Proposed Changes to Bankruptcy A Mixed Bag for Creditors
Written by: Edgar Carranza
Proposed changes to federal bankruptcy law will make it easier for unsecured creditors to receive payment in bankruptcy. But secured creditors - especially home mortgage companies - may be worse off
Both the House and Senate have versions of the Bankruptcy Abuse Prevention and Consumer Protection Act. Both versions of the bill substantially limit an individual’s ability to file Chapter 7 bankruptcy. Under the proposed law, anyone whose household income is enough to pay basic expenses will not qualify for Chapter 7 bankruptcy.
Under the proposed law, more debtors would be pushed into Chapter 13 bankruptcy which requires the debtor to put together a repayment plan with at least three years of monthly payments. Chapter 13 plans substantially increases the likelihood that an unsecured creditor will get paid something from a debtor.
Forcing potential Chapter 7 debtors into Chapter 13, however could hurt home mortgage companies who would avoid bankruptcy in Chapter 7 where the individual was current in their home mortgage payments.
In addition, both the House and Senate versions of the bill would limit the homestead exemption caps to $100,000 and $125,000 respectively. Bigger homestead exemptions, like the $200,000 cap in Nevada, protect mortgage companies during bankruptcy by keeping more of the home equity securing a mortgage out the of reach other creditors.
For more information regarding the proposed bankruptcy legislation or how it might affect your business, please contact Edgar Carranza.