Showing posts with label student loans and bankruptcy. Show all posts
Showing posts with label student loans and bankruptcy. Show all posts

Tuesday, May 30, 2017

Discharging Student Loans in Bankruptcy: A Field Guide For People Who Have Nothing To Lose

Student loans cannot be discharged in bankruptcy. How often have you heard that said? But that bromide is not true. Student loans are being discharged--or at least partly discharged--in the bankruptcy courts every year.

So if you are a distressed student borrower who will never pay back your student loans, why not attempt to discharge your college loans through bankruptcy? What have you got to lose?

You say you don't have money to pay a lawyer to represent you in bankruptcy court? Then represent yourself. Again--what have you got to lose?

This essay is a field guide for struggling debtors who are thinking about filing for bankruptcy to discharge their student loans.  This is a difficult process, and not everyone will be successful. In fact, much depends upon drawing a sympathetic bankruptcy judge. But you will not know whether your college debt is dischargeable through bankruptcy unless you make the effort. So let's get started.

I. The standard for discharging student loans in bankruptcy--the "undue hardship" rule.

Section 523(a)(8) of the Bankruptcy Code states that a student loan cannot be discharged in bankruptcy unless the debtor can show that paying the loan would pose an "undue hardship" on the debtor and his or her dependents.

Congress did not define undue hardship when it adopted this provision, so it has been left to the courts to define it. Most federal circuits have adopted the Brunner test, named for a 1987 federal court decision. The Brunner test contains three parts:


(1) that the debtor cannot maintain, based on current income and expenses, a "minimal" standard of living for herself and 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 of the student loans; and 

(3) that the debtor has made good faith efforts to repay the loans.

Although most bankruptcy courts and federal appellate courts utilize the Brunner test when deciding student-loan bankruptcy cases,  there is a remarkable variations among the courts about how the Brunner test is interpreted, with some courts interpreting it more favorably for debtors than others.

II. Filing an adversary complaint

Filing for bankruptcy is a relatively straightforward process--particularly for people who have no assets. Many lawyers will walk you through a Chapter 7 bankruptcy for a flat fee.


But discharging your federal student loans requires you to file an adversary action--a separate lawsuit--against your student loan creditors, which may be the U.S. Department of Education, a student loan guaranty agency, or one of the government's approved debt collectors. And if you have private student loans you will need to sue your private creditor as well.

Drafting a complaint for your adversary action is not difficult; you can find forms on the web or in published bankruptcy guides.

III. Gather your evidence before you filed your adversary complaint

In my view, you should gather all your documentary evidence before you file your adversary complaint. That evidence should include:
  • all the records you have of payments you made, 
  • correspondence with your creditor, 
  • documents supporting efforts you made to find employment, 
  • evidence of health problems, disability status, and any other documents that support your claim that paying off your student loans would be an undue hardship.
In addition, if you negotiated with your creditor about entering into a long-term income-based repayment plan, gather the documents that show what efforts you made to explore repayment options.

If relevant, you should also gather evidence showing the  job market for your profession is bad. People who attended law school, for example, should provide evidence of the bad job market for newly graduated lawyers. If you failed the bar exam or another pertinent licensing exam, you should gather evidence establishing that fact.

If you attended a for-profit school that has been found guilty of fraud or misrepresentation, you should obtain documents to educate the bankruptcy judge about your school's misbehavior.

Why is it important to gather your evidence before you file your adversary complaint? Two reasons:

First, one of the first things your creditor will do after you file your lawsuit is send you discovery requests: 1) interrogatories (questions) about your financial status and your expenses,
2) requests for  production of your documents, and
3) requests for admissions (more about requests for admissions later.)

Having your documents prepared in advance will enable you to respond to your creditor's requests for documents in a timely manner and will subtly communicate that you are prepared to have your case go to trial.

Secondly, assembling your documents early will help you determine the strengths and weaknesses of your case before you file your adversary complaint. For example, if you are disabled or have medical problems, evidence about your health status will be helpful in establishing undue hardship.

On the other hand, if you made few or no payments on your student loans over the years, that is a negative fact for you because the creditor will argue that you did not manage your loans in good faith. Courts have discharged student loans in several cases in which the student debtor made no voluntary loan payments, but you will want to be able to argue you that you meet the good faith test in spite of your spotty payment history.

IV. Know the case law about student loans and bankruptcy in your jurisdiction.

It is also important that you know how courts have ruled in student-loan cases in your jurisdiction. If you live within the boundaries of the Ninth Circuit, you will want to be familiar with the Roth decision, Hedlund, Scott and Nyes. If you live in the Tenth Circuit, you will want to know about the Polleys decision.  If you are in the Seventh Circuit, the Krieger decision is important to you.

V. Be psychologically prepared for a long court battle.

Published court decisions show that the Department of Education and the student loan guaranty agencies are sometimes willing to fight student debtors in the courts for a long time. In the Hedlund case, for example, involving a law graduate who failed to pass the bar exam, the creditor fought Mr. Hedlund in the federal courts for ten years.

Why do the student-loan creditors drag out litigation with bankrupt student borrowers? Two reasons: First, the student loan guaranty agencies are reimbursed by the federal government for their attorneys fees, so they have little incentive to stop litigating. And of course, the Department of Education has free government attorneys to represent its interests.

Secondly, by filing appeals and driving up litigation costs, the Department of Education and the student loan guaranty agencies know they are demoralizing student debtors, making it more likely they will abandon their lawsuits. And of course, by imposing heavy financial and psychological costs on people who file adversary actions, the Department of Education knows that it is discouraging distressed debtors from even trying to discharge their student loans in bankruptcy.

VI. Be appropriately suspicious of any document a creditor's attorney asks you to sign.

Once you file your lawsuit, be aware of two potential dangers. First, the Department of Education or one its debt collectors will probably send you a "Request for Admissions." Do not ignore that document. If you fail to respond to a Request for Admissions, the statement you are asked to admit is deemed admitted.  It is very important to remember that.

Second, it is improper for a party to ask an opposing party to admit a principle of law. For example, it would be improper for a Request for Admission to ask you to admit that it would not be an undue hardship for you to repay your student loans.

Obviously, you should answer all interrogatories and requests for admissions truthfully, but do not admit to propositions that you are unclear about or which you do not understand. If you do not know the answer to a question, it is permissible to state that you do not know.

Similarly, don't sign a stipulations of facts that a creditors' attorneys asks you to sign unless you are very clear that signing a stipulation won't prejudice your case in court. And remember--when a government attorney waves a stipulation in your face and asks you to sign it, the attorney is not making that request to help you. The lawyer drafted that stipulation to help the government.

VII. What do you do if you win your adversary action and the creditor appeals?

 In several instances, student-loan debtors have gone to court without an attorney and won their case. It has been my observation that some bankruptcy judges are sympathetic to people who are overwhelmed by student loan debt, and these judges have written remarkably thorough decisions ruling in the debtor's favor.

But sometimes the creditor appeals, forcing the debtor to figure out how to file a strong appellate brief. For example, Alexandra Acosta-Conniff won a student-loan discharge in an Alabama bankruptcy court, and George and Melanie Johnson won their case before a Kansas bankruptcy judge. In both cases, the debtors were opposed by Educational Credit Management Corporation (ECMC); and in both cases, ECMC appealed.

In my view, debtors need an attorney to represent them in appellate proceedings, so debtors who win their cases at the bankruptcy-court level without lawyers need to find an appellate lawyer to help them if their bankruptcy court victory is appealed.

If it is absolutely impossible to hire an appellate attorney and you are forced to file an appellate brief without an attorney, then you should at least try to find appellate briefs filed in other cases to help you file your own appellate brief.  You can contact me, and I will be happy to help you find pleadings that will be helpful to you.

VIII. A few words about private student loans


Thanks to the deceptively named "Bankruptcy Abuse Prevention and Consumer Protection Act of 2005," private student loans are as difficult to discharge in bankruptcy as federal student loans. For both types of loans, the "undue hardship" rule applies.

To protect their own interests, the banks and other private student-loan defenders (Sallie Mae, etc.) usually require student borrowers to find a co-signer to guarantee the loan. Generally, the co-signer is a parent or other relative.

So remember, even if you discharge a private student loan in bankruptcy, your co-signer is still liable to pay back the loan. And the co-signer, like you, must meet the "undue hardship" test if he or she tries to cancel the debt in bankruptcy.

Conclusion

The student loan crisis grows worse with each passing month. As the New York Times noted recently, 1.1 million student borrowers defaulted on their student loans in 2016--that is an average of 3,000 defaults a day!

Bankruptcy judges read the newspapers, and many of them have children or relatives who are overwhelmed by their student loans. I think the judges are beginning to be more sympathetic to "honest but unfortunate" student-loan debtors who acted in good faith and simply cannot pay back their student loans.

Some student borrowers have a better case for a bankruptcy discharge than others, but hundreds of thousands of people have a decent shot at getting their student loans cancelled through bankruptcy if they just make the effort.

Filing an adversary complaint in a bankruptcy court takes courage, fortitude and hard work--particularly in gathering evidence necessary to show a bankruptcy judge that repaying your student loans truly constitutes an undue hardship. And not everyone who seeks relief from student loans through bankruptcy will be successful

Nevertheless, if you are a student debtor with crushing student loans, you should consider filing for bankruptcy. If, after careful thought, you determine that you have nothing to lose by filing, then you should file an adversary complaint and fight for relief from oppressive student debt. Others have been successful, and you too might be victorious in a federal bankruptcy court.

References

The Wrong Move on Student LoansNew York Times, April 6, 2017.





Tuesday, May 23, 2017

Parents should NEVER co-sign a child's student loans: Don't throw your life away!

For pity's sake, Christine, say no! Don't throw your life away for my sake!

Raoul De Chagny
Phantom of the Opera 

If you are a parent of a college student and are thinking about co-signing your child's student loan, you should read an article posted recently on Moneytips.com and re-posted on Personal Finance Syndication Network.

Moneytips reported on a survey by LendEdu that asked parents to rate their experiences as co-signers of their children's student loans. The survey findings are harrowing:
  • 34 percent reported that their child failed to make a payment on time.
  • 34 percent reported that a co-signed loan hurt their ability to apply for financing.
  • 35 percent of survey takers regretted co-signing a loan for their child.
  • 57 percent said that a co-signed loan had hurt their own credit rating.
And contemplate this sobering statistic: More than half (51.2 percent) of the respondents believed that co-signing a student loan had put their own retirement in jeopardy!

Parents often fail to understand the catastrophic consequences that can result from co-signing student loans with their children:

First of all, co-signing parents are 100 percent liable for paying back the loan if their child fails to make loan payments.

Second, a parent will find it very difficult to discharge a co-signed student loan in bankruptcy. Like student borrowers, parent co-signers cannot discharge student-loan debt in a bankruptcy court unless they can demonstrate "undue hardship"--a very difficult standard to meet.

Third, if a co-signed loan goes into default, penalties will be assessed to the amount borrowed, and the parent's credit will be adversely affected.

There are exceptions for almost every rule, but there are no exceptions to this one: NEVER CO-SIGN A STUDENT LOAN FOR A CHILD.  If your darling child's college plans require you to co-sign a student loan, then your child needs to make another plan--a plan that doesn't put your financial future at risk.



References

Why Co-Signing a Loan Could Delay Your Retirement, Moneytips.com April 28, 2017. Re-posted on  Personal Finance Syndication Network, pfsyn.com

Friday, April 14, 2017

Bankrupt student-loan debtors need GOOD LAWYERS: The sad case of Ronald Joe Johnson v. U.S. Department of Education

We often hear that student loans cannot be discharged in bankruptcy---don't even try. But in fact, quite a few people have gotten relief from their student loans in the bankruptcy courts. And a few student-loan debtors have gone to bankruptcy court without lawyers and been successful.

But if you go to bankruptcy court to shed your student loans, you should bring a good attorney because the Department of Education or one of its agents will be there to meet you, and DOE and its proxies have battalions of skilled lawyers who will fight you every step of the way.


The Sad Case of Ronald Joe Johnson v. U.S. Department of Education

Johnson v. U.S. Department of Education, decided in 2015, illustrates why student-loan debtors should have good lawyer to represent them in the bankruptcy courts.  In that case, Judge Tamara Mitchell, an Alabama bankruptcy judge, refused to discharge Ronald Joe Johnson's student loans even though he and his wife were living on the edge of poverty. If Mr. Johnson had been represented by a competent attorney, I think he might have won his case.

In 2015, Johnson filed an adversary proceeding in an Alabama bankruptcy court, seeking to have his student loans discharged. The U.S. Department of Education opposed a discharge (as it almost always does), and a lawyer from the U.S. Attorney's Office in Birmingham, Alabama showed up to represent DOE and make sure Johnson lost his case.

Johnson had taken out student loans in the 1990s to enroll in some sort of postsecondary program, which Judge Mitchell did not bother to describe in her opinion. Johnson testified that he had enrolled for four semesters but had only completed one of them,  He testified further that his studies had not benefited him at all.

In 2000, Johnson obtained a Direct Consolidation Loan  in the amount of about $25,000, with interest accruing at 8.25 percent per year. Although he paid approximately $10,000 on the loan, mostly through wage garnishments and tax offsets, he hadn't reduced the principal by even one dollar. In fact, when Johnson appeared in bankruptcy court in 2015, his debt had grown to over $41,000.

Mr. Johnson desperately needed relief from his student loans. He testified at trial that he made about $2,000 a month working at two jobs; he was a municipal employee and also an employee at a local Walmart. His wife suffered from diabetes, which required expenditures for insulin and other supplies; and of course some of his income had been garnished by the government.

Unfortunately for Mr. Johnson, he signed a formal stipulation of facts that a DOE lawyer had cunningly prepared. In that stipulation, Johnson affirmed that it would not be an "undue hardship" for him to repay his student loans.

Although Mr. Johnson did not know it at the time, he lost his adversary proceeding the instant he signed his name to DOE's prepared stipulation. Debtors cannot discharge their student loans in bankruptcy unless they can show undue hardship; and Mr. Johnson admitted in writing that paying back his loans would not be an undue hardship.

If Ronald Joe Johnson had been represented by a lawyer, he would never have signed that document. Moreover, a lawyer would have told him to bring evidence to court documenting his wife's medical expenses.

In short, Johnson was a sitting duck when he walked into Judge Mitchell's bankruptcy court without legal counsel. Judge Mitchell noted that he admitted that his loans did not present an undue hardship and that he had not brought any evidence of the expenses he had incurred to treat his wife's diabetes.

And then Judge Mitchell walked Johnson through the the three-pronged Brunner test and concluded that he failed all three prongs.  He was able to pay back his loans and maintain a minimal standard of living, Judge Mitchell ruled; and he had not shown any additional circumstances indicating he could not pay back the loans in the future.

Finally, Judge Mitchell ruled that Johnson failed the good faith test because he had made virtually no loan payments other than payments made through income-tax offsets and wage garnishments.

Mr. Johnson had gone to court to argue reasonably that he believed he had paid down his loans through income-tax offsets and wage garnishments. All he asked for was relief from the interest and penalties that had been added to his debt.

But Johnson's arguments fell on deaf ears. He and his wife are stuck with a debt that grows larger every day and will probably never be repaid.

Why can't student debtors find good lawyers?


Why can't people like Ronald Joe Johnson find good lawyers to represent them in bankruptcy court There are at least three reasons:

First, lawyers are expensive, and people who go to bankruptcy court don't have money to hire a good lawyer.

Second, bankruptcy lawyers are not keeping up with recent trends in the bankruptcy courts  and many believe--incorrectly--that it is impossible to discharge student loans in bankruptcy. Thus, even if Mr. Johnson had had money to pay a lawyer, a bankruptcy attorney might have told him that it would be pointless to try to shed his student loans in bankruptcy.

Third, legal aid clinics and poverty law centers, which should be representing people like Mr. Johnson, aren't interested in the student-loan crisis. They would prefer to provide pro bono legal services in landlord-tenant disputes or fight courthouse battles over traditional civil rights issues.

In fact, I called the Southern Poverty Law Center, which maintains an office in Alabama, and asked if the Center would help desperate student-loan debtors. I was told the SPLC does not do that kind of work.

Distressed student-loan debtors need legal representation in the bankruptcy courts, but they are not likely to get it. Nevertheless, some bankruptcy judges have begun issuing sensible, compassionate, and well-reasoned decisions on behalf of people like Ronald Joe Johnson.  Unfortunately for Mr. Johnson, Judge Tamara Mitchell is not a a compassionate bankruptcy judge.

References

Johnson v. U.S. Department of Education, 541 B.R. 750 (N.D. Ala. 2015).



Friday, December 2, 2016

Sandy Baum's new book on student debt contains some good ideas

In the past,  I have been critical of Sandy Baum's work on the federal student-loan program. In my view, she sometimes drastically understated the enormity of the student-loan crisis. But her new book, titled Student Debt: Rhetoric and Realities of Higher Education Financing, contains some good ideas, which I endorse.  Here are some of her most important recommendations:

"Don't Garnish Social Security Payments." I have long argued that the federal government should stop garnishing the Social Security checks of elderly student-loan defaulters. Baum agrees. As she put it, it is one thing for the government to garnish wages of student-loan defaulters or scoop up defaulters' tax refunds, but "[f]urther diminishing the living standards of senior citizens . . . with no potential for labor market earnings who are struggling to make ends meet on their Social Security payments is quite another thing." Bravo.

Stop giving private lenders special protection in the bankruptcy courts. In 2005, Congress amended the Bankruptcy Code to make private student loans nondischargeable in bankruptcy unless the borrower could show "undue hardship," the same standard that applies to federal student loans. This is wrong.

As Baum observed, "[t]here is no good reason for the government to sanction these unsecured loans as student loans or to grant them any special provisions, particularly . . ., protection from bankruptcy proceedings." This is an eminently sensible observation, and other respected policy commentators agree with Baum on this.

Treat student loans like any other unsecured debt in bankruptcy. I have argued for years that student loans should be treated like any other unsecured debt in bankruptcy and that the "undue hardship" provision in the Bankruptcy Code should be repealed or at least interpreted far more humanely. 

I was heartened to read that Baum, a leading expert on the federal student loan program, agrees with me on this point. Indeed, reforming bankruptcy laws to allow distressed student-loan debtors relief from oppressive student loan debt is the key to reforming the entire student loan program.

Other reforms Baum proposes. Baum made some other good points in her book. For example, some limits should be placed on the amount of money people can borrow to fund their college studies; and some limit needs to be placed on the amount of interest that can accrue on student-loan debt. She also said limits should be placed on the amount elderly people can borrow to fund their studies since they won't work long enough to pay off enormous amounts of student-loan debt.

Baum makes other good points in her book. But the reforms I've listed here are critical.  If the policy makers aren't going to listen to me (and so far they have not), then perhaps they will listen to Sandy Baum.

References

Sandy Baum. Student Debt: Rhetoric and Realities of Higher Education Financing. New York: Palgrave-MacMillan, 2016. 

Thursday, November 10, 2016

The student loan crisis and the first 100 days: Please, President Trump, provide bankruptcy relief for distressed student-loan debtors

Hillary Clinton lost the presidential election, and we can throw her promise of a tuition-free college education in the ashcan. Meanwhile, the student loan crisis grows worse with each passing month.

Eleven million people have either defaulted on their loans or are delinquent in their payments. More than 5 million student-loan debtors are in long-term income based repayment plans that will never lead to loan payoffs.Several million student borrowers have loans in deferment or forbearance while interest continues to accrue on their loan balances.

Soon we will have a new president, and an exciting opportunity to look at the federal student loan program from a fresh perspective. What can President Trump do to bring relief to distressed college-loan debtors. Here are some ideas--respectfully submitted:

FIRST, TREAT THE WOUNDED.

President Trump can do several things quickly to alleviate the suffering.

Stop garnishing Social Security checks of loan defaulters. More than 150,000 elderly student-loan defaulters are seeing their Social Security checks garnished. President Trump could stop that practice on a dime. Admittedly, this would be a very small gesture; the number of garnishees is minuscule compared to the 43 million people who have outstanding student loans. But this symbolic act would signal that our government is not heartless.

Streamline the loan-forgiveness process for people who were defrauded by the for-profit colleges. DOE already has a procedure in place for forgiving student loans taken out by people who were defrauded by a for-profit college, but the administrative process is slow and cumbersome. For example, Corinthian Colleges and ITT both filed for bankruptcy, and many of their former students have valid fraud claims. So far, few of these victims have obtained relief from the Department of Education.

Why not simply forgive the student loans of everyone who took out a federal loan to attend these two institutions and others that closed while under investigation for fraudulent practices?

Force for-profit colleges to delete mandatory arbitration clauses from student enrollment documents. The Obama administration criticized mandatory arbitration clauses, but it didn't eliminate them. President Trump could sign an Executive Order banning all for-profit colleges from putting mandatory arbitration clauses in their student-enrollment documents.

Banning mandatory arbitration clauses would allow fraud victims to sue for-profit colleges and to bring class action suits. And by taking this step, President Trump would only be implementing a policy that President Obama endorsed but didn't get around to implementing.

Abolish unfair penalties and fees. Student borrowers who default on their loans are assessed enormous penalties by the debt collectors--18 percent and even more. President Trump's Department of Education could ban that practice or at least reduce the penalties to a more reasonable amount.

PLEASE PROVIDE REASONABLE BANKRUPTCY RELIEF FOR DISTRESSED STUDENT-LOAN DEBTORS.

The reforms I outlined are minor, although they could be implemented quickly through executive orders or the regulatory process. But the most important reform--reasonable access to the bankruptcy courts--will require a change in the Bankruptcy Code.

Please, President Trump, prevail on Congress to abolish 11 U.S.C. 523(a)(8) from the Bankruptcy Code--the provision that requires student-loan debtors to show undue hardship as a condition for discharging student loans in bankruptcy.

Millions of people borrowed too much money to get a college education, and they can't pay it back. Some were defrauded by for-profit colleges, some chose the wrong academic major, some did not complete their studies, and some paid far too much to get a liberal arts degree from an elite private college. More than a few fell off the economic ladder due to divorce or illness, including mental illness.

Regardless of the reason, most people took out student loans in good faith and millions of people can't pay them back. Surely a fair and humane justice system should allow these distressed debtors  reasonable access to the bankruptcy courts.

President Trump can address this problem in two ways:

  • First, the President could direct the Department of Education and the loan guaranty agencies (the debt collectors) not to oppose bankruptcy relief for honest but unfortunate debtors--and that's most of the people who took out student loans and can't repay them.
  • Second, the President could encourage Congress to repeal the "undue hardship" provision from the Bankruptcy Code.
Critics will say that bankruptcy relief gives deadbeat debtors a free ride, but in fact, most people who defaulted on their loans have suffered enough.from the penalties that have rained down on their heads.

More importantly, our nation's heartless attitude about student-loan default has discouraged millions of Americans and helped drive them out of the economy. President Trump has promised middle-class and working-class Americans an opportunity for a fresh start. Let's make sure that overburdened student-loan debtors get a fresh start too.

References

Natalie Kitroeff. Loan Monitor is Accused of Ruthless Tactics on Student Debt. New York Times, January 1. 2014. Accessible at http://www.nytimes.com/2014/01/02/us/loan-monitor-is-accused-of-ruthless-tactics-on-student-debt.html?_r=0

Stephen Burd. Signing Away Rights. Inside Higher Ed, December 17, 2013. Available at https://www.insidehighered.com/views/2013/12/17/essay-questions-mandatory-arbitration-clauses-students-profit-higher-education

Andrew Kreighbaum, Warren: Education Dept. Failing Corinthian StudentsInside Higher Ed, September 30, 2016. Accessible at https://www.insidehighered.com/quicktakes/2016/09/30/warren-education-dept-failing-corinthian-students

Senator Elizabeth Warren to Secretary of Education John B. King, Jr., letter dated September 29, 2016. Accessible at https://www.warren.senate.gov/files/documents/2016-9-29_Letter_to_ED_re_Corinthian_data.pdf

Ashley A. Smith. U.S. Urged to Deny Aid to For-Profits That Force Arbitration. Inside Higher Ed, February 24, 2016. Available at: https://www.insidehighered.com/quicktakes/2016/02/24/us-urged-deny-aid-profits-force-arbitration?utm_source=Inside+Higher+Ed&utm_campaign=183bc9e3a3-DNU20160224&utm_medium=email&utm_term=0_1fcbc04421-183bc9e3a3-198565653

U.S. Department of Education. U.S. Department of Education Takes Further Steps to Protect Students from Predatory Higher Education Institutions. March 11, 2016. Accessible at http://www.ed.gov/news/press-releases/us-department-education-takes-further-steps-protect-students-predatory-higher-education-institutions?utm_content=&utm_medium=email&utm_name=&utm_source=govdelivery&utm_term=

U.S. General Accounting Office. Older Americans: Inability to Repay Student Loans May Affect Financial Security of a Small Percentage of Borrowers. GAO-14-866T. Washington, DC: General Accounting Office. http://www.gao.gov/products/GAO-14-866T

Tuesday, July 5, 2016

Democratic Party Platform Plank on Higher Education: A Big Pile of Horse Manure

The Democratic Party released its Platform this week, or rather it released a draft marked "Deliberative and Predecisional." The Higher Education plank is only a few hundred words long, but it still adds up to one big pile of horse manure.

First, the Democrats promise to cut interest rates on student loans, "thereby preventing the federal government from making billions of dollars in profits from student loans." What was the Platform Committee smoking when it wrote that sentence?

Everyone who knows even a little bit about the student-loan crisis realizes that the federal government is not making a profit on student loans. It is incurring huge losses--losses that are growing by the day.

Why do I say this? First of all, the student-loan default rate is catastrophic--far higher than the anemic rate the Department of Education publishes every autumn. The Brookings Institution reported that almost half of students who take out loans to attend a for-profit institution default in five years. The five-year default rate for students overall is 28 percent.

Moreover, the Obama administration is pushing distressed student-loan borrowers into long-term repayment plans that set monthly payments so low that borrowers are not paying down accruing interest. In fact, more than half of student borrowers are seeing their loan balances go up two years after beginning the repayment phase of their loan--not down.

Do the Brookings numbers indicate to you that the government is making a profit on the student loan program? Of course not. And the fact that Senators Elizabeth Warren, Charles Schumer, Barbara Boxer, and now the whole Democratic Party insist that the government is reaping huge profits off the student loan program demonstrates that the Democrats are clueless about the student-loan crisis or that they are lying about it.

The Democrats also promise to "simplify and expand access to income-based repayment so that no student loan borrowers have to pay more than they can afford." In other words, the Democrats want to push more and more student borrowers into 20- or 25-year income based repayment plans (IBRPs).

Five million people are in IBRPs now; and President Obama wants to enroll 2 million more by the end of next year. Apparently, the Democrats want to increase that number even further.

Of course, IBRPs are nothing more than a conspiracy by our government to create a giant class of sharecroppers who will pay a percentage of their incomes to Uncle Sam over the majority of their working lives.

And finally, the Democrats pledge to "restore the prior standard in bankruptcy law to allow borrowers with student loans to discharge their debts in bankruptcy as a measure of last resort." I interpret this pie-in-the-sky promise to mean the Democrats will delete the "undue hardship" provision from the Bankruptcy Code.

I hope that is a promise the Democrats will keep if Hillary becomes President. If Congress would actually strike the "undue hardship" standard from the Bankruptcy Code, millions of Americans would be lining up to file bankruptcy within a week after the law is changed. And if distressed student-loan borrowers could truly get relief from their oppressive student-loan debt, a half trillion dollars in student loans would be wiped off the books.

That scenario would cause the student-loan program to collapse, which would cause hundreds of colleges and universities to close.

Our government will never let that happen. Which is why the Democratic Party's Higher Education platform is a big pile of horse manure.

Image result for elizabeth warren and charles schumer
Senators Schumer and Warren: Shoveling horse manure

References

Democratic Party Platform Draft, July 1, 2016 [Deliberative and Predecisional]. Accessible at https://demconvention.com/wp-content/uploads/2016/07/2016-DEMOCRATIC-PARTY-PLATFORM-DRAFT-7.1.16.pdf

Schumer and Warren Pushing Obama to Address Student Debt. CNN Transcript, January 12, 2016. Accessible at http://www.cnn.com/TRANSCRIPTS/1601/12/nday.06.html

Democrartic Senators Highlight Obscene Government Profits Off Student Loan Program. Senator Warren press release, January 31, 2014. Accessible at https://www.warren.senate.gov/?p=press_release&id=329


Monday, March 21, 2016

Student Loan Bankruptcy and Educational Credit Management Corporation: Who pays the ECMC lawyers?


I know quite a bit about the student loan crisis. After studying both governmental and nongovernmental documents, I know the student-loan default rate is much higher than the government reports. According to the Department of Eduction, the three-year default rate is about 10 percent, but the people who stop paying on their loans is at least 30 percent.  And among people who attended for-profit colleges, the default rate is at least 50 percent.

I also know a lot about college borrowers who try to discharge their student loans in bankruptcy. Shedding student loans through bankruptcy is difficult, but over the past three years or so, a number of bankruptcy courts have ruled in favor of college-loan debtors, showing both compassion and common sense.

But I dont' know who pays the lawyers for the student-debt collection agencies that fight student debtors in the bankruptcy courts or how much those lawyers get paid. 

In particular, who paid the lawyers for Educational Credit Management Corporation, which opposed bankruptcy relief for Janet Roth, an elderly woman with chronic health problems who was living on  Social Security income of only  $774 a month?  And ECMC lawyers didn't just fight Ms. Roth in the bankruptcy court, it fought her all the way to the Bankruptcy Appellate Panel of the Ninth Circuit Court of Appeals. And everybody knew that Jane Roth's income was so low that she would have paid nothing on her student loans even if she lost her case. 

Who paid the ECMC lawyers who appealed a bankruptcy decision in favor of George and Melanie Johnson, a couple with two school-age children who lost their home in a foreclosure proceeding?

And who ultimately paid the tab for ECMC to fight bankruptcy relief for Janice Stevenson, a woman in her 50s with a history of homelessness who was living on only at thousand dollars a month?

A New York Times article reported that ECMC has been accused of ruthless loan-collection tactics, and I would say ruthless is putting it mildly. And take my word for it, ECMC lawyers aren't working for free.

To paraphrase the great Lynyrd Skynyrd, I know a little about student loans and bankruptcy, and baby I can guess the rest. I think the taxpayers are paying  ECMC's lawyers--either directly or indirectly. 

In a letter issued last July, Assistant Deputy Secretary of Education Lynne Mahaffie wrote that student-loan debt collectors should take cost into account when deciding when to oppose bankruptcy discharge for distressed college-loan borrowers. But if ECMC is absorbing the cost of attorney fees to fight Jane Roth, Janice Stevenson, and Mr. and Mrs.Johnson, why would the Department of Education care what ECMC is spending in its collection efforts? 

Certainly ECMC wasn't taking cost into account when it dragged Janet Roth through the federal courts for several years.  There could have been no monetary gain to the taxpayers in fighting bankruptcy relief for Ms. Roth.

In the months to come, we will see if DOE really meant it when it authorized Mahaffie to say that DOE and its student-loan debt collectors would not fight bankruptcy discharge of student loans when it is not cost effective to do so.

My guess is this. ECMC will continue harassing student-loan debtors in the bankruptcy courts as long as its lawyers get paid for doing so.  So if Lynn Mahaffie really meant what she said in that 2015 letter, DOE needs to change the system whereby ECMC lawyers get rich hounding people like Jane Roth, Janice Stevenson, and George and Melanie Johnson.

References

Natalie Kitroeff. Loan Monitor is Accused of Ruthless Tactics on Student Debt. New York Times, January 1, 2014. Acccessible at http://www.nytimes.com/2014/01/02/us/loan-monitor-is-accused-of-ruthless-tactics-on-student-debt.html?_r=0

Lynn Mahaffie. Undue Hardship Discharge of Title IV Loans in Bankruptcy Adversary Proceedings, July 7, 2015, GEN 15-13.  Accesible at https://ifap.ed.gov/dpcletters/attachments/GEN1513.pdf

Roth v. Educational Credit Management Corporation, 490 B.R. 908 (9th Cir. BAP 2013). Accessible at http://cdn.ca9.uscourts.gov/datastore/bap/2013/04/16/RothV%20ECMC%20opinion-FINAL%20AZ-11-1233.pdf




Student Loan Bankruptcy and Educational Credit Management Corporation: Who pays the ECMC lawyers?

    Say I know a little
    I know a little about it
    I know a little
    I know a little 'bout it
    I know a little 'bout love
    And baby I can guess the rest.

Lynyrd Skynyrd
I Know A Little

I know quite a bit about the student loan crisis. After studying both governmental and nongovernmental documents, I know the student-loan default rate is much higher than the government reports. According to the Department of Eduction, the three-year default rate is about 10 percent, but the people who stop paying on their loans is at least 30 percent.  And among people who attended for-profit colleges, the default rate is at least 50 percent.

I also know a lot about college borrowers who try to discharge their student loans in bankruptcy. Shedding student loans through bankruptcy is difficult, but over the past three years or so, a number of bankruptcy courts have ruled in favor of college-loan debtors, showing both compassion and common sense.

But I dont' know who pays the lawyers for the student-debt collection agencies that fight student debtors in the bankruptcy courts or how much those lawyers get paid. 

In particular, who paid the lawyers for Educational Credit Management Corporation, which opposed bankruptcy relief for Janet Roth, an elderly woman with chronic health problems who was living on  Social Security income of only  $774 a month?  And ECMC lawyers didn't just fight Ms. Roth in the bankruptcy court, it fought her all the way to the Bankruptcy Appellate Panel of the Ninth Circuit Court of Appeals. And everybody knew that Jane Roth's income was so low that she would have paid nothing on her student loans even if she lost her case. 

Who paid the ECMC lawyers who appealed a bankruptcy decision in favor of George and Melanie Johnson, a couple with two school-age children who lost their home in a foreclosure proceeding?

And who ultimately paid the tab for ECMC to fight bankruptcy relief for Janice Stevenson, a woman in her 50s with a history of homelessness who was living on only at thousand dollars a month?

A New York Times article reported that ECMC has been accused of ruthless loan-collection tactics, and I would say ruthless is putting it mildly. And take my word for it, ECMC lawyers aren't working for free.

To paraphrase the great Lynyrd Skynyrd, I know a little about student loans and bankruptcy, and baby I can guess the rest. I think the taxpayers are paying the fees of ECMC's lawyers--either directly or indirectly. 

In a letter issued last July, Assistant Deputy Secretary of Education Lynne Mahaffie wrote that student-loan debt collectors should take cost into account when deciding when to oppose bankruptcy discharge for distressed college-loan borrowers. But if ECMC is absorbing the cost of attorney fees to fight Jane Roth, Janice Stevenson, and Mr. and Mrs.Johnson, why would the Department of Education care what ECMC is spending in its collection efforts? 

Certainly ECMC wasn't taking cost into account when it dragged Janet Roth through the federal courts for several years.  There could have been no monetary gain to the taxpayers in fighting bankruptcy relief for Ms. Roth.

In the months to come, we will see if DOE really meant it when it authorized Mahaffie to say that DOE and its student-loan debt collectors would not fight bankruptcy discharge of student loans when it is not cost effective to do so.

My guess is this. ECMC will continue harassing student-loan debtors in the bankruptcy courts as long as its lawyers get paid for doing so.  So if Lynn Mahaffie really meant what she said in that 2015 letter, DOE needs to change the system whereby ECMC lawyers get rich hounding people like Jane Roth, Janice Stevenson, and George and Melanie Johnson.

References

Natalie Kitroeff. Loan Monitor is Accused of Ruthless Tactics on Student Debt. New York Times, January 1, 2014. Acccessible at http://www.nytimes.com/2014/01/02/us/loan-monitor-is-accused-of-ruthless-tactics-on-student-debt.html?_r=0

Lynn Mahaffie. Undue Hardship Discharge of Title IV Loans in Bankruptcy Adversary Proceedings, July 7, 2015, GEN 15-13.  Accesible at https://ifap.ed.gov/dpcletters/attachments/GEN1513.pdf

Roth v. Educational Credit Management Corporation, 490 B.R. 908 (9th Cir. BAP 2013). Accessible at http://cdn.ca9.uscourts.gov/datastore/bap/2013/04/16/RothV%20ECMC%20opinion-FINAL%20AZ-11-1233.pdf




Tuesday, November 17, 2015

The Department of Education's so-called plan to "strengthen" the student loan system is pathetic. Do President Obama and Secretary of Education Arne Duncan really care about distressed student-loan debtors?

On October 1, 2015, the U.S. Department of Education issued a report entitled Strengthening the Student Loan System to Better Protect All Borrowers. It's about time. More than 20 million people are struggling with unmanageable student loans, including 10 million who are delinquent on their loans or in default.

But what a pathetic document! Clearly President Obama and Secretary of Education Arne Duncan don't have the moral courage to seriously address the student-loan crisis. They are just tinkering with this problem, hoping they can keep the student-loan crisis off the public's radar screen until after Obama leaves office.

Here are my specific critiques:

Garnishing Social Security checks of elderly student-loan defaulters. The federal government garnished the Social Security checks of a 155,000 student-loan defaulters in a recent year, which is shameful. It is true that the U.S. Supreme Court approved this practice in its heartless Lockhart decision; but President Obama, using his discretionary enforcement powers that he so often invokes, could stop garnishing Social Security checks immediately. But he hasn't done that because he really doesn't give a damn about the suffering of elderly people.

Instead, the Department of Education recently proposed to insert an inflationary index into the garnishing system that would allow Social Security recipients to protect more of their Social Security check from garnishment when inflation occurs. (Currently, only $750 a month is protected from garnishment.)

This is an incredibly callous proposal. In the Roth case, the 9th Circuit BAP court's 2013 decision, Jane Roth sought to discharge more than $90,000 in student-loan debt. At the time she filed for bankruptcy, she was 68 years old, had chronic health problems, and was entirely dependent on her Social Security check of less than $800 a month.

How could any humane and reasonable person argue that  any of Ms. Roth's Social Security check should be garnished? But that is what the Department of Education's recent report basically proposes.

Arbitration clauses imposed on unsophisticated student-loan borrowers by for-profit colleges. The New York Times reported recently that many private businesses (particularly those in the finance industry) require individuals to agree to arbitration clauses and to waive their right to sue. As the Times pointed out, the arbitration system favors the business community over private individuals.

Many for-profit colleges also require students to arbitrate their grievances and to give up their right to sue, even if they believe their college defrauded them or breached contractual obligations. Arbitration can be more costly for individuals than litigation because arbitration fees can be quite expensive. And a business party is more likely to win than an individual.  For-profit arbitration clauses have been upheld by the courts.

Why don't Arne Duncan and Barack Obama stop the for-profit college industry from inserting litigation waivers and arbitration clauses into their admission documents, which they could do simply by enacting a regulation prohibiting the for-profits from engaging in this pernicious practice?

I'll tell you why. Because for all their public hand-wring and their tongue-clucking over the student-loan crisis, Obama and Duncan are firmly committed to the status quo.  Obama and Duncan's failure to address unconscionable arbitration clauses is shameful.

Making private loans dischargeable in bankruptcy. The DOE report recommends "potential changes" to the treatment of private loans in the bankruptcy courts.  DOE is referring to a provision in the Bankruptcy Code that Congress legislated in 2005 that makes private student loans nondischargeable in bankruptcy unless the debtor can show "undue hardship."  Senator Joe Biden, acting at the behest of the banking industry, helped get that legislation passed.  Thanks,Joe!

Several prominent bankruptcy scholars have recommended that the 2005 legislation be repealed and that private student loans be dischargeable in bankruptcy like any other nonsecured debt. But the DOE doesn't go that far. Here's what the DOE report says:
[T]he report recommends allowing private loans that do not offer [pay-as-you-earn or PAYE]-like borrower protections to be dischargeable in bankruptcy similar to other forms of consumer debt. Allowing private lenders the protection of non-dischargeability if they offer PAYE-like features will provide an incentive for private lenders to create meaningful ex ante payment modification options available for when borrowers cannot make standard payments. (p. 17)
In other words, Obama and Duncan propose that banks will still have the protection of having their student loans virtually impossible to discharge in bankruptcy if they will allow distressed student-loan borrowers to switch from standard loan payments to long-term income-based repayment plans. Of course, the banks might be willing to add an income-based repayment feature to their student loans, but that would mean that most private student loans would negatively amortize due to the fact that the income-based payments would almost certainly not be large enough to pay accumulating interest.

What an idiotic notion! What the DOE report should have said is simply this: private student loans should be dischargeable in bankruptcy like any other unsecured loan--period.

The fact the the Department of Education advocates any restrictions on bankruptcy relief for distressed debtors who took out private student loans is outrageous and shows that the Obama administration--for all its posturing--is little more than a lackey of the banks.

A few timid but good recommendations. The DOE report does contain a few timid but good recommendations  Eliminating tax liability for people whose student loans are forgiven under long-term income-based repayment plans is a good idea and one that President Obama had earlier proposed.

But student-loan borrowers were never under much of a threat of being assessed a huge tax bill if their loans were discharged. Present IRS regulations do not consider a forgiven loan to be taxable income if the debtor is insolvent at the time the loan is forgiven.  And in any event, this relief is small consolation for people who wind up in 25-year income-based repayment plans.

Streamlining the disability discharge process, which DOE recommends, is also a good idea.  But if it is such a good idea, why did DOE oppose bankruptcy discharge for Bradley Myhre, a quadriplegic student-loan debtor whose expenses exceeded his income due to the fact that he needed  a personal full-time caregiver in order to remain employed? (Myhre v. U.S. Department of Education, 2013).

Finally, DOE promises to streamline the process whereby individuals can have their student loans forgiven if they were defrauded by the institution they attended.   The DOE report states that the Department of Education "will conduct negotiated rulemaking on borrower defense and plans to develop new regulations to clarify and streamline loan forgiveness under the defense repayment  provision . . . ."

What DOE probably means is that it will negotiate with the for-profit college industry regarding the process for forgiving loans owed by students who were enticed to enroll at for-profit collegea through fraud or misrepresentation. Of course it is a good idea to streamline the loan-forgiveness process for people who attended institutions that have been found guilty of misrepresenting their education programs.

But I doubt if DOE is willing to streamline the loan-forgiveness process enough to provide meaningful relief. After all there are 350,000 former students of the Corinthian Colleges system, which filed for bankruptcy last spring amid allegations of wrongdoing.  As of a few months ago, only about 3,000 students had had their student loans forgiven by DOE.

Conclusion

In my opinion, President Obama's Department of Education issued a report that purports to "strengthen" the student loan system for the protection of borrowers but does not attack the underlying problems.  Until the private loan industry and the for-profit college industry are shut down and distressed student-loan debtors have meaningful access to the bankruptcy courts, the student-loan catastrophe will just grow bigger. And the number of people who can't make their student-loan payments--now more than 20 million--will only grow larger with each passing day.

https://i.guim.co.uk/img/static/sys-images/Guardian/Pix/pictures/2008/12/16/obamaeducation476.jpg?w=620&q=85&auto=format&sharp=10&s=26d17b6c928a0f80f7662a66a2d328a8
Frankly, my dear, we don't give a damn.
References


Sirota, David. Joe Biden Backed Bills to Make It Harder For Americans To Reduce Their Student Debt. International Business Times, September 15  , 2015. Accessible: http://www.ibtimes.com/joe-biden-backed-bills-make-it-harder-americans-reduce-their-student-debt-2094664

U.S. Department of Education. Strengthening the Student Loan System to Better Protect All Borrowers.  Washington, D.C., October 1, 2015: Author. Accessible: http://www2.ed.gov/documents/press-releases/strengthening-student-loan-system.pdf