What is the Consumer Bankruptcy Reform Act (CBRA)?

Back in April, we previewed the possibility that a Biden presidency might mean significant changes to the U.S. Bankruptcy Code. Biden had signaled that he would support the bankruptcy plan set forth by Senator Elizabeth Warren, a long-time advocate for bankruptcy reform and increased consumer financial protection. 

Now, Warren and House Judiciary Committee Chairman Jerrold Nadler have introduced the Consumer Bankruptcy Reform Act of 2020 (CBRA). House Antitrust Subcommittee Chairman David N. Cicilline and Senators Dick Durbin and Sheldon Whitehouse co-sponsored the legislation. The CBRA, if passed, will make big changes to everything from the way consumers file bankruptcy to what debts can be discharged and how property is protected. 

Core Goals of the CBRA

The bill’s sponsors say the new law would: 

• Make it easier and less expensive for cash-strapped families and individuals to obtain financial relief
• Ensure that filers can care for themselves and their families during the bankruptcy process
• Help address racial and gender disparities in the bankruptcy system 
• Close loopholes that allow the wealthy to exploit the bankruptcy system
• Crack down on predatory practices and hold corporate wrongdoers accountable

It’s a long bill with a lot of detail–188 pages. Some of the specific changes that would help achieve these goals including: 

Restructuring Bankruptcy

Instead of a consumer having to decide whether to file Chapter 7 bankruptcy or Chapter 13 bankruptcy, there would be a single type of consumer bankruptcy filing. Under the current bill, this new type of bankruptcy would be called Chapter 10. Chapter 10 would provide two separate paths to relief. 

One would allow for a discharge similar to Chapter 7 bankruptcy. For filers with relatively little income and few assets, Chapter 10 would provide a path to discharge with no payment. For those with high-value assets or incomes above 135% of the state median for their household size, a minimum payment would be required. 

The other path would allow the consumer to create debt-specific repayment plans, including a three-year plan to fulfill a minimum payment obligation for unsecured debt. 

Removing Obstacles to Bankruptcy

The pre-filing credit counseling requirement would be eliminated. This change is long overdue. Though credit counseling is relatively inexpensive and can generally be completed online or over the phone in just a couple of hours, it created an unnecessary hurdle for consumer bankruptcy petitioners. As early as 2007, the U.S. Government Accountability Office (GAO) issued a report entitled BANKRUPTCY REFORM: Value of Credit Counseling Requirement is Not Clear. The report stated, in part, “Anecdotal evidence suggests that by the time most consumers receive the prefiling counseling, their financial situations are dire, leaving them with no viable alternative to bankruptcy.” 

In the years since, assessments of the effectiveness of requiring pre-filing credit counseling didn’t change much. But, the requirement remains in effect. 

Another obstacle CBRA would remove is the complication associated with payment of the bankruptcy attorney’s fees. The nature of Chapter 7 bankruptcy currently prevents a consumer from hiring a Chapter 7 attorney, getting the case started, and paying the attorney over time. Payment over time is an option in Chapter 13, but Chapter 13 isn’t the best answer for everyone, and is typically more expensive and takes much longer to resolve. Unfortunately, under the current system, some debtors have no choice but to file under Chapter 13, simply because they can’t afford to file for Chapter 7. Chapter 10 would fix that. 

Making Additional Debts Dischargeable

Most unsecured debt is dischargeable in Chapter 7 bankruptcy. And, some remaining unsecured debt may be discharged at the end of a Chapter 13 plan. But, certain types of debt are excluded from discharge. 

Probably the best-known exclusion is student loan debt. With nearly 45 million Americans carrying student loan debt and about 11% of those accounts in default, student loan debt is a significant problem for millions of people. Various studies have indicated that this burden has a broad impact on borrowers individually and the economy as a whole. But, the bar for discharge of student loan debt in bankruptcy is currently prohibitively high for nearly every borrower.

Under the CBRA, student loan debt would be treated like other unsecured debt. 

The Act would also eliminate bars to discharge for certain types of criminal fines and fees that disproportionately impact the poor and minority filers. 

Additional CBRA Provisions

Some other changes the new law would bring include: 

• Simplifying bankruptcy exemptions by combining most exemptions into one lump sum rather than allocating specific amounts to specific categories of property
• Tying the homestead exemption to the local conforming loan limits, which will make the exemption more appropriate to the cost of home ownership in the area–that means, for instance, that more home equity will be protected in a high cost area like Los Angeles County
• Making federal exemptions available in all states
• Allowing the option of payment over time instead of surrendering non-exempt assets
• Simplifying repayment requirement calculations and giving the bankruptcy petitioner greater freedom by considering only income and assets and leaving expenditures to the debtor’s discretion
• Disallowing claims if the creditor has violated a consumer financial protection statute in its dealings with the debtor
• Increasing remedies when a creditor or debt collector attempts to collect a debt that has been discharged in bankruptcy

The bill has a long way to go to become law, but it has the support of a wide range of advocacy groups and is based on Senator Warren’s previous plan, which has already been endorsed by President-Elect Joe Biden. 

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