Pending Bankruptcy Reforms Favor Debtors

Pending Bankruptcy Reforms Favor Debtors

For many years, typical consumers could choose between filing under Chapter 7 or Chapter 13 of the US bankruptcy code.

In Chapter 7—the far faster option—an independent trustee liquidates the debtor’s available assets and makes distributions to creditors. In Chapter 13, debtors contribute their income to a trustee who makes payments under a three- or five-year plan.

Chapter 13 cases are often unsuccessful, with fewer than half of filers ultimately getting their discharge.

Lawyers generally want to be paid in advance on a Chapter 7 case.This drives many filers into Chapter 13, where attorneys can be paid over time.

Pending Reforms

Under proposed legislation, individuals with less than $7.5 million in debt would file under a newly-created Chapter 10. Chapter 13 would be eliminated.

Consumers would follow one of two paths in the new Chapter 10. One path would provide a simple discharge of debts. The other option would require individuals with a certain annual income level—above 135% of the median income for the state —to make partial payments to creditors over a three-year plan.

The bill would also allow debtors to pay attorneys after the filing, eliminating the requirement to pay upfront.

Debtors also would be allowed to wipe out certain government and criminal fines.

The bill also would ease debtors’ ability to keep their homes and cars. Homeowners would have more options to sell their properties free of liens and facilitate mortgage modifications based on fair market value. Debtors who rent can stay without having to make lease default amounts, so long as they don’t exceed six months’ rent.

Car owners would be able to keep their vehicles by paying the lenders only their market value, not the full amount of the loan.

There would also be a federal $35,000 wildcard exemption that the debtor can use to protect any chosen asset.

What About Student Loans?

Over the years, student loans have become increasingly difficult to wipe out in bankruptcy.

In most jurisdictions debtors have to satisfy an extremely difficult threshold establishing that the debt creates an “undue hardship” that would continue into the future.

The bill proposes to remove the rule that student loans aren’t dischargeable.

Debtors who can make payments under the newly proposed Chapter 10 would still make payments on student loans, the same as with other debts. But when the three-year payment time frame ends, the remaining student debt would be discharged.

All the pending bankruptcy reforms would be good news for modest-income consumers.