Broader Economic Trends
- 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.
- 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.
- 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.
Commentary provided by Clifford J. White, Managing Director – Bankruptcy Compliance for AIS.