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Charbonneau on the “Warren Plan”

Coral Gables — December 23, 2020 — In the next few months, the uniform federal laws, which have governed all bankruptcy cases in the United States for decades, will be examined and potentially updated under the Biden administration.

Two weeks ago, Sen. Elizabeth Warren introduced a controversial and sweeping consumer bankruptcy reform bill (the “Warren Plan”).  The centerpiece of the Warren Plan is the abolition of Chapter 7 (sometimes called “liquidation” bankruptcy) and Chapter 13 (also called a wage earner’s plan) of the Bankruptcy Code; and replacing both with a proposed Chapter 10. 

Currently, under Chapter 7 consumers with nominal disposable monthly income are allowed to discharge their debts after liquidating non-exempt assets to reimburse creditors. Under the current Chapter 13 structure, consumers can discharge debts after paying their disposable income to creditors pursuant to a multi-year repayment plan.

This new chapter would have a “…menu of options available [and] would include a Chapter 7-type option of surrendering all non-exempt property in exchange for having … unpaid debts ‘discharged,’ as well as options that allow people to deal with specific financial problems without involving all of their obligations.”

It’s a little difficult to understand how this would be implemented as currently, bankruptcy filers already have a menu of options, checking a box on their petitions and electing to file under either Chapter 7, 11, 12 or 13.  It is also unclear how the proposed Chapter 7 and 13-type codes would vary from the existing Bankruptcy Code.  I cannot point to any corner of our country’s justice system that is perfect, but the existing Bankruptcy Code replaced the Bankruptcy Act in 1978.  A decade of bankruptcy jurisprudence has developed in the ensuing 42 years, and the system has generally worked well.  So my question is, what happens to all of that accumulated wisdom?  

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