Monday, March 12, 2018

Fed Chairman Jerome Powell says he can't explain why student loans can't be discharged in bankruptcy: An astonishing admission that the emperor wears no clothes

Federal Reserve Chairman Jerome Powell made an astonishing admission at a Senate Banking Committee hearing last month.  He said he could not explain why federal law does not allow distressed debtors to discharge their student loans in bankruptcy.

"I think alone among all kinds of debt, we don’t allow student loan debt to be discharged in bankruptcy," Powell said. "I'd be at a loss to explain why that should be the case."

Powell also acknowledged that mounting student indebtedness could injure the American economy. "It’s not something you can pick up in the data right now," Powell told the Banking Committee, "but at this goes on, and as student [debt] gets larger and larger, it absolutely could hold back growth." 

Fed Chairman Powell is not the first senior Washington official to admit that the student loan program could hurt the American economy. Former Fed Chair Janet Yellen made a similar observation in 2014. "The [student] debt loads certainly are high enough that they may play a role in, for example, making it hard for people to buy first homes, to build a down payment,” Yellen said at a hearing of the Senate Budget Committee.  

But Powell's remarks last month is the first time a senior federal official has candidly admitted that he cannot explain why the Federal Bankruptcy Code makes it very difficult for overburdened college debtors to discharge their student loans through bankruptcy.

In essence, Chairman Powell's surprisingly candid remark is very much like the children's story about the emperor who wore no clothes. Everyone knew the emperor wasn't wearing clothes, but no one was brave enough to state the obvious until a child explained: "The emperor is naked!"

I think Chairman Powell's frank observation may be just the nudge our government needs to honestly address the fact that millions of Americans who took out student loans in good faith simply can't pay them back.

How can the Chairman's remarks be exploited?

I. Alert the bankruptcy judges to the Fed Chair's remarks

First, all student debtors who attempt to their discharge student loans in bankruptcy should notify the bankruptcy judge--either in the complaint itself or in a pleading--that a top economic official in the federal government cannot explain why honest student debtors are barred from shedding their burdensome student loans through bankruptcy.

Powell's observation stands in stark contradiction to the stance taken by the Department of Education and the student-loan debt collectors that have fought bankruptcy relief for almost all student debtors.  For example, DOE opposed bankruptcy relief for a quadriplegic debtor in the Myhre case, and Educational Credit Management Corporation (ECMC) fought Janet Roth, an elderly woman in poor health who was living on less than $800 a month, all the way to the Ninth Circuit Bankruptcy Appellate Panel.

How can DOE and ECMC defend their heartless behavior when the Chair of the Federal Reserve says he can't explain why our government puts onerous restrictions on bankruptcy relief  for insolvent student debtors? Powell's remark might be just the piece of evidence bankruptcy courts need to begin discharging student loans in bankruptcy under more humane standards than currently prevail.

II. Powell's statement should spur a bipartisan effort in Congress to amend the Bankruptcy Code

Second, Powell's admission should prompt Republicans and Democrats to join in a bipartisan push to amend the Bankruptcy Code to remove the "undue hardship" provision in 11 U.S.C. sec. 523 (a)(8). Representatives Katko and Delaney have filed a bill to remove the "undue hardship" clause from the Bankruptcy Code, but so far the bill has gone nowhere.  Senators Warren and McCaskill have introduced a bill to stop the federal government from garnishing Social Security payments to insolvent, elderly student debtors, but that bill too has gone nowhere.

Surely Powell's statement should be all the encouragement Republicans and Democrats need to revise the Bankruptcy Code so that student loans are dischargeable in bankruptcy like any other consumer debt.

Fed Reserve Chair Jerome Powell


Joseph Lawler. Federal Reserve chairman: Mounting student debt could hold back economic growth. Washington Examiner, March 1, 2018.

Joseph Lawler. Janet Yellen warns student debt may be holding back housing recovery. Washington Examiner, May 8, 2014.

Representative John Delaney press release. Delaney and Katko File Legislation to Help Americans Struggling with Student Loan Debt. May 5, 2017.

Wednesday, March 7, 2018

Alexander Holmes v. National Collegiate Student Loan Trust: Don't co-sign your children's student loans!

In 2006, Alexander Holmes co-signed a student loan with Charter Bank One to fund his son's education at the University of Southern Indiana. Charter Bank sold Holmes' loan in a pool of loans to National Collegiate Funding, which then sold the loan to National Collegiate Student Loan Trust (NCSLT).

Ten years later, NCSLT sued Mr. Holmes, claiming he owed more than $16,000 on the loan plus accrued interest. Holmes denied NCSLT's claim and argued that NCSLT did not have standing to sue him.

NCSLT moved for summary judgment, which an Indiana trial court granted. The court then ordered Holmes to pay NCSLT $18,183.26 plus interest and costs.

But Mr. Holmes had a good lawyer and he appealed. An Indiana appellate court reversed the lower court's order against Mr. Holmes on the grounds that NCSLT had not provided admissible evidence that it had the right to collect on the debt Holmes owed Charter Bank.

The court's reasoning is a bit technical; but this is a summary of the appellate court's decision:
In support of its motion for summary judgment against Mr. Holmes, NCSLT offered the affidavit of Jacqueline Jefferis, an employee of Transworld Systems, Inc. (TSI), which was the "loan subservicer" for U.S. Bank, National Association, which the court identified as the "Special Servicer" working for NCSLT.

In a sworn statement, Ms. Jefferis' said she was familiar with TSI's business practices regarding loan records. But, as the Indiana Court of Appeals pointed out:

[T]he Jefferis affidavit provided no testimony to support the admission of the contract between Holmes and Charter One Bank or the schedule of pooled loans sold and assigned to National Collegiate Funding, LLC, and then to NCSLT . . . . There was no testimony to indicate that Jefferis was familiar with or had knowledge of the regular business practices or record keeping of Charter One Bank, the loan originator, or that of NCSLT regarding the transfer of pooled loans . . . . [Emphasis added by me.
In other words, as far as the appellate court was concerned, Ms. Jefferis didn't know nuthin' about no loan from Charter Bank to Mr. Holmes. Consequently, the trial court's judgment against Mr. Holmes was reversed.

Why is the Holmes case, decided by an Indiana state court, important to other student-loan debtors? Three reasons:

I. The private student-loan industry is bundling student loans and selling them to investors

First, the private student-loan industry has been packaging student loans into bundles (or pools) and selling them to third parties, and these third parties often then sell these bundled loans to yet other parties. In fact, these loans can have multiple owners.

In this flurry of transactions, the paperwork often gets mislaid or lost. Sometimes the companies suing student-loan debtors for payment do not have the critical documents necessary to show that they have the legal right to collect on the debt.

This confusion sometimes occurs due to "robo-signing," the mindless signing of documents by people who are not familiar with the original transactions. This was a significant issue during the home-mortgage crisis of 2008, and judges sometimes dismissed home-foreclosure suits because the parties trying to foreclose on houses could not prove they were entitled to grab someone's home.

Thus, anyone who is sued by a company trying to collect on a private student loan should demand that the suing party show that it is the legal entity entitled to sue for the money. Fortunately for Mr. Holmes, NCSLT was unable to show that it was the party that had legal standing to sue him.

II. Student-loan debtors need good lawyers

This brings me to the second reason the Holmes case is significant for other student-loan debtors. Mr. Holmes defeated NCSLT on a technicality. Specifically, NCSLT's documentation did not pass muster with Indiana Evidence Rule 803(6). But only a competent lawyer would know how to make the technical argument that benefited Mr. Holmes.

I once thought that student-loan debtors with the right facts could go into court without lawyers and be successful. And indeed, some debtors have won their cases in federal bankruptcy courts over the ruthless opposition of the debt collectors' lawyers.

But many of these cases turn on legal technicalities that a nonlawyer could not be expected to know. The Holmes case was based on Indiana law, but federal bankruptcy law also has technicalities that nonlawyers will find very difficult to master.

That is why I was heartened by the decision of the Massachusetts Bar Association to organize teams of volunteer lawyers to represent student-loan debtors in bankruptcy courts. If student-loan debtors can get good lawyers, they will have a far better chance of winning their cases than if they go to court without legal counsel.

III. Never co-sign your children's student loans

There's a third lesson to be learned from the Holmes case. Mr. Holmes co-signed a student loan with his son Nicholas to enable Nicholas to enroll at the University of Southern Indiana. In my view, that was a mistake. If Nicholas couldn't figure out a way to attend a regional state university without having his dad co-sign a student loan, then Nicholas needed to figure out another way to go to college.

I've said this before, and I'll say it one more time. Parents should never co-sign their children's student loans. Never. Never. Never.

Note: My thanks to Steve Rhode for calling my attention to Holmes v. 


Alexander Holmes v. National Collegiate Student Loan Trust (Ind. Ct. App. Feb. 27, 2018).

Steve Rhode. Perfect Example Why Most National College Student Loan Trust Lawsuits are BS. Getoutofdebtguyorg., March 1, 2018.

Thursday, March 1, 2018

Lady Bird, the movie, sends an insidious message about elite East Coast colleges (Spoiler Alert)

Lady Bird, Greta Gerwig's  new coming-of-age movie, has been nominated for five Academy Awards, including Best Picture. But it is an insidious movie, which delivers a treacherous message that self-fulfillment can be found at an elite East Coast college.

Christine, who calls herself Lady Bird, is a discontented California girl who attends a Catholic high school in Sacramento. Her mother doesn't understand her, the guy she is sweet on is gay, and she cheats on her exams.

To make matters worse, Lady Bird's parents live in a tiny ranch-style home, with only one bathroom. She self-deprecatingly tells her boyfriend she lives on the wrong side of the tracks, an insult he guilelessly passes on to her mom and dad.

Sacramento bores Lady Bird, which she dismisses as "the Midwest of California." She longs to escape California to go to college on the East Coast.   Although several elite schools reject her, she finally get accepted to a fancy college in New York.

But the school is expensive. Her father, who comes across as a genuinely nice guy, recently lost his job; and at his age, he is unlikely to get another one. Lady Bird's mother, a nurse, works double shifts at a hospital to make ends meet.

But Lady Bird simply must go east to college, so her dad refinances the family home to cover the cost. The movie ends with Lady Bird in New York City, where she lies to one of the first guys she meets and tells him she is from San Francisco.

What a piece of crap! Any young woman who allows her out-of-work father to refinance the family's pathetic little house so she can attend a snooty East Coast college is a self-absorbed jerk. Although the movie is pitched as a young woman's heroic quest for self-fulfillment, it's really just a gratuitous insult to flyover country, which the filmmaker expanded to include parts of California.