It is remarkable how little of the COVID-19 economic pain has been shared upstream. But the 2020 crisis, unlike the 2008 financial crash, need not be a permanent marker of rampant financial inequality. Applying a simple principle, slightly more complex to implement, can remedy much of the unequal impact and relieve much of the pain.
The principle is that to the extent a person or business has been financially disabled for any month by the pandemic, that month – and its accrual of rental, interest, and other financial obligations – is deleted from the financial calendar. Our loan, foreclosure, and eviction pauses, and similar temporary relief, should be turned into an amnesty. Let me illustrate that by example.
Joan Smith is unemployed because her restaurant employer has been closed. Giving priority to her basic need to feed and clothe her family, she is unable to pay her rent. She has benefited from an eviction moratorium, but the obligations are piling up on her financial ledger. All of those months are deleted by an amnesty, and her lease is extended by those months. Her monthly car and appliance payment obligations are deleted if they are in default, or are credited against future obligations if she made them. Those loans and leases also are extended.
A proportional amnesty
Smith’s landlady has an eight-unit building and half of her COVID-affected tenants cannot pay their rent. Her landlady also gets a proportional amnesty, to the extent that she cannot pay her mortgage in addition to maintaining her building and paying her taxes. To that proportional extent, her months of accruing mortgage obligations are also deleted from the calendar, and the mortgage is extended. If she owns the building as a part of a corporate conglomerate, she is obligated to demonstrate that these entities, considered as a single enterprise, are materially impaired by the amnesties granted to their customers.
ABC Mortgage Company, the landlady’s lender, may or may not be able to navigate the storm without special assistance. But it can invoke the crisis to defer or cancel payments to its investors, and also gets a proportional amnesty in its obligations to its lenders. Before getting its amnesty it demonstrates that all of its affiliated business entities, considered as a single enterprise, are materially impaired by the amnesties granted to their customers.
Mack’s Diner, Smith’s employer, gets the same loan and rent relief that she gets, for the months that it has been dark or subject to restrictions. Again, the impact of those closings and restrictions are measured against the financial resources of any business affiliates.
And so forth, upstream to the highest financial citadels. The pain becomes more diffuse and manageable as it is shared by our full economy.
Managing the complexity
How do we do all of that with only “slight” complexity? First, respecting our Constitution, we acknowledge that the states are prohibited (with some well-established exceptions or nuances) from “impairing the obligation of contracts.” But Congress has the power to do exactly that, by enacting “uniform Laws on the subject of Bankruptcies throughout the United States.” Over the last four decades, Congress has accompanied its bankruptcy laws with the establishment of specialized bankruptcy courts. Those courts are not necessary for this special effort, because our state courts are courts of general jurisdiction. If Congress permits it, our state courts can share the responsibility for overseeing and enforcing the amnesty.
Second, how do we make the calculations of ability to pay, and of proportionality? We do that by taking a lemon and turning it into lemonade. As a result of the 2005 bankruptcy amendments, we have developed a sophisticated but rapid process of determining the ability of individuals to pay their creditors. For purposes of the amnesty, we can tweak that process to give food and clothing financial priority over shelter and financial obligations. What is good for the consumer can also be good for the business; the array of forms can be adapted to measure their ability to pay their debts.
Third, how do we prevent the benefits of an amnesty from drowning in a swamp of litigation? In addition to enlisting our growing army of mediators, we can require the parties to meet, confer, and then place their bets before they go into litigation. Require parties who cannot resolve their differences without resort to the courts to put concrete, comprehensive written proposals on the table before they initiate or defend the litigation. The parties who best predict the result get their costs and attorney’s fees reimbursed by the other parties.
Kurt M. Anderson is a lawyer in Minneapolis. His practice includes bankruptcy and mental health law.
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