David Lander Is Back!

Welcome to occasional guest blogger, David Lander, currently a professor of practice at Saint Louis University School of Law. In addition to his current and past academic postings, David has practiced consumer bankruptcy law with legal services organizations as well as business bankruptcy law at the Greensfelder Law Firm. Long-time readers will know that this mix of experience gives David a perspective that few others have. Welcome back, David!

Bankruptcy Filing Rate Remains Flat

Every month I see stories about the bankruptcy rate moving up and down. The truth is that the U.S. bankruptcy filing rate has remained flat over about the past four years.

The table to the right shows the total number of bankruptcy filings, consumer and business, using data from Epiq. For 2019, the figure is an estimate. For each of the past two years, 85.3% of the yearly bankruptcy filings had occurred by October 31. Extrapolating from the 648,000 bankruptcy filings through October 31 of this year, the total number of bankruptcy filings by year end will be about 760,000. That is not much different than the 767,000 in 2017 or the 755,000 in 2018.

Call for Papers -- 2020 Boulder Conference on Consumer Financial Decision Making

The inimitable John Lynch emailed to let me know that the call for papers is open for the 2020 Boulder Conference on Consumer Financial Decision Making, to be held from May 17-19, 2020. Much more information, including how to submit an abstract for consideration, appears on their web site.

If you are interested in the sort of content we have at Credit Slips, this conference is for you. Several of the Credit Slips bloggers, including myself, have presented at the conference. The papers and discussions are high quality. The setting at the St. Julien Hotel is fantastic. And, after a day of conference discussions or when the conference is over, you are in Boulder, Colorado, in the spring. If you have a paper that fits, I highly recommend submitting.

A Drafting Error in Small Business Reorganization Act?

Is there a drafting error in the Small Business Reorganization Act? The other day I posted my estimate that 42% of chapter 11's would qualify, but my sharp-eyed colleague, Ralph Brubaker, noticed something wonky (in all senses of the word) in the new definition of a "small business debtor." (He also tells me that the next issue of the always-excellent Bankruptcy Law Letter will provide an in-depth look at the new law.)

Specifically, the problem is in the exclusionary clause. After defining a small-business debtor as a debtor with less than $2,725,625 in debts, at least 50% of which arose from business activities, the definition then excludes (among other things):

(ii) any debtor that is a corporation subject to the reporting requirements under section 13 or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m, 78o(d)); or
(iii) any corporation that—

(I) is subject to the reporting requirements under section 13 or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m, 78o(d)); and
(II) is an affiliate of a debtor.

Clause (iii)(I) excludes the same thing as subparagraph (ii) with only slightly different words. Obviously, an extra condition in clause (iii)(II) does not make paragraph (iii) exclude anything that clause (ii) does not already exclude.

Read literally, the definition would allow a small subsidiary of a public-traded company to take advantage of the new small-business debtor rules. The ABI Commission to Study the Reform of Chapter 11 recommended they be excluded. My guess is that the drafters of the new law intended to exclude them, but the language used did not quite get the job done. Is there a reason for this language that I have missed? If not, it would seem to be a prime candidate for a technical correction fix.

How Many New Small Business Chapter 11s?

The Small Business Reorganization Act of 2019 adds a new subchapter V to chapter 11 for small businesses. The new subchapter gives small businesses the option of choosing a more streamlined -- and hence cheaper and quicker -- procedure than they would find in a regular chapter 11. Perhaps most significantly, the absolute priority rule, which requires creditors to be paid in full before owners retain their interests, does not apply. For those interested in more detail, the Bradley law firm has a good blog post summarizing the key points of the new law, which takes effect in February 2020 (and if I have the math correct -- February 19 to be exact).

A point of discussion has been how many cases will qualify to be a small-business chapter 11. Using the Federal Judicial Center's Integrated Bankruptcy Petition Database, my calculation is that around 42% of cases filed since October 1, 2007, would have qualified. The rest of this post will explain how I came to that estimate as well as discuss year-to-year variations and chapter 11 filings by individuals.

The Fifth Circuit Finds a Way to Make It Even Harder to Discharge Student Loans in Bankruptcy

On Tuesday, the United States Court of Appeals for the Fifth Circuit released an opinion that, if anything, makes it even more difficult to discharge student loans in bankruptcy. Writing for a three-judge panel in a case called In re Thomas, Judge Edith Jones reaffirmed the court's commitment to the existing case law and added yet another judicial gloss to the words of the statute. The opinion was a missed opportunity to return to a reasonable standard that allows debtors to discharge student debt in appropriate cases while still protecting the public fisc.

The debtor was over 60 years old, part of the trend of older filers in bankruptcy court. She had taken out $7,000 in student loans for two semesters of community college. Within a year after leaving community college, the debtor developed diabetic neuropathy, which left her unable to work at any job that required standing for any period of time. The debtor had to leave a retail job, a restaurant job, and a job at UPS. She lost a previous job at a call center after it was acquired by another company who then fired her within three months for wearing headphone and listening to music during her lunch break, a determination that probably not so coincidentally meant the debt was ineligible for unemployment insurance.

Pug Repossession

If you missed it, Thursday's New York Times had a story about a debt collector who seized the family's dog over unpaid bills. The pet, a purebred pug, was sold for the equivalent of $800 on eBay which apparently meant it could be seized under German law which allows valuable pets to be seized in repayment of debts. Mutts are exempt.

In the United States, there are businesses who will give purchase-money loans for pets, which are often structured as financing leases. The consequence of nonpayment is the usual for nonpayment -- repossession of the collateral even if it is the family's beloved Fido or Fluffy. There is legislation in Nevada, California and New York that tries to ban the practice, although the statutes are far from a model of clarity about what they make illegal.

Arbitration in Bankruptcy -- Discharge, the Easy Case

Now that the major work of the ABI Commission on Consumer Bankruptcy is done, I seem to have this thing called "time" again. One of the topics that I have been wanting to post about is arbitration in bankruptcy. If I follow through on my intentions, this will be the first of a few posts on arbitration in bankruptcy.

Arbitration has come to the bankruptcy courts. In the coming years, how the Federal Arbitration Act intersects with the Bankruptcy Code will become an increasingly prominent issue. What I want to talk about in this post is arbitration of a violation of the discharge injunction itself. In the typical factual set-up, a debtor alleges a violation of the discharge injunction, and the creditor moves to send the question to an arbitrator under a predispute arbitration clause, almost always embedded in a form contract. Given the ubiquity of these form contracts in consumer transactions, the only thing at stake is the effectiveness of the consumer bankruptcy system.

We can first exclude one approach to the topic that I occasionally see. It goes something like this. The Supreme Court keeps sending disputes to arbitration and thus has signaled repeatedly it favors arbitration. Therefore, the Court would hold that bankruptcy disputes can be arbitrated. This is not how law works. The Court's tendencies are not "law." One of the Supreme Court justices has famously declared he favors a certain malted beverage, but that hardly makes it the drink of the land (although I also would not be against making it so).

ABI Consumer Commission Report Is Nearly Finished

For the past two years, the American Bankruptcy Institute's Commission on Consumer Bankruptcy has been hard at work. As the Commission's reporter, I am very happy to say that the work is nearly finished. All of the drafting is completed, and we are in the final stages of the editing process.

The report will be released on April 11. If you want to learn about the report, come to the ABI's Annual Spring Meeting where there will be a number of sessions about the report.

The Commission's charge was to recommend "improvements to the consumer bankruptcy system that can be implemented within its existing structure." The recommendations represent the work of a broad group of bankruptcy professionals across all types of roles and types of practice. The report will have forty-nine sections across five chapters, with multiple recommendations in many of the sections. Although the substance of the recommendations will not be released until April 11, the topic list is public. You can expect recommendations on student loans, attorney compensation, the means test, rights in repossessed collateral, chapter 13 plans as well as many other topics.