Senator Elizabeth Warren is arguably the nation’s leading consumer advocate in the area of bankruptcy and other financial protections. She strongly opposed the 2005 bankruptcy reform that made it harder for many Americans to file Chapter 7 bankruptcy, has published significant studies on the root causes of bankruptcy in the United States, and even authored books about the economic challenges middle-class Americans face. So, bankruptcy attorneys and consumer advocates alike were encouraged to hear presumptive Democratic presidential nominee Joe Biden say he was endorsing Warren’s plan to revise the U.S. Bankruptcy Code.
Here are some of the changes people considering bankruptcy could expect if the plan becomes law:
- Elimination of the “means test” that forces many people with incomes above the state median to file under Chapter 13 and make payments for three to five years
- Elimination of the pre-bankruptcy credit counseling requirement
- Simplification of the paperwork associated with a consumer bankruptcy filing
- Reducing costs of filing for bankruptcy, including an automatic waiver of filing fees for anyone below the federal poverty level
- Creating more flexibility for bankruptcy filers to provide for themselves and their children during the bankruptcy process
- Ending the special requirements that make it nearly impossible to discharge student loan debt
- Creation of a standard federal homestead exemption based on conforming loan limits in the relevant community
- A path to modifying mortgage loans in bankruptcy
- Elimination of the provision in the 2005 bankruptcy law revision that forces some filers to pay more than fair market value to keep their vehicles
- The ability to eliminate certain local government fines in bankruptcy
In addition to these specific changes, the plan involves restructuring bankruptcy to eliminate the two-track approach. Rather than filing under Chapter 7 or Chapter 13, the bankruptcy petitioner would simply file a consumer bankruptcy case. Within that case, the consumer could pursue options similar to the current Chapter 7 liquidation process or Chapter 13 repayment process, or might be able to choose a narrower option, such as resolving a delinquent mortgage loan through bankruptcy while continuing to pay other outstanding debts directly.
Under the new rules, bankruptcy petitioners would also have more flexibility about when and how to pay their bankruptcy attorneys’ fees. That’s more important than you might think, since the current law makes it necessary for a Chapter 7 bankruptcy filer to pay attorney fees in full before the case is filed. That’s a significant obstacle for many people who are already struggling to make ends meet, and often delays the filing of a bankruptcy petition. That delay can increase financial hardship, as collection efforts continue and consumers may lose income to wage garnishment, face lawsuits or vehicle repossession, and otherwise encounter stresses and additional financial challenges while saving up to file for bankruptcy.
Cracking Down on Bankruptcy Abuses
The 2005 bankruptcy reform was touted as a means of cutting back on abuse–the bill’s title was the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPC PA). However, the new law did nothing to protect consumers and didn’t address some of the most serious abuses of the bankruptcy process. Rather, it made it harder for ordinary people who were struggling financially and needed bankruptcy protection to get the help they needed.
Loosening restrictions and eliminating hurdles as described above would reverse many of the added burdens consumers have faced since 2005 and make it easier for working and retired people to regain control of their finances. But, the plan Biden has embraced goes further. For example:
- Creditor claims would be disallowed–meaning the creditor couldn’t collect even in a repayment plan or if there were assets available for distribution–if the creditor violated consumer financial protection laws
- Creditors would be prohibited from attempting to slip through claims based on expired debts
- Creditors would be prevented from enforcing arbitration clauses with regard to debts in bankruptcy, and these claims would be resolved as part of the bankruptcy process
The plan would also close the door on some techniques the wealthiest of bankruptcy filers often use to protect assets while eliminating responsibility for debts. For example, the proposed legislation would eliminate a loophole that allows a debtor to place assets in a trust and then avoid counting those assets when determining eligibility for Chapter 7 bankruptcy or assessing the property that may be available for liquidation.
Of course, these changes are speculative at the moment. But, if Biden is elected and Senator Warren and her colleagues are able to move the bill through the legislature and present it to him for signature, Americans struggling with debt could have an easier, cheaper, quicker and less stressful path to financial relief. And, bankruptcy could become a viable option for many who can’t use the process today, either because they have one significant asset such as equity in a home that puts the Chapter 7 process out of reach or because their main burden is student loan debt that is currently non-dischargeable.
Help for Californians Struggling with Debt
At Borowitz & Clark, we’ve helped tens of thousands of people resolve debt through the bankruptcy process. We understand the challenges individuals and families face when debt spirals out of control, and we want to help. If you’re considering bankruptcy, you can schedule a free consultation with one of our experienced Los Angeles bankruptcy attorneys by calling 877-439-9717 or filling out the contact form on this page.
Barry Edward Borowitz is the founding partner of Borowitz & Clark, LLP, a leading bankruptcy law firm that represents clients petitioning for bankruptcy protection under Chapter 7 and Chapter 13 of the bankruptcy code. Mr. Borowitz has been practicing bankruptcy law exclusively for more than 15 years. View his full profile here.