An Update on Proposed Bankruptcy Reform and Relief Legislation

Bankruptcy reform is a key agenda item for the Biden Administration, and several proposed bills providing relief to consumers are progressing through Congress

Key takeaways:

• Numerous bills addressing bankruptcy have been introduced in the 117th Congress and the Consumer Bankruptcy Reform Act of 2020 is gaining new attention (CBRA).

• The CBRA would be the most significant change to the bankruptcy code since a 2005 law, if enacted as written, and would upend many of that law’s conventions.

• Broad bankruptcy reform will likely face a difficult fight in Congress, but more targeted relief measures show signs of being enacted. 

• Bills addressing the bankruptcy process in 2021 have been shaped by the COVID-19 pandemic and a change in Congressional leadership.

Bills addressing bankruptcy on the docket of the 117th Congress reintroduce reforms proposed in late 2020, offer pandemic-related relief, and outline accountability for some high-profile business owners. Leading the pack is the Consumer Bankruptcy Reform Act (CBRA), backed on the campaign trail by President Joe Biden and awaiting its chance to emerge from committee.

Analysts suggest that among the other pressing concerns of Congress, wide-reaching bankruptcy reform will face a difficult fight if it reaches the floor, particularly in the Senate. But since the pandemic increased the number of bankruptcies and restructurings, some advocates believe the time is right to change the system while providing economic relief. 

Bills specifically targeting pandemic-caused hardships such as the Medical Bankruptcy Fairness Act of 2021 may progress more rapidly through the legislative process than broader legislation. The path of the COVID-19 Bankruptcy Relief Extension Act of 2021, introduced in early March and signed into law later that month with overwhelming bipartisan support, supports that opinion.

The scope and status of the numerous proposed bankruptcy bills, from pragmatic to progressive, provide insight into how this group of lawmakers may approach debtor and creditor concerns. 

Executive branch support for significant reform 

While a senator, Biden “worked hard to add progressive reforms” to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which was easily voted into law by a majority-Republican Congress. According to many advocacy groups, the law (supported by the credit card industry) made consumer bankruptcies more difficult and expensive for individuals and made business reorganizations more challenging. In response, the American Bankruptcy Institute (ABI) formed a Commission whose recommendations became the foundations of current calls to reform the bankruptcy process. 

As a candidate for president, Biden strongly supported Senator Elizabeth Warren’s plan that would “fundamentally reshape our bankruptcy system.” In December 2020, Senator Warren (D-MA), along with House Judiciary Committee Chairman Jerrold Nadler (D-N.Y.), introduced the Consumer Bankruptcy Reform Act of 2020 (CBRA), bicameral legislation to “simplify and modernize the consumer bankruptcy system to make it easier for individuals and families forced into bankruptcy to get back on their feet.” 

This legislation would be the most significant change to the bankruptcy code since the 2005 law. The CBRA is intended to streamline the existing bankruptcy process by eliminating Chapter 7 and Chapter 13 bankruptcy filings and replacing them with a new Chapter 10. 

Chapter 10 intends to address some of the racial and gender disparities in the current system by reducing filing fees, simplifying payment terms, and adding other consumer-friendly protections. Chapter 10 would also cover the discharge of student loan debt and other currently non-dischargeable obligations.

Some additional provisions of the CBRA are: 

• A “homestead exemption” in bankruptcy would apply to a single-family residence within the particular county of the debtor’s residence, with additional protections for debtors aged 65 or older. 

• An amendment to the Bankruptcy Code section 548 (the bankruptcy fraudulent transfer law) changing its limitation period to four years, making it more consistent with existing state fraudulent transfer laws. 

• Exemptions for life insurance benefits and retirement benefits received by debtors.

• The elimination of the pre-credit counseling requirement and a waiver of filing and administrative fees for debtors whose household income is at or below 150% of the poverty line. 

The CBRA also strengthens some federal consumer protection financial laws and includes amendments to the Equal Credit Opportunity Act, the Fair Debt Collection Practices Act, and the Truth in Lending Act, among others.

Additional bankruptcy legislation introduced in 2021 

The 117th Congress has been busy introducing and ruling on bills intended to help businesses and individuals faced with bankruptcy because of COVID-19. As mentioned above, the “COVID-19 Bankruptcy Relief Extension Act of 2021” passed in March by unanimous consent in the Senate and with only 14 dissenting votes in the House. This law extends financial relief for another year to debtors in bankruptcy.

Both the Medical Bankruptcy Fairness Act of 2021 and the Protecting Homeowners in Bankruptcy Act of 2021 are examples of pending legislation directed toward providing additional relief for consumers facing hardships because of COVID-19. Introduced in February by Senator Sheldon Whitehouse (D-RI), the Medical Bankruptcy Fairness Act intends to provide protections for “medically distressed debtors” facing bankruptcy. The Protecting Homeowners Act, introduced in the House in January by Representative Madeleine Dean (D-PA), would raise the homestead exemption an individual debtor can claim in bankruptcy to $100,000 if passed. 

Addressing the drain bankruptcies can have on recovering local economies and consumers, Representative Zoe Lofgren (D-CA) reintroduced the Bankruptcy Venue Reform Act. Previously submitted to the House Judiciary Committee in 2019, the bill proposes that Chapter 11 bankruptcy proceedings take place where the principal place of business or principal assets of the corporation are located. The purpose of the legislation is to curb “venue shopping” by companies by requiring corporate bankruptcies to be adjudicated locally, with “convenient court access for employees, retirees, and local creditors and a judge who knows the affected community.” 

A bill nicknamed the “SACKLER Act” was introduced in the House by Rep. Carolyn B. Maloney (D-NY) in March. Cited officially as the Stop Shielding Assets from Corporate Known Liability by Eliminating Non-Debtor Releases Act, it would prohibit protections for non-debtors in a bankruptcy case, such as the Purdue Pharma case involving Sackler family members. If passed, the bill could result in Sackler family members facing lawsuits filed by 20 other attorneys general seeking individual accountability for their role in the opioid epidemic.

The legislation addressing the bankruptcy process in 2021 has been shaped by both the pandemic and a change in Congressional leadership. As these bills wind their way through the legislative process, some will likely be tabled, revised almost beyond recognition, or otherwise meet their end.  

Some relief measures included in omnibus bills have addressed the needs of consumers facing bankruptcy, particularly first-time filers impacted by COVID-19. But many lawmakers believe that is not enough. In a divided Congress, sweeping structural change is often not possible. The fight over CBRA and other controversial approaches bears watching, given the extent of the proposed changes. 

Johnston Clem Gifford’s Distressed Debt & Bankruptcy lawyers routinely advise commercial and retail banks, credit unions, hedge funds, REITs, consumer finance lenders, insurers, secured and unsecured creditors, creditors committees, bankruptcy trustees, and other parties affected by financial insolvency issues. Contact us online or by calling (214) 974-8000.