Chapter 10 Bankruptcy

The federal bankruptcy system could see a drastic overhaul if a bill proposed by two Congressional Democrats becomes law.

Rep. Jerry Nadler (D-N.Y.) and Sen. Elizabeth Warren (D-Ma.) say their Consumer Bankruptcy Reform Act of 2020 (CBRA) would “simplify and modernize” bankruptcy proceedings. It proposes replacing the old Chapter 7 and Chapter 13 filings with a new Chapter 10, which would allow two routes for individual filings.

The first option allows consumers to surrender assets to pay debts and be freed of obligations. In the second, bankruptcy could be declared on some debts when a consumer commits to remain current on other payments. The second option would produce debt-specific plans related to the individual and/or family.

Those with significant credit card debt or other burdensome obligations should keep an eye on the proposed legislation. In the interim a good option to address debt would be to consult a nonprofit credit counselor.

What Would Chapter 10 Bankruptcy Change?

The 188-page bill remains a proposal that Congress had not taken up as of March 2021. Introduced on Dec.9, 2020, it is the first major proposed reform of the bankruptcy system in 16 years. Georgetown Law Professor Adam Levitin assisted in developing the law and called it “a really good and important piece of legislation that I hope will become law.”

Among the proposed changes, the bill …

Streamlines filings. In the present structure, consumers can file in Chapter 7 (liquidation) or Chapter 13 (repayment plans). The new law would mean anyone with debt less than $7.5 million would be eligible for Chapter 10.

Makes reaching a solution faster and more user-friendly. Surrendering assets – a car, jewelry, etc. – could lead to debt being discharged without payments. The debtors receive assets, the consumer is freed from the burden. Those who lack assets can work out a payment plan only on the debt causing problems.

“Decouples” financial obligations. In the present system, a consumer filing for bankruptcy must address all debts. The proposed bill allows a limited proceeding, which means the consumer deals with the heaviest debts – perhaps it’s credit cards, perhaps an unwieldy mortgage.

Eliminates the “means test” and creates the opportunity to pay attorney fees over time. The means test takes into account income, expenses and family size when determining eligibility for Chapter 7 bankruptcy. Those who did not meet the means test were forced to Chapter 13, which lasts longer and costs more. The new one-track proposal focuses on eliminating the problematic debt. In the present Chapter 7 system, lawyers must be paid up front and in full; the new law would allow consumers to pay legal fees over time, which would ease financial burdens.

Tries to make sure families can keep their cars and homes while they deal with bankruptcy. Current law requires renters to pay all back rent to keep their apartment or rental residence. With the CBRA the back rent is treated like any other unsecured debt. Warren proposes a standard way nationwide to modify mortgage, which is not permitted in the present law. The proposal also allows filers to keep their car and pay their auto lender cash equal to the value of the car. Warren said it’s important for those who need a car to work and take care of their family to keep it.

Makes student loan debt dischargeable. A key change in the system. The bill also allows consumers to keep enough money for a reasonable number of toys, books and recreational activities for children.

Tries to address racial and gender inequities in the system. In the present system, poor people and people of color were generally forced into Chapter 13, which is almost 2 ½ times the cost of Chapter 7, and less likely to result in the discharge of debts. A one-track system intends to eliminate the disparities, which are also present for women, who statistics show typically earn less. In addition, local government fines can be part of the proceeding, and income from alimony, child support, the child tax credit and earned income tax credit are excluded from proceedings.

About the Consumer Bankruptcy Reform Act

The original proposal for the law was one of the stanchions of Warren’s failed presidential run. Nadler joined her in proposing the bill. Its co-sponsors are Sens. Dick Durbin (D-Ill.) and Sheldon Whitehouse (D-R.I.) and House Antitrust Subcommittee Chairman David N. Cicilline (D-R.I.).

Warren’s stated goal: To help those dealing with bankruptcy deal with their debts while providing more rights and options to take care of themselves and their children. This would be accomplished in part by submitting a plan that allows collections to be stopped to the extent needed to complete the plan, and tries to keep people in their homes.

Warren has long been critical of the Bankruptcy Abuse and Protection Act of 2005, which she said was far more beneficial to financial institutions than consumers. Research by economists showed that bankruptcy law actually contributed to the financial crisis in 2008.

Will the CBRA Become Law?

This bill has a long way to go to become law. In our divided government, it seems likely to pass the Democratically controlled House, but could run into trouble in the Senate, which is split 50-50.

President Joe Biden adopted Warren’s proposal before the inauguration. Biden called it “absurd” that student loan debt cannot be discharged, and said Warren’s approach would “close loopholes that allow the wealthy and corporate creditor to abuse the bankruptcy system at the expense of everyone else.”

Biden voted for the 2005 bill, which prompted stern rebukes from Warren and led her to give up her teaching career at Harvard to enter politics. During the campaign, Warren charged that Biden was “on the side of the credit card companies.”

Biden’s website states the president “worked hard to add progressive reforms to a bankruptcy bill that was going to be passed with or without him.”