By David C. Nalley, Partner
A group of Senators and Congressmen lead by Elizabeth Warren, (D-MA) have introduced a bill to substantially overhaul the consumer Bankruptcy system. The proposal is for a major change to the current Chapter 7/13 system, merging the two under a new Chapter 10.
One of the proffered goals of the bill is to reduce many of the costs and challenges under the current law for consumers. Rather than two separate chapters, one chapter would be created and the requirement for a payment plan and the timing of the discharge would be tied to a Debtor’s non-exempt assets and future income. Those who cannot pay would get a quick discharge. Those with an ability to pay would propose a plan and get their discharge upon confirmation of the plan. This is a huge departure from current Chapter 13 practice where the discharge is tied to completion of a plan. Another major change would be an allowance of a discharge for student loans, which are virtually non-dischargeable under current law.
Of major significance to Mortgage and Car creditors, the residence or property plan CAN modify the terms of secured debt – meaning the 910 car protections and Residential first mortgage anti-modification provisions would go away. Debtors could pay the secured creditor the value of the lien (i.e., they can cramdown) based on an interest rate based on the current prime rate. The term on the residence can be 15 years or 5 years after the contractual maturity date, whichever is longer. For cars, the term can be 5 years or the contractual maturity date, whichever is longer.
As well, the proposed legislation allows for special “carve out” plans solely for residences and other property. Under the bill, a Debtor could file a “limited proceeding” relating solely to their mortgage or car. With a Limited Proceeding, there is no option for a discharge. As such, this would be mainly done to keep a house or car and cure defaults over time without having to include the rest of the debtor’s finances in the bankruptcy proceeding.
It remains to be seen if this bill will have the traction needed to make it into law. It has the backing of many consumer, civil rights, and labor organizations at this time. However, Mortgage and Car creditors should keep their eyes on how this bill progresses as it has the possibility for having a major impact on their portfolios.
If you have questions on the proposed bill, please contact our office. We will be following this closely in the coming months.