7 + 13 = 10: The CBRA’s Huge Proposals to Change Consumer Bankruptcy
When a consumer is facing bankruptcy, many are given the choice between Chapter 7 and Chapter 13. While some consumers have successful bankruptcies under these chapters, these gloves don’t fit many financially distressed consumers. The Consumer Bankruptcy Reform Act (CBRA) was introduced to streamline consumer bankruptcy and provide more consumers with the opportunity to receive a discharge. The CBRA was introduced as a 188-page bill with many provisions addressing a variety of areas of bankruptcy reform., Most significantly, the bill consolidates Chapter 7 for individuals and Chapter 13 into a new Chapter 10.
Chapter 7 offers consumers the chance to liquidate their non-exempt assets in exchange for a discharge, while Chapter 13 allows a consumer to make payments over the course of a three- to five-year plan. The CBRA would make individuals ineligible for Chapter 7 and would repeal Chapter 13. All individuals with assets worth less than $7.5 million are instead eligible for Chapter 10 bankruptcy. Individuals with assets over $7.5 million would be required to file for Chapter 11, or 12 if eligible. Chapter 10 acts like a hybrid of Chapter 7 and 13 but is meant to completely replace both.
Consumer flexibility was one of the bill authors’ primary concerns when drafting the CBRA. While a consumer may have a choice between Chapter 7 and 13, that choice is often meaningless. Chapter 7 does not allow attorney’s fees to be paid through liquidation of estate assets. In effect, this makes many individuals too poor to file for Chapter 7. This pushes consumers to Chapter 13, which is more expensive, and it is less likely the debtor will receive a discharge because many debtor’s plans fail. Moreover, the “means test” is another barrier to Chapter 7 relief that forces consumers into a Chapter 13 plan. The single-track system proposed by the CBRA prevents this bifurcation by putting all consumers in the same Chapter 10 pool.
Chapter 10 looks to a debtor’s nonexempt assets and future income simultaneously, instead of the current approach in which Chapter 7 looks at nonexempt assets, and Chapter 13 looks to future disposable income. In a Chapter 10 bankruptcy, the debtor is no longer confronted with the difficult choice of choosing whether to liquidate assets but retain their future income under a Chapter 7 or to keep all their assets while paying their disposable income to creditors throughout a Chapter 13 plan. Significantly, Chapter 10 does not consider a debtor’s expenses like a Chapter 13 does, so a debtor will not have to justify expenses to the bankruptcy court.
How to Receive a Discharge Under Chapter 10
Under Chapter 10, a debtor must pay a “minimum payment obligation” equal to the sum of the debtor’s nonexempt assets and a graduated percentage of the debtor’s annual income exceeding 135% of the state median income for a household of the same size.
The goal of this minimum payment obligation requirement is to quickly separate debtors who can pay and debtors who cannot. Thus, if a debtor’s minimum payment obligation is zero, the debtor is eligible for an immediate discharge of all dischargeable unsecured debts, much like a Chapter 7 currently, whereas debtors with a non-zero minimum payment obligation will receive a discharge upon confirmation of a repayment plan.
If a debtor can pay a minimum payment obligation, they must create a repayment plan to repay their creditors over the course of at least a three-year plan. This plan can be paid by using a combination of future income, exempt assets, and nonexempt assets. Distributions are made according to the same priority levels of 11 U.S.C. § 726, but there is no requirement that priority claims be paid in full. Chapter 10 also gives flexibility to a debtor who cannot pay the minimum payment obligation if they are justifiably excused for “circumstances the debtor cannot reasonably avoid.” Creditors are given some protection by allowing them to request the case be dismissed, but the CBRA removes the judge-created “substantial abuse” standard, allowing a creditor to have a case dismissed only if the debtor engaged in a “manifestly improper use of the bankruptcy system.” It is unclear, what the difference is between these two standards, but it seems clear that the drafters are intentionally rebuking the “substantial abuse” language.
The bankruptcy court must confirm any feasible plan that is not proposed in bad faith and covers court fees, so long as the debtor current on their domestic support obligations incurred post-petition. If the plan is proposed without any objections, then it will be confirmed immediately without a hearing. This is another example of the CBRA’s commitment to expediting the bankruptcy process for consumers to reduce costs.
One of the most significant changes under Chapter 10, is that a debtor receives a discharge immediately upon plan confirmation. Under Chapter 13, a debtor receives a discharge only after completing their plan, which debtors often fail to do. Chapter 10 drastically changes the supervision of the bankruptcy court over the life of a plan, making the trustee responsible for enforcing the debtor’s bankruptcy obligations. The trustee does this through liens on the debtor’s nonexempt assets. A default on the plan does not revoke the discharge like under Chapter 13, and Chapter 10 provides the debtor with more flexibility to modify their plan because of changing financial conditions.
What About Secured Debt?
Secured debt is handled under separate “property” and “residence” plans. These plans allow a debtor to change the terms of their obligations but by themselves do not result in a discharge. This allows for a debtor to file a “limited” bankruptcy to address falling behind on a mortgage or car loan without having to bring all the debtor’s other creditors into court. However, a combination of a repayment plan and a property or residence plan can lead to a discharge, and there is still an immediate discharge for a debtor whose minimum payment obligation is zero. Property and residence plans give the debtor the option to adjust interest rates and payment schedules, and allow defaults to be cured. Additionally, Chapter 13’s mortgage modification restrictions are eliminated in Chapter 10.
The CBRA also eliminates the credit counseling requirements that were added by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). These amendments required that a debtor receive credit counseling both before filing and to receive a discharge. Supporters of the CBRA claim that there is no data suggesting that credit counseling helped the consumer, and the requirement is just an additional cost and barrier to bankruptcy relief.
Under the CBRA, creditors would still be given the opportunity to interview debtors at a 341 meeting, but the in-person requirement would be eliminated if the debtor would be burdened by having to attend a 341 meeting in-person. This is a logical change, especially considering COVID-19. The U.S. Trustee has already been conducting remote 341 meetings in response to the pandemic, and this has been more convenient for many debtors and creditors than having to do them in-person.
Current law allows a debtor to exempt some of their property from Chapter 7 liquidation and the liquidation analysis in a Chapter 13. There is a list of federal exemptions, and each state has their own exemptions. Currently, states are allowed to opt out of the federal exemptions, leaving the debtor with only the state exemptions to choose from. However, under the CBRA, states would no longer be allowed to opt out of federal exemptions, and the debtor would always be able to choose between state and federal exemptions.
The new federal exemptions under the CBRA would add a $35,000 wildcard exemption that can be applied to any assets. This is similar to how a homestead exemption can be used under the current federal exemptions, where if a debtor does not use the entirety of their homestead exemption, then they can apply the remaining value of the homestead exemption to any assets, even if those assets would not normally qualify for an exemption. The wildcard exemption effectively does the same thing, but it is added on top of a new homestead exemption which accounts for geographic variations in home prices.
The Fate of the CBRA
There are many more provisions in the CBRA that substantially alter current bankruptcy law. This post only covers highlights. The CBRA is the brainchild of Senator Elizabeth Warren and has sat in political limbo since 2020 despite support from President Biden. The bill is unlikely to be adopted in its current form, but it could be monumental if some of these amendments to the Bankruptcy Code were adopted. The last significant bankruptcy reform amendments came from BAPCPA, but data suggests that BAPCPA has increased the costs of consumer bankruptcy and prevented certain consumers from bankruptcy relief altogether. BAPCPA was meant to address a perceived bankruptcy abuse issue, but many critics believe that this issue was overstated by BAPCPA’s proponents and that its amendments are overly harsh to consumer debtors.
In many ways the CBRA seeks to reverse the effects of BAPCPA. According to Senator Warren’s website, the CBRA will “make it easier and less expensive for financially-strapped families to obtain financial relief.” It is certainly easy to see how the CBRA would accomplish this, but the ongoing debate will likely be whether the bill offers enough protection to lenders and how it would affect credit availability for consumers. The CBRA proposes sweeping changes to the Bankruptcy Code. It will be exciting to see what happens to the bill going forward and whether any of its proposals are adopted. While Ag & Business Legal Strategies is not a consumer bankruptcy firm, we support the CBRA, both for the positive effects it would have on consumers seeking bankruptcy relief and for the positive changes it would make to the Bankruptcy Code as a whole. Contact your senators and representatives and urge them to support the CBRA!
To keep up with any updates to the CBRA go to Congress.gov and look for H.R. 8902 or S.4991.