* Assistant Professor, William & Mary School of Law. B.S. 1990, Georgetown University; J.D. 1997, University of Chicago; Ph.D. 1998, University of Pennsylvania. Copyright 2002 by Richard Hynes. All rights reserved. Please send comments to rmhyne@wm.edu. The author thanks Peter Alces, Robert Chapman, Mechele Dickerson, John Duffy, Jim Dwyer, Alan Meese, Eric Posner, Eric Kades, and Todd Zywicki for their comments and Tyler Bass and David Browne for research assistance. All errors remain my own.
1 Massachusetts imprisoned defaulting debtors as late as 1857. Charles Warren, Bankruptcy in United States History 52 (1935). Ancient Athens considered defaulting on a debt a capital crime. E.g., Lawrence H. White, Bankruptcy as an Economic Intervention, 1 J. Libertarian Stud. 281, 281 (1977). In ancient Rome the creditors of a defaulting debtor could enslave the debtor or divide the debtor’s body into proportionate shares. Id.
2 See, e.g., Kathy Bergen, Bankruptcy Becoming Prosperity’s Partner Largely a Declaration of the Middle Class, Chi. Trib., July 5, 1998, at 6 (quoting Elizabeth Warren, “[bankrupt debtors] are middle-class—that’s what’s scary about this. . . . They are not marginal workers. They are you and me, they are our neighbors.”).
3 Non-bankruptcy law protects some of these assets as well. See infra notes 165–173 and accompanying text.
4 See, e.g., Teresa A. Sullivan et al., The Fragile Middle Class: Americans in Debt 3–6 (2000) (arguing that bankruptcy plays an important role in the larger social safety net).
5 For studies describing the financial shocks that have led to individual bankruptcies, see Teresa A. Sullivan et al., As We Forgive Our Debtors 95–102, 166–77 (1989); Sullivan et al., supra note 4, at 15–22, 75–107, 141–71, 172–98; Teresa A. Sullivan et al., Consumer Debtors Ten Years Later: A Financial Comparison of Consumer Bankrupts 1981–1991, 68 Am. Bankr. L.J. 121, 130–31 (1994).
6 Credit insurance typically insures against risks such as unemployment, disability, death, and destruction of property. For an overview of credit insurance, see Consumer Credit Ins. Ass’n, The 2000 Fact Book of Credit-Related Insurance 4–7 (2000). Consumer advocacy groups have been highly critical of credit insurance. See, e.g., Consumers Union & the Ctr. for Econ. Justice, Credit Insurance: The $2 Billion a Year Rip-Off, Ineffective Regulation Fails to Protect Consumers 2–45 (1999), at http://www. consumersunion.org/pdf/credit.pdf.
7 Some scholars question whether contracting costs can justify the presence of collections limitations because the frequency of credit transactions may allow the use of standardized contracts; debtors could then select a loan based on the forgiveness it offered as well as its other terms. See, e.g., Samuel A. Rea, Jr., Arm-Breaking, Consumer Credit and Personal Bankruptcy, 22 Econ. Inquiry 188, 189 (1984).
8 See, e.g., Thomas H. Jackson, The Logic and Limits of Bankruptcy Law 232–42 (1986). This Article suggests that bankruptcy insures debtors against their own negligent financial management. See infra notes 227–244 and accompanying text.
9 This is what is known as a “market for lemons” problem. Effectively, insurers believe that only high-risk individuals will buy insurance and therefore charge high rates. Because of the high rates, low-risk individuals will not want the insurance and the expectation is self-fulfilling. See George A. Akerlof, The Market for “Lemons”: Quality, Uncertainty and the Market Mechanism, 84 Q.J. Econ. 488, 489–90 (1970) (demonstrating the fundamental problem by using the used car market as an example); Gillian Lester, Unemployment Insurance and Wealth Redistribution, 49 UCLA L. Rev. 335, 361–62 (2001) (applying the lemons problem to insurance). The “asymmetric” information can have other adverse consequences as well. For example, in the consumer credit context, “good” credit risks may agree to harsh collections terms, such as no bankruptcy protection, in order to distinguish themselves from “bad” risks and thus receive lower rates. “Good” risks will find these terms less costly than “bad” risks because they will default less often. One can construct a model in which both good and bad credit risks would be better off if these harsh terms were banned; one can also construct a model, however, in which these harsh terms are necessary to prevent the lemons problem discussed above. For a more thorough explanation of this problem, see Richard Hynes & Eric A. Posner, The Law and Economics of Consumer Finance, 4 Am. L. & Econ. Rev. 168, 173–76 (2002).
10 See, e.g., Jackson, supra note 8, at 229–34; Theodore Eisenberg, Bankruptcy Law in Perspective, 28 UCLA L. Rev. 953, 976–91 (1981); Margaret Howard, A Theory of Discharge in Consumer Bankruptcy, 48 Ohio St. L.J. 1047, 1047–70 (1987).
11 See, e.g., Vern Countryman, For a New Exemption Policy in Bankruptcy, 14 Rutgers L. Rev. 678, 746–48 (1960); Wells M. Engledow, Cleaning Up the Pigsty: Approaching a Consensus on Exemption Laws, 74 Am. Bankr. L.J. 275, 275–78 (2000); Note, Bankruptcy Exemptions: Critique and Suggestions, 68 Yale L.J. 1459, 1459 (1959).
12 See, e.g., Wenli Li, To Forgive or Not to Forgive: An Analysis of U.S. Consumer Bankruptcy Choices, 87(2) Fed. Res. Bank Richmond Econ. Q. 1, 15–18, 21 (2001); Hung-Jen Wang & Michelle J. White, An Optimal Personal Bankruptcy Procedure and Proposed Reforms, 29 J. Legal Stud. 255, 274–86 (2001).
13 See Barry Adler et al., Regulating Consumer Bankruptcy: A Theoretical Inquiry, 29 J. Legal Stud. 585, 587–601, 605–09 (2000); Jean Braucher, Increasing Uniformity in Consumer Bankruptcy: Means Testing as a Distraction and the National Bankruptcy Review Commission’s Proposals as a Starting Point, 6 Am. Bankr. Inst. L. Rev. 1, 1–11 (1998); A. Mechele Dickerson, Bankruptcy Reform: Does the End Justify the Means?, 75 Am. Bankr. L.J. 243, 245–46, 269-77 (2001); Judge Edith H. Jones & Todd Zywicki, It’s Time for Means-Testing, 1999 BYU L. Rev. 177, 177–83; Elizabeth Warren, The Bankruptcy Crisis, 73 Ind. L.J. 1079, 1080–1101 (1998).
14 See, e.g., Adler et al., supra note 13, at 601–08; Marianne B. Culhane & Michaela M. White, Debt After Discharge: An Empirical Study of Reaffirmation, 73 Am. Bankr. L.J. 709, 709–11 (1999); Elizabeth Warren, A Principled Approach to Consumer Bankruptcy, 71 Am. Bankr. L.J. 483, 498–502 (1997).
15 See generally A.B. Atkinson, Income Maintenance and Social Insurance, in 2 Handbook of Public Economics 779 (Alan J. Auerbach & Martin Feldstein eds., 1985) (reviewing the relevant literature on public assistance); Gary Burtless, The Economist’s Lament: Public Assistance in America, 4 J. Econ. Persp. 57 (1990) (reviewing the relevant literature on public assistance); Joseph E. Stiglitz, Pareto Efficient and Optimal Taxation and the New New Welfare Economics, in 2 Handbook of Public Economics, supra, at 991(Alan J. Auerbach & Martin Feldstein eds., 1985) (reviewing the relevant literature on taxation).
16 See, e.g., A. Mechele Dickerson, America’s Uneasy Relationship with the Working Poor, 51 Hastings L.J. 17, 19, 23–25 (1999).
17 See, e.g., Harold M. Hochman & James D. Rodgers, Pareto Optimal Redistribution, 59 Am. Econ. Rev. 542, 542–43 (1969).
18 See infra notes 45, 102 and accompanying text.
19 See, e.g., Timothy Besley & Stephen Coate, The Design of Income Maintenance Programmes, 62 Rev. Econ. Stud. 187, 188, 193–95 (1995).
20 See Stiglitz, supra note 15, at 995–96.
21 Chapter 13 of the Bankruptcy Code is entitled, “Adjustment of Debts of an Individual with Regular Income.” 11 U.S.C. �� 1301–1330 (2000).
22 See id.
23 In Aesop’s fable of the ant and the grasshopper, the grasshopper plays the summer away while the ant toils to save for winter. There are numerous versions of this fable and they differ largely on how the grasshopper is treated in the winter. See, e.g., Aesop’s Fables 23 (Jacob Lawrence, Illus., U. Wash. Press, 1997). Several prominent bankruptcy scholars have used the story of the ant and the grasshopper to explain the moral hazard created by bankruptcy. See, e.g., Jones & Zywicki, supra note 13, at 219–20; Lynn M. LoPucki, Common Sense Consumer Bankruptcy, 71 Am. Bankr. L.J. 461, 463–65 (1997); Warren, supra note 13, at 1084. This Article adopts an expanded definition of the grasshopper problem that includes willful misbehavior, such as a willful and malicious tort, that makes financial distress more likely.
24 See infra notes 325–330 and accompanying text.
25 See infra notes 62–67, 95 and accompanying text.
26 See infra notes 407–424 and accompanying text.
27 See infra notes 228–234 and accompanying text.
28 See supra note 23 and accompanying text.
29 See infra notes 120–131 and accompanying text.
30 See infra notes 142–148 and accompanying text.
31 11 U.S.C. � 1328(a) (2000); see, e.g., Solomon v. Cosby, 67 F.3d 1128, 1130 (4th Cir. 1995); Petty v. Belanger, 232 B.R. 543, 545 (D. Mass. 1999) (decided under Chapter 7, although debtor originally filed for Bankruptcy under Chapter 13); In re Carsrud, 161 B.R. 246, 247 (Bankr. D.S.D. 1993).
32 See infra note 284 and accompanying text.
33 See supra note 13 and accompanying text.
34 As discussed below, debtors filing for bankruptcy under Chapter 7 need not repay anything out of their future income. See infra note 177 and accompanying text.
35 See infra notes 325–330 and accompanying text.
36 See infra note 307 and accompanying text.
37 See infra notes 331–333 and accompanying text.
38 See infra notes 331–333 and accompanying text.
39 See infra notes 163–406 and accompanying text.
40 Although public assistance could take the form of a negative income tax such as the earned income tax credit, these problems are often treated separately in the literature. See, e.g., Atkinson, supra note 15, at 782, 804–06; Burtless, supra note 15, at 68–77; Stiglitz, supra note 15, at 1038. The differences in these literatures, however, are unimportant for the purposes of this Article.
41 See Stiglitz, supra note 15, at 991 (“For more than a hundred years, economists have attempted to show that progressive taxation can be justified on more fundamental principles.”).
42 See, e.g., Hochman & Rodgers, supra note 17, at 542–43. Earlier efforts at justifying progressive taxation and public assistance relied on the idea that redistribution would increase aggregate happiness because the poor value an additional dollar of income more than the rich. See, e.g., Neil Bruce, Public Finance and the American Economy 213–19 (2d ed. 2001). This approach received a great deal of criticism because it assumes that the government can compare the happiness of different individuals. See, e.g., Joseph Bankman & Thomas Griffeth, Social Welfare and the Rate Structure: A New Look at Progressive Taxation, 75 Cal. L. Rev. 1905, 1917–18 (1987). For a review of the development of the justifications for these redistributive policies, see Atkinson, supra note 15, at 791–95.
43 See, e.g., Bruce, supra note 42, at 209–13.
44 See John C. Harsanyi, Cardinal Utility in Welfare Economics and in the Theory of Risk-Taking, 61 J. Pol. Econ. 434, 434–35 (1953); John C. Harsanyi, Cardinal Welfare, Individualist Ethics, and Interpersonal Comparisons of Utility, 63 J. Pol. Econ. 309, 314–16 (1955); see also Atkinson, supra note 15, at 793–95 (discussing the insurance justifications of redistributive programs).
45 The reader may associate this term with the work of John Rawls. See John Rawls, A Theory of Justice 12, 136–42 (1971). In Rawls’s version of the veil of ignorance argument, the debtor is not just ignorant as to whether he will be rich or poor in the future, but is also ignorant as to the chance of each circumstance occurring. Id. at 12, 137. Therefore, according to Rawls, an individual would want an equal distribution of income unless an unequal distribution aids the most disadvantaged member of society. See id. at 148–49. This conclusion has some importance for the interpretation of the second-best tax discussed below. Differences between Rawls’s work and the earlier work of Harsanyi, however, are not central to this Article.
46 See, e.g., Besley & Coate, supra note 19, at 188, 193–95.
47 See id. at 188, 195–205.
48 See, e.g., Stiglitz, supra note 15, at 995–96.
49 When studying the effect of income taxation, economists refer to two effects, the wealth (or income) effect and the substitution effect. The wealth effect refers to the tendency of individuals to work more because taxes make them poorer and hence they value an additional dollar of income more highly and are willing to sacrifice more leisure to get it. The substitution effect refers to the fact that the individual does not get to keep all of the last dollar earned. The tax therefore makes leisure cheaper and the individual substitutes leisure for work. It is the substitution effect, and not the wealth effect, that determines the efficiency of a tax. See, e.g., Bruce, supra note 42, at 428–32 (describing the income and substitution effects in the context of an income tax).
50 See, e.g., Stiglitz, supra note 15, at 995–96 (noting that optimal lump-sum taxes can equalize the consumption of each individual and yet still provide each individual with the incentive to work an amount such that her marginal rate of substitution between goods and leisure equals her marginal product).
51 Because many public assistance programs do not appear to be structured to serve an insurance motive, economists often view them as a product of altruism or at least limited altruism. See, e.g., Besley & Coate, supra note 19, at 189. Still, even under these assumptions the first-best system is just a lump-sum tax based on recipients’ ability to support themselves. Id. at 188.
52 This assumption is more controversial than it appears. For example, one might think that the amount of leisure available may affect the happiness an additional dollar yields.
53 The government will assign each individual a consumption level such that the happiness that each individual would derive from an additional dollar of consumption, his marginal utility of consumption, would be the same. If this were not the case, aggregate happiness could be increased by redistributing money to those who valued it more highly. If all individuals have the same preferences and the happiness that they derive from an additional dollar of income depends solely on how much they are consuming, then every individual must consume the same amount. See, e.g., Stiglitz, supra note 15, at 995–96. This does not mean that all individuals are equally happy; in fact, those who can earn more are likely worse off because the government will expect them to work more as long as leisure is a “normal” good. See id. at 995.
54 See Dickerson, supra note 16, at 17–18.
55 See, e.g., Staff of House Comm. on Ways and Means, 105th Cong., 1998 Green Book 537, 537–41 (Comm. Print 1998).
56 Id. (arguing that some teens would not have become pregnant but for the existence of a social welfare system).
57 See Louis Kaplow, Human Capital Under an Ideal Income Tax, 80 Va. L. Rev. 1477, 1482–90 (1994) (describing the endowment at birth with quantifiable earning potential, discountable to present value). But see Lawrence Zelenak, The Reification of Metaphor: Income Taxes, Consumption Taxes and Human Capital, 51 Tax L. Rev. 1, 7–11 (1995) (arguing, among other things, that human capital endowment is not always a good proxy for earnings potential).
58 In fact, individuals may actually be worse off if they have a higher earnings ability. If leisure is a “normal” good so that individuals would want to consume more of it as its price (the available wage) falls, then the government will expect them to work more hours and yet consume the same amount as others. See Stiglitz, supra note 15, at 995.
59 See, e.g., Mark A. Rothstein et al., Employment Law 799 (2d ed. 1999) (“States usually set weekly benefit amounts as 1/23, 1/24, 1/25, or 1/26 of the earnings obtained by applicants during the relevant calendar quarters, resulting in benefit amounts ranging from 50 to 56% of average weekly earnings.”).
60 See Stiglitz, supra note 15, at 996–1004.
61 See, e.g., Besley & Coate, supra note 19, at 195–205 (exploring the optimal system of public assistance); Stiglitz, supra note 15, at 996–1023 (reviewing the basic lessons of the literature).
62 See Stiglitz, supra note 15, at 997. A significant portion of the public assistance literature discusses the use of other proxies to tag individuals deserving of relief or the intentional design of programs to screen those able to support themselves. See, e.g., George A. Akerlof, The Economics of “Tagging” as Applied to the Optimal Income Tax, Welfare Programs, and Manpower Planning, 68 Am. Econ. Rev. 8, 8 (1978). In addition, the government may be able to punish recipients in order to dissuade those who can support themselves from seeking assistance. See, e.g., Besley & Coate, supra note 19, at 188 (discussing the use of “workfare” to screen for those debtors with a low earnings capacity). While punishment mechanisms such as the loss of one’s credit reputation undoubtedly could play an important role in an optimal bankruptcy system, they are beyond the scope of this Article.
63 See, e.g., Stiglitz, supra note 15, at 1023–30.
64 Under some assumptions the optimal income tax may actually decline over some ranges of income. See, e.g., id. at 1022.
65 In theory, it is possible that the wealth effect could dominate the substitution effect and the individual could decide to work more after the imposition of an income tax. This makes little difference, however, because only the substitution effect has any bearing on whether a tax is efficient. See supra note 42 and accompanying text.
66 See Stiglitz, supra note 15, at 1006 (noting the equity-efficiency tradeoff).
67 See id.
68 See infra notes 101–114 and accompanying text.
69 See supra notes 46–47 and accompanying text.
70 See supra notes 62–66 and accompanying text.
71 See infra notes 420–422 and accompanying text.
72 Economists consider an individual altruistic if his happiness depends at least in part on the condition of others. See Hochman & Rodgers, supra note 17, at 543. Because altruistic individuals do not want to see their neighbor destitute, they may prefer a system like bankruptcy that makes extreme poverty less likely. Because it is the creditor, and, ultimately, debtors themselves who bear the cost of this insurance, bankruptcy offers some advantages over public assistance financed from the public fisc. In particular, public assistance may encourage debtors to engage in risky financial behavior, such as over-borrowing, because public assistance partially shields them from the consequences of their actions. See Thomas H. Jackson, The Fresh-Start Policy in Bankruptcy Law, 98 Harv. L. Rev. 1393, 1402 (1985); Eric A. Posner, Contract Law in the Welfare State: A Defense of the Unconscionability Doctrine, Usury Laws, and Related Limitations on the Freedom to Contract, 24 J. Legal Stud. 283, 286 (1995). The fact that the public fisc does not bear the costs of bankruptcy, however, makes it difficult to offer a prediction of how the altruist would set the debtor’s consumption in bankruptcy. Assume that the debtor’s consumption in bankruptcy is set by an altruist who is not also a borrower. If the altruist is a true altruist and seeks to maximize the debtor’s expected happiness, the altruist would just choose the same bankruptcy procedure that the debtor herself would choose in an insurance model. Therefore, assume that the altruist cares only about the debtor’s consumption. Because the altruist does not have to pay for the debtor’s consumption, the debtor pays for it through higher interest rates and reduced access to credit; there is nothing to limit the debtor’s choice. This is not to say that altruism plays no role; the altruist may care about some combination of the debtor’s happiness or consumption or may only care that these stay above certain levels. This Article will focus, however, on the insurance role of bankruptcy to avoid this confusion.
73 The utopian bankruptcy system would still leave the debtor with a fixed obligation. The amount of this obligation, however, would be determined by the amount that the altruist would choose for the debtor rather than the amount that the debtor would choose from behind a veil of ignorance. As explained above, however, the amount that the altruist would choose is uncertain. See supra note 72.
74 The profitability of insurance companies is based on the premise that they will receive more premiums than they will pay in claims. See, e.g., A. Mitchell Polinsky, An Introduction to Law and Economics 54 (2d ed. 1989).
75 See id.
76 See id.
77 See infra notes 203–204, 228 and accompanying text. For a further discussion of consumer bankruptcy as insurance, see Charles G. Hallinan, The Fresh Start Theory in Consumer Bankruptcy: A Historical Inventory and an Interpretive Theory, 21 U. Rich. L. Rev. 49, 98–109 (1986).
78 See supra note 76 and accompanying text.
79 See, e.g., Hallinan, supra note 77, at 105.
80 Credit markets may not be perfectly competitive. Some consumer credit markets, however, such as those for credit card debt or mortgages, are now truly national markets and it would be very difficult to claim that any lender truly has market power. In addition, state and federal regulatory structures work to prevent excessive concentration in local lending markets. Furthermore, there is some evidence that different types of lenders—banks, finance companies, etc.—compete for the consumer’s business. See, e.g., A. Charlene Sullivan, Competition in the Market for Consumer Loans, 36 J. Econ. & Bus. 141, 141 (1984).
81 Even if consumer lenders are unable to invest readily in other sources, they are only financial intermediaries. The ultimate source of credit, the individuals who own the wealth that is lent, can choose from among a dizzying array of investments including domestic and foreign securities and banks that loan to corporations. See, e.g., William H. Meckling, Financial Markets, Default, and Bankruptcy: The Role of the State, 41(4) Law & Contemp. Probs. 13, 19 (1977).
82 According to economists, the question of who bears the cost of bankruptcy is answered by examining the elasticity of the supply and demand for credit. If credit markets were perfectly competitive and if consumer lending were but a small part of the overall investment opportunities, then the supply of credit would be perfectly elastic. That is, if the return to lending increased even infinitesimally above the return to other forms of lending, then money would flow into the consumer lending market until the return fell to the normal level. Likewise, if the return decreased, money would flow out until the return rose to the normal level. Therefore, if generous bankruptcy laws increase the rate of default, then money will flow out of the consumer lending market until interest rates rise to raise the expected return of lending to the normal level. See id. at 19–24. Of course, some question the elasticity of the supply of credit and thus question whether creditors and investors will bear more of the costs of bankruptcy. See, e.g., J. Fred Weston, Some Economic Fundamentals for an Analysis of Bankruptcy, 41(4) Law & Contemp. Probs. 47, 48–51 (1977). Empirical evidence suggests that consumers do bear at least some of the costs of laws that restrict collections. See, e.g., Reint Gropp et al., Personal Bankruptcy and Credit Supply and Demand, 112 Q. J. Econ. 217, 230–31 (1997) (finding that debtors who live in states with larger property exemptions pay higher interest rates and have a reduced access to credit). The primary results of this Article, however, do not depend on how much of the costs of bankruptcy are borne by lenders. Even if the lenders incurred much of the costs of bankruptcy, debtors would still have an incentive to choose an efficient means of collection because they could then extract a more generous system. Note too that bankruptcy will provide a net benefit if consumers value the insurance provided more than the additional costs of credit. Therefore, bankruptcy could actually expand the demand for credit, and, if the supply of credit is not perfectly elastic, creditors could actually capture much of the gain from bankruptcy. Therefore, the relevant question is whether the insurance provided by bankruptcy is more valuable than the costs of the distortions it creates. See, e.g., Daniel J. Villegas, Regulation of Creditor Practices: An Evaluation of the FTC’s Credit Practice Rule, 42 J. Econ. & Bus. 51, 56–64 (1990) (testing whether limitations on credit provide a net benefit to consumers and lenders).
83 See analogous discussion, supra note 45 and accompanying text.
84 See supra notes 20, 49 and accompanying text.
85 The author plans to revisit these issues in a future paper.
86 See, e.g., Elizabeth Warren & Jay Lawrence Westbrook, The Law of Debtors and Creditors 426 (4th ed. 2001) (“The property exemptions may make little difference because the debtors who file for bankruptcy may not own much of value that isn’t already mortgaged to the hilt.”).
87 According to the 1998 Survey of Consumer Finances, half of all non-homeowners had a net worth of less than $4,200. See Arthur B. Kennickell et al., Recent Changes in U.S. Family Finances: Results from the 1998 Survey of Consumer Finances, Fed. Res. Bull. 7 (Jan. 2000), available at http://www.federalreserve.gov/pubs/oss/oss2/98/bull0100.pdf. Moreover, this low net worth does not appear solely attributable to an excess of debts. Only 63.5% of these non-homeowners listed any debts at all, and of those that did list debts, half had debts of less than $6,000. See id. at 21.
88 See supra note 5 and accompanying text.
89 See, e.g., Braucher, supra note 13, at 19. Currently � 1325(b) of the Bankruptcy Code defines “disposable income” as income minus reasonably necessary expenses. See 11 U.S.C. � 1325(b) (2000).
90 See, e.g., Nat’l Bankr. Rev. Comm’n, Bankruptcy: The Next Twenty Years 262–73 (1997) [hereinafter NBRC Report]. Interestingly, one of the leading advisors to this commission, Elizabeth Warren, is one of the leading advocates for the argument that unexpected expenses often lead to bankruptcy. See supra note 5. This issue fits firmly within the theory of the second-best. While the first-best solution would adjust debtors’ required repayment for their reasonably necessary expenses, judges may be unable to determine this amount. To the extent that they are unable to do so, differences in expenses must be ignored.
91 See H.R. 5745, 107th Cong. � 707(b)(2)(A) (2002).
92 One can obscure, at least temporarily, this distinction by assuming that debtors can over-borrow from the creditor and store the amount that they do not consume in a riskless asset so that the debtor will always repay something after default. The need for this assumption, however, has important implications for bankruptcy law that will be discussed below. See infra note 290 and accompanying text.
93 In the year 2001 there were approximately 1,452,000 non-business bankruptcy filings. See Am. Bankr. Inst., U.S. Bankruptcy Filings 1980–2001, available at http://www.abiworld.org/stats/1980annual.html [hereinafter Bankruptcy Filings 1980–2001]. The population of the United States in the year 2001 was approximately 275,000,000. See U.S. Census Bureau, U.S. Dep’t of Commerce, Annual Projections of the Total Resident Population as of July 1: Middle, Lowest, Highest, and Zero International Migration Series, 1999 to 2100, available at http://www.census.gov/population/projec-tions/nation/summary/np-t1.pdf [hereinafter Annual Projections of the Resident Population].
94 In 1998 there were a total of 1,135,000 divorces (including annulments) in the U.S. See Nat’l Ctr. for Health Statistics, Divorce, available at http://www.cdc.gov/nchs/fastats/divorce.htm. In addition, in 1998, there were a total of 6,210,000 unemployed persons in the U.S. See U.S. Census Bureau, U.S. Dep’t of Commerce, Statistical Abstract of the United States 404 (2000) [hereinafter Statistical Abstract]. In that same year there were 1,398,182 non-business bankruptcy filings. See Bankruptcy Filings 1980–2001, supra note 93. Of course this represents the number of filings and not the number of debtors. Married individuals may file for bankruptcy jointly. See 11 U.S.C. � 302. Debtors may also file under Chapter 13 frequently, perhaps more than once a year, in order to delay foreclosure or other creditor remedies. See, e.g., Warren, supra note 14, at 502–03 (discussing strategic refiling by Chapter 13 debtors).
95 An alternative answer is suggested by the literature on public assistance which faces a similar issue in that only a small fraction of citizens receive this assistance. See Statistical Abstract, supra note 94, at 380 (indicating that of about 71 million families surveyed in 1998, about 2.6 million received some form of public assistance during 1997). Partly as a consequence, many economists focus on the altruistic goals that these programs may serve by ensuring that citizens do not fall below some minimal standard of living. See, e.g., Besley & Coate, supra note 19, at 187. Bankruptcy may play a similar role and may do so at less cost to the public fisc because the debtors themselves bear the cost of the protection in the form of higher interest rates and reduced access to credit. As discussed above, however, one needs stronger assumptions to predict the bankruptcy system that the altruist would choose. See supra note 72. Moreover, bankruptcy does not appear to be just about concern for the destitute. Studies of debtors in bankruptcy reveal that they resemble society as a whole. See Sullivan et al., supra note 5, at 328; Sullivan et al., supra note 4, at 6.
96 See, e.g., Robert M. Townsend, Optimal Contracts and Competitive Markets with Costly State Verification, 21 J. Econ. Theory 265, 265 (1979).
97 See id.
98 See, e.g., Douglas Gale & Martin Hellwig, Incentive-Compatible Debt Contracts: The One-Period Problem, 52 Rev. of Econ. Stud. 647, 648 (1985). Many of the results of this “optimal contracts” literature depend on very strong assumptions. The fundamental observation that information itself is costly, however, may have important implications for the structure of collections law. In particular, society may rationally choose to forego information in some circumstances and rely on other forms of verification such as punishment. See, e.g., Kelly D. Welch, From Debtor’s Prison to Bankruptcy: The Enforcement of Optimal Debt Contracts 8 (Feb. 2001) (unpublished paper, on file with author). This Article, however, seeks to describe the bankruptcy system that society should choose given that the judge has collected all available information.
99 See Gale & Hellwig, supra note 98, at 661.
100 As discussed above, a court may wish to simply forgive all of the debts of all debtors who have no ability to pay. See supra note 92 and accompanying text.
101 See supra note 48 and accompanying text.
102 See Karen Gross, Preserving a Fresh Start for the Individual Debtor: The Case for Narrow Construction of the Consumer Credit Amendments, 135 U. Pa. L. Rev. 59, 148 (1986) (arguing for this approach for modifications of bankruptcy plans).
103 See, e.g., Warren, supra note 13, at 1081 (describing inability of consumers to withstand shocks, such as divorce or unemployment, due to debt obligations they have incurred).
104 See id.
105 The debtors’ negligence stems from the fact that their borrowing increases the probability of default by an unreasonable amount.
106 See supra notes 20, 48 and accompanying text.
107 See supra notes 48–53 and accompanying text.
108 See supra notes 48–53 and accompanying text.
109 See supra notes 48–53 and accompanying text.
110 This follows from precisely the same logic as used in the optimal tax context. See supra notes 48–49 and accompanying text.
111 See Jackson, supra note 8, at 246–47; Gross, supra note 102, at 136–38.
112 See Jackson, supra note 8, at 246–47 (arguing that if debtors are asked to pay more when their earnings are higher, they may choose jobs with more non-pecuniary benefits such as teaching). But see Gross, supra note 102, at 136–38 (arguing that the repayment required in Chapter 13 of the Bankruptcy Code should not be conditioned on what the debtor could earn because this would reduce the debtor’s ability to choose alternative occupations and would therefore reduce the voluntary nature of bankruptcy).
113 See Gross, supra note 102, at 136–40.
114 See supra note 51 and accompanying text.
115 Numerous articles in the optimal taxation literature have taken this approach and demonstrate that a lump-sum tax is not necessarily optimal. See, e.g., P.A. Diamond et al., Optimal Taxation in a Stochastic Economy, 14 J. Pub. Econ. 1, 6–7 (1980); Jonathan Eaton & Harvey S. Rosen, Labor Supply, Uncertainty, and Efficient Taxation, 14 J. Pub. Econ. 365, 365–66 (1980); Joseph E. Stiglitz, Self-Selection and Pareto Efficient Taxation, 17 J. Pub. Econ. 213, 213 (1982); Hal R. Varian, Redistributive Taxation as Social Insurance, 14 J. Pub. Econ. 49, 66 (1980). The primary purpose of these articles, however, is to accomplish what the standard optimal tax literature largely failed to do: justify progressive marginal income tax rates.
116 See supra Part II.A.1.
117 See Gross, supra note 102, at 148 (arguing for this approach for modifications of bankruptcy plans).
118 The extreme pessimist might even reject the assumption that the judge may observe the debtor’s actual income. To some extent this is undoubtedly true. Judges cannot effectively value some forms of economic income, such as the work product of a spouse that stays home to raise the family’s children. But this problem is not unique to bankruptcy law; it is a frequent topic among tax scholars. See, e.g., Nancy C. Staudt, Taxing Housework, 84 Geo. L.J. 1571, 1577–79 (1996). A more severe pessimist would assert that judges just do not have the resources to observe a bankrupt debtor’s actual income after filing. If this is the case, the only method of solving the opossum problem is to punish those who seek relief; those who “can” pay will pay in order to avoid the punishment. See Rea, supra note 7, at 195. Perhaps this is a plausible description of Chapter 7, which appears to rely heavily on the threat of a damaged credit reputation to discourage debtors from filing. The use of punishment in a bankruptcy system is left to a future article as it leaves little role for a bankruptcy judge.
119 See supra note 59 and accompanying text.
120 See, e.g., Rothstein et al., supra note 59, at 771 (“Mere inadvertence or inattention [that led to termination] will normally be insufficient to disqualify unemployment claimants. There must be evidence of intentional misconduct.”).
121 See, e.g., Stephen Coate, Altruism, the Samaritan’s Dilemma, and Government Transfer Policy, 85 Am. Econ. Rev. 46, 46 (1995).
122 See, e.g., Polinsky, supra note 74, at 56.
123 See id.
124 See id. at 56–57; Steven Shavell, Economic Analysis of Accident Law 211 (1987); Gary T. Schwartz, The Ethics and the Economics of Tort Liability Insurance, 75 Cornell L. Rev. 313, 337 (1990).
125 See, e.g., Shavell, supra note 124, at 8.
126 See, e.g., id. at 212.
127See, e.g., Breeden v. Frankfort Marine, Accident & Plate Glass Ins. Co., 119 S.W. 576, 576 (Mo. 1909).
128 See Robert E. Keeton & Alan I. Widiss, Insurance Law: A Guide to Fundamental Principles, Legal Doctrines, and Commercial Practices 497 (1988). Some courts, however, have suggested in dicta that grossly negligent or reckless conduct could bar recovery. See id. at 539–41.
129 See id. at 492. Some courts, however, have suggested in dicta that grossly negligent or reckless conduct could bar recovery. Id. at 492–93.
130 See Schwartz, supra note 124, at 344. Homeowner’s insurance policies also protect the homeowner against other risks as well.
131 See, e.g., Richard A. Posner, Economic Analysis of Law 221 (5th ed. 1998) (“Automobile liability insurance is now almost universal, although this is partly because states required drivers to buy liability insurance or present equivalent evidence of financial responsibility for accidents.”).
132 See Shavell, supra note 124, at 212; Schwartz, supra note 124, at 344–45.
133 See Schwartz, supra note 124, at 347.
134 See, e.g., Polinsky, supra note 74, at 57.
135 See id.
136 See, e.g., Warren, supra note 13, at 1084.
137 See Jackson, supra note 8, at 232–41.
138 See, e.g., Braucher, supra note 13, at 6–8.
139 By making bankruptcy less generous, society forces debtors to bear more of the costs of their financial failure and thus provides debtors with an incentive to avoid financial distress.
140 See, e.g., Schwartz, supra note 124, at 351 (discussing the under-compensation of victims in the tort system).
141 See, e.g., Adler et al., supra note 13, at 608–09 (discussing trade-off between the generous treatment of a debtor in bankruptcy and the effect that this generosity has on the debtor’s incentives to avoid financial distress).
142 See Keeton & Widiss, supra note 128, at 498 (“Insurance policies typically include express provisions which either require that a loss be accidental or preclude coverage for intended results.”); Willy E. Rice, Insurance Contracts and Judicial Discord over Whether Liability Insurers Must Defend Insureds’ Allegedly Intentional and Immoral Conduct: A Historical and Empirical Review of Federal and State Courts’ Declaratory Judgments—1900–1997, 47 Am. U. L. Rev. 1131, 1145–46 (1998) (describing the main components and clauses of a third-party liability insurance contract); D. Heath Baily, Note, Auto-Owners Insurance Co. v. Harrington: Resisting the Impulse to Judicially Rewrite Exclusion Clauses, 1998 BYU L. Rev. 1645, 1645–46 (1998) (stating that insurance companies protect themselves through the use of an intentional acts exclusion clause).
143 See Keeton & Widiss, supra note 128, at 498 (“Thus, as discussed in the preceding section, courts frequently have held that even in the absence of express provisions, insurance contracts only provide coverage for accidental losses.”).
144 See, e.g., id. at 519 (citing Ambassador Ins. Co. v. Montes, 388 A.2d 603, 606 (N.J. 1978)).
145 Id. at 516.
146 See id. at 518.
147 See, e.g., Rothstein et al., supra note 59, at 771.
148 See infra notes 246–288 and accompanying text.
149 See supra note 47 and accompanying text.
150 This statement ignores the use of punishment to separate those debtors who can pay from those who cannot. By punishing the debtor when he defaults, one can again implement a system that provides some relief for the destitute debtor. See, e.g., Rea, supra note 7, at 193. Punishment may play a large role in bankruptcy. For example, the threat of the loss of a debtor’s credit reputation may deter those debtors who can repay from filing for bankruptcy. This use of punishment is only appropriate in the absence of information. See Welch, supra note 98, at 1–2. It is entirely possible that the size of bankruptcy judges’ dockets prevents them, or even bankruptcy trustees, from inquiring as to the specific circumstances of most debtors, and therefore a punishment–based system is needed. This Article, however, focuses on the question of how judges should act if they had at least some information about a debtor’s ability to pay. Moreover, this reliance on punishment assumes that judges effectively play no role in the bankruptcy process. Therefore, this Article leaves the role of punishment in bankruptcy to future work.
151 See supra notes 54–59 and accompanying text.
152 See supra notes 54–59 and accompanying text.
153 The analysis of the proper rates for this effective income tax is a little more complicated than in the tax analysis and more closely resembles the analysis of the effective rates that should be included in second-best public assistance programs. That is, one must consider not only the effect that the effective tax has on the work incentives of those receiving relief but also on the work incentives of those not receiving relief. Because lower effective tax rates may encourage some individuals to work a little less in order to begin receiving relief, one cannot even conclude that an effective tax rate of 100% discourages work in the aggregate. See infra note 406 and accompanying text.
154 See supra notes 20, 62 and accompanying text.
155 See supra note 20 and accompanying text.
156 See supra note 62 and accompanying text.
157 See supra notes 115–117 and accompanying text.
158 See supra notes 115–117 and accompanying text.
159 See supra notes 115–117 and accompanying text.
160 This effect is probably even more dramatic if one focuses on a debtor’s disposable income, or income net of expenses. If bankruptcy adjusted for any small change in the debtor’s income after expenses, the debtor would have no incentive to live more frugally.
161 For example, in 1992 the unemployment rate was at or above 7.3% each month. See Bureau of Labor Statistics, U.S. Dep’t of Labor, Labor Force Statistics from the Current Population Survey, available at http://data.bls.gov/cgi-bin/surveymost (last visited Sept. 9, 2002). In 2000, the unemployment rate was at or below 4.1% each month. Id.
162 The family law context provides an interesting analogy. Most states set child support payments equal to the percentage of the parent’s income that the child would have received had the family remained together. Barbara R. Rowe & Kay W. Hansen, Child Support Awards in Utah: Have Guidelines Made a Difference?, 21 J. Contemp. L. 195, 200 (1995). This “income share” model, however, does not require a change in child support payments from month to month as the parent’s income changes. Rather the court sets a fixed dollar obligation based on the parent’s income at the time of the hearing. See generally Nat’l Center for State Courts, A Summary of Child Support Guidelines 11 (1990). The parties can seek a modification of the child support obligations, but unless a substantial amount of time has elapsed (often about three years), the moving party usually must show that the amount awarded would change by at least 10%. See id. at 17.
163 See infra note 328 and accompanying text.
164 See, e.g., Am. Bankers Ass’n, 1997 Installment Credit Survey Report 109 (9th ed. 1997) (reporting that approximately 70% of all bank consumer credit losses occur outside of bankruptcy). Of course, this is a percentage of the dollar amount of outstanding obligations rather than individuals, and it is possible that some individuals might file for bankruptcy long after their creditors accounted for their debt as unlikely to be repaid. This figure, however, clearly implies that a large number of debtors who refuse to repay their loans do not file for bankruptcy. See id.
165 Americans also have a long tradition of simply hiding from their creditors, a tradition that continues today. See, e.g., Jean Braucher, Lawyers and Consumer Bankruptcy: One Code, Many Cultures, 67 Am. Bankr. L.J. 501, 524 (1993) (noting that lawyers sometimes advise their clients to evade their creditors by moving or changing their telephone numbers).
166 Fair Debt Collections Practices Act, 15 U.S.C. �� 1692–1692o (2000).
167 Id. �� 1672–1673 (restricting garnishment in favor of general creditors to no more than the lesser of 25% of debtors’ disposable earnings or the amount by which their disposable earnings exceeds thirty times the federal minimum wage. “Disposable earnings” is defined in this context to mean roughly the debtor’s take-home pay).
168 See, e.g., Tex. Prop. Code Ann. � 42.001(b)(1) (Vernon 2002) (exempting current wages for personal services).
169 See infra notes 170–173 and accompanying text.
170 See, e.g., Eric A. Posner et al., The Political Economy of Property Exemption Laws 5–6 (Sept. 19, 2001) (working paper, on file with the author) (describing property exemption laws).
171 See, e.g., Cal. Civ. Proc. Code � 704.730 (West Supp. 2002) (allowing homestead exemptions between $50,000 and $125,000, depending on household composition).
172 See, e.g., id. � 704.010 (providing a $1,900 exemption of equity in a motor vehicle).
173 See, e.g., id. � 704.060 (providing a $5,000 exemption for tools).
174 For example, in one of the leading casebooks on debtor-creditor law only approximately 157 of 1043 pages are devoted to non-bankruptcy collections. See Warren & Westbrook, supra note 86, at 3–1043.
175 Individual debtors may also file under Chapter 11. In 2000, however, only 686 of over 1,217,000 non-business bankruptcy filings (less than .05 of 1%) were filed under Chapter 11. See Am. Bankr. Inst., Non-Business Bankruptcy Filings by Chapter, 1990–2001, per Quarter, available at http://www.abiworld.org/stats/1990nonbuschapter.html (last visited Sept. 9, 2002).
176 For example, in the year 2000 approximately 69% of all non-business bankrupt debtors chose Chapter 7. See id.
177 Some debts are excepted from discharge. See 11 U.S.C. � 523 (2000) (amended by Pub. L. No. 107–204, Tit. XIII, � 803, 116 Stat. 745, 801 (2002)). Secured debts, such as a home mortgage or an automobile loan, must be repaid in full if the debtor is to retain the collateral. See id. � 724(b). Therefore, many debtors reaffirm these obligations and the debts survive the discharge. See, e.g., Culhane & White, supra note 14, at 713 (finding that 25% of cases sampled had a reaffirmation agreement in the file); Warren, supra note 14, at 499 (claiming that more than 40% of debtors reaffirm some debt).
178 The Bankruptcy Code gives the debtor the choice of the property exemptions of the state in which the debtor lives or certain uniform bankruptcy exemptions. See 11 U.S.C. � 522(b) (1978). Section 522(d), however, also gives the states the right to “opt-out” and deny their debtors the use of the uniform exemptions. See id. � 522(d). Thirty-seven states have chosen to “opt-out” under � 522(d). See Posner et al., supra note 170, at 16.
179 See, e.g., Warren, supra note 14, at 495 (“Exemptions were designed to help ensure that families were not put out of their homes in times of temporary financial reversal, but they have become investment vehicles for savvy debtors to protect significant cash assets from creditors.”) (citation omitted).
180 For example, twenty-three states allowed married couples to exempt at least $60,000 of home equity. See, e.g., 14 Mark Bane et al., Collier on Bankruptcy AL–1—WY–4 (Lawrence P. King et al. eds., 15th rev. ed. 1996 & Supp. 2001) (listing the homestead exemptions of each state). By contrast, in 1995 the median home equity for all families with a head of household at least twenty-five years of age was less than $15,000. See Joseph M. Anderson, U.S. Dep’t of Commerce, The Wealth of U.S. Families: Analysis of Recent Census Data 6 (Nov. 10, 1999), available at http://www.bls.census.gov/sipp/workpapr/wp233.pdf.
181 See Bankr. Admin., U.S. Gen. Accounting Office, Case Receipts Paid to Creditors Professionals 1–2 (1994) (on file with the United States General Accounting Office, Washington, D.C.) (“Of the 1.2 million Chapter 7 bankruptcy cases closed in statistical years 1991 and 1992, about 5% (56,994) generated some receipts for distribution to professionals and creditors.”); see also Warren & Westbrook, supra note 86, at 426 (“The property exemptions may make little difference because the debtors who file for bankruptcy may not own much of value that isn’t already mortgaged to the hilt.”). These figures may overstate the repayment in Chapter 7 as they include business bankruptcies filed in Chapter 7 and business bankruptcies account for nearly eighty percent of all creditor receipts in Chapter 7. See NBRC Report, supra note 90, at 137. This does not mean that consumers repay nothing in Chapter 7; they will often repay their secured creditors or reaffirm their secured loans.
182 Although almost no debtors in Chapter 7 have non-exempt assets, it is possible that bankrupt debtors who do have assets choose another chapter in order to retain their property. See Ian Domowitz & Robert L. Sartain, Determinants of the Consumer Bankruptcy Decision, 54 J. Fin. 403, 416–17 (1999) [hereinafter Determinants]; Ian Domowitz & Robert L. Sartain, Incentives and Bankruptcy Chapter Choice: Evidence from the Reform Act of 1978, 28 J. Legal Stud. 461, 477–82 (1999) [hereinafter Incentives] (finding debtors with more equity in their home or car were more likely to choose Chapter 13); Romona K.Z. Heck, An Econometric Analysis of Interstate Differences in Nonbusiness Bankruptcy and Chapter Thirteen Rates, 15 J. Consumer Aff. 13, 13–16, 29–30 (1981) (examining factors influencing state Chapter XIII rates under the Federal Bankruptcy Act); Jon P. Nelson, Consumer Bankruptcy and Chapter Choice: State Panel Evidence, 17 Contemp. Econ. Pol’y 552, 553, 560 (1999). In addition, in Chapter 7 debtors risk losing their most valuable assets—such as their car or their home—unless they can either repay their secured claims in full or can convince their secured creditors to allow them to reaffirm their debts. See 11 U.S.C. � 724(b).
183 See 11 U.S.C. � 523.
184 There is some empirical support for this proposition in that scholars are unable to explain differences in choice of chapter by other theories tested. See, e.g., Teresa A. Sullivan et al., Consumer Bankruptcy in the United States: A Study of Alleged Abuse and of Local Legal Culture, 20 J. Consumer Pol’y 223, 244–45 (1997) [hereinafter Study of Abuse]; Teresa A. Sullivan et al., The Persistence of Local Legal Culture: Twenty Years of Evidence from the Federal Bankruptcy Courts, 17 Harv. J.L. & Pub. Pol’y 801, 806, 830 (1994) [hereinafter Persistence] (interpreting inability to explain variation in percentage of bankrupt debtors choosing Chapter 13 in different bankruptcy districts to be evidence of the importance of a local legal culture).
185 See 11 U.S.C. � 707(b) (2000).
186 See, e.g., Gross, supra note 102, at 77–85 (describing lobbying efforts leading to amendments to Bankruptcy Code in 1984).
187 In 1978, there were 172,000 non-business bankruptcy filings. See Michelle J. White, Personal Bankruptcy Under the 1978 Bankruptcy Code: An Economic Analysis, 63 Ind. L.J. 1, 29 (1987–1988). By 1984 this figure had risen to 284,517. See Bankruptcy Filings 1980–2001, supra note 93.
188 Between 1984 and 2001 the number of non-business bankruptcy filings rose from 284,517 to 1,452,030. See Bankruptcy Filings 1980–2001, supra note 93.
189 In 1984, approximately 68.8% of non-business filings were made under Chapter 7. See Am. Bankr. Inst., Annual U.S. Non-Business Bankruptcy Filings by Chapter 1980–1984, at http://www.abiworld.org/stats/1980stateannualnonbuschapter.html (last visited Sept. 22, 2002) [hereinafter Non-Business Bankruptcy Filings 1980–1984]. By 2001 this figure had risen to 70.1%. See Am. Bankr. Inst., Annual U.S. Non-Business Bankruptcy Filings by Chapter 2000–2001, at http://www.abiworld.org/stats/00stateannualnonbuschapter.html (last visited Sept. 22, 2002).
190 See supra note 181 and accompanying text.
191 See, e.g., Warren, supra note 14, at 486–88, 492–93 (describing the lobbying efforts of the consumer credit industry).
192 See Marianne B. Culhane & Michaela M. White, Taking the New Consumer Bankruptcy Model for a Test Drive: Means-Testing Real Chapter 7 Debtors, 7 Am. Bankr. Inst. L. Rev. 27, 31 (1999) (finding that only 3.6% of debtors would be classified as “can pay” under the statute); Jones & Zywicki, supra note 13 (discussing Culhane & White as well as other studies that find a greater fraction of debtors that can pay).
193 Section 74 was passed in the Act of March 3, 1933, Ch. 204, 47 Stat. 1467 (repealed 1938). It was later revised and incorporated into Chapters XI, XII and XIII in the Chandler Act of June 22, 1938, Pub. L. No. 75–696, 52 Stat. 840–940 (1938) repealed by Bankruptcy Reform Act of 1978, Pub. L. No. 95598, 92 Stat. 2549 (1978).
194 Bankruptcy Act of 1898, Pub. L. No. 696, 30 Stat. 544, � 606 (repealed 1978).
195 Chapter 13 is restricted to individual debtors (other than stockbrokers and commodity brokers) with regular income who have non-contingent, liquidated unsecured debts of less than $290,525 and non-contingent, liquidated secured debts of less than $871,550. 11 U.S.C. � 109(a), (e) (2000) (dollar amounts updated by revision of certain dollar amounts in the Bankruptcy Code prescribed under � 104(b) of the Code, 66 Fed. Reg. 10.910, 10.911 (Feb. 20, 2001)).
196 See infra notes 371–406 and accompanying text.
197 11 U.S.C. � 1322(d). Debtors may propose plans that will last less than three years if they will repay their creditors in full, but this is rare. See In re Leser, 939 F.2d 669, 672–73 (8th Cir. 1991) (quoting In re Davidson, 72 B.R. 384, 387 (Bankr. D. Colo. 1987) (commenting that plans providing for 100% payout are relatively rare)). Bankruptcy practitioners usually use the terms “thirty-six months” or “sixty months” instead of “three years” or “five years.”
198 See 11 U.S.C. � 1325.
199 See id. � 1328(a).
200 Compare id. � 1328(a), with id. � 727(a)–(e).
201 11 U.S.C. �� 1051, 1052 (1970). Incidentally, the composition agreements made possible by the 1874 Amendments to the Bankruptcy Act of 1867 required creditor consent of the majority of creditors in number and three-fourths in value. See Ch. 390, � 17, 18 Stat. 183 (1874) (repealed 1878).
202 One survey found that approximately 99% of Chapter XIII plans proposed to pay all debts in full. David T. Stanley & Marjorie Girth, Bankruptcy: Problem, Process, Reform 94 (1971); accord B. Weintraub & A. Resnick, Bankruptcy Law Manual � 9.01, at 9–3 (2d ed. 1986). The consent requirement gave creditors significant bargaining power because many of the protections now afforded debtors in non-bankruptcy law did not exist during the term of the Bankruptcy Act or were introduced relatively late in its tenure. For example, prior to a Supreme Court ruling in 1969, many states allowed unsecured creditors to attach property of the debtor prior to a judgment or even a hearing. See Sniadach v. Family Fin. Corp., 395 U.S. 337, 341–42 (1969). Federal limitations on garnishment were not in place until 1968, 15 U.S.C. � 1672 (2000), and many states offered little limitation on its use. See 2 Howard J. Alperin & Roland F. Chase, Consumer Law: Sales Practices, Credit Regulation �� 630–631, 352–354 (1986). Furthermore, the Fair Debt Collection Practices Act was not passed until 1977. 15 U.S.C. �� 1692–1692o; Pub. L. No. 95–109, Sept. 20, 1977, 91 Stat. 874. In addition, few states had similar provisions prior to the mid to late 1970s. See Alperin & Chase, supra, at 352–54.
203 See In re Leser, 939 F.2d at 672–73 (quoting In re Davidson, 72 B.R. 384, 387 (Bankr. D. Colo. 1987) (commenting that plans providing for 100% payout are relatively rare)). But see William C. Whitford, The Ideal of Individualized Justice: Consumer Bankruptcy as Consumer Protection, and Consumer Protection in Consumer Banktruptcy, 68 Am. Bankr. L.J. 397, 411 tbl. 2 (1994) (showing that in some jurisdictions a significant number of confirmed Chapter 13 plans do propose 100% repayment).
204 See 11 U.S.C. � 1326.
205 Id. � 1325(a)(2).
206 Id. �� 1322(a)(2), 507.
207 See id. � 1322(a)(2). If a secured creditor holds collateral that is worth less than the value of its loan, its secured claim will equal the amount that it would cost the debtor to replace the collateral; the remainder of the secured creditor’s loan is treated as an unsecured claim. See Assoc. Commercial Corp. v. Rash, 520 U.S. 953, 961 (1997). Note that only the secured claim must be promised full repayment for the debtor to retain the collateral. 11 U.S.C. � 506(a). This limitation does not apply, however, to the most important secured creditors, the mortgage lenders, who must receive the entire amount of their loans, including any interest specified in the mortgages, if debtors are to keep their homes. See Nobelman v. Am. Sav. Bank, 508 U.S. 324, 325–26, 331 (1993) (interpreting 11 U.S.C. � 1322(b)(2)).
208 11 U.S.C. � 1325(a)(4).
209 See discussion supra note 182.
210 See sources cited supra note 181.
211 See 11 U.S.C. � 1325(a)(4).
212 See supra note 180 and accompanying text.
213 See supra note 192 and accompanying text.
214 See, e.g., In re Raburn, 4 B.R. 624, 625 (Bankr. M.D. Ga. 1980) (refusing to confirm plan unless it paid 70% of unsecured claims); In re Burrell, 2 B.R. 650, 653 (Bankr. N.D. Cal. 1980) (“Although debtor’s plan meets the best effort test, it falls considerably short of meeting the substantial payment requirement.”).
215 See, e.g., Noreen v. Slattengren, 974 F.2d 75, 76 (8th Cir. 1992) (claiming that 11 U.S.C. � 1325(b) subsumed most of the factors courts may have found relevant in determining good faith, but the totality of the circumstances test remained in place.); In re Carsrud, 161 B.R. 246, 250–51 (Bankr. S.D.S.D. 1993) (“The traditional totality of circumstances approach . . . not addressed by the legislative amendments were preserved.”); see generally Brandon L. Johnson, Good Faith and Disposable Income: Should the Good Faith Inquiry Evaluate the Proposed Amount of Repayment?, 36 Gonz. L. Rev. 375, 381–86 (2000–2001) (reviewing cases).
216 The Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub. L. No. 98–353, 98 Stat. 333 (codified as amended in scattered sections of 11 U.S.C. and 28 U.S.C.).
217 “Disposable income” is defined as “income which is received by the debtor and which is not reasonably necessary to be expended . . . for the maintenance or support of the debtor or a dependent of the debtor . . . .” 11 U.S.C. � 1325(b)(2) (2000).
218 At first a few courts held that they could ignore this provision, reasoning that the term “may not” is merely permissive. See, e.g., In re Schyma, 68 B.R. 52, 63 (Bankr. D. Minn. 1985) (noting the language of � 1325(b)(1) indicates that Congress intended to grant a discretionary power to the court to refuse to approve the plan, rather than to mandate denial of confirmation); In re Otero, 48 B.R. 704, 708 (Bankr. E.D. Va. 1985) (reading the section as a voluntary section to be applied at the court’s discretion). While these decisions have not been explicitly overruled, few, if any, recent courts have adopted their holding because these early courts ignored a section of the Bankruptcy Code that explicitly states that the term “may not” is prohibitive and not permissive. See 11 U.S.C. � 102(4).
219 Much of the controversy about this provision centers on the difficulty courts face when determining a debtor’s “reasonably necessary” expenses. See, e.g., LoPucki, supra note 23, at 471–73. This Article’s analysis can readily extend to this issue. A utopian bankruptcy system would account for differences in each debtor’s cost of living and allow each debtor to consume as much as he would have contracted for in advance. To the extent, however, that courts are unable to determine this amount, either directly or by using observable characteristics of the debtor as a proxy for what the debtor would have agreed to, they must ignore expenses entirely or each debtor will have an incentive to overstate his cost of living.
220 11 U.S.C. � 1328(b).
221 See id. �� 1307(a), 1307(e).
222 Id. � 1307(b).
223 Because federal limitations on garnishment do not apply in a bankruptcy proceeding, it is possible that debtors could be required to repay more in bankruptcy than they would under non-bankruptcy law. See 15 U.S.C. � 1673 (2000).
224 See 11 U.S.C. � 1329 (1978).
225 See generally Harry L. Deffebach, Postconfirmation Modification of Chapter 13 Plans: Sheep in Wolf’s Clothing, 9 Bankr. Dev. J. 153, 155–66 (1992).
226 Of course, this silence may also be explained by the absence of an effective interest group to lobby on behalf of tort victims. Proposed legislation would significantly erode the superdischarge, eliminating the debtor’s ability to obtain a discharge for: i) loans procured by fraud or false pretenses; ii) debts for fraud, embezzlement or larceny; and iii) debts for willful and malicious injury to a person. See H.R. 5745, 107th Cong. � 314(b)(4) (2002). Debtors would still be able, however, to obtain a discharge of willful and malicious torts that resulted in damage to property. Id.
227 See supra note 105 and accompanying text.
228 Most, if not all, bankruptcy scholars would agree that at least some debtors are in bankruptcy because of their poor spending habits, though they would likely disagree as to the size of this group. See, e.g., Braucher, supra note 13, at 7 (“It would be hard for anyone to disagree with the proposition that Americans have too much debt and not enough savings, and that if we had less debt and more savings, there would be less bankruptcy.”); Jones & Zywicki, supra note 13, at 224 (“In short, one can simply recharacterize the ‘debt causes bankruptcy’ thesis as ‘overspending causes bankruptcy’”); LoPucki, supra note 23, at 464 (“The grasshoppers eat at the pizza parlor on Friday night and buy the new sneakers and the houses. They quit their jobs when the going gets tough. The fallout lands on their credit cards. When winter comes, they discharge the credit card debt in bankruptcy.”); Warren, supra note 13, at 1084 (“Some incur [excessive] debt with little thought about how it adds up, perhaps like the grasshopper who never thought about the coming winter.”).
229 See 11 U.S.C. � 707(b) (2000).
230 See, e.g., In re Kornfield, 164 F.3d 778, 784 (2d Cir. 1999); In re Lamanna, 153 F.3d 1, 1 (1st Cir. 1998); In re Green, 934 F.2d 568, 572–73 (4th Cir. 1991); In re Edwards, 50 B.R. 933, 936 (Bankr. S.D.N.Y. 1985).
231 While most, if not all, courts would consider the debtor’s ability to pay in the substantial abuse analysis, there is broad disagreement as to the meaning of the phrase “substantial abuse.” Some courts hold that an ability to pay one’s debts alone supports a finding of substantial abuse. See, e.g., United States Tr. v. Harris, 960 F.2d 74, 77 (8th Cir. 1992); accord In re Kelly, 841 F.2d 908, 914–15 (9th Cir. 1988). Other courts, however, find that an ability to pay one’s debts is not sufficient by itself to find substantial abuse. See In re Green, 934 F.2d at 572–73. Still, most courts seem to regard the ability to pay as the primary consideration in the substantial abuse analysis. See, e.g., In re Stewart, 175 F.3d 796, 809 (10th Cir. 1999); see also In re Lamanna, 153 F.3d at 4–5.
232 Occasionally, one finds a case that focuses primarily on the circumstances surrounding the incurrence of the debt. These cases, however, generally involve intentional, as opposed to negligent, behavior. See, e.g., In re Bruno, 68 B.R. 101, 102–03 (Bankr. W.D. Mo. 1986) (dismissing filing because husband sought to discharge debts resulting from murder of his wife). As discussed below, Chapter 7 has more direct limitations on relief for such behavior. See infra note 248 and accompanying text.
233 See supra note 23 and accompanying text.
234 See, e.g., Warren, supra note 14, at 493 (“The creditors as a group did not quarrel with relief for those in need; instead, they emphasized that consumer bankruptcy should be available only to those in need.”).
235 The Constitution grants Congress the power to enact uniform bankruptcy laws. See U.S. Const. art. I, � 8, cl. 4. Prior to 1898, however, Congress enacted three bankruptcy acts that together lasted less than twenty years. Congress repealed the Bankruptcy Act of 1800 in 1803, 2 Stat. 248 (1803), the Bankruptcy Act of 1841 in 1843, Act of March 3, 1843, 5 Stat. 614 (1843), and the Bankruptcy Act of 1867 in 1878, Act of June 7, 1878, 20 Stat. 99 (1878). Of course, state law did afford early debtors some protection from their creditors. See generally Charles Warren, Bankruptcy in United States History (1934).
236 Bankruptcy Act of 1898, Pub. L. No. 696, ch. 541, 30 Stat. 544 (repealed 1978).
237 See supra note 127 and accompanying text.
238 See, e.g., Warren, supra note 13, at 1081 (discussing the characteristics of bankrupt debtors).
239 See supra notes 137–148 and accompanying text.
240 See supra note 139 and accompanying text.
241 See, e.g., Todd J. Zywicki, Bankruptcy Law as Social Legislation, 5 Tex. Rev. L. & Pol. 393, 395–408 (2001).
242 See supra note 181.
243 See supra note 181. This approach does offer some advantages in that the debtor and creditor can contract in advance for the minimum amount that the debtor must repay in bankruptcy. Unfortunately, the usefulness of this strategy is limited by an inability to pledge one’s future income as collateral. Because the amount that must be repaid in Chapter 7 is independent of the debtor’s future income, this test provides imperfect insurance and is subject to abuse.
244 Compare Jones & Zywicki, supra note 13, at 192–200, 248, with Warren, supra note 13, at 1084–87, 1100–01.
245 See supra notes 142–147 and accompanying text.
246 See 11 U.S.C. � 35(a) (1970) (current version at 11 U.S.C. � 523(a)).
247 See id. � 1060 (current version at 11 U.S.C. � 1328(a), (c)–(d) (2000)).
248 See id. � 523.
249 See id. � 1328(a). Originally, Chapter 13 would discharge judgments for criminal restitution as well. See Pa. Dep’t. of Pub. Welfare v. Davenport, 495 U.S. 552, 564 (1990). Shortly after this case, Congress excepted criminal restitution from the superdischarge. See Crime Control Act of 1990, Pub. L. No. 101–647, Tit. XXXI, � 3103(3), 104 Stat. 4789, 4916 (1990) (codified at 11 U.S.C. � 1328(a)(3)). In 1994, however, Congress changed its mind, and current law no longer excepts criminal restitution from the superdischarge (although � 1328(a)(3) still applies to cases filed before Oct. 22, 1994). See Pub. L. 103–394, � 501(d)(38)(b) (1994). Proposed legislation would significantly erode the superdischarge, eliminating the debtor’s ability to obtain a discharge for: i) loans procured by fraud or false pretenses; ii) debts for fraud, embezzlement or larceny; and iii) debts for willful and malicious injury to a person. See H.R. 5745, 107th Cong. � 314(b)(4) (2002). Debtors would still be able, however, to obtain a discharge of willful and malicious torts that resulted in damage to property. Id.
250 The Bankruptcy Code limits Chapter 13 to debtors with non-contingent, liquidated unsecured debts of less than $290,525. 11 U.S.C. � 109(e) (dollar amounts updated by Revision of Certain Dollar Amounts in the Bankruptcy Code prescribed under Section 104(b) of the Code, 66 Fed. Reg. 10.910, 10.911 (Feb. 20, 2001)). Pending tort claims, however, will generally not count toward this amount either because they are contingent (the tort claimant must win at trial) or they are unliquidated (the court cannot determine the amount of the claim until the trial). See, e.g., 14 Mark Bane et al., supra note 180, at � 109.06 [2][b]-[c].
251 See, e.g., In re Peterson, 228 B.R. 19, 22 (Bankr. M.D. Fla. 1998); In re McBroom, 51 B.R. 953, 955 (Bankr. W.D. Va. 1985).
252 See, e.g., In re Nipper, 224 B.R. 756, 757 (Bankr. E.D. Mo. 1998); In re Britt, 211 B.R. 74, 76 (Bankr. M.D. Fla. 1997).
253 See, e.g., In re Kelly, 217 B.R. 273, 274 (Bankr. D. Neb. 1997); In re Ledin, 179 B.R. 721, 722 (Bankr. M.D. Fla. 1995).
254 See, e.g., In re Day, 1999 WL 96117, *1 (7th Cir. 1999) (Table decision at 172 F.3d 52) (aggravated battery); In re Easley, 72 B.R. 948, 948 (Bankr. M.D. Tenn. 1987).
255 See Handeen v. LeMaire, 898 F.2d 1346, 1347 (8th Cir. 1990).
256 See, e.g., Solomon v. Cosby, 67 F.3d 1128, 1130 (4th Cir. 1995); Petty v. Belanger, 232 B.R. 543, 545 (D. Mass. 1999) (decided under Chapter 7, although debtor originally filed for bankruptcy under Chapter 13); In re Carsrud, 161 B.R. at 247.
257 See, e.g., Slattengren, 974 F.2d at 75.
258 Robert L. Hughes, Chapter 13’s Potential for Abuse, 58 N.C. L. Rev. 831, 843 (1980) (“Though Section 1328(a) represents a congressional rejection of the Commission’s position on t[he] issue [of the exceptions to discharge], the legislative history offers no explanation for that decision.”).
259 Since 1978, Congress has excepted some debts from the superdischarge, including criminal restitution (from 1990–1994). See supra note 249.
260 See, e.g., NBRC Report, supra note 90, at 290–91. Notwithstanding the National Bankruptcy Review Commission’s views, however, proposed legislation would significantly erode the superdischarge. See supra note 249.
261 See supra notes 143–144 and accompanying text.
262 See, e.g., NBRC Report, supra note 90, at 290–91.
263 See supra note 216 and accompanying text.
264 See, e.g., Hughes, supra note 258, at 845. Moreover, what little legislative history that does exists suggests that some Congressmen accepted the superdischarge under the presumption that the requirement of creditor approval would result in some check on this provision. See Report of the Commission on the Bankruptcy Laws of the United States, H.R. Doc. No. 93–137, 93d Cong., 1st Sess., Pt. I, at 175 (1973) (In considering proposed legislation analogous to the current Chapter 13, the commission stated, “If the debtor wants to pay his debts pursuant to a plan, and if the creditors are willing to go along, he should be allowed to do so. The fact that a discharge would not be available in a liquidation case should furnish a greater incentive for the debtor to perform under the plan.”(emphasis added). Perhaps Congress assumed that this would mean that Chapter 13 plans would continue to routinely include full repayment of unsecured creditors and did not sufficiently revisit the issue when the creditor consent requirement was dropped.
265 See, e.g., NBRC Report, supra note 90, at 291.
266 See, e.g., Ambassador Ins. Co. v. Montes, 388 A.2d 603, 606 (N.J. 1978) (adopting a minority rule allowing such insurance policies if they benefit innocent third parties, but recognizing that a majority of courts do not allow insurance for willful misconduct); Keeton & Widiss, supra note 128, at 519 (stating that insurance law generally prohibits insurance policies covering willful misconduct).
267 See, e.g., Montes, 388 A.2d at 606 (noting that the majority of courts reason that “[w]ere a person able to insure against the economic consequences of his intentional wrongdoing, the deterrence attributable to financial responsibility would be missing.”).
268 See supra note 132 and accompanying text.
269 See supra note 133 and accompanying text.
270 See M’Naughten’s Case, 8 Eng. Rep. 718, 719 (H.L. 1843).
271 See Wayne R. LaFave, Criminal Law 4 n.9, 348–49 (3d ed. 2000). Prior to this time, many jurisdictions had adopted an “irresistible impulse” test that also looked to the ability of the defendant to control his conduct. See id. at 339–40.
272 See United States v. Brawner, 471 F.2d 969, 973 (D.C. Cir. 1972).
273 See LaFave, supra note 271, at 350.
274 See, e.g., Joshua Dressler, Understanding Criminal Law 367–70 (2001) (discussing expansion of this doctrine in California judicial opinions and in the enactment of the Model Penal Code).
275 See People v. White, 172 Cal. Rptr. 612, 615 (Cal. Ct. App. 1981); Lawrence M. Friedman, Crime and Punishment in American History 404–05 (1993).
276 After John Hinckley was acquitted of the attempted murder of President Reagan for reasons of insanity, Congress passed a statute that returned federal courts to something akin to the M’Naughten Rule. Friedman, supra note 275, at 405; see 18 U.S.C. � 17 (2000).
277 See White, 172 Cal. Rptr. at 613.
278 See supra notes 142–148 and accompanying text.
279 See 11 U.S.C. � 1325(a)(3) (2000).
280 See, e.g., Keach v. Boyajian, 243 B.R. 851, 857, 868 (B.A.P. 1st Cir. 2000); In re Gathright, 67 B.R. 384, 385 (Bankr. E.D. Pa. 1986). But see In re Scotten, 281 B.R. 147, 149 (Bankr. D. Mass. 2002) (considering pre-petition conduct to determine good-faith despite Keach’s lack of consideration of such a factor).
281 These courts reason that because courts did not look to the debtor’s pre-filing conduct when applying the good faith standard in Chapter XIII of the Bankruptcy Act of 1898, modern courts should not look to pre-filing conduct when applying the same good faith standard in Chapter 13 of the Bankruptcy Code. See, e.g., Keach, 243 B.R. at 868–71. Chapter XIII did not offer a superdischarge, however, so courts were generally not confronted with plans that sought to discharge debts arising out of willful misconduct. See supra note 247 and accompanying text. Moreover, even if a debtor did file a plan that sought to discharge such a debt, the creditor consent requirements of Chapter XIII meant that the plan would almost invariably propose to pay all debts, including unsecured debts, in full. See supra note 202.
282 See, e.g., Keach, 243 B.R. at 868 (“The contrary view of good faith, so prevalent in the case law, is blatantly inconsistent with a debtor’s clear statutory rights.”). Furthermore commentators sometimes suggest that the plain meaning of � 1325(a)(3) precludes the consideration of pre-petition conduct because it only requires that the plan be proposed in good faith. See, e.g., 3 Keith M. Lundin, Chapter 13 Bankruptcy � 180.1, at 180–89 (3rd ed. 2000) (“It is more difficult to explain that distant debtor conduct—for example, at the time of incurring a debt months or years before bankruptcy—illuminates the debtor’s good faith in proposing the plan.”); Bradley M. Elbein, The Hole in the Code: Good Faith and Morality in Chapter 13, 34 San Diego L. Rev. 439, 456 (1997) (“The explicit terms of � 1325(a)(3) require only an evaluation of good faith in the proposal of the plan . . . .” Despite the plain meaning of the statute, only a minority of courts apply � 1325(a)(3) as written.).
283 See, e.g., In re Day, 1999 WL at *4; Gier v. Farmers State Bank of Lucas, 986 F.2d 1326, 1328–29 (10th Cir. 1993); Robinson v. Tenantry, 987 F.2d 665, 668 n.6 (10th Cir. 1993); Slattengren, 974 F.2d at 77; LeMaire, 898 F.2d at 1349; 3 Lundin, supra note 282, at 180–89 (“The courts persist in finding relevance to good faith in [pre-petition] debtor conduct without finer distinctions. The reported decisions bucking this (illogical) trend can be counted on few fingers.”).
284 See, e.g., In re Anadell, 190 B.R. 309, 310, 312 (Bankr. S.D. Ohio 1995) (citing the fact that attorney debtor had lost his law license and was incarcerated in deciding to approve plan paying approximately 10% of judgment for misappropriation of funds); In re Corino, 191 B.R. 283, 290–91 (Bankr. N.D.N.Y. 1995) (“As a consequence for embezzling funds from [the bank], Debtor has already served time in prison, has forfeited a savings account and since 1989 has paid [the bank] approximately $6,500 pursuant to varius wage garnishment orders. . . . Debtor not only appeared repentant, but her efforts in negotiation and her proposal to pledge all of her disposable income to a five year plan demonstrates a willingness to pay her debt . . . .”).
285 See, e.g., In re Sitarz, 150 B.R. 710, 722–23 (Bankr. D. Minn. 1993) (“The identity of the creditor, whether institutional or individual, is certainly relevant. The personal impact of the debtor’s conduct on an individual creditor, both at the time of the infliction of the injury and in its future, is also significant. . . . The extent to which the debtor’s payment proposal would make the objecting creditor financially whole is another factor for consideration.”).
286 See 3 Lundin, supra note 282, at � 184.1, 184–7 (“In anticipation of a good-faith objection to confirmation, the debtor guilty of pre-petition criminal misconduct should consider a five-year plan that maximizes payment to the victim.”).
287 See supra notes 80–82 and accompanying text.
288 Perhaps this need to consider the creditor’s interest explains why Congress chose to offer the superdischarge only to those debtors who complete a Chapter 13 plan; the superdischarge is unavailable to debtors who receive a hardship-discharge in Chapter 13. See 11 U.S.C. � 1328(a)–(c) (2000) (applying to hardship discharges granted pursuant to � 1328(b)). Of course, the inability of a tort victim to easily absorb the loss makes the discharge of other tort judgments problematic as well.
289 See supra note 181 and accompanying text.
290 See supra note 92 and accompanying text; see also Braucher, supra note 13, at 13 (“The premise that supports our current system is that the overwhelming majority of people who file in Chapter 7 do not have enough to repay much of anything . . . .”). Chapter 7 may also play a role if it is too costly for judges to collect any information about debtors. In this case, society may wish to rely on punishment to deter the debtor from falsely claiming a need for relief. See Rea, supra note 7, at 196, 206. Chapter 7 may embody this punishment-based approach to bankruptcy through the loss of collateral and the harm to the debtor’s credit reputation. Whether the punishment delivered by Chapter 7 could be better designed is left to a future paper.
291 See supra note 13 and accompanying text.
292 See supra notes 110–114 and accompanying text.
293 See supra notes 149–150 and accompanying text.
294 See 11 U.S.C. � 1325(b) (2000).
295 See infra notes 296–297 and accompanying text.
296 See 11 U.S.C. � 1329.
297 See id. � 109(e).
298 See, e.g., LoPucki, supra note 23, at 471.
299 See supra notes 95–126 and accompanying text.
300 See 11 U.S.C. � 1325(b).
301 See id. � 1325(b)(1)(b) (emphasis added).
302 See id. � 1325(b).
303 21 F.3d 355, 356–57 (9th Cir. 1994).
304 Id. at 357–58. The court also relied on the ability of the trustee to modify a plan pursuant to � 1329 if the debtor’s circumstances substantially improved. See id. at 358. As discussed below, this is an example of the “guardedly optimistic” approach to bankruptcy. See infra notes 334–369 and accompanying text.
305 See In re Anderson, 21 F.3d at 357–