A logical and commonsense reform bill for bankruptcy was proposed by Senators Elizabeth Warren (D-MA), Dick Durbin (D-IL), and Sheldon Whitehouse (D-RI) and Representatives Jerrold Nadler (D-NY) and David Cicilline (D-RI).
If it should be considered and become law but I would be surprised since strong forces will be at play to gut it.
And while you would assume those forces are banks and creditors, hold on. Since the bill also removes the requirement for consumer counseling, non-profit credit counseling associations are probably going to have a few things to say as well.
According to the bill summary, the Consumer Bankruptcy Reform Act would make it easier for financially strapped consumers to get the legal relief allowed under bankruptcy protection.
Chapter 10 Bankruptcy Replaces Chapter 7 and Chapter 13
The new proposed Chapter 10 provides potential relief in one of two ways.
Route 1: No-payment discharge. For low-income/low-asset filers with no minimum payment obligation, this option wipes out all unsecured debt except for certain categories of debt, such as child support or debts incurred by fraud. A minimum payment obligation arises for debtors with valuable assets available to pay creditors or with an annual income over 135% of the median income for the state and household size. Discharge has no impact on liens on property.
Route 2: Debt-specific plans. Creates bankruptcy plans that allow individuals to resolve the debts that are specific to them. Individuals can file one or more plans, and collection of debts are paused while the filer remains current on a plan.
- Repayment plan (for unsecured debt, like medical, credit card, and student loan debt): Provides for payment of the filer’s minimum payment obligation. Plans are repaid over the course of 3 years through a trustee, with the repayment obligation secured by a lien on the debtor’s nonexempt property. Individuals with a minimum payment obligation must file a repayment plan to receive a discharge.
- Residence plan (for home mortgages): Addresses mortgages on the individual’s principal residence. Repaid directly by the debtor.
- Property plan (for secured debt other than home mortgages, like car loans): Addresses property secured by a lien other than the individual’s principal residence. Repaid directly by the debtor.
The Chapter 10 bankruptcy waives filing and administrative fees if household income is at or below 150% of the poverty line.
Proposed Chapter 10 Helps to Keep Families Safe
For renters: 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.
- Eliminates the ability of states to opt-out of federal exemptions and creates a new federal floor keyed to 50% of the Federal Housing Finance Agency (FHFA) conforming loan limit for the debtor’s county of residence or a similar leasehold (or 75% of the conforming loan limit for debtors aged 65 or older). Creates an additional set of federal exemptions, including a generous $35,000 wildcard exemption, which further protect debtors’ key assets.
- Allows filers with mortgages to sell encumbered property free and clear of any liens if the first lienholder refuses to take tender of the property, subject to junior liens.
- Allows filers to modify their mortgages based on the market value of the property, with interest rates reduced to achieve a sustainable debt-to-income ratio.
For car owners: Ends the requirement that filers pay the full amount of the loan in order to keep their vehicle. Under the bill, individuals are required to pay only the liquidation value of secured claims like car loans (with an exception of cars purchased 90 days before bankruptcy).
For individuals with student loan debt: Removes the provision that makes private and federal student loans nondischargeable, allowing these loans to be treated like most forms of consumer debt.
Holds Corporations More Responsible
Cracks down on predatory practices and holds corporate wrongdoers accountable:
- Disallows all claims if the claimholder or its assignor has violated a federal consumer financial law in regard to the debtor.
- Expands the Fair Debt Collection Practices Act (FDCPA) to make it an unfair practice for a debt collector to sue or file a bankruptcy claim without an actual, reasonable, good faith belief that the debt is within the applicable statutory limitations period.
- Makes a knowing collection or attempt to collect on a debt discharged in bankruptcy an unfair practice under the FDCPA, unless the debtor has voluntarily chosen to repay the debt without pressure from the collector; allows lawsuits against creditors and collectors who collect debts discharged in bankruptcy, including in class action lawsuits; and prevents creditors from pursuing these consumers in mandatory arbitration in matters related to the bankruptcy case.
- Establishes a new Consumer Bankruptcy Ombuds at the Consumer Financial Protection Bureau (CFPB) to handle consumer bankruptcy complaints; expands the CFPB’s supervisory authority to all lenders that make loans at over a 36% military APR rate, irrespective of size; and gives the CFPB supervision and enforcement authority for title 11 consumer cases by making title 11 an “enumerated consumer law.”
Deeper Dive Delayed
I’ll keep an eye on this bill and take a deeper dive into what is proposed if the thing does die on the vine in Congress. For now, read this for more information.
You can read the full bill proposed below.