%1

The House Judiciary Committee yesterday approved (19-5) a bill that would extend bankruptcy protections to borrowers with private or federally held student loans, Bloomberg Law reported. H.R. 2648, the "Student Borrower Bankruptcy Relief Act," strikes the section of the Bankruptcy Code that makes it much more difficult for student loan borrowers to discharge their student debt in bankruptcy, Forbes reported. Borrowers must generally prove that they have an “undue hardship” in order to discharge their student loan debt in bankruptcy. These restrictions initially only applied to federal student loans, but were subsequently expanded to cover private student loans following the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. The “undue hardship” standard applied to student loan debt is not adequately defined in statute, so bankruptcy judges have established various tests (which vary by jurisdiction) to determine discharge eligibility. Read more.

Click here to view the full text of H.R. 2648. 

The House Judiciary Committee also approved other pieces of legislation to amend the Bankruptcy Code, including:

- H.R. 7370, the Protecting Employees and Retirees in Business Bankruptcies Act of 2020 (20-10 vote).

- H.R. 8366, To amend title 11 of the United States Code to increase the amount of the allowable homestead exemption. or the Protecting Homeowners in Bankruptcy Act of 2020 (18-5 vote).

New Jersey Democratic Gov. Phil Murphy (D) on Monday signed bipartisan legislation exempting combat pay earned by members of the military from the state income tax, the Associated Press reported. Federal law already exempts combat pay from income tax, but the New Jersey law means pay that residents earn while in combat zones won’t be subject to the state’s income tax as well. The measure defines a combat zone as any area the president designates as such in an executive order. Combat zone pay is an additional payment beyond a military member’s regular salary.

As measured by employment and gross domestic product, the recession brought on by the COVID-19 pandemic has been the deepest since the Great Depression, according to a Bloomberg News commentary. Going by Bloomberg’s Corporate Bankruptcy Index, though, it’s a standard-issue downturn, nowhere near as bad as the recession of just over a decade ago. This index, which was heavily affected by a few large bankruptcies in 2008 and 2009 (Lehman Brothers, Washington Mutual, General Motors, CIT Group), is definitely not the only way to measure bankruptcy activity. Edward Altman, an emeritus professor at New York University’s Stern School of Business, favors counting the number of bankruptcies with liabilities of more than $1 billion, of which he says there have been 50 so far this year, breaking 2009’s full-year record of 49. Then again, the total number of business bankruptcies is actually down, according to the commentary. Federal courts data show business filings in the second quarter of this year (April through June) to be the lowest in more than a decade and nearly the lowest in four decades. Only the first two quarters after the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 took effect, raising the bar for both business and consumer filings, saw fewer. Trillions of dollars of aid from Congress and the Federal Reserve have clearly played a role here, as has the mostly exuberant state of financial markets (which is not unrelated to all that aid from the government), according to the commentary. U.S. corporate bond issuance through the end of August totaled $1.73 trillion, according to the Securities Industry and Financial Markets Association, breaking the full-year record of $1.67 trillion set in 2017. During the last recession, bond issuance fell 38 percent from 2007 to 2008. This year to date, it’s up 83 percent. Although that channel of financing has not been available to smaller businesses, many of them have been able to avail themselves of the government’s Paycheck Protection Program. Personal bankruptcies are down, too, with chapter 7 and chapter 13 filings through August of this year 27 percent lower than over the same period in 2019. On the whole, those with family incomes of $40,000 or less surveyed by the Federal Reserve reported being in slightly better financial shape in July than before the pandemic, according to the commentary. With additional federal help looking less and less likely before November’s election, and the economy showing some signs of stalling from its rapid early-summer rebound, these positive trends won’t necessarily persist. “Once the government and Fed stimuli end, I feel there will be a spike in all bankruptcies,” Altman predicts.

*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. 

Each year, only a fraction of the Americans who could benefit financially from bankruptcy actually seek relief, according to an Associated Press commentary. About 14 percent of U.S. households — or roughly 17 million — owe more than they own, according to Federal Reserve Bank of New York estimates. Many of these households could benefit from having their debts wiped out, but fewer than 1 percent of U.S. households actually file for bankruptcy each year. Last year, there were 752,160 personal bankruptcy filings. Researchers refer to this gap as “missing bankruptcies” — the filings that could be happening, but aren’t. Now, there’s an additional set of missing bankruptcies: the cases people normally would have filed in recent months, but haven’t. Bankruptcy filings dropped dramatically in the second quarter of this year, to about 60 percent of the average for the previous five years. Courthouses were shuttered by pandemic closures, which made it harder for creditors to pursue foreclosures and wage garnishments. Those are two big drivers of consumer bankruptcy filings, says David Cox, a bankruptcy attorney in Lynchburg, Va., and co-author of ABI's Consumer Bankruptcy: Fundamentals of Chapter 7 and Chapter 13 of the U.S. Bankruptcy Code. Borrowers have benefited from various forms of coronavirus relief, such as suspended payments on federal student loans, mortgage forbearance and expanded hardship options for loans and credit card accounts. The $600 weekly bump in unemployment checks, which expired in July, also kept many people afloat, Cox says. Lower jobless benefits, along with the reopening of courts and continued high unemployment, mean the lull in bankruptcy filings is likely temporary, says Jenny Doling, a bankruptcy attorney in Palm Desert, Calif., who served on the ABI Consumer Bankruptcy Commission’s Chapter 13 Advisory Committee. She worries that people will wait too long to file. Too often, people drain retirement funds or other assets that would be protected in bankruptcy to pay debts that will ultimately be erased, she says. Putting off bankruptcy also can make it harder to come up with the $1,500 needed to file a typical case.