A bicameral bill has been introduced in Congress that aims to improve our nation’s bankruptcy system. Arguing that the current bankruptcy system is too complicated and puts minorities at a disadvantage, the supporters of the bill propose the Consumer Bankruptcy Act of 2022 as a way of reforming bankruptcy laws in the United States.
What are the current personal bankruptcy options in the United States?
When it comes to filing for personal bankruptcy, currently, there are two main options in the United States.
The first option is Chapter 7 bankruptcy. Also referred to as “liquidation bankruptcy,” in a Chapter 7 bankruptcy, the debtor’s non-exempt assets are collected and then sold. The proceeds from the sale are used to pay off the debtor’s financial obligations in priority order. Once the proceeds from the sale run out, many of the debtor’s remaining debts are extinguished.
The second option is Chapter 13 bankruptcy. Also referred to as a “wage-earner’s plan,” in a Chapter 13 bankruptcy, the debtor, under the supervision of a bankruptcy trustee, will enter into a three- to five-year repayment plan. Periodic payments will be made under the terms of the plan, payments that are used to pay the debtor’s creditors. At the end of the plan, many of the debtor’s remaining debts are extinguished.
How would the Act change bankruptcy in the United States?
Proponents of the Act argue that minorities are often encouraged to file for Chapter 13 bankruptcy instead of the quicker Chapter 7 bankruptcy. Despite this, proponents of the Act argue, less than 50% of Chapter 13 filings are successfully completed. They also claim that Chapter 7 bankruptcy can be prohibitively expensive for many debtors.
Under the Act, a new bankruptcy filing would be created. The Act would establish “Chapter 10” bankruptcy proceedings as an option for those filing for personal bankruptcy.
Chapter 10 will provide debtors with two options. One option would provide a simple way to discharge the debtor’s financial obligations. The second option, required for those who meet a certain income level, would have debtors make regular payments to creditors for three years.
Under Chapter 10, debtors could keep their home and vehicles. Debtors will have the option of selling their home free from a bankruptcy lien. If a debtor rents an apartment rather than owning a home, they cannot be evicted as long as they are not more than six months in arrears on their rent. Those who own an automobile can keep their vehicle as long as they are able to pay their lender the fair market price for the vehicle, even if this price is less than what they owe on the automobile.
Chapter 10 would allow for student loans to be discharged through the bankruptcy process the same as other debts without requiring debtor to show they are suffering an “undue hardship.” Chapter 10 would also give debtors the ability to extinguish certain fines.
Chapter 10 would eliminate the requirement that debtors attend credit counseling. In addition, Chapter 10 would give debtors the option to pay legal counsel after filing for bankruptcy, rather than making debtors pay legal counsel upfront.
Still, it is important to remember that the Consumer Bankruptcy Act of 2022 is still just that —a piece of proposed legislation that is not yet law. Currently, debtors only have Chapter 7 or Chapter 13 as options for personal bankruptcy. Still, it is interesting to note that some lawmakers are looking to change the bankruptcy landscape in a way that could help ease the strain on those filing for bankruptcy.