Over the past year, bankruptcy filings have increased. We are projecting 768,000 filings by the end of the 2019 year — 61% of the filings as chapter 7, 37% as chapter 13, and 2% as chapter 11 and 12 filings. This is a 2% increase from the prior year. Commercial filings are at 5,542 filings compared to 5,108 in 2018.
Increased Filings in Commercial Sector, Especially Retail, Medical and Transportation
The country has seen increases in bankruptcy filings in the commercial sector. The businesses with the largest increases are in retail, medical, and transportation. We expect to see an increase in 2020 filings in these sectors as well. We should see additional big box retailers file chapter 11 proceedings and potentially close their doors through liquidation. The trucking industry continues to be an area of concern as more truckers are being stranded as their companies attempt to obtain credit and improve their cash liquidity. We continue to see more hospitals, senior living facilities, and home health care facilities file bankruptcy.
High Auto Loan Default Rates in Consumer Sector With Increased Regs Impacting BK Litigation
In the consumer arena, auto loans are facing their highest default rates in years and individuals are having difficulty obtaining low interest-rate loans. Despite the Federal Reserve reducing the interest rate, lending institutions are requiring higher credit scores and larger down payments. Consumers may be forced to the sub-prime market and these higher borrowing costs could fuel individual bankruptcy filings.
Increased state and federal regulation of the consumer credit markets will have a significant impact on bankruptcy filings. This past year, creditors and their service providers experienced increased litigation for both federal and state law violations. These included claims under the Fair Debt Collection Practices Act (FDCPA), Telephone Consumer Protection Act (TCPA), Fair Credit Reporting Act (FCRA) and state licensing claims. We expect to see increased litigation in 2020, including a swell of class actions.
Additionally, in consumer cases, we have seen an increase in the number of objections to claims filed by both trustees and debtors’ counsel pertaining to debts subject to expired statutes of limitations. Some of these objections are even occurring in cases where the creditor has obtained a judgment pre-bankruptcy. Claim objections are up and so are the costs for creditors managing their claims.
We expect to see continued issues arise under Rule 3001 of the Federal Rules of Bankruptcy Procedure, pertaining to providing a breakout of interest, fees and costs. We have seen increased litigation in just a few districts and expect the issue to be decided by at least one federal Court of Appeals in 2020.
Supreme Court Active in Bankruptcy Cases in 2019, Releasing Important Rulings
The Supreme Court of the United States handed down significant decisions in 2019 and had an active docket of bankruptcy cases compared to past years where it only considered a limited number of bankruptcy cases.
In Taggart v. Lorenzen, No. 18-489, 587 US _ (June 3, 2019), the Supreme Court held that a court may only hold a creditor in civil contempt for a violation of a discharge order if there are no fair grounds of doubt as to whether the order bars the creditor’s conduct when there has been an alleged violation of the automatic stay. A creditor’s subjective belief that it was in compliance with an order will not insulate tit from civil contempt if that belief was objectively unreasonable.
The Supreme Court also ruled on Mission Products Holdings Inc. v. Tempnology LLC, No. 17-1657, 587 US __ (May 20, 2019), addressing the rejection of executory contracts under 11 USC § 365. The Court held that while the rejections can be breaches of the contracts, a breach does not necessarily cause a rescission since the term “breach” is not defined in the bankruptcy code. Instead, you must then look to controlling state court contract law. As a result, the decision will preserve the right for creditors to seek rejection damages.
Student Loans and Privacy Issues Expected to Spur More Litigation
Upcoming in 2020, the Supreme Court will review a case which deals with payments made by parents for their children’s college tuition. The First Circuit Court of Appeals in In Re Palladino, No. 17-1334 (1st Cir. Nov. 11, 2019), held that parents who paid college tuition on behalf of their adult children do not receive “reasonably equivalent value” and therefore have no defense to a preference action by a trustee. Many trustees around the country have proceeded to file preference litigation against colleges in the parents’ bankruptcy actions. The circuit courts are split as to whether the parents receive reasonably equivalent value for tuition payments, a defense schools can use under 11 USC § 547 when defending against preference actions.
The Supreme Court may also decide issues concerning violations of the automatic stay for retaining “property of the estate.” Circuit courts remain split on the question of whether a creditor is required to return collateral or garnished funds that were obtained pre-petition.
The year 2020 offers to be an interesting one for bankruptcy litigation. With several issues before the Supreme Court, at least one will have a material effect on financial services. In addition, higher credit costs will spur an increase in the number of bankruptcy filings, both on the consumer and commercial side. With the California Consumer Privacy Act taking effect on Jan. 1, it will not be long before we see issues arising from it percolating into bankruptcy cases.