How Not to Deal with the Private Student Loan Problem

Until passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), private student loans were treated as ordinary unsecured consumer debt.  That badly misnamed piece of legislation  made private education loans nondischargeable in bankruptcy except in cases of undue hardship.

Several measures to relieve private student loan debtors have been introduced in Congress in the last two years, but none has been enacted. One measure, S 1541 also called the private Student Loan Debt Swap Act of 2009, looks like an attempt to relieve debtors.  When analyzed closely this bill proves to be more about bailing out lenders than helping students.  It would allow students to refinance private student loans under the Federal Direct Loan Program under the same terms as consolidation loans.

Unfortunately, the proposed legislation would only be available if  the student had been eligible for an unsubsidized Stafford Loan under the Federal Family Education Loan Program (FFEL) when the debt was incurred, and did not exceed debt ceilings established for that progran.  If enacted, the borrower would benefit from a lower interest rate and more flexible repayment terms but would now have the entire debt collection arsenal of the Federal Government arrayed against her.

In the unlikely event Congress restores bankruptcy protection for private student loan debtors, this debtor would be out of luck, while the lender would have collected its full claim from the Federal Government.  As the bill is written, it applies mainly to people who never worked with the financial aid office of a reputable educational institution and were steered directly into private loan arrangements with unfavorable terms.

It would not apply to the much larger body of debtors who resorted to private loans after exceeding FFEL limits, to cosigners (mainly parents), or to people who enrolled in programs that did not qualify for FFELP but are nonetheless considered to have educational loans for purposes of the bankruptcy laws.  In short, it does essentially nothing for struggling debtors, since, even for those who qualify for refinancing, reducing interest rates and extending the repayment period will fail to make many obligations affordable.

By |Aug 21, 2009|Categories: Bankruptcy, Student Loans|Tags: , , , |

Who is the US Trustee?

The Office of the U. S. Trustee was established by Congress in the Bankruptcy Reform Act of 1978.  It was intended to help regulate or supervise certain aspects of the bankruptcy process.  Congress makes policy decisions by passing laws; the Executive supervises the enforcement of laws passed by Congress.  The US Trustee was created as a division of the US Department of Justice, part of the Executive branch of government.

The US Trustee program consists of the Executive Office for U. S. Trustees (EOUST) which is located in Washington, DC; the regional offices located around the country; and the field offices located in each region. 

By |Apr 26, 2009|Categories: Bankruptcy|Tags: , , |

Denial of Bankruptcy Discharge a Serious Matter

The bankruptcy court is generally reluctant to deny discharge to an honest debtor.   In citing several 9th Circuit Court of Appeals cases that repeat a pithy quote, Judge Randall Dunn states:

“A denial of a discharge is an act of mammoth proportions, and must not be taken lightly. In light of this gravity, this Court and many others have stated that Section 727 must be construed liberally”

However, with the standard of proof set at a preponderance of the evidence, Judge Dunn goes on to say “in spite of whatever weight on the scale favors the debtor’s discharge, a party seeking to deny the debtor a discharge under 11 USC § 727 likely will prevail if the evidence establishes that it is more likely than not that the objecting party’s case is justified.”

It seems that untracked transactions of nearly a million dollars with Russian clients/customers/friends in one year is sufficient to swing the balance in favor of the United States Trustee in an unreported opinion denying discharge to debtor Valerie Caron. 

Bankruptcy Code Section 727(a)(3) prevents the granting of a discharge to a debtor when he “has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the debtor’s financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all of the circumstances of the case.”  That was clearly the case for Mr. Caron.

While debtors in bankruptcy are often poor record keepers, the 9th Circuit Court of Appeals has repeatedly required a “true presentation” of the debtor’s financial affairs so that the creditors need not risk the concealment of assets obscured by inaccurate or incomplete books and records.  In other words, if the record keeping is so bad that it is not possible to determine whether or not assets are being hidden, a discharge in bankruptcy can be denied to the debtor.

By |Mar 30, 2009|Categories: Bankruptcy|Tags: , , |

Check that Lender’s Arithmetic!

The problem of the debt which ought to have been liquidated according to the terms of a Chapter 13 plan, but surfaces with a vengeance due to undisclosed fees and lender accounting shenanigans, is familiar in mortgage contexts but may also involve student loans, as the recent case of Carlson-Callow v. Sallie Mae Servicing, Educational Credit Management Corporation, and Northwest Loan Association (U.S. Bankr. Idaho, 2008 Bankr. Lexis 1815) illustrates.

On first reading this looks like one of those rare instances where a debtor obtained real relief from an onerous student loan. The debtor, 60 years old and suffering from a serious congenital disorder likely to progressively limit her ability to work full time in an indifferently-paid profession, owed $88,776 in 2001, when she consolidated all her loans, and $123,070 in 2005, because of interest accruing during forbearance. The creditors had already agreed to settle for the original principal and reduce the interest rate to 5%, but this did not result in an affordable repayment amount.

After scrutinizing the debtor’s budget, disallowing minimal support to an adult daughter, and putting the last nail in the coffin of an unprofitable business, the court concluded the debtor could currently afford to pay $447/month toward her student loans.  The court then discharged all but $37,500 of the debt on grounds of undue hardship, maintaining that that amount could be paid off over five years on a graduated payment plan rising to $672 in the final 32 months of the plan.  The graduated payment took into account that other debts would be paid off earlier; it did not take into account the debtor’s deteriorating health.

The monthly amount required to fully amortize a $37,500 debt over five years at 5% interest is $707.  The payment schedule as entered into the court record leaves an undischargeable debt of $9,252.78, assuming the debtor is able to make all payments as scheduled. Something doesn’t add up here.  It looks as if this is one more area in which attorneys are going to have to go through all the documents with a fine-toothed comb, checking all the figures, to make sure their clients are getting the relief they are being told to expect.

By |Dec 15, 2008|Categories: Bankruptcy, Student Loans|Tags: , |

Debtor’s Anonymous – Can Bankruptcy Help?

There is a national organization, Debtor’s Anonymous, which is based on the principles of Alcoholics Anonymous and uses AA’s 12 Steps to address the problem of unmanageable debt. This program is not a substitute for bankruptcy by any means, being primarily aimed at helping people avoid incurring additional debt, but it is potentially a very useful tool for anyone with debt problems. 

As with all 12-step programs, getting involved is easy and requires minimal commitment.  The Debtor’s Anonymous Website has links for local contacts and schedules of meetings.  If you live in an urban area, there is probably a regularly-scheduled meeting nearby.  If you think you have a problem with debt, you are welcome to attend, listen, and decide whether you might benefit from exploring the program further.  A typical meeting will involve some study of literature and some sharing among members about how they deal with budget problems.  There are no dues or fees involved – the low costs of maintaining a program that runs almost entirely on volunteer labor are met through small voluntary contributions from members.  Buying some inexpensive literature may also be recommended.

Working the program involves attending meetings, getting a sponsor, and putting together a “Pressure Relief Group” consisting of two program members who have gotten their finances under control, with who work with the debtor on a spending plan (to manage a budget without incurring additional unsecured debt) and an action plan (to retire existing debt).

The first aim of Debtor’s Anonymous is to change people’s behavior so that they stop incurring additional unsecured debt.  Philosophically, Debtor’s Anonymous encourages people to take responsibility for their prior debts, which could include steering people away from filing bankruptcy when they were eligible to do so. If you are truly overwhelmed by debt that you cannot possibly repay, especially if it involves large obligations such as medical debt that are not the result of improvident spending, you need a bankruptcy attorney, not Debtor’s Anonymous. The same is true of a home foreclosure or other crisis situation that can’t wait until a budget is repaired.

Debtor’s Anonymous is not a debt relief agency. It cannot help you file bankruptcy, provide required credit counseling certificates or negotiate with lenders to settle debts.  It does not offer legal advice.  A sponsor or Pressure Relief Group can probably suggest financial management strategies that reduce the burden in small ways.  

Debtor’s Anonymous can be very useful if you are not now facing bankruptcy, but see your debts mounting and will soon be facing bankruptcy if you cannot rein in your spending.  Having a neutral and knowledgeable third party to talk to about financial matters is invaluable.  When working through a Chapter 13 plan, participation a a DA support group can help you adhere to its terms.  After discharge, continuing with the program may help to prevent slipping back into old spending habits.  It is the nature of 12-step programs that people who have some time in them volunteer their services to help newcomers – a great way to reinforce one’s own continued solvency or sobriety, and a source of general satisfaction.

Addiction is a factor in many bankruptcies

Unfortunately, addiction is everywhere in America. It’s becoming almost normative for adults to use some substance or engage in some activity to such excess that it becomes an overriding compulsion, trumping family, health, and financial solvency. The classic heroin addict has usually descended too far down the scale to benefit from filing for bankruptcy, but he has plenty of more respectable cousins still clinging to a tenuous middle class lifestyle while their compulsions drive them deeper and deeper into debt.

Alcoholism, abuse of prescription medications, gambling, and pornography are some of the commonest “respectable” addictions recognized as such by the medical community. Compulsive shopping, while not officially recognized as a disorder by the American Psychiatric Association, has much in common with gambling and pornography, including inducing changes in brain chemistry that trigger craving for more. For a good discussion of the addictive qualities of compulsive shopping, see: Compulsive shopping: Illness or Bad Choices.

Teenagers may become involved with hard street drugs such as heroin and methamphetamine.  When they do, it’s disastrous for the rest of the family.  An addicted family member will steal and sell household possessions, find a way to clean out bank accounts, and run up huge obligations through mandatory treatment and penalties from the criminal justice system. Addicted older adult children may persuade parents or grandparents to cosign for loans or otherwise underwrite the addiction at the expense of the parents’ financial security.

Active addiction contributes to bankruptcy in a number of ways. A budget which looks adequate won’t cover living expenses if a large chunk of it is being diverted towards alcohol or the gaming table. The addict (and often his or her spouse) will be in denial about just how much money the addiction consumes, and concoct implausible explanations for the chronic budgetary shortfall.

A mind befogged by alcohol or painkillers is prone to poor budget management and unwise spending decisions. An addict will neglect to pay insurance bills or make mortgage payments even though there is money in the bank to cover them. He or she is easily persuaded that some product or service will cure the misery his addiction fosters, and will shell out for a lavish vacation, a Cadillac-grade home-entertainment center, or a high-profile personal development seminar, incurring debt for something that fails to deliver the promised relief.

As addiction progresses is erodes employability, beginning with missed promotions and fewer hours and ending in layoff.  A person fired or laid off because of substance abuse finds it virtually impossible to get another job while he is still using.  Unless the process is somehow halted, there’s a good chance he’ll end up on the streets or in prison.

Addictions frequently lead to divorce.  The non-addicted spouse is now free of the day-to-day drain on household finances, but hasn’t taken much away from the breakup and now has difficulty collecting child support. Accustomed to a chaotic unmanageable budget, the spouse may continue to make poor decisions.  She (or he) may be headed for bankruptcy.

A certain class of addict has learned to form relationships with vulnerable individuals and then exploit them as a source of cash, persuading them, for example, to use their good credit to obtain a loan the exploiter swears to pay back.  We see clients in our office who could use some counseling or a support group aimed at avoiding getting involved with suitors whose professions of undying love and admiration are immediately followed by a request to cosign on a loan.  Some people embroiled in such relationships find support in Al-anon or Nar-anon, the 12-step programs for spouses and family members of alcoholics and addicts.

A bankruptcy attorney’s office will encounter people in various phases of this process – from those in early stages of addiction, for whom other factors are more important, through families with an unemployable primary wage earner, to the truncated family trying desperately to recover from the wreckage wrought by an addicted ex-spouse.  In other articles I will address some strategies for working with addicted bankruptcy clients, and how the legal bankruptcy process can coordinate with 12-step programs such as Alcoholics Anonymous.

By |May 29, 2008|Categories: Bankruptcy|Tags: , , , , |