Commentary: The Populist Backlash Regarding Chapter 11*​​​​​​

Although the pandemic confounded the typical pattern of rising bankruptcies during an economic crisis, in another respect the pandemic has proved true to form, according to a recent Brookings Institute report written by Prof. David Skeel of the University of Pennsylvania Law School. During the 2007-2009 crisis, populist movements emerged on both ends of the political spectrum — the Tea Party on the right and Occupy Wall Street on the left — each one protesting the bailouts of large financial institutions. The current crisis has prompted another populist backlash, as can be seen in controversies that have arisen in the Purdue Pharma opioid bankruptcy and in the bankruptcy of USA Gymnastics after the revelations of horrendous sexual abuse by former team doctor Larry Nassar. Unlike the Tea Party and Occupy Wall Street, however, the current outrage is directed at the bankruptcy process itself. Even before the pandemic, concerns were growing about current developments in the restructurings of large corporations. During the pandemic, discontent with current bankruptcy practice has grown considerably, according to Prof. Skeel. The long-term implications of the populist backlash triggered by these developments may depend on how bankruptcy professionals and bankruptcy judges respond to this unrest. If courts address the legitimate concerns raised by bankruptcy populists, the credibility and effectiveness of chapter 11 may be restored. If these problems continue to fester, though, this populist backlash may lead to sweeping bankruptcy reforms. Yet such reforms are unlikely to be carefully tailored to the problems that prompted them.

*The views expressed in this commentary are from the author/publication cited, are meant for informative purposes only, and are not an official position of ABI.

Government Losses on Student Debt Climb Above $100 Billion Amid Pause on Payments​​​​​​

The pause in student-debt repayments has cost the federal government more than $100 billion since the start of the pandemic and could cost $4 billion to $5 billion a month until the moratorium is lifted at the beginning of May, according to government estimates, the Wall Street Journal reported. With costs mounting, congressional Republicans, led by Rep. Virginia Foxx and Sen. Richard Burr, both of North Carolina, asked the Education Department yesterday to release documents related to how the government calculates projected losses from students defaulting on their loans. Among the documents requested is an internal report commissioned by Betsy DeVos, former education secretary under the Trump administration, that showed a far more dire picture of taxpayers’ exposure to student loan defaults than the one presented by the government. Biden Education Department officials have disputed the findings of that report. In congressional testimony last October, Richard Cordray, the head of Federal Student Aid at the Education Department, said, “There’s some question [as to] whether the methodology used in that particular report … was the most accurate.” In November testimony, Undersecretary of Education James Kvaal told Foxx that the Department would send over the requested documents within a month, but that hasn’t happened. (Subscription required.)

Commentary: A Better Way to Fix the Student Loan Problem*​​​​​​

The Biden administration sought to strike a balance last month when it announced that it was extending the COVID-19-related moratorium on federal student loan repayments. But the move was criticized by both moderates, who see the moratorium as unnecessary and regressive, and progressives, who think it does not go far enough and want to see outright loan forgiveness. However, this debate misses the true nature of the student loan debt problem, according to a commentary by Profs. John R. Brooks and Adam. J. Levitin of Georgetown University Law School. What really matters is not the total amount owed by any borrower, but the amount of the monthly payment relative to the borrower’s income. Large debts owed by high-income borrowers are often affordable, while smaller debts of those who do not complete college or attend predatory for-profit schools can pose crushing hardships, according to the commentary. Blanket relief could end up routing too much relief to those who do not need it and too little to those who do. Going forward, there’s a better and fairer way of helping student borrowers: Let them make payments based on their income level, according to the commentary. The problem is that under the current student loan system, IDR is not the default repayment plan for borrowers. Instead, borrowers need to take affirmative steps to enroll in IDR and then need to recertify their eligibility every year. In addition, it’s difficult for borrowers in default to get into IDR, even though they need it the most. As a result, hundreds of thousands of borrowers who should be in IDR are not and end up with massively larger — and often unaffordable — student loan payments.



*The views expressed in this commentary are from the author/publication cited, are meant for informative purposes only, and are not an official position of ABI.

Jobless Claims Increase in First Week of January​​​​​​

New weekly claims for jobless benefits jumped by 23,000 during the first full week of January, according to data released today by the Labor Department, The Hill reported. In the week ending Jan. 8, seasonally adjusted initial claims for unemployment insurance rose to 230,000, up from the previous week’s revised level of 207,000. The four-week moving average of claims rose to 210,750, an increase of 6,250 from the previous week’s unrevised average of 204,500. “The rise in claims likely reflects an increase in layoffs due to the surge in Covid cases, as seasonal adjustment factors last week worked in favor of a lower headline claims figure,” wrote Nancy Vanden Houten of Oxford Economics. “Claims may remain elevated in the near term, but we expect initial claims will gravitate back to the 200k level once the Omicron wave passes. Encouragingly, there are indications that cases from the Omicron variant are peaking.”

CFPB Issues Bulletin to Prevent Unlawful Medical Debt Collection and Credit Reporting​​​​​​

The Consumer Financial Protection Bureau (CFPB) today released a bulletin reminding debt collectors and credit bureaus of their legal obligations in light of the No Surprises Act, which protects consumers from certain unexpected medical bills, according to a CFPB press release. Companies that try to collect on medical bills that are prohibited by the No Surprises Act, or who furnish information to credit bureaus about such invalid debts, may face significant legal liability under the Fair Debt Collection Practices Act (FDCPA) and the Fair Credit Reporting Act (FCRA). The bulletin advises credit bureaus that the accuracy and dispute obligations imposed by the FCRA apply with respect to debts stemming from charges that exceed the amount permitted by the No Surprises Act. The CFPB will investigate claims and take action against companies that attempt to collect or report or furnish consumer information about debts stemming from charges that exceed the amounts permitted under the No Surprises Act.



The “Legislative Update” column in the forthcoming February edition of the ABI Journal will have an overview and key practitioner insights of the No Surprises Act, which went into effect on Jan. 1. Make sure to look for this article when your February Journal arrives!
 

LIBOR, Long the Most Important Number in Finance, Expires After 52 Years​​​​​​

The London interbank offered rate (LIBOR), a number that spent decades as a central force of international finance and was used in setting interest rates on everything from mortgages to student loans, has died after a long battle with regulators, the New York Times reported. It was 52. The interest-rate benchmark once underpinned more than $300 trillion in financial contracts but was undone after a years-long market-rigging scandal came to light in 2008. It turned out that bankers had been coordinating with one another to manipulate the rate by skewing the number higher or lower for their banks’ gain. LIBOR could no longer be used to calculate new deals as of Dec. 31 — more than six years after a former UBS trader was jailed for his efforts to manipulate it and others were fired, charged or acquitted. Global banks including Barclays, UBS and Royal Bank of Scotland ultimately paid more than $9 billion in fines for fixing the rate for their own profits.

Next Wednesday’s abiLIVE Webinar to Examine Implications of the Collision Between Chapter 11 and Cybersecurity​​​​​​

A special abiLIVE next Wednesday sponsored by ABI's Commercial and Regulatory Law Committee will feature a panel of experts who will discuss the implications for, and obligations of, attorneys representing companies in chapter 11 when a security incident/data-privacy event happens. Register for FREE by clicking here.

Volunteer Today to Become a Preliminary-Round Judge for the Duberstein National Bankruptcy Moot Court Competition!
The Duberstein National Bankruptcy Moot Court Competition will be held in New York Feb. 26-28. The Duberstein Competition, now in its 30th year, is a result of a longstanding partnership between the American Bankruptcy Institute and St. John’s University School of Law. It is widely recognized as one of the nation’s preeminent moot court competitions. After moving to a virtual platform in 2021 due to the COVID-19 pandemic, the Duberstein Competition will return to being an in-person competition in 2022. Forty-six teams from law schools across the country will compete through written briefings and oral arguments. This year’s problem, which was once again developed by Hon. John T. Gregg (U.S. Bankruptcy Court W.D. Mich.; Grand Rapids, Mich.) and Paul R. Hage (Jaffe Raitt Heuer & Weiss; Southfield, Mich.), presents two hotly contested issues for argument: (1) whether a seller of goods is entitled to reduce its preference exposure pursuant to 11 U.S.C. § 547(c)(4) by the value of goods sold, even though the debtor in possession paid for such goods in full pursuant to 11 U.S.C. § 503(b)(9); and (2) whether a trustee must timely perform the obligations of a debtor under 11 U.S.C. § 365(d)(3) by paying rent due prior to the rejection of an unexpired nonresidential real property lease but allocable to the period after the effective date of rejection.

The competition fact pattern is available here.

The Duberstein Competition is looking for volunteer judges for the preliminary rounds on Saturday, Feb. 26, and Sunday, Feb. 27. To volunteer to serve as a preliminary-round judge, please register here. For inquiries regarding serving as a preliminary-round judge, please contact Paul R. Hage.

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