Recommended consumer bankruptcy changes from the American Bankruptcy Institute

Here at Shenwick & Associates, spring is in the air and the A/C isn’t on yet.  One of things that we love about the law is that it’s always changing, and we do our best to keep up with new developments in bankruptcy law.

So we were excited to see that the American Bankruptcy Institute (one of the most respected institutions in bankruptcy law) issued the final report of its Commission on Consumer Bankruptcy earlier this month, which contains a plethora of recommendations to amend the Bankruptcy Code and Federal Rules of Bankruptcy Procedure.  In this e-mail, we’ll review its key recommendations.

Student loans. As our readers know, it’s extremely difficult to discharge student loans in bankruptcy.  The Commission recommends that student loans that are: (a) made by nongovernmental entities; (b) incurred by a person other than the person receiving the education; (c) being paid through a five-year chapter 13 plan; or (d) first payable more than seven years before a chapter 7 bankruptcy is filed be made dischargeable in bankruptcy.

Remedies for Violation of the Discharge Injunction.  Currently most violations of the discharge injunction can only be remedied by contempt proceedings.  The Commission recommends creating a statutory private right of action for violations of the discharge injunction, like the action for violations of the automatic stay, which would provide the full range of sanctions, including costs, attorney fees, and punitive damages.

Credit Counseling and Financial Management Course.  The Commission recommends eliminating prepetition credit counseling and eliminating the requirement for a course in financial management in chapter 7, but retaining it in chapter 13, with further study of its

effectiveness.

Means Test Revisions & Interpretation.  The Commission recommends amending the means test to require reduced documentation from debtors with below-median income; to exclude from income public assistance, government retirement, and disability benefits, capped by the maximum allowed Social Security benefit; to remove the presumption of abuse if the debtor shows special circumstances, even if the circumstances arose voluntarily; and to allow certain statutory expense deductions from income only to the extent actually incurred by the debtor and necessary for the support of the debtor and debtor’s dependents.

Chapter 13 Debt Limits. To reduce the need for individuals to file under chapter 11, the Commission recommends increasing the chapter 13 debt limit to $3 million, eliminating the

distinction between secured and unsecured debts; and for married couples, applying the limit separately to each spouse and not aggregating the spousal debt, even in joint cases.

All of the Commission’s recommendations would dramatically improve access to bankruptcy relief, but Congress would need to introduce bills to enact the Commission’s recommendations for statutory amendments.  For information on how bankruptcy relief could help you, please contact Jim Shenwick.