Bankruptcy can be a scary and complicated process to navigate, but for some individuals, families, and businesses, it's a necessary step for moving forward after mounting financial debt. A new piece of legislation aims to streamline this complicated process by replacing Chapter 7 and Chapter 13 bankruptcy with a revamped Chapter 10 through the Consumer Bankruptcy Reform Act.

The CBRA was introduced by Senators Elizabeth Warren (D-MA), Dick Durbin (D-IL), and Sheldon Whitehouse (D-RI) along with Representatives Jerrold Nadler (D-NY) and David Cicilline (D-RI). This bill aims to streamline the bankruptcy process in an effort to make filing less complicated to navigate for those who need to file. If passed, this bill would be the latest overhaul to the bankruptcy code since the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).

What is Chapter 10 Bankruptcy?

There are two routes an individual consumer can take when filing for bankruptcy under the proposed Chapter 10. Both routes take current methods of Chapter 7 and Chapter 13 and alter them so that applicants have an easier time navigating the process.

One key difference of Chapter 10 is that filers do not have to address all debts when filing. Limited proceedings that address the heaviest debts like consumer debt or a mortgage will be allowed.

Along with Senator Warren, proponents of overhauling bankruptcy law tout that among the goals of CBRA is to help minority groups who are disproportionately pushed toward the costlier Chapter 13 bankruptcy.

No Payment Discharge

The first route would absolve a filer of any payment. According to the bill’s summary, this option would be best suited for low-income and low asset filers. Under this option, all unsecured debt including medical and credit card debt will be wiped out. However, there are still several categories of debt including child support and debt obtained through fraud that will not be wiped away.

The debt discharge will also have no impact on liens or property. Lastly, there is no minimum payment required unless a filer has an annual income greater than 135% of the median income for their household size in their state, or if a filer has valuable assets which they can liquidate or give up to creditors.

Debt Specific Repayment Plans

The second route would put debtors on a repayment plan for unsecured and secured debt. One of the biggest points of this route is that it considers student loan debts as well. This is a first as bankruptcy laws have long maintained that student loan debt could not be discharged through bankruptcy without extreme difficulty.

Removes Burdensome Steps in the Bankruptcy Process

Many details have also been put in place to ease the burden for filers. The main features of Chapter 10 will allow the filing fees to be waived if an applicant has a household income at or below 150% of the poverty line. The current fee for Chapter 7 is $335 and $310 for Chapter 13.

Additionally, applicants will no longer be required to take part in credit counseling, another program that typically costs about $50. Lastly, attorney’s fees will no longer be required to be paid upfront. Instead, lawyer’s fees can be put on a payment plan to ease the financial burden for filers.

Chapter 10 Wants Filers to Keep Their Car and House

Another main focus of Chapter 10 is to help filers maintain ownership of their vehicle and home. Current bankruptcy laws require renters to pay back all their back rent in order to keep their residential rental. With CBRA, back rent will be treated as unsecured debt.

Filers will also be allowed to keep their vehicle. When paying back their car lender, the bill would require debtors to pay back the liquidation value. An exception exists for vehicles purchased 90 days prior to filing for bankruptcy.

Homeowners will also have more options available to them, including modifying mortgages based on market value and lowered interest rates that reflect a feasible debt to income ratio.

Addressing Racial and Gender Disparities in the System

Another aspect of Chapter 10 bankruptcy addresses racial and gender disparities. In a ProPublica data analysis on how racial disparities exist in the bankruptcy system, their analysis reflects that only 39% of filters from Black majority zip codes were able to discharge their debts under Chapter 13 as compared to the 58% of successful discharges from White area zip codes.

Under current bankruptcy laws, Black filers, minorities, and those from low-income houses are routinely pushed into Chapter 13 bankruptcy after failing the “means test.” Unlike chapter 7 that wipes away all your debts after liquidation, Chapter 13 will only wipe away your debts once you have adhered to a typical five-year repayment plan. For those vulnerable filers, they may struggle to keep up with payments according to the repayment plan under Chapter 13. By eliminating the “means test,” there will be a single streamlined track for individuals seeking out bankruptcy.

Chapter 10 aims to resolve this by moving toward an income and asset only approach to calculate repayment plans as opposed to an expense-based approach. Also, instead of many line-item exemptions, Chapter 10 proposes a lump sum personal property exception that is calculated by the number of dependents. Other assets including child support, the tax child credit, and the Earned Income Tax Credit (EITC) will all be protected.

In an effort to keep better track of who is filing for bankruptcy and the outcome of certain demographics, Chapter 10 will also require that information regarding a filer’s gender, race, and age is collected.

Aims to Keep the Wealthy from Exploiting the System

To help those who are truly struggling with paying back their creditors, Chapter 10 puts added pressure on predatory practices like the “Millionaire's loophole” that corporations and wealthy filers have often taken advantage of.

The bill would especially hold corporations accountable by setting forward stricter regulations that question the intent of filing. Details would include expanding the Fair Debt Collection Practices Act and establishing the Consumer Bankruptcy Ombuds at the Consumer Financial Protection Bureau (CFPB) to specifically handle consumer bankruptcy claims.

Where Does Chapter 10 Stand Now?

The bill is likely to pass the Democrat-controlled House, but it will likely run into issues in the Senate where party representation is split 50-50. Though the bill does appear to have bipartisan support, it will likely be modified if there is hope for it to pass. The public perspective of the bill is likely to be favored, especially because of the added student loan discharge.