Congress May Be Forced to Deal with Coming Wave of Bankruptcies

Congress May Be Forced to Deal with Coming Wave of Bankruptcies

ABI Bankruptcy Brief

May 14, 2020

ABI Bankruptcy Brief

Congress May Be Forced to Deal with Coming Wave of Bankruptcies

Despite record unemployment numbers, consumer bankruptcies declined last month by more than 30 percent compared with last year, according to ABI data, CQ Roll Call reported. Prof. Bob Lawless of the University of Illinois College of Law and reporter for ABI’s Commission on Consumer Bankruptcy said that consumers usually file for bankruptcy after they’ve hit rock bottom, rather than in the middle of a crisis. “People are probably going to use consumer credit to smooth over the problems they have right now,” he said. “It doesn’t make sense to file bankruptcy if you are just going to continue to pile up debts.” If Congress fails to act soon, bankruptcy courts could be overwhelmed by a record number of newly jobless consumers looking to shed crushing debts, said Raymond Kluender, an economist at the Harvard Business School. More than 20 million people filed for unemployment in April. Some research indicates there could be 10 or more bankruptcy cases for each additional 1,000 job losses — meaning that 200,000 people could eventually end up filing for bankruptcy based on April’s numbers alone, Kluender said. If the economic crisis continues, bankruptcy filings could eclipse those sparked by the Great Recession, which peaked at more than 1.5 million filings in 2010. “The actual capacity of the court system to process and adjudicate bankruptcy filings is quite fixed, and we have to start to think about what 20 or 30 million unemployed is going to mean,” Kluender said. Late last month, the Judicial Conference requested more than $36 million in additional appropriations. That would include funds to turn 14 temporary bankruptcy judgeships into permanent spots and to extend deadlines so that courts can handle an expected increased caseload.

The Judicial Conference of the U.S. sent a letter on April 28 to leaders on the House and Senate Appropriations Committees with a $36.6 million request for COVID-19 prevention, preparedness and response in the court system. The Judicial Conference also requested that temporary judges be converted to permanent, new judgeships to meet anticipated caseload increases and that temporary authority be granted to bankruptcy courts to extend or “toll” certain statutory deadlines under the Code. Click here to read the full letter.

Weekly Jobless Claims Total 2.981 Million in Latest Dept. of Labor Report

New filings for unemployment claims totaled just shy of 3 million for the most recent reporting period, a number that while still high declined for the sixth straight week, according to Labor Department figures, reported. The total 2.981 million new claims for unemployment insurance filed last week brought the coronavirus crisis total to nearly 36.5 million, by far the biggest loss in U.S. history. The count announced last week was revised upward by 7,000 to 3.176 million, putting the weekly decline at 195,000 between the two most recent reports. While the numbers have been declining since the March 28 peak, joblessness remains pervasive through the U.S., even as states continue to come back online slowly following the economic shutdown. The Labor Department reported a loss of 20.5 million jobs in April that brought the unemployment rate to 14.7 percent, both post-World War II highs.

In related news, a report released by the Federal Reserve showed that the coronavirus crisis led to dramatic changes in Americans’ finances as millions of workers faced layoffs or other cutbacks in their jobs, with low-wage workers taking the biggest hit, Reuters reported. Nearly one in five of all adults either lost their jobs or had their hours reduced at work in March, the survey found. The job cuts were most severe for lower-income workers, with 39 percent of people with a household income of less than $40,000 reporting a job loss in March. That compares to 19 percent of workers with household incomes between $40,000 and $100,000 and only 13 percent of workers with household incomes above $100,000, the Fed said.

Congress, States and Cities Aim to Assist Struggling Renters

Across the country, dozens of state and local programs have emerged to prevent a potential wave of evictions as the country’s unemployment rate reaches historic highs and as moratoriums that prevent landlords from removing tenants from their homes begin to expire. But these patchwork measures are not likely to be enough to prevent millions of people from losing their homes in the coming months, housing industry officials and economists say, the Washington Post reported. Amherst, a data and analytics real estate firm, estimates that up to 28 million renters, or 22.5 percent of all U.S. households, are at risk of eviction or foreclosure because of the coronavirus. House Democrats included $100 billion for a national rental assistance program in their $3 trillion coronavirus relief bill (HEROES Act) this week. Republicans quickly rejected the proposed legislation, and some tenant advocacy groups say $100 billion will not be enough. Many communities were already suffering a housing affordability crisis that made renters more vulnerable to financial shocks from the coronavirus pandemic, they say. The number of Americans struggling to pay their rent or mortgage has exploded since March, as unemployment rates have reached heights unseen since the Great Depression. As of May 7, nearly 4.1 million homeowners were receiving mortgage relief, up 7 percent from the end of April and 2,600 percent from the beginning of March, according to Black Knight, a mortgage technology and data provider.


Dept. of Education Discloses It Is Illegally Seizing Wages of 54,000 Borrowers

The CARES Act was supposed to suspend all wage garnishments for borrowers in default on their government-held federal student loans. But for many student loan borrowers, that suspension has not happened — and it was supposed to be effective as of March 13, 2020, nearly eight weeks ago, Forbes reported. Student loan borrowers filed a lawsuit against Education Secretary Betsy DeVos earlier in May to force the Department of Education to comply with the CARES Act and stop the ongoing wage garnishments. In a court filing on Monday, the Department of Education disclosed that a staggering 54,000 borrowers continue to have their wages garnished despite the mandate of the CARES Act. One out of every eight student loan borrowers whose wages were being garnished prior to the effective date of the CARES Act continues to have their wages garnished today. In the lawsuit — Elizabeth Barber v. DeVos, filed in the U.S. District Court for the District of Columbia — student loan borrowers are seeking class action status to stop the Department of Education from continuing to garnish their wages in violation of the CARES Act. The student loan borrowers are being represented by the National Student Loan Legal Defense Network and the National Consumer Law Center, with support from the Student Borrower Protection Center.


SBA Backs Off Threat Against Firms that Didn’t Need Loans

The Trump administration said firms that took loans of more than $2 million that they didn’t need from a small business aid program would be allowed to repay the money without legal consequences, reversing an earlier threat that the government could pursue them criminally, Bloomberg News reported. New guidance issued yesterday for the Paycheck Protection Program by the Small Business Administration and the Treasury Department also said that companies that accepted loans of less than $2 million will automatically be determined to have done so in good faith because they’re less likely to have access to other resources. The guidance came before the deadline today that the SBA and Treasury had set for firms that weren’t eligible for a PPP loan to return them without penalty, and it provides more assurance for firms with smaller loans who were uncertain about whether they should keep the money. Some companies have reported returning loans even though they think they’re eligible amid changing rules and guidance.


White House Opens Door to State Aid

White House officials have privately signaled that they are willing to provide tens of billions of dollars in relief to states as part of a bipartisan deal with Democrats in the coming weeks, despite President Trump’s reluctance and strong opposition from conservative groups, the Washington Post reported. Although that position is likely to anger some Republicans who have warned that Democrats want “blue state bailouts,” many White House officials now believe that providing new funding to states to deal with challenges related to the novel coronavirus will be necessary if they want to secure their own priorities, such as tax breaks and liability protections for businesses. Two White House officials said they have made it clear to business leaders and conservative allies in recent days that Trump is “not willing to provide a blank check” to states, but is “open” to negotiating depending on whether he can win concessions from Democrats on taxes in exchange for an influx of cash — and they have told conservative leaders that they will make sure any new cash is directed only toward problems sparked by the pandemic. An unveiling of the White House’s tax proposals is expected in the coming days.


Jefferson County Bankruptcy May Foreshadow Fate of Cities in Crisis

A massive share of the local government’s tax revenue disappears. Elected officials lay off employees and shutter a health care facility used by the poorest residents. Road work grinds to a halt. Residents wait in hours-long lines to renew their licenses. That was 2011 for Jefferson County, Ala., whose financial crisis may preview what’s ahead for local governments hammered by the worst economic collapse in decades, according to a Bloomberg News analysis. Jefferson County filed what was then the biggest local government bankruptcy in November 2011 to get out from under the weight of $3 billion of debt issued for its sewer system. What pushed it over the edge was the decision by Alabama’s highest court to strike down a wage tax that generated $75 million annually. The county didn’t have the power to raise other taxes to make up for the gap. Jefferson County’s painful past may be the future for some local governments facing what could become the biggest fiscal crisis in decades. With an aid package still pending in Congress, local governments are preparing to cut services, idle employees, raise taxes and sell assets. As a last resort, those burdened by excessive long-term debt and pension obligations could file for bankruptcy, although so far investors and analysts haven’t predicted a wave of insolvencies, and not every state even allows it.


OECD Chief Warns that Coronavirus Debt Will “Come Back to Haunt Us”

Organization for Economic Cooperation and Development Secretary-General Angel Gurría yesterday warned that the debt countries and companies take on to weather the coronavirus pandemic would be a drag on economies in the future, The Hill reported. The debt, he said, would “come back to haunt us.” “We are going to be heavy on the wing because we are trying to fly and we were already carrying a lot of debt and now we are adding more,” Gurría said. Governments are struggling with how much debt they can take on to keep their economies afloat during lockdowns. Some economists have argued that the move toward austerity in the aftermath of the 2009 financial crisis was too swift and led to a slow, anemic recovery. But debt-saddled governments may worry about the prospect of a painful default down the road if their debt becomes unsustainable and their economies falter. A default, or even the prospect of one, can cause its own set of financial concerns and economic pain. The comments came just hours after Federal Reserve Chairman Jerome Powell came out in favor of deficit spending that could support the economy.


Upcoming abiLIVE Webinars Look to Update Chapter 12 Skills, Provide a Look at COVID-19 Relief Funding and Reopening America, and Examine the Health Care Industry in the Shadow of COVID-19

Upcoming abiLIVE webinars will provide a look at key issues for practitioners amid the economic downturn due to the COVID-19 pandemic. Registration is FREE for these upcoming programs; CLE is available for an administrative fee.

• Hosted by ABI’s Legislation Committee, the “Update Your Chapter 12 Skills” webinar on May 20 features Bankruptcy Judge Robert L. Jones (N.D. Tex.), Joseph A. Peiffer of AG & Business Legal Strategies (Cedar Rapids, Iowa) and Chapter 13 Trustee Ronda J. Winnecour (Pittsburgh). Register here.

• The “COVID-19 Relief Funding & Reopening America: What’s Really Happening in Congress” webinar on May 21 features former House Speaker John Boehner and current senior U.S. Senator Joe Manchin (D-W. Va.), who will share their thoughts on how best to safely and gradually re-open business across America. Panelists also include Stephen D. Lerner (Cincinnati), James Barresi (Washington, D.C.), Karol K. Denniston (San Francisco) and Edward J. Newberry (Washington, D.C.), all from Squire Patton Boggs. Register here.

• Sponsored by Getzler Henrich Management & Financial Consultants, the “Health Care in the Shadow of COVID-19: What Will the “New Normal” Look Like?” webinar features David Campbell of Getzler Henrich & Associates LLC (Chicago), Brian Fortune of Farragut Square Group (Washington, D.C.), Jeremy Johnson of Polsinelli (New York), Dan Polsky of Getzler Henrich & Associates LLC (New York) and Christopher A. Ward of Polsinelli (Wilmington, Del.). Register here.

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A recent blog post summarizes the challenges faced by bankruptcy judges and practitioners in this post-COVID-19 climate of uncertain real estate values.

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