September 19, 2022
The House of Representatives Judiciary Committee is expected to hold a consumer bankruptcy reform hearing on September 29th at 1 pm. The hearing would likely be a subcommittee hearing. At this time, we have been told that the focus will be on the Nadler-Warren legislation introduced at the end of the last Congress. A link to the legislation can be found here. The hearing also is expected to cover the treatment of student loans.
Congress last made significant changes to federal bankruptcy law in 2005. The Nadler-Warren, "Consumer Bankruptcy Reform Act" would impose a radical restructuring of the current consumer system and satisfy a number of demands from the consumer lobby. The bill is designed to simplify consumer bankruptcy, but even those favoring the legislation have expressed concerns about its complexity. Overall, the bill would allow individual debtors to retain more of their property and pay less to their creditors.
Major highlights of the legislation include the following:
- The centerpiece of the Warren-Nadler bill is the creation of a new chapter 10 of the Bankruptcy Code covering individual debtors with assets under $7.5 million. The new chapter would jettison the current means test and weaken other debtor abuse provisions in favor of a series of asset and income determinations which generally will allow most debtors to get an immediate discharge of all debts and others to repay a smaller portion of their disposable income to their creditors than the law currently allows.
- Among the most favorable changes to debtors, home mortgage loans may be "crammed down" to the home's value at the time of filing along with an interest rate adjustment. Similarly, automobile loans can be crammed down, and liens stripped more easily. The bill also would impose minimum periods of delinquent payments before a creditor may seek to take back its collateral.
- The Consumer Financial Products Protection Board (CFPB) would be given new powers to intervene on behalf of consumer debtors in bankruptcy court without reducing the authority of the Justice Department's United States Trustee Program (USTP), which is the "watchdog" of the bankruptcy system as a whole. The CFPB's additional authorities would also include the right to provide informal dispute resolution.
- There are many other proposed changes included in the bill, such as making student loan debts more easily dischargeable, eliminating reaffirmations, and allowing debtors to redeem property over time without making a one-time payment. Of significance, the legislation also directs courts to interpret CBRA "liberally in favor of relief for consumer debtors."
The bill would likely upset settled expectations of creditors, reduce collections, and increase losses to banks and other creditors. In addition, the legislation would affect multiple lines of business for lending institutions, home mortgages, auto lending, credit cards and student loans.
AIS will monitor and report on the hearing.