By the end of 2020, many of us weren’t sure what 2021 would look like from a bankruptcy standpoint. Would consumer deposits increase? Could we see bankruptcy reform, particularly in the area of student loan clearance? There was a lot to consider throughout the year. This article will provide an overview of what we saw and where we might be heading in 2022.
Filing for bankruptcy in 2021
Bankruptcy filings in the first 11 months of 2021 were at their lowest level since the 1980s.
According to EPIQ, the total number of bankruptcy filings until November of this year stands at 373,312, an average of 33,937 per month. If this pace continues, or if the number of deposits continues to decline in December, we will end the year with no more than 407,000 deposits against 522,808 deposits in 2020. That is a net loss of 115,000 deposits in 2021.
On the consumer side, 1.31 individuals per 1,000 people have filed for bankruptcy in the past 11 months. The states with the highest per capita deposits in the past year were Alabama (3.14) Nevada (2.62) and Tennessee (2.43). 
It is important to examine the cause of the reduction in deposits. No one can attribute the drop in deposits to just one item. There are several reasons for the decline.
One important reason was the moratoriums on foreclosures and evictions. Despite the lifting of their moratorium by many states in mid-2021, the number of foreclosures and evictions that had resumed did not have a correlative effect on bankruptcies.
Another reason for the reduced number of deposits is that mortgage lenders have been more creative with forbearance agreements. Low interest rates have also helped individuals stay in their homes.
The justice system has also played a role due to the pandemic. With courts barely recovering in some jurisdictions and the time it takes for foreclosure states to close a sale, there was a negative trend over the dreaded tsunami of bankruptcy filings. In addition, the time given to creditors to obtain judgments and proceed with the execution of the debtor’s assets has slowed the process down and does not force consumers or businesses into bankruptcy.
Another question to consider is if businesses are struggling because of Covid-19, why don’t we see a substantial increase in commercial bankruptcy filings either through Chapter 11, Sub-Chapter V or Chapter 7 liquidations?
As PPP funding continued, along with other grants or low-interest loans made available by federal and state governments, businesses were able to continue to operate. This is true even with the higher labor costs due to difficulties in obtaining workers from the workforce. Business owners have been more inclined to work with a struggling property or lease because the difficulty in finding a replacement owner or tenant may have been difficult.
Court activity impacts the bankruptcy landscape
Once again, the Supreme Court has ruled on a bankruptcy issue. The Court addressed the issue of violation of automatic stay and retention of property when filing for bankruptcy.
In City of Chicago v. Fulton 141 S. Ct. 585 (2021), the Court held that it was not a violation of the suspension for the City of Chicago to detain a vehicle in its possession due to non-payment of parking tickets. The Supreme Court concluded that maintaining the status quo was not a violation of the stay.
The court, however, returned it for further proceedings and said a motion of assignment might be the correct course of action to gain possession of the vehicle.
The Ninth Circuit Court of Appeal also addressed this issue in Stuart v. City of Scottsdale, CV-20-00755-PHX-JAT (D. Ariz. 2021), regarding the seized funds that were being held. The Ninth Circuit found that the estate had no interest in the property and that the failure to release the garnishment was not a violation of the automatic stay.
Under 11 USC § 363 (a) (2) and § 362 (a) (3), the city has not taken steps to recover a pre-motion judgment. The court also found that by promptly informing the trial court of the bankruptcy filing, it had maintained the status quo.
The Middle District of Pennsylvania also addressed maintaining the status quo on the funds that were seized. As long as there is no affirmative action to offset “ownership” on the debt, there will be no suspension violation.
Recently, the Northern District of Illinois Bankruptcy Court at Cordova v. City of Chicago 19-00684 (Bankr. ND Ill. December 6, 2021) ruled on a motion to dismiss a class action suit alleging that the detention of vehicles by the city violated subsections (a) (3), (a) (4), (a) (6) and (a) (7) of 11 USC § 362 as well as 11 USC § 542 (a).
The Court concluded that the Supreme Court’s decision in Fulton was not in control and discovered that potential claims existed under (a) (4) and (a) (6). The Court dismissed the charge under (a) (7) without prejudice, which would allow the plaintiffs to re-file this claim after modification. The Court allowed claim 542 (a) regarding the transfer of the assets of the estate. The court dismissed the claim for punitive damages with prejudice.
As a result of this ruling, we expect to see additional filings in this case and potentially in other jurisdictions across the country.
What the Supreme Court ruling has shown us is that maintaining possession of property when bankruptcy is filed is an unresolved issue. While there is no suspension violation, other disputes will arise including, but not limited to, rotation motions and notification issues.
Another question that continues to be debated is whether a debtor has an absolute right to dismiss Chapter 13 proceedings under 11 USC § 1307 (b). This article provides that a debtor has the absolute right to reject its Chapter 13 proceedings until the case has first been converted.
Several circuit courts and lower courts have addressed this issue and have issued decisions to the contrary. Some courts have held that there is an absolute right, while others have ruled that the absolute right does not exist when there are bad faith issues in the debtor’s filing.
The most recent case is In Mingrove of South Carolina, 2021 WL 445589 (Bkr D. SC 2021). The court ruled that the debtor had an unconditional right to dismiss the case, but the court had the ability to impose penalties based on the debtor’s bad faith filing. With circuit court splits on the matter, we may see a writ of certiorari filed with the Supreme Court.
The other area of bankruptcy litigation continues to revolve around the FRBP 3001 and the allocation of interest charges and costs when filing proof of claims on indefinite unsecured bonds. We continue to see litigation on this issue in Virginia and new objections to the claims are being filed across the country.
In addition to the conflicting cases that have been filed, we also see requests for costs in cases where an objection to a creditor’s proof of claim is argued and state law provides for costs under its law.
Recently, a Nevada judge awarded fees under Nevada law (NRS § 1801. (2) (B)) when an objection to the claim was upheld. This case is currently under appeal to the Bankruptcy Appeal Board.
We have also seen a slight increase in litigation to use state court costs laws in Florida when a debtor overrides an objection to the claim. So far, these cases have met with little success.
Congress takes a closer look at student loan cancellation and medical debt
Of the bankruptcy bills pending in Congress, the bill that received the most support and likelihood of passage was the bipartisan student loan release bill. In August, Senator Dick Durbin of Illinois and Senator John Cornyn of Texas introduced the Fresh Start Through Bankruptcy Act of 2021. The main provisions of the bill would allow the cancellation of federally guaranteed student loans if the borrower has been paying for 10 years. . The bill will likely be reintroduced during the next session of Congress.
One bill that has been introduced without bipartisan support is the Medical Bankruptcy Fairness Act of 2021. It would allow debtors with medical debt representing 10 percent of their adjustable gross income to claim an exemption of $ 250,000 for homestead. It would also allow them to pay off their student loans. With the midterm elections arriving in 2022, we don’t expect this bill to pass.