The Consumer Bankruptcy Reform Act of 2020

Today Senators Elizabeth Warren (D-MA), Dick Durbin (D-IL), and Sheldon Whitehouse (D-RI) and Representatives Jerrold Nadler (D-NY) and David Cicilline (D-RI) introduced the Consumer Bankruptcy Reform Act of 2020. This is the first major consumer bankruptcy reform legislation to be introduced since the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). Whereas BAPCPA introduced a number of major, but targeted reforms to consumer bankruptcy law (and also a few business bankruptcy provisions as well), the CBRA is a much more ambitious bill:  it proposes a wholesale reform of the structure of consumer bankruptcy law with an eye toward reduces the costs and frictions that prevent consumers from being able to address their debts in bankruptcy.

This is a long post with an extended overview of the bill. The bill's sponsors have a one-page version or a two-page summary, but I figure you're here at the Slips because you just can't get enough bankruptcy law, and we're happy to oblige. Let me start with a disclosure, though. I was privileged to provide assistance with the bill, along with several other Slipsters. That means I know what's in it, and I think it's a really good and important piece of legislation that I hope will become law. 

A New Chapter 10 for Consumer Bankruptcy (Eliminating Consumer 7s and Chapter 13) 

Whereas consumer bankruptcy has long existed in two primary flavors—liquidations (chapter 7) and repayment plans (chapter 13)—the CBRA proposes a single chapter structure (a new chapter 10).  Under the CBRA, individual debtors would no longer be eligible for chapter 7, and chapter 13 would be repealed in its entirety. All individual debtors with debts of less than $7.5 million would be eligible for chapter 10; those with larger debts would have to file for 11 (or 12 if they qualify).  It's important to keep this structure in mind when evaluating the CBRA. While the CBRA takes elements from chapters 7 and 13, the CBRA is not trying to replicate existing 7 or 13. That means if you come to CBRA with a mindset of "wait, that's not how we do it in 13," well, yeah, that's kind of the point. 

The CBRA is a huge bill (188-pages) with a lot of provisions. In addition to the new chapter 10, it also contains amendments to numerous provisions in chapters 1, 3, and 5 of the Bankruptcy Code, as well to certain federal consumer financial protection statutes. I'm not going to try to cover everything in detail, but I want to cover how chapter 10 would work, as well as some of the highlights from other provisions. This is a very long post, but I think it's important for there to be a clear statement of how chapter 10 would work because there will undoubtedly be some misinterpretations of the bill, and I'd like to see consideration of the bill be on its actual merits.  

Chapter 10

Chapter 10 is meant to be the single point of entry for almost all consumers. That's a contrast with the current system where consumers can "pick" between 7 and 13. I put "pick" in quotation marks because there often isn't a meaningful choice. Chapter 7 has no provision for payment of attorneys' fees, so consumers who are unable to save up for bankruptcy don't have any real option other than chapter 13. Moreover, even when a consumer is able to afford a 7, bankruptcy attorneys play a large role in deciding what chapter to file under. Part of this is that 7 and 13 have different tools, but part is also local legal culture. There are  massive variations in chapter 7 vs. 13 filing rates by state—some states have a 7 culture and some have a 13 culture. That's hardly consistent with the spirit of constitutional authorization of "uniform laws on the subject of bankruptcies." What's worse, there is substantial empirical evidence that minority debtors are more likely to end up chapter 13, which is both more expensive  (about 2.5x more expensive) and less likely to result in a discharge of debts (only around a third of chapter 13 cases result in a discharge, while virtually all chapter 7 cases do). Replacing the two-track system with a single chapter eliminates these disparities. 

Filing for chapter 10 involves nothing more than filing a short form petition with the bankruptcy court. All of the BAPCPA credit counseling requirements are repealed. There was zero evidence that the credit counseling helped consumers—it was just an added cost and friction to getting bankruptcy relief. (But you'd better bet that this will be an industry that opposes the legislation—their government mandated business flow is threatened.)

Once a debtor files the automatic stay kicks in, as does a co-debtor stay. The debtor retains control of his or her property except as required to be surrendered to the trustee pursuant to a minimum payment obligation (discussed below). The debtor will have to file much (but not all) of the information currently required under section 521 about the consumer's assets and liabilities, and creditors will still get a chance to question the debtor at a section 341 meeting. The CBRA allows for remote attendance at a 341 meeting and does not require in-person appearance of the debtor if it would be burdensome on the debtor (including more than minimal travel). The meeting is also to be scheduled at a time that does not conflict with the debtor's employment (no reason for the debtor to miss work to go bankrupt!).

As with current law, the CBRA exempts certain property of the debtor from creditors' claims. The exemptions are updated and simplified under the CBRA. The debtor can choose between a set of federal exemptions and the debtor's state law exemptions (subject to anti-abuse cap on recently acquired homestead values). States cannot opt out of the federal exemptions, however. Key changes to the federal exemptions include a $35,000 wildcard exemption and a homestead exemption (with extra protection for seniors) keyed to the FHFA Conforming Loan Limit, which reflects geographic variations in home prices. Debtors' exemptions are also adjusted based on their number of dependents. 

The key feature of the CBRA is that it screens "can't pay" from "can pay" debtors based on a combination of the debtor's nonexempt assets and future income. This is a different approach to the two-track system that lets debtors choose between giving up assets, but keeping future income (chapter 7) or keeping assets, but giving up future income (chapter 13). The CBRA's payment screen looks only to income and assets, not to expenses. What a debtor chooses to spend her money on is her business. A debtor will not have to justify choices about their children's education or medical care.

Instead, every chapter 10 debtor has a "minimum payment obligation," which is the sum of the debtor's non-exempt assets and a progressively graduated percent of annual income exceeding 135% of the state median income for a household of like size. This minimum payment obligation is what the debtor will have to pay in order to get a discharge. (For involuntary bankruptcy petitions, which are exceedingly rare currently, the minimum payment obligation is calculated only in reference to the consumer's current nonexempt assets, not the consumer's future income--no forced repayment plans.) 

Immediate discharge for debtors with no minimum payment obligation

If a debtor's minimum payment obligation is zero, the debtor is eligible for an immediate discharge of all unsecured debts, other than those that are non-dischargeable under section 523. This means that the "can't pay" debtors are moved through bankruptcy incredibly quickly and at a very low cost. This is what a well-designed consumer bankruptcy system should be doing:  triage among debtors and require repayment only from those who have meaningful ability to repay. 

Discharge upon confirmation for debtors with a minimum payment obligation

If a debtor has a positive minimum payment obligation (the "can pay" debtors), the debtor must propose a "repayment plan," addressing the debtor's personal liability on unsecured and secured obligations, under which the debtor must pay at least that minimum payment amount over three years. That plan can be paid under any combination of future income, nonexempt assets, and exempt assets (enabling an installment redemption of nonexempt assets).  Distributions under the plan follow the 726/1326 waterfall, but there is no requirement that priority claims be paid in full, only a requirement of paying the minimum payment obligation, and there is a safety valve for inability to make the minimum payment obligation when the debtor is "justly excused" for "circumstances that debtor cannot reasonably avoid". That allows some flexibility for debtors who have unusual situations, like extremely high medical expenses for themselves or a dependent. Conversely, creditors are protected by the ability to have the case dismissed for a "manifestly improper use of the bankruptcy system"—language indicating an intention to jettison the existing "substantial abuse" jurisprudence"). 

If the plan pays the minimum payment obligation, is feasible, is not proposed in "bad faith," covers court fees, and the debtor is current on post-bankruptcy domestic support obligations, the court is required to confirm the plan. If no objection is raised, no hearing is required for confirmation.  Upon confirmation, the debtor receives an immediate discharge. This is a major change from chapter 13, where a discharge is granted only upon completion of a chapter 13 plan, something that many chapter 13 debtors fail to achieve. An individual can get a discharge under chapter 10 (whether through a repayment plan or with no monthly payment obligation) only once every six years. 

The debtor's obligations under a repayment plan are enforceable solely by the bankruptcy trustee, and the obligations are secured by a lien on all of the debtor's nonexempt assets. A default on a plan does not unwind the discharge, however, and a plan may be modified based on a material change in the debtor's financial condition that would result in the plan obligations imposing a "substantial burden" on the debtor—another safety valve. 

Secured debt is handled under separate "residence" and "property" plans

Under chapter 10, secured debt is handled under separate "residence" or "property" plans for the debtor's principal residence and all other property. A residence or property plan allows the debtor to change the terms of secured obligations, but does not result in a discharge. A discharge is possible only with coupling the plan with a repayment plan or having no minimum payment obligation.  This means that in chapter 10, a consumer can adjust the interest rate and amortization schedule of a loan or cure a default on the loan. Chapter 10 also removes chapter 13's restrictions on mortgage modification ("cram down"), and pars back (but does not eliminate) the restriction on auto loan lien stripping. Chapter 10 also enables consumers to get rid of "zombie" mortgages through a right of first refusal process.  

Residence and property plans operate substantially similarly other than the plan period and the relevant interest rate prescribed. The secured creditor keeps its lien and debtor must pay the secured creditor the value of the lien as of the effective date of the plan based on an interest rate prescribed for mortgages and cars (meaning Till v. SCS Credit Corp. would apply only to other, unusual collateral). The rates are calculated in reference to an average prime offer rate. Payments can be made over the longer of 15 years or 5 years after the stated maturity date for a residence. For cars and other property, the plan can be over the longer of 5 years or the the stated maturity date of the debt. Payments under a residence or property plan are handled directly by the debtor, but the secured creditor is stayed from taking any action unless there is a default under the plan, which requires 120 days delinquency for mortgages and 90 days delinquency for everything else. 

Limited Proceedings—decoupling debtor's financial obligations

One of the major innovations of chapter 10 is that it decouples a debtor's various financial obligations. Currently a consumer who files for bankruptcy faces a day of reckoning with all creditors—the credit card issuer, the tort creditor, the mortgage lender, the car lender, the student lender, the tax authority, etc. It does not matter if the consumer is only have a problem on the mortgage or with the credit card debt. All of the debts get pulled into the bankruptcy. There is no way to deal with debts a la carte under current law. Chapter 10 changes that by introducing the concept of a "limited proceeding." A debtor may elect at the time of filing to conduct a "limited proceeding," that consists of solely a residence or property plan—treating only secured debt--which means no discharge. This is particularly useful as it enables a cure of a mortgage or car loan without a full-blown bankruptcy. 

Other CBRA provisions

There are a number of other CBRA provisions of note. First, eliminating consumer chapter 7 means that the BAPCPA "means test" is gone. So too is single-shot redemption of nonexempt property (installment redemption is allowed). Reaffirmations are also entirely gone. 

Second, the CBRA creates a provision for the payment of attorneys fees in chapter 10. That's key because it means that debtors can pay their attorneys over time if they don't have the money today (and they are bankrupt after all). 

Third, the CBRA makes it possible for renters to keep their residences. Under current law, a renter must pay all back rent in order to keep a rental residence. That's generally impossible if there's more than a month or two of back rent owing--othewise the debtor wouldn't be filing for bankruptcy. The CBRA allows renters to stay in their leases without having to pay several months of back rent. That back rent is treated like any other unsecured debt. There's no reason landlords should be special in this regard. 

Fourth, the CBRA create a role for the Consumer Financial Protection Bureau in consumer bankruptcy. The CFPB is authorized to appear and be heard in any bankruptcy case and will have the authority to enforce its prohibition on unfair, deceptive, and abuse acts and practices in chapter 10 cases. Moreover, the CBRA creates a "Consumer Bankruptcy Ombuds" at the CFPB, a parallel to the existing Student Loan Ombudsman position. This means that there will be a permanent office in the CFPB responsible for consumer bankruptcy. The Consumer Bankruptcy Ombuds is tasked with a range of duties:  data analysis, policy recommendations, but also setting up an informal dispute resolution system. 

Fifth, the scope of what is or is not dischargeable is also amended. Section 523 is amended to make certain previously non-dischargeable debts (most notably student loans and certain types of criminal justice-related debts, like costs of public defense or incarceration) fully dischargeable. At the same time, certain types of debt, like those incurred in civil rights violations, are made nondischargeable. The discharge has much sharper teeth under the CBRA—discharge violations are now a free-standing cause of action. 

Sixth, the CBRA expands claim disallowance to include "bad boy" grounds—violations of federal consumer financial laws. The bankruptcy system is a federally operated debt collection system, and creditors who want succor in the system must have clean hands. 

Seventh, the CBRA updates the damages provisions of federal consumer financial laws. Some of these statutes have not had their damages provisions--which are not inflation adjusted--amended since the 1970s. They have become toothless. CBRA gives them a set of choppers that reflect their original bite and ensures that they will be inflation adjusted going forward. 

Eighth, the CBRA truly closes the Millionaire's Loophole for self-settled trusts.

Ninth, the CBRA fixes a plethora of bad Supreme Court decisions (actually, it's hard to think of a consumer bankruptcy case where SCOTUS got it right!). These are things that only a bankruptcy lawyer cares about, but it's nice to see decades of damage undone. 

Finally, the CBRA creates a robust bankruptcy data collection system.  Good policy needs data.  

Politics

I do not want to get into a discussion here of the politics of the bill, beyond noting three things. First, the foundation for the CBRA is the consumer bankruptcy plan from Warren's Presidential campaign, which President-Elect Biden has adopted as his own. Second, the bill has already been endorsed by an impressive array of consumer, civil rights, and labor organizations, and has among its original co-sponsored the the House Judiciary Committee Chair, House Judiciary Antitrust, Commercial, and Administrative Law Subcommittee Chair, and the possible Senate Judiciary Committee Chair. That means the bill has the possibility of moving in committee. And third, there will also be a real need for ensuring access to effective bankruptcy relief, as we will be facing a tidal wave of COVID-19 related consumer financial distress in 2021, when moratoria on foreclosures, evictions, and collections lapse. The CBRA offers a legislative path to improving access to justice for hard pressed consumers and ensuring that the bankruptcy system offers them all of the tools necessary for addressing financial distress. 

 

Comments

[Camille Hope]

Do you really think you can get this bill passed, the extra staff hired at CBRA to make appearances in every bankruptcy court in the country by 2021?
That's impossible and you know it, not to mentions the many other facets that would take a long time to get up and going. I am a chapter 13 trustee, close to end of my career, so I really don't fear change. But you need to be real.

[Adam Levitin]

There's no question that any major legal system change will present some challenges, but that's not a reason not to pursue the change.

As for "extra staff," I don't know what you're referring to. The bill leaves open the choice of standing vs. panel trustees to the USTrustee Program, but I would assume that it's the existing standing trustees who become chapter 10 trustees. There's no extra staff involved.

[Rohan Pavuluri]

Thank you so much for taking the time to write this thorough summary and for your hard work on the bill, Adam.

[S. Clifford]

Thank you so much for this summary. As a law student, I found it very enlightening!

[John Rogers]

I've been practicing consumer debtor bankruptcy law for over 30 years. The law needs to be changed, but I don't believe eliminating Chapter 7 and Chapter 13 is the way to do it. All that is needed is to eliminate the BAPCPA changes and a make a few other tweaks, including allowing student loan discharge, and the system should work fine, just like it used to. My two cents from years of experience on the front lines.

[C.E. Petit]

It's the little things that will make or break both "passability" and success. One such package of little things that strikes me is a non-bankruptcy change that is sort of implied in the helpful summary above, but as I don't know the organization of the bill well I can't find quickly:

Are the "miscreant's net worth" limits for the major "bad boy" consumer statutes (TILA, FDCPA, RESPA, etc.) still there? If so have they been adjusted for both post-1970s inflation and... trying to be polite here... business-entity structures intended to make class actions nonviable?

So as to avoid circularity, are any damages/attorney's fees/penalties imposed by those "bad boy" consumer statutes themselves exempt (or exemptable) from discharge? Are state-law-imposed penalties for similar conduct treated the same way?

[Adam Levitin]

Yes, the net worth limits for class actions have also been adjusted from the lesser of $1 million or 1% of net worth to the lesser of $5 million or 5% of net worth, and they are inflation adjusted going forward. That reflects inflation (and some rounding). This is sections 202-206. There's no adjustment to reflect the difficulty in bringing a class action, although that's an interesting thought.

RESPA isn't covered because it has a different damages structure of 3x the kickback, not a net worth limit.

The bill is only dealing with the debts of individuals (which could be business debts, but subject to a $7.5 million limit for all debts), so it doesn't get into the non-dischargeability of liability from violations of federal or state consumer financial protection law.

[Tim Mallory]

We have to do something with the student loan issues. Making student loans non-dischargable is, I feel, responsible for much of this mess. Once lenders understood they had students trapped into servitude, they relaxed their lending standards. Then the schools were free to make the price unlimited. The fact that a graduate cannot pay for their student loans speaks to the value of the education vs its cost. An education should not come with a negative ROI.

I do take issue with the idea of discharging back rent while retaining the remainder of the lease. The availability of the residence is itself a security to the rental contract. Discharging the debt while also denying the owner the ability to recover the residence smacks of appropriation as it mandates future service at higher risk without recourse. I fear the result of this will be devastating for lower income renters who will not be able to meet the terms of the future rental agreements this will create.

[Scott W. Spradley]

Changing the law to allow a bankrupt tenant to remain in a premises and discharge past due rent would result in an incredible increase into landlord due diligence before approving new tenants. I also agree with an earlier comment that tying future possession with curing rent serves as security for a landlord. After all, most landlords need that rent to pay their mortgage. Bad idea. And I am a consumer debtor attorney.

[RT]

Why not just adopt the ABI Consumer Commission report for the proper and recommended changes within the current system. American Citizens need proven, sound and fair debt relief. Lets not assume the Empirical Studies truly are demonstrating the underlying non-bankruptcy policies. Chapter 13 is the solution or fix to these non bankruptcy policies.

[Luke Jackson]

As a consumer bankruptcy practitioner, I look forward to being able to discharge student loan debt!

[RT]

This proposal is designed to eliminate / reduce the involvement of attorneys as they are considered barriers to entry into bankruptcy. Review the articles and websites. Thats what is coming.

[Adam Levitin]

RT—Chapter 10 is designed to make filing easier, but it is not designed to eliminate/reduce attorney involvement. If anything, it is quite friendly to bankruptcy attorneys—who are essential for making the system work—as it ensures that they can be paid in the chapter 10, something not currently possible in a 7.

To be sure, attorneys fees can be paid in a 13, but only around a third of plans are completed and result in a discharge, and Katie Porter's scholarship has shown that the consumers who fail to complete their plan don't fare very well. 13 is a good solution for a subset of consumers, but it is not for many others.

[Adam Levitin]

Scott W. Spradley—I disagree. This is a sunk cost fallacy of sorts. That back rent is not getting paid in almost any scenario.

Landlords don't come off any worse under chapter 10 than under current law, and maybe they come off better.

Under current law, if a renter is behind, all arrearages must be cured to assume the lease. Most tenants can't do that if they're behind, so they have to reject the lease and give up their residence. If that happens, the landlord gets a claim for:
(1) back rent and (2) lease breach damages, but that's it. Payment on that claim will be in "bankruptcy dollars"—little or nothing on that claim. The landlord can try to find a new tenant, but the new tenant won't pay the back rent. The new tenant is also unlikely to take over immediately. To the extent there is a delay, that just increases the lease breach damages that are unlikely to get paid much (and once there is a new tenant, it reduces the lease breach damages).

Contrast with chapter 10: the landlord still gets an unsecured claim for (1) back rent; no change there. But in 10, if the debtor assumes the lease, the debtor has to pay it according to its terms going forward. That means the landlord avoids (2) the lease breach claim, which would have been paid in tiny little bankruptcy dollars. Instead, the landlord gets paid in real dollars.

In other words, chapter 10 helps the landlord avoid the risk of having to find a new tenant in the middle of a lease. That's a big deal in markets like college towns where there is a clear annual cycle to the leasing market. The only way the landlord seems to come out worse here is if the lease is currently below market and the landlord would be able to immediately fill it with a new tenant. I suppose the landlord could always complain that it is deprived of an option to compromise on the cure requirements, but that seems like a relatively small change in landlords' position.

Now even if you disagree with my analysis, recognize that only a very small fraction of lessees will file for bankruptcy, and those that do are unlikely to be 6 months behind on their rent. More likely we're talking about 1-2 months of back rent (because the landlord will otherwise have sought to evict). All told, I'm skeptical that this would move the needle on any lease pricing.

[Sam Turco]

Random thoughts on Consumer Bankruptcy Reform Act

1. It is unwise and simply unfair to all those diligent students who dutifully repaid and denied themselves the luxury of excessive student loans to allow student loans to be discharged without exception or qualification. This may be great politics and headline winning, but consumer hero Elizabeth Warren fails the fairness test of rewarding irresponsible student loan borrowing while punishing students who limit borrowing and mightily pay back what they owe. How is this fair? Would it not be wiser and prudent to delay such discharges until such loans become 10 or 20 years old?
2. What if this 180-page bill be reduced to a single sentence: "The Bankruptcy Reform Act of 2005 and all its awfulness is hereby repealed."
3. We already have a "single point of entry" to the bankruptcy system. Chapter 7 and 13 petitions are nearly identical except for a single checkbox that says 'chapter 7" or "chapter 13." The content of each petition is virtually identical. There is nothing novel in a chapter 10 petition.
4. "Filing for chapter 10 involves nothing more than filing a short form petition with the bankruptcy court." Um, . . . Wrong. Filing chapter 10 is no different from the extensive process that presently exists. Filing bankruptcy is a short form petition? No, it is not. It involves considerable thought about the issues of exempt and non-exempt property and the consequences thereof. Nothing in chapter 10 makes that process any simpler.
5. Correction. Providing a $35,000 wildcard exemption makes the process simpler. Few debtors own more than that amount.
6. Legal fees. Allowing debtors to pay legal fees after the case is filed will increase access to the system, but not allowing attorneys to factor their receivable will limit this benefit to only the most finally stable debtors--i.e., debtors with long job tenure and stable bank accounts. Factoring receivables is the key to incentivizing zero-down cases.
7. Why not repeal BAPCPA and empower Chapter 13? Change is painful. This proposal basically leaves Chapter 7 in tact but gives it a new name of Chapter 10 via no plan. It's really the same thing with 3 more digits. It makes little sense to tear down the entire chapter 13 system when the real purpose of chapter 10 is to supercharge the chapter 13 powers.
8. Minimum Payment Obligation. Chapter 10 eliminates concepts of Disposable Income and Disposable Monthly Income by requiring higher-income debtors to pay a sliding scale of their income above 135% of household median income to unsecured creditors. Hmm, no more budget fights? No good faith arguments on spending? A quick application of this concept to current cases reveals that higher-income debtors will actually have to repay more to unsecured creditors since they no longer can shield their income by discounts afforded to secured debts (i.e., large mortgage and auto deductions allowed under the Means Test).
9. Elizabeth Warren reaps headlines but not results. This Chapter 10 proposal will generate headlines for awhile but will fade away. That is disappointing because real bankruptcy reform is needed, and real reform requires real compromise. Are we trying to make headlines or make progress?

[Tim Mallory]

This quotation:
"Under current law, if a renter is behind, all arrearages must be cured to assume the lease."
is, I believe, incorrect. It may be true that most landlords will not want to continue a lease with people who don't pay them, I am not aware of any law forcing eviction on an unwilling landlord. Even though past monies may be lost in any case, I do not believe the law prevents the landlord from simply discharging the past due rents and continuing the lease. I also do not believe the landlord is prevented from issuing a new lease. The offering of future credit is presently up to the landlord.

What this becomes is the mandated issuance of continuing future credit by an unwilling landlord. I envision this creating a market in third party factored annual rental finance agreements.

[RT]

The American Bankruptcy Institute's consumer commission has recommended sound changes within our current bankruptcy system. The report was produced by a working group of judges, attorneys, trustees, law professors (who are apart of credit slips),and financial representatives. Most agree some changes are needed to our current system. This is the “pretend solution”. I can appreciate the creative approach. However, its unproven and the affects or assumptions are unknown. This is a mash up of chapter 13 provisions, 7 and some additions but its still two systems except this is worse (sorry – but 20 some year experience). Attorneys all ready can get paid for chapter 7s. Attorneys have to charge fees appropriately per case. I never needed to bifurcate fees. Debtors can voluntarily pay after the case is filed (creditors and attorneys). Everyone thought the 2005 Amendments were burdensome or creditor friendly, however the reality is good or bad they provide the correct balance of debtor and creditor rights. The current system all ready has many of these provisions. Chapter 7s are not burdensome, the document requirements are not burdensome. Upsolve has figured it out ( they are not a law firm). The forms (yes they have issues) but they are not difficult to prepare and we all ready have fee waivers. Yes, you added changes to 523. Chapter 13 is actually the most flexible, sound and trusted insolvency proceeding. It is not difficult to manage and there are plenty of advantages. The Code as written is clear, organized and concise. Creditors, lenders, parties in interest rely on the current system and Trustees pay out annually hundreds of millions of dollars to all creditors, priority, secured, unsecured creditors. The means test with all its faults – does a good job of determining eligibility for chapter 7 and 13. The problem before the means test is that many high income individuals were filing chapter 7 (not to say they could not) but the 11 USC 707b abuse standard was not a bright line. This legislation kind of has an income test though its not clear. I guess the goal is not pay anything to creditors. Who employ staff, pay taxes, rent space, lend money. While I think something has to be done with student loans – I am not sure how you do it equitably or what the affects will be with lending and institutions. In the end tax payers are funding the system because the US government loans 95 percent of the student loans. There needs to be some give and take -if you discharge your loans. There is nothing about addressing the collateral industries that truly harm individuals like -mortgage foreclosure/modification scam companies, for profit credit counseling/debt payment companies, tax relief companies. These groups go unregulated and prey upon individuals.

I think maintaining data is good -I would never recommend my client to fill out the information required in this proposal as to age, race, gender. It has never been needed (yet we are to assume the “empirical studies” data is accurate). The empirical studies are not conclusive because they don’t know other then by checking zip codes to perceived areas. Presumptions or assumptions – yes they will say “well we control for that in our regression table.” One study merely alleged to send a fact pattern to attorneys to answer questions on scaled response sheet to allege that 43 percent recommend a chapter 13 to one set of names then the other set of names. The fact pattern steered toward a chapter 13, but attorneys can differ on opinion or strategy. I would not use it as empirical data. I see the potential harm in that it will only be used to isolate Jurisdictions, Judges, Trustees, Courts, attorneys. Data, regression tables don’t account for the reality in each individual case, because nobody has looked or asked “why did you file a chapter 13”?

The chapter 13 completion rate is actually closer to 58 percent. The empirical(law review articles) studies calculate all case filings. Some don’t make it out of the gate or to confirmation. The courts have to take every case filed. Pro se's get bad advice they file and nothing else. The better measure is to measure confirmation to completion. Confirmation rates are close to 70 percent. Further to compare chapter 13 to 7 serves no purpose - they are two different insolvency proceedings. Chapter 7 success? What is it? Getting a discharge? But not if they owe priority taxes, post-petition HOA fees, student loans, fines or license fees) reaffirmed on car or house. (you may have gotten rid of reaffirmations but how does that affect what the lenders requirements will be). Changes are needed to non-bankruptcy policies that affect individuals, Chapter 13 is the solution or fix to these policies. Chapter 13 is not the cause. None of the reports illustrated above actually look at what is causing the higher 13 filing rate. Policies like license suspensions, court costs, parking enforcement, low state exemptions. No studies actually determine why the case was filed. What was the triggering point. Chicago is the perfect example. Governmental fines, parking, license suspension make up 9 percent of their budget, yet they adversely affect individuals. They don’t have 4,000 to get their license and car out of impound. You cant discharge or get your car back in a 7. So – you will likely see more chapter 13 filings, because chapter 13 can help them get the car back, the license, discharge these charges. A case may not complete but maybe it did not have to – they got the car, and the license back. I don’t see the point of the single entry system. To properly file a case requires a review and due diligence to determine the best insolvency proceeding that fits the clients circumstances. Yes, fix the dischargability of certain debts under 523 -that would likely help change some of the numbers because of the non-bankruptcy policy. The pandemic proves this as chapter 7s have dropped about 15 or 20 percent while chapter 13 have dropped about 65 percent. The "steering or no money down" argument is not being seen and rarely existed in reality. You cannot just footnote the strategy or benefits for individuals available in chapter 13.

The ABI Consumer Report addresses those changes within our current system. To endorse this- as written is troublesome. This legislation to rewrite the code is cumbersome, unmanageable, expensive and unproven. Did you repeal chapter 7 or not? Did you bring in Subchapter V cases? The organization of the sections makes it difficult to understand and manage. Rewriting loans, 5-15 years, payments outside of the system with no oversight. Confirming 2 plans in one case? A limited proceeding plan? Creditors parties will never be able to follow this process. Its way too cumbersome for pro-se filers. A lien against nonexempt assets ( with your $30,000 wild card) is worthless, especially as a recordation in an unrecognized system. There is no benefit or consequence because once that discharge is entered at confirmation there is no consequence other than dismissal. Specific provisions designed to assist individuals and families can be amended to our current system without making it as cumbersome and uncertain. How can pro se individuals manage in this system? Administering cases under this proposal will increase the costs and is not even manageable. The negative effects on lending will only increase costs to all consumers. The current system is proven, tested, manageable by pro-se debtors. Creditors rights are severely prejudiced by this proposal and would drive up the costs of credit, which is available to many struggling individuals.

I also don’t understand why politics is involved. It should not be. Its disappointing to think that paid congressional representatives, who have never represented a debtor would draft bankruptcy legislation that will not help individuals (aside from dischargabilty of student loans and governmental fines). There was a real opportunity to provide sensible amendments to the current system that would have not been difficult to pass quickly to truly help individuals and families.

[Adam Levitin]

Tim Mallory—section 365(b)(1)(A) might be the most poorly drafted section in the whole Bankruptcy Code--I have a whole slide deck that attempts to parse the language, and I'm still not 100% sure what all of it means—but I am pretty confident that it is supposed to be requiring cures of all monetary defaults on an unexpired lease as a condition of cure.

RT—the ABI Commission had a totally different charge than the members of Congress took upon themselves. ABI was about making targeted improvements to existing law, not trying to do a ground-up reform.

Sam Turco—I'm not going to respond to all your points, but a few observations:

A. BAPCPA made the law a lot worse, but the problems with consumer bankruptcy pre-date BAPCPA.

B. Chapter 10 is not just a supped up 10. The no-plan discharge emulates the no-asset chapter 7s (96% of cases), but debtors with a minimum payment obligation are required to go through a plan process (closer to a 13), but with a discharge at the front, not the end of the process. 10 takes elements from each chapter, but is its own new thing.

C. There is absolutely novelty in the 10 petition. There is no longer a choice of chapter that then dictates what bankruptcy relief looks like and which is often dependent upon local legal culture and the ability to pay the attorney. In chapter 10, everyone gets the same options no matter where they file and no matter their ability to pay their legal fees upfront. That's a huge change.

D. The problem you describe about unfairness with student loans is a criticism of bankruptcy relief of any sort for any debt. We offer bankruptcy relief despite the unfairness to folks who didn't get over-leveraged because we know that the social consequences of over-indebtedness are problematic.

E. As for "higher-income debtors will actually have to repay more to unsecured creditors since they no longer can shield their income by discounts afforded to secured debts (i.e., large mortgage and auto deductions allowed under the Means Test)." Yup. That's a feature, not a bug. (And is also a response to your fairness concern about student loans.) A good bankruptcy law does not mean that debtors pay nothing. A good law creates a fair system in which those with ability to pay, pay to get a discharge, and those who cannot pay do not. That's what chapter 10 does.

[Sam Turco]

Adam—
A. Student Loans: “The unfairness with student loans is a criticism of bankruptcy relief of any sort for any debt.” Not really. Student loans involve borrowing money from your fellow taxpayers. Banks assume a risk in lending as part of their business model, but borrowing from your neighbor is something different and we all know that. Yes, we all see the social consequence of student loan debts. I routinely interview couples who are afraid of getting married and starting families because of student loan debt, and that is not healthy for our society. Sometimes you ask clients if they would have that second child if their debts were gone and their eyes fill with tears. It’s not like I don’t get the problem. But to say that a student can discharge debt two seconds after graduating college is just never going to seem fair to voters and to call for such a change is to basically undermine the goal of getting any relief at all. I’d rather get something in the bag—discharge after 10 to 20 years—than nothing at all.

B. Chapter 10 label is form over substance: “There is no longer a choice of chapter that then dictates what bankruptcy relief looks like and which is often dependent upon local legal culture and the ability to pay the attorney.” There is no longer a choice of chapter? Sorry, but elections are made in this new chapter 10 format. And, elections—click the chapter 7 box or the chapter 13 box—are made in the current system. There is no difference. So why generate so much confusion and anxiety in the field if we are just changing labels? Such changes create extreme stress in our practice. Forms have to be changed—again. Software has to be changed—again. And for what? So we be vogue and say that we have evolved beyond chapter 7 to use a chapter 10 format that, . . . um is basically the same as 7?

C. Chapter 10 is nothing more than Chapter 13 reform. Yes, I can agree with many of the suggested changes of chapter 10. But to tear down the entire chapter 13 system instead of amending the 13 code is not wise. Want to grant discharges upon plan confirmation? Well, okay, by why can’t we just amend the 13 code to say that? Want to allow a plan to rewrite a consumer home loan? Ok, but put that in the 13 code and utilize the existing system. We are all fine with overdue reforms, but not with tearing down a functioning Chapter 13 system.

D. CFPB: To inject the Consumer Financial Protection Bureau is unnecessary. Gosh, every darn case I file is review by the U.S. Trustee, the bankruptcy trustee, by the Court, and by creditors. Not enough oversight? Really?

E. Beware of magical formulas. Eliminating review of debtor budgets by utilizing some type of sliding scale of debt repayment for debtors earning more than 135% of median income sounds enticing, until you review actual cases. Two families may have identically high income, but one may involve severe medial expenses while the other involves an addiction to a lavish lifestyle. You can’t treat them the same. Also, when BAPCPA attempted to apply mathematical formulas to set payments the results were disastrous. It took years of litigation for the Courts to basically disregard the formulas and to take back their rightful discretion. You give me a system driven by formulas and I’ll play it like a pinball machine.

[Ed Flynn]

Hi Adam:

Thanks for the great summary of this bill. I don't want to comment on the merits, but I think the drafters may need to check their math regarding the proposed definition of “minimum payment obligation”. The sliding scale is 15% on the first $10,000 in excess of the 135% of median standard, 45% on the next $40,000, 75 percent on the next $50,000 For someone with $100,000 in excess income, this works out to $57,000, by taking:
-$1,500 on the first $10,000;
-$18,000 on the next 40,000;and
-$37,500 on the next $50,000.

The problem comes in for the calculations for debtors with over $100,000 excess income. The statute calls for $94,500 plus 150% of the excess over $100,000. It looks like the drafters added in the $37,500 number twice to get to $94,500. Also, surely they could not intend to have a rate of over 100% for the amounts over $100,000

One more issue is that the current means test income figures for one-person households are based on families with one earner - not one person. (The medians are much lower for one person households.) This issue came up in some of the early analyses of what eventually became BAPCPA.

[Adam Levitin]

Sam Turco--

A. I think the student loan issue is a separate and broader debate than just about bankruptcy, and I have previously written that there are important differences between public student loans and private loans that might counsel for different treatment. That said, the way ED operates, losses in one year are do not affect the interest rates in the next year, etc. As long as we finance student loans from appropriations, we need to recognize that it is a system that subsidizes consumers, and given that there's no underwriting of direct loans we already have all kinds of cross-subsidies baked in. Yes, the tax payer ultimately picks up the tab, but we crossed that bridge the moment we got into student lending. Allowing discharge of student loans in bankruptcy is a matter of degree, not kind, and given the social costs of student loan debt this is one of the least radical options on the table, as it would still require (1) a bankruptcy filing and (2) making the minimum payment obligation. That's not a get-out-of-debt-free card for higher income or higher asset borrowers under 10.

B. Chapter 10 still involves an election about what debts to restructure, but that's a totally different choice than in the current system. If you file for a 7 today you are limited to certain tools, while if you file for 13 you are limited to other tools. The fact that some states have 80% of their filings as 7s and others have 80% as 13 is a strong indication that the 7 vs. 13 isn't being determined simply by what tools are better for debtors, unless you think that debtors in Tennessee are so materially different than debtors in Iowa, etc.

The argument that change is hard, well, that's an argument against _any_ reform, and as such it's not one I'm ready to accept. One has to balance the costs of change against the benefits. You might disagree on the balancing, but the fact that change has costs is not a determinative point. (Let me observe that software has to be updated every three years at the very least because of inflation adjustments.) In any event, bankruptcy law's purpose is not to serve the bankruptcy bar. It's to serve consumers, and if lawyers have to retool or learn some new law, that's part of the business.

C. OK, in point B you said that 10 is just a 7, and here you say it's just a 13. Which is it? It's neither. It's a new chapter with elements of both. So how does it different from 13 reform? First, most chapter 10 cases would likely be zero minimum payment discharges. That's _nothing_ like chapter 10. It's an immediate discharge without any payment, much like a no-asset 7. Something similar to the chapter 13 structure remains for debtors with a positive minimum payment obligation, although its operation still has substantial differences from chapter 10, starting with the calculation of what has to be paid, proceeding to the lack of requirement of paying priority claims in full, the upfront discharge, and payments all being made through the trustee. Additionally, a debtor in a 10 can deal with only personal liability on debts, deal with liens, or deal with both. Just want to cure a mortgage, without messing with other debts? Possible in 10, but not in 13. In 13 the debtor has to deal with all debts, but can't do as much regarding secured debt as in a 10.

D. The bill does not anticipate the CFPB being involved in every case. It's not another UST. Instead, what it does is enables the CFPB to get involved as appropriate in order to police abusive creditor behavior. It's not debtor oversight. It's creditor oversight, but with a much more robust set of tools than the UST's office has and vested in an agency that has a different outlook than the UST.

E. Yes, formulas can be gamed, and yes, formulas produce problematic results in "edge" cases. But this is about designing a system that works well for the overwhelming majority of debtors, not the 5% of cases that are edge cases. Chapter 10 is supposed to provide quick, low-cost relief for most debtors, while providing bi-directional safety valves to accommodate edge cases. A minimum payment obligation can be reduced or waived by the court finds that "the debtor is justly excused" "because of circumstances that the debtor cannot reasonably avoid". Similarly, the case can be dismissed for "manifestly improper use of the bankruptcy system." Will there be litigation over what falls into those safety valves? Of course. And that's not a problem. There's a bright line rule but with flexible standards-based safety valves that will have to be developed with case law because there's no way legislators can imagine every possible circumstance.

[RT]

I can appreciate creative ideas. We can agree to disagree. The AbI consumer report with recommendations is the more sound approach because if they thought this idea was better they would have properly vetted it or compared it. They didnt recommend tear it down! Novel ideas do not always = reality. This idea has been floated before. Its never been tested or proven. There are no costs estimates or proof how this is better. So the “your just afraid of change” or “change for the sake of change” argument as being better is weak when we are dealing with real people who are looking for sound financial solutions through our bankruptcy system. We are the ones who work in it everyday. Chapter 11 has been questioned for years. It has not been torn down! Its irresponsible to propose an untested and unproven overhall during or after a pandemic of this magnitude. That does not mean certain positive provisions can not be vetted and worked into the current system. (I will even help) - many will.

You may find the unintended consequences of making it more expensive and courts bogged down in litigation. There is smoke and mirrors so while some provisions initially sound good there is the “or” “but only if”. There is no balance - its extreme debtor then extreme consequences (maybe) to sell it as fair? This idea only has value if 523 is changed for 8 and new 7, mortgage modifications and 522 is amended.
This all could be done under the existing law. There is a pending bill on 523(a) (8). There is or was provisions beneficial to consumers in the HEROES Act. Consumers need a reliable and proven system that has and will continue to help them.

So many industries ( credit counseling is the least of the worries) are affected by this, that some provisions will not make It. Just because you move the discharge upto confirmation- does not mean individual debtors will achieve their intended goal. Yes you get the statistic of a “discharge”. I guess It wont matter after that if plans are completed? They can refile! It also completely under values or it was determined that the chapter 13 program has no value to individuals or creditors or the Court. Thats an unfortunate and uniformed mistake. The many vital and beneficial services the 13 trustee program provides to consumers and the many benefits are provided through a transparent, proven and very reasonable fee, well below the statutory or market fee. We never hear about them because were to worried about “statistics”. We never hear about the many beneficial programs developed by Bankruptcy Judges and Courts with the Trustees participation to make them successful.

So for (3) plans, if you count the limited plan, and the other two plans you have shifted the oversight to the debtor or their attorney - which means more expensive, less efficient, no oversight and likely very low completion. Go sit with a trustee for an hour, a day or a week. You will see. The drafters of chapter 13 new the importance and role of the 13 program and It has evolved.

Everyone has a choice now to voluntary file chapter 7 or chapter 13. For attorneys its called Malpractice. Clients want some certainty rather then roll the dice when you file a case waiting for who to determine which way It goes? No plan, or Plan. What part is changed under 10. Since the math does not work on the miniumum payment - imagine the issues in practice. Most attorneys would want their fees up front and at higher amount. How does It help consumers? Many pro se will not be able to manage these 4 different plans. Its not simpler, less costly and your taking out the involvement of the 13 trustees who are the only ones assisting with the formation of their plans and administration of their current cases. How does chapter 10 fill that big hole. How does that help consumers. The Ominbudsman or the UST cant or have the ability to handle the daily phone calls, emails, stopping into the office?

The proposed 523(a)(7) complicates it even more because there will be litigation in the $0.00 or no plan cases. There will be litigation on many of the provisions. Governments will change their orders. Will it lead to getting the car out of impound or the license unsuspended? Do you know with certainty ? Attorneys will have to charge higher fees upfront because of the uncertainty and undeveloped law. There will be litigation on every matter involving secured creditors.

The reality is our bankruptcy system is not the problem. Nonbankruptcy laws and policies are the cause. For 2020 chapter 7s are at 69 percent and chapter 13 at 28 percent. For 2019 National numbers showed 61 percent 7 and 37 percent 13. 2018 the same, 2017 the same. 2016 the same. Most states in the South have low exemptions and a combination of other factors. Tennessee has low exemptions and non judicial foreclosures ( I believe). There are many advantages to chapter 13 then chapter 7 for most consumers.

What has been shown is that certain non bankruptcy policies like government fines, license suspensions,which because they are nondischargeable in chapter 7, and dont lead to getting the car back or license - Chapter 13 is the better solution. Its the non- bankruptcy policies, low exemptions and 523 which has been the problem. Chapter 13 is not the problem. It has been the answer or fix to non bankruptcy policies and laws. Many clients dont have 4000 to get the car out of impound or 10,000 to reinstate the mortgage. If they want to try to save them chapter 7 is not the answer - so why would an attorney advise them to file a 7?
The legislation summary even says this.

From the summary:  

Helps address racial and gender disparities in the bankruptcy system. Racial disparities:
Makes certain criminal justice fines and fees dischargeable while preventing the discharge of debts stemming from civil rights violations.  

Fix and Improve in our current system.

[THOMAS K NOONAN]

Having practiced debtor bankruptcy law for thirty years, I LOVE some of the provisions in this proposed law, although the comments about getting one's student loans discharged the day after graduating from college make a very valid point. My main concern however is how this bill, or anything closely resembling it, can get past a senate filibuster, whether or not Republicans retain control of that chamber.

[MaryAnn Bride, Esq.]

Adam, thanks for the summary. It has been helpful and informative. There's something I don't understand though. If debtors are eligible for a discharge immediately upon plan confirmation, what is the incentive for debtors to continue paying their plans? I'm specifically interested to know why a debtor might continue to pay attorney fees or any other unsecured debt if it has already been discharged.

[Adam Levitin]

The trustee can enforce the plan obligations as a simple contract and is secured with a lien on all of the debtor's nonexempt property. The trustee operates as a litigation machine that enforces the plan.

Also, remember, most debtors will not have a minimum payment obligation, so there won't be any plan for them unless they choose to pay their attorneys' fees under a plan. In that case, it's the trustee, not the attorney, who is doing the collection work.