Bankruptcy Reform: Are Changes On the Horizon?

In December of 2020, Senator Elizabeth Warren (D-MA) and four other Democratic members of Congress introduced to Congress the Consumer Bankruptcy Reform Act (CBRA) of 2020. The CBRA is the first significant consumer bankruptcy reform legislation proposed since the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). 

Unlike the BAPCPA, which was widely seen as favoring banks and credit card companies over individuals, the CBRA is designed to make it easier and less expensive to obtain financial relief. As one of the bill’s sponsors said, “Our bankruptcy system tends to put the profits of big corporations ahead of families fighting to stay afloat. I’m proud to support this sensible bill to allow Americans facing financial hardship to free themselves of student loan and medical debt.”

Goals of the Consumer Bankruptcy Reform Act

According to the sponsors of the CBRA, the new law would:

  • make it easier and less expensive for cash-strapped families and individuals to obtain financial relief,
  • ensure that filers can care for themselves and their families during the bankruptcy process,
  • help address racial and gender disparities in the bankruptcy system,
  • close loopholes that allow the wealthy and corporate creditors to exploit the bankruptcy system, and
  • crack down on predatory practices and hold corporate wrongdoers accountable.

Top Changes to Consumer Bankruptcy Law in the Consumer Bankruptcy Reform Act

The following are some of the top changes to bankruptcy law proposed by CBRA:

1) Chapters 7 and 13 Will Be Replaced with a New Chapter 10

Currently, individuals and families who are struggling financially have the option to file bankruptcy under Chapter 7 or Chapter 13 of the Bankruptcy Code. 

Debtors whose monthly income is less than the median income in their state for a household of the same size can file a Chapter 7 bankruptcy. This allows for a discharge of their debts after liquidating any non-exempt assets to repay their creditors. 

Debtors whose monthly income is greater than the median income in their state for a household of the same size can file a Chapter 13 bankruptcy. Chapter 13 allows individuals and families to discharge their debts after paying their disposable income to creditors under a three- or five-year repayment plan.

The CBRA would replace Chapters 7 and 13 with an entirely new chapter: Chapter 10. 

If the bill becomes law, it would mean that anyone with debt less than $7.5 million would be eligible for Chapter 10, while those with debts greater than $7.5 million would need to seek relief under Chapter 11. 

By replacing the two separate consumer bankruptcy chapters (Chapters 7 and 13) with a single chapter (Chapter 10) available to all consumers, the CBRA will make the consumer bankruptcy process easier and less expensive by streamlining the filing process and reducing filing fees.

2) Focuses on Debtors’ Ability to Pay, Eliminates Analysis of Expenses

Currently, bankruptcy trustees review recent purchases by consumers who file bankruptcy to ensure they did not spend any funds on what is termed “luxury” expenses, which is broadly defined as extravagant, indulgent, or nonessential purchases.

In some instances, bankruptcy cases may be converted to a different chapter or dismissed altogether if the debtor has been found to be abusing the Bankruptcy Code by making luxury purchases prior to filing their case.

Instead of examining whether debtors are making luxury purchases, the CBRA proposes only to determine the ability of debtors to make the “minimum payment obligation” based on the value of their non-exempt assets and their annual income.

3) New Chapter 10 Provides Two Plan Routes for Filing Consumer Bankruptcy

The CBRA evaluates debtors’ ability to make payments to their creditors based on the amount of their non-exempt assets and their income. This evaluation will determine which of the following consumer bankruptcy routes a debtor is likely to choose.

No Payment Discharge Plan

For filers whose annual income is under 135% of the state median income for their household size and whose non-exempt assets are insignificant, the CBRA will allow an immediate discharge of all unsecured debt except for certain categories such as child support or debts incurred by fraud. Discharge of debt under this route has no impact on liens on property.

Repayment Plans for Secured and Unsecured Debt

A minimum payment obligation arises for debtors with non-exempt assets or whose annual income is over 135% of the state median income for their household size. Under these circumstances, individuals and families can file one or more of the following three options depending on their debt situation:

A General Repayment Plan

Which addresses unsecured debts, such as credit card, medical, and student loan debts. Under this general repayment plan, debtors are required to make monthly minimum payments over a three-year period. And unlike Chapter 13, debtors receive their discharges at the time of plan confirmation, rather than after the successful completion of plan payments.

A Residence Plan

Which allows a debtor to deal with mortgages on the debtor’s principal residence; 

A Property Plan

Which addresses secured debt other than home mortgages, like car loans. 

Under current Chapter 13, debtors can modify the terms of loans secured by property other than the debtor’s principal residence, and can cure existing arrearages on home mortgages, but cannot otherwise restructure home mortgage loans. Under the CBRA debtors will be permitted to alter interest rates, adjust mortgage amortization schedules, and cure defaults on all secured loans, including loans secured by the debtor’s principal residence. Debtors will have the longer of 15 years or five years after the loan maturity date to complete payment plans on secured debts.

As is already the case under Chapter 13, secured creditors will retain their liens on the collateral until receipt of the full amounts owed as of the effective date of the plan. Debtors who propose to restructure secured loans under a residence or property plan will not receive discharges of their personal liability on the secured debt The CBRA will also provide that if a consumer defaults on payments under a residence or property plan the secured creditor will be stayed from taking enforcement action until after the consumer is 120 days delinquent on mortgages and 90 days delinquent on other secured loans.

4) No More Credit Counseling or Debtor Education Courses

Under the current Bankruptcy Code, all individual bankruptcy filers are required to complete pre-bankruptcy credit counseling (before filing) and pre-discharge debtor education (before discharge). The CBRA would eliminate these requirements.

5) Remote 341 Hearings Will Be the Norm

Prior to COVID, every bankruptcy case filed required that the debtor attend a 341 hearing or meeting of creditors in person at a courthouse. When the COVID pandemic hit, however, these meetings were conducted remotely via conference calls and videoconferencing. 

Under the CBRA, debtors will still need to attend 341 hearings, but the practice of conducting meetings remotely will continue, imposing less of a burden on debtors and their counsel having to travel to a courthouse. Furthermore, 341 hearings will be scheduled at times that do not conflict with debtors’ work schedules.

6) Payment of Attorney’s Fees Over Time

In some cases, debtors cannot afford the required pre-filing, lump sum payment for legal representation in a Chapter 7 bankruptcy case, and will choose (or be directed) to file under Chapter 13 which allows for debtors’ attorneys’ fees to be paid over the course of the case. Debtors in these situations are often unable to successfully complete their Chapter 13 plans, and as a consequence do not receive a discharge of their debt. 

The CBRA addresses this issue by allowing debtors who cannot afford to file for bankruptcy to pay their attorneys over time if they don’t have all the money up front.

7) Student Loan Debt Can Be Discharged

Section 523 of the Bankruptcy Code currently lists a number of debts that are non-dischargeable in bankruptcy. Student loan debt, for example, cannot currently be discharged without a demonstration of “undue hardship” in an “adversary proceeding,” a separate lawsuit filed by the debtor as part of a bankruptcy case.

The CBRA amends section 523 to make certain previously non-dischargeable debts fully dischargeable, including student loans. Under the CBRA, both private and federal student loans will be treated like other unsecured consumer debts.

8) Other Federal Consumer Protection Financial Laws Are Amended

Beyond amending the Bankruptcy Code, the CBRA also proposes changes to a number of federal consumer protection financial laws:

Adds “Unclean Hands” Provision

The CBRA provides for claims to be disallowed if the claimholder, or its predecessor, violated a federal consumer protection financial law with regards to the consumer. 

Amends The Fair Debt Collection Practices Act (FDCPA)

These amendments crack down on big companies that break the law or otherwise unfairly pressure debtors in the bankruptcy process.

No More Stale Debt Claims

The CBRA proposes an amendment to the Fair Debt Collection Practices Act (FDCPA) that makes filing a proof of claim in bankruptcy for stale debt (i.e., debt that is non-collectable under the applicable statute of limitations) an unfair collection practice. 

FDCPA is Expanded

The FDCPA is further expanded to provide that collection of or attempts to collect discharged debts, other than those voluntarily paid by consumers, are also unfair practices. 

Updates Damages Provisions of Federal Consumer Financial Laws

The CBRA updates some of these statutes – which have not been amended or adjusted for inflation – to reflect their original purpose: to serve as disincentives to violate federal consumer protection financial laws.

Creates a New Consumer Bankruptcy Ombuds at The Consumer Financial Protection Bureau (CFPB)

The Consumer Bankruptcy Ombuds will be a permanent office in the CFPB charged with oversight of consumer bankruptcy. The Ombuds will have a variety of responsibilities, including policy recommendations, data analysis, handling consumer bankruptcy complaints, and enforcement of federal consumer financial law and enforcement of the Fair Debt Collection Practices Act in Chapter 10 cases. 

Closes Loopholes that Benefit the Wealthy

The CBRA will close the “Millionaire’s Loophole” and ensure that assets in self-settled trusts and revocable trusts are not exempt from creditors’ claims in bankruptcy.

The CBRA has broad support among consumer advocates and bankruptcy attorneys. However, credit industry groups see many of its provisions as unnecessarily punitive, oppose the bill.

Moreover, while most professionals in the bankruptcy field acknowledge that bankruptcy reform is long overdue, some professionals believe it can be achieved just as effectively without the sweeping changes proposed by the CBRA. So, even if the CBRA becomes law in the next few years, it is not clear how much the law that passes will resemble the bill that is currently under consideration

The push for bankruptcy reform continues into 2022, and I will continue to update you as the CBRA makes its way through Congress.

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