Top 10 Changes to Consumer Bankruptcy Proposed in the Consumer Bankruptcy Reform Act of 2020 | Bradley Arant Boult Cummings LLP
On December 9, 2020, Congressional Democrats including Elizabeth Warren (D-Mass.) And Jerrold Nadler (DN.Y.) proposed sweeping legislation that would revise consumer bankruptcy law. The proposed changes generally make it easier for consumers to access bankruptcy and repay their debts. Below is a discussion of 10 critical changes proposed in the Consumer Bankruptcy Reform Act of 2020 (CBRA).
1. Chapters 7 and 13 are replaced by the new chapter 10
The CBRA is proposing to replace the current Chapters 7 and 13 on consumer bankruptcy with the brand new Chapter 10. Currently, Chapter 7 allows consumers with nominal monthly disposable income to pay off their debts after liquidating any unsuccessful assets. exempt to repay their creditors. Chapter 13 provides that consumers pay off their debts after paying their disposable income to creditors under a three- or five-year repayment plan.
Under the CBRA, consumers with debts less than $ 7.5 million would apply under the new Chapter 10. Consumers with debts greater than $ 7.5 million would seek relief under Chapter 11 To request relief under Chapter 10, consumers will need to file a petition and schedules and statements, similar to those currently filed under Section 521 of the Bankruptcy Code.
2. More credit counseling
The most recent major changes to the Bankruptcy Code were adopted as the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). Under the BAPCPA, consumer releases were conditional on attending a credit counseling course and filing a certificate of completion in their bankruptcy cases. The new CBRA eliminates this seemingly arbitrary credit counseling requirement.
3. Remote meetings 341 that do not conflict with consumers’ working hours
Prior to COVID-19, consumers had to attend section 341 meetings in person where they were interviewed under oath by bankruptcy trustees and creditors. As the nation moved into quarantine, 341 meetings began to take place remotely, via conference calls and video conferences. Under the CBRA, consumer debtors will still be considered at 341 meetings, but these meetings can be conducted remotely. In addition, 341 meetings will be scheduled at times that do not conflict with consumers’ working hours.
4. Focus on consumers’ ability to pay rather than spending choices
Under the current Bankruptcy Code, consumer bankruptcy cases can be converted to a different chapter or dismissed as “abusive” if consumers choose to spend their money on certain “luxury” expenses, such as school fees in schools. private schools, expensive vehicle payments and alimony payments. for adult children. The CBRA eliminates the analysis to determine whether consumers are spending their disposable income on acceptable and non-luxury expenses. Instead, the CBRA only examines whether consumers have the funds to make a “minimum payment obligation” based on the value of their non-exempt assets and annual income.
5. Three types of Chapter 10 plans: “residence” and “property” plans for the repayment of secured debts and general repayment plans for unsecured debts.
Chapter 10 consumers can file one or more plans, including (1) a “residence” plan, which deals with mortgages on consumers’ primary residences; (2) a “Real Estate” plan, which deals with debts secured by other assets; and (3) a general repayment plan, which deals with unsecured debt, such as credit card debt, medical debt, and student loans. Consumers who must pay a minimum payment obligation will not receive a release without confirmation of a repayment plan.
The residence and property plans under the CBRA allow consumers to change loan interest rates, adjust amortization schedules, and remedy defaults. Unlike the current Chapter 13, consumers can change the terms of mortgages on their primary residence under the CBRA. However, unless residence or property plans are offered in conjunction with a repayment plan, consumers will not receive a discharge for residence or property debts. Secured creditors retain their privileges until receipt of all of the sums due on the effective dates of the plans. Consumers have 15 or five years after the due date, whichever is longer, to make payments on secured debts. Significantly, if a consumer defaults under a residence or property plan, the secured creditor is prevented from taking action until the consumer is 120 days past due on mortgages and 90 days in arrears. suffering for other privileges.
6. Some consumers receive immediate discharges without making any payment
Currently, consumers who file for Chapter 7 bankruptcy relief typically receive their discharge in about 90 days. Chapter 13 consumers receive their discharges after successful completion of a three- or five-year repayment plan. Instead of these waiting periods, the CBRA anticipates that consumers who have insufficient non-exempt assets and income to trigger a minimum payment obligation will be discharged immediately. Notably, however, certain debts under article 523 of the Bankruptcy Code will always be non-dischargeable. In addition, liens on property will continue to survive release under the CBRA.
7. Consumers with minimum payment obligations receive waivers upon confirmation of the plan
The CBRA assesses the ability of consumers to make payments to their creditors based on the amount of their non-exempt assets and income. Consumers who need to make payments to their creditors will come up with repayment plans whereby their minimum payment obligation is to be paid over a three-year period. Creditors would receive payment under the Chapter 10 plans under the current priority regime. Plans are confirmed as long as they are feasible, are not offered in bad faith, and pay the full amount of the minimum payment obligation. Additionally, consumers receive their discharges at the time of confirmation, rather than after successful completion of plan payments.
8. Debtors’ lawyers paid over time
Currently, some consumers cannot afford the pre-filing lump sum payment required for legal representation in a Chapter 7 bankruptcy case. Insufficient liquidity can lead consumers who would have been eligible for relief. of Chapter 7 to file a claim under Chapter 13, which allows payment of debtors’ attorney fees during the course of the case. Consumers in these situations often do not successfully complete their Chapter 13 plans, reimburse their creditors, and do not receive a discharge. The CBRA addresses this problem, allowing consumer lawyers to be paid over time. This provides access to bankruptcy relief for consumers who otherwise would not be able to afford to file for bankruptcy.
9. Student loan debts can be discharged
The CBRA amends section 523 to allow consumers to pay off certain previously unreliable debt, including student loan debt. This includes private and federal student loans. Under the CBRA, student loan debt is generally treated like other unsecured consumer debt.
10. Other Federal Financial Consumer Protection Laws Are Amended
Beyond amending the Bankruptcy Code, the CBRA is also reorganizing some federal financial laws on consumer protection. A new “dirty hands” provision provides for the dismissal of complaints if the complaint holder, or its predecessor, has violated a federal consumer finance law as it relates to the consumer. In addition, the Fair Debt Collection Practices Act (FDCPA) is amended to provide that the filing of a bankruptcy proof of claim for an expired debt (that is, a debt not collectible under the applicable limitation period) ) is an unfair practice. The FDCPA is further expanded to provide that collection or attempted collection of discharged debts, other than those voluntarily paid by consumers, are also unfair practices. To oversee federal financial laws on consumer protection in bankruptcy, the CBRA is creating a new Consumer Bankruptcy Ombudsman within the Consumer Financial Protection Bureau (CFPB).
We will keep you posted on new developments as the CBRA progresses through Congress.