In an effort to broaden his appeal to members of the left-leaning electorate, Joe Biden endorsed Senator Elizabeth Warren’s bankruptcy plan during this past weekend. Ms. Warren’s plan, a material piece of the platform from her former presidential bid, is focused on protecting struggling individual consumers by reducing bankruptcy costs, streamlining the process, and expanding debt forgiveness. Like many of her plans, Ms. Warren’s bankruptcy plan is detailed and generally includes the following proposals:
• Eliminate Means Testing. This would allow those individuals with incomes above their state’s median level to file Chapter 7 (which eliminates ongoing payment burdens post-bankruptcy) rather than seek reorganization under Chapter 13 (which requires that debtor’s comply with a payment plan following bankruptcy). Currently, individuals with incomes above that median income level are limited to Chapter 13 relief.
• Expanded Options for Individuals. Adding flexibility to the bankruptcy process that might, for example, allow someone to discharge a mortgage while paying off other debts over time or proposing a debt repayment plan while maintaining a stay of certain collection activities to protect a car or a home.
• Limiting Paperwork and Other Hurdles. Personal financial information would be limited to assets, liabilities, income and expenses, unless otherwise ordered by the Court. The plan would further reduce costs by eliminating the need for pre-filing credit counseling and for counsel to certify the accuracy of the debtor’s disclosures.
• Student Loan Debt. Eliminating the “undue hardship” standard for discharging student debt, allowing for a discharge consistent with most other forms of debt. While courts have recently shown greater flexibility, the need to establish undue hardship remains a significant hurdle to discharging student debt. Allowing greater access to discharge could have a severe impact on the student debt markets (the aggregate amount of public and private student loan debt is currently in excess of $1.5 trillion).
• Federal Homestead Exemption. To avoid the perceived inequities of allowing wealthy, but financially stretched, individuals to preserve assets by acquiring homes in states with unlimited homestead exemptions, the plan would set a Federal exemption at 50% of the “conforming loan limit” in the filer’s county of residence.
• Expanded Rights to Spend Money During Bankruptcy. The plan would allow debtors to continue paying, among other things, union dues to preserve their ongoing employment options and rent if such payment would allow them to avoid eviction.
• Prepackaged Mortgage Bankruptcy. The plan includes a mechanism for homeowners to access a statutorily defined mortgage modification which would allow an automatic reduction of the loan to the market value of the property along with a reduction in rates to fixed debt to income ratio. Implementation could have a dramatic impact on the RMBS markets and would likely face significant opposition. The plan would similarly make it easier for individuals to keep their cars, requiring payments up to the fair market value, regardless of the amount of the original loan.
Of course, it is not clear whether Mr. Biden was endorsing each element of the Warren plan or instead is focused on the higher profile proposals such as student debt relief. In any event, should Mr. Biden defeat Donald Trump later this year, we should anticipate an effort to reverse of some of the more controversial aspects of the 2005 Bankruptcy Code amendments. It is much less likely that a President Biden would show strong support for a bill that has been floated by the House, the Bankruptcy Venue Reform Act of 2019. The act would amend 28 U.S.C. 1408, narrowing the permissible forums for corporate bankruptcy cases, and instead requiring debtors to file in jurisdictions where they carry on their primary business activities. Section 1408 now allows a corporate debtor to commence a bankruptcy case in any of the following: (i) the district in which it was incorporated, (ii) the district which houses its principal place of business or principal assets, or (iii) the district in which an affiliated entity has filed bankruptcy. This final clause allows corporate families, often consisting of entities organized and owning assets in various states, to conduct a bankruptcy proceeding in a common forum, and has been the subject of the most attention in recent years. One of the jurisdictions that benefits most greatly from current venue provisions is the State of Delaware, Mr. Biden’s home state.