Consumer Bankruptcy in the Age of COVID-19

The last year and half was a time to be remembered in Bankruptcy Law. It started with an eye on increasing the ability of small businesses to utilize the Chapter 11 process in a more efficient and less expensive way, which led to record number of commercial filings, a reduction in consumer filings, and a test of the bankruptcy system. What will the second half of 2021 look like? This article will walk you through Consumer Bankruptcies in the age of COVID-19. The article will discuss the filing trends, Supreme Court cases (City of Chicago v. Fulton, 19-357), proposed legislation and the arena of consumer protection cases in bankruptcy proceedings.

In 2020, the total number of bankruptcy filings was 544,463. This was approximately 230,000 fewer filings then in either 2018 or 2019. Only Chapter 11 filings increased in 2020 to 8,113. This was almost a 1,300-case increase from 2019. This reduction of cases overall during the pandemic could be due to several factors, including:

• the foreclosure and eviction moratorium (which on a federal level will extend through July 2021),
• many financial institutions scaling back on vehicle repossessions;
• collection agency restrictions on the type of debt that could be collected,
• closing of courts around the country, and the corresponding inability to obtain and execute on judgments,
• increased unemployment benefits to laid off individuals, and
• the stimulus checks.

Whether we will see an increase in the number of bankruptcy filings later in 2021 will depend on how Congress is able to address the COVID-19 Stimulus bills and whether they may be an extension of the CARES Act SABRA provisions.

Despite the decreases in number of bankruptcy filings, the bankruptcy world was not stalled. The Supreme Court decided a very important case with potential far-reaching ramifications in consumer bankruptcy. City of Chicago v. Fulton (19-357), deals with turnover of collateral upon the filing of a bankruptcy proceeding and violation of the automatic stay. The Supreme Court held that the mere retention of the debtor’s collateral after filing does not violate 11 U.S.C. §362(a). The Court left the door open for further litigation on how to address the turnover motions in bankruptcy proceedings.

Additionally, at the end of 2020, we saw a bill introduced that would revamp the consumer bankruptcy system. Senator Elizabeth Warren and Representative Jerrold Nadler introduced the Consumer Bankruptcy Reform Act of 2020. The main purpose of the legislation is to create a new Chapter 10, and eliminate Chapter 7 and Chapter 13 in consumer cases. If passed, the bill would streamline the process of filing bankruptcy and lower costs for debtors. It would create a single-chapter consumer bankruptcy system, allowing modification of mortgages on all residences, and modification of vehicle loans based on the market value of the vehicle. It would also allow for the discharge of student loan debt on equal terms with most other types of debt. The legislation would reduce alleged abusive creditor behavior and close bankruptcy loopholes that allegedly allow the wealthy to exploit the bankruptcy process.

As the 116th Congress ended, the bill died. However, with the democrats in control of both the House and Senate in the 117th Congress, there is a strong chance the bill will be reintroduced this year. When the bill was first introduced, there was both strong support and strong opposition from both sides involved in the bankruptcy process. Reintroduction of the bill could allow meaningful discussions in order to address some of the issues that plague bankruptcy cases on both the debtor and creditor sides.

Other movement in Congress occurred on February 25, 2021. Senators Dick Durbin and Chuck Grassley introduced bipartisan legislation to extend the CARES Act Bankruptcy Relief Provisions. The current law was to sunset on March 27, 2021. The legislation would extend the temporary bankruptcy provisions until March 2022 and provide critical relief to families and small business facing hardship due to the ongoing COVID-19 pandemic. (See Dick Durbin February 25, 2020 Press Release). The legislation would also extend the provisions of the Small Business Reorganization Act, increasing the maximum debt limit to $7.5 million. The bill would also exempt COVID-related relief payments from consumer cases for purposes of the means test and disposable income. Lastly, the bill would not deny a discharge to those debtors who missed 3 or fewer payments due to COVID circumstances. The legislation passed, and the protections under the CARES Act will now run through March of 2022. As a result, you can expect to see a continued number of Subchapter V filings.

Although the number of consumer filings did not explode, plaintiff and debtor attorneys continue to raise the issues of the itemization of interest fees and costs in proof of claims. Although this issue has not been widespread throughout the country, we have seen an increase in activity – particularly in Florida, Georgia, and Virginia. We have no Circuit Court opinions; however, several Bankruptcy Courts have set forth their views as to how these amounts should be set out and whether damages exist. In Thomas v. Midland Funding LLC (17-0510), the Bankruptcy Judge for Western District of Virginia issued a lengthy opinion setting forth her views on whether the breakdown of interest, fees, and costs satisfies the itemization requirement set forth in Federal Rule of Bankruptcy Procedure 3001(c)(2)(a) (“FRBP 2001(c)”). That Rule requires that an itemized statement of the interest, fees, expenses, or charges must be filed with the proof of claim “[i]f, in addition to its principal amount, a claim includes interest, fees, expenses, or other charges incurred before the petition was filed.”

The court went on to state that the creditor, for failing to properly itemize, did not comply fully with FRBP 3001(c) and opened itself up to potential sanctions under FRBP 3001(c)(2)(D). The court has the ability to “award other appropriate relief, including reasonable expenses and attorney’s fees caused by the failure.” We will see where the Western District of Virginia proceeds on this issue, but it has laid out a current road map for creditors to follow.

2020 was a year that many would like to forget. What the second half of 2021 brings will be a wait and see scenario. Once foreclosures and evictions are initiated again, are we likely to see increases in consumer bankruptcy filings? Can small businesses survive, or will there be additional closures? Will Circuit Courts provide any additional guidance as to FDCPA actions and bankruptcy? Will the Supreme Court continue to accept and hear bankruptcy cases? Is bankruptcy reform on the horizon?

Six months into 2021, we have not seen the feared tsunami of consumer bankruptcy filings. Bankruptcy courts are not overwhelmed. This lack of an increase in bankruptcies could extend for a substantial period of time as businesses reopen, COVID restrictions are released, consumers begin to spend and travel, and certain states and the government look to resume foreclosure and eviction moratoriums. We optimistically wait to see what the second half of 2021 brings.