U.S. Supreme Court Hears Debt-Collection Dispute; Justices Raise Points Found in ABI Consumer Commission Report

U.S. Supreme Court Hears Debt-Collection Dispute; Justices Raise Points Found in ABI Consumer Commission Report

ABI Bankruptcy Brief

April 25, 2019

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U.S. Supreme Court Hears Debt-Collection Dispute; Justices Raise Points Found in ABI Consumer Commission Report

The nation’s highest court will decide soon whether debt collectors should have more leeway to fight steep fines for pursuing collections even after a consumer used bankruptcy to make that debt disappear, the Wall Street Journal reported. Consumer advocates worry that the case could weaken protections for Americans who file for bankruptcy. U.S. Supreme Court justices yesterday heard oral argument in Taggart v. Lorenzen from lawyers who laid out a patchwork of rulings from judges who disagree on how easy it should be to punish debt collectors who pursue debt even after a person is no longer obligated to pay. Justice Elena Kagan said that she “was totally stunned” that it isn’t clear what standard applies. Roughly 750,000 people got out of bankruptcy with a discharge during the 12-month period ending Sept. 30, 2018, according to ABI researcher Ed Flynn, who analyzed Federal Judicial Center figures. At yesterday's arguments, several justices were concerned about who is responsible for proving that collectors knew about a bankruptcy filing and who would pay for legal disputes over violations. “Since allowing the creditors to proceed on debts that may or may not be dischargeable, it seems to me perfectly reasonable to have them bear the risk [and] have them make a careful choice,” Chief Justice John Roberts said. Several consumer-advocacy nonprofits, law professors and retired bankruptcy judges Gene Wedoff and Leif Clark raised similar questions in legal briefs filed before the arguments began. Lifting the onus from debt collectors and other creditors could encourage aggressive creditors to risk trying to collect a discharged debt, knowing that the bankrupt person needs to prove that a violation occurred, they said. People who have gone through bankruptcy could be too poor to fight in court, and their lawyers have no duty to represent them in such disputes, these people said. (Subscription required.)

A recommendation in the Final Report of ABI's Commission on Consumer Bankruptcy on discharge injunction enforcement dovetailed with the oral argument comments by Chief Justice Roberts and Justice Kagan, according to Commissioner Rudy Cerone of McGlinchey Stafford (New Orleans). With respect to Kagan’s analogy to § 362(k), the Commission recommended, at section 1.02(a), that § 524 be amended to provide the same private right of action as is available under 362. Concerning the “safe harbor” cited by the Chief Justice, section 1.02(b) of the Commission Report recommends the adoption of an expedited contested matter procedure under the Bankruptcy Rules to obtain a bankruptcy court order on whether the discharge injunction applies to a particular action. To download a copy of the Commission's Final Report, please click here.

Commentary: Two Bills Being Considered by Congress Can Help Family Businesses in Financial Distress

Our bankruptcy laws may be well provisioned for (1) large businesses with lots of passive owners and (2) consumers, but our bankruptcy laws fall short for struggling family businesses and their owners, according to a blog post by Don Swanson. Two bills currently winding their way through the U.S. Senate are attempts to correct, but they still need a little tweaking, according to Swanson. On the surface, the Small Business Reorganization Act (SBRA) provides much-needed relief for small businesses. Here’s the catch, according to Swanson: To qualify as a small business under the Act, the debtor must have less than $2.6 million of debt. Most successful businesses have more debt than that, according to Swanson. The SBRA is a great piece of legislation that needs to be enacted at once. But its $2.6 million debt limit needs to go away, according to Swanson. Second, the Family Farm Relief Act would expand the debt-eligibility limits for family farmers seeking chapter 12 from $4.4 million to $10 million. The $10 million limit being proposed in the bill is helpful, but Swanson poses the question of why there should be a debt limit at all for family farmers. While he recommends a few tweaks to be made to both bills, Swanson finds the two pieces of legislation to be good vehicles for helping struggling small business owners and family farmers access bankruptcy.

To access the full bill text of the Small Business Reorganization Act (S. 1091) and the Family Farm Relief Act (S. 897), be sure to visit the Legislative News page in the ABI Newsroom.

Sen. Warren’s Student-Debt Deal Would Most Benefit Stronger Earners, Study Finds

A new analysis by the Brookings Institution found that Sen. Elizabeth Warren’s (D) proposal for the government to forgive a huge chunk of student debt would disproportionately help upper-income households, the Wall Street Journal reported. Nearly half of the estimated $640 billion to be forgiven under her plan would go to the top 40 percent of earners, or households making at least $67,847 a year, according to the Brookings Institution, a think tank. The analysis also shows a disproportionate share of the money would go to those in managerial and professional jobs. A quarter of the money would go to people with master’s degrees, and 9 percent would go to households with doctorate and professional degrees, such as lawyers and doctors. About 28 percent of the money would go to households in the bottom 40 percent of earners. A tenth would go to households in the bottom fifth. Lower-income households tend to have less student debt — but are also more likely to default on their loans — because they include higher rates of borrowers who dropped out or attended low-quality schools and have fewer resources to repay.

Study: Gen Z Getting to the Mall More than Previous Generations

An International Council of Shopping Centers (ICSC) study found that nearly 95 percent of those in Generation Z visited a physical shopping center in a three-month period in 2018, as opposed to just 75 percent of millennials and 58 percent of Gen Xers, Bloomberg Businessweek reported. And they genuinely like it; three-quarters of them said that going to a brick-and-mortar store was a better experience than online, ICSC found. “There’s always been this assumption that as you go through the age spectrum, the younger consumer that has grown up with online and digital and is very savvy would shun physical experiences,” said Neil Saunders, an analyst at GlobalData Retail. “But actually that’s not turned out to be the case.” Gen Z — or the group of kids, teens and young adults roughly between the ages of 7 and 22 — still appreciate brick and mortar. But they aren’t just millennials living in a different time. Today’s teens interact differently with stores than their older siblings and Gen X parents before them, and several retailers who didn’t understand the fundamental differences in how they shop have landed themselves in bankruptcy court: Charlotte Russe, Wet Seal and Claire’s were once staples of the teen mall circuit.

Fed Shift Shakes Up World of Speculative Debt

A sharp rally in speculative-grade corporate bonds has pushed the average yield on those bonds below that of comparably rated loans, an unusual market distortion reflecting an improved U.S. economic outlook and the Federal Reserve’s retreat from tightening monetary policy, the Wall Street Journal reported. Bond yields, which move in the opposite direction of prices, typically exceed those of loans because holders of the latter are typically paid first in bankruptcies. This year, yields on both are down amid a broad rally in riskier assets. As of Tuesday, the average yield to maturity of bonds in the Bloomberg Barclays high yield index was 6.51 percent, down from 8 percent at the end of last year, while the average yield of loans in the S&P/LSTA Leveraged Loan index was 6.53 percent, down from 7.23 percent. Loan yields have exceeded bond yields since March 26, the first prolonged stretch where that has been the case since 2007. That year, the Fed also shifted course after years of raising rates.

Commentary: After the Bust, Are Bitcoins More Like Tulip Mania or the Internet?

When you talk to tech industry insiders about where Bitcoin is heading, two vastly different comparisons are inevitable: the tulip bulb and the internet, according to a New York Times commentary. Bitcoin’s critics say that the digital tokens are like the tulip bulbs of 17th-century Holland. They generated a wild, speculative rush that quickly disappeared, leaving behind nothing but pretty flowers and wrecked bank accounts. Bitcoin believers, on the other hand, want us to think about cryptocurrencies as if they were the internet: a broad technology category that took some time to reach its potential, even though expectations got ahead of reality in the early years. If that’s true, last year’s crash in Bitcoin prices was like the dot-com bust — a temporary setback before the big ideas come to fruition. The commentary does not find that either of these comparisons of Bitcoin quite works, however. Bitcoin is neither an irredeemable flop nor an economic miracle. We are still a few years away from any sort of clarity about where this technology will fit in the world. If we want to imagine where it might be going, we need to look beneath the gyrating price to understand how it is being used today and who is using it. At the most basic level, Bitcoin has introduced a new way to hold and send around value online. Anyone can open a Bitcoin wallet and receive money from a friend or a stranger. The system works without any central authority, thanks to a network of computers that is not unlike the network of computers supporting the internet. Even after last year’s bust, Bitcoin users are generally sending somewhere between $400 million and $800 million worth of Bitcoin across the network every day, according to data from the blockchain, the public ledger on which all Bitcoin transactions are recorded.

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New on ABI’s Bankruptcy Blog Exchange: Wisconsin Credit Unions, Banks Get Legal Win in Collections Case

The Wisconsin Supreme Court upheld a "narrow interpretation" of a state-level consumer-protection law that maintains lenders' rights to collect debts without fear of being sued for damages, 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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