The Consumer Bankruptcy Reform Act of 2020 and Consumers

[womanonfire]

Can we discuss the positives and the negatives of this? I don't think I quite understand it.

[justbroke]

I lost a bunch of what I was writing, but this is only a proposal. It is not in any committee and we don't even know if it has legs. However, I don't think that all 10 major provisions are going to make it. Here's my opinion on the major sections.

I think that most of it is puffery.

1. Chapters 7 and 13 Are Replaced with New Chapter 10

The $7.5 million cutoff could be done easily by changing the definition in 11 USC 101. There's no need to create an entirely new chapter of bankruptcy to do this. Chapter 11s have always been for those who can't file a Chapter 13, so this doesn't affect a Chapter 7 at all.

2. No More Credit Counseling

I found the credit counseling to be useless, for myself. I already maintain budgets and track expenses. I have done that for years before my crisis. That's not to say that most consumers don't even know how to balance a check book or have ever created and maintained a budget. I think this is a non-starter if you ask me.

3. Remote 341 Meetings That Do Not Conflict with Consumers’ Employment Schedules

This is easy to do under the existing rules by just changing the Federal Rules of Bankruptcy Procedure (FRBP) with no need to change the existing law.

4. Focus on Consumers’ Ability to Pay Rather Than Choices of Expenses

This is actually the worst of these. From what I read of this, the CBRA 2020, you basically would just say "I can't make my minimum payments" and you get to discharge your debt. You are not measured on what a reasonable person would expend, but rather it would be based on what you're actually spending today. That doesn't bode well and the person would be in bankruptcy again. The entire point of the bankruptcy abuse act was to prevent multiple filings.

5. Three Types of Chapter 10 Plans: “Residence” and “Property” Plans for Repayment of Secured Debts and General Repayment Plans for Unsecured Debts

So this is just a Chapter 13 with a new name and calling Plans of Reorganization something different? I mean, they are plans of reorganization so why do you have to call them something different? What if a person has a residence and property... is that a Residence and Property Reorganization plan? The current code already provides this.

For interest rate changes, they do suggest allowing a change in interest for real property which is not allowed (11 USC 1322). That would be a game changer but I think the banking industry would go crazy and make lending more difficult. Imagine just filing for bankruptcy because you want to -- since they don't go by a fixed expense schedule but allow you to use whatever you have for expenses -- just to reduce an interest rate on a mortgage that you don't like.

Must of the other things can be done under existing FRBP rules or the court could order as such, where there is merit.


6. Some Consumers Receive Immediate Discharges without Making Any Payments

Ummm... we call that Chapter 7.


7. Consumers with Minimum Payment Obligations Receive Discharges upon Plan Confirmation

This is basically what happens under Chapter 11, but a (consumer) Chapter 13 is a different thing. In a Chapter 11, you basically exit bankruptcy upon confirmation (technically the "effective" date which can be as soon as 10 days after confirmation). Additionally, this seems to make all "Chapter 13s" only 3 year payment plans, removing the 5 year requirement. I think that the carrot and the stick feature of Chapter 13s works better overall. You pay for 3-5 years, and you get the discharge. So, in this new Chapter 10, is the discharge revoked if the debtor doesn't make it 3 years? What's the affect of the revocation of the discharge? Seems like setting up people for failure or allowing to get into even more debt before their plan is completed.


8. Debtors’ Attorneys Paid over Time

This was already a feature in Chapter 13s. This would allow someone filing a Chapter 7 to do a similar thing by paying their attorney later (or through the Plan).


9. Student Loan Debts Can Be Discharged

This is likely the ONLY thing that is interesting.

Student loans debts can already be discharged if you meet the test related to ability to pay, but this proposes that they are simply unsecured dischargeable debt. People would go to medical school and file Chapter 10 to discharge their $250-500K in student debt. What would happen to private student loans, the schools themselves, and the Department of Education? It's laudable to make student loans more easily dischargeable, but it's another thing where those loans are guaranteed and not based on credit. I'm sure the entire private student loan industry would be shuttered.

To really get to dischargeable loans I don't believe the answer is making them dischargeable. The answer is changing the costs to attend school. Everyone talks of free college, but for most, in many States, it is already free or nearly free to attend a State/Public college or university (if you are an in-State resident). I think we should be addressing the cost to attend and not the blanket dischargeablity of student loans. Most of the money is spent in private schools or because students go to out-of-State schools for their education (and they pay the full rate).

The easy access to student loans is what allows students to make these choices. The types of education offered is also the issue. A degree in fine or studio art does not typically pay. Let me explain. If you go to the Rhode Island School of Design you'll pay $50,000 a year in tuition and fees. That's $200,000 over 4 years. Your student loans will cost you $2,000/month. Now, what job is going to pay you at least $75,000/year with that degree. This is why I say that the cost is the issue, not the dischargeability.

Comparatively, spending $300K on a medical degree is more feasible, but I think it's still rather expensive overall. But, again, it depends on in-State versus private and out-of-State tuition. For example, University of South Florida medical school charges just $16,863 for in-State tuition for "core" medical students. Harvard medical school is $64,984 (source: Harvard 2021). And that's just tuition... expect to pay more for room, board, books and fees.

The math is easy. The problem is not dischargeability, but the cost.


10. Other Federal Consumer Protection Financial Laws Are Amended

No comment.

[despritfreya]

It took 9 years for BAPCPA to pass. What was proposed in the beginning was not what was passed 9 years later.

At this point, very few bk attnys are even looking at this.

Des.

[bcohen]

Student loans debts can already be discharged if you meet the test related to ability to pay, but this proposes that they are simply unsecured dischargeable debt. People would go to medical school and file Chapter 10 to discharge their $250-500K in student debt. What would happen to private student loans, the schools themselves, and the Department of Education? It's laudable to make student loans more easily dischargeable, but it's another thing where those loans are guaranteed and not based on credit. I'm sure the entire private student loan industry would be shuttered.

To really get to dischargeable loans I don't believe the answer is making them dischargeable. The answer is changing the costs to attend school...

The easy access to student loans is what allows students to make these choices. The types of education offered is also the issue. A degree in fine or studio art does not typically pay. Let me explain. If you go to the Rhode Island School of Design you'll pay $50,000 a year in tuition and fees. That's $200,000 over 4 years. Your student loans will cost you $2,000/month. Now, what job is going to pay you at least $75,000/year with that degree. This is why I say that the cost is the issue, not the dischargeability...

The problem is not dischargeability, but the cost...

I am going to respectfully disagree with your position on student loans, which have become a major economic problem for millions of people. While I don't doubt that (most) people would be able to comfortably afford their student loan payments if the maximum debt load was $20k or less, the chicken vs. egg argument of educational costs vs. student loan debt is not helpful. It's actually a vicious cycle: because student loan debt is excruciatingly difficult to discharge through bankruptcy, therefore lenders are happy to lend large amounts of money to young people with no established career or credit, and as a result, colleges and universities are able to charge very high tuition and fees since students can borrow money to attend.

The fact that some judges and districts are more generous with bankrupt student loan borrowers than others is of no help to distressed borrowers living somewhere else where the Brunner test is used. Similarly, the fact that some people are foolish enough to borrow $200k to study art at an overpriced private school should not be construed to mean that all borrowers who need relief have wasted their student loan proceeds.

In any case, I would argue that higher education is overpriced, as is residential real estate at the moment, and the reason is because banks (and the federal government) are willing to lend money to support these prices. If student loan debt was capped, universities and colleges would be forced to lower their tuition and fees because otherwise they'd have no students. Of course, higher education is a powerful lobbying group, so Congress would attempt no such thing. (By the same token, housing costs have skyrocketed within the past two years--reaching bubble proportions--because lenders are willing to issue mortgages to allow people to pay these prices. Take away the ability to borrow more than a sensible amount, and prices come crashing down to Earth.)

That being said, I do believe that student loan debt should be treated the same as any other type of consumer debt with one caveat: a waiting period after graduation or withdrawal from college/university. If a waiting period of even five years were required, this would thwart the straw-man hypothetical of freshly-minted doctors declaring bankruptcy upon graduation from medical school. Few people who study medicine are interested in remaining poor enough to qualify for Chapter 7 bankruptcy for five years just to weasel out of paying their debts. And if the waiting period was set at 8 years or 10 years, this non-problem would be completely eliminated, while still providing relief to those who legitimately need it.

To be honest, I would argue that anyone who is poor enough to need Chapter 7 bankruptcy after being out of school more than a few years is unlikely to ever be able to afford to repay their student loan debt. The current system of pursuing debtors for this type of debt until the day they die is cruel, and has become a huge financial albatross for millions of people. I would argue that allowing student loans to be discharged after a reasonable waiting period would be the best solution, both from the perspective of deterring abuse and keeping student loans available to those who need them, while also providing relief from insurmountable debt to those who need it. I am, of course, not a politician, nor am I an attorney, so I can't say what that reasonable waiting period should be, although 8 years sounds reasonable to me.

[justbroke]

You may have misunderstood me. I'm 100% okay with discharging student debt, but why not go to the heart of the problem; cost. My rant on that was to say that simply allowing discharge of the debt doesn't fix the underlying issue. I still a bunch in student debt that I'd love to discharge, but the problem really was not / is not that I have tens of thousands remaining. The problem is that it cost me that much to begin with!

My real rant was about addressing the root issue; the elephant in the room. The cost to attend is the elephant and the root cause. Many are looking at bankruptcy as a cure for the symptom, which is debt. I want both issues addressed and not just wave the shiny discharge object in out face. A bankruptcy should never be the end result of education.

(I ranted about availability of loans if they are more easily dischargeable. The reason why the lenders are eager to loan is because it's difficult to discharge. Flip that around and you won't have the money available. Without the money available, what do you do about education? So let's address cost as the solution and we can also do discharges once the solution is in place. Otherwise everyone will just be in bankruptcy as their educational outcome. You may have read more into my response to the puffery in the bill than I intended. There are serious issues and the feel-good language in the proposal is just that; feel good language.)

[womanonfire]

justbroke

Thank you for taking the time to post! I love reading your opinions!

despritfreya

You don't think that with the dems in control it might get passed much faster?

[despritfreya]

despritfreyaYou don't think that with the dems in control it might get passed much faster? [/QUOTE]

While it might not take 9 years, in general, "no". They still have to deal with the very, very powerful creditor lobby. While I am not up on "procedure" my guess is that any bill that finally gets out of committee for a possible vote is not going to be anything like what you are looking at today.

Des.