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Consumer Bankruptcy Reform ... and American Xenophobia?

posted by Jason Kilborn

I hope I'm not stepping on Bob's toes in announcing the public release of the long-awaited report of the ABI Commission on Consumer Bankruptcy. The Commission, with Credit Slips' own inimitable Bob Lawless as its reporter, was formed in December 2016 to explore revisions to the US consumer bankruptcy system that would improve the operation of its existing structure; that is, evolution, not revolution. With this explicitly limited charge, one would not necessarily expect to find much high-level discussion of how the US approach squares with or fits within the many recent global developments in consumer insolvency relief, and one would expect to see a concentration on local solutions for local stumbling blocks.

That being said ... and in no way to detract from the monumental amount and truly impressive nature of the work the Commission has done here ... one might have expected to see a bit of discussion, if not even a touch of inspiration, from comparative sources. In 1970, the Bankruptcy Commission rejected any consideration of foreign developments in consumer bankruptcy, in part because there were few such developments, and in part because so little was known about the operation of non-US bankruptcy law at the time (for those younger than I, note that neither home computers nor the public Internet existed in 1970 ...). Nearly 50 years later, we now have at our fingertips a mountain of comparative data and analysis on the development, operation, and revision of consumer insolvency systems around the world, much of it reported in English specifically to make it widely available to law reformers like the ABI Commission. Again, one would not have expected this comparative material to occupy center stage in a reform of largely US problems in the uniquely US consumer bankruptcy system. But in a bit part here and there, some comparative observations might have supported the Commission's already compelling recommendations.

For example, the Commission recommends eliminating the BAPCPA-imposed requirements of pre-filing "credit counseling" (I can't resist using scare quotes here) and pre-discharge financial management training, at least in Chapter 7. It might have added fuel to the Commission's fire here to note several other prominent world consumer insolvency systems have done away with their previous requirements of credit counseling/negotiation, such as Austria, Greece, and Sweden, for some of the same reasons cited by the Commission. The Commission also recommended reforming the means test very mildly, including the possibility of Chapter 13 debtors' being allowed to set aside a reserve fund (held by the trustee and accessible only after notice and a potential hearing) for unforeseen expenses. Though this is a big ask, it might have been enlightening to consider the massive reforms in plan budgeting and debtor austerity requirements around the world, explored in the World Bank's report on consumer insolvency, which clearly reflects a trend away from squeezing debtors and toward making plans more doable. In particular, Swedish administrators have long factored a "buffer" amount into debtor's monthly budgets, a bit of lagniappe to ensure a cushion for unforeseen expenses--and not sequestered in the trustee's possession. Finally, the Commission recommends increasing the Chapter 13 debt limit to $3 million. The purpose of this limit--to distinguish between cases where the structures of Chapter 11 were warranted and not--was discussed in the World Bank's recent report on MSME insolvency, and again not mentioned (or as far as I can tell considered) in the Commission's proceedings.

It's a bit sad when one compares consumer bankruptcy reform reports like the Commission's to similar reports produced by non-US bodies. The latter tend to be peppered with comparative observations from multiple jurisdictions. As far as I can tell, there isn't one solitary comment in the Commission's otherwise quite fine report on how any of this has played out in the tumultuous last few decades beyond the US border. On the bright side, it seems to me this is the ironic consequence of living in a such a huge country with such vast resources, as reflected on the truly awe-inspiring membership list of the ABI Commission. We are hindered by the very richness of our local resources, leaving us with the perception that no reference to extra-US resources is necessary. Perhaps not necessary, but to combat the perception if not the reality of US isolationism, a few such references here and there might be useful.   


I very much agree that this is, looking back, a blind spot that we didn't consider. You are also, to continue the visual metaphor, correct that "the very richness of our local resources" regarding bankruptcy, leaves Americans with the perception that we need not look to other countries.

That outlook, however, seems to be both directions- I'm just reading "Bankruptcy- The Case for Relief in an Economy of Debt" by Joseph Spooner from the U.K. about the English (and I guess Welsh) system of bankruptcy and debt relief. It is chock full of references to U.S. bankruptcy law, policy, and research, but has far, far less from other nations, including English-speaking ones. This points again to the "richness" of our bankruptcy resources but also hints that there is a dearth of much from elsewhere.

That said, it is very interesting to compare debt relief American style with elsewhere. One immediate take away is that the English administrative Debt Management Plans lacking the clear adversarial nature of American bankruptcy, seems to be a system that has been "captured" by the financial industry, who constantly ratchet up the requirements of such plans. So, even though consumer debtor's attorneys get accused of being greedy and racially biased, at least American debtors can have zealous advocates.

You should actively reach out to the ABI to encourage its next project to be a review of what international insolvency can teach the U.S. about bankruptcy and debt solutions.

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