Elizabeth Warren’s second attempt at bankruptcy reform seeks balanced relief

On Wednesday, Massachusetts Sen. Elizabeth Warren reintroduced legislation that would make filing for bankruptcy easier and more affordable for individuals who are struggling financially.

Warren first introduced the legislation, The Consumer Bankruptcy Reform Act, in 2020. The bill addresses common issues associated with filing for bankruptcy. If passed, it would streamline the process, reduce fees associated with it, and provide certain protections for financially vulnerable individuals.“People typically file for bankruptcy for one of three reasons: a job loss, a medical problem or a family breakup — and when they do, they’re faced with an expensive and complicated system,” the Massachusetts Democrat said in a statement in reintroducing the bill. “My bill would simplify and modernize the consumer bankruptcy system to make it easier and less expensive for people to get relief.”

Warren also said that the legislation would help ensure that people who are in the process of filing for bankruptcy don’t lose their homes or other assets, like cars. It would also make the process much more affordable by reducing filing fees, would close loopholes that allow wealthy individuals to exploit the system, and would address racial and gender disparities that make filing more challenging for certain populations.

Currently, filing for Chapter 7 bankruptcy (“liquidation bankruptcy”), which requires debtors to surrender assets while retaining future income, costs around $1,500. Chapter 13 bankruptcy, which allows debtors to retain their assets while adhering to a strict payment plan, is far more costly at around $4,500. According to USCourts.gov, a large portion of those who file for Chapter 13 bankruptcy don’t get the desired result. In 2022, only 56% of individuals who filed actually had their debts discharged.The new legislation would eliminate Chapter 7 and 13 for individuals and replace it with Chapter 10, which would have two separate filing options. The first is a no-payment discharge, which would help lower-income individuals eliminate debt. The second is a debt-specific plan, which would help individuals remain current on loans while pausing debt collection efforts that are draining their finances.Much of Warren’s bill seeks to reverse actions spurred by a 2005 Republican-led bill, which was designed to deter people from filing by increasing the amount of necessary paperwork and upping filing fees. While it protected businesses, it took bankruptcy protections away from individuals. It also gave special treatment to private student loan companies by disallowing individuals from having student loan debt discharged. The new legislation would treat student loan debt like any other form of debt.As a senator, President Biden backed the 2005 legislation, voting for it four times since 1998 to its passing. He also voted for a loophole that would allow wealthy individuals filing for bankruptcy to protect their assets by placing them in trusts. But in 2020, he changed course, endorsing Warren’s bill which attempted to undo many of the 2005 reforms that complicated the process for low-income individuals.

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