Consumer financing expert Paige Marta Skiba seeks to prevent a wave of consumer bankruptcies as unemployment aid ends

Paige Marta Skiba, a professor at Vanderbilt Law School and its Department of Economics, co-chairs a new COVID-19 Working Group of a Consumer Committee of Bankruptcy Scholars who have sounded an alarm about a coming wave of bankruptcies in a July 24 letter to Congress.

In their letter, the interdisciplinary group, which includes scholars from nine universities who study consumer financial health, debt, collections and the bankruptcy system, stated that bankruptcy courts could soon be flooded with consumer bankruptcy filings if Congress does not immediately implement a set of targeted interventions designed to protect households from debt collection, foreclosure and eviction.

In their letter, addressed to Senate Majority and Minority Leaders Mitch McConnell and Charles Schumer and House Speaker and Minority Leader Nancy Pelosi and Kevin McCarthy, the working group offered four recommendations they believe are essential to forestall a flood of consumer bankruptcies resulting from job losses due to the pandemic and the end of the supplemental unemployment benefit many Americans were relying upon to pay rent or a home mortgage.

“Bankruptcy courts are not well equipped to deal with such a dramatic increase in consumer bankruptcy filings,” Skiba said. “They are already dealing with an overwhelming surge in business bankruptcy filings. We have laid out a plan that enables Congress to reduce the number of consumer bankruptcy filings and ensure that bankruptcy is financially useful to those who do file.”

Skiba and members of her working group propose that Congress take these four actions to avert the need for consumer bankruptcy filings:

  • Halt all wage garnishments expect for earnings currently allowed to be garnished for child support and alimony. “At this time and during the pendency of the COVID-19 crisis, people will need all of their wages to support themselves and their families,” the scholars stated, “Halting wage garnishments except for domestic support obligations will give people much-needed breathing room while their incomes stabilize.”
  • Declare that any collection of debt by a debt collector is an unfair practice in violation of the Fair Debt Collection Practices Act until at least the end of 2020. “Research shows that people file bankruptcy in response to creditor collection efforts,” the letter stated, recommending that, rather than a patchwork of state provisions, that Congress should “provide consistent and uniform relief to struggling families as they grapple with the financial fallout from the pandemic.”
  • Extend the foreclosure moratorium provided in the CARES Act through at least the end of 2020 and expand forbearance coverage to all “federally related mortgage loans,” to protect most home mortgages from foreclosure. “At a time when people need to “shelter at home,” temporarily pausing home foreclosures is crucial in controlling the public health crisis,” they stated.
  • Halt all proceedings to evict tenants from rental housing through at least the end of 2020. “Congress has the power to enact such temporary legislation under the Commerce Clause,” the scholars stated. “Congress must not only extend the eviction moratorium provided in the CARES Act, but also expand the protection to cover almost all renters.”

The working group also offered four additional recommendations to enable the bankruptcy system to respond more capably to the unique conditions of the pandemic:

  • Ensure that tenants can remain in rental housing after they file bankruptcy. “Ensuring that people have a place to live is crucial to controlling the public health crisis,” the scholars stated. “We recognize that this may mean some landlords will not be able to make ends meet and will thus require additional small-business relief.
  • Reduce the amount of monthly income debtors are required to pay to creditors each month under Chapter 12 bankruptcy. “At present, repayment plans provide no cushion to account for changes to debtor’s monthly expenses,” the letter stated.
  • Amend the Code to allow people filing bankruptcy to choose which chapter to file under based on their needs rather than how and when the attorney representing the will be paid. “Ensuring that people are not deterred from filing under the chapter suited to their financial and legal needs because they do not have money to pay attorney’s fees prior to filing will improve access to bankruptcy and the functioning of the bankruptcy system,” the scholars stated.
  • Allow all debtors to file and sign documents electronically. “Some bankruptcy courts still require debtors to sign paper petitions with a wet ink signature, and not all bankruptcy courts across the country have implemented electronic filing for people who file without an attorney,” the working group stated. “Congress should ensure that all people can file with electronic signatures and electronically regardless of whether they have assistance from a bankruptcy attorney.”

The working group also recommended that Congress budget for the short-term hiring of additional bankruptcy judges and staff such as law clerks and judicial assistants to provide adequate capacity for the increased caseload.

The letter was signed by 18 faculty members representing law schools, business schools and economic departments at universities throughout the nation.

Skiba formed the working group this spring with eight scholars from other American universities to develop policy solutions for issues created or exacerbated by the pandemic.

“Our goal is to produce research that identifies the role of consumer bankruptcy law during this crisis and explores the limits of that role so we can recommend possible reforms,” she said. “We have talked with staffers working for House members and helped craft statutory language for bills, and we are also working to keep lawmakers informed about actions they could take to improve the dire financial circumstances of Americans who have lost their jobs or are otherwise suffering due to the pandemic.”

The working group includes subgroups focusing on consumer bankruptcy, corporate bankruptcy, small business bankruptcy and municipal bankruptcy.