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Failure and Forgiveness: Rebalancing the Bankruptcy System.

A press release from the Bankruptcy Issues Council reveals that 1.1 million people filed for Personal bankruptcy in 1996, resulting in the elimination of $30 billion in payment obligations. Bankruptcy filings during 1997 are expected to increase by a whopping 23 percent. Assuming that the level of debt remains stable, nearly $37 billion of debt will be eliminated in 1997. These are staggering numbers.

More staggering, however, is the impact of these filings. For every debtor, Karen Gross, author of Failure and Forgiveness and professor of law at New York Law School, estimates that at least 13 creditors are involved. In 1996, bankruptcy directly involved 15.4 million debtors and creditors. Left out of these figures are countless others affected by these filings.

Many people touched by the bankruptcy process feel the process is unfair. After all, why should debtors be allowed to avoid paying debts they have incurred or be allowed to shirk legal responsibility for the injuries they have caused through negligent acts? Why should debtors that have produced unsafe products be allowed to avoid responsibility for their inadequate testing of those products? Why should secured creditors -- simply because they have filed proper financing statement -- get priority of payment over other creditors? Is it in anyone's interest for a bankruptcy to take five or more years and involve millions in fees and costs?

Failure and forgiveness describes the current bankruptcy system, analyzes its frailties, and makes recommendations for reform. The book and the debate it should engender are important. As the author writes, "Bankruptcy is all about responsibility and forgiveness. It is about health, not ruin. It is about moral strength, not moral destituteness. It is about the future and not the past. It is about people's potential to grow and become. A legal system designed to deal with failure says a lot about the United States as a nation."

Gross examines the Bankruptcy Code and how it is implemented from the perspective of debtors, creditors, and what she calls "the community." The first section, where she describes the current system and how it functions, is readable and thorough. Gross describes how the code works and how it treats different classes of debtors. She also outlines the options open to these debtors.

Her next three parts deal with what she believes the bankruptcy system should attempt to accomplish for the three factions: debtors, creditors, and community. The premise for her analysis and recommendations are twofold. The first, with which everyone would likely agree, is that we live in a credit-based society. The second, with which many of us might take issue, is that individuals are inherently altruistic.

In the case of debtors, Gross suggests that the system should provide a "fresh start" to them, while preserving their sense of self in a way that encourages rehabilitation. She acknowledges that doing so has an opportunity cost, both to creditors and society. She also suggests that debtors be looked at and differentiated based on how they incurred their debts.

To achieve a fresh start in the current system, Gross offers five recommendations. One is a proposal to extend the limitation on discharge for certain acts to nonindividual debtors. For example, if both an individual and a corporate debtor borrowed money from a bank by falsifying financial statements, under Chapter 11 the corporate debtor may obtain a discharge while the individual debtor may not.

Her analysis then turns to creditors. Gross points out that the current system is modeled on the principle of treating creditors equally. For example, each unsecured creditor receives a pro rata payment equal to that of every other unsecured creditor. This kind of system fails to recognize and distinguish between creditors.

The current system also establishes a hierarchy of priorities. In other words, it determines who gets paid first But the system does not take into account the size of the creditor's business, the impact of the debt on the creditor or the creditor's business, or the origin of the debt.

Gross believes it is time to implement a mechanism that would provide for equality of outcome, and she makes a challenging recommendation for how this can be accomplished. She recommends that any unsecured creditors may challenge the standard pro rata distribution as it applies to them. This could be done by showing irreparable injury.

The discussion of the community is novel. There is currently no mechanism for taking the community into account. Further, she asks, what is the community, and what community matters? She answers both questions well. She points out that the debtor-creditor relationship does not exist in a vacuum. People are interrelated on a number of levels, and these relationships have value.

Gross concludes by making recommendations for balancing competing interests. While all will not -- and probably should not -- implemented, Gross does an excellent job of engaging the debate about what is wrong with the current system and how it can be fixed.
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Author:Farnsworth, T. Brooke
Publication:Trial
Article Type:Book Review
Date:Jul 1, 1997
Words:820
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