Congressional Democrats should pressure DeVos to clean up the student-loan collection business

Democrats are critical of Betsy DeVos, President Trump's new Secretary of Education, but one concern is particularly valid, which is this: DeVos has business ties with a student-loan debt collector.

Those ties, which were explained in a Washington Post article are complicated. Here is what the Post said:

Education Secretary nominee Betsy DeVos and her husband have extensive financial holdings through their private investment and management firm, RDV Corporation. . . .

RDV is affiliated with LMF Portfolio, a limited liability corporation listed in regulatory filings as one of several firms involved in a $147 million loan to Performant Financial Corp., a debt collection agency in business with the Education Department.

Twenty-three percent of Performant's revenue is directly tied to its dealings with the Education Department, which had 14 contracts worth more than $20 million with the company in fiscal 2016.

According to the Post, Performant lost a recent contract bid with the Department of Education and is protesting DOE's decision with the Government Accountability Office.

DeVos's complicated ties with a student-loan debt college company is a legitimate worry to Democrats because as Secretary of Education, "DeVos would be in a position to influence the award of debt collection, servicing and recovery contracts, in addition to the oversight and monitoring of the contracts." In addition, the Post article points out, DeVos will also "have the authority to revise payments and fees to contractors for rehabilitating past-due debt--all of which has Senate Democrats concerned."

Senator Elizabeth Warren criticized DeVos because DeVos has no experience in higher education. "As Education Secretary," Warren charged, "Betsy DeVos would be in charge of running a $1 trillion student loan bank. She has no experience doing that." In fact, Warren correctly observed, "Betsy DeVos has no experience with student loans, Pell Grants, or public education at all."

Like Senator Warren, most Senate Democrats senators opposed DeVos to be Secretary of Education primarily on the ground that she has no experience in higher education, which is true. But I think a bigger concern is the fear that DeVos won't regulate the for-profit college industry aggressively and that she won't monitor the government's debt collectors, including the student loan guaranty agencies, which have a ruthless record of collection activities against distressed student loan debtors.

I confess I did not take DeVos's ties with a debt collection agency into consideration during the nomination process. I thought, perhaps naively, that DeVos's lack of experience in higher education might be a plus, since she could look at the student loan program with fresh eyes.

And perhaps she will. But the Democrats can smoke her out by moving aggressively for transparency and an accounting in the student-loan collection business and calling for a reduction in the collection fees and penalties the debt collectors are slapping on defaulted student loans.

Senator Warren could lead the charge by holding hearings on the activities of the student loan guaranty agencies: Educational Credit Management Corporation and the others. The Century Foundation reported that four of these agencies, which are nonprofit organizations, each hold $1 billion in assets.

If Secretary DeVos does not move aggressively to rein in the for-profits and clean up the debt collection business, then the Democrats will have a legitimate charge against her. The best way to see how DeVos will handle her new responsibilities is to hold hearings and introduce legislation to clean up the student loan industry.

If DeVos opposes legitimate calls for reforming the federal student loan program, then the Democrats are right about her.

References

Danielle Douglas-Gabriel. Dems raise concern about links between DeVos and debt collection agency. Washington Post, January 17, 2017. 

Eugene Scott. Warren grills DeVos: 'I don't see how she can be the Secretary of Education.' CNN, January 18, 2017.

Robert Shireman and Tariq Habash. Have Student Loan Guaranty Agencies Lost Their Way? The Century Foundation, September 29, 2016. Accessible at https://tcf.org/content/report/student-loan-guaranty-agencies-lost-way/

Betsy DeVos is the new Secretary of Education: How About Bipartisan Support for Senator Warren & Senator McCaskill's Bill to Stop Garnishing Social Security Checks of Elderly Student-Loan Defaulters?

Any excuse for a slumber party, right?

Yesterday, Democrats kept the Senate in session all night to register their opposition to Betsy DeVos as the  new Secretary of Education. But Vice President Pence broke the tie vote in the U.S. Senate this morning, and today Betsy DeVos is President Trump's new Secretary of Education.

Senate Democrats bitterly opposed DeVos's nomination, but that battle is over. Now is a good time for Democrats and Secretary DeVos to cooperate on a common objective--an objective that should attract broad bipartisan political support.

So here's what I suggest: relief for elderly student-loan debtors.

Senators Claire McCaskill and Elizabeth Warren supported a bill in 2015 that would stop the federal government from garnishing the Social Security checks of elderly and disabled people who defaulted on their student loans.  The bill got nowhere.

The Senators also asked the Government Accountability Office to prepare a report on elderly Americans with student loan debt, and GAO delivered that report last December. The report was widely covered by the media and contained some fascinating information.

• First, "[t]here has been a 10-fold increase in the amount of student debt held by people age 65 or older--from $2 billion in 2005 to $22 billion" in 2015  (quoting the Washington Post).

• The federal government has increased efforts to garnish Social Security check of student-loan defaulters. According to Senator McCaskill's office, "The number of Americans whose Social Security checks are being garnished by the government to recoup defaulted student loans has increased by 540 percent in the last decade to over 114,000 older borrowers."

• In 2015, 173,000 Americans had their Social Security income offset due to defaulted student loans. This is a dramatic increase from 2002, when the government only applied offsets to 36,000 Social Security recipients (page 11 of GAO report).

• Some Social Security recipients whose income was offset lived below the federal poverty guideline and others dropped below the poverty level after their Social Security checks were reduced (p. 27 of GAO report). In fact, as Senator Elizabeth Warren emphasized in a recent press release, "Since 2004, the number of seniors whose Social security benefits have been garnished below the poverty line increased from 8,300 to 67,300."

• More than 7 million people age 50 and older still owe on student loans, and 870,000 people age 65 and older have student loan debt. Among student-loan borrowers age 65 and older, 37 percent are in default (figure 2, page 10 of GAO report).

• The amount of money the government collects from Social Security offsets is a pittance compared to overall student debt. The government  only collected $171 million from Social Security offsets in 2015, about $1,000 per garnishee.

• Most of the money collected from Social Security offsets went toward paying fees and accumulated interest.  "Of the approximately $1.1 billion collected through Social Security offsets from fiscal year 2001 through 2015 from borrowers of all ages, about 71 percent was applied to fees and interest" (p. 19 of GAO report).

Surely, Senators McCaskill and Warren can muster bipartisan support for legislation that will stop the federal government from garnishing the Social Security checks of elderly student-loan defaulters. Perhaps they might ask for a couple of Senate Republicans to join as co-sponsors. I suggest Senator Lisa Murkowski of Alaska and Susan Collins of Maine. Both voted against Ms. Devos' confirmation.

And I'll bet Senators McCaskill and Warren could get Betsy Devos and the Department of Education to endorse the bill. At least they could ask.

Who would oppose such a bill? I don't think anyone would.  What a wonderful message such a law would send to the American people: the message that our elected leaders--Congress and the Executive Branch--can work together to advance the common good.

On the other hand, if Congress and the U.S. Department of Education can't cooperate to get this wholly beneficial legislation adopted, then the political process is indeed broken.

References

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

Jordan Carney. Two GOP senators to vote no on Betsy DeVos. The Hill, February 7, 2017.

Danielle Douglas-Gabriel. The disturbing trend of losing Social Security benefits to student debt. Wall Street Journal, December 20, 2016.

Senator Claire McCaskill Press Release, December 20, 2016. McCaskill-Warren GAO Report Shows Shocking Increase in Student Loan Debt Among Seniors.

Senator Elizabeth Warren Press Release, December 20, 2016. McCaskill-Warren GAO Report Shows Shocking Increase in Student Loan Debt Among Seniors. 

United States Government Accountability Office. Social Security Offsets: Improvement to Program Design Could Better Assist Older Student Borrowers with Obtaining Permitted Relief. Washington DC: Author, December 2016).

All the Bankruptcy Attorneys I Contact Say It’s Not Possible to Discharge Student Loans

Dear Steve,

I am a librarian with two masters degrees living in the Charlotte, NC area. I owe over $120K in student loans, both federal and private, as well as a large amount of unsecured debt thanks to living off credit trying to make student loan payments. I have had to default on my student loan payments in order to pay my other bills and rent. I have already done IBR, however, my federal loan payments are still almost as much as my rent and they will not work with me at all on the private loan amounts, which eat up almost as much as the federal student loans. I have contacted Damon Day for help and received no response.

How do I find a legitimate bankruptcy attorney that is willing to at least attempt to get my student loans discharged in bankruptcy? I am planning to declare bankruptcy, as I see it as the best solution for my financial struggle, however, the attorneys I have been contacting for consultations will not even consider attempting to include my student loans in the bankruptcy case.

Darcey

Answer:

Dear Darcey,

So to give everyone a different point of view on this type of question I’ve answered a lot I asked my friend Professor Richard Fossey to provide his point of view to assist you.

Here is what he wanted to share with you.

“Darcey, my name is Richard Fossey. I am a professor who has followed the student loan bankruptcy process for many years. A few bankruptcy courts have ruled more compassionately in favor of student loan debtors in recent years, but trying to discharge your loans in bankruptcy is still a heavy lift.

The courts seem to be influenced by a number of factors: age and health, children, good faith in making loan payments, etc. As you may have already found out, it is difficult for a student debtor to find a bankruptcy attorney. Debtors generally don’t have the money to hire an attorney, and often the bankruptcy attorneys know nothing about student loans. Many believe that it is impossible to discharge student loans in bankruptcy. You may have already been told that.

Some people have filed adversary proceedings in bankruptcy court to discharge their student loans, acting as their own attorney. One law review article concluded that people filing without attorneys had a success rate comparable to the debtors who were represented by lawyers.

One question only you can answer: what do you have to lose? If you are insolvent and eligible to discharge your other debts in bankruptcy, you might decide–what the heck–and file an adversary proceeding in an effort to get your student loans discharged.
If you do that, you need to know that you will filing a lawsuit without an attorney and will be opposed by skilled lawyers. It sounds like you have both federal loans and private loans. If that is the case, then an attorney for the Department of Education or a loan guaranty company will represent the federal government and another lawyer will represent the private lenders.

The standard for discharging a student loan in bankruptcy is undue hardship, and most courts follow the so-called Brunner test. You will need to show 1) that you cannot pay your student loans and maintain a minimal standard of living, 2) that additional circumstances make it unlikely you will ever be able to pay your student loans, and 3) your have dealt with your student loans in good faith.

Good faith generally means that you made loan payments when you could or that you negotiated with your creditors in good faith, but the Ninth Circuit Bankruptcy Appellate Panel ruled that one debtor met the good faith test even though she had never made a single voluntary loan payment because she had lived frugally and had tried to maximize her income.
If you file an adversary complaint without a lawyer you need to have the mental stamina to see it through. Some people’s litigation over student loans have stretched out for years. Also, you should get all your evidence and paperwork together before you file your adversary proceeding and you should have a good argument in place as to why you meet the Brunner test. You also need to be prepared for discovery requests from the creditors’ lawyers.

I am not a practicing lawyer and can’t give you legal advice. And a person’s decision to try to discharge student loans in bankruptcy is a person decision that involves the assessment of a lot of unique factors.

But I do think the public sentiment about the student loan crisis is changing and there are some indications that the bankruptcy courts are beginning to see that many people simply cannot pay off their loans. I would be happy to talk with you about this by phone. I wish you the best of luck. Richard Fossey”

So Darcey, there you go. Finding the right attorney is a tough job for people. They will run into far more “can’t be done” than “I can do it.” There is no other solution than to keep calling bankruptcy attorneys who are licensed in your state and ask if they have had experience in discharging student loans through an Adversary Proceeding.

Here are a couple of articles that will help inform you in the process:

How to Find a Great Bankruptcy Attorney

Federal Student Loans Discharged in Bankruptcy. A Look at the Surprising 2012 Data and Cases.

How to Really Discharge Your Student Loans in Bankruptcy. Many Can. But Never Try.

If you find a local bankruptcy attorney who is willing to tackle this, you can always ask them to contact me or Professor Fossey for help.

Alternatively, you might want to strongly consider setting up a consultation with my friend and debt coach, Damon Day. Damon and I discuss this topic very frequently and he can guide you through this process and has relationships with people who might be able to provide additional help.

Bottom line, for the right person who is willing to fight for relief there are options. People who are hoping most bankruptcy attorneys will tackle this, will be disappointed.

Note. This post was originally posted by Steve Rhode. The original post can be found at: https://getoutofdebt.org/100868/bankruptcy-attorneys-contact-say-not-possible-discharge-student-loans

Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994.

Educational Credit Management Corporation is a bad actor: Rafael Pardo's article about ECMC's litigation misbehavior

In recent blogs, I discussed two cases in which Educational Credit Management Corporation, the Department of Education's most ruthless student-loan debt collector, was sanctioned by a court for misbehavior. In the Bruner-Halteman case, a Texas bankruptcy judge assessed punitive damages against ECMC for garnishing the wages of a bankrupt Starbucks employee in violation of the Bankruptcy Code's automatic stay provision. The judge awarded Ms. Bruner-Halteman $74,000 in punitive damages--$2,000 for each of the 37 times ECMC wrongly garnished her wages.

In the Hann case, the First Circuit Court of Appeals upheld sanctions against ECMC for trying to collect on a student loan debt in spite of the fact that a federal bankruptcy judge had ruled that the debt had been paid.

Are these isolated cases of misbehavior? No they are not. In 2014, Rafael Pardo published an article in the University of Florida Law Review that documents how often ECMC's attorneys engage in "pollutive litigation" in cases against hapless bankrupt student-loan debtors.

Pardo's article is long (77 pages) and a bit dense and technical (477 footnotes).  I will limit my discussion of his impressive essay to a few of the highlights:

Failure to file corporate ownership statement

The Federal Rules of Bankruptcy Procedure require corporate parties in adversary proceedings to file a "corporate ownership statement" that identifies any corporate party that directly or indirectly owns 10 percent or more of the corporate party's equity interests. According to Pardo's analysis of a random sample of cases, ECMC failed to file its corporate ownership statement 81 percent of the time during 2011 and 2012.

What is the significance of ECMC's noncompliance This is what Pardo said:

The significance of such procedural noncompliance is that, in the overwhelming majority of these adversary proceedings, ECMC has failed to provide the presiding judge with the information necessary to determine whether [the judge] has a financial interest in ECMC that would warrant self-disqualification. Even assuming that ECMC would not have had to report any entity in the corporate ownership statement if ECMC had been procedurally compliant, the failure to file the statement casts a cloud on the legitimacy of the outcomes of proceedings that ended favorably for ECMC. (p. 2149)

Motion Practice 

Pardo also documented incidents when ECMC failed to abide by the Federal Rules of Civil Procedure in its motion practice.  First, in some adversary proceedings a student-loan debtor fails to name ECMC as a defendant, probably because the debtor did not know the name of the correct party to sue. In such cases, ECMC is required to state with particularity that the debtor's student-loan debt has been assigned to ECMC and that it is the proper party to litigate whether the debt is dischargeable.

Pardo found that ECMC often asserted itself as the proper party in an adversary proceeding without filing the appropriate representations about its interests. First, Pardo found that in 9.2 percent of a random sample of cases, ECMC didn't file any motion to become a named party; it simply entered into the litigation as if it had been named in the student-debtor's complaint. (p. 2153)

Furthermore, when ECMC did file a motion to join the litigation, the motion contained a substantive deficiency 80 percent of the time (in the cases Pardo examined).  Deficiencies included failing to allege assignment of the loan, failure to provide documentation of a loan's assignment, and failure to indicate which of the Federal Rules entitled it to be granted relief.

One might respond to Pardo's findings with a yawning so-what, but as Pardo pointed out, "Such procedural noncompliance is significant because it calls into question the legitimacy of a court's decision to allow a movant who may not have a valid basis to join the litigation" (p. 2153). Moreover, the fact that bankruptcy courts have allowed ECMC to get away with these procedural violations suggests that the courts aren't looking closely enough to determine whether ECMC has the right to insert itself into a student-debtor's adversary proceeding.

Responsive-Pleading Practice

Pardo's research found that student debtors named ECMC as a named defendant about 24 percent of the time. In such cases, ECMC filed an improper response in about one case out of four. (p. 256)

In the majority of the cases Pardo examined, the debtor did not name ECMC as a defendant. In those cases, ECMC was required to file a motion to intervene on the grounds that it was the proper named party. In the cases Pardo reviewed, ECMC filed an improper response 89 percent of the time. For example, ECMC would sometimes answer a student debtor's complaint before it had served its motion to intervene.

How these irregularities affects a student-debtor's interest is a bit complicated, and I invite you to read Pardo's discussion on that issue. But it is remarkable, in my view, that ECMC, a sophisticated debt collector, fails to abide by the Federal Rules of Procedure on so many occasions.

Discovery Practice

Pardo also found significant rules violation in ECMC's discovery practices. In particular, Pardo found a case in which ECMC moved for summary judgment based on a student debtor's deemed admissions even though ECMC had wrongly asked the debtor to admit to a conclusion of law.

In my mind, ECMC engages in serious misconduct when it formally asks a bankrupt student-loan debtor to admit to conclusions of law--especially an unsophisticated debtors who is not represented by an attorney.  Not only are such requests impermissible under the Federal Rules, but student debtors may not know that; and they may also not know that an unanswered Request for Admission is deemed to be admitted.

Conclusion: ECMC engages in "pollutive litigation" and it uses taxpayer's money to do so

Pardo characterized ECMC's bankruptcy-case behavior as "pollutive litigation," and that's putting the matter mildly. ECMC gets reimbursed by the federal government for its attorney fees--fees that are often spent harassing unsophisticated debtors who do not even have lawyers.

Moreover, ECMC frequently wears student debtors down just by prolonging the litigation. Janet Roth, for example, an elderly woman living on Social Security income of less than $800 a month, filed for bankruptcy in January 2009. Her case was not concluded until April 2013, more than four years later.

There are a lot of things Congress can do to clean up the student-loan mess and bring relief to millions of suffering student debtors. But shutting down ECMC would be a big step in the right direction.

The Department of Education Should Shut This Bad Boy Down.

References

Bruner-Halteman v. Educational Credit Management Corporation, Case No. 12-324-HDH-13, ADV. No. 14-03041 (Bankr. N.D. Tex. 2016).

Hann v. Educational Credit Management Corporation, 711 F.3d 235 (1st Cir. 2013).

John Hechinger. Taxpayers Fund $454,000 Pay for Collector Chasing Student Loans. Bloomberg.com, May 15, 2013. Accessible at: http://www.bloomberg.com/news/2012-05-15/taxpayers-fund-454-000-pay-for-collector-chasing-student-loans.html

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

Rafael Pardo. The Undue Hardship Thicket: On Access to Justice, Procedural Noncompliance and Pollutive Litigation in Bankruptcy. 66 Florida Law Review 2101-2178.

Roth v. Educational Credit Management Corporation, 490 B.R. 908 (9th Cir. BAP 2013). 

Robert Shireman and Tariq Habash. Have Student Loan Guaranty Agencies Lost Their Way? The Century Foundation, September 29, 2016. Accessible at https://tcf.org/content/report/student-loan-guaranty-agencies-lost-way/

Senator Charles Schumer cries bitter tears over Trump's travel ban on people coming to U.S. from countries that export terror: Where are the grownups?

I knew in my heart that President Trump had done a bad thing--a terrible thing--when he imposed a temporary ban on people traveling to the U.S. from countries that export terrorism. But I did not grasp the enormity of his iniquity until I saw Senator Charles Schumer break down in sobs over Trump's foul deed.

After all, as President Trump admitted, Senator Schumer is not a crier. He has witnessed some truly awful things during his long political career. Yet he never broke down--not once.

Senator Schumer was dry-eyed after the San Bernardino shootings and the Orlando massacre. I don't think he shed a single tear after the Russians shot down that airliner in Ukraine. As far as I know, Senator Schumer kept a stiff upper lip after the terrorists killing sprees in Paris, Brussels, and Nice.

So why did President Trump's executive order--his ill advised and poorly implemented executive order--cause Schumer to go into near hysterics?

I do not; I honestly do not know.

But this I do know. This country has some serious problems, and only grownups can solve them. And here are just a few of them:

• The number of Americans on food stamps grew by almost 20 million people over the last eight years.
• Accumulated student-loan debt has reached $1.4 trillion, and 8 million people are in default.
• Mortality rates for working class Americans have spiked upward, driven by suicide and deaths related to drug and alcohol abuse.
• Suicide rates among middle-aged people have gone up alarmingly, and crushing personal debt may be a factor.

But let's not cry about this sad news. Let's do something about it. So please, Senator Schumer, treat yourself to a nice long cry and then go back to work.

I assure you, Senator Schumer, if you begin acting like a grownup and start working on the nation's problems, you will feel much better. On the other hand, if you break down in tears every time President Trump does something you don't like, you're going to need a lot of handkershiefs.

People acting like grownups after the San Bernardino shooting

References

Alan Bjerga. Food Stamps Still Feed One in Seven Americans Despite Recovery, Bloomberg.com, February 3, 2016.

Jillian Berman. When your Social Security check disappears because of an old student loan. MarketWatch, June 25, 2015.  Accessible at: http://www.marketwatch.com/story/when-your-social-security-check-disappears-because-of-an-old-student-loan-2015-06-25

Anne  Case and Angus Deaton. Rising morbidity and mortality in midlife among white
non-Hispanic Americans in the 21st century.  Accessible at: http://www.pnas.org/content/early/2015/10/29/1518393112.full.pdf

Editorial. Death AmongMiddle Aged Whites. New York Times, November 5, 2015.

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

Katherine A. Hempstead and Julie A. Phillips. Rising Suicide Among Adults Aged
40–64 Years: The Role of Job and Financial Circumstances.  American Journal of Preventive Medicine 84(5):491-500 (2015).

Gina Kolata. Deaths Rates Rising Middle-Aged White Americans, Study Finds. New York Times, November 3, 2015.

Betsy McKay. The Death Rate Is Rising for Middle-Aged Whites. Wall Street Journal, November 3, 2015. 

ECMC abuses the bankruptcy process: Hann v. Educational Credit Management Corp.

Last week I posted a blog about Bruner-Halteman v. ECMC, which was decided last April. In that case, a Texas bankruptcy judge awarded punitive damages against Educational Credit Management Corporation for repeatedly garnishing the wages of a bankrupt Starbucks employee in violation of her legal rights.  ECMC got slapped with $74,000 in punitive damages.

Brunner-Halteman is not the first case in which ECMC has been found guilty of abusing the bankruptcy process. In Hann v. ECMC, decided in 2013, the First Circuit Court of Appeals upheld a lower court decision  against ECMC for continually trying to collect on student loans it claimed were owed by Barbara Hann, even though a bankruptcy judge had ruled that Hann owed ECMC nothing.

Hann v. ECMC: Sanctions are imposed on ECMC for abusing the bankruptcy process

Here is a brief rendition of the facts. Barbara Hann filed for bankruptcy in November 2004, and she dutifully listed all her debts.  ECMC filed a proof of claim in the case, alleging Hann owed ECMC more than $54,000 for unpaid student loans (including accrued interest and collection costs).

Hann objected to ECMC's claim on the grounds that she had paid her student loans in full. The bankruptcy judge held a hearing on the matter, which ECMC did not attend.

At the hearing, Hann testified that she had paid off her student loans and produced documentary evidence to support her testimony. After considering Hann's evidence, the bankruptcy judge ruled that Hann owed ECMC nothing.

Hann probably thought her student debts were behind her, but she was wrong. After her bankruptcy case was concluded, ECMC renewed its efforts to collect on Hann's old student loans. In fact, it even garnished her Social Security.

Richard Gaudreau, Hann's lawyer, contacted ECMC and told the company that Hann's student-loan debt had been discharged in bankruptcy. Nevertheless, ECMC continued trying to collect the debt.

 Gaudreau then reopened Hann's bankruptcy case and asked a new bankruptcy judge to order ECMC to stop its collection efforts.   ECMC showed up for the hearing, where it, argued that the former bankruptcy judge, who had retired, had never adjudicated the amount of ECMC's claim and that student-loan debt is generally nondischargeable. ECMC, did not, however, quantify how much it claimed Hann still owed.

Again, a bankruptcy judge ruled in Hann's favor, and the judge awarded sanctions against ECMC.  ECMC appealed this order to the First Circuit's Bankruptcy Appellate Panel, and the Panel upheld the bankruptcy court.  The BAP specifically approved the sanctions against the debt collector, explaining that ECMC's continued collection activities in spite of the bankruptcy court's ruling, "constituted an abuse of the bankruptcy process and defiance of the court's authority."

Did ECMC get the message? Apparently not. ECMC then appealed the BAP's ruling to the First Circuit Court of Appeals,  On March 29, 2013, almost nine years after Hann filed for bankruptcy, the First Circuit ruled in Hann's favor yet again. Hann owed ECMC nothing, the appellate court ruled; and the bankruptcy court had appropriately sanctioned the debt collector for abusing the bankruptcy process.

Implications of the First Circuit's ruling in Hann v. ECMC

The Hann case is extraordinary for two reasons. First, ECMC defended its right to collect on Hann's student loans all the way to the First Circuit Court of Appeals, despite its "repeated inability to identify or quantify [Hann'] outstanding debt obligation" to the bankruptcy court.

Second, the sanctions that ECMC fought were not large: only about $9,000. Clearly, it made no economic sense for ECMC to fight a pitifully small sanction award at two appellate levels. Surely, ECMC's attorney fees were many times the amount of the sanctions award.

Taken together, the Bruner-Halteman decision and the Hann decision portray ECMC as  a pretty rough outfit. It has appeared in hundreds of court cases involving student-loan debtors, and surely it knows the Bankruptcy Code. Yet it was willing to garnish Bruner-Halteman's wages 37 times in defiance of settled law and to continue trying to collect on student loans that had been discharged in bankruptcy.

Who paid ECMC's attorney fees in these two wild-hare cases? It is not entirely clear, but the Century Foundation's report on ECMC and other student-loan guaranty agencies suggests that the federal government is paying ECMC's fees.

If that is true, then you, Mr. and Ms. Taxpayer, are paying ECMC's lawyers to hound distressed student-loan debtors through the federal courts. Don't you think we should find out? And wouldn't that be a good question for the U.S. Senate to explore through its hearing process?


References

Bruner-Halteman v. Educational Credit Management Corporation, Case No. 12-324-HDH-13, ADV. No. 14-03041 (Bankr. N.D. Tex. 2016).

Hann v. Educational Credit Management Corporation, 711 F.3d 235 (1st Cir. 2013).

John Hechinger. Taxpayers Fund $454,000 Pay for Collector Chasing Student Loans. Bloomberg.com, May 15, 2013. Accessible at: http://www.bloomberg.com/news/2012-05-15/taxpayers-fund-454-000-pay-for-collector-chasing-student-loans.html

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

Robert Shireman and Tariq Habash. Have Student Loan Guaranty Agencies Lost Their Way? The Century Foundation, September 29, 2016. Accessible at https://tcf.org/content/report/student-loan-guaranty-agencies-lost-way/

Alan and Catherine Murray are Poster Children for the Student Loan Crisis: Income-Driven Repayment Plans for Distressed Student-Loan Debtors are Insane

In a recent post, I wrote about Alan and Catherine Murray, who won a partial discharge of their student-loan debt in a bankruptcy case decided in December 2016.  Educational Credit Management (ECMC), the creditor in their case, is appealing the decision. We should all hope ECMC loses the appeal, because the Murrays are the poster children for the student-loan crisis.

Alan and Catherine Murray: Poster Children for the Student-Loan Crisis

Alan and Catherine Murray, a married couple in their late forties, took out 31 federal student loans to get bachelor's degrees and master's degrees in the early 1990s. In all, they borrowed about $77,000, not an unreasonable amount, given the fact that they used the loans to get a total of four degrees.

In 1996, the Murrays consolidated all those loans, a sensible thing to do; and they began making payments on the consolidated loans at 9 percent interest.  Over the years they made payments totally $58,000--or 70 percent of what they borrowed.

Nevertheless, during some periods, the Murrays obtained economic hardship deferments on their loans, which allowed them to skip some payments. Interest continued to accrue, however; and by 2014, when the Murrays filed for bankruptcy, their $77,000 debt had ballooned to $311,000!

Fortunately for the Murrays, Judge Dale Somers, a Kansas bankruptcy judge, granted them a partial discharge of their massive debt. Judge Somers ruled that the Murrays had managed their student loans in good faith, but they would never be able to pay back the $311,000 they owed. Very sensibly, he reduced their debt to $77,000, which is the amount they borrowed, and canceled all the accumulated interest.

 Educational Credit Management Corporation (ECMC), the Murrays' student-loan creditor, appealed Judge Somers' ruling. The Murrays should have been placed in an income-driven repayment plan (IDR), ECMC argued, which would have required them to pay about $1,000 a month for a period of 20 years.

Obviously, ECMC's argument is insane. As Judge Somers pointed out, interest was accruing on the Murrays' debt at the rate of almost $2,000 a month. Thus ECMC's proposed payment schedule would have resulted in the Murrays' debt growing by a thousand dollars a month even if they faithfully made their loan payments. By the end of their 20-year payment term, their total debt would have grown to at least two thirds of a million dollars.

The Murrays' case is not atypical: Billions of dollars in student loans are negatively amortizing

You might think the Murray case is an anomaly, but it is not. Millions of people took out student loans, made payments in good faith, and wound up owing two, three, or even four times what they borrowed. In other words, millions of student loans are negatively amortizing--they are growing larger, not smaller, during the repayment period.

For example, Brenda Butler, whose bankruptcy case was decided last year, borrowed $14,000 to get a bachelor's degree in English from Chapman University, which she obtained in 1995. Like the Murrays, she made good faith efforts to pay off her loans, but she was unemployed from time to time and could not always make her loan payments.

By the time Butler filed for bankruptcy in 2014, her debt had doubled to $32,000, even though she had made payments totally $15,000--a little more than the amount she borrowed.

Unfortunately for Ms. Butler, her bankruptcy judge was not as compassionate as the Murrays' judge. The judge ruled that Butler should stay on a 25-year repayment plant, which would terminate in 2037, 42 years after she graduated from Chapman University.

Here is sad reality. Millions of people are seeing their total student-loan indebtedness go up--not down--after they begin repayment. According to the Brookings Institution,  more than half of the 2012 cohort of student-loan borrowers saw their total indebtedness go up two years after beginning the repayment phase.  Among students who attended for-profit colleges, three out of four saw their loan balances grow larger two years into repayment.

An analysis by Inside Higher Ed concluded that less that half of college borrowers (47 percent) had made any progress on paying off their student loans 5 years into repayment. In the for-profit sector, only about a third (35 percent) had paid anything down on their student loans  over a 5-year period.

And the Wall Street Journal reported recently that half the students at more than a thousand colleges and schools had not reduced their loan balances by one dime seven years after their repayment obligations began.

The Federal Student Loan Program is a Train Wreck

Awhile back, Senator Elizabeth Warren accused the federal government of making "obscene" profits on student loans because the interest rates were higher than the government's cost of borrowing money. Warren's charge might have been true if people were paying back their loans, but they are not.

Eight million people are in default and millions more are seeing their student-loan balances grow larger with each passing month.  The Murrays are the poster children for this tragedy because they handled their loans in good faith and still wound up owing four times what they borrowed.

In short, the federal student loan program is a train wreck. Judge Somers' solution for the Murrays was to wipe out the accrued interest on their debt and to simply require them to pay back the principle. This is the only sensible way to deal with the massive problem of negative amortization.

References

Butler v. Educational Credit Management Corporation, No. 14-71585, Adv. No. 14-07069 (Bankr. C.D. Ill. Jan. 27, 2016).

Paul Fain. Feds' data error inflated loan repayment rates on the College Scoreboard. Inside Higher Ed, January 16, 2017.

Andrea Fuller. Student Debt Payback Far Worse Than Believed. Wall Street Journal, January 18, 2017.

Adam Looney & Constantine Yannelis, A crisis in student loans? How changes in the characteristics of borrowers and in the institutions they attended contributed to rising default rates. Washington, DC: Brookings Institution (2015).

Murray v. Educational Credit Management Corporation, Case No. 14-22253, ADV. No. 15-6099, 2016 Banrk. LEXIS 4229 (Bankr. D. Kansas, December 8, 2016).

Ruth Tam. Warren: Profits from student loans are 'obscene.' Washington Post, July 17, 2013.