I heard a distressing story about the war against debtors recently.
It seems a high rate of successful Chapter 13 plan completions triggered multi-day audit of the trustee by the United States Trustee. The UST likes to remind us that it is an arm of the Department of Justice pledged to be a bankruptcy watchdog.
The UST thinks something must be wrong if debtors were completing low-payment plans. That isn’t how BAPCPA was supposed to work, goes the UST mindset.
The subtext of the story, unarticulated but nonetheless present, seems to be “How dare you let debtors succeed“.
Only the UST could be offended by debtor success.
And the auditors found….
Or rather, the auditors found that the trustee relied on the sworn statements of the debtor for values of assets. The auditors wanted the file to contain unsworn opinions of third parties, like real estate agents, and copies of the page from Kelly Blue Book.
No mention of the fact that under the rules of evidence, the owner of an asset can competently testify as to the value of the asset in court. An expert isn’t necessary. An expert might be more persuasive, but the owner is deemed to be a reliable source of value.
But not, apparently, if you are a UST auditor, instead of a judge.
All of this is relevant because the value of the debtor’s assets is the foundation of the best interests of creditors test for Chapter 13 confirmation.
Before Chapter 13 confirmation. the trustee analyzes the debtor’s non exempt assets to assess what, if anything, creditors would get if the debtor had filed a Chapter 7 liquidation case.
There’s no reason to think that the results of the analysis would have been different had the trustee accumulated more paper in the file. No finding that the facts were actually different than the debtor represented. Just not enough paper.
So local practice will now require third party opinions of value even for underwater real estate, additional declarations, longer 341 meetings. The list of new procedures, required questions, and supporting paper filled five pages. Trees will die needlessly.
Why UST hostility matters
To my core, I am offended by the premise of the UST and those who ordered the audit that debtor success in completing their plans was cause for concern. It seems to assume that if debtors can do what they pledge to do, and get a Chapter 13 discharge, the trustee must be slacking.
Why isn’t the UST documenting the trustee practices that result in high rates of completion?
After all, looking for success factors would be equally effective in making work.
Second, I wonder why the UST thinks that low dividend, or no dividend plans that have been confirmed by the bankruptcy judge need a second look. After all, every judge I appear before took to heart the admonition of the Supreme Court in Espinosa that judges should independently assess the propriety of Chapter 13 plans before confirmation.
Low or no dividend plans are an honest product of the means test that Congress was so proud of and the fact that the possessions of most of those willing to file bankruptcy don’t amount to much.
Third, building a file for the trustee in support of his job performance simply raises the cost to the debtor of good representation in Chapter 13. So, debtors either pay more, or the bankruptcy bar works for even less than we presently make. If good bankruptcy lawyers can’t make a decent living at this, they will leave the field.
But remember that many commentators on bankruptcy “reform” in 2005 thought that the proponent’s game plan was to reduce the number of bankruptcies by intimidating bankruptcy lawyers and by raising the cost and hassle factor to the point that debtors wouldn’t seek relief in bankruptcy.
It may yet work.