Bankruptcy: A Constitutional Right Not to Pay Debts?

Bankruptcy: A Constitutional Right Not to Pay Debts?

Tom Stilp, JD, MBA/MM, LLM, MSC

Crain’s Chicago Business reported recently that creditors of Richard Klarchek, a multi-millionaire, received just $181,000 of the $140.5 million a bankruptcy judge said the creditors were owed.  (“Fallen mobile-home park magnate faces charges he cheated lenders,” Crain’s Chi. Bus., 8-17-2020, p. 4).

About 1/10th of 1% – How is this possible?

In our running series of “Checks & Balances,” where do checks and balances exist in Bankruptcy?

Not many people know this, but Bankruptcy is in the U.S. Constitution.  The Constitution, Article I, Section 8, Clause 4, states that Congress shall enact “uniform laws on the subject of Bankruptcies throughout the United States.”

Some say, therefore, that “Bankruptcy is a Constitutional Right not to pay your debts.”

Congress has the power to create the law, and has exercised its authority since 1801, and as it did with the Bankruptcy Code in 1978, which replaced the prior bankruptcy laws going back almost 200 years.

In over 30 years, our Creditor Rights, Collection and Credit Risk Practice has represented hundreds of creditors in bankruptcies.  Although we’ve seen a lot, a collection of less than 1% appears to be a failure in the Klarchek bankruptcy.

Klarchek had a seven-bedroom mansion in Lake Geneva, Penthouse in Chicago, private jets and all the trappings of wealth.  (Source: “Financial Tornado Hits Mobile-Park Owner, content/uploads/2015/01/ Klarchek_in_Crains.)  These assets do not simply disappear, turn to smoke and evaporate.

Here, the “checks and balances” exist when the private sector challenges the Bankruptcy.  The attorneys for the creditors must zealously represent their clients, and the Bankruptcy Judge is charged with ensuring that the Debtor has filed complete and accurate schedules of assets and income. (Section 541 of the Bankruptcy Code requires a list of all “property” for the Bankruptcy.  11 U.S.C. §541.)   In our experience, the creditor attorney must file objections to provoke a response, but if nothing is filed, or pursued, then nothing happens.

The Bankruptcy Court in North Carolina states that Bankruptcy is intended to provide a debtor with a “fresh start” not a “head start.”  In re Beitzel, 333 B.R. 84, 88 (Bankr. M.D.N.C. 2005).  The US Supreme Court has noted that Bankruptcy is for the “honest but unfortunate debtor.”  Grogan v. Garner, 498 U.S. 279, 287 (1991).

At 1/10th of 1%, unfortunate indeed —

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