On January 7th, Senator Elizabeth Warren unveiled a plan to reform the consumer bankruptcy system. The plan provides for one chapter that everyone files, combined with a menu of options to respond to each individual’s particular needs. It also undoes some of the amendments that came with the 2005 bankruptcy law, including the means test. The bankruptcy means test determines who can file for debt forgiveness through Chapter 7 bankruptcy. It considers income, expenses and family size to determine whether one has enough disposable income to repay debts. In doing so, it sets new rules for the discharge of student loan debt, modification of home mortgages, and keeping cars.

The plan also tackles bad behavior that some big banks and corporations currently engage in once people file, like trying to collect already discharged debt and requires additional data collection including debtors’ age, gender, and race.

During the start of COVID-19 stay-at-home orders, banks and credit unions began to tighten lending standards, while carmakers increased incentives for prime borrowers.

As traditional institutions such as banks and credit unions, became more selective about who they would loan money to, individuals with lower credit scores used finance companies or buy-here-pay-here car lots for used cars.

Prime borrowers with FICO scores of 661 to 779, paid an average interest rate of 6.05% in the second quarter on used cars.  That’s down 49 basis points from a year earlier. Subprime borrowers, individuals with FICO scores 500 to 600, paid 17.78%, up 42 basis points from a year earlier.

As a result, bank and credit union market shares for used cars dropped sharply during the spring.