Legal Experts Urge Federal Lawmakers to Fix Consumer Bankruptcy Law

Legal Experts Urge Federal Lawmakers to Fix Consumer Bankruptcy Law

ABI Bankruptcy Brief

April 11, 2019

ABI Bankruptcy Brief

Legal Experts Urge Federal Lawmakers to Fix Consumer Bankruptcy Law

Parts of the country’s consumer bankruptcy system are badly broken, according to a new report from ABI's Commission on Consumer Bankruptcy, which calls for better protections for homeowners, student loan borrowers and low-income families who can’t afford to file for chapter 7 protection, the Wall Street Journal reported. Bankruptcy courts — the federal court that everyday citizens are most likely to use — have lost their power to help people fix some financial problems stemming from the massive social and economic shifts that have taken place since modern bankruptcy law was passed in 1978, according to the report released today. The commission urged federal lawmakers to pass changes to bankruptcy law that it said would make it easier for financially struggling Americans to get a fresh start. The 218-page report blamed the law’s weakened power on skyrocketing student loan debt, changing finance trends for mortgages, unscrupulous lawyers, and federal lawmakers who passed new rules in 2005 as growing numbers of Americans declared bankruptcy. (Subscription required.)

To obtain a copy of the report, please click here.

To watch the special briefing this morning by Commission leadership to discuss the Final Report, please click here.

Sessions at the Annual Spring Meeting tomorrow and Saturday will feature members of the Commission taking a closer look at the Final Report. Walk-ups welcome!

Senate Legislation Introduced to Help Small Businesses Restructure Debt

Senate Judiciary Committee members Chuck Grassley (R-Iowa), Sheldon Whitehouse (D-R.I.), Thom Tillis (R-N.C.), Amy Klobuchar, Joni Ernst and Richard Blumenthal (D-Conn.) on Tuesday introduced S. 1091, the "Small Business Reorganization Act" (SBRA), according to a press release from Sen. Grassley's office. The bill streamlines existing bankruptcy procedures and provides new tools to improve small businesses’ ability to restructure. Representatives Doug Collins (R-Ga.) and David Cicilline (D-R.I.) are working to introduce companion legislation in the House of Representatives. “Our bankruptcy system is designed to help highly complex businesses reorganize after falling on hard times, but for many small businesses going through bankruptcy, these requirements can create unnecessary burdens that stall recovery," Grassley said. "The Small Business Reorganization Act takes into account the unique needs of small businesses and streamlines existing reorganization processes. The legislation adds a new subchapter V to chapter 11 to streamline the bankruptcy process for small business debtors. By reducing liquidations and increasing recoveries to creditors, the bill will lead to more successful restructurings. Specifically, key provisions of the Small Business Reorganization Act will increase debtors’ ability to negotiate a successful reorganization and retain control of the business, reduce unnecessary procedural burdens and costs, and increases oversight and ensures quick reorganization. The SBRA was crafted in consultation with ABI, the National Bankruptcy Conference and the National Conference of Bankruptcy Judges, and it incorporates input from numerous stakeholders ranging from commercial lenders to U.S. Trustees.

Click here to read the full bill text.

Moody's Gives Thumbs Up to Detroit's ‘Conservative' Fiscal 2020 Budget

Moody's Investors Service is giving the Detroit City Council's newly minted 2020 fiscal year budget high marks for using "conservative revenue assumptions" and socking away $45 million in surplus revenue to fund post-bankruptcy pension obligations coming due in five years, Crain's Detroit Business reported. The Wall Street credit-rating agency said the $2.1 billion overall spending plan for the fiscal year that begins July 1 that City Council passed Monday is "credit positive" for Michigan's largest city — more than four years after it emerged from the largest municipal bankruptcy in U.S. history. "The credit-positive budget reflects sound financial practices, including conservative revenue assumptions and long-range projections, [and] a significant capital investment and continues to set aside funds for a scheduled pension cost spike in fiscal 2024," Moody's analysts wrote in a note published today. The budget plan adds $45 million to a $123 million trust fund Mayor Mike Duggan's administration created to help the city shoulder its bankruptcy court-ordered resumption of full pension payments in the 2024 fiscal year.

Commentary: Why Privatizing Puerto Rico's Electrical System Will Fail

Current plans to privatize Puerto Rico's electrical system are likely to fail, according to a commentary in The Hill on Monday. Billions of dollars of investment are needed to restore and upgrade Puerto Rico’s electrical system, which continues to run mostly on oil-fired power plants. Further, the system relies heavily on an extensive network of long-distance transmission lines that are vulnerable to severe storms. The Puerto Rico Electric Power Authority’s (PREPA) fiscal plan, approved by the federal Financial Oversight and Management Board, calls for $7 billion over five years in federal investment as a “floor” on funding needed for resilience; other estimates put that floor significantly higher. Without adequate investment, the next major storm in Puerto Rico will cost yet more lives and further delay economic recovery. Congress should take note that the privatization plans currently under consideration are not likely to achieve the island’s declared policy of affordable, resilient and 100 percent renewable energy by 2050, according to the commentary.

Report: Shrinking Middle Class Threatens Global Growth, Stability

The middle class is shrinking and its economic power diminishing in the U.S. and other rich countries, a development that threatens political stability and economic growth, according to a report by the Organization for Economic Cooperation and Development, the Wall Street Journal reported. At the peak of its powers in 1985, the aggregate income of the middle classes was four times that of the richest group. Three decades later, it had fallen to less than three times. And while income growth for the middle classes has been slow over that period, the cost of housing, education and health care has risen much more rapidly. The result of that squeeze is that middle-income households have taken on more debt and feel less secure in their status, while younger generations are less likely to gain membership in a group once seen as accessible to all. The notion that the middle class is under pressure isn’t entirely new, and has become more politically salient since the financial crisis. But the OECD’s report provides evidence to back up that sense of peril. (Subscription required.)

Commentary: What’s at Risk if the Fed Becomes as Partisan as the Rest of Washington, D.C.

Politicians have had strong opinions on what the Federal Reserve should and shouldn’t do throughout its 105-year history, according to a New York Times commentary. They have pushed for lower interest rates and easier money, or for this or that policy on bank regulation or consumer protection. They have summoned Fed leaders to the White House or Congress to persuade and cajole. In that sense, there is nothing new in President Trump’s aggressive approach to the Fed, according to the commentary. This week, he called for lower interest rates and new quantitative easing, and he signaled an intention to appoint two vocal supporters, Stephen Moore and Herman Cain, to the board of governors. What makes Trump’s approach to the Fed so unusual is that he has repeatedly publicly undermined a Fed chief he appointed (Jerome Powell), and, if successful, he would put two officials with a background in partisan politics in the inner sanctum of Fed policymaking. (Moore was founder of the Club for Growth, which supports conservative candidates for office, and Cain ran for president.) “People around the table did have political views, and I did, too,” said Alan Blinder, who was appointed vice chairman of the Fed by President Bill Clinton and is more recently the author of “Advice and Dissent,” about the role of politicians versus technocrats in shaping policy. “But you weren’t supposed to bring them into the room when it was time to make a decision, and people didn’t.”

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New on ABI’s Bankruptcy Blog Exchange: Getting Pot Banking Legislation Right

The House Financial Services Committee recently approved protections for banks financing cannabis companies in states where it’s legal. This a good first step, but improvements are needed, according to a recent blog post.

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

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