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16 November 2017

Stray Bankruptcy and Insovlency Ideas

I've noted some of these things before, but I'm jotting down some stray ideas on bankruptcy and insolvency law reform in one play without a lot of elaboration and support as a reminder to follow up on them in greater depth at some point.

1. There are certain classes of debt that should be subordinate:

a. Exemplary damages.
b. Default interest in excess of non-default interest rates or statutory interest rates where no non-default interest rates is stated.
c. Late fees.
d. Civil and criminal fines.
e. Penalties such as tax penalties.

Basically, everyone should have what their basic obligations are paid before anyone gets something extra and there should not be an incentive to burden defaulting debtors which could actually lead to a tipping point that sends them into insolvency or bankruptcy simply for the strategic reason of getting ahead of other creditors.

2. Debts owed to insiders should be subordinate to debts owed to outsiders harmonizing the law of preferences and CUFTA and common law rules. This would still be prior to the statutorily subordinated debts mentioned above.

3. Trade credit of businesses should have priority over long term debt, not just selected wage and services debts.

4. Limited liability entities, at least if they are publicly held or subsidiaries or affiliated of publicly held companies, should be required to be bonded as to trade creditors so that only long term creditors are taking credit risk and are doing so consciously. All limited liability entities should also be required to have adequate insurance determined in some formulatic way.

5. Ordinary income tax debt should not have priority over other creditors. Tax priority ought to be limited to taxes subject to perfected liens, property tax liens, and withheld taxes where there is a trust fund obligations (e.g. withholding taxes on employees).

6. The non-dischargeability of student loans under current law is too severe. It should not apply to loans to attend schools that are unaccredited during attendance or to loan balances not yet repaid for schools that lose their accreditation before they are paid in full. Loans for attendance at accredited schools from which the student graduates should lose their exemption from discharge at the end of the originally contemplated amortization period of the loan. The standard for hardship discharges of student loan debt should be lower in cases where the student did not graduate and in cases where the student did not obtain licensure and/or employment in the student's chosen field following a pre-professional course of instruction. For example, the hardship standard should be lower for someone who does not pass the bar exam following law school than for one who does.

7. Cram downs of personal residences and of personal vehicles should be allowed in personal Chapter 11s and in Chapter 13.

8. There should be a streamlined reorganization process for Chapter 11 reorganizations that extinguish all equity, extinguishes all subordinated debt if it would not reasonably have been paid in a Chapter 7, and converts non-trade credit general creditors into equity holders, that does not disturb the operations of the company at all.

9. The amount of future income contributions to a bankruptcy estate that are required should generally be fixed at a certain percentage of income for a certain period of time. To mirror non-bankruptcy law, an amount equal to 25% of income in excess of 30 hours a week at minimum wage (the maximum wage garnishment for ordinary debts) for three years (the low end of existing Chapter 13 plans) should be normative, with exemptions more or less identical to wage garnishment exemptions, generalized to self-employment. There might be exceptions to including future income, for example, for disability, but they should be fairly narrow. This might greatly reduce the distinction between Chapter 7 and Chapter 13.

10. It should be easier to declare non-dischargeable debts not discharged than the strict deadlines and definitions and standards of proof of current law.

11. A new chapter should be added to allow a stay to be obtained by insolvent probate estates.

12. Exemption from discharge for fraud debts should be limited to out of pocket losses and not a benefit of the bargain measure.

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