By Phyllis A.Ulrich, Esq.

Carlisle Law

USFN Member (OH)

On September 28, 2022, Sen. Elizabeth Warren and Rep. Jerrold Nadler reintroduced the Consumer Bankruptcy Reform Act (the “CBRA” or “Bill”) seeking to: reduce paperwork; simplify the filing process for debtors; and decrease the cost of filing. The Bill was previously introduced on December 6, 2020, but never made it to a floor vote during the 116^th Congressional session. Warren and Nadler reintroduced the bill as originally written.

The Bill would eliminate Chapters 7 and 13, replacing them with a hybrid under new Chapter 10 (11 U.S.C. §1001, et. seq.). The new Chapter 10 retains the mechanism for a Chapter 7-like discharge and provides various plans of reorganization for claims, as provided for in the current Chapter 13. The automatic stay mirrors that provided for in current Chapter 13, including a separate co-debtor stay upon the filing of a case (11 U.S.C. §1009).

There are three types of plans of reorganization referenced in 11 U.S.C. §1022, all of which can be filed by debtor(s) in a single case.

One plan type –  the Residence Plan (11 U.S.C. §1022(b)) –  addresses debts secured only by the principal residence of the debtor. The plan can modify the rights of the holders of these claims (including first mortgage loans) or provide for sale of the residence in the plan, but it can only deal with debts secured by the residence.

Another plan type –  the Property Plan (11 U.S.C. §1022(c)) –  addresses all other claims secured by property, not including the debtor’s residence.

Though the third plan type –  the Repayment Plan (11 U.S.C. §1022(a)) – does not have the same categorical purpose, it provides for repayment of the debtor’s unsecured debts.

At first glance, the provisions of the Bill appear to allow the debtor to pick one of the three plans to file, which would certainly streamline and simplify the current case flow. However, a closer reading indicates that the debtor can file all three plans in one case at the same time. For example, 11 U.S.C. §1021(b)(A) states a debtor may file one or more plans. 11 U.S.C §1023(c) provides for a single hearing on confirmation if the debtor files more than one plan under 11 U.S.C. §1021.

The Bill is made more complex by the debtor’s option to elect a “limited proceeding.” If the debtor elects a limited proceeding under 11 U.S.C. §1051, they could select certain claims secured by specific property to include for reorganization. Such limited proceedings would only give rise to a limited automatic stay - only applicable to the creditors whose claims are secured by the selected property. Once again, the debtor may file one or more of the plans provided for under §1022.  The debtor may elect to convert the limited proceeding to a general proceeding if the court fails to confirm a plan under the limited proceeding pursuant to 11 U.S.C. §1053(b). Upon conversion to a general proceeding, the automatic stay and co-debtor stay applies to all creditors of the debtor.

One plan to address all claims under the current Chapter 13 is more compact and tidier. With a National Form Plan, that is used for the most part, in many bankruptcy jurisdictions, it is now comfortable for the creditor to scan the plan under familiar provisions to determine treatment of its claim. The possibility of three plans being filed in one case, results in a situation where a creditor must carefully read each plan that a debtor files in a case to determine which plan applies to its claim. The Chapter 10 Trustee will be busier than ever attempting to address all the plans to ensure each complies with the Bankruptcy Code and Rules.

While proposed Chapter 10 may theoretically create a simpler and less expensive process from a debtor’s perspective, it is likely to create more questions (and perhaps litigation) for most everyone involved in a case. The end result may be a drawn-out and litigated bankruptcy case, which equates to more expenses and complication for the debtor. Ironically, a previous Chapter 10 Bankruptcy option, available for corporations, was eliminated by the Bankruptcy Reform Act in 1978 due to its complexity.

The CBRA may or may not get to the floor for a vote in this 117^th Congress. However, if enacted, it would radically change the state of current bankruptcy proceedings and practice of today.

Copyright @2022 USFN

December 2022 USFN e-Update