Rambling thoughts on the impact of the 2020 elections on the practice of bankruptcy law.

Unless both Georgia senate runoff races are won by the Democratic Party candidates, it appears that the United States Senate will still be ruled by the Republicans and Mitch McConnell.

Why does this matter? Because if the Democrats take control of the Senate you can expect Senator Elizabeth Warren to lead up a crusade to overturn the Bankruptcy Reform Act of 2005.  Senator Warren has campaigned to make several changes to the bankruptcy laws, including:

  • Making student loans dischargeable through bankruptcy again.
  • Eliminating the bankruptcy “Means Test” that has driven up the cost of filing bankruptcy by imposing tremendous paperwork burdens.
  • Eliminating the requirement of completing a Credit Counseling course prior to file bankruptcy.
  • Reducing the amount a person has to pay to file a case by allowing debtors to pay attorneys after the case is filed.
  • Increasing protection to homes by creating a larger and standardized Homestead Exemption law.
  • Allowing debtors to “cramdown” auto loans to the value of the vehicle.
  • Streamlining the bankruptcy process to make it easier and less expensive to file.

But if Republicans continue to control the Senate by winning one or both runoff elections in Georgia–something that is more likely than not–then it is doubtful any radical changes will be made to the bankruptcy laws.

The election results makes a big difference when advising new clients, especially clients with large student loan debts. “Are you sure you want to file a case now under the current law when student loan debts may become dischargeable if the Democrats take control of the Senate?” That is the question I have been asking clients in recent months, urging them to see if they could delay the process until we knew the results of the election. Well, now we know a lot more, and it doesn’t appear that much if anything is likely to change unless upsets are achieved in the January runoff elections..

Even if the Republicans stay in control of the Senate, it is possible that newly elected President Joseph Biden will spearhead an effort to reform the bankruptcy laws he helped mess up in 2005. Biden has pledged to reverse the bankruptcy amendments he championed in 2005.

Bankruptcy reforms we can all agree on now.

Regardless of who controls Congress in 2021, here are some suggestions that both Democrats and Republicans should agree upon right now:

  • Student Loans.  Student Loans should be dischargeable in bankruptcy after a certain period of time.  Can we all agree that these loans should be dischargeable after 20 years? Gosh, that is a very hard position, but it’s a lot better than the one we have now that they can never be discharged unless an extreme hardship is present.
  • Means Test. Abolish the Means Test. This is a silly requirement that has never achieved its intended purpose other than to make filing bankruptcy more expensive and difficult.
  • Attorney Fees.  Allow attorney fees to be paid after the case is filed. Too many low-income debtors continue to be garnished because they cannot afford all the upfront fees to file bankruptcy.
  • Eliminate Credit Counseling.  The courses debtors must take to file and complete a case are worthless. No real education occurs and the courses do not cause debtors to avoid filing.
  • Communications with Banks. Prohibit banks from canceling online access to borrowers who file bankruptcy and require mortgage lenders to speak to borrowers who call them after filing bankruptcy. Banks often take the unreasonable position that they are not allowed to speak to customers in a bankruptcy case, and I would agree that banks should not hound borrowers in bankruptcy with collection calls, but there is no reason they cannot speak to customers who call them. The refusal to speak to their customers in bankruptcy is shear madness.
  • Standardize Bankruptcy Exemptions.  Standardize bankruptcy exemptions by not allowing states from opting out of the federal exemption scheme.
  • Video/Telephone Court Hearings.  Continue the telephonic and/or video meetings with the Trustees that started during COVID-19.  Ever since COVID-19 hit we have been conducting required meetings with the bankruptcy trustees via telephone conference calls.  Guess what? They work just as well as in person meetings.  Instead of driving hundreds of miles in the Nebraska snow during winter to attend meetings that typically last about two minutes, debtors are able to call in to answer the routine questions asked by trustees over the telephone. I do not notice any decrease in the effectiveness of the trustee’s examinations, and in some cases their effectiveness may be increasing since they have their full computer systems before them.  The US Trustee’s Office should begin work on a video conferencing system similar to Zoom to handle all trustee hearings going forward. The ability to share computer screens and to view debtors over a camera system works great. A system with a Zoom “waiting room” that allows the trustee to interview one debtor at a time without the distraction of a crowd of debtors waiting for their turn at the table would be ideal.
  • Digital Signatures: Make permanent the use of Digital Signatures that began in Nebraska in 2018 and extended all all bankruptcy courts during COVID-19.  The use of Digital Signatures has been a tremendous success that greatly decreases the burdens on debtors and the court without spending a single extra taxpayer dollar.
  • Chapter 13 Debt Limits:   The chapter 13 debt limits were designed to keep complex business cases out of this streamlined repayment program.  However, with student loan and medical debts, the debt limit (currently set at $419,275) frequently prevents debtors with simple cases from filing chapter 13.  This problem could be solved by not counting medical and student loan debts towards the debt limit.

The 2020 elections tell us that radical bankruptcy reform is off the table. But practical reforms are very possible if our leaders focus on what they can all agree upon instead of dwelling on what divides us.


Image courtesy of Flickr and Anthony Quintano