On December 9, 2020, the Consumer Bankruptcy Reform Act (the “Act”) was introduced which seeks to establish Chapter 10 Bankruptcy as the principal Bankruptcy proceeding for individuals and repeals Chapter 13 Bankruptcy. This is the first major consumer bankruptcy reform legislation introduced since the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. The Act was created in effort to provide individuals and families relief from financial distress for reasons outside their control such as job loss, medical bills, educational debt, or financial problems related to the recent COVID-19 pandemic. Creating a single-chapter bankruptcy system allows consumers greater flexibility in addressing their debts and prevents disparate treatment of similarly situated consumers. Perhaps the most notable difference between Chapter 10 Bankruptcy and the current two-track system is that borrowers may be able to discharge their student debt on equal terms with most other types of debts.
Consumer bankruptcy has long existed in a two main paths – Chapter 7 (liquidation) and Chapter 13 (repayment plans) – whereas Chapter 10 provides a single point of entry for almost all consumers. Chapter 10 repeals all credit counseling requirements set forth in Chapter 7 and Chapter 13. Essentially, there has been zero evidence that the credit counseling helped consumers and instead added increased cost to bankruptcy relief. 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). Filing Chapter 10, as currently set out, involves nothing more than filing a short petition with the bankruptcy court.
Currently, the Act exempts certain property of the debtor from creditor’s claims. The debtor can choose between a set of federal exemptions or apply state law exemptions. States cannot opt out of federal exemptions.
Perhaps the most important feature of Chapter 10 bankruptcy is that the Act screens “can’t pay” debtors from “can pay” debtors based on a combination of the debtor’s nonexempt assets and future income. This varies from the current two track approach, under Chapter 7 or Chapter 13, which allows you to either give up current assets and keep future income or keeping current assets and giving up future income. The Act’s screen looks only at income and assets not expenses. A debtor will not have to justify how she spends her money. Instead, every Chapter 10 debtor will have a “minimum payment obligation” which will be the amount the debtor must pay to discharge their debt. The calculation of this “minimum payment obligation” can be tricky as is subject to change upon passage of the Act.
The Act has yet to get much traction in the Senate after its introduction on December 9, 2020. However, the attorneys at Feldmann Nagel Cantafio & Song are keeping a careful watch on all updates in bankruptcy. Check out our blog regularly to stay up to date.