When 2020 ended, many of us were unsure what 2021 would look like from a bankruptcy perspective. Would consumer filings increase? Could we see bankruptcy reform and particularly in the area of discharge of student loans?
There was a lot to consider throughout the year. This article will provide some insight as to what we saw and where we may be headed in 2022.
Bankruptcy Filings Down in 2021
Bankruptcy filings through the first 11 months of 2021 were at their lowest levels since the 1980s.
According to EPIQ, the total number of bankruptcy filings through November of this year stands at 373,312, an average of 33,937 a month. If that pace continues, or if the number of filings continue to decrease in December, we will end the year at no more than 407,000 filings compared with 522,808 filings in 2020. That is a net loss of 115,000 filings in 2021.
On the consumer side, 1.31 individuals per 1,000 people filed a bankruptcy over the last 11 months. The states with the highest per capita filings over the last year were Alabama (3.14) Nevada (2.62) and Tennessee (2.43). [1]
It is important to look at the cause of the reduced filings. No one can attribute the decline in filings to just one item. There are several reasons for the decline.
One important reason was the foreclosure and eviction moratoriums. Despite numerous states releasing their moratoriums in the middle of 2021, the number of foreclosures and evictions that had resumed have not seen a correlating effect on bankruptcies.
Another reason for the reduced number of filings is that the mortgage lenders have been more creative with forbearance agreements. Low interest rates have also helped keep individuals in their homes.
The court system has also played a role due to the pandemic. With courts just getting back up to speed in some jurisdictions, and the amount of time it takes in judicial foreclosure states to complete a sale, there was a negative trend on the feared tsunami of bankruptcy filings. Further, the time for creditors to obtain judgments and to proceed to execute on assets of the debtor has slowed down the process and is not forcing consumers or businesses into bankruptcy.
Another question to consider is if businesses are struggling due to Covid-19, why are we not seeing a substantial increase in commercial bankruptcy filings whether through Chapter 11, Subchapter V reorganizations or liquidations in Chapter 7?
As PPP funding has continued, as well as other grants or low interest loans that are made available by the federal and state governments, businesses have been able to continue to operate. This is true even with the higher employee costs due to the difficulties to obtain workers from the labor force. Commercial landlords have been more apt to work with a distressed property or lease, as the difficulty in finding a replacement owner or tenant may have been difficult.
Activity in the Courts Impacts the Bankruptcy Landscape
Once again, the Supreme Court has weighed in on a bankruptcy issue. The Court addressed the issue of the violation of the automatic stay and retention of property when a bankruptcy was filed.
In City of Chicago v. Fulton 141 S. Ct. 585 (2021), the Court held that it was not a stay violation for the City of Chicago to retain a vehicle that it was in possession of by way of failure to pay parking tickets. The Supreme Court found that maintaining the status quo was not a stay violation.
The Court, however, did remand for further proceedings and stated that a motion to turnover might be the proper course of action to obtain possession of the vehicle.
The Ninth Circuit Court of Appeals also addressed this issue in Stuart v. City of Scottsdale, CV-20-00755-PHX-JAT (D. Ariz. 2021), as it pertained to garnished funds that were being held. The Ninth Circuit found that the estate did not have an interest in the property and the failure to release the garnishment was not a violation of the automatic stay.
Under 11 U.S.C. § 363(a) (2) and § 362(a) (3), the city did not take steps to collect on a pre-petition judgment. The Court also found that by the city promptly notifying the trial court of the bankruptcy filing, it had maintained the status quo.
The Middle District of Pennsylvania also addressed maintaining the status quo on funds that were garnished. So long as there is no affirmative action to set off the “property” on the debt, there will be no stay violation.
Recently, the Bankruptcy Court for the Northern District of Illinois in Cordova v. City of Chicago 19-00684 (Bankr. N.D. Ill. Dec 6, 2021) ruled on a motion to dismiss in a class action complaint that alleged the retention of vehicles by the city violated subsections (a) (3), (a) (4), (a) (6) and (a) (7) of 11 U.S.C. § 362 as well as 11 U.S.C. § 542(a).
The Court found that the Supreme Court’s decision in Fulton was not controlling and found potential claims existed under (a) (4) and (a) (6). The Court dismissed the count under (a) (7) without prejudice, which would allow the plaintiffs to refile that claim after amendment. The Court allowed the 542 (a) claim addressing turnover of property of the estate. The Court dismissed the punitive damage claim with prejudice.
As a result of this ruling, we anticipate seeing additional filings in this case and potentially in other jurisdictions around the country.
What the Supreme Court’s ruling has shown us is that maintaining possession of property when a bankruptcy is filed is an unsettled issue. Although there is no stay violation, additional litigation will occur including but not limited to turnover motions and notification issues.
Another issue that continues to be litigated is whether a debtor has the absolute right to dismiss a Chapter 13 proceeding under 11 U.S.C. § 1307 (b). This section provides that a debtor has the absolute right to dismiss their Chapter 13 proceeding so long as the case was not previously converted.
Several circuit courts and lower courts have addressed this issue and have issued contrary holdings. Some courts have found that an absolute right exists, while others have held that the absolute right does not exist when there are issues of bad faith in the debtor’s filing.
The most recent case is In re Mingrove from South Carolina, 2021 WL 445589 (Bkr D. SC 2021). The Court ruled that the debtor had an unconditional right to dismiss the case, but the court had the ability to issue sanctions based on the debtor’s bad faith filing. With circuit court splits on the issue, it is possible that we will see a writ of certiorari filed with the Supreme Court.
The other area of continued litigation in bankruptcy continues to revolve around FRBP 3001 and the breakout of interest fees and costs when filing proof of claims on open ended unsecured obligations. We continue to see litigation on this issue in Virginia and are seeing new objections to claims being filed around the country.
On top of the adversary cases that have been filed, we are also seeing requests for fees in cases where an objection to a creditor’s proof of claim is sustained and the state law provides for fees under its statute.
Recently, a judge in Nevada awarded fees under Nevada law (NRS § 1801. (2) (B)) when an objection to claim was sustained. That matter is currently on appeal to the Bankruptcy Appellate Panel.
We have also seen an uptick in litigation to utilize the state court fee statutes in Florida when a debtor prevails on an objection to claim. So far, those cases have been met with little success.
Congress Takes a Closer Look at Discharge of Student Loans and Medical Debt
Of the bankruptcy bills that are pending before Congress, the bill that had the most support and likelihood of passage was the bipartisan bill on student loan dischargeability. In August, Sen. Dick Durbin of Illinois and Sen. John Cornyn of Texas introduced the Fresh Start Through Bankruptcy Act of 2021. The key provisions of the bill would allow federally backed student loans to be discharged if the borrower has been paying for 10 years. The bill will likely be reintroduced in the next congressional session.
A bill that was introduced without bipartisan support is the Medical Bankruptcy Fairness Act of 2021. It would allow debtors with medical debt consisting of 10 percent of their adjustable gross income to claim a homestead exemption of $250,000. It would also allow them to discharge student loans. With the mid-term elections arriving in 2022, we do not expect to see this bill being passed.
From a bankruptcy standpoint, 2021 was an interesting year. We saw reduced filings, Supreme Court and Circuit Court decisions and continued proof of claim and automatic stay litigation. We are looking forward to seeing what 2022 will bring. Bankruptcy 2022 is a story that will continue to unfold, and Maurice Wutscher will continue to keep you updated as to key bankruptcy trends, issues, and legislation.
[1] All bankruptcy statistics obtained through EPIQ and the ABI
