Bankruptcy world turned upside down

Alumni magazines are often a quick read and a throw-away, but I just got one from my dear old alma mater (Northeastern U.) that caught my eye. Professor Daniel Austin wrote a nice article entitled “Consumer Bankruptcy: Staggering Towards Coherency.” You can read the full article here.

Professor Austin’s thesis is that the 2005 BAPCPA amendments enacted by Congress turned the world upside down for consumer bankruptcy law. These changes were intended to make it harder for financially strapped consumers to be discharged from all debts through a Chapter 7 liquidation, but instead to be nudged towards repaying part of their debt through a Chapter 13 plan.

Austin notes this scheme has failed to accomplish what it set out to do: “Of the 1.4 million consumer bankruptcy cases filed in 2009, 71 percent were Chapter 7, about the same percentage as before BAPCPA.”

Still, Austin thinks that “in spite of itself, bankruptcy under BAPCPA is making fitful steps toward coherency.” He points to the recent Supreme Court decision in Hamilton v. Lanning, where the court voted 8-1 to give bankruptcy judges some discretion in calculating income and expenses on the means test.

Professor Austin (and many others) would like to see more positive changes to the bankruptcy laws. “The exclusion of education loans as a debt that can be ordinarily discharged should be reconsidered,” he writes (wonder if the Northeastern deans would agree?). In addition, Austin would allow a chapter 13 debtor “to lower the principal balance of a residential mortgage debt to reflect true market value,” which is something that has been part of the code for other debts for a long time.

The prohibition on modifying car loans for vehicles bought within 90 days of bankruptcy is “a blatant giveaway to auto lenders,” and should also be eliminated.

Austin still sees bankruptcy as “a vital safety valve for financially distressed Americans,” and while the recent Supreme Court activity “represents improvement, there is still a long way to go.”

 

By Doug Beaton

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