National Association of Attorneys General

National Association of Attorneys General National Association of Attorneys General

Show Me the Money! Why Pay Attention to Bankruptcy?

Karen Cordry, NAAG Bankruptcy Counsel

Bankruptcy is rarely viewed as a priority issue for Attorneys General offices. Yet, if the focus is broadened to include collection and enforcement of judgments generally, the importance quickly becomes clear. Pursuing cases to judgment without enforcing those judgments is a waste of time for the government, makes the process a cruel hoax to the victims, and destroys the deterrent effect of the prosecution. Conversely, there are two values served by an aggressive enforcement and collections program. First, in true revenue areas, such as taxes, student loans, benefit overpayments, health care payments, and government contracts, careful advance planning of transactions and a thorough, proactive plan for enforcing the terms of those obligations can be extremely cost-effective.

While bankruptcy is often seen as disruptive of collection efforts, the Bankruptcy Code is, at bottom, quite solicitous of government revenues and can even prove helpful. Chapter 13 cases, for instance, are a court-supervised repayment program that requires full payment of the principal of most taxes without any action by the government except to file a claim. Compensation of Chapter 13 trustees comes from payments by debtors, relieving the government of the costs to pursue more traditional methods such as foreclosure or garnishment.

Much of the other collection activity under the Code is routine and lends itself to standard forms and procedures prepared by law clerks and paralegals. A well thought-out, assertive collection strategy can result in recovering many times the cost of any extra staff needed for such an effort. Once put in place, such a program can have a continued upward impact on the effectiveness of state revenue collection efforts. Conversely, an inadequate collection program will likely lead to lower levels of general compliance by the public and lower the success rate of revenue enforcement in nonbankruptcy contexts.

Any problems in nonbankruptcy collections will be exacerbated in the bankruptcy arena because the Code rewards efforts to collect current taxes and downgrades collection efforts directed at “stale” taxes. Moreover, a state that does not have a well thought-out plan to deal with bankruptcy will likely lose large amounts of revenue, either by failing to meet the swift and stringent procedural requirements of the Code, or by failing to recognize and oppose the creative efforts of debtors to “push the envelope” of what the Code allows. Thus, an unwary state may find debtors taking great liberties with its obligations if the state does not actively monitor and participate in cases. In short, a vigilant program for dealing with bankruptcy issues is crucial to assuring the integrity of the overall revenue collection process of the state.

The second reason bankruptcy is important is its relationship to the many other aspects of the Attorneys General’s offices that are not specifically revenue driven – those referred to as police and regulatory matters.[1] It is not enough to fully investigate, litigate, and/or settle a case and obtain far-reaching relief if the judgment or consent decree is put in a drawer with the assumption that it will enforce itself. It is as much the government’s job to enforce the order as to obtain it in the first place. Beneficiaries of those orders have a right to assume they will get what was ordered. If that doesn’t happen, then victims will be victimized again, and defendants will realize that the orders they sign are mere pieces of paper that can be violated with impunity.

In short, to make a judgment meaningful, the government will have to act as a creditor. War is the last stage of diplomacy; bankruptcy is the last stage of debtor-creditor relations. Any defendant facing a large payment obligation or a substantial expenditure to bring a facility into compliance inevitably considers whether a bankruptcy filing will relieve it of those burdens. Settlement and/or compliance negotiations always proceed under the threat, spoken or implicit, that the defendant will file for bankruptcy if the terms are too harsh. If the government is uninformed about its rights and obligations under the Code, it is likely to unduly fear those threats credible and to settle for less than it needs to in order to avoid having the debtor file. Similarly, if there is a bankruptcy filing after a settlement, an unprepared government may view the bankruptcy as a “black hole” into which its judgment disappears, never to be heard from again. However, while bankruptcy presents serious challenges to governments, the Code protects their special needs in many ways to avoid having bankruptcy become a “haven for wrongdoers.”

Finally, knowledge of the effects of bankruptcy must be part of an overall enforcement strategy. Structuring a settlement agreement or judgment correctly can greatly increase the chances that the government will be able to enforce that agreement in a bankruptcy. Careful and strategic thinking, up front, about how settlement actions will impact on a future bankruptcy case will benefit the government in deciding the precise wording of terms for a settlement – and may be the best incentive to convince a defendant that a bankruptcy filing will not serve its goals in any event. In short, one cannot effectively enforce the law without knowing about and deciding how to cope with bankruptcy. Since effective enforcement is at the heart of what Attorneys General do, their ability to function in the context of the federal bankruptcy system is an integral part of their powers and duties.

[1] While such matters often involve collecting money for victims, those funds do not inure to government, and enforcement is viewed as critical, whether or not collection is likely. A cost-benefit analysis that might be applied to tax collection is less important in regulatory matters.

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