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

Abstract

Congress has a great affinity for debt adjustment bankruptcies, in which a debtor keeps rather than liquidates her asset and instead repays creditors out of future income. Although originally the terrain of individual consumer debtors under chapter 13 of the Bankruptcy Code, Congress in 2019 dramatically expanded the scope of debt adjustment bankruptcy by making it available to small businesses. Most debt adjustment bankruptcies fail. The relative rights of debtors and creditors when tensions arise are therefore of great importance. Yet the law in this area is wholly unsettled. Doctrinally, the courts are deeply split on the lifespan of the bankruptcy estate. This article defends a theory of the bankruptcy estate in debt adjustment bankruptcies known as the estate termination theory. It holds that debtors in debt adjustment bankruptcies are both free from bankruptcy court supervision and not generally entitled to special bankruptcy protection. The article situates the limited lifespan bankruptcy estate in a model of bankruptcy it dubs “light-touch” bankruptcy, emphasizing the advantages of simple, streamlined, and cheaply administrable procedures.

Keywords: Bankruptcy