Friday, 8 October 2010

Discharge in Comparative Perspective - The American approach

We have examined the Scottish position regarding discharge in personal insolvency. Now we can turn to the American (pictured) position. Scholarship by our American cousins on the personal side of the subject far outstrips that which has been undertaken by English academia.[1] Legislators, policy makers and academics, amongst others, can therefore learn a great deal from the corpus of literature that is extant on the America approach[2] to personal insolvency.[3] The Bankruptcy Abuse Prevention and Consumer Protection Act 2005 (BAPCPA)[4] has recently amended the approach engendered in the 1978 US Bankruptcy Code. The provisions retain at their heart the fresh start and rehabilitation ethos that has permeated through American approaches to personal insolvency law for so long[5] and which have clearly influenced other jurisdictions, not least England and Wales with the reforms engendered in the Enterprise Act 2002. BAPCPA does however make access to chapter 7 more difficult for insolvent individuals. Pursuant to the new regime insolvents are forced into chapter 13 where possible as the procedure provides for some form of repayment before discharge, whereas chapter 7 can expunge all liability. Another major policy shift involves attendance on a compulsory personal financial management course for chapter 7 and chapter 13 debtors.[6] Failure to attend a course can constitute grounds for refusal of discharge.[7]

Discharge operates in the American Bankruptcy Code provisions in a broad sense for “honest but unfortunate debtors.”[8] When discussing American approaches to discharge[9] must have in mind the main procedures that are used for non-business bankruptcy, namely, chapters 7, 11, 12, or 13. The discharge provisions differ in relation to each procedure. As bankruptcy law is administered at a federal level in the United States, and has been since 1898, there are no state-by-state differences in approaches to discharge at a technical level.[10] When American bankruptcy law was first promulgated at a federal level, in 1898,[11] discharge was enacted as unconditional, save for a relatively small number of non-dischargeable debts. The effect was to put relatively few fetters in the way of the individual in terms allowing a true fresh start.[12]

In terms of state level application there may of course be different policy approaches in practice, in the sense of the grant of discharge, but this would be an issue for a blog entry (or article!) in itself. For the purpose of the thesis being tested in this blog entry, namely, do more liberal discharge provisions give rise to more prudent lending behaviour?, the federal application is disappointing in the sense that any state to state differences may have helped to highlight how discharge works in different states in different ways.[13] The discharge comparisons being made in this blog entry will therefore have to be reserved to the country under discussion and not their constituent states.

It is broadly correct to say in relation to the American personal insolvency regimes that discharge is automatic. Some debts are however not discharged automatically and they survive the bankruptcy due to public policy considerations.[14] For chapter 7 bankruptcy, which is a liquidation type procedure, discharge is usually obtained about four months after the debtor files their petition. If no complaints have been received objecting to the discharge and there has been no substantial abuse, discharge will be granted. [15] The formal process of discharge in Chapter 7 can be a collective affair. As Westbrook, Warren and Sullivan have opined, “At the hearing will be a crowd of debtors, all being discharged at once. The judge may give a little lecture…Debtors usually rise en masse and are declared discharged from their debts.”[16] It is presumed that discharge from the formal state of chapter 7 bankruptcy occurs simultaneously. A certificate of discharge then follows. 

The next two species of personal insolvency procedure are akin to the English and Welsh IVA procedure. Chapter 11 can be used as a reorganisation procedure for individuals. Chapter 12 is a procedure used to adjust the debts of family farmers and fishermen. The court, in both these procedures, will grant discharge as soon as possible after the debtor has completed all of the payments that were contained in the terms of the Chapter 11 or Chapter 12 plan. A condition of discharge may include attendance at a financial management course by the debtor. Consequentially, the length of the plan and the behaviour of the debtor directly affects the time before discharge is achieved. Typically, discharge “occurs about four years after the date of filing.”[17]

Milman’s contention, outlined above, that comparative examinations can be problematic due to cultural differences might influence our use of American personal insolvency provisions particularly in relation to discharge. Chapters 11 and 13 are not comparable with bankruptcy and as chapter 13 is now the American’s preferred route one must have in mind the policy drivers behind this re-emphasis away from chapter 7 which is roughly analogous to the English bankruptcy model. However, the period before automatic discharge is vastly expedited under chapter 7 compared with the English and Welsh position, occurring as it does some four months following the filling of the bankruptcy petition. Useful considerations of discharge policy cannot perhaps be drawn from this jurisdiction.

[1] The American literature on the subject is voluminous. See for example: Shuchman, P. An Attempt at a “Philosophy of Bankruptcy” [1973] 21 UCLA Law Rev. 403; Boshkoff, D. Limited, Conditional and Suspended Discharges in Anglo-American bankruptcy proceedings (1982) University of Pennsylvania Law Review 131; 69-126; Ziegel, J. The Philosophy and Design of Contemporary Consumer Bankruptcy Systems: A Canada-United States Comparison (1999) 37, Osgoode Hall Law Journal, p.205; Niemi-Kiesilainen, J. Consumer Bankruptcy in Comparison: Do we cure a market failure or a social problem (1999) 37 Osgoode Hall Law Journal 473; Radin, M. The Nature of Bankruptcy [1940] University of Pennsylvania Law Review, vol.89, no. I, pages 1 to 38; Ramsay, IDC. Individual Bankruptcy: Preliminary Findings of a Socio-Legal Analysis (1999) 37 Osgoode Hall L.J. 15; Sullivan, TA & Warren, E & Westbrook, JL. As We Forgive our Debtors: Bankruptcy and Consumer Credit in America. Oxford University Press, New York, Oxford. 1989; Sullivan, TA & Warren, E & Westbrook, JL. As We Forgive our Debtors: Bankruptcy and Consumer Credit in America. BeardBooks, Washington DC. 1999.
[2] On early American insolvency laws see: Cooper, T. The Bankrupt Laws of America, Compared with the Bankrupt Law of England. Philadelphia. 1801.
[3] Ziegel, J. Facts on the Ground and Reconciliation of Divergent Consumer Insolvency Philosophies [2006] vol,.7 Theoretical Inquiries in Law, no.2, pp. 299-321. For a late 1990’s discussion of mooted change see also: Niemi-Kiesilninen, J. Changing Directions in Consumer Bankruptcy Law and Practice in Europe and USA (1997) 20 J. Consumer Policy 133.
[4] Pub.L. 109-8, 119 Stat. 23, enacted April 20, 2005. On the reforms see: Warren, E & Lawless, RM & Littwin, AK & Porter, KM & Pottow, JAE & Thorne, DK. Did Bankruptcy Reform Fail? An Empirical Study of Consumer Debtors (2008) 82 American Bankruptcy Law Journal 349.
[5] For an early judicial discussion of discharge see: Local Loan Co. v. Hunt, 292 US 234 (1938).
[6] For a discussion of this process see: Gross, K. Pre-bankruptcy Counseling and Post-filing Debtor Education, Chapter 111 in Collier on Bankruptcy, 15 ed. Rev. (L.P. King, ed., Matthew Bender, 2005).
[7] BAPCPA 11 U.S.C. § 727(a)(11), and: Gross, K & Block-Lieb, S. Empty Mandate or Opportunity for Innovation? Prepetition Credit Counseling and Post-Petition Financial Management Education (2005) 13 American Bankruptcy Institute Law Review 549–567.
[8] Bankruptcy: The Next Twenty Years. National Bankruptcy Commission Final Report. October 20, 1997. Volume I. William S. Hein & Co, Inc. Buffalo, New York, 2000, at page 179.
[9] For am comparatively early survey of discharge in personal insolvency in America see: Howard, M. A Theory of Discharge in Consumer Bankruptcy (1987) 48 Ohio St. LJ. 1047, 1085-87.
[10] There were state level differences prior to 1898. The US Constitution (Article I, section 8) authorises Congress to adopt “uniform laws” on bankruptcy.
[11] Pursuant to the Bankruptcy Act 1898, c.541, 30 Stat.544. The Chandler Act of 1938 followed this statute in relation to the regulation of personal insolvency in the United States. This was superseded by the Bankruptcy Code of 1978 (as amended) which is the pertinent legislation today. For a discussion of the formulation of the first federal statute see: Skeel, DA. Debt’s Dominion: A History of Bankruptcy Law in America. Princeton University Press, Princeton and Oxford. 2001, at Chapter One.
[12] On contracting out of the fresh start discharge from bankruptcy on the personal side of the subject see: Adler, BE. Bankruptcy Primitives (2004) 12 Am Bankr. Inst. L. Rev 219.
[13] A future instructive piece of research might focus on the different States approaches to bankruptcy during the nineteenth century.
[14] United States Bankruptcy Code, s.523.
[16] Sullivan, T & Warren, E, & Westbrook, JL. As We Forgive Our Debtors – Bankruptcy and Consumer Credit in America. Oxford University Press, Oxford, 1989, at page 30.
[17] Ibid.

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