalanced bench. Trustees are treated as judicial partners and are actually the debtor's adversaries. Trustees are given more leeway and many times end up hiring high-priced attorneys to desecrate the debtor (who obviously can't afford equal representation).

Congress needs to make corrections. The mission of the bankruptcy court used to be a fresh start for the debtor and for the creditors to have an opportunity to get paid. That is no longer the case. For the fees the trustees' hired attorneys make on one case alone, an army of attorneys could be on payroll with the US Trustees' offices with less incentive to fee crank leaving more for the creditors in the estate. Judges should be Article III and moved around the country so as not to establish unhealthy camaraderie or political alliance and remain more fair and balanced.

The thrust should be to allow the debtor the opportunity to repay the debt. It should not be more costly to make payments (14% surplus for the Ch.13 Trustee is an outrageous interest rate) and repayment plans should be encouraged. Any creditor foolish enough to want revenge against a debtor by pushing the debtor into Chapter 7 rather work out payments usually gets nothing... And that's why there is such a stigma to bankruptcy.

An excellent paper and content. Thanks for sharing.

Ray

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  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless (rlawless@illinois.edu) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.

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