The Debtor Class

In recent years, individuals seeking bankruptcy protection have encountered an unexpected harm: their lenders have misrepresented the amounts they owe, lost or misapplied their loan payments, and violated clear requirements of bankruptcy law and procedure. Recent investigations of consumer bankruptcy cases reveal widespread abuse of the Bankruptcy Code, ranging from the filing of unsupported or overinflated proofs of claim to violations of the automatic stay and discharge injunction. Such practices undermine consumer bankruptcy’s central goals to provide consumer debtors a fresh financial start and to achieve the fair treatment of and distribution of assets to creditors. Because many debtors affected by lender misconduct may not have the resources or the financial incentives to fight back individually, class actions may serve a valuable remedial role. Class litigation additionally may create a deterrent effect that institutional checks have failed to provide. But debtor class actions face two primary impediments: The first is jurisdictional. The concept of a debtor class appears to conflict with fundamental principles of bankruptcy jurisdiction. The second emanates from the class device itself and the Supreme Court’s apparent drive to limit the availability of class litigation.

This is the first of a series examining these hurdles. This Article addresses the threshold jurisdictional challenges facing the debtor class. It reconciles the divergent case law and presents a framework for approaching class action proceedings in bankruptcy. It concludes that courts generally should not hesitate to exercise jurisdiction over nationwide classes of consumer debtors asserting violations of bankruptcy law. Still, the debtor class action is no panacea. Class relief may be unavailable in many cases, and additional law reform efforts will be needed to fully remedy the disconnect between bankruptcy law and creditor action. A forthcoming article will consider these issues.