Consumer Bankruptcy Reform Bill Introduced In The House & Senate

Jeffrey N. Schatzman | Miami, Florida | January 15, 2021

Senator Elizabeth Warren (D-MA) and others have been persistent advocates for consumer bankruptcy reform both prior to and after enactment of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”).  President Biden has sided with Senator Warren’s recommendations and on December 9, 2020, Senators Warren, Dick Durbin (D-IL), and Sheldon Whitehouse (D-RI) introduced the Consumer Bankruptcy Reform Act of 2020 (“CBRA”) in the Senate (S. 4991), which was preceded by House of Representatives Jerrold Nadler (D-NY) and David Cicilline (D-RI) introduction of the CBRA in the House (H.R. 8902) on December 8, 2020.  The CBRA proposes a radical overhaul of the laws governing consumer bankruptcy cases.  The primary intent of the Bill is to reduce consumers’ cost of filing bankruptcy and to balance racial disparity in the outcome of bankruptcy cases.

How Will CBRA Work? 

Under current bankruptcy laws, individuals are compelled to file under Chapter 13 or Chapter 7, depending on the amount of disposable income they are determined to have upon application of what has been coined as the “Means Test”.  Those debtors with little to no disposable income can qualify for filing under Chapter 7, generally referred to as a complete liquidation.  However, those debtors who have a certain level of monthly disposable income, as determined under the Means Test, must file a five year payment plan under Chapter 13.  The CBRA creates a new Chapter 10 and eliminates Chapter 13 and the ability for individuals to file under Chapter 7.

Chapter 10 gives debtors more flexibility and is designed in some ways like a Chinese menu.  Debtors can choose from one or more of several options of which type of debts they wish to discharge and/or modify.  Such choices are not available under the current system and debtors are required to include all of their debts in both Chapter 7 and 13.

The Bill is 188 pages long and it would be difficult to touch on all of the changes, but I will elaborate on several of the more relevant provisions. Read the full Bill here.

Minimum Payment Obligation Replaces the Means Test

Under the current system, a determination of whether a debtor qualifies for a Chapter 7 or Chapter 13 is determined by applying the Means Test.  The Means Test calculates whether the debtor has sufficient disposable income to make a meaningful repayment of unsecured debts by weighing the debtor’s income against expenses.  Chapter 10 establishes a Minimum Payment Obligation (“MPO”).  The MPO equal to the lesser of:

1. 1. The Allowed Unsecured Claims;
2. 2. The sum of the debtor’s interest in the property of the estate, less secured obligations and exemptions; or
3. 3. The amount of the debtor’s annual income in excess of 135% of the State median income for the same size household, subject to some scaled adjustments.

Once the MPO is determined, the debtor can choose from one or more of the following options:

1. 1. 1) A Discharge Without a Plan.  If the Minimum Payment Obligation is $0.00, then the debtor has no payment obligation and will receive a discharge without having to file a plan.  If the Minimum Payment Obligation is greater than $0.00, then the debtor may choose one or more of the following plans:
   2. 2) A Repayment Plan.  Under this plan, the debtor satisfies the Minimum Payment Obligation by making deferred cash payments over a period of up to 36 months; or if the trustee believes it will provide a meaningful distribution, the trustee may request the debtor to tender for liquidation all of the debtor’s non-exempt assets (the debtor may choose to redeem such nonexempt assets by paying an equivalent amount under the plan).  The plan may provide for the assumption, rejection or assignment of any executory contract or unexpired lease and, so long as all priority claims under § 507 are paid in full, provide for the payment in full of any nondischargeable claim.  A discharge is granted following confirmation of the plan;
   3. 3) A Residence Plan.  This plan allows for the treatment of claims secured by the debtor’s principal residence.  Under this plan, the debtor may:
      1.  Modify or leave unaffected claims secured by the debtor’s principal residence;
      2. Waive or cure any default on a claim secured by the debtor’s principal residence;
      3. Pay claims secured by the debtor’s principal residence;
      4. Sell the debtor’s principal residence free and clear of any liens if the first lienholder refuses to accept tender of the property subject to all junior liens.

1. 1. 4) A Property Plan.   This plan provides for treatment of claims secured by property other than the debtors’ principal residence.  Under this plan, the debtor may:
      4. 1. Modify or leave unaffected claims secured by property other than the debtor’s principal residence;
         2. Waive or cure any default on a claim secured by property other than the debtor’s principal residence;
         3. Pay claims secured by property other than the debtor’s principal residence;
         4. Treat claims of the following creditors as secured claims:
            1. the seller or assignee of an installment sales contract for personal property;
            2. a personal property lessor; or
            3. a party to an agreement that creates a security interest in personal property under applicable nonbankruptcy law.

Plan Confirmation

A debtor may propose multiple plans.  If there are no timely objections to a plan, the court will confirm the plan(s) without a hearing.  Unless a creditor otherwise objects, all of the proposed plans will be heard at a single confirmation hearing.  An unimpaired creditor has no right to object to a plan.

Upon confirmation, the trustee is granted a lien on all of the debtor’s nonexempt property in the amount of the MPO to secure any payment default by the debtor.  The trustee has the exclusive right to foreclose the lien and enforce plan defaults.

Plan Payments

All payments under a Repayment Plan will be made to the trustee commencing 30 days after the date of the order for relief.  The trustee holds all payments until confirmation of the plan and then disburses payments in accordance with the confirmed plan.  If the plan is not confirmed, the trustee is required to return the payments to the debtor, after deducting administrative expenses.

Key Miscellaneous Changes

There are a number of added provisions designed to provide wider access to bankruptcy and simplify the process.  The following are some of the more eye-catching provisions:

Attorney’s Fees.  In a Chapter 7 case, debtor’s counsel must be paid in full pre-petition and cannot accept installment payments from the debtor once the case is filed.  Under Chapter 10, debtor’s counsel is permitted to accept installment payments similar to what is now permitted in Chapter 13.

Co-Debtor Stay.  A stay of actions on consumer debts against a co-debtor is imposed upon entry of the order for relief.  Relief from the stay may be granted under limited circumstances.

Exemptions.  States are no longer permitted to opt out of the bankruptcy exemptions and debtors will have the choice of selecting either the exemptions established under § 522(b)(2) or as defined in § 522(b)(3) as the exemptions, other than what are provided in § 522(b)(2), under Federal law or State law where the debtor has been domiciled for 730 prior to the filing the case.  The new § 522(b)(2) includes a wildcard exemption of $30,000 for a single debtor, which can increase up to $102,300 for a debtor with 4 claimed dependents.

In order to protect a homestead with significant equity, Floridians, who enjoy an unlimited homestead exemption, would likely choose the § 522(b)(3) exemptions, except that the unlimited homestead is limited by the value of the equity in the debtor’s prior homestead if the debtor acquired the current home within 1 year before filing the bankruptcy case.  If the debtor’s equity in a homestead purchased within 3 years prior the filing of the bankruptcy case is more than $1,000,000, then the debtor’s exemption is limited to the value of the equity in the debtor’s prior homestead property.  In addition, any equity or interest acquired by the debtor in a homestead within 4 years prior to filing the bankruptcy case is limited to $170,000, except that any interest transferred from a prior homestead within the same state that was acquired prior to the beginning of the 4 year period is not included.

Dischargeability of Student Loans.  The Bill eliminates § 523(a)(8), no longer including student loans as debts that are excepted from discharge.

No PrePetition Budget and Credit Counseling Course Required.  The Bill eliminates the pre-bankruptcy requirement of taking a budget and credit counseling course.

Broadens Dischargeability of Vehicle Debt.  Under the current law, debts secured by a purchase money security interest in a motor vehicle that was incurred within 910 days prior to filing bankruptcy must be paid in full.  CBRA requires that the debtor only pay the vehicle liquidation value of such secured loans for those vehicles purchased more than 90 days prior to the bankruptcy filing.

Assumption of Primary Residence Leases.  A debtor can assume and remain in a leased property that is their primary residence without having to cure up to 6 months of back rent.  If the debtor is more than 6 months behind on rent payments, the debtor will have 90 days after the date of assumption to cure any monetary defaults amounting to more than 6 months of rent payments.  The debtor’s discharge will be withheld until the cure amount is fully paid.

Expands the FDCPA.  CBRA expands the Fair Debt Collection Practices Act to make it a violation for a debt collector to sue on or file a bankruptcy claim without a good faith belief that the debt is within the statute of limitations.  It also makes knowing collections or attempts to collect a discharged debt a violation, unless the debtor has voluntarily chosen to repay the debt without being pressured by the collector.

The CFPB Gets Involved.  The bill creates a Consumer Bankruptcy Ombuds at the Consumer Financial Protection Bureau (“CFPB”) to handle bankruptcy complaints and gives the CFPB supervisory and enforcement authority over consumer bankruptcy cases by including Title 11 as an “enumerated consumer law”.

My Take

The Bill attempts to meet its goals of making bankruptcy more affordable and accessible by reducing the amount of paperwork to be completed and filed, limiting qualification calculations, making payment of attorney’s fees more flexible and providing debtors with the option of choosing which of their debts they want to address in bankruptcy.  As an attorney who mostly represents debtors, I believe that overall, the passage of the Bill would provide greater access to bankruptcy and simplify the process, but we will have to see whether the Bill can gain any traction in both the House and Senate and to what extent many of the provisions will be acceptable.

I fear that there may be some unintended consequences if parts of the Bill remain.  While the Bill appears to address many issues created by BAPCPA, it also imposes some of Senator Warren’s strong consumer protection ideals, most significantly, the intervention of the CFPB.  Since its creation, the CFPB has aggressively sought regulation and enforcement of the collection industry.  However, often times the CFPB’s regulation has done nothing more than to create confusion and uncertainty for debt collectors who have been burdened with substantial costs associated with maintaining compliance with such moving target regulations.  Although the goal of the legislation is to make bankruptcy more affordable for debtors, if the CFPB attempts to regulate bankruptcy in the way it has the collection industry, it will certainly cause the cost of bankruptcies to increase.