Consumer Bankruptcy Reform Might Actually Happen This Time

I was reading Adam Levitin’s piece on CNBC on the forces at play that is hanging a giant financial anvil over consumers.

The Consumer Bankruptcy Reform Act (CBRA) probably has a good chance of being considered because the wave of people about to hit a financial wall is enormous following the pandemic.

Think about this for a moment:

  • Somewhere between 18% (Census numbers) and 23% (National Multifamily Housing Council numbers) of renters are delinquent. Most of those are going to face eviction when the covid rent holiday ends.
  • Almost 5% of mortgages are more than 90 days past due. Those people that are on some forbearance program with their lender need to read the fine print. Private lenders will have the ability to call the delinquency due when the coronavirus payment holiday expires. That is the third-highest level of delinquencies since 1978.
  • Collection efforts blocked by pandemic relief will end, and collection activity will begin with force. Delayed payments are still due.
  • Unemployment insurance is not income replacement for lost jobs. Households treading water or spending down limited savings are headed for a cliff.
  • Large numbers of people that had a medical issue related to the virus will have explosive bills they will not be able to pay.
  • Current bankruptcy repayment plans in a Chapter 13 bankruptcy fail and are unsuccessful. See this study.

I did find it very enlightening that the Texas Law Review study concluded, “The data from this study reveal the serious failures of Chapter 13 bankruptcy. There is no longer a vacuum of knowledge that permits alternative theories to excuse away the realities of Chapter 13 outcomes. Nearly all of the two in three families that file Chapter 13 and later drop out of their repayment plans do so in precarious financial straits.”

It went on to say, “These families still owe their unsecured debts, and they are out of ideas and options. Some families may file another bankruptcy, some may simply avoid collectors for years, and some will simply tumble down the socioeconomic ladder, losing homes, cars, and their aspirations for middle-class prosperity.”

See also  Chapter 10 Bankruptcy Proposed in CBRA of 2020

Something should change when dealing with the wave of debtors about to fall off the financial cliff.

The proposed Chapter 10 bankruptcy in the CBRA proposed changes is a reasonable adjustment to bankruptcy.

Unless we allow people to seek and obtain a fresh start under the bankruptcy laws and deal with all debt, including federal and private student loans, we will be left with a tremendous number of people who will be financially walking wounded and eventually be a burden on society.

3 thoughts on “Consumer Bankruptcy Reform Might Actually Happen This Time”

  1. The study you reference is flawed. There is a basic misconception about the success rate of chapter 13 cases. Some articles claim that only one-third of cases complete to discharge, but that is not accurate. For years, authors have attempted to define “success” in chapter 13 based only on the completion rate or discharge rate of cases. Instead, we should be asking, “does chapter 13 work for individuals and creditors?” The answer is a resounding yes. We know this because millions of individuals have saved their homes, cars, and other personal property while repaying priority, secured and unsecured creditors through chapter 13 plans. Choice of chapter is generally guided by which chapter of the Bankruptcy Code will provide the best financial solution for the particular individual’s financial circumstance and goals. Since 1989, chapter 13 has been criticized for low success rates compared to a completely different insolvency proceeding in chapter 7. Chapter 11 has suffered the same criticism over the same period of time. Chapter 13 has at least one overlooked difference: the ability of the chapter 13 debtor to voluntarily dismiss their case at any time. Voluntary dismissal is a feature that often results from life changes over the course of a chapter 13 case. It can provide a second chance for many individuals to reset and try again. “the best measure of success in chapter 13 is the rate of cases that complete to discharge. But the measure should not be the overall completion rate for all cases filed, but the rate of completion of cases which have a confirmed plan of reorganization.” By limiting the discharge measurement to only the cases with a confirmed plan of reorganization, the success rates of chapter 13 are not artificially and unjustly reduced by unscrupulous filers, debtors with no ability to fund plans, and cases that are converted prior to confirmation. Many cases get filed but do not even make it to a § 341 meeting. To include these cases for statistical purposes to evaluate “success” serves no valid purpose. Also, debtors have a near-absolute right to move to dismiss their chapter 13 case at any time. Further, an individual can file a chapter 13 after receiving a chapter 7 discharge, to cure an arrearage or pay a nondischargeable debt, without the entry of a discharge at plan completion. That individual would certainly consider their chapter 13 case a “success” – and this factor alone illustrates why we should not measure “success” just based on whether the debtor obtained a discharge.

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  2. Thanks for writing about the prospects of bankruptcy reform. If Congress doesn’t reform the bankruptcy process and make it easier for consumers to shed their debts, millions of people will drop out of the middle class in the years to come. Bankruptcy is intended to give honest but unfortunate debtors a fresh start, and the Bankruptcy Code should not put barriers in the way of people seeking a fresh start.

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