Consumer Bankruptcy in the Age of COVID-19

The past year and a half has been a momentous time in bankruptcy law. It started with the goal of increasing the ability of small businesses to use the Chapter 11 process in a more efficient and less costly manner, which has led to a record number of commercial filings, a reduction in corporate filings. consumers and a test of the bankruptcy system. . What will the second half of 2021 look like?

This article will guide you through consumer bankruptcies in the COVID-19 era. The article will discuss filing trends, Supreme Court cases (City of Chicago v. Fulton, 19-357), proposed legislation and the business arena of consumer protection in bankruptcy proceedings.

In 2020, the total number of bankruptcy filings was 544,463. This was around 230,000 less than in 2018 or 2019. Only Chapter 11 filings increased in 2020 to 8,113. This was an increase of almost 1,300 cases from 2019. This overall reduction in cases during the pandemic could be due to several factors, including:

  • the moratorium on seizures and evictions (which, at the federal level, will run until July 2021),
  • many financial institutions are reducing repossessions of vehicles,
  • collection agencies’ restrictions on the type of debt that can be collected,
  • the closure of courts across the country, and the corresponding inability to obtain and enforce judgments,
  • increase in unemployment benefits for those made redundant, and
  • stimulus checks.

Whether we will see an increase in the number of bankruptcy filings later in 2021 will depend on how Congress is able to deal with the COVID-19 stimulus bills and whether they can be an extension of the provisions. of the CARES SBRA law.

Despite the decrease in the number of bankruptcy filings, the world of bankruptcy has not been at a standstill. The Supreme Court has ruled on a very important case with potentially far-reaching ramifications in consumer bankruptcy. City of Chicago v. Fulton (19-357) deals with the rotation of collateral when filing bankruptcy proceedings and the violation of automatic stay. The Supreme Court ruled that simply withholding the debtor’s collateral after filing does not violate 11 USC §362 (a). The court left the door open for further litigation over how to handle turnover motions in bankruptcy proceedings.

Additionally, at the end of 2020 we saw a bill introduced that would overhaul the consumer bankruptcy system. Senator Elizabeth Warren and Representative Jerrold Nadler presented the Consumer Bankruptcy Reform Act, 2020. The main objective of the legislation is to create a new Chapter 10 and eliminate Chapters 7 and 13 in consumer affairs. If passed, the bill would streamline the bankruptcy process and reduce costs for debtors. It would create a one-chapter consumer bankruptcy system, allowing mortgage modification on all residences and auto loan modification based on the market value of the vehicle. It would also allow student loan debt to be discharged on terms equal to most other types of debt. The legislation would reduce alleged abusive behavior by creditors and eliminate loopholes in bankruptcy that allegedly allow the wealthy to exploit the bankruptcy process.

At the end of the 116th Congress, Bill died. However, with Democrats controlling both the House and Senate during the 117th Congress, there’s a good chance the bill will be reintroduced this year. When the bill was first introduced, there was both strong support and strong opposition from both sides involved in the bankruptcy process. The reintroduction of the bill could allow meaningful discussions to resolve some of the problems that plague bankruptcy cases on both the debtor and creditor side.

Another movement in Congress took place on February 25, 2021. Senses Dick Durbin and Chuck Grassley introduced bipartisan legislation to expand the bankruptcy relief provisions of the CARES Act. The current law was set to expire on March 27, 2021. The legislation would extend the temporary bankruptcy provisions until March 2022 and provide critical relief to families and small businesses facing hardship due to the ongoing COVID-19 pandemic. . (See Dick Durbin February 25, 2020 Press release). The law would also expand the provisions of the Small Business Reorganization Act, raising the maximum debt limit to $ 7.5 million. The bill would also exempt COVID-related relief payments from consumption cases for means and disposable income test purposes. Finally, the bill would not deny a discharge to debtors who have missed three or fewer payments due to COVID circumstances. The legislation has been passed and protections under the CARES Act will now extend through March 2022. As a result, you can expect to see a continued number of Subchap V filings.

Although the number of consumer filings has not exploded, lawyers for plaintiffs and debtors continue to raise the issue of the breakdown of interest charges and costs in proof of claims. While this problem has not been prevalent nationwide, we have seen an increase in activity, particularly in Florida, Georgia and Virginia. We don’t have a circuit court notice; however, several bankruptcy courts have expressed their views on how these amounts should be determined and whether damages exist. In Thomas v. Midland Funding LLC (17-0510), the Bankruptcy Judge for the Western District of Virginia issued a lengthy opinion setting out his views on whether the allocation of interest, charges, and costs met the detail requirements set out in the Federal Rule of Bankruptcy Procedure 3001 (c) (2) (a) (“FRBP 2001 (c)”). This rule requires that a detailed statement of interest, fees, expenses or charges be filed with the proof of claim “[i]f, in addition to its principal amount, a claim includes interest, costs, expenses or other charges incurred before the filing of the claim.

The court went on to say that the creditor, for failing to properly detail, had not fully complied with FRBP 3001 (c) and exposed itself to potential penalties under FRBP 3001 (c) ( 2) (D). The court has the capacity “to award other appropriate remedies, including reasonable expenses and attorneys’ fees caused by the failure.” We’ll see where the Western District of Virginia proceeds on this issue, but it has established a current roadmap for creditors to follow.

2020 was a year that many would like to forget. What the second half of 2021 will bring will be a waiting scenario. Once foreclosures and evictions kick in again, are we likely to see an increase in consumer bankruptcy filings? Can small businesses survive or will there be additional closures? Will circuit courts provide further guidance regarding FDCPA actions and bankruptcy? Will the Supreme Court continue to accept and hear bankruptcy cases? Is bankruptcy reform on the horizon?

Six months after 2021, we haven’t seen the dreaded tsunami of consumer bankruptcy filings. Bankruptcy courts are not overwhelmed. This lack of surge in bankruptcies could last for a long time as businesses reopen, COVID restrictions are lifted, consumers begin to spend and travel, and some states and government seek to resume moratoria. on foreclosures and evictions. We look forward to seeing what the second half of 2021 has in store for us.

* This article originally appeared in Business law today.

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