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Commentary: With Student Loan Debt at an All-Time High, Proposed Solutions Range from Code Changes to Loan Forgiveness

ABI Bankruptcy Brief

December 19, 2019

 
ABI Bankruptcy Brief
 
 
NEWS AND ANALYSIS

Commentary: With Student Loan Debt at an All-Time High, Proposed Solutions Range from Code Changes to Loan Forgiveness

For millions of Americans, seeing the federal government simply forgive their student loan debts may sound very appealing, according to a blog post on CardRates.com. And with Democratic hopefuls like Bernie Sanders and Elizabeth Warren pushing plans that would eliminate all — or a significant portion of — student loan debt, the prospect doesn’t seem completely unrealistic. Other more nuanced recommendations, such as those proposed by ABI's Commission on Consumer Bankruptcy, suggest changes to the U.S. Bankruptcy Code that would make it easier for student loan debt to be discharged during or after bankruptcy. John Rao, an attorney at the National Consumer Law Center who is also a member of ABI's Consumer Bankruptcy Commission, shed some light on the report and highlighted some of its recommendations on the student loan debt crisis. Current bankruptcy law allows consumers to discharge student loans only if they can prove that repayment of the loans will impose an “undue hardship” on them and their families. “We included what we consider to be a best interpretation of the undue hardship provision,” Rao said. “We suggest an interpretation that I think is actually closer to the statutory language and points out how courts have really missed the mark on this, and they have developed standards that are much more extreme than what the language would suggest.” The commission’s stance is that recent graduates should generally be required to repay “government-made or guaranteed student loans,” but it does recommend amendments that would allow the loans to be discharged in certain circumstances. These situations include loans made by nongovernmental entities, loans incurred by a person other than the person receiving the education, loans being paid through a five-year chapter 13 bankruptcy plan, or loans that are first payable more than seven years before a chapter 7 bankruptcy is filed. Read more.

To view the Commission’s recommendations on student loan debt and bankruptcy, please click here.

Be sure to also read “Game of Loans: Is Student Debt Forgiveness Coming?” in the December edition of the ABI Journal.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) and student debt was the focus of a segment on "Tucker Carlson Tonight" on FoxNews on Monday. Carlson pointed out that BAPCPA has prevented young people from discharging student loan debt through bankruptcy. Students who had been pressured to take on “life-destroying” amounts of student loan debt could never get rid of that debt under the new law, harming America's middle class in the face of rising education costs. Click here for the video clip and the transcript of the segment.

Also, the cost of rising tuition was a focus of an ABI Talk at the 2019 Winter Leadership Conference. Click here to watch the presentation by Inez Stepman of the Independent Women’s Forum (Washington, D.C.)
 

Pot Firms’ Grim Reality: Cash Crunch, No U.S. Bankruptcy Access

It was only a year ago that exuberance enveloped the marijuana industry as legalization was spreading and the growth potential seemed boundless. But that bubble has burst as the reality of a difficult regulatory landscape sunk in, according to a Bloomberg News analysis. Since March, stocks are down by about two-thirds. Capital markets have largely frozen for all but the strongest companies, and now a cash crunch is leaving some on the verge of going bust. But due to the illegal status of cannabis under U.S. federal laws, firms there are blocked from seeking protection in bankruptcy court. The industry’s problems have become so dire that one senior executive at a large cannabis company predicts that as many as a dozen smaller companies may fail by the second quarter of 2020. For U.S. firms, this poses an intractable problem: Bankruptcy is governed by federal law, which considers marijuana an illegal substance. This means they can’t get chapter 11 protection from creditors or a centralized sale process. Without that, the result could be a state-by-state scramble by creditors for assets. The U.S. bankruptcy trustee, which serves as a watchdog over the court process, “has taken a hard-line position on this,” said Sean Gordon, partner at Thompson Hine LLP. “It is incredibly difficult for a marijuana-related business to file and not get their case dismissed.” In Canada, bankruptcy filings have already begun. Wayland Group Corp., one of the first Canadian cannabis companies to be awarded a cultivation license in 2014, filed for protection from creditors earlier this month. DionyMed Brands Inc. filed for receivership in October when a creditor demanded immediate payment of a C$25 million loan, and Ascent Industries Corp. has been reorganizing under court supervision since March. While the smallest players are most at risk, better-known companies are also running low on cash. Los Angeles-based MedMen Enterprises Inc. said last week it has reduced corporate staff by more than 40 percent. It also issued $27 million in shares at 43 cents each, 14 percent below the stock’s Dec. 10 closing price.

Commentary: Fuzzy Math that Fueled Junk Debt Boom Is Sparking Jitters

Some of the riskiest borrowers, and the private-equity firms often behind them, have been massaging a measure known as EBITDA — earnings before interest, taxes, depreciation, and amortization — to appear more creditworthy and take out bigger loans, according to a Bloomberg Businessweek commentary. Money managers, regulators and credit-rating companies say they’re being vigilant. Even so, the fuzzy numbers may be creating a false perception of safety in the $2.5 trillion market for low-rated corporate debt. That market is a key source of funds for companies with less-than-stellar credit and for private-equity firms, which typically load the businesses they acquire with debt to boost returns. Institutional investors have increased their purchases of high-risk loans and bonds over the past decade, as near-zero interest rates made other fixed-income assets less attractive. That demand helped make bigger and riskier loans possible. Matthew Mish, head of credit strategy at UBS Group AG, says that even a garden-variety recession in the next year or two could cause earnings for the weaker borrowers to drop by as much as 40 percent from peak to trough, rivaling the declines seen during the global financial crisis. Such a meltdown of corporate balance sheets could fuel a cascade of defaults and bankruptcies.


 

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BLOG EXCHANGE

New on ABI’s Bankruptcy Blog Exchange: Supreme Court Grants Cert to Decide Fate of Repossessed Cars in Bankruptcy

Yesterday, the SCOTUS granted certiorari in City of Chicago v. Fulton, 19-357, to resolve a circuit split about whether a creditor's inaction in not returning property repossessed pre-petition can violate the automatic stay. The split arises predominantly from chapter 13 cases in which, pre-petition, creditors repossessed or cities impounded debtors' cars.

For further analysis, be sure to read today's column of Rochelle's Daily Wire.

To read more on this blog and all others on the ABI Blog Exchange, please click here.

 
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