Friday, April 7, 2017

3,000 people a day are defaulting on student loans and Betsy DeVos rewards the student loan indusry. You broke our hearts, Betsy!

Yesterday, the New York Times published an editorial scolding Secretary of Education Betsy DeVos for allowing the student-loan servicers to slap a 16 percent penalty on student borrowers who default on their loans.

 And let's remember this: That 16 percent penalty is not 16 percent on the amount borrowed; its 16 percent on the unpaid balance plus accumulated interest.  Millions of debtors have their student loans in forbearance or deferment for years while their debt grows due to accruing interest. Thus, when they default, they may owe double, triple, or even quadruple what they borrowed. The 16 percent penalty is calculated by the total debt--not just the original loan amount.

And the lenders apply that penalty even when debtors immediately start the process of bringing their loans back into good standing. That stinks.

Secretary of Education DeVos made a big mistake when she caved in to the student-loan industry at the expense of struggling student debtors. I can think of only two explanations. Either she doesn't know what she's doing or she's in the pocket of student loan guaranty agencies and their collection agents.

But it doesn't really matter why she did it. After all, Fredo Corleone didn't know what he was doing when he betrayed his brother Michael in Godfather II. But Michael didn't cut Fredo any slack. Remember what Michael said? "I know it was you, Fredo – you broke my heart – you broke my heart!"

 As the Times noted in its editorial, 3,000 people a day in the government's direct lending program defaulted on their student loans last year--about a million people. That's a lot of people having penalties slapped on their loan balances--that's a lot of suffering that Betsy DeVos could have stopped.

It is now clear: student debtors can't look to the Trump administration for assistance. The bankruptcy courts are their only hope.

I know it was you, Betsy--you broke my hear, you broke my heart!

References

Editorial. The Wrong Move on Student Loans. New York Times, April 6, 2017.




Thursday, April 6, 2017

The Student Loan Crisis is WORSE than the 2008 Housing Crisis: The Return of "The Big Short"

As everyone knows, the housing market collapsed in 2008, triggering a major economic crisis in the United States. The nation descended into recession, and the national economy is still recovering from this catastrophe.

Steve Rhode and others have described a student loan "bubble," and I share these commentators' view that the federal student loan program as it functions now is unsustainable.  Approximately 42 million borrowers collectively owe $1.4 trillion in student-loan debt, and families are beginning to experience sticker shock. Enrollments are declining at the for-profit schools, and nonprofit liberal arts colleges are desperately scrambling to maintain their enrollments.

Many people may think the student-loan crisis--no matter how bad it is--is just a small tremor compared to the 2008 housing crisis, which was an earthquake.

But in fact, the student loan crisis has produced more casualties in terms of human suffering than the housing collapse ten years ago.

Earlier this week, Alan White of Credit Slip, an online news source on economic matters, commented on a housing-data report released recently by the Urban Institute. Based on the Urban Institute's data, White assessed the total damage from the subprime housing crisis. From 2007 to 2016, 6.7 million homes went into foreclosure and another 2 million homes were lost through short sales or deeds-in lieu of foreclosure. Thus the total number of homeowners who lost their homes in the subprime housing debacle is about 8.7 million. If we assume a majority of those homes were owned by married couples, then the total number of individuals who were injured in the housing crisis is about 16 million.

That's a lot of people, but the casualty list from the student loan crisis is larger. 

As the New York Times reported in 2015, about 10 million student borrowers have defaulted on their loans or have loans in delinquency. Almost 6 million debtors are now in income-driven repayment programs (IDRs), and those people are locked into repayment plans that last from 20 to 25 years. A majority of those people are making payments so low they are not servicing accruing interest, which means their student loans balances are growing larger (negatively amortizing) with each passing month.

So we're talking about 16 million people who defaulted, have delinquent loans, or who are in IDRs. And millions more have student loans in forbearance or deferment, which means they are not making payments on their loans but are not counted as defaulters. For most of those people, interest is accruing, which means their student loan balances are growing. The Consumer Financial Protection Bureau reported a total of about 9 million people in deferment or forbearance in its 2013 report titled A Closer Look at the Trillion

All these numbers are fluid. Some delinquent student-loan borrowers will bring their loans current, and some defaulters will rehabilitate their loans. And some people will move from deferment status to some form of IDR.

But it is safe to say--indeed conservative to say--that about 20 million Americans have outstanding student loans they can't pay back. That's 4 million more people that were injured by the housing crisis. It's The Big Short all over again.

Alan and Catherine Murray, who received a partial discharge of their student loans in a Kansas bankruptcy court last year, are the poster children for this calamity. They borrowed $77,000 to finance their studies, and both obtained a bachelor's degree and a master's degree. They paid back $54,000--about 70 percent of what they borrowed. 

But the Murrays experienced hard times and put their loans into deferment for a few years while interest accrued at the rate of 9 percent. They now owe $311,000! Will they ever pay that back? No, they won't.

Yes, the federal loan program is in a bubble, and the suffering has already begun. The federal government is propping up this house of cards and disguising the real default rate. Congress doesn't have the courage to address the problem, and the Trump administration appears to be clueless

We must look to the federal bankruptcy courts for relief. The Murrays obtained a partial dischage of their their loans from a Kansas bankruptcy judge last year, but their case is now on appeal.  

Stay tuned for further developments.

The Big Short


References

Rohit Chopra. A closer look at the trillion. Consumer Financial Protection Bureau, August 5, 2013.

Editorial, "Why Student Debtors Go Unrescued." New York Times, October 7, 2015, A 26.

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

Steve Rhode. The Student Bubble That Many Don't Want To See. Get Out Of Debt Guy, July 15, 2016.

Jill Schlesinger. Looking for the next bubble. Chicago Tribune, August 24, 2016.

Alan White, Foreclosure Crisis Update. Credit Slip, April 5, 2017.

Monday, April 3, 2017

Sara Fern v. FedLoan Servicing: A single mother of three discharges her student loans in bankruptcy over the objections of the U.S. Department of Education

Student loans cannot be discharged in bankruptcy, right? WRONG! Distressed student borrowers have won a string of victories in the bankruptcy courts over the past few years. And Fern v. FedLoan Servicing is another case for the win column. 

Fern v. FedLoan Servicing: A single mother of three children discharges her student loans in bankruptcy

In 2016, Sarah Fern, a 35-year-old mother of three children, discharged about $27,000 in student loans in an Iowa bankruptcy court. And last February, her victory was affirmed by the Bankruptcy Appellate Panel of the Eighth Circuit Court of Appeals.Over the years, 

Fern had not made a single payment on her student loans. Nevertheless, she had never been in default because her loans had always been in deferment or forbearance due to her economic circumstances.

At the time of her bankruptcy trial, Fern was raising three children on take-home pay of about $1,500 a month, which she supplemented with food stamps and public housing assistance. Fern drove an old car in need of repair, and she could not afford to buy a more reliable vehicle.

Although Fern attempted to improve her income status by taking out student loans to enroll in two postsecondary programs, neither program led to a higher paying job. As the bankruptcy court noted, Fern had never earned more than $25,000 a year.

The Department of Education opposed Fern's effort to shed her student loans in bankruptcy. DOE produced an expert witness who testified that Fern qualified for various income-based repayment plans. According to the expert, Fern's income was so low that her monthly payments would be zero if she entered one of these plans.

But Judge Thad Collins, an Iowa bankruptcy judge, rejected DOE's arguments and discharged Fern's student loans in their entirety. In Judge Collins' view, Fern would probably never be in a financial position to pay back her loans.

Under an income-based repayment plan, Judge Collins noted, Fern's monthly payments would be zero, but her debt would continue to grow as interest accrued on the unpaid balance. Although the government would forgive any unpaid portion of Fern's loans at the end of the repayment period (20 or 25 years in the future), the cancelled loan debt might be taxable to her. In addition, if Fern's student loans were not discharged, they would be a blot on her credit record.


Judge Collins recognizes emotional stress from long-term indebtedness

Judge Collins also considered the emotional distress that comes from long-term indebtedness, Fern's loans had already caused her emotional stress, Collins observed, and she would continue to suffer from emotional stress if she were forced into a long-term repayment plan:

This mounting indebtedness has also indisputably been an emotional burden on [Fern]. [She] testified that knowing that the debt is hanging over her, constantly growing, and that she will never be able to repay this debt, is distressing to her. [Fern] testified that she feels like she will never be able to get ahead because she will always have this debt.
In Judge Collins' opinion, the emotional burden of long-term indebtedness was a hardship that weighed in favor of discharging Fern's student loans, even though this burden could not be quantified. "The Court will not ignore a hardship," Collins wrote, "simply because it is not reflected on a balance sheet."

Department of Education appeals Judge Collins' decision

The Department of Education appealed Judge Collins' decision; and last February. the Bankruptcy Appellate Panel of the Eighth Circuit Court of Appeals affirmed Collins' ruling. According to DOE, Judge Collins erred by taking Fern's emotional burdens into account, by considering the tax consequences of a long-term repayment plan, and by recognizing that Fern's debt would grow over the years because her monthly payments under a long-term plan (zero), would cause interest on her loans to continue accumulating.

But the Eighth Circuit's BAP disagreed. "These additional observations identified by the Bankruptcy Court simply served to supplement its determination of undue hardship under the totality of circumstances test," the BAP court wrote.

The Fern decision is a big win for student-loan debtors. This is the latest federal appellate court decision to reject creditors' arguments that bankrupt student borrowers should be pushed into 20- or 25-year repayment plans instead of getting a fresh start. 


There is justice in the world (sometimes)

As one of Cormac McCarthy's fictional characters said in the novel, The Crossing, "Hay justicia en el mundo!"

Yes, there is justice in the world, but justice is not distributed evenly and sometimes it arrives too late to do us any good. Sara Fern was very fortunate to have obtained justice from Judge Thad Collins, who wrote a remarkably sensible and compassionate decision. And she was even more fortunate to have Judge Collins' decision affirmed on appeal by the Eighth Circuit's Bankruptcy Appellate Panel.

References

Fern v. FedLoan Servicing, 563 B.R. 1 (8th Cir. BAP 2017).

Fern v. FedLoan Servicing, 553 B.R. 362 (Bankr. N.D. Iowa 2016).

















Saturday, April 1, 2017

Higher Education as a criminal enterprise: The U.S. Department of Education (or its agents) is trying to collect on a student loan debt 37 years old!

In Clusterfuck Nation, James Howard Kunstler has argued that many sectors of our economy have descended into criminal enterprises: banking, medicine and higher education in particular. And by God, he has convinced me.

Kunstler concluded his latest essay with these words: "It is getting to the point where we have to ask ourselves if we are even capable of being a serious people anymore." I am beginning to think the answer is no.

A few days ago a retired man in California contacted me through my blog site and asked for help with a student-loan problem. As I understand it, he took out a small student loan back in the 1970s and allowed it to go into default.

In 1980, the federal government or one of its agents obtained a default judgment against the guy, and he paid the judgment in full sometime thereafter.

Now, 37 years later, a government debt collector is trying to collect on the loan. You may think the debt is uncollectable.  All states have statutes of limitations for lawsuits to collect a debt. Generally, the statute of limitations on a promissory note is six years. So the guy has nothing to worry about, right?

Wrong. Congress passed the Higher Education Technical Amendments of 1991, which abolished all statutes of limitations on student loans, and some courts have ruled that the law applies retroactively. Thus, even if the statute of limitations on my correspondent's debt expired before the federal law was passed in 1991 (and I think it did), the government can still collect on it--at least according to some courts' interpretation.

Now that is fundamentally wrong and violates an ancient principle of equity known as laches. As explained in Black's Law Dictionary, "The doctrine of laches is based on the maxim that "equity aids the vigilant and not those who slumber on their rights." Thus, as a matter of fundamental fairness, claimants must pursue their remedies within a reasonable time. After all, it is unfair to start collection activities on a debt long after most reasonable people would have discarded documents that would prove the debt had been paid.

In fact, I'm sure millions of student debtors who paid of their students loans do not now have documents to prove their loans were paid.  In fact, in a lawsuit decided a few years ago, a woman obtained a court order finding she had paid off her student loans, and Educational Credit Management Corporation continued its collection efforts against her in spite of that fact.

As I write this, the U.S. Department of Education's debt collectors are pursuing desperate student-loan borrowers into the bankruptcy courts and arguing to federal judges that these hapless debtors should be put in 25-year repayment plans. These people are as heartless as the mob characters in the movie Godfather II.

So yes, higher education has become a criminal enterprise, and the Department of Education is basically a racketeer, which Congress and the courts show no inclination toward trying to control.   As Mr. Kunstler put it, "It is getting to the point where we have to ask ourselves if we are even capable of being a serious people anymore."

There may be an argument that the Higher Education Technical Amendments of 1991 is unconstitutional when applied against people long after they can reasonably defend themselves. Perhaps some starving law graduate, also burdened by student loans, could do some research on the constitutionality of this pernicious law.

It's not personal. It's only business.


References

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

James Howard Kunstler. Racket of Rackets. Clusterfuck Nation, March 31, 2017.

United States v. Hodges, 999 F.2d 341 (8th Cir. 1993).

Friday, March 31, 2017

Student Debtors in the Bankruptcy Courts and the Battle of Britain: "Never have the few come from the ranks of so many"

The Battle of Britain was perhaps the most thrilling episode of the Second World War. During the summer and autumn of 1940, Hitler sent the Luftwaffe to bomb London, hoping to pummel the British into submission.

But Hitler failed. A handful of young pilots in the Royal Air Force clawed their way into the skies day after day and inflicted unacceptable casualties on the German Air Force. Before the year was out, Hitler gave up, and the Battle of Britain was won.

You may think it inappropriate to attach a military analogy to the ongoing battle between oppressed student borrowers and the federal government's debt collectors that is taking place now in the bankruptcy courts. But the comparison is apt.

Eight million people have defaulted on their student loans and at least 15 million more aren't paying them back.  If these people were indebted for any other reason than college loans, they would get relief from their debt in the bankruptcy courts.

But most oppressed debtors don't even try. Jason Iuliano reported that almost a quarter of a million people with student loans filed for bankruptcy in 2007, but only a few hundred even attempted to discharge their student loans.

But a few brave souls have filed adversary proceedings, where they've fought the U.S. Department of Education and its loan collectors--notably Educational Credit Management Corporation. Incredibly, some of them have been successful, and important appeals are now in the federal appellate courts.

Alexandra Acosta Conniff, an Alabama school teacher, acting without an attorney, defeated ECMC in 2015. ECMC appealed, but Alexandra is now represented by an eminent attorney, retired bankruptcy judge Eugene Wedoff.  I believe Alexandra will ultimately prevail.

Alan and Catherine Murray, a Kansas couple in their late 40s, beat ECMC last year, winning a partial discharge of their student loans, which had ballooned to almost a third of a million dollars. They were ably represented by George Thomas, a Kansas lawyer and ex-Marine.  Again, ECMC appealed, but I am confident Mr. Thomas and the Murrays will win through.

Overburdened student-loan debtors have been hounded and harassed by the U.S. government and its predatory agents for years, but some are now fighting back and they are beginning to find sympathetic bankruptcy judges.

Winston Church, in one of the immortal sentences in the English language, paid this tribute to the pilots of the RAF. "Never was so much owed by so many to so few."

And Boris Johnson, author of The Churchill Factor, pointed out that most of the RAF pilots came from the English working and middle classes. Few Oxford men climbed into those Hurricane fighter planes during the summer of 1940. And so Johnson added this fitting epitaph to Churchill's tribute: "Never have the few come from the ranks of so many."

So here is a message for the millions of oppressed student-loan debtors: Hang on! A few courageous individuals, aided by sturdy lawyers, are fighting for you in the federal courts. And they will ultimately win. The bankruptcy laws are going to change and become more compassionate toward honest but unfortunate individuals who were victimized by our corrupt and unjust student loan program.


"Never have the few come from the ranks of so many."


References



Acosta-Conniff v. Educational Credit Management Corporation, No. 12-31-448-WRS, 2015 Bankr. LEXIS 937 (M.D. Ala. March 25, 2015).

Cloud, R. C. & Fossey, R. (2014). Facing the student debt crisis: Restoring the integrity of the federal student loan program. Journal of College and University Law, 40, 101-32.

In re Roth, 490 B.R. 908 (9th Cir. BAP 2013).

Iuliano, J. (2012). An Empirical Assessment of Student Loan Discharges and the Undue Hardship Standard. American Bankruptcy Law Journal, 86, 495-525.

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




Wednesday, March 29, 2017

Bank of America hit with $45 million punitive damages award for violating automatic stay provision of Bankruptcy Code: ECMC take notice!

A few days ago, Judge Christopher Klein, a California bankruptcy judge, struck a breathtaking blow for justice when he assessed $45 million in punitive damages against Bank of America for violating the automatic-stay provision of the Bankruptcy Code. You may recall that a Texas bankruptcy judge hit Educational Credit Management Corporation with a $74,000 punitive damages award for the same offense.

Here are the opening words of Judge Klein's Bank of America decision:

Frank Kafka lives. This automatic stay violation case reveals that he works at Bank of America. 
The mirage of promised mortgage modification lured [Erick and Renee Sundquist] into a kafkaesque nightmare of stay-violating foreclosure and unlawful detainer, tardy foreclosure rescission kept secret for months, home looted while the debtors were dispossessed, emotional distress, lost income, apparent heart attack, suicide attempt, and post-traumatic stress disorder for all of which Bank of America disclaims responsibility. 

Judge Klein then detailed Bank of America's offenses in detail--his opinion is 107 pages long! And at the end, Judge Klein spelled out how the punitive damages award should be apportioned:

The actual . . . damages are $1,074,581.50. The appropriate . . . punitive damages are $45,000,000.00.
The Sundquists are enjoined to deliver $40,000,000 (minus applicable taxes) to public service entities that are important in education in consumer law and deliver of legal services to consumers: National Consumer Law Center ($10,000,000.00), National Consumer Bankruptcy Rights Center ($10,000,000.00), and the five public law schools of the University of California System ($4,000,000.00).

Of course, Bank of America will appeal Judge Klein's punitive damages award, and who knows how that will go. But regardless of what happens on appeal, Judge Klein has turned a glaring spotlight on Bank of America's outrageous behavior.

And if the damages award is upheld, money will flow to entities that can help distressed debtors fight the predatory tactics of the banks.  That would be a great blessing for American society.

And this brings me to Educational Credit Management Corporation, the predatory student-loan debt collector that violated the automatic stay provision of the Bankruptcy Code more than 30 times by repeatedly garnishing the wages of Kristin Bruner-Halteman, a student-loan debtor who worked for Starbucks.  In a 2016 decision, Judge Harlin DeWayne Hale, a Texas bankruptcy judge, awarded Bruner-Halteman $74,000 in punitive damages for ECMC's misbehavior.

But $74,000 is a pittance for ECMC; it probably has that much cash in loose change that slipped under its couch cushions.  According to a report by the Century Foundation, ECMC has $1 billion in unrestricted assets. That's billion with a B.

So--listen up distressed student-loan debtors. If you file for bankruptcy in  a case opposed by ECMC and ECMC violates the Bankruptcy Code's automatic stay provision as it did in the Bruner-Halteman case, you need to ask for several million dollars in punitive damages. How about $10 million--that's only one percent of ECMC's assets.

References

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

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/

Sundquist v. Bank of America,  Adv. Pro. No. 204-0228, Case No. 10-35624-B-13J (Bankr. E.D. Calif. March 23, 2017).




Thursday, March 23, 2017

Trump and DeVos give aid and comfort to For-Profit Colleges: The Democrats should hold hearings on this sleazy industry

As Senator Dick Durbin once observed, the for-profit colleges "own every lobbyist in town." And indeed they do. David Halperin, in a terrific article for The Nation, explained how the for-profit colleges have effectively used lobbyists and lawyers to fight off federal efforts to regulate their sleazy industry.

And now the for-profits don't even have to pay their lobbyists and attorneys. Secretary of Education Betsy DeVos pays them directly!

As the New York Times reported, DOE hired two for-profit insiders to help shape DOE's policy toward the for-profit industry. Robert Eitel is taking an unpaid leave of absence from his job as vice president for regulatory legal services at Bridgepoint Education, Inc.  to take a paid job on the Department's "beachhead team." Bridgepoint, a for-profit education provider, is currently being investigated by the Securities and Exchange Commission. Former Senator Tom Harkin, a longtime critic of the for-profit college industry, called Bridgepoint a "a scam, an absolute scam."

And DOE also hired Taylor Hansen, a former for-profit lobbyist, to be a consultant. At least Hansen had the decency to resign his DOE position after a public outcry was raised.

These hires, along with DOE's decision to delay compliance deadlines for for-profit colleges to meet DOE's "gainful employment" regulations, are a strong indication that the Trump administration will not vigorously regulate this bandit industry.

Senate Democrats could put enormous pressure on Trump and DeVos if they would hold hearings on the for-profit colleges. I would like to see Senators Elizabeth Warren and Bernie Sanders question some of the so-called educators who run these diploma mills.  Nearly half of the students who took out federal loans to attend for-profit colleges default on their loans within five years of beginning repayment.

And Senate Democrats also need to examine the student-loan debt collectors who slap huge fees on student-loan defaulters and engage in high-pressure collection tactics.  Educational Credit Management Corporation (ECMC), for example, was hit with punitive damages last year for repeatedly garnishing the wages of a bankrupt student-loan debtor in violation of the Bankruptcy Code's automatic stay provisions.

Senator Warren might ask Janice Hines, ECMC's CEO, to disclose her compensation package--surely well over $1 million a year. And Senator Sanders might ask Hines how ECMC amassed $1 billion in assets.

Great political theater! So why don't the Democrats get busy and schedule those hearings? I tell you why. Too many politicians--Republicans and Democrats alike--are in bed with the for-profit college industry.  Read David Halperin's article in The Nation for details.

Janice Hines: How much money do you make running ECMC?

References

Patricia Cohen. Betsy DeVos's Hiring of For-Profit College Official Raises Impartiality Issues, New York Time, March 17, 2017.

Patricia Cohen. For-Profit Schools, an Obama Target, See New Day Under Trump. New York Times, February 20, 2017.

Danielle Douglas-Gabriel. Trump administration rolls back protections in default on student loans. Washington Post, March 17, 2017.

David Halperin. The Perfect Lobby: How One Industry Captured Washington, DC. The Nation, April 3, 2014.

 Shahien Nasiripour. , Betsy DeVos Hands Victory to Loan Firm Tied to Advisor Who Just Quit. Bloomberg News, March 20, 2017.
  
Predator Colleges May Thrive Again (editorial). New York Times, March 23, 2017, p. A 24.