Discharging Student Loan Debt in Bankruptcy: Borrower and Creditor - - PowerPoint PPT Presentation

Discharging Student Loan Debt in Bankruptcy: Borrower and Creditor Perspectives

Bankruptcy Code Provisions; Educational Loan Types; Relevant Cases; Partial Discharge; Specialized Treatment in Chapters 7 and 13

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WEDNESDAY , DECEMBER 11, 2019

Presenting a live 90-minute webinar with interactive Q&A John T . Baxter, Attorney, Nelson Mullins Riley & Scarborough, Nashville, Tenn. Natalie Jean-Baptiste, Founder, Law Office Of Natalie Jean-Baptiste, Uniondale, N.Y . Kurt A O’Keefe, Founder, Detroit Bankruptcy Lawyer Kurt O’Keefe, Detroit

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Student Loans and Bankruptcy

Student Loans – An Overview

• Two Types of Student Loans: Federal & Private
• Federal Loans
• FAFSA (Free Application for Federal Student Aid)
• Perkins Loan
• Direct Loans
• Generally limited based on information provided in the FAFSA
• Subsidized by the Government (depending on information in FAFSA)

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Student Loans – An Overview

• Private Loans
• Typically No FAFSA
• Require a credit-check on the front-end – may need a cosigner
• Provided by banks, credit unions, and other typical lending institutions
• No governmental subsidies

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Student Loans – An Overview

• Key Differences
• Federal: Deferral typically an option; income-based repayment; potential for loan

forgiveness

• Private: Dependent on credit score; higher interest rates unless excellent credit; amount

not limited by FAFSA; typically no deferral to payment while in school, though some lenders may provide

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Student Loans – An Overview

• Student Loan Servicers
• Navient
• Great Lakes
• Nelnet
• HESC/FedLoan
• American Education Services
• Granite State
• MOHELA
• OSLA
• EdFinancial

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Educational Loans in Bankruptcy

• Section 523(a)(8) – The Battlefield in Bankruptcy
• A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not

discharge an individual debtor from any debt–

• (a) unless excepting such debt from discharge under this paragraph would impose an undue

hardship on the debtor and the debtor’s dependents, for–

• (A)(i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental

unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or

• (ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or
• (B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of t

he Internal Revenue Code of 1986, incurred by a debtor who is an individual . . . .

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Educational Loans in Bankruptcy

• Unpacking Section 523(a)(8) – Three Types of Loans Covered
• A “qualified education loan,” as defined by the Internal Revenue Code
• An educational benefit overpayment or loan made, insured, or guaranteed by a

governmental unit or made under any program funded in whole or in part by a governmental unit or non-profit institution

• E.g. payments under the G.I. Bill above the amount needed for tuition
• An obligation to repay funds received as an educational benefit, scholarship or stipend

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Educational Loans in Bankruptcy

• Co-Obligors Covered
• Although the text of the statute appears to only apply to the person who receives the

actual benefit of the loan, co-obligors (typically parents) typically fall within the discharge exception.

• See In re Salter, 207 B.R. 272, 275 (Bankr. M.D. Fla. 1997) (“The exception to discharge

provision as it relates to student loans applies even if the borrower is not a student but, as in the present instance, a parent.”)

• But see, In re Pryor, 234 B.R. 716, 716 (Bankr. W.D. Tenn. 1999) (holding that comaker of

student loan that was not student who received the educational training was not covered by discharge exception of section 523(a)(8)).

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Educational Loans in Bankruptcy

• Whether a loan is private versus federal can impact dischargeability
• Typically, there is no question that federal loans fall within the discharge exception of

523(a)(8)

• Purely private loans, however, may be more likely to be subject to discharge
• A recent case is illustrative: Nitcher v. Educational Credit Management Corp. (In re Nitcher),

18-03090 (Bankr. D. Ore. Aug. 23, 2019)

• In Nitcher, the Bankruptcy Court discharged the majority of a debtor’s private loans, as the

private lender had the sole decision-making authority to garnish wages to obtain the funds, a result the Bankruptcy Court determined would cause the debtor an undue hardship

• Conversely, the governmental loans were payable on an income-based plan, so the debtor

could eventually have the remainder discharged at the end of the payment period.

• The Court discharged the bulk of the private loans, but did not discharge the federal loans.

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Educational Loans in Bankruptcy

• The Primary Points of Argument
• (1) Does the loan meet the statutory definition of an educational loan?
• (2) Is the loan federal or private?
• (3) Is there an argument that the “purpose” of the loan or the use of the loan was not

for an “educational benefit”?

• (4) Is the debtor the primary obligor (e.g. student) or a co-maker of the loan?

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DISCHARGING STUDENT LOAN DEBT IN BANKRUPTCY

Natalie Jean-Baptiste, Esq.

Law Office of Natalie Jean-Baptiste, P.C.

DISCHARGING STUDENT LOAN DEBT IN BANKRUPTCY

Establishing Undue Hardship

Determining Undue Hardship

Brunner Test – adopted by all circuits except First and Eighth Circuits. The burden of proof is on the debtor to establish undue hardship. The debtor must establish:

• 1. That the debtor cannot, based on current income and expenses, maintain a minimal

standard of living for himself or herself and his or 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; and

• 3. That the debtor has made good faith efforts to repay the loans.

Brunner v. N.Y. State Higher Educ. Servs. Corp., 831 F.2d 395, 396 (2d Cir.1987)

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Determining Undue Hardship

Totality of the Circumstances Test – adopted by the Eighth Circuit and some courts in the First Circuit. The Bankruptcy Court must consider: 1. The debtor’s past, present, and reasonably reliable future financial resources; 2. A calculation of the debtor’s and her dependents’ reasonable and necessary living expenses; and 3. Any other relevant facts and circumstances surrounding each particular case.

Long v. Educ. Credit Mgmt. Corp. (In re Long), 322 F.3d 549, 553 (8th Cir.2003)

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Totality of the Circumstances Test

Multiple factors considered, including:

• Total present and future incapacity to pay debt not in the debtor’s control
• Good faith effort to negotiate a deferment or forbearance
• Whether there is a long-term hardship
• Whether debtor made payments on the loan
• Permanent or long-term disability
• Can debtor find gainful employment in her area of study
• Efforts to maximize income and minimize living expenses
• Was the dominant purpose of the bankruptcy to discharge the student loan
• The ratio of student loan to total debt

In re Jesperson, 571 F3d 775 (8th Cir 2009)

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Applying Brunner – Minimal Standard of Living

• What is debtor’s standard of living?
• Are debtor’s expenses reasonable?
• –Any unique expenses related to dependents (e.g., children with

disability/medical condition)?

• Elements of the minimal standard of living:
• –Decent shelter and utilities; food and personal products; vehicles

maintained, insured and tagged; health insurance, or ability to pay for medical and dental expenses when they arise; at least small amount of life insurance; and funds for recreation (e.g. cable, pet) In re Ivory, 269 B.R. 890 (Bankr. N.D. Ala. 2001)

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Applying Brunner – Minimal Standard of Living

• Debtor satisfied minimal standard of living factor because she had $400 of disposable

income but payment of all student loans of over $350, would be an undue hardship. Norasteh v. Boston Univ. (In re Norasteh), 311 B.R. 671,676 (S.D.N.Y. 2004)

• Debtor satisfied minimal standard of living factor because debtor had been

unemployed for years, lived with his mother, and received SSI. Traversa v. Educ. Credit

• Mgmt. Corp (In re Traversa) 444 Fed.Appx. 472,474 (2d Cir 2011)
• Debtor failed to satisfy minimal standard of living factor because debtor had $1272 of

monthly disposable income and his student loan payment was $808, leaving him with $464 after payment. Hixson v. U.S. Dept. of Ed. (In re Hixson), 4 B.R. 9, 20 (S.D.N.Y 2011)

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Reasonable and Necessary Expenses

• Food
• Housing
• Utilities
• Basic Communication
• Necessary Medical and Dental
• Necessary Insurance
• Transportation
• Childcare
• Child Support/Alimony

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“Luxuries”

• Dining Out
• Gym Membership
• Premium Cable
• Premium Cell Phone Service
• Salon/Spa/Cosmetics
• Concert Tix
• Vacation
• Alcohol/Cigarettes

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Applying Brunner – Additional Circumstances

• Are there “additional circumstances” that more likely than not current

hardship will continue?

• How can you prove a “certainty of hopelessness?”
• –Is it required? See In re Nys, 446 F. 3d 938 (9th Cir. 2009)
• Factors: age, children, earning capacity peaked, limited or poor education,

etc.

• Continue for how long?
• For original loan repayment period (not for 25 years, or until borrower dies)

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Applying Brunner – Additional Circumstances

• Debtor satisfied the additional circumstances factor because she was 64 years old,

worked on an assembly line for 12 years, and never completed her college education. Bene v. Educ. Credit Mgmt. Corp. (In re Bene), 474 B.R. 56 56,73 (W.D.N.Y. 2012)

• Debtor satisfied the additional circumstances factor because he suffered from severe

bipolar disorder. Jackson v. Ed. Res. Inst., et al (In re Jackson) (S.D.N.Y 2007)

• Debtor failed to satisfy additional circumstances factor because although debtor

suffered from depression, sleeping disorders, ADHD and bipolar disorder, debtor’s condition improved with medication. Traversa at 475

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Applying Brunner – Good Faith

• The “good faith” test: no textual basis in Code
• Efforts to maximize income/Past career decisions: bad

for ministers, artists/musicians, public interest lawyers

• Being too poor to make payments is not bad faith, In re

Mosley, 494 F.3d 1320 (11th Cir. 2007)

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Applying Brunner – Good Faith

• Debtor satisfied good faith factor because debtor made efforts to maximize income,

minimize expenses, and obtain employment. He communicated regularly with his lenders and was conscientious in paying his loans when he could. King v. Vermont Student Assistance, et al. (In re King) 368, B.R. 358, 373-4 (D. Vt. 2007)

• Debtor satisfied good faith factor because he waited a substantial period of time

before acknowledging that his medical and financial conditions required him to discharge his student loans. Jackson at *9

• Debtor failed good faith standard because although debtor sought deferments,

she made no attempt to avail herself of the other repayment options. Thomas v. Educ. Credit Mgmt. Corp., 257 B.R. 144, 150 (S.D.N.Y. 2001)

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Partial Discharge

• Courts are divided regarding whether they have

authority to discharge a portion of a student loan while declaring the remainder nondischargeable.

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Partial Discharge – Strict Approach

• “All or nothing”
• Courts conclude that 523(a)(8) contains no statutory

language that would authorize a partial discharge of a student loan. Educ. Credit Mgmt. Corp v. Carter (M.D. Ga

2002)

• Authorizing partial discharge leads to unpredictability,

lack of uniformity Conway v. Nat’l Collegiate Tr. (In re

Conway)

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Partial Discharge – Flexible Approach

• Court’s willingness to discharge a portion of student

loan

• Discharge the portion of the debt that created the

hardship and require repayment only on the remaining

• portion. Littell v. State Board of Higher Education (In re Littell)
• Debtor must generally satisfy the Brunner (or TOC)

standard as to discharged portion. Carnduff v US Dept of

Educ.

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Partial Discharge – Hybrid Approach

• Forbids partial discharge of a single loan yet

allows debtors who hold multiple student loans to discharge some of those loans but not others.

Conway v. Nat’l Collegiate

• On a loan-by-loan basis, some may be

discharged while others may be found nondischargeable Grigas v. Sallie Mae Servicing Corp.

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Income-Driven Repayment Program

• Participation in an income-driven repayment program is not

required to establish an undue hardship. Educ. Credit Mgmt.

• Corp. v. Mosley (In re Mosley), 494 F.3d 1320, 1327 (11th Cir.

2007)

• “The fact that a debtor can afford the monthly ICRP payment is

not dispositive as to whether she can maintain a minimal standard of living while repaying her student loan.” Durrani v. Educ.

Credit Mgmt. Corp. (In re Durrani)

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Student Loans And Bankruptcy - More

Resources

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National Consumer Law Center (NCLC)

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Joshua Cohen – The Student Loan Lawyer

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Kurt O’Keefe blog

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Government Site Links

• The USED (United States Department of Education)

https://studentloans.gov/myDirectLoan/login.action http://www.loanconsolidation.ed.gov https://studentaid.ed.gov/sa/redirects/ombudsman-ed-gov

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Chapter 13 Bankruptcy Student Loan Treatment

• - Some jurisdictions allow separate classification, so your

client can stay current on payments

• - However, if this is not allowed, filing Chapter 13 puts

your client into default on student loans

• - You could file Chapter 13 to buy time, betting the law

will change in our favor

• - Official USED policy is not to file claims to avoid

dealing with district specific mediation and other such programs

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AP in 13

• - The same Brunner standard applies
• - You already have your projected income and

expenses, and your client is making good faith payments, so part of the test is satisfied

• - You have a way to get paid – if you can do that in

the Chapter 13 Plan

• - Your client is protected while you litigate

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Student Loan Adversary In Chapter 13? Timing

• You could file the AP right after the case, adjourning

confirmation until the AP is resolved. This builds a fund with the trustee for your fee application.

• If your client can start the case with a lump sum payment

to the trustee, that could be a source for your fees

• You may need to know the result of your AP to properly

schedule the student loans in the plan

• Caveat – some courts require the AP not be filed until

near the end of the plan

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Advantages of Filing Ap’s - NOT a Lost Cause

• A study of bankruptcy cases with student loan debt in

2007 revealed a total of 213 student loan adversary proceedings filed – out of a possible 169,774 bankruptcy cases

• 50% received some relief, 25% full discharges
• An ABI article, Volume 83, Issue #1, the Pardo & Lacey

study showed that having an experienced attorney makes a big difference

• Lots of the bad case law we read is from pro per debtors

filing adversaries

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Bankruptcy Proof Of Claim

• Who cares?
• This may be a chance to bounce a zombie student loan

debt

• National Collegiate Trust (NCT) and Younomics buy

private student loan debt

• Like all zombie debt creditors, they have trouble

connecting the dots

• If you get an order denying the claim, that should be issue

preclusive to any future state court lawsuit by the creditor

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What Entity Filed the Proof of Claim?

• I had a client with a prior Chapter 13 case with

another attorney on which NCT filed one claim –

• For NINE different NCT trusts
• Their attorney argued in state court that “NCT” was

just a nickname

• That should have precluded each of the NINE trusts

suing my client in separate lawsuits from even bringing a lawsuit

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Student Loan Bankruptcy Law Will Change

• I predict in the next 3 years, because, everyone has or knows

someone on the hook for big student loan debt

• National Association of Bankruptcy Attorneys (NACBA)

supports a bill that would make student loan debt dischargeable just like any other debt https://www.nacba.org/who-we- are/nacba-in-congress/

• “NACBA specifically focused on encouraging House

sponsorship of bipartisan bill H.R. 2366 Discharge Student Loans in Bankruptcy Act of 2017 sponsored by Congressmen John Delaney (D-MD) and John Katko (R-NY). NACBA members also encouraged Senators to take lead in sponsoring a similar bipartisan bill.”

44

American Bankruptcy Institute

• ABI did an extensive nationwide study into

improving consumer bankruptcy law. The full report is available at https://consumercommission.abi.org/commission- report

45

ABI Proposed Student Loan Code Change

• Student loans should be dischargeable under §

523(a)(8), regardless of the degree of hardship they impose, if they were

• made by a nongovernmental entity (private loans),
• incurred by a person other than the one receiving
• the education, or
• first payable more than seven years before the

bankruptcy.

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ABI Proposed Brunner Test Changes

• • Under the Brunner test, “undue hardship” should be

found if

• ⎼ the debtor cannot currently pay,

⎼ will not be able to pay during loan term, and ⎼ has not failed to act in good faith.

• Findings should be made on a preponderance of the

evidence.

• Appellate review: the determination of undue hardship

should be treated as a finding of fact.

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ABI Proposed Student Loan Administrative Changes

• Administrative procedures:
• The Department of Education, through regulations or

interpretive guidance, should provide that student loan creditors

• should not oppose the discharge of student loans owed by

anyone (i) eligible for Social Security or veterans disability benefits or (ii) falling below certain poverty-level thresholds, and

• should accept and evaluate the borrower’s evidence without

reference to formal guidelines such as court discovery rules.

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War Stories

• In re: Chandler ED MI AP# 14-4318 USED

stipulated to partial discharge, 197k to 125k and lower interest rate

• In re: Dell ED MI AP #11-06135, stipulated to

partial discharge, 20k to 15k and lower interest rate

• In re: Wilson, ED MI AP #19-05212, Navient

stipulates to discharge

• In re: Good, ED MI AP # 17-04451, potpourri

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Thank You

John T. Baxter john.baxter@nelsonmullins.com Natalie Jean-Baptiste natalie.jeanbaptiste@gmail.com Kurt A O’Keefe koklaw@gmail.com

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