Is Bankruptcy Reform on the Way?

The last big bankruptcy reform in the United States—the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) that took effect in 2005—was bad for consumers. The law changes, which included the pre-filing credit counseling requirement, the means test for Chapter 7, and an increase in the required wait time between bankruptcies, was largely crafted by consumer lenders.

Many, from consumer bankruptcy attorneys to consumer advocacy organizations, have been recommending changes since. In 2019, the American Bankruptcy Institute’s Commission on Consumer Bankruptcy issued an extensive report accompanied by several recommendations for changes to the U.S. Bankruptcy Code. With a change in administration and a shift in the balance of the Senate, some of those reforms may be on the horizon.

Before the election, then-candidate Joe Biden signaled that he would largely adopt Senator Elizabeth Warren’s plan for bankruptcy reform.

The Consumer Bankruptcy Reform Act (CBRA)

Late in 2020, Senator Warren and Representative Jerry Nadler introduced legislation to significantly reform consumer bankruptcy. Those bills aren’t currently pending. They expired with the end of the 116th Congress and will have to be reintroduced in the new Congress for consideration—a common occurrence when one session of Congress ends and another begins. But, the text of the lengthy bill provides a look at proposed reforms.

Goals of Bankruptcy Reform

Some of the key aims of the bills’ sponsors include:

• Simplifying the bankruptcy process
• Making bankruptcy more affordable
• Ensuring that bankruptcy filers retain sufficient resources to care for themselves and their families during the process
• Alleviate racial and gender disparities
• Protect against exploitation of the process by the well-off
• Create greater accountability for unscrupulous creditors and debt collectors

Reform under or similar to the CBRA would also standardize access to federal exemptions, which are currently available in some states and not others, and would create an alternative option that would allow filers to keep more non-exempt assets.

Key Changes Proposed

If the Warren/Nadler plan advances, the structure of consumer bankruptcy would change significantly. Chapter 7 and 13 would be eliminated and all consumer bankruptcy cases would be filed under a new type, Chapter 10. Chapter 10 bankruptcy would offer different paths, providing protections for those with mostly unsecured debts who would previously have filed under Chapter 7 and those who currently file Chapter 13 to manage secured debts.

For those without significant assets and with relatively low incomes, Chapter 10 would provide a quick and simple path to discharge. Those with high-value assets or incomes above 135% of the median would have a required minimum payment.

Other changes would include elimination of the pre-filing credit counseling requirement created by BAPCPA, and a shift in the treatment of bankruptcy attorney fees.

Elimination of the credit counseling requirement eliminates a hurdle that many have argued serves no real purpose. The requirement was intended to help ensure that alternatives had been fully explored and only those who truly needed to file bankruptcy did so. But, an early report from the U.S. Government Accountability Office stated: “Anecdotal evidence suggests that by the time most consumers receive the prefiling counseling, their financial situations are dire, leaving them with no viable alternative to bankruptcy.”

The new treatment of fees is aimed at ending a difference in treatment of Chapter 7 and Chapter 13 fees that often forces filers who can’t pay the full balance up front into Chapter 13, though Chapter 7 might be a quicker and more affordable option.

Dischargeability of Student Loan Debt

One of the most significant proposed changes is a shift to allowing student loan debt to be discharged much like any other unsecured debt. Millions of student loan debtors are behind on their payments, and many others are struggling to keep current, often through deferrals and forbearances.

A handful of other debts would also become dischargeable, including some types of criminal fines and fees.

h2.Is Bankruptcy Reform Worth Waiting For?

There are no one-size-fits-all answers in bankruptcy. Bankruptcy reform is only a proposal at this point. There is no guarantee that reform will pass, or when it would take effect. For many people considering bankruptcy, timing counts. For instance, those facing foreclosure or repossession often have to act quickly if they want to preserve their property. Even if there isn’t a specific issue that makes bankruptcy urgent, delay can be costly and stressful.

On the other hand, someone with significant student loan debt and no sense of urgency might find it worthwhile to hold off and wait to see whether the option of discharging that student debt opens up in the coming months.

As with most questions concerning bankruptcy, it’s a case-by-case assessment. The best source of information and guidance is an experienced consumer bankruptcy attorney in your area. The veteran debt resolution lawyers at Bond & Botes offer free, remote consultations to people struggling with debt in Mississippi, Tennessee, and Alabama. You can schedule yours by calling [csutom:phone] or filling out the contact form on this site.