CBRA Op-Ed

I have an op-ed about the Consumer Bankruptcy Reform Act running on CNBC's site. Given that both collection moratoria and benefit extensions keep getting dribbled out in one to three month bites, we will definitely see an expiration of both as the pandemic wanes, and neither is sufficient for many households to address their arrearages.

Consider this (not in the op-ed): there's now 4.78% of mortgages that are 90+ delinquent. That's the third-highest level since 1978. Part of that is that there are virtually no foreclosures happening, but a lot of it is that the delinquencies aren't being cured. Once a household runs 90+ delinquent, cure gets very difficult—the arrearage is just too big. We are going to be looking at a lot of foreclosures down the road. Add to that a rental delinquency rate somewhere between 18% (Census numbers) and 23% (Nat'l Multifamily Housing Council numbers), and we've got a real mess looming. Unfortunately, it won't just be an economic problem or a personal tragedy for many families. It will be a political problem that will have long-term ramifications, just like the 2008 foreclosure crisis.  

Comments

[Debra L Miller, Trustee]

Adam/Bob:

Question about CRBA. Under CBRA, the minimum payment obligation is calculated using the amount that the debtor's annual income exceeds 135% of the median family income of the applicable state and household.

As the calculation is using annual income data, shouldn't that be the minimum payment obligation for each year in the bankruptcy?

I have run numerous calculations using means test and the CBRA calculation, with the result being paid to unsecured creditors under CBRA being 10% or less than the amount required under the means test. (For example, Debtor makes $15.5k a month. Under MT required to pay $257k to GUC, under CBRA required to pay $20,948.81.)

Only when the Debtor's income increased to having income 100k above the 135% of median income- did the percentage increase. (In that case, Debtor would be required to pay to unsecureds $104k under CBRA and $328k under the means test.)

Is the minimum payment obligation supposed to be a yearly amount or was this change in the calculation to unsecureds correct?

Thanks

[Adam Levitin]

Hi Debra,

The minimum payment obligation is the total face amount to be paid over three years, generally in level payments. It's based on the debtor's pre-bankruptcy income. There is a safety valve for adjusting the MPO if the debtor's financial condition materially declines post-bankruptcy.

I haven't tried to replicate your numbers, not least because it would require knowing household size and state, but I would not be surprised if lower income/asset debtors pay less to unsecureds, while higher income/asset debtors pay more.

[Bob Lawless]

Like Adam said, the calculations depend on household size and state. But, let's use a 2-person household in Indiana. The median income for a 2-person household in Indiana is $65,577. A monthly income of $15,500 is $186,000. That is over the applicable median income by $186,000 - $65,577 = $120,423. Therefore the MPO should be $58,500 plus 150% of the excess over $100,000. Stated mathematically: $58,500 + 150% * ($120,423 - $100,000) = $58,500 + $30,634.50 = $89,134.50. The plan would have to pay that amount over 36 months which is a monthly payment of $2,476 or 16% of their gross monthly income.

(The bill says that the relevant amount should be $94,500 plus 150% of the excess of the amount over $100,000. That was a mathematical error. The figure should have been $58,500, which is the sum of the amounts for a person with income of an excess of $100,000 over the state median income.)

The means-test payment would depend on a lot of things, not the least of which are secured debt payments. The $257,000 payment you calculated would be for a five-year plan where CBRA plans are three-year plans. The $257,000 total payment works out to about 27% of monthly gross income. That does not sound like a lot in the abstract, but considering that take-home pay will be a lot less and with some home-loan and car-loan payments, there will be little margin for error. Indeed, even at 16% of gross monthly income, the MPO is hardly a free ride.