By Richardo I. Kilpatrick, Craig B. Rule and Suzy M. Sidote of Kilpatrick & Associates, P.C., Auburn Hills, MI

11 U.S.C. § 101, the introduction to the Bankruptcy Code, begins not with a preamble discussing the purposes behind the legislation, but with a list of definitions.  The definitions generally discuss the meaning of key terms that appear frequently throughout Title 11.  What is missing from this section and the Bankruptcy Code as a whole, however, is a definitive Congressional declaration of the goals of the bankruptcy process.  The nature of a consumer Chapter 7 case clearly points to discharge as the primary intended goal of a debtor.  Chapter 13, the consumer reorganization chapter of the Bankruptcy Code, does not lend itself to such an unambiguous answer.  A Chapter 13 debtor may define “success” in a number of ways depending on the circumstances surrounding the filing of the case and the subjective goals of the debtor.  These individual understandings of success, however, may not comport with the intent of Congress in this area.  Given the lack of an explicit definition of a successful Chapter 13 case in the Bankruptcy Code, we are left to the legislative history, implicit understandings in the Code, and judicial interpretations to resolve this quandary.  As discussed below, the reliance on these tools to discern Congressional intent fails to produce any clear-cut answer.

The legislative history of the Bankruptcy Code and the amendments thereto provides little guidance as to the Congress’s goals in enacting Chapter 13.  Rather, the various reports merely elucidate the meaning of specific provisions of the Code.  Accordingly, any analysis must turn to meanings embedded within the language of the Bankruptcy Code and the pronouncements of courts examining that language.

The Bankruptcy Code and its judicial interpretations appear to point to only two competing definitions of a successful Chapter 13 case: discharge or the mere completion of plan payments.  The former position is best supported by 11 U.S.C. § 1328(a), which provides for the general discharge of a debtor’s obligation to pay debts upon completion of Chapter 13 plan payments.  As in Chapter 7 cases, the “default” result of the completion of a Chapter 13 is the discharge most debts[i].  Any exceptions to granting a general discharge are narrowly defined in the Bankruptcy Code and, in practice, come into play in only a small minority of cases.  This provides a powerful indication that Congress intended a successful Chapter 13 case to result in a discharge.

Judicial findings as to the over-arching purpose of the Bankruptcy Code similarly point to discharge as the ultimate goal of consumer bankruptcy cases.  The Supreme Court has proclaimed that the “principal purpose of the Bankruptcy Code is to grant a ‘fresh start’ to the ‘honest but unfortunate debtor.’” Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365, 367 (2007), quoting Grogan v. Gardner, 498 U.S. 279, 286 (1991).  The Marrama Court, in fact, employs this statement to preface a discussion regarding discharge in both Chapter 7 and Chapter 13 cases.  The idea of a “fresh start” has long been synonymous with a discharge in the bankruptcy context.  As early as 1904, the Supreme Court indicated that bankruptcy is “designed to relieve the honest debtor from the weight of indebtedness which has become oppressive and to permit him to have a fresh start in business or commercial life, freed from the obligation and responsibilities which may have resulted from business misfortunes.” Wetmore v. Markoe, 196 U.S. 68, 77 (1904)(Emphasis Added).  This purpose is best fulfilled when a debtor does more than just delay repayment while reorganizing; a debtor cannot truly make a financial “fresh start” without the general discharge provided for under Section 1328(a).

The Bankruptcy Code and case law interpreting it also point to a competing potential goal of a Chapter 13 case: the successful completion of plan payments.  Although discharge clearly plays a significant role in the Chapter 13 scheme, there is no definitive indication that the potential for discharge is a necessary requirement.  Although Section 1328(a)[ii] affords a debtor a broad discharge after plan payments are completed, the 2005 Amendments, through the enactment of 11 U.S.C. § 1328(f), prohibits discharge in certain cases in which a debtor has received a prior bankruptcy discharge.[iii] This exception, contained in the discharge section of Chapter 13, does nothing to prohibit the filing or confirmation of a Chapter 13 case.

Had Congress intended to compel all Chapter 13 debtors to be eligible for discharge upon completion of their cases, it would have narrowed the class of individuals entitled to file a Chapter 13 case.  11 U.S.C. § 109(e) sets forth who may file a Chapter 13 case.  This subsection provides that only an individual with regular income who has secured and unsecured debts below specified maximum dollar amounts is permitted to seek Chapter 13 relief.  Absent is any suggestion that the debtor must be eligible to receive a discharge if the plan is successfully completed.

Similarly, the inability of a case to proceed to discharge does not hamper the confirmation of a proposed plan.  Neither 11 U.S.C. § 1322 nor 11 U.S.C. § 1325, which respectively address the mandatory contents of a plan and the requirements for confirmation, conditions confirmation on whether the debtor will receive a discharge.  Instead, the Bankruptcy Code appears to require, in order to confirm a case, that the debtor shows that it is likely that he or she will successfully complete the plan.  This mandate is embodied in the feasibility provision of 11 U.S.C. § 1325(a)(6), which provides that a bankruptcy court shall confirm a plan if “the debtor will be able to make all payments under the plan and to comply with the plan”.  Section 1325(a)(6) “requires debtors to establish and courts to find, considering all the circumstances, that there is a reasonable likelihood of success of plan completion, and that debtors will be able to comply with all plan terms.” In re Erbaugh, 199 B.R.367, 369 (Bankr. S.D. Ohio1996).

Absent a definitive statement of what constitutes a successful Chapter 13 case from Congress, practitioners and judges will continue to make only educated guesses.

[ii] Furthermore, in a Chapter 13 cases, unlike a Chapter 7 case, it is possible (although in practice, extremely rare) that a debtor, by the completion of the plan, may pay 100% of all debts with interest.  In these circumstances, a discharge is essentially meaningless since all debts were paid in full and there is nothing to which the discharge could apply.  The goal of the Chapter 13 case, therefore, was solely to take advantage of the automatic stay to give the debtor time to repay all debts.  It is unlikely that Congress would deem such a scenario improper.

[iii] Decided before the 2005 Amendments, the Supreme Court, in Johnson v. Home State Bank, 501 U.S. 78 (1991), appears to validate the ability of a debtor to file a Chapter 13 case immediately after receiving a Chapter 7 discharge, and, therefore, the ability of a Chapter 13 case to proceed to completion without a discharge.

RICHARDO I. KILPATRICK

Admitted to Bar, 1983, Michigan; United States District Court, Eastern and Western Districts of Michigan; United States Court of Appeals, Sixth Circuit; admitted to United States Supreme Court, March 17, 1997.

EDUCATION: Harvard University (B.A., Economics, 1973); University of Michigan Law School (J.D. 1982).

PRACTICE: Kilpatrick & Associates, P.C., President (January 2000 – Present) – A professional corporation specializing in Creditors Rights and Insolvency Law focusing on Insolvency, Corporate, Consumer and Commercial Litigation and Bankruptcy, Real Property Remedies for Creditors, Real Property Transactions, and General Corporate Counseling.

MEMBERSHIPS: State Bar of Michigan; United States District Court, Eastern and Western District of Michigan; Sixth Circuit Court of Appeals and the Supreme Court of the United States.  Mr. Kilpatrick served on the Board of Directors for the American College of Bankruptcy; the Counsel of Certified Bankruptcy Specialists; and President (2001) of the American Bankruptcy Institute. He was inducted as a Fellow into the American College of Bankruptcy, March 1999 and served on the Board of Directors July 2001-2007. Mr. Kilpatrick spoke at the National Conference of Bankruptcy Judges in 1989, 1995 and 1997-1999, 2002 and 2005. He is a presenter at numerous seminars focusing on bankruptcy and collections given by the Institute of Continuing Legal Education faculty for the Norton Litigation Institute (1992-present); PESI and the American Bankruptcy Institute. Mr. Kilpatrick is the Editor for Norton’s Treatise on Bankruptcy and frequently publishes articles on Consumer and Commercial Bankruptcy. In October of 2008, Mr. Kilpatrick was invited to the National Bankruptcy Conference as a Conferee and accepted the invitation. The Conference provides input to Congress and others on how to improve the bankruptcy system.  In August of 2011, Mr. Kilpatrick accepted an invitation to serve as a member of the Judicial Conference Advisory Committee on Bankruptcy Rules.