New Pro-Consumer Legislation Expected
by Craig D. Robins, Esq.
Since the election, the bankruptcy bar has been buzzing about how President-Elect Barack Obama may ultimately bring change to the highly controversial bankruptcy reform laws that went into effect in October 2005. After all, Obama ran on a platform of change, and that promise, in large part, swept him into the White House.
As the campaign approached Election day, the economy took an extreme and precarious dive, creating an adverse situation that now supports easing up on the harsh bankruptcy laws that were enacted three years ago.
President Bush, during his eight-year administration, supported a mostly-Republican agenda to make it harder for individual consumers to seek bankruptcy relief. Each year, from the date he was sworn-in to office, the credit card industry heavily lobbied Congress for harsher bankruptcy laws, and Bush made it clear that he would sign any such legislation that was placed before him – and that he didn’t even need to read it first.
It took the lobbyists five years before they were successful in persuading Congress to actually enact strict bankruptcy reform measures. So when the legislation passed both the House and Senate, Bush immediately signed it. Senator Obama was against this legislation.
Ironically, Democratic Senator Joe Biden, our Vice President-Elect, was actually a key proponent of these new anti-consumer bankruptcy laws. Many have said that Biden, whose constituency was in Delaware, has had what amounts to “an incestuous relationship” with MBNA, who was the nation’s largest credit card company. (MBNA has since merged with Bank of America.) MBNA was the largest employer in the State of Delaware.
Some people previously nick-named Biden, “Senator MBNA,” as MBNA has been the number one donor to the Senator’s prior campaigns. To add to the mix, the senator’s son, Hunter Biden, joined MBNA as a management trainee after graduating from Yale Law School and rose to be an MBNA executive vice president. Later, as a partner in a lobbying and law firm, he received a $100,000 annual retainer from MBNA.
What did MBNA get for all that money? While Mr. Biden’s main work has been on the Foreign Relations Committee, he has been a consistent advocate for MBNA and actively supported the company’s favorite federal legislation, the Bankruptcy Reform Act. However, it is reasonable to say that now, under Obama, his sentiment will certainly shift away from the credit card industry and instead, towards the consumer.
As president, Obama will have the ability to control the actual bankruptcy laws, as well as the interpretation of the current or future bankruptcy laws, in several ways. First, it is unlikely that there will be any harsher measures proposed under the new Democratic administration. Thus any proposed legislation making its way towards his desk will undoubtedly be pro-debtor and Obama should sign into law such changes.
Secondly, Obama will have the ability to shape the judicial interpretation of bankruptcy law for years to come as he will likely be in a position to nominate at least one, if not two, associate justices of the Supreme Court. As Supreme Court decisions often come down to a five-to-four vote, any appointments that Obama makes may end up being determinative of how existing bankruptcy law is interpreted.
In addition, since the 2005 Bankruptcy Amendment Act is relatively new, virtually all litigation of issues under the Act have only made their way up to the Circuit Courts. It could still be some time before the Supreme Court will ultimately resolve those issues – a Court that Obama will help shape. Furthermore, if Obama does sign new bankruptcy law, as many pro-consumer groups are urging him to do, then there could be a bigger Democratic, pro-consumer balance of Supreme Court justices at that time, even in a future Republican administration.
President-elect Obama now faces the worst economic crisis our country has seen since the Great Depression. Home foreclosures are reaching epidemic proportions, credit card and auto loan delinquencies are rising to extreme levels, and U.S. companies are laying off workers by the thousands and then lining up, themselves, to ask for federal aid.
Judging by statements that he made during his campaign, Obama will probably seek to reverse some of the harsh changes that Bush put into law.
During the campaign, Obama’s web site contained the statement, “Obama and Biden will reform our bankruptcy laws to protect working people.” Obama also proposed to make it easier for families to file bankruptcy whose debts were the result of a medical crisis.
Obama will likely seek to change the bankruptcy laws to help people avoid losing their homes, a step that the Bush administration and the mortgage industry have heavily resisted.
Like other Democrats, Obama wants to enable consumer debtors in bankruptcy proceedings to modify the terms of their mortgages on primary residences if the mortgage is under-secured.
Often referred to as a “cram-down” or “strip-down,” this involves having the bankruptcy court reduce the balance owed on a mortgage to be commensurate with the amount of equity securing the mortgage. Thus, if a house is worth $300,000, but the mortgage balance is $350,000, the court would reduce the balance to $300,000, saving the homeowner $50,000. This is a huge issue, especially here on Long Island, as we see many homeowners with substantial amounts of negative equity in their homes.
Under our current laws, consumer debtors can’t cram down any home mortgage in a Chapter 7 case, and they can only cram down a second mortgage in a Chapter 13 case, provided that the second mortgage is totally unsecured by virtue of there being insufficient equity in the home. Incidentally, the current laws do enable debtors to cram-down mortgages on commercial property and second homes.
The Bush administration has argued that permitting consumers to cram down mortgages would ultimately drive up mortgage rates, thereby worsening the downturn in the housing market. The Bush administration has also argued that it would violate the sanctity of contracts and drive investors away from the mortgage market.
Now, with a president-elect who will sign pro-consumer legislation, and with more comfortable Democrat majorities in both houses of Congress, it is possible that some new pro-consumer bankruptcy laws will come quickly.
About the Author. Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a regular columnist for the Suffolk Lawyer, the official publication of the Suffolk County Bar Association in New York. This article appeared in the December 2008 issue of the Suffolk Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Medford, Commack, Woodbury and Valley Stream. (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.