Consumer Credit Fairness Proposed for the Bankruptcy Code

On Monday, Senators Whitehouse and Durbin introduced S. 3259, the Consumer Credit Fairness Act. The bill would cut back on some of the worst consumer credit abuses by trimming back on collection rights in bankruptcy.

The bill begins by defining a "high cost consumer credit transaction" as any extension of credit, including costs and fees, that exceeds the lesser of (a) 15% plus the 30-year Treasury bond rate (a calculation that currently stands at 22.4%) or (b) 36%. There are two consequences that would flow from a transaction that met this definition. First, the creditor in a "high cost consumer credit transaction" would have their claim subordinated to all other claims in the bankruptcy case. Second, any debtor who filed bankruptcy as a result of a "high cost consumer credit transaction" would be exempt from the means test that determines eligibility for chapter 7 bankruptcy.

Comments

[Jason Kilborn]

Awesome! Based on a review of French consumer insolvency law, I suggested a move like this several years ago: "Payday lenders, pawnshops, rent-to-own outlets, and home-equity 'predatory' lenders have reaped enormous and growing profits over the last two decades. It would make perfect sense to hold them accountable for the distress that their 'distressed lending' causes to consumers. . . . Would it not be perfectly equitable, as the French law suggests, to offer such creditors vastly inferior treatment in a plan?" (26 Mich. J. Int'l L. 619 (2005)) The French overindebtedness commissions don't seem to have done much with their power to subordinate "irresponsible" lenders, unfortunatley. I doubt this proposal will have legs in the U.S., but it's nice to see these kinds of ideas circulating.

[Fledermaus]

Doesn't have a chance in hell of passing put it is a great idea.

[Ken Doran]

I am not sure the subordination rule would make all that much difference. Relatively few cases, including Chapter 13's, pay out very much to unsecureds. Also, the same party could be victim in one instance and beneficiary in another, sometimes in the same case. The means test provision could, however, depending on the fine print, blow a major hole in that strange process. That raises the question of what "substantial abuse" or other tests would remain in place in its absence, however.