Vindicating Bankruptcy Rights

Kara J. Bruce

Hundreds of thousands of consumer debtors pass through the bankruptcy process each year. Although these cases are legally complex, the bankruptcy system handles them in a routinized manner. This streamlined process allows consumer debtors to obtain a discharge of their debts at relatively low financial cost, yet the system leaves open avenues for abuse. Repeat players can take advantage of the bankruptcy process—its complexity, the limited savvy of many debtors, and the likelihood that small-scale misbehavior will go unnoticed or unaddressed—to extract undue benefits.

In November 2014, for example, national news media reported allegations that large national lenders, including JPMorgan Chase, Bank of America and Citigroup, refused to remove debt that had been discharged in bankruptcy from borrowers’ credit reports. This tactic is believed to pressure borrowers into repaying debts they no longer owe. Six years earlier, Katherine Porter brought to light pervasive problems in proofs of claim filed by mortgage lenders and servicers. Her study of 1744 chapter 13 bankruptcy cases revealed rampant errors in bankruptcy mortgage claims, most of which negatively affected debtors or competing creditors, and nearly all of which passed through the bankruptcy process unchecked. In the late 1990s, the Sears Corporation faced criminal liability and the largest fine ever assessed for bankruptcy fraud, based on a widespread program to collect debt using unenforceable reaffirmation agreements. This type of behavior has affected thousands of debtors in bankruptcy. It not only violates federal law and bankruptcy court orders, but also undermines the fundamental goals of consumer bankruptcy: treating creditors fairly and providing debtors a fresh financial start.

This Article is part of the first comprehensive study examining the use of class action adversary proceedings to curb systematic overreaching by creditors in bankruptcy. Class actions have long been promoted as a solution to the problem of small value consumer claims, as they permit litigants to bring claims that are uneconomical to litigate on an individual basis. These actions not only compensate individuals for harm suffered, but also force defendants to internalize some of the costs of their misconduct. In this way, class actions can serve as a valuable complement to bankruptcy’s broader regulatory efforts. Class actions also increase transparency, preserve judicial resources, and encourage uniformity and consistency in the application of law. Moreover, bankruptcy courts are well-suited to handle debtor class actions, based on their institutional capacity for handling aggregate claims and addressing consumer protection’s goals.