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  Under the CBRA, individual debtors would no longer be eligible for chapter 7, and chapter 13 would be repealed in its entirety.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.  


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.