Sen. Warren Releases Proposal to Overhaul Bankruptcy Process, Plan Includes Debt Collection Components

Sen. Elizabeth Warren [D-Mass.], who is running for president, has unveiled a proposal that would make it far easier for individuals to file for bankruptcy protection and undo much of the 2005 overhaul of bankruptcy law in the U.S.

“I lost that fight in 2005, and working families paid the price,” Sen. Warren wrote in an article that was published yesterday. “But I didn’t stop fighting to hold the financial industry accountable and to help American families.”

Buried at the bottom of the article is a section where Sen. Warren discusses her plan to stop “companies from collecting on debts that are no longer valid.” This includes “making clear that collection of an expired debt is a violation of the law.” As well, the plan would give filers the right to sue when a company attempts to collect on a debt that had previously been discharged in bankruptcy, and prohibit the enforcement of mandatory arbitration clauses during the bankruptcy process.

“By making it harder for people to discharge their debts and keep current on their house payments, the 2005 bill made the 2008 financial crisis significantly worse: Experts found that the bill ’caused about 800,000 additional mortgage defaults and 250,000 additional foreclosures,’ ” Sen. Warren wrote. “And despite the claims from the industry and their allies in Congress that the 2005 bill would reduce credit card costs across the board for consumers, the cost of credit card debt went up too.”

In an interesting note, Sen. Warren, who was a bankruptcy law professor at Harvard in 2005 when the new bankruptcy law was enacted, testified against the bill, going toe-to-toe with then-Sen. Joe Biden [D-Del.], who would go on to become Vice President and who is also now running for the Oval Office.

Among the other provisions of Sen. Warren’s proposal are:

  • Allow for student loan debt to be discharged during bankruptcy proceedings
  • Create a federal homestead exemption for how much of an individual’s home value could be protected during bankruptcy proceedings
  • Allowing individuals in bankruptcy to modify their mortgages
  • Eliminate the means test and replacing Chapter 7 and Chapter 13 filings with one system
  • Eliminate the requirement for individuals to obtain credit counseling

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