Consumer Bankruptcy Reform Act of 2020

Congressional Democrats proposed legislation that would drastically change consumer bankruptcy law on December 9, 2020. It is unlikely this proposal will see any action in 2020 and its future in 2021 is uncertain. If it does move forward, there are likely to be many changes as special interest groups and lobbyists suggest changes that benefit their clients.

Five of the proposal’s biggest changes:

  1. Elimination of Chapter 7 (for consumers) and Chapter 13. These would be replaced with a hybrid chapter called Chapter 10 that would seemingly do what Chapter 7 and Chapter 13 do. Some people would have no repayment plan, some people would have a repayment plan. My take: there are a lot of stakeholders in the current bankruptcy system. Creating this hybrid option doesn’t seem to bring a lot of value over revamping the currently available chapters.
  2. No more credit counseling. The bankruptcy laws where changed in 2005 to include the required to do a credit counseling course before and after filing a bankruptcy case. These courses seem to offer little to no value to person filing bankruptcy and seemingly are in place only as a roadblock to filing/getting a discharge. My take: the companies that offer these credit counseling courses have a vested interest in continuing these courses. Pretty much anyone else in the consumer bankruptcy arena would be hard pressed to make an argument in favor of their continuation.
  3. 341 Meetings (also called Meeting of creditors) could be conducted remotely and not requiring in person appearance. These meeting also will be scheduled at times that are not in conflict with the debtors’ work schedules. My take: remote hearings are happening now because of the Covid-19 pandemic. Continuing this course after the pandemic offers flexibility to the debtors, trustee, creditors, and attorneys for debtors. These hearings being scheduled at off-hours seems unlikely to happen. Most parties in the system do not want to work nights or weekends because they have familial obligations.
  4. Debtors attorneys can be paid over time after the bankruptcy filing. This would be a big change for those getting a Chapter 7 equivalent in this system. Currently, you generally have to pay all of yours fees upfront in a Chapter 7 or the attorney risks his unpaid fee being part of the bankruptcy discharge. Chapter 13 allows the payment via the payment plan the debtor has to pay. The new proposal eliminates this option. My take: this could assist debtors in getting relief quickly. It can take many individuals months to come up with fees to get a chapter 7 case filed. I’d expect creditors to push back on this. Creditors would prefer for delayed filings or to push debtors into repayment plans where they may get some of their debt paid.
  5. Student loan debts can be discharged. This would be a big change to the bankruptcy laws. Currently it is incredibly difficult (and almost impossible) to get rid of student loans through bankruptcy. My take: student loans are a large issue that lawmakers have continued to grapple with. Allowing student loans to be discharged in bankruptcy like credit card debt would be a great way to help individuals get a truly fresh start. Most student loans are government based so the government could be the biggest loser if this were allowed. I would expect lawmakers with concerns about the national debt to argue against discharge. You’ll also have the sizable private student loan lenders lobbying hard to avoid their debts being easily dischargeable.

This proposal provides many other pro-consumer options such as better exemptions (which dictate what you can keep through bankruptcy), availability of the federal exemptions for states that have opted out, and residential mortgage cramdowns amongst others. As a bankruptcy practitioner, I’m realistic and believe many of these provisions will never become law; however, I’m optimistic that the conversation is happening. Certain proposed provisions, such as easier student loan dischargeability, could drastically improve options for many Americans. Reviewing the bankruptcy laws is long overdue and I hope 2021 brings about some welcome change for consumers who are struggling.

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