Category: Bankruptcy

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The Unconstitutionality of State-Created Bankruptcy-Specific Exemptions

Judge Jeffrey R. Hughes, writing for the U.S. Bankruptcy Court for the Western District of Michigan, has held a Michigan exemption law that applies only in federal bankruptcy proceedings to be unconstitutional. In re Wallace, 2006 WL 2347807 (Bankr. W.D. Mich. Aug. 9, 2006) (to be published). The Bankruptcy Code authorizes states to opt out of the Code’s exemption scheme. As a general matter, then, debtors from opt-out states may only exempt property from their bankruptcy estates pursuant to state-provided exemptions and nonbankruptcy federal exemptions. 11 U.S.C. § 522(b)(2), (3)(A). In this regard, the Bankruptcy Code recognizes and defers to nonbankruptcy entitlements. A state exemption law that applies only in federal bankruptcy proceedings (a “bankruptcy-specific exemption”) raises the issue of whether the recognition of and deference to nonbankruptcy entitlements translates into a congressionally-delegated authority for states to create bankruptcy entitlements. Within the exemption context, the Wallace court has answered “no.” States do not have such authority, thus rendering a state-created bankruptcy-specific exemption unconstitutional.

The court in Wallace referenced a 2000 decision issued by the U.S. Bankruptcy Court for the Northern District of Indiana, In re Cross, 255 B.R. 25 (Bankr. N.D. Ind. 2000), which found that an Indiana bankruptcy-specific exemption regarding entireties property was unconstitutional. Aside from these two decisions, I know of no others that address this issue. This is curious as Delaware, Georgia, Iowa, Kentucky, New York, Ohio, and West Virginia have all enacted bankruptcy-specific exemptions in one form or another—some allowing debtors in bankruptcy to claim more exempt property than they otherwise could outside of bankruptcy and others providing the opposite. I wonder whether courts and/or legislatures in these jurisdictions will take notice of the Wallace decision. Perhaps there are more constitutional challenges or even statutory amendments on the horizon. Stay tuned.

10

Educated Yet Broke

Can you be too poor to file for bankruptcy, yet have the ability to repay your student loans?

When Congress amended the Bankruptcy Code in 2005, it also amended the Judicial Code to provide for the waiver of the mandatory filing fee for bankruptcy. That’s right. Prior to this statutory amendment, if you were so financially strapped that you couldn’t pay the filing fee (then, $150 for Chapters 7 and 13; now, $220 for Chapter 7 and $150 for Chapter 13), you were out of luck: Per the Supreme Court’s 1973 decision in United States v. Kras, 409 U.S. 434, in forma pauperis relief was unavailable in bankruptcy. Lest we prematurely praise Congress for changing this state of affairs, debtors today will get a waiver of the filing fee only under very narrow circumstances. A debtor must have (1) household income less than 150% of the poverty line and (2) and an inability to pay the filing fee in installments (see 28 U.S.C. § 1930(f)(1)).

Now that we have a sense of what Congress deems to be a financially dire situation, at least for purposes of filing for bankruptcy, it strikes me that we might use this measure to gauge a debtor’s inability to repay other types of debts—say, for example, student loans. In an empirical study of the discharge of student loans in bankruptcy, Michelle Lacey (mathematics, Tulane) and I documented that the financial characteristics of the great majority of debtors in our sample evidenced an inability to repay their student loans. One measure we used was the amount of the debtor’s household income in relation to the poverty line established by the U.S. Department of Health and Human Services. We had sufficient information to calculate this figure for 262 discharge determinations. For this group of debtors, half of them had household income less than 200% of the poverty line. It didn’t occur to us to run the numbers using the 150% figure applicable to the fee waiver. In light of the new statutory provision, I’ve set out to look at our data from this perspective. The numbers are sobering, to say the least.

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Now Playing in a Bankruptcy Court Near You

Imagine that, for the past several years, you’ve worked diligently and dutifully as a bankruptcy judge. Unlike your Article III colleagues on the federal bench, you don’t have lifetime tenure or salary protection. But that doesn’t really bother you all that much because you care about what you do and you feel you make a difference. What’s more, you love the substance of your work—applying the Bankruptcy Code day in and day out. Sure, it has its share of inconsistencies and ambiguities that present some interpretive difficulties, as any statute would, but, at the end of the day, it’s elegant and workable. And then, BAM! Your life as a judge as you know it comes to a screeching halt.

On April 20, 2005, President Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) into law, thus becoming Congress’s willing accomplice in committing statutory massacre. And when I say statutory massacre, I’m not even thinking about how BAPCPA substantively changes the Bankruptcy Code. Rather, I’m focusing on BAPCPA’s inartful drafting. As recently blogged by Bob Lawless over at Credit Slips: “Regardless of one’s views about the substance of the amendments, most everyone seems to agree that the legislative drafting left something to be desired.” And that’s putting it quite mildly. A quick glimpse at some of the statements from members of the bankruptcy bench during the past year gives the impression that some of the judges are not too happy with Congress.

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Bankruptcy in the Wake of Katrina

katrina.jpgI’ve recently been thinking about the difficulty researchers will face in studying Hurricane Katrina’s effects on bankruptcy filing rates in New Orleans. A couple of weeks ago, over at Credit Slips, Bob Lawless (University of Illinois) discussed the importance of extending credit relief to natural-disaster victims. Lawless’s empirical work on bankruptcy filing rates after a major hurricane has found “that for every two new bankruptcies that occur in areas unaffected by the hurricane, there are three new bankruptcies in the judicial district where the hurricane made landfall.” The study focused on hurricanes from 1980 – 2004, so I’m curious to see whether in the case of Katrina this finding will hold to be true for the Eastern District of Louisiana (E.D. La.), within which New Orleans is located. My hunch is that it won’t. Since the New Orleans diaspora involved hundreds of thousands of individuals, many of whom would be likely candidates for bankruptcy but have not returned (and may never return) to the city, the increased volume of bankruptcy filings will not materialize in E.D. La. A preliminary look at recent bankruptcy-filing data from the district suggests as much.

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