Both Senator Warren and Congressman Nader recently introduced the Consumer Bankruptcy Reform Act, which has been received as the biggest alteration of the United States Bankruptcy Code since the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. While the chance of the Act becoming law is low, the Act represents an interesting suggestion of where Congress is headed. 

The following reviews some important details of the Warren Nadler Consumer Bankruptcy Reform Act and the changes it could introduce.

Changes to Consumer Bankruptcy

The Consumer Bankruptcy Reform Act will remove the existing framework for Chapter 13 consumer bankruptcies as well as create a new Chapter 10 bankruptcy for both individual and small business bankruptcy. The new Chapter 10 bankruptcy would function similarly to Chapter 11 reorganization, including repayment plans that must be approved by the Bankruptcy Court.

Creation of a Homestead Exemption

Another change proposed by the Consumer Bankruptcy Reform Act is that it would create a homestead exemption comparable to 50% of the value of the conforming loan limit of a single-family residence within the particular county where the debtor resides. This amount would increase to 75% of the conforming loan limit if the debtor is 65 or older. 

Currently, single homeowners in California receive a $75,000 equity homestead exemption. A head of household receives a $100,000 equity exemption. Seniors over the age of 65 as well as physically disabled individuals and those who earn less than $15,000 a year, however, receive a $175,000 exemption. 

Besides the homestead exemption, life insurance benefits received by a debtor would also be exempt as would retirement benefits. Additionally, a $30,000 “wildcard” exemption would be established through which a debtor could claim against any property. 

Additionally, if a debtor has one dependent, the exemption amount would double and would increase 25% for the first additional dependent, 10% for the second additional dependent, 5% for the third additional dependent, and 1% for every additional dependent. 

Limitations on Bankruptcy Abuse

To avoid abusing available exemptions, the proposed legislation would permit bankruptcy courts to limit the homestead exemption if the court finds that exemptions are “manifestly unnecessary” for the support of either the debtor or the debtor’s dependents. A presumption also exists that exempt property greater than $1.5 million is “manifestly unnecessary” for supporting the debtor or the debtor’s dependents. 

To avoid taking advantage of bankruptcy exemptions, debtors would have to live at least two years in a state before being able to claim that state’s bankruptcy exemptions. To utilize the homestead exemption, if a person moves within one year of filing for bankruptcy, that person’s exemptions would not be greater than the amount that would have been exempt in the previous state. An exception exists if the value of the new property is greater than $1 million, in which a three-year period exists.

Additionally, the homestead exemption is reduced by the amount equal to the result of any action taken by the person pursuing bankruptcy to delay or defraud creditors except as far as the non-exempt portion of the property is involved. Additionally, if the debtor has chosen to select the state homestead exemption, this individual is limited to an exemption of only $170,000 in the value of their home to the degree that it was acquired or appreciated within the previous four years. A $170,000 limit also applies if a judgment occurs from certain violations of federal laws.

Retirement Plans

The Act will also substantially protect retirement plans, including transfers from one tax-qualified plan to another. Rollovers will also be protected by the Act provided that retirement funds reach a new account.

Bankruptcy Exemptions

Additionally, unsecured creditors are not able to enforce waivers of exemptions by debtors or their agreements to avoid certain transfers. Liens on a debtor’s assets will also be unenforceable under the Act to the degree that the liens operate to impair the debtor’s exemptions. Circumstances will arise in which a debtor can claim an applicable exemption even regarding property that has been avoided as a fraudulent or preferential transfer. 

The Act requires debtors to file a list of assets that are claimed to be exempt. The property listed on these documents is then treated as exempt provided that no objections to the exempt status are made.

Following the discharge of a debt, creditors who either intentionally or negligently attempt to enforce a claim can be subject to legal action by either the United States Trustee or the Trustee for the debtor’s bankruptcy estate. Additionally, punitive damages are sometimes awarded if appropriate in addition to compensatory damages.

Bankruptcy Fraudulent Transfer Law is Amended

Bankruptcy Code section 548, which is also known as the bankruptcy fraudulent transfer law, has been amended by the Act to have a limitation period of four years. The party in a fraudulent transfer action brought under this law bears the burden of both pleading as well as establishing that the debtor did not make the transfer with the actual intent to delay, defraud, or hinder creditors. 

Additionally, if a trustee can recover a transfer from a transferee, a trustee can recover a reasonable attorney’s fees. If the transferee wins, however, the trustee does not pay any attorney’s fees. 

Debt Counseling Requirement

The Act will remove the requirements that debtors first receive debt counseling before filing for bankruptcy. The Act will also remove the requirement that debtors provide certain tax documents, though this paperwork will still be available to interested parties through a document demand or subpoena.

Obtain the Services of an Experienced Bankruptcy Attorney

Navigating the California bankruptcy process is full of challenges, but a knowledgeable lawyer can help you navigate the various issues that arise. If you or your loved ones need help navigating the bankruptcy process, do not hesitate to schedule a free case evaluation with attorney Melanie Tavare today.