USTP to Resume Debtor Audits in March 2023

USTP to Resume Debtor Audits in March 2023

December 22, 2022

ABI Bankruptcy Brief

USTP to Resume Debtor Audits in March 2023​​​

Effective March 13, 2023, the USTP will resume its designation of individual chapter 7 and chapter 13 cases for audit. These audits had been suspended in March 2020 due to public health concerns associated with the COVID-19 pandemic. As authorized in section 603(a) of Public Law 109-8, the USTP established procedures for independent audit firms to audit petitions, schedules and other information in consumer bankruptcy cases. Pursuant to 28 U.S.C. § 586(f), the USTP contracts with independent accounting firms to perform audits in cases designated by the USTP. Read more. 

Commentary: Will the Supreme Court Employ Vicarious Liability to Block an Innocent Debtor’s Discharge?*​​​
By David R. Kuney
On Dec. 6, 2022, the U.S. Supreme Court heard oral argument in Bartenwerfer v. Buckley, (Case No. 21-908). The question presented arose under the Code’s section setting forth an exception to debts that may be discharged. Section 523(a)(2)(A) states, “A discharge … does not discharge an individual debtor from any debt … for money, property [or] services … to the extent obtained by … actual fraud.” Ms. Bartenwerfer did not commit actual fraud herself, but the court found that her husband did in connection with the renovation and sale of their home (which they owned jointly) to the respondent. The question was whether Ms. Bartenwerfer could lose her discharge for “actual fraud” on the grounds that she was “vicariously liable” for the fraud of her husband/partner. We think the answer is no, because § 523(a)(2)(A) requires “actual fraud,” which includes “scienter,” or intent, and the requirement for intent precludes reliance on vicarious liability. A decision is pending. In the words of one scholar, the decision by the Supreme Court could force thousands of individual debtors into “permanent or at least indefinite pauperism,” and could do so where an innocent spouse is denied a discharge because of the wrongdoing of her spouse. Ms. Kate Bartenwerfer faces a claim of over $1.3 million for a wrong committed by her husband. A ruling that a spouse can lose his or her discharge through the misconduct of a spouse would run deeply counter to notions of protection for the honest debtor and would be injurious to marital relationships. Read the full commentary.

*The views expressed in this commentary are from the author/publication cited, are meant for informative purposes only, and are not an official position of ABI. 

Analysis: Why This Is No Madoff Moment for FTX Creditors​​​

The legion of creditors who lost billions in last month’s collapse of crypto exchange FTX just got a tiny piece of good news: A number of parties that received payments and political contributions from the company; its jailed founder, Sam Bankman-Fried; and his associates have expressed a willingness to return the money, FTX said in a statement Monday night, the New York Times DealBook blog reported. Politicians were among the biggest benefactors. Mr. Bankman-Fried; Ryan Salame, the former co-CEO of FTX; and Nishad Singh, a former head of engineering at the company, donated a total of $84.3 million to Democrats, Republicans and political action committees since 2019, according to data collected by and shared with DealBook. Some politicians, including Hakeem Jeffries, the incoming Democratic leader in the House, and Representative-elect Aaron Bean, a Republican from Florida, have returned donations or given the money to charity since FTX fell into scandal. Clawing back enough to make creditors whole will be difficult. FTX went bankrupt last month owing more than $3 billion to its top 50 creditors and having racked up losses that exceeded $8 billion. Many commentators have pointed to the case of Bernie Madoff, the poster child for Ponzi-schemers, as a model for how FTX’s new CEO, John Ray III, and a bankruptcy court might collect assets to repay depositors. In that case, judges ruled that a court-appointed trustee, Irving Picard, was allowed to claw back funds from anyone who pulled out more money than they put in. Mr. Madoff, though, may be an imperfect model for FTX because he claimed he was investing his clients’ funds, but there was no evidence of that. He appears instead to have kept their money in cash. FTX’s client funds, by contrast, were almost certainly converted into some cryptocurrency that traded on exchanges. In that case, experts say that clients of FTX could claim that they were entitled to gains — and if they were lucky enough to get their money out earlier, they could probably keep them. Read more. 

Child Care Faces $24 Billion Fiscal Cliff as Pandemic Aid Ends​​​

A crucial source of emergency funding for U.S. child care providers is starting to run out, threatening to hit an already overstretched industry at one of its biggest pain points: trying to hold on to low-paid staff in a tight job market, Bloomberg Businessweek reported. Much of the $24 billion handed out as part of the pandemic-era American Rescue Plan (ARP) has been used by child care providers to give wage increases or bonuses to teachers to discourage them from leaving for higher-paying jobs. With the supply of federal dollars coming to an end, providers say they’ll likely have to roll back those raises or increase tuition, something that’s already caused some parents to pull their kids out of care. Read more. 

U.S. Jobless Claims Tick Up, Economy Grows Faster than Previously Thought​​​

The U.S. labor market remains historically tight, and resilient consumer spending propelled stronger economic growth this summer than previously estimated, the Wall Street Journal reported. But economists say higher interest rates resulting from the Federal Reserve’s efforts to tame inflation could weigh on growth and hiring in the coming year. New filings for unemployment benefits rose by a seasonally adjusted 2,000 last week but remain at historically low levels, the Labor Department reported today. The 216,000 claims last week were in line with pre-pandemic levels, when the labor market was also tight, suggesting that employers are holding on to workers despite concerns about an economic slowdown. In a separate report, the Commerce Department said third-quarter economic growth was stronger than previously estimated. The economy grew at a 3.2% seasonally adjusted annual rate, up from an earlier estimate of 2.9%, largely due to higher estimates of consumer spending. The third-quarter number snapped two consecutive quarters of contraction. Taken together, the two reports point to an economy in expansion despite the Fed’s aggressive pace of interest-rate increases. Fed officials are looking to cool the economy to bring down inflation, which hit 40-year highs earlier this year. There have been early hints of softening. Retail sales fell a seasonally adjusted 0.6% in November from the previous month, the Commerce Department said earlier this month. Continuing jobless claims, which reflect the number of people seeking ongoing unemployment benefits, moved down by 6,000 in the week ended Dec. 10., but have slowly climbed since mid-September. That could be a sign that some unemployed people are taking longer to find new jobs. Read more. 

Mortgage Buydowns Are Making a Comeback​​​

Rising borrowing costs have dramatically increased the cost of buying a home this year, reviving interest in mortgage products like temporary buydowns that fell out of favor after the 2008 financial crisis, the Wall Street Journal reported. Temporary buydowns offer steep, but short-term, savings on mortgage rates. Borrowers get a much lower rate in the loan’s first year that gradually increases until it resets to a rate in line with market conditions at the time the loan was made. They differ from standard buydowns, in which buyers pay an upfront fee to permanently lower the loan’s rate. Unlike adjustable-rate mortgages, the loans reset to a fixed rate. Buyers typically don’t cover the cost of temporary buydowns. Home sellers, lenders and builders can use temporary buydowns to win over buyers concerned about high rates. They cover the difference between the actual mortgage rate and the rate the buyer pays, stashing those funds into a custodial account that the lender dips into each month. (Subscription required.) Read more. 

Big Changes to 401(k) Retirement Plans Move Ahead in Congress​​​

Congress is on the verge of passing a bill that aims to help Americans save more for retirement and leave their retirement savings untouched and untaxed for longer, the Wall Street Journal reported. The bill nearing approval raises the age people are required to start withdrawing money from tax-deferred retirement accounts to 75 from 72. It increases retirement savings contribution limits for older workers and provides an increased incentive to people with low and moderate incomes to save in retirement accounts. It also paves the way for more employers to offer emergency savings accounts inside 401(k) plans. Congress, which published the final details of the bill on Tuesday, is expected to pass the measure in the next few days as part of a larger year-end spending bill. President Biden is expected to sign it soon after. Lawmakers have been writing and negotiating the changes to America’s retirement system for several years in response to an aging U.S. population. Also driving the need for changes, say lawmakers and many investment professionals, is that more employers have shifted responsibility for retirement savings to individuals. Roughly half of American households aren’t saving enough to sustain their standards of living after retirement, according to Boston College’s Center for Retirement Research. The bipartisan retirement measure builds on retirement-policy changes enacted in 2019 that, among other things, raised the age people were required to start withdrawing money from retirement accounts to 72 from 70½. Read more. 

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New on ABI’s Bankruptcy Blog Exchange: Lawmakers Caution SBA on Admitting Fintech Lenders to 7(a) Program

In their first meeting since the Small Business Administration proposed opening its flagship 7(a) loan guarantee program to fintechs, Democrats and Republicans on the Senate Small Business Committee have made it clear that the agency must be prepared to effectively oversee any new lenders it lets in the door, 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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