Editor’s note: In an interview with News Bureau business and law editor Phil Ciciora, University of Illinois law professor Robert M. Lawless, a leading consumer credit and bankruptcy expert, discusses the changes to bankruptcy law recommended by the American Bankruptcy Institute’s Commission on Consumer Bankruptcy. Lawless served as reporter of the committee.
What was the impetus behind the commission and the report?
The commission was formed in 2016. There was a sense among many bankruptcy professionals that there were many ways in which bankruptcy law was not working well for consumers but that it could be improved without tearing everything down.
A major reason why the current bankruptcy law does not work well is that it dates back to 1978. Consider all the changes in American society since 1978. The explosion of consumer credit began not too long after the law went into effect and continued throughout the 1980s. I do not think that there was a causal connection in any way, but when the 1978 law was passed, people didn’t have the kind of credit card debt or student loan debt that they have today. Indeed, the government didn’t start separately reporting the amount of student loan debt until 2006.
There were major amendments to the law in 2005, but even those are 14 years old now. The charge of the commission was to work within the existing structure of the law, which means we couldn’t propose repealing the law and writing something completely different. There was a sense that there were a few changes that could make the system work a lot better.
What’s the biggest recommendation that the committee made?
The recommendation that has received the most attention is the one on student loans and bankruptcy. We only had one piece of the student loan puzzle, and that’s the bankruptcy piece. There are lots of proposals floating around about doing something with student loans generally, but that wasn’t our remit. We were charged specifically with looking at how bankruptcy treats student loans.
The commission recommended that we go back to the rule that was in existence in the 1990s, which is that student loans become dischargeable in bankruptcy after seven years. The typical repayment period of a government student loan is 10 years, so that’s 70 percent of the way there.
At the same time, the commission rejected proposals to treat student loans like any other debt in bankruptcy. The commission’s recommendation is a balanced approach that recognizes people should not be able to immediately discharge a loan after they’re done with school. But people who truly cannot pay back their debts after seven years or more have elapsed should be able to go to bankruptcy court and get the fresh start that American law has traditionally afforded people. The sense among the bankruptcy experts on the commission was the seven-year rule worked pretty well in the 1990s and should be brought back.
One key thing to bear in mind is that declaring bankruptcy is not a free ride. If you have assets or income, bankruptcy law is written to make people pay back as much as they can. So if they have assets or income, they still have to pay back those student loans to the extent they are able.
The commission made other recommendations on student loans. For example, only government student loans should receive bankruptcy protection. Private lenders can protect themselves.
Who are these recommendations addressed to – Congress, the courts or administrative agencies?
Although the commission did not hesitate to recommend statutory changes where needed, many of the report’s recommendations are addressed to the courts and administrative agencies. One of the things we suggest is that the Department of Education, as a matter of administrative regulation, can say that there are certain cases in bankruptcy court where people can’t repay their loan, and the department will not contest those cases. They could just do that as a matter of their administrative judgment.
For example, if someone who has student loans has already been adjudicated to have a disability and files for bankruptcy, those student loans should be dischargeable.
What other recommendations did the commission make?
One other important issue is how people pay for their bankruptcies. If you are drowning in debt, one of the problems you face is coming up with the money to pay for a bankruptcy lawyer. The fact that people have to do that distorts how people come to bankruptcy. In those cases, they tend to use the Chapter 13 bankruptcy procedure, which is more expensive and can be less effective, but allows them to pay off those fees over time.
The commission also has a number of recommendations on how to lower the costs of filing for bankruptcy. The 2005 changes to the law made it harder for people to file for bankruptcy. For example, it required more documentation, which equates to more work for attorneys, which of course means that attorneys charge more. Another recommendation of the commission is to scale back those documentation requirements except in the cases where it’s needed. Someone who earns $35,000 but has a lot of debt and needs to file bankruptcy should not have the same documentation requirements as a real estate developer with millions of dollars in debt.