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Consumer Bankruptcy, Done Correctly, To Help Struggling Americans

posted by Pamela Foohey

Today, Senator Elizabeth Warren unveiled her new plan to reform the consumer bankruptcy system. The plan is simple, yet elegant. It is based on actual data and research (including some of my own with Consumer Bankruptcy Project co-investigators Slipster Bob Lawless, former Slipster, now Congresswoman Katie Porter, and former Slipster Debb Thorne). Most importantly, I believe it will make the consumer bankruptcy system work for American families. And, as a bonus, it will tackle the bad behavior that big banks and corporations currently engage in once people file, like trying to collect already discharged debts, and some non-bankruptcy financial issues, such as "zombie" mortgages.

In short, the plan provides for one chapter that everyone files, combined with a menu of options to respond to each families' particular needs. It undoes some of the most detrimental amendments that came with the 2005 bankruptcy law, including the means test. In doing so, it sets new, undoubtedly more effective rules for the discharge of student loan debt, for modification of home mortgages, and for keeping cars. It also undoes "smaller" amendments that likely went unnoticed, but may have deleterious effects on people's lives. Warren's plan gets rid of the current prohibition on continuing to pay union dues, the payment of which may be critical to allowing people who file bankruptcy to keep their jobs and keep on their feet. Similarly, the plan eliminates problems debtors face paying rent during their bankruptcy cases, which can lead to eviction.

One chapter that everyone files means that the continued racial disparities in chapter choice my co-authors and I have documented will disappear. No means test, combined with less documentation, as provided by Warren's plan, means that the most time-consuming attorney tasks will go away. Attorney's fees should decrease. Warren's plan also provides for the payment of fees over time. People will not have to put off filing for bankruptcy for years while they struggle in the "sweatbox." Costly "no money down" bankruptcy options should disappear. People will have the chance to enter the bankruptcy system in time to save what little they have, which research has shown is key to people surviving and thriving post-bankruptcy.

In creating a consumer bankruptcy system that actually responds to American families' financial problems, Warren's plan makes the system itself nimble. Families can file to deal with their home mortgage, to deal with their car loan, to deal with medical bills, to deal with student loans, or to deal with the fallout of a marriage. Older Americans, whose increased bankruptcy filings have made headline news over the past year, will have access to a system that they can tailor to their needs. While the bankruptcy system cannot solve the fallout from increased healthcare costs, changes in employment practices, and the other risks we document that have been shifted onto the elderly, Warren's plan at least will provide more help to struggling older Americans. This help includes a new, higher federal bankruptcy homestead exemption that will help Americans, including older Americans, stay in their homes.

One of my favorite parts of Warren's plan is that those debtors who choose an option that comes with some sort of repayment plan will be assured that the plan will allocate them sufficient money going forward to provide for their families. This will be a marked departure from the current chapter 13 repayment plan paradigm, under which a majority of debtors fail to complete their plans in part because the budgets are just too tight. As I've written in a recently published article, research about procedural justice strongly suggests that the demoralization that comes with failed repayment plans negatively affect how families fare post-bankruptcy -- financially, psychologically, and socially. A consumer bankruptcy system that allows the families that use it to succeed simply is good economic and social policy.

A nimble system also can deal with bad actors effectively, unlike our current consumer bankruptcy laws. Warren's plan includes provisions that allow creditors to seek to dismiss a case or to object to discharge based on abuse. Indeed, Warren's plan likely makes it easier to prove abuse. Perversely, I suspect this will be a particularly unwelcome feature because the provisions will trap higher-income, higher-net-worth individuals. Warren's plan also prevents these individuals from squirreling away assets in self-settled trusts and from engaging in other dubious bankruptcy planning tactics. And her plan recognizes that it is not only higher-net-worth individuals engaging in dubious tactics. For instance, it also includes provisions to prevent fathers (and mothers) from siphoning off income and assets that should be paid to their children as child support.

Finally, as an empirical scholar who primarily studies consumer and business bankruptcy by gathering data, I must end by noting that Warren's plan includes additional data collection -- debtors' age, gender, and race. We only know about age, gender, and racial disparities in consumer bankruptcy because the Consumer Bankruptcy Project, started by Senator Warren when she was still Professor Warren, asks people these key demographic questions. The federal government should collect this information so that it actually can investigate how its system works and affects American families.


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