Rock Paper Scissors Bankruptcy

It’s a quiet day in June, so I’ve had some time to reflect on the brilliance of the “rock, paper, scissors” game.  Kids all over the world have played it for generations.  It’s an easy way to break a tie or decide who goes first.  A federal judge once ordered attorneys to resolve a prolonged dispute over where to conduct a deposition by “rock, paper, scissors,” with the winner choosing the deposition location.  “Rock, paper, scissors” is also a competitive game involving deep strategy.  Professional and amateur associations host championship tournaments. 

The game is endlessly challenging because it is so balanced.  There are three choices.  Each choice has a strength and a weakness and will defeat or lose to one of the other two.  

If you aren’t convinced how rare and finely balanced this game is, try to come up with alternatives.  They’re out there.  For instance, there’s “bear, hunter, ninja” (ninja kills hunter, hunter shoots bear, bear eats ninja), and the well-known expansion, “rock, paper, scissors, Spock, lizard.”  But coming up with variations that work as well as the original isn’t easy. 

What does any of this have to do with bankruptcy?  The careful balance of rights in the Bankruptcy Code suggests several variations on the game.  You’d have to be a huge bankruptcy nerd (which I might be) and have at least two other bankruptcy-nerd friends to try these, but the balance is there, and they work:

Example #1: Mortgage Arrearage and Bankruptcy

Let’s call this “Feasibility, Foreclosure, Bankruptcy.” 

When homeowners have an interruption in income or other hardship, they may get behind in their mortgage payments.  The lender threatens foreclosure.  Filing a bankruptcy petition stops foreclosure. That’s straightforward, but feasibility is the swing vote here.  It can both cause a bankruptcy filing (defeating foreclosure) and make it impossible to cure the mortgage arrearage or make ongoing payments (defeating bankruptcy).  Therefore:  

•           Bankruptcy defeats foreclosure but can be defeated by feasibility.
•           Feasibility can defeat bankruptcy, but loses to foreclosure. 
•           Foreclosure is defeated by bankruptcy but prevails over feasibility.      

Let’s try a different example.  The concept and lingo make it a bit more challenging. 

Example #2: Vehicles in Bankruptcy

Call it “910, Cramdown, Surrender.” 

When someone has trouble making vehicle payments, the lender will want to repossess the vehicle, basically a forced surrender.  This will often trigger a bankruptcy filing to avoid repossession.  In a Chapter 13 bankruptcy case, the vehicle owner can “cram down” the lender to reduce the amount owed to the value of the vehicle.  (So if the vehicle is worth only $15,000 but the loan balance is $25,000, the lender might only get $15,000 in a Chapter 13 bankruptcy case.)  But cramdown only works if the loan is at least 2 ½ years (or 910 days) old.  If the loan is newer than that, cramdown is blocked.  If that’s the situation, the owner might decide to use bankruptcy to voluntarily surrender the vehicle and pursue other transportation alternatives.  Thus:

•           Surrender loses to Cramdown but beats 910.
•           Cramdown beats surrender but loses to 910.
•           910 beats cramdown but loses to surrender.

Let’s try this in the context of income and Chapter 7 bankruptcy. 

Example #3: Chapter 7 Bankruptcy

The choices here are “Chapter 7, No Income, High Income.”  The object here is to qualify for a Chapter 7 bankruptcy case. 

Chapter 7 bankruptcy is often the fastest way to obtain a bankruptcy discharge if you have no assets to lose and no income (or at least not enough income to pay bills).  After the changes to the Bankruptcy Code in 2005, if you have high income you might not qualify for Chapter 7.  So in this scenario:

•           Chapter 7 defeats No Income, but it’s no help against High Income.
•           High Income beats Chapter 7 but loses in this scenario to Low Income. 
•           No Income defeats High Income but loses to Chapter 7. 

This takes a stretch of the imagination since in most situations it would be better to have high income than no income.  That is not the case if you are trying to qualify for Chapter 7 (in which case Chapter 7 can beat problems caused by low income).  Finally, let’s reverse the rules.

Example #4: Chapter 13 Bankruptcy

One new player here, “Chapter 13,” joins “No Income” and “High Income.”  This time the goal is to qualify for Chapter 13. 

Chapter 13 allows you to catch up missed payments and keep your property by making plan payments over a period of three to five years.   But you need sufficiently High Income to make those payments.  The Bankruptcy Code requires a Chapter 13 debtor to have regular income; therefore, debtors with No Income do not qualify.  And with these rules:

•           High Income defeats No Income and loses to Chapter 13.
•           No Income defeats Chapter 13 and loses to High Income.
•           Chapter 13 defeats Low Income and loses to High Income.

In other words, if you have High Income you can prevail in Chapter 13.  We’re using “High Income” here to contrast with Chapter 7, but you don’t need to be wealthy to be successful in Chapter 13.  Having too much income can lead to problems in Chapter 13 …a subject for another day, or maybe another game.

The7thirteen is a blog written by Jeff Narmore, focusing on consumer bankruptcy issues.  Visit the website at narmorelawoffice.com. 

Narmore Law Office LLC is a debt relief agency that helps people file for relief under the Bankruptcy Code, and occasionally invents corny bankruptcy games.