The Limited Lifespan of the Bankruptcy Estate: Managing Consumer and Small Business Reorganizations

Authors

Jonathan M. Seymour, Duke Law SchoolFollow

Document Type

Article

Publication Date

2020

Abstract

Congress has a great affinity for debt adjustment bankruptcies. These are bankruptcies in which a debtor keeps rather than liquidates her assets and instead repays creditors out of future income. Chapter 13, which allows individual consumer debtors to reorganize in this way, was supplemented in 1986 by chapter 12 for farm bankruptcies. In 2019, in the largest expansion of debt adjustment bankruptcies since the Bankruptcy Code was enacted, Congress made debt adjustment bankruptcy available to small businesses.

The reality is, however, that most debt adjustment bankruptcies fail. For that reason, the relative rights of debtors and creditors when tensions arise are of great importance. The bankruptcy court must know what protections a debtor may resort to if she is struggling to make payments under her plan, and whether new, unpaid creditors may undertake their own collection efforts if doing so will jeopardize the bankruptcy case. Although these questions are basic, they are unresolved. A deep split among bankruptcy courts and courts of appeals has persisted in the law of chapter 13 since the early years of the Code. This disunity threatens the bankruptcy courts' ability to coherently implement Congress's new small business bankruptcy provisions. This Article proposes a solution to this Gordian Knot, and then attempts to situate that solution within a broader normative conception of debt adjustment bankruptcy law.

Doctrinally, the key division among courts concerns the lifespan of the bankruptcy estate. Property within the estate is subject to court supervision and protected by the automatic stay. This Article defends a theory of the bankruptcy estate in debt adjustment bankruptcies known as the estate termination theory. This theory holds that the bankruptcy estate is of a limited lifespan. Once the debtor has secured court approval for a repayment plan and the case is underway, she is both free from bankruptcy court supervision and without special bankruptcy court protection. Moreover, although a default rule, the early termination of the bankruptcy estate is sticky. Preserving property within the estate is possible, but the power to do so is limited. Some valid bankruptcy law purpose is necessary before property can be retained within the estate.

On a broader level, this Article attempts to situate the limited lifespan of the bankruptcy estate within a model of bankruptcy it dubs "light-touch" bankruptcy. This model emphasizes the advantages of simple, streamlined, and cheaply administrable procedures, and suggests that debtors may benefit most by being able to enjoy a financial fresh start, free from entanglement with the bankruptcy court, at the earliest possible moment during their bankruptcy cases.

Citation

Jonathan M. Seymour, The Limited Lifespan of the Bankruptcy Estate: Managing Consumer and Small Business Reorganizations, 37 Emory Bankruptcy Developments Journal 1-63 (2020)