The Legislative and Regulatory Environment for Bankruptcy Heading into 2023

Bankruptcy filings dropped nearly 7 percent over the last 12 months, but that gap has closed significantly in the second half of 2022. November marked the fourth consecutive month in which overall filings were above the same month in the previous year.

Credit usage has increased, interest rates continue an upward climb, and inflation stands over 7 percent for the year. But over the last month, there have also been numerous developments in the election and government policy spheres that could impact bankruptcy filing rates going forward.

Here are just three developments that may be worth considering that we will cover during our upcoming 2023 Bankruptcy Outlook Webinar in January:

1. Few political prognosticators predicted the outcome of the November 8th election. Exit polls showed Republicans winning on most issues of concern to voters, but Democrats kept their Senate majority and barely lost their House of Representatives majority. This probably means that there will be little meaningful legislative activity, including on bankruptcy, until after the next Presidential election. Some wags might be justified in saying that the beleaguered electorate likes gridlock and many businesses might benefit from that, too.
2. A pause in Congressional law-making does not necessarily mean that all will be quiet on the regulatory front. One may recall recent history when the executive branch grew restless in the face of legislative stalemate and doubled down on their exercise of regulatory authorities. In this regard, it will be interesting to see if the Consumer Financial Protection Board (CFPB) picks it enforcement battles more carefully in light of its recent major loss in the United States Court of Appeals for the Fifth Circuit. In Community Financial Services Association of America v. CFPB, the appeals court struck down a CFPB rule-making authority on grounds that the agency’s funding mechanism, which does not require Congressional appropriations, is unconstitutional. The U.S. Department of Justice is seeking reversal of the decision in the Supreme Court.
3. The Justice Department (DOJ) also took a major step to relieve student loan borrowers of their repayment obligations if they file for bankruptcy. Currently, debtors with high student loan balances often do not file because that debt is generally not dischargeable in bankruptcy. If more debt-ladened students file, then not only will student loan debts be discharged, but so will credit card and other debts.

To effect the more generous loan forgiveness policy, DOJ established more sympathetic criteria for the government to use in determining whether the statutory "undue hardship” standard for discharge of student loan debts is satisfied. If the government now more readily agrees with the debtor that repayment would impose an "undue hardship,” then it is far more likely that the bankruptcy court will grant the discharge. This should make bankruptcy a more attractive option for students, as well as their parents and grandparents who took out the loans on the students’ behalf, who cannot keep up with their bills.

Some observers think that the administrative paperwork requirements imposed under the new DOJ procedures may discourage student loan borrowers from applying for the better treatment. Some cynics think the major beneficiaries of the policy may be debtors’ lawyers who may get to charge another $1000 or so to complete the paperwork and deal with DOJ. In any event, the new policy probably will increase filings at least modestly and potentially more than modestly.

For more information, please register for our webinar on January 25th.