Shortly before the Christmas recess, Senators Elizabeth Warren (D-MA), Dick Durbin (D-IL), and Sheldon Whitehouse (D-RI), introduced a bill entitled the Consumer Bankruptcy Reform Act of 2020 (“CBRA”). If enacted, this would be the first major overhaul of the Bankruptcy Code since the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”). That Act, in turn, was a major revision to the Bankruptcy Code enacted in 1979, which replaced the Bankruptcy Act from 1898. This bit of historical trivia is to illustrate that major changes the the nation’s bankruptcy laws don’t come along too often. The fact that CBRA was introduced only 15 years after BAPCPA is a testament to just how horribly bad BAPCPA is.
CBRA would make wholesale revisions to the way bankruptcy is approached in the United States. For starters, two mainstays of consumer bankruptcy law, Chapter 7 and Chapter 13, would be eliminated as options for individuals, replaced by a single Chapter 10. Businesses could still file Chapter 7. Because Chapter 13 applies only to individuals, it would go away completely.
Two Paths to Discharge
Under Chapter 10, debtors could take one of two paths to a discharge. In the first path, debtors with low income and few non-exempt assets would quickly receive a discharge. This path looks very similar to the “no-asset” Chapter 7 bankruptcy that now exists. Currently, debtors whose income falls below the median income for a family of their size, as determined by the Means Test, and who have no non-exempt assets that they want to protect, file Chapter 7 and receive a discharge within about four months. Under Chapter 10, a discharge would come even sooner.
Under the second path, debtors who have what is termed a “minimum payment obligation” can choose any or all of three repayment options. The minimum payment obligation is a calculation similar to the Means Test that includes the debtor’s income, to the extent it exceeds 135% of the median income for the debtor’s state, and her assets available to creditors.
Formerly, bankruptcy was an all-or-nothing proposition. A debtor either filed with respect to all debts or she didn’t file at all. Under proposed Chapter 10, a debtor could choose to file only with respect to certain debts.
Option One, Residence Plan.
If a debtor was behind on house payments but was otherwise current, she could choose the Residence Plan. This is essentially a court sanctioned agreement with the mortgage company to cure a default. Payments would be made directly to the mortgage company according to the court-approved plan. The debtor would make all other payments without court oversight.
Option Two: Property Plan
The is like a Residence Plan, but for property other than the debtor’s residence. This includes cars, boats, vacation homes, and the like. Unlike Chapter 13, the court does not examine the debtor’s expenses and allow some but disallow others. Under Chapter 10, the debtor can choose how to spend her money; she will not have to justify any expenses, so long as she can meet the minimum payment obligation.
Option Three: Repayment Plan
Debtors who have a minimum payment obligation must file a repayment plan, regardless of whether they choose a Residence or Property Plan. A Repayment Plan is for unsecured creditors, such as credit cards, medical bills, and student loans. If a debtor does not need a Residence or Property plan (because, for example, she is current on those payments), those debts need not be included in the bankruptcy.
Student Loans Dischargeable
A major feature of CBRA is to make student loans dischargeable. Under the new law, student loans would become just like any other unsecured debt such as credit cards and medical bills. To the extent not repaid under Chapter 10, they would be discharged.
Under CBRA, federal exemptions would be expanded and states would no longer be able to opt out of the federal exemption scheme, meaning any debtor in any state would have the choice of which exemptions, the federal ones or those provided by her state, to choose. Federal exemptions would include a higher, $35,000 wild card exemption.
Under the current Bankruptcy Code, a tenant of residential property must be or become current in order to assume (keep) a lease with her landlord. If a debtor was behind in her lease payments, there was no way to prevent eviction. CBRA allows renters to continue in the lease of their principal place of residence without curing monetary defaults of less than six times their monthly rent. This provision appears to be solely for the protection of the debtor during the bankruptcy process, since it places the entire loss of the past six months’ unpaid rent on the landlord and forces the landlord to keep the debtor as a tenant, at least until the tenant falls behind in her post-petition rent.
Credit Counseling Requirement Eliminated
One of the most ridiculous requirements of BAPCPA is that a debtor must take not one but two consumer credit counseling courses. The supposed theory behind this requirement was that if debtors could be educated about financial matters, they could avoid becoming repeat filers. There is zero evidence that the requirement achieved or even helped achieve that goal. Instead, all it did was create a whole industry of providers whose existence is now threatened and who will undoubtedly oppose this part of CBRA.
More to Come
CBRA comes in at 188 pages. This is a brief overview of some of the highlights. There’s much more to talk about and I’ll address more in later posts. Whether the bill becomes law is also uncertain. While it has far broader and more scholarly and practical support than BAPCPA ever had, it has highly controversial provisions, such as discharge of student loans and the requirement that landlords just ignore six months’ past-due rent. Both of these will have long-term consequences for students needing to finance their educations and renters. The latter group, one without an organized lobby in any legislative body, might be particularly hard-hit as landlords tighten up rental standards.
Additionally, the timing of CBRA could be problematic. Most observers, myself included, expect a wave, a tsunami, of bankruptcy filings once the various moratoria designed for COVID relief expire. A brand new law that no one has experience with thrown into that mix could prove chaotic, to say the least.
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