Legislative Coverage: House Judiciary Subcommittee Bankruptcy Reform Hearing Focuses on Small-Business, Consumer Issues

Members of the House Judiciary Subcommittee on the Administrative State, Regulatory Reform and Antitrust laid out a modest, small-business- and consumer-focused agenda for potential changes to the Bankruptcy Code at a bipartisan hearing today. The members and witnesses focused on expanding simplified subchapter V small-business chapter 11 and individual chapter 13 eligibility and potentially reforming student loan discharge requirements.

Ben Cline, R-Va., did touch on one mega-chapter 11 issue by advocating for increased protection of consumer genetic data in the Bankruptcy Code – a concern triggered by the potential sale of consumers’ genetic information in the 23andMe bankruptcy. Professor Melissa Jacoby of the University of North Carolina at Chapel Hill confirmed for Cline that consumers are currently treated as general unsecured creditors in bankruptcy, with no ability to prevent a sale of their data.

Zoe Lofgren, D-Ca., also mentioned possible reform of chapter 11 venue rules, citing companies that incorporated shell entities and rented post-office boxes in Houston to file in the Southern District of Texas. Lofgren said she intends to reintroduce a bill that requires companies to file in the district where they actually do business; a similar 2023 bill languished in the Republican-controlled Judiciary Committee.

However, most of the hearing was dedicated to subchapter V, chapter 13 and student loan discharge issues. In his opening statement, subcommittee chair Scott Fitzgerald, R-Wisc., seemed to rule out sweeping reform of the bankruptcy system, indicating the subcommittee would focus on “narrowly tailored” revisions to the Bankruptcy Code.

Fitzgerald specifically suggested restoring the temporary 2020 increase in the debt limit for subchapter V eligibility to $7.5 million (which reverted to $3 million in June) and increasing base compensation for chapter 7 trustees.

Ranking member Jerrold Nadler, D-N.Y., agreed and added that Congress should restore the temporary 2020 increase in the debt limit for chapter 13 eligibility to $2.75 million (which reverted to about $2 million in June). Nadler also said the Bankruptcy Code should allow for compensation of chapter 7 debtors’ counsel from the estate, as in chapter 11.

Professors Douglas Baird of the University of Chicago, Edith Hotchkiss of Boston College and Jacoby and attorney Megan Murray of Underwood Murray endorsed restoration of the increased subchapter V debt limit. Baird called the small-business chapter 11 program an “unequivocal success” and Jacoby described subchapter V as “the bankruptcy system at its best.”

The members disagreed on potential student loan discharge reform. According to Fitzgerald, taxpayers should not be “on the hook” for federal student loans taken out to finance “useless undergraduate degrees” from private universities.

Nadler responded that Congress should give student loans the same dischargeability treatment as other unsecured debts. There is “no reason this one category of debt” should be “singled out for special treatment” by making discharge effectively impossible, according to Nadler.

Bankruptcy Judge Michelle Harner of the District of Maryland supported Nadler’s call for making student loans more easily dischargeable, arguing the change would benefit debtors and treat other creditors more fairly. Jacoby agreed, calling the existing “undue hardship” test for discharge of student loan debt “broken.”

Jacoby added that the traditional argument for nondischargeability of government-backed student loans – preservation of federal funds – is not best served by current bankruptcy law and suggested the entire scheme for nondischargeability of specific kinds of debts in section 523 of the Bankruptcy Code, including but not limited to the student loan provision, is “overdue” for reform.

House Judiciary Committee ranking member Jamie Raskin, D-Md., suggested that the fresh start policy behind subchapter V, and chapter 11 more generally, supports making student loans dischargeable. The purpose of chapter 11 is to encourage potentially beneficial but risky debt-fueled innovation by businesses, and the Bankruptcy Code should also encourage potentially beneficial debt-fueled risk-taking by individuals, Raskin remarked.