Bankruptcy Reform: a Glimpse Into What Could Be
It helps to dream big, and in the world of bankruptcy reform, that saying also applies. As the new year passes, many congresspeople in Washington have begun talking about passing a bankruptcy reform bill. While many of these will never see the light of day to actually become a law, it is interesting to see what could be, and imagine how these changes could help consumers.
Chapter 10 Bankruptcy
Many consumers get confused about the difference between Chapter 7 and Chapter 13, and if you’ve read any bankruptcy legal blog, you know that lawyers always have to explain the differences between the two and how they apply to differing situations.
But the new proposed reform proposes replacing the Chapter 7/Chapter 13 bankruptcies with just one form of bankruptcy, which, according to the proposal, would be called Chapter 10. Chapter 11 would still be the same, but would be for anybody with more than $7.5 million in debt.
Chapter 10 would be broken down into subsets. One would be for people who have debts that are secured by property (such as a mortgage or a car loan), and one that is focused on consumers who have unsecured debt, like medical bills or credit card debt. Consumers would be able to alter the terms of their mortgage loans, which they cannot do now under Chapter 13.
Additionally, consumers would have up to 15 years to pay back or cure unsecured loans, which is much more than the maximum 5 years. This would make keeping property in bankruptcy much more affordable for most consumers, as the arrearages—what is in default—would be spread over a much longer period of time.
One proposal that could become law is allowing consumers to continue to appear for their 341 meetings remotely. This of course has been the norm since the start of the pandemic. The bill also wants to make sure that 341 meetings do not interfere with consumers’ work schedules.
Consumers who file what was a Chapter 7 would get an immediate discharge if they had no property to be given to creditors (currently, discharges are received in about 90 days). Those under a Chapter 13-like payment plan would get their discharge immediately when the plan is confirmed – not at the end of the entire plan.
Student Loan Changes
Most notable is the proposed change to treat student loan debt like any other unsecured debt—completely dischargeable. This would do away with hardship tests and complex and difficult litigated bankruptcy cases, which are often required now when a consumer wants to discharge student loans.
The discharge would apply both to federal and private student loans, and a court would no longer be able to so strictly scrutinize and criticize a consumer’s expenses and living budget the way courts can do now when consumers are looking to discharge student loans.