2020 has been a hard year. (But you don’t need me to tell you that.)
Thankfully, help could be on the way. In public health news, two major drug companies announced, to our collective relief, positive vaccine news this month. And for those struggling with economic hardship, President-elect Biden’s proposed bankruptcy reform may offer relief.
These changes pertain to individual filers and depend on undoing provisions of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BACPA). This act placed restrictions on Chapter 7 bankruptcy proceedings, making it more difficult for individuals to discharge their debts through bankruptcy.
Bankruptcy has a bad rap, but it’s an important resource for people. Divorce, natural disaster, or unexpected economic upheaval can have a huge and sudden impact on financial standing—and bankruptcy proceedings are how our society accounts for them. Biden’s plan aims to make filing easier.
Understanding the BACPA
Two of the most common filing options for individuals are Chapter 7 and Chapter 13. Under Chapter 7, individuals pay off their debts by surrendering all non-exempt property, but keep their future income. Under Chapter 13, filers keep their property and undertake a multi-year repayment plan, which requires surrendering future earnings.
The problem with filing under Chapter 13 is that it can force debtors to remain in bankruptcy longer and pay more to creditors over time. In addition, many people can’t complete their repayment plans, so their debts are not discharged.
The 2005 BAPCPA mandated that only individuals with income less than the state median could file under Chapter 7. The bill also required Chapter 7 filers to get credit counseling and placed limits on the debts that could be discharged. In particular, it prevented individuals from discharging student loan debt through bankruptcy proceedings and any debt on a line of credit that had been used for cash advances or the purchase of luxury goods. These provisions, known as means testing, ultimately forced more people to file under Chapter 13, or to avoid filing altogether.
President-elect Biden has adopted a bankruptcy reform plan initially put forward by Senator Elizabeth Warren. This plan would do away with the Chapter-based distinction for consumers, instead offering a single system with a menu of options for addressing debts.
Biden’s team has said that the goals of reform are to make getting relief through bankruptcy filing easier, expand the rights of people undergoing the process, allow more people to protect their cars and homes when filing, and address racial and gender-based disparities in the bankruptcy system.
Biden’s plan will also allow student loan debt to be discharged under bankruptcy proceedings.
What It Means
President-elect Biden’s team has said that this plan aims to make filing cheaper, faster, and more flexible—which will make deciding to file simpler for individuals regardless of their current situations.
Provisions that allow many filers to keep their homes and cars can also change the cost-benefit calculation that goes into deciding whether to file. If filing in 2020 made little sense for you, perhaps filing will be the right choice next year—it all depends on your goals and on the specifics of the proposed reform.
For individuals with debt who previously made too much to file under Chapter 7, or for those for whom student debt is a significant burden, filing may be about to become much more workable.
How to File
Filing for bankruptcy is about starting over in whatever way makes the most sense for you, and deciding when and whether to file is all about knowing what best serves you.
If you have questions about whether these changes should affect your financial planning (or general questions about bankruptcy proceedings), contact us. Our experienced attorneys can guide you through the process.