Presidential candidate Joe Biden recently came out in support of Senator Elizabeth Warren’s bankruptcy reform plan, which is somewhat embarrassing because she is basically proposing to nullify the Bankruptcy Reform Act of 2005 championed by Biden.

Our nation is at the beginning of a COVID-19 Recession that, once again, is dragging the bottom 60% of Americans back into the mud of economic turmoil.  If Biden should win the election it is highly likely that bankruptcy reform legislation lead by Senator Warren is coming our way in the near future.

What exactly is Elizabeth Warren proposing? Details of her plan are lacking, but here is basic list of her plan.

#1 Abolish the Means Test

The 2005 Bankruptcy Reform Act attempted to deny Chapter 7 for higher income debtors by requiring them to submit a statement of their average monthly income earned during the six months prior to filing bankruptcy.  That average monthly income figure was then multiplied by 12 to come up with an annualized income figure.  This calculation is what we call the Means Test.

Debtors with annualized income exceeding the Median Family Income in their state find it much more difficult to file Chapter 7.  Instead, such debtors are forced to repay a portion of their debt in expensive Chapter 13 cases.

Preparing a Means Test is time consuming and expensive. It requires bankruptcy attorneys to acquire six months of paycheck stubs and bank statements from their clients, and that has caused the cost of filing Chapter 7 to double or triple since 2005.

Senator Warren says it is time to scrap this vengeful process, and she is right. The Means Test is a disaster that causes tremendous stress on debtors who are unable to gather paycheck stubs from previous jobs and bank statements from closed accounts. And what is the point of calculating an average monthly income for debtors who have become unemployed? Bravo Senator Warren!   Yes, the Means Test needs to go away.

#2 Eliminate paperwork requirement

Currently, debtors must submit paycheck stubs,  bank statements and tax returns to their bankruptcy attorney. The Warren Plan cancels that requirement, although I suspect Trustees will still demand to review recent paycheck stubs and the most recent tax return filed.

#3 Elimination of Chapter 7 and Chapter 13???

This part of the Warren Plan makes absolutely no sense and is contradictory.  Warren wants to simplify the process and create a “single point of entry.”  Debtors will “choose from a menu of options for addressing their debts.”  A menu of options?

The menu of options available would include a Chapter 7-type option of surrendering all non-exempt property in exchange for having their unpaid debts “discharged,” as well as options that allow people to deal with specific financial problems without involving all of their obligations

Okay, Warren would abolish Chapter 7 and 13 and then we create a menu of options that includes a “Chapter 7-type option.”  Um . . . what the hell does that mean?

My plan does away with means testing and the two chapters for consumer debtors. Instead, it offers a single system available to all consumers.

Senator Warren, are you aware that when a person files a bankruptcy petition they check a box for Chapter 7, 13, 11 or 12?  Um, . . . that’s a “menu of options” right there.  You see, we already have a menu of options in our current system.

And what does it mean to do away with the two chapters for consumer debtors? Would she delete the entire Bankruptcy  Code governing Chapter 7 and Chapter 13? And how does Warren’s Chapter 7-type code vary from the current code?  Why would any sane legislator do that? Such a change would throw the entire United States bankruptcy practice into utter chaos.

The current Bankruptcy Code was enacted in 1978 and it replaced the old Bankruptcy Acts originally enacted in 1801.  The Chapter 7 and 13 consumer bankruptcy law has been in existence for 42 years and thousand upon thousands of court cases have interpreted and applied that code. Is Warren really proposing to do away of 42 years of bankruptcy jurisprudence?

#4 Eliminate credit counseling requirements

The 2005 bankruptcy amendments imposed a requirement that debtors take a credit counseling class approved by the United States Trustee.  Warren’s plan eliminates this requirement, and I fully agree that these courses are entirely worthless.

#5 Debtor attorney duty to certify the accuracy of financial disclosures eliminated, but new Disciplinary Panels to be established. (What’s the difference?)

The 2005 bankruptcy amendments require attorneys to certify that they have performed a “due diligence” investigation into the accuracy of the bankruptcy schedules. Basically, the attorney must “audit” his client and review credit reports, background checks, public records, tax returns and other documents to verify that the bankruptcy schedules are truthful.

Warren says that such requirements caused bankruptcy attorney fees to increase and that this burden should be eliminated. However, she would create Disciplinary Panels to keep dishonest attorneys out of the system.

This proposal is stupid. Despite all the bad changes in the 2005 bankruptcy amendments, requiring attorneys to verify the accuracy of what they file in court is sensible.

The proposal for new Disciplinary Panels is ill advised. Every bankruptcy court already has a system to investigate unethical attorney behavior and the US Trustee’s Office is very active in disciplining attorneys who behave badly. There is no need for yet another overlapping regulatory body to do what is already being done.

#6 Lawyer advertising restrictions lifted

Bankruptcy Code Section 528 requiring attorneys to state that “We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code” would be eliminated.  Agreed.

#7 Filing fees waived for lower-income debtors, phased in for higher income debtors.  

Debtors currently pay $335 in court fees to file Chapter 7 and $310 to file Chapter 13.  These fees are used to fund salaries and expenses of the bankruptcy court.  Reducing the amount of fees requested may cause a financial crisis in bankruptcy courts unless other sources of funding are obtained.

#8  Chapter 7 Attorney fees may be paid after the case is filed

Bankruptcy attorneys are not permitted to collect legal fees after the case is filed because, like all other creditors, collection of their debt is automatically stayed by the bankruptcy filing. As a result, chapter 7 attorneys require all their fees and costs (typically $1,300 to $2,000) be paid before a case is filed.

Warren’s plan correctly allows those fees to be paid after the case is filed and that should bring down the filing fees debtors must pay to file a case. It will also have the effect of dramatically increasing the number of chapter 7 cases filed.

#9 Eviction Help to allow debtors to continue to pay rent and cure defaults (Already exists?)

Warren proposes to help debtors stop evictions, but no details are provided.  Current provision in chapter 13 cases already have provisions to repay past due rent, so it is unclear how Warren’s proposal improves upon this.

#10  Chapter 13 Savings Accounts?

My plan allows people in the bankruptcy process who select a repayment plan option to set aside more money to cover the basics for themselves and their children. . . . Allowed parents to spend a reasonable amount of money on toys and books and basic recreation activities for their kids during the bankruptcy process.”

Hmm, this already exists in every Chapter 13 case.  Line 13 of Bankruptcy Schedule J (Monthly Expenses)  provides for “Entertainment, clubs, recreation, newspapers, magazines, and books.”

If Warren is suggesting that debtors be allowed to set aside money in a supervised savings account, say 5% of their income, that would be a welcome and wise change.

#11 Union Dues.  Allow union members to continue paying their union dues during the bankruptcy process.

Senator, please note that Line 5(g) of Bankruptcy Schedule I already allows for payment of union dues.

#12 Student Loan Discharge

My bankruptcy reform plan ends the absurd special treatment of student loans in bankruptcy and makes them dischargeable just like other consumer debts.

Is Warren proposing the immediate discharge of all student loan debts? Would graduating students be immediately eligible to discharge their entire student loan debt burden? No waiting period?

Doesn’t it seem a bit unfair for recent college graduates to discharge taxpayer subsidized student loans when their income is likely to rise in the near future? Other consumer debts are not subsidized by taxpayers. Isn’t that the key difference?

Something tells me that voters do not view limited discharge options on taxpayer guaranteed loans as an absurd special treatment. A waiting period to discharging student loans is fair and appropriate, and allowing their discharge after 20 years is probably acceptable to most legislators and voters.

#13: Uniform Federal Homestead Exemption

My plan creates a uniform federal homestead exemption. The exemption would be set at half of the Federal Housing Finance Agency’s conforming loan limit for the bankruptcy filer’s county of residence . . . . For most communities, it would be $255,200 in 2020″

Wow! Nebraska’s current homestead exemption only protects $60,000 of home equity. One of the most common reasons a client will not file chapter 7 is that they have more than $60,000 of equity, so they file chapter 13 instead to protect their home.

The 2005 bankruptcy amendments attempted to curtail homestead exemption planning by preventing debtors who move to states with more generous homestead exemptions from claiming those exemptions. (Rather, debtors had to claim the exemption in the state they moved from less than two years ago.)

Warren’s plan blasts opens the doors to homestead exemption planning. Her plan encourages debtors to sink money into their homesteads on the eve of filing bankruptcy.

There is a lot to be said for creating standard bankruptcy exemptions that apply to all cases nationwide. We actually have that system now, but current law allows states to opt out of the federal exemption system.  By standardizing exemption laws the the bankruptcy process becomes more uniform and that in turn encourages lawyers and software developers to create cost cutting mega firms that cross state lines.  Essentially, Warren appears to advocate the “Turbo-Taxing” of the bankruptcy process by making the process streamlined and uniform.

#14 Mortgage Loan Modifications

My plans also permits people to modify their mortgages in bankruptcy -something that is generally prohibited by law . . . As part of the menu of options available to a bankruptcy filer, it offers a special streamlined pre-packaged mortgage bankruptcy procedure that will allow struggling homeowners to get a statutorily defined mortgage modification

What does this pre-packaged procedure involve? Will it allow for a cramdown of the loan balance to the present value of a home?  Will it allow debtors to re-write mortgage loans to cure defaults outside of chapter 13 plan? Will a debtor be allowed to cramdown the interest rate to current levels?

Will homeowners receive a windfall by modifying loans to cramdown mortgage balances and interest rates during periods of declining home values, and then keep all the new equity acquired when property values rise again in good times?

Banks will vigorously oppose this reform, and that will cause a potential log-jamming of reform legislation thus  risking no reform is passed at all.

Modification Limits?  How many times may a homeowner force the bank to modify the loan?

#15 Zombie Mortgages

Warren proposes to force banks to complete a foreclosure if the debtor surrenders the home.  How is this constitutionally valid? By what right may Congress force a bank to take an affirmative act to acquire property they do not want?

Perhaps it would be better to allow debtors to exercise existing bankruptcy powers to conduct an auction of unwanted property via a motion to sell free and clear of liens.

#16 Auto Loans: Repeal 910 Day Rule

The plan repeals the 2005 amendment that prohibits the cramdown of auto loans acquired within 910 days of filing bankruptcy to the value of the vehicle.  Will this change be limited to chapter 13 cases?  May a debtor cramdown a loan to the asset value in chapter 7?

#17 Local Government Fines

Warren proposes to allow the discharge of local government fines, except for fines related to death, personal injury or other egregious behavior.

What about landlord code violations? Speeding tickets?

#18 Civil Rights Debts

No discharge for violations of civil rights such as, for example, police brutality. However, these debts are already not dischargeable under Bankruptcy Code 523 for intentional bad acts.

#19 Improved Data Collection

Warren would invites bankruptcy filers to provide statistical information on racial identification, gender, and age.  Why not make this mandatory? What if they “identify” as a Martian? Perhaps we should just go with whatever their state driver’s license says?

#20 Lump-sum Personal Property Exemption

Warren’s plan provides for a standard federal personal property exemption that is adjusted by the number of dependents in the household. A single federal personal property exemption would greatly simplify the process and give rise to more national bankruptcy law firms since state exemption law complexity would be eliminated.

Does this preempt all state exemption laws? What about exemptions for personal injuries and other rights to compensation that are difficult to measure? Will all of these numerous state exemption laws be replaced by a single dollar federal exemption?

#21 Millionaire’s Loophole Closed

Warren would eliminate protect for self-settled trusts. She also seems to say that Spendthrift trusts would become property of bankruptcy estate.  Um, . . how?  State law governs what is property of the estate, and state laws say property in spendthrift trusts are not property of the debtor.

#22 Exemptions forfeited if debtors lie on bankruptcy schedules.

#23 Fraudulent transfer law strengthened.

Property transfers by deadbeat parents to trusts to avoid paid support would be reversed. The statute of limitations to reverse fraudulent transfers would be extended.  And, Warren would make it a federal crime to engage in or aid and abet or receive an actual fraudulent transfer.

Transferring property while insolvent becomes a crime? To receive a transfer becomes a crime? This is very dark.

#24 Disallow Bankruptcy Claims of Creditors that Violate Consumer Laws

Creditors would be barred from filing claims for expired debts. The FDCPA law would be amended to ban collection on expired debts.