CORAL GABLES, FL – Jan. 7, 2021 – Several weeks ago Senator Elizabeth Warren introduced a controversial and sweeping consumer bankruptcy reform bill (the “Warren Plan”). Most of the discussion surrounding the Warren Plan has been academic given the composition of Congress. However, now that Democrats are in control of the White House and Congress there is a real possibility for bankruptcy reform.
There are a couple of areas of concern with the Warren Plan, but there are also some very good things the legislation proposes to accomplish. The first thing is abolishing the means test. The 2005 Bankruptcy Reform Act attempted to deny access to 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 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 more expensive Chapter 13 cases.
Preparing a Means Test requires bankruptcy attorneys to acquire six months of paycheck stubs and bank statements from their clients, and that can make filing a Chapter 7 more costly.
Senator Warren says it is time to scrap this process, and she may be right. The Means Test has been a cause of unnecessary stress on debtors who may be unable to gather paycheck stubs from previous jobs and bank statements from closed accounts. The Warren Plan does away with the need for debtors to provide paycheck stubs and tax returns to their counsel, although in all probability Trustees will still demand to review recent paycheck stubs and the most recent tax return filed in advance of creditors meetings.
The 2005 bankruptcy amendments also imposed a requirement that debtors take a credit counseling class approved by the United States Trustee. Warren’s plan eliminates this requirement, and thank goodness – these courses are of little use or value.
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. Once again, the devil is in the details and over the next few months it will be interesting to see how this all unfolds.