The Consumer Bankruptcy Reform Act: The Uncoupling of Debts

• Published in: American Bankruptcy Institute journal Vol. 42; no. 7; pp. 8 - 63
• Main Author: Woodman, Brittany M
• Format: Journal Article
• Language: English
• Published: Alexandria American Bankruptcy Institute 01.07.2023
• Subjects: Automobile loans; Bankruptcy laws; Debt; Delinquency; Hearings & confirmations; Loan workouts; Mortgages; Personal bankruptcy
• ISSN: 1931-7522

Under 1026 of the CBRA, debtors in a chapter 10 who wish to cure secured debt deficiencies in a bankruptcy proceeding shall provide separate "residence" and/or "property" plans for secured debts related to the debtor's principal residence and all other property.6 Section 1021 of the CBRA explains the three different plan types that a debtor may file, making it clear that secured debts and unsecured claims are not to be intermingled under one plan.7 Each plan would be treated separately for the purposes of confirmation, discharge and revocation of a confirmation or setting aside the discharge order.8 This is a significant change from the current system in which consumer debtors in chapter 13 simply provide one plan that accounts for the handling of all debts, both secured and unsecured.9 The CBRA proposes multiple protections for debtors, such as plan modifications, no requirement that priority claims be paid in full, and flexibility if repayment delinquency occurs because of circumstances that a debtor reasonably could not avoid.10 Under a residence or property plan, debtors may change the terms of secured obligations by modifying the interest rate, adjusting the amortization schedule or curing defaults.11 Chapter 10 effectively eliminates the mortgage-modification restrictions under chapter 13 for primary-residence properties.12 A residence or property plan does not result in a discharge unless paired with a completed repayment plan.13 However, if a chapter 10 debtor has a zero-minimum-payment obligation, he/she is entitled to an immediate discharge, which is similar to chapter 7.14 Residence and other property plans operate similarly. Both plans allow secured creditors to retain their liens, and debtors make payments directly as determined under each plan,15 which is different from a repayment plan under chapter 10, as repayment plans would be repaid through a trustee.16 The CBRA further details how secured debts, such as mortgages and car loans, would differ as far as valuation and repayment determination under the residence and property plans in comparison to the current bankruptcy system.17 Finally, secured creditors are prohibited from taking any action unless there is a default under the plan, which mandates 120 days of delinquency for mortgages and 90 days of delinquency for all other forms of secured debt.18 Á la Carte Bankruptcies Since the CBRA proposes three plan types that are treated separately for the purposes of bankruptcy proceedings, chapter 10 debtors would be able to decouple certain debts.19 Under the current system, a debtor filing for bankruptcy must confront all of his/her debts during a bankruptcy. In the text of the CBRA, there is no explanation on this other than information on establishing the average prime-offer rate for motor-vehicle financing, and the allowance per 101 for the adjustment of car loans ("allowing the modification of car loans based on the market value of a car"). * Separation of secured and unsecured debts would potentially lessen the stress that most debtors feel when addressing sometimes dozens of creditors at once during a bankruptcy. Separating debts, especially larger ones such as a mortgage or car loan, into their own plans would give creditors and debtors a better chance at successfully confirming at least one plan, perhaps while other disputes are resolved. * Confirmation hearings would remain similar to how they already are held under chapter 13, as a single confirmation hearing would be held even if multiple plans have been filed.27 The Cons * Separating secured and unsecured debts into different plans could result in incurring more attorneys' fees for debtors.