Rehabilitating Bankruptcy Reform
50 Pages Posted: 31 Aug 2012
Date Written: July 17, 2012
Over the last thirty years, our bankruptcy laws have seen a series of amendments designed to enhance and solidify select creditors’ entitlements in bankruptcy cases. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) dramatically furthers this trend. A number of BAPCPA’s amendments, individually designed to provide financial incentives or increased control to a select creditor constituency, work together to limit a firm’s ability to use bankruptcy as a tool for reorganization. Although these amendments affect all debtors seeking Chapter 11 bankruptcy protection, their impact is magnified for large retail debtors.
BAPCPA’s amendments reflect a legislative intent to increase creditor certainty by replacing flexible, judge-driven standards with mechanical rules. BAPCPA’s rules have drained debtors’ liquidity and increased parties’ incentives to behave non-cooperatively. This article demonstrates how BAPCPA’s overreliance on rules has eviscerated foundational bankruptcy policies and, counterproductively, has undermined BAPCPA’s purported normative aims.
Viewing the effects of BAPCPA’s rigidity on large retail cases exposes enduring faults in the bankruptcy reform process. This article concludes by exploring how a standards-focused framework for reform could have attained BAPCPA’s normative priorities while ensuring that debtors’ assets are put to their highest-value use. This analysis clarifies key principles that should guide Congress in future bankruptcy reform efforts.
Keywords: Bankruptcy, Reorganization, Chapter 11, BAPCPA, Retail, Rules and Standards, Public Choice
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