discharging student loan debt in bankruptcy: borrower and...
TRANSCRIPT
Discharging Student Loan Debt in Bankruptcy:
Borrower and Creditor PerspectivesBankruptcy Code Provisions; Educational Loan Types; Relevant Cases; Partial Discharge;
Specialized Treatment in Chapters 7 and 13
Today’s faculty features:
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WEDNESDAY, DECEMBER 11, 2019
Presenting a live 90-minute webinar with interactive Q&A
John T. Baxter, Attorney, Nelson Mullins Riley & Scarborough, Nashville, Tenn.
Natalie Jean-Baptiste, Founder, Law Office Of Natalie Jean-Baptiste, Uniondale, N.Y.
Kurt A O’Keefe, Founder, Detroit Bankruptcy Lawyer Kurt O’Keefe, Detroit
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Student Loans and
Bankruptcy
Student Loans – An Overview
• Two Types of Student Loans: Federal & Private
• Federal Loans
• FAFSA (Free Application for Federal Student Aid)
• Perkins Loan
• Direct Loans
• Generally limited based on information provided in the FAFSA
• Subsidized by the Government (depending on information in FAFSA)
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Student Loans – An Overview
• Private Loans
• Typically No FAFSA
• Require a credit-check on the front-end – may need a cosigner
• Provided by banks, credit unions, and other typical lending institutions
• No governmental subsidies
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Student Loans – An Overview
• Key Differences
• Federal: Deferral typically an option; income-based repayment; potential for loan
forgiveness
• Private: Dependent on credit score; higher interest rates unless excellent credit; amount
not limited by FAFSA; typically no deferral to payment while in school, though some
lenders may provide
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Student Loans – An Overview
• Student Loan Servicers
• Navient
• Great Lakes
• Nelnet
• HESC/FedLoan
• American Education Services
• Granite State
• MOHELA
• OSLA
• EdFinancial
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Educational Loans in Bankruptcy
• Section 523(a)(8) – The Battlefield in Bankruptcy
• A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not
discharge an individual debtor from any debt–
• (a) unless excepting such debt from discharge under this paragraph would impose an undue
hardship on the debtor and the debtor’s dependents, for–
• (A)(i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental
unit, or made under any program funded in whole or in part by a governmental unit or nonprofit
institution; or
• (ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or
• (B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of t
he Internal Revenue Code of 1986, incurred by a debtor who is an individual . . . .
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Educational Loans in Bankruptcy
• Unpacking Section 523(a)(8) – Three Types of Loans Covered
• A “qualified education loan,” as defined by the Internal Revenue Code
• An educational benefit overpayment or loan made, insured, or guaranteed by a
governmental unit or made under any program funded in whole or in part by a
governmental unit or non-profit institution
• E.g. payments under the G.I. Bill above the amount needed for tuition
• An obligation to repay funds received as an educational benefit, scholarship or stipend
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Educational Loans in Bankruptcy
• Co-Obligors Covered
• Although the text of the statute appears to only apply to the person who receives the
actual benefit of the loan, co-obligors (typically parents) typically fall within the
discharge exception.
• See In re Salter, 207 B.R. 272, 275 (Bankr. M.D. Fla. 1997) (“The exception to discharge
provision as it relates to student loans applies even if the borrower is not a student but, as
in the present instance, a parent.”)
• But see, In re Pryor, 234 B.R. 716, 716 (Bankr. W.D. Tenn. 1999) (holding that comaker of
student loan that was not student who received the educational training was not covered by
discharge exception of section 523(a)(8)).
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Educational Loans in Bankruptcy
• Whether a loan is private versus federal can impact dischargeability
• Typically, there is no question that federal loans fall within the discharge exception of 523(a)(8)
• Purely private loans, however, may be more likely to be subject to discharge
• A recent case is illustrative: Nitcher v. Educational Credit Management Corp. (In re Nitcher), 18-03090 (Bankr. D. Ore. Aug. 23, 2019)
• In Nitcher, the Bankruptcy Court discharged the majority of a debtor’s private loans, as the private lender had the sole decision-making authority to garnish wages to obtain the funds, a result the Bankruptcy Court determined would cause the debtor an undue hardship
• Conversely, the governmental loans were payable on an income-based plan, so the debtor could eventually have the remainder discharged at the end of the payment period.
• The Court discharged the bulk of the private loans, but did not discharge the federal loans.
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Educational Loans in Bankruptcy
• The Primary Points of Argument
• (1) Does the loan meet the statutory definition of an educational loan?
• (2) Is the loan federal or private?
• (3) Is there an argument that the “purpose” of the loan or the use of the loan was not
for an “educational benefit”?
• (4) Is the debtor the primary obligor (e.g. student) or a co-maker of the loan?
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DISCHARGING STUDENT LOAN DEBT IN BANKRUPTCY
Natalie Jean-Baptiste, Esq. Law Office of Natalie Jean-Baptiste, P.C.
DISCHARGING STUDENT LOAN DEBT IN BANKRUPTCY
Establishing Undue Hardship
Determining Undue Hardship
Brunner Test – adopted by all circuits except First and Eighth Circuits. The burden of proof
is on the debtor to establish undue hardship.
The debtor must establish:
1. That the debtor cannot, based on current income and expenses, maintain a minimal
standard of living for himself or herself and his or her dependents if forced to repay
the loans;
2. That additional circumstances exist indicating that this state of affairs is likely
to persist for a significant portion of the repayment period; and
3. That the debtor has made good faith efforts to repay the loans.
Brunner v. N.Y. State Higher Educ. Servs. Corp., 831 F.2d 395, 396 (2d Cir.1987)
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Determining Undue Hardship
Totality of the Circumstances Test – adopted by the Eighth Circuit and some courts in the First Circuit. The Bankruptcy Court must consider:
1. The debtor’s past, present, and reasonably reliable future financial resources;
2. A calculation of the debtor’s and her dependents’ reasonable and necessary living expenses; and
3. Any other relevant facts and circumstances surrounding each particular case.
Long v. Educ. Credit Mgmt. Corp. (In re Long), 322 F.3d 549, 553 (8th Cir.2003)
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Totality of the Circumstances Test
Multiple factors considered, including:
• Total present and future incapacity to pay debt not in the debtor’s control
• Good faith effort to negotiate a deferment or forbearance
• Whether there is a long-term hardship
• Whether debtor made payments on the loan
• Permanent or long-term disability
• Can debtor find gainful employment in her area of study
• Efforts to maximize income and minimize living expenses
• Was the dominant purpose of the bankruptcy to discharge the student loan
• The ratio of student loan to total debt
In re Jesperson, 571 F3d 775 (8th Cir 2009)
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Applying Brunner – Minimal Standard of Living
• What is debtor’s standard of living?
• Are debtor’s expenses reasonable?
• –Any unique expenses related to dependents (e.g., children with disability/medical condition)?
• Elements of the minimal standard of living:
• –Decent shelter and utilities; food and personal products; vehicles maintained, insured and tagged; health insurance, or ability to pay for medical and dental expenses when they arise; at least small amount of life insurance; and funds for recreation (e.g. cable, pet)
In re Ivory, 269 B.R. 890 (Bankr. N.D. Ala. 2001)
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Applying Brunner – Minimal Standard of Living• Debtor satisfied minimal standard of living factor because she had $400 of disposable
income but payment of all student loans of over $350, would be an undue hardship. Norasteh v. Boston Univ. (In re Norasteh), 311 B.R. 671,676 (S.D.N.Y. 2004)
• Debtor satisfied minimal standard of living factor because debtor had been unemployed for years, lived with his mother, and received SSI. Traversa v. Educ. Credit Mgmt. Corp (In re Traversa) 444 Fed.Appx. 472,474 (2d Cir 2011)
• Debtor failed to satisfy minimal standard of living factor because debtor had $1272 of monthly disposable income and his student loan payment was $808, leaving him with $464 after payment. Hixson v. U.S. Dept. of Ed. (In re Hixson), 4 B.R. 9, 20 (S.D.N.Y 2011)
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Reasonable and Necessary Expenses
• Food
• Housing
• Utilities
• Basic Communication
• Necessary Medical and Dental
• Necessary Insurance
• Transportation
• Childcare
• Child Support/Alimony 22
“Luxuries”
• Dining Out
• Gym Membership
• Premium Cable
• Premium Cell Phone Service
• Salon/Spa/Cosmetics
• Concert Tix
• Vacation
• Alcohol/Cigarettes 23
Applying Brunner – Additional Circumstances
• Are there “additional circumstances” that more likely than not current hardship will continue?
• How can you prove a “certainty of hopelessness?”
• –Is it required? See In re Nys, 446 F. 3d 938 (9th Cir. 2009)
• Factors: age, children, earning capacity peaked, limited or poor education, etc.
• Continue for how long?
• For original loan repayment period (not for 25 years, or until borrower dies)
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Applying Brunner – Additional Circumstances• Debtor satisfied the additional circumstances factor because she was 64 years old,
worked on an assembly line for 12 years, and never completed her college education. Bene v. Educ. Credit Mgmt. Corp. (In re Bene), 474 B.R. 56 56,73 (W.D.N.Y. 2012)
• Debtor satisfied the additional circumstances factor because he suffered from severe bipolar disorder. Jackson v. Ed. Res. Inst., et al (In re Jackson) (S.D.N.Y 2007)
• Debtor failed to satisfy additional circumstances factor because although debtor suffered from depression, sleeping disorders, ADHD and bipolar disorder, debtor’s condition improved with medication. Traversa at 475
25
Applying Brunner – Good Faith
• The “good faith” test: no textual basis in Code
• Efforts to maximize income/Past career decisions: bad for ministers, artists/musicians, public interest lawyers
• Being too poor to make payments is not bad faith, In re Mosley, 494 F.3d 1320 (11th Cir. 2007)
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Applying Brunner – Good Faith • Debtor satisfied good faith factor because debtor made efforts to maximize income,
minimize expenses, and obtain employment. He communicated regularly with his lenders and was conscientious in paying his loans when he could. King v. Vermont Student Assistance, et al. (In re King) 368, B.R. 358, 373-4 (D. Vt. 2007)
• Debtor satisfied good faith factor because he waited a substantial period of time before acknowledging that his medical and financial conditions required him to discharge his student loans. Jackson at *9
• Debtor failed good faith standard because although debtor sought deferments, she made no attempt to avail herself of the other repayment options. Thomas v. Educ. Credit Mgmt. Corp., 257 B.R. 144, 150 (S.D.N.Y. 2001)
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Partial Discharge
• Courts are divided regarding whether they have authority to discharge a portion of a student loan while declaring the remainder nondischargeable.
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Partial Discharge – Strict Approach
• “All or nothing”
• Courts conclude that 523(a)(8) contains no statutory language that would authorize a partial discharge of a student loan. Educ. Credit Mgmt. Corp v. Carter (M.D. Ga 2002)
• Authorizing partial discharge leads to unpredictability, lack of uniformity Conway v. Nat’l Collegiate Tr. (In re Conway)
29
Partial Discharge – Flexible Approach
• Court’s willingness to discharge a portion of student loan
• Discharge the portion of the debt that created the hardship and require repayment only on the remaining portion. Littell v. State Board of Higher Education (In re Littell)
• Debtor must generally satisfy the Brunner (or TOC) standard as to discharged portion. Carnduff v US Dept of Educ.
30
Partial Discharge – Hybrid Approach
• Forbids partial discharge of a single loan yet allows debtors who hold multiple student loans to discharge some of those loans but not others. Conway v. Nat’l Collegiate
• On a loan-by-loan basis, some may be discharged while others may be found nondischargeable Grigas v. Sallie Mae Servicing Corp.
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Income-Driven Repayment Program
• Participation in an income-driven repayment program is not required to establish an undue hardship. Educ. Credit Mgmt. Corp. v. Mosley (In re Mosley), 494 F.3d 1320, 1327 (11th Cir. 2007)
• “The fact that a debtor can afford the monthly ICRP payment is not dispositive as to whether she can maintain a minimal standard of living while repaying her student loan.” Durrani v. Educ.
Credit Mgmt. Corp. (In re Durrani)
32
Student Loans And
Bankruptcy - More
Resources
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National Consumer Law Center
(NCLC)
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Joshua Cohen – The Student Loan
Lawyer
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Kurt O’Keefe blog
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Government Site Links
• The USED (United States Department of Education)
https://studentloans.gov/myDirectLoan/login.action
http://www.loanconsolidation.ed.gov
https://studentaid.ed.gov/sa/redirects/ombudsman-ed-gov
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Chapter 13 Bankruptcy Student
Loan Treatment
• - Some jurisdictions allow separate classification, so your client can stay current on payments
• - However, if this is not allowed, filing Chapter 13 puts your client into default on student loans
• - You could file Chapter 13 to buy time, betting the law will change in our favor
• - Official USED policy is not to file claims to avoid dealing with district specific mediation and other such programs
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AP in 13
• - The same Brunner standard applies
• - You already have your projected income and
expenses, and your client is making good faith
payments, so part of the test is satisfied
• - You have a way to get paid – if you can do that in
the Chapter 13 Plan
• - Your client is protected while you litigate
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Student Loan Adversary In Chapter
13?
Timing- You could file the AP right after the case, adjourning
confirmation until the AP is resolved. This builds a fund with the trustee for your fee application.
- If your client can start the case with a lump sum payment to the trustee, that could be a source for your fees
- You may need to know the result of your AP to properly schedule the student loans in the plan
- Caveat – some courts require the AP not be filed until near the end of the plan
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Advantages of Filing Ap’s -
NOT a Lost Cause
• A study of bankruptcy cases with student loan debt in 2007 revealed a total of 213 student loan adversary proceedings filed – out of a possible 169,774 bankruptcy cases
• 50% received some relief, 25% full discharges
• An ABI article, Volume 83, Issue #1, the Pardo & Lacey study showed that having an experienced attorney makes a big difference
• Lots of the bad case law we read is from pro per debtors filing adversaries
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Bankruptcy Proof Of Claim
• Who cares?
• This may be a chance to bounce a zombie student loan debt
• National Collegiate Trust (NCT) and Younomics buy private student loan debt
• Like all zombie debt creditors, they have trouble connecting the dots
• If you get an order denying the claim, that should be issue preclusive to any future state court lawsuit by the creditor
42
What Entity Filed the Proof of
Claim?
• I had a client with a prior Chapter 13 case with another attorney on which NCT filed one claim –
• For NINE different NCT trusts
• Their attorney argued in state court that “NCT” was just a nickname
• That should have precluded each of the NINE trusts suing my client in separate lawsuits from even bringing a lawsuit
43
Student Loan Bankruptcy Law Will
Change
• I predict in the next 3 years, because, everyone has or knows someone on the hook for big student loan debt
• National Association of Bankruptcy Attorneys (NACBA) supports a bill that would make student loan debt dischargeable just like any other debt https://www.nacba.org/who-we-are/nacba-in-congress/
• “NACBA specifically focused on encouraging House sponsorship of bipartisan bill H.R. 2366 Discharge Student Loans in Bankruptcy Act of 2017 sponsored by Congressmen John Delaney (D-MD) and John Katko (R-NY). NACBA members also encouraged Senators to take lead in sponsoring a similar bipartisan bill.”
44
American Bankruptcy Institute
• ABI did an extensive nationwide study into
improving consumer bankruptcy law. The full report
is available at
https://consumercommission.abi.org/commission-
report
45
ABI Proposed Student Loan Code
Change
• Student loans should be dischargeable under §523(a)(8), regardless of the degree of hardship they impose, if they were
• made by a nongovernmental entity (private loans),
• incurred by a person other than the one receiving
• the education, or
• first payable more than seven years before the bankruptcy.
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ABI Proposed Brunner Test
Changes
• • Under the Brunner test, “undue hardship” should be found if
• ⎼ the debtor cannot currently pay,⎼ will not be able to pay during loan term, and ⎼ has not failed to act in good faith.
• Findings should be made on a preponderance of the evidence.
• Appellate review: the determination of undue hardship should be treated as a finding of fact.
47
ABI Proposed Student Loan
Administrative Changes
• Administrative procedures:
• The Department of Education, through regulations or interpretive guidance, should provide that student loan creditors
• should not oppose the discharge of student loans owed by anyone (i) eligible for Social Security or veterans disability benefits or (ii) falling below certain poverty-level thresholds, and
• should accept and evaluate the borrower’s evidence without reference to formal guidelines such as court discovery rules.
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War Stories
• In re: Chandler ED MI AP# 14-4318 USED stipulated to partial discharge, 197k to 125k and lower interest rate
• In re: Dell ED MI AP #11-06135, stipulated to partial discharge, 20k to 15k and lower interest rate
• In re: Wilson, ED MI AP #19-05212, Navient stipulates to discharge
• In re: Good, ED MI AP # 17-04451, potpourri
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Thank You
John T. Baxter
Natalie Jean-Baptiste
Kurt A O’Keefe
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