President Biden endorsed Senator Warren’s proposals relating to the changes adopted in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Public Law 109–8, 4/20/2005 (the “Act”).

Senator Warren originally opposed the Act, asserting that the changes made it more difficult for some consumers to file bankruptcy under Chapter 7 (under which debts are paid only out of existing assets) and compelled them to use Chapter 13 (under which a percentage of debts must be paid over a period of 3–5 years).

Warren’s criticism of BAPCPA

According to Senator Warren, after the passage of the Act, bankruptcy filings decreased by 50%, and the number of insolvent people increased by 25%.

Warren also claimed (correctly) that the Act made it harder for Americans to discharge debts in bankruptcy, and as a consequence, exacerbated the impact of the 2008 financial crisis, including causing approximately 800,000 additional mortgage defaults and 250,000 additional foreclosures.

When the bill was being debated in Congress, then Senator Biden supported the measure, which created a conflict between him and Senator Warren. Critics of Biden claimed he supported the Act at the behest of credit card companies and banks, substantial donors to his campaigns. 

Biden’s bankruptcy policy

The changes to the Act being considered include the following reforms:

#1 – Get rid of the means test

Eliminate the means test for bankruptcy filing and establish a single system: Under the Act, there is a means test that compels filers with income above their state’s median income to file for Chapter 13 and make payments from their wages for an extended period. Under Warren’s plan, the means testing will be eliminated, and a single system would be available to all debtors, rather than a Chapter 7 and 13 bankruptcy proceedings.  

#2 – Cut the paperwork

Reduce extensive paperwork requirements for individuals: The Act imposes the same onerous paperwork requirements on individual filers as it does on wealthy business owners, including months of pay stubs and old tax returns. Thus, the proposal merely requires that bankruptcy filers disclose their assets, liabilities, income, and expenses. If necessary, the bankruptcy court could direct filers to provide more information.

#3 – Ditch credit counseling

Credit counseling requirement: The Act’s requirement that debtors filing for bankruptcy seek credit counseling would be reversed because it is viewed as costly and time-consuming, not to mention ineffective.

#4 – Attorneys no longer have to certify petitions

Attorney certification requirements: Under the Act, bankruptcy attorneys are required to certify the accuracy of debtor’s financial disclosures and the debtor’s ability to make certain payments. In addition, attorneys are required to advertise their services under specific guidelines and to provide certain financial advice to clients. Warren’s proposal eliminates these requirements and authorizes local bankruptcy courts to develop disciplinary panels to strengthen enforcement of the existing rules that discipline ineffective or dishonest lawyers.

#5 – Reduce bankruptcy filing fees

Reducing filing fees for bankruptcy filing:  Warren’s proposal waives filing fees for debtor’s with incomes below the federal poverty level and slowly phases in the fees above that level. In addition, the bankruptcy filer would be permitted to pay off reasonable lawyers’ fees at any time during or after the bankruptcy, not just up front.

#6 – Ease restrictions on renters

Expanding people’s rights to take care of themselves and their families during the bankruptcy process: In an effort to help families during the bankruptcy proceeding, the proposal will permit renters to continue paying their rent if it allowed them to avoid eviction and allows individuals in the midst of the bankruptcy process who select a repayment plan option to set aside more money to cover the basics for themselves and their dependents children. Finally, for those filers who are union employees and selected a repayment plan, they may continue to pay their union dues.

#7 – Student loan debts become dischargeable

Student loan debt cancellation: In an effort to alleviate the student loan crisis, Warren’s proposal permits cancelation of student loans up to $50,000 in bankruptcy in contrast to the Act, which doesn’t permit the cancellation of student loans in bankruptcy. 

#8 – Cars and homes

Exemptions for car and home ownership: In an effort to preserve car ownership during the bankruptcy proceeding, the proposal repeals the Act’s requirement that filers must pay the full amount of their original car loan, regardless of the true worth of the vehicle.  

#9 – Federal homestead exemption

In addition, under the current system, bankruptcy filers can protect a certain amount of home equity value (a “homestead exemption”) in bankruptcy, but these exemptions vary by state.  Thus, Warren calls for a uniform federal homestead exemption, which would be set at half of the Federal Housing Finance Agency’s conforming loan limit for the bankruptcy filer’s county of residence. The reforms also permit filers to modify their mortgages in bankruptcy through a streamlined, standardized mortgage modification option, which is currently prohibited under the Act. Finally, the proposal would eliminate the “zombie mortgages” by forcing lenders to complete the foreclosure process on defaulted mortgages. In the past, lenders sometimes started, but do not complete, foreclosures to avoid assuming liability for property taxes and code violations on the mortgaged property, which has created uncertainly for the debtors after they have vacated the foreclosed property.

Most of Biden’s plans are debtor friendly. Depending on the state you live in, Biden’s new law could actually make it easier for a creditor to take your home in bankruptcy. Remember, states like Texas and Florida have unlimited homestead exemptions. If the debtor could elect which exemptions to use, as they can under the current law, the issue would be moot.

#10 – Local fines

Local fines and civil rights debts: Warren’s proposal eliminates the special privilege for local fines in a bankruptcy proceeding, except for fines related to death, personal bodily injury, or other egregious behavior that threatened public safety. More importantly, those who have debts arising from the commission of civil rights violations such as police brutality will no longer be permitted to expunge those debts in bankruptcy.

Trump on bankruptcy

Despite approving a variety of stimulus programs to combat the economic impact of the COVID-19 outbreak, the Trump Administration had not yet embraced any major changes to the bankruptcy laws as the Democrats have. 

Bankruptcy filings are expected to increase substantially during this period of economic uncertainty.  Thus, in the event Biden is successful in the fall elections there is a possibility of major reforms of the bankruptcy laws to ease the burden on individual filers. 

Walter Metzen

Walter Metzen is a Board Certified Specialist in Consumer Bankruptcy with over 28 years of experience. He’s represented more than 20,000 bankruptcy clients in and around Detroit where his firm is located. View his profile here.
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