Improving Chapter 13?: Some Thoughts on Dear Congress

We had a thoughtful and very entertaining program at Southwestern Law School yesterday.  It was the cdcbaa Second Annual Jim King Bankruptcy Symposium.  Headliners were Judges Keith Lundin from Tennessee and our own Meredith Jury, Hank Hildebrand, the irrepressible chapter 13 trustee in Nashville, and Prof. Katie Porter from the University of California, Irvine.

Judge Lundin (leading with his nose basically) suggested a number of ways to improve the chapter 13 practice here in the central district of California.

1.   Conduit Payments:  Judge Lundin, supported wholeheartedly by Hank (did I mention irrepressible?) and Prof Porter, suggested that all payments to secured creditors should be made through the plan, i.e., to the trustee’s office.    The benefits are that the trustee will shoulder the burden of making the payments to the secured creditors and shoulder the burden of fighting with the creditor about the creditor’s extraneous (and endless) charges which will presumably be unnecessary since the creditor will recognize that the trustee is without sin and doesn’t need the creditor looking over his shoulder.  There are areas apparently where this works so well that the mortgage servicing companies waive the late charges, and basically go on cruise control when the trustee is making the payments.  The trustee will also, it was argued, have all the information about the payments over the plan period and can establish that all payments were made so that the debtor can get the discharge with as little effort as possible.

The idea was not too popular.

The counter-point is the cost which Hank argued is a non-issue.  The trustee’s salary is fixed in any event, and it is not that much additional work for the trustee -since the trustee is doing most of it already – so the dollars going to the trustee will not increase.  Further, waiving the late charges saves debtors a lot (assuming of course that most debtors are late with their payments – a fact not established).

Further, even if we are promised that there will be no additional cost to the debtor, we don’t trust the government to actually do that (I certainly don’t).  We have all heard about the budgeting process which lags a good 18 months behind reality.  In other words, a huge increase in filings would not result in a like increase to the trustees’ budgets because of the lag.    And in that case, the trustees would have the bulk of the debtor’s income without the financial ability to do their job.  In a down-turn in filings (like now), the debtors would be paying additional amounts to trustees that they will not necessarily need which will then be paid over to creditors – simply because the trustee is making the mortgage and car payments directly.

Counter-point two – at least for this group – is that turning over the job of protecting the debtor to the trustee is not particularly appealing.  Only one of our trustees is an attorney and there simply isn’t the same motivation to protect the debtor that debtor’s counsel has.   This is only partially an administrative process – it is also part litigation.  Everyone agreed that the “accounting practices” of loan servicers is appalling.  Nancy Clark made a great point reminding everyone that FRBP 3002.1 puts specific burdens on banks which debtor’s counsel should be taking advantage of when banks are doing their typical “we’re the big powerful bank” routine.

2.  Get Rid of the No-Look Fee:  Lundin was adamant that debtor’s counsel should be paid for their work and if that is $6, 000 – $8,000 – $10,000 – whatever, counsel should file a fee application in every case and demand to be paid.  The no-look fee gives the attorney who does a poor or even mediocre job the right to the same amount of fees as the good practitioner.  I personally agree with this hugely.  We have to file fee apps in every chapter 11.  Everyone in my department keeps track of their time so we can tell the judge (and of course we then know exactly how much we are writing off).

The counter-point to that is that our judges do not want that.  Reviewing an individual fee application for each case would require a huge amount of work for the judge and his or her staff.  Lundin chuckled at that and insisted that debtor’s counsel should press the point.  I agree (speaking of leading with your nose).

3.  Set all Chapter 13 Confirmation hearings on the same day of the week:     In other words, if all judges heard all confirmation hearings on Tuesday morning at 9:00 a.m. for example,  lawyers would be in court on that day and back in the office the rest of the time.  Judge Jury’s comment to that was something like “you’re dreaming.”   That comment seems pretty appropriate here.  With 18 judges doing chapters 13s, even if they did that, an attorney could be required to be in five different parts of the city each Tuesday morning.  It was agreed however that that might work at least at the division level.  It is by the way a great idea in concept.

4.  Nationalize the Forms:  The question was asked about how the “national forms” are coming.  The panel seemed to agree that the national forms concept is going down in dust.  They also seemed to agree that having debtors use the same forms throughout the country would be a good idea but apparently there are just too many individual judges and/or districts and/or trustees that are insistent that “our district can’t possibly use THESE forms.”  I frankly am not sure what our group thinks of the idea.

5.  Automatic Paycheck Deductions:  This one didn’t go far.  Judge Lundin suggested that there should be a paycheck deduction order in every case.  The problem is obviously that most debtors are scared to death and believe that banks and judges and trustees have extraordinary powers.  Automatic paycheck deductions often means, to the debtor, that they will be fired.  We know the code says they can’t be fired, for filing at least, but the debtor doesn’t know that and doesn’t believe us when we tell them.  Further, I would bet that a huge percent of debtors do not get a regular paycheck.

6.  Insist on Consistency from our Judges and Trustee:  I’m with you Judge Lundin!  He said something like “make sure your local rules work for you.”  Katie Porter pointed out that she went to some dinner and it took a half hour to get the 24 judges in our district just to sit down because there were no seat assignments and the politicking for seats took that long.

It was refreshing to me to sit and think about things that perhaps we should give more time and thought to.  Perhaps it’s the mediator in me that thinks – “there has to be some way to do this.”  Some way to get to a better result.

I really want to thank  Judges Keith Lundin and Meredith Jury, Hank and Katie Porter for doing this for us.  We did not pay them.  They are interested in the quality of what we all do, interested in helping people.  They took basically a whole Saturday to give us their ten cents worth and we are better for it.  Thanks to to Amrane Cohen for attending and offering his view of different things and to Aki Koyama and Kathy Dockery for the data that they provided for the materials.
Jon