Introduction
In the world of cross-border corporate insolvency, those in the know are familiar with the increasingly popular scheme of arrangement, the British quasi-reorganization procedure that allows a company to restructure some, but not all, of its debt. The typical scheme effects a corporate balance sheet reshuffling by supermajoritarian approval (and judicial “sanction”) but often leaves other debt, such as the trade, untouched. A key conceptual component of the scheme mechanism is its intentional modularity, called by some its “selectivity.” It does not require a comprehensive reckoning of all claims against a given debtor, only some. The scheme has proved popular—so popular, in fact, that corporate bankruptcy market share–grabber Singapore introduced scheme-like procedures in its most recent overhaul of its insolvency system. Indeed, some wags have pronounced it the Decline and Fall of Chapter 11.
Yet our European friends have struggled with how to assess the scheme legally. Formally, it originated outside insolvency law. It does not appear in Annex A of the EU Insolvency Regulation (which houses the “insolvency proceedings” entitled to automatic recognition), although it has been adjudicated by some courts to constitute an “insolvency proceeding” for purposes of, for example, the Lugano Convention and the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency. The reason for this tension arises from the deep-seated understanding in the restructuring world that one foundational pillar of what it means to be a “bankruptcy” law is that the legal intervention should be comprehensive and address all circumstances of general financial default, with its attendant collective action challenges. Talk of a “partial” bankruptcy proceeding may strike many well-socialized insolvency professionals as simply nonsensical. And yet the scheme persists; if anything, its ascendancy reveals its Darwinian staying power from market demand.
Less attention—no attention, really—has been devoted to the potential applicability of the corporate scheme of arrangement to the consumer side of bankruptcy. This Article seeks to fill that gap. Specifically, this Article suggests that the intentional modularity of the scheme procedure may well be transplantable to the world of consumer debt readjustment. Such a transplant would be far from effortless. Consumer bankruptcy raises different policy concerns, implemented through different doctrines, from those raised by corporate reorganization, including such issues as, inter alia, discharge, priority, and abuse-prevention. In addition to these consumer-specific policy concerns, implementation of a consumer scheme would raise questions flowing from the attempt to resolve only part of a consumer’s financial distress. Unpacking a seeming premise of the primary extant consumer provisions of the U.S. Bankruptcy Code (Chapters 7 and 13)—that all the individual debtors’ debts will be settled and their creditors’ rights functionally extinguished—would necessarily require difficult consideration of how to address the differential treatment of secured and unsecured debt in a modular proceeding. For example, in the realm of secured debt, assets in which the debtors had equity would have to be treated differently from assets in which the debtors had no equity (and, indeed, a sizable deficiency), depending on the scope of the “partial” bankruptcy estate. Each of these challenges could be overcome, albeit doubtless with differing degrees of satisfaction, in considering a modular system of consumer bankruptcy inspired by the modern usage of the British scheme.
This Article will proceed as follows. First, it will briefly canvass the major current theories of the consumer bankruptcy system to extract some conceptual foundations necessary to appraise critically the proposal for a consumer scheme. Second, it will describe the UK scheme of arrangement and its unique approach to debt adjustment, as well as examining the empirical and normative case for selective consumer relief. Third, it will outline what a consumer scheme would look like, with a focus on asset-based relief, using a proposed “car scheme” as an explanatory prototype. Fourth, it will consider in some detail the serious normative, constitutional, and doctrinal challenges to how a consumer scheme would address such issues as deficiency claims for undersecured debt and surplus equity for oversecured debt. Finally, this Article will conclude and discuss a current legislative proposal to overhaul the bankruptcy system to gauge compatibility with the scheme proposal. In doing so, this Article will argue that a consumer scheme is not just possible but desirable to accord consumers the same heterogeneity benefits of lower-cost debt relief enjoyed by their corporate insolvency peers.