Keep Your Eye on These Key Bankruptcy Policy Issues

By Ted Gavin, CTP, NCPM, Managing Director & Founding Partner

With a new Congress and administration ramping up, several significant bankruptcy policy issues will be up for review. While the Biden administration implemented major changes to insolvency processes—especially concerning student loans and corporate liability protections—ongoing legal battles and legislative proposals could reshape the bankruptcy landscape. Here are a few areas to watch in the coming months.

1. Student Loan Discharges: A Policy at Risk

One of the most significant bankruptcy reforms under the Biden administration was the easing of rules for discharging government-backed student loans. Before the 2022 changes, borrowers had to meet an extremely high bar to prove economic hardship. Now, under the revised guidelines, if a borrower’s income and expenses are roughly equal, they may qualify for relief.

Since the new rules took effect, bankruptcy filings for student loan discharges have surged by 36%. However, this policy is not enshrined in law and could be rolled back at any time by the Trump Administration. While existing forgiveness is likely safe, Trump could take steps to limit future relief. Republicans have strongly opposed student loan forgiveness efforts, making this a particularly vulnerable policy.

2. Third-Party Releases: The Purdue Pharma Fallout

One of the most contentious bankruptcy issues in recent years has been third-party releases, which allow non-debtor parties—like corporate executives or owner/shareholders—to receive immunity from civil claims as part of a bankruptcy plan.

The Biden administration’s Justice Department argued that bankruptcy courts should not have the power to grant these releases unless all affected creditors agree. In June, the Supreme Court upheld this position in the Purdue Pharma case, blocking the Sackler family from receiving non-consensual releases from lawsuits tied to the opioid company’s bankruptcy.

The Supreme Court’s ruling casts doubt on other mass settlement plans that rely on third-party releases, such as the Boy Scouts of America’s sex-abuse settlement. While Congress could theoretically step in and expand the use of third-party releases beyond asbestos-related cases, as noted in the Supreme Court’s opinion, legislative action on this issue remains uncertain.

3. Small Business Bankruptcy Protections: Will the $7.5M Threshold Return?

It’s easy to forget the last major changes to the bankruptcy code were signed into law by President Trump – those changes included the HAVEN Act which expanded accessibility to bankruptcy for disabled veterans, and the creation of Subchapter V, the small-business chapter 11 procedures. During the COVID-19 pandemic, Congress temporarily expanded access to streamlined bankruptcy protections under Subchapter V of Chapter 11, raising the debt eligibility limit from $2.75 million to $7.5 million. This expansion made it significantly easier for many more small businesses to avail themselves of Chapter 11 and thereby restructure and turn the page on a new chapter.

The higher debt limit expired last June, a victim of political rivalries notwithstanding strong support from bankruptcy professionals and members of Congress. With an estimated 7,500 small businesses utilizing Subchapter V in recent years, there is growing pressure to reinstate the $7.5 million threshold permanently. Whether Congress will act remains to be seen. But it is worth noting that it was a Senate and White House that looks remarkably similar to the present ones that first passed the Small Business Reorganization Act, bringing Subchapter V into existence, so perhaps there is hope. And, as I quipped to a colleague back in November, 2016, if any President is going to understand bankruptcy and the value of access to bankruptcy protections for businesses, it’s this one.