Bankruptcy and How It Affects Student Debt. Hosted by: The Bursar Brothers David Glezerman Dennis DeSan:s

Transcription

1 Bankruptcy and How It Affects Student Debt Hosted by: The Bursar Brothers David Glezerman Dennis DeSan:s

2 Ed Berger, Esquire, Gordin & Berger, P.C. Edward L. Berger is a graduate of the State University of New York at Albany and obtained his Bachelor s Degree in He obtained his law degree from Rutgers University in May of 1980 and is licensed to prac:ce law in PA and NJ. Since June of 1982 Ed has been deeply commived to the field of student loan/receivables collec:ons. Ed specializes in the li:ga:on of student loan and receivable accounts and student/borrower bankruptcies. Ed is a frequent par:cipant and presenter at various student loan conferences and mee:ngs.

3 Introduc=on Nature and Purpose of Bankruptcy Laws Statutory Authority Effect on Student Loans and Receivables No:ce of Filing, Sec:on 341 Mee:ng of Creditors and Automa:c Stay Pursuant to Sec:on 362

4 Dis=nguishing Different Types of Available Bankruptcy Relief Chapter 7 Liquida:on Chapter 11 Business Reorganiza:on Chapter 13 Individual Reorganiza:on

5 Chapter 7 Liquida=on

6 Chapter 7 Liquida=on The debtor will liquidate all non- exempt assets. Proceeds from any non- exempt assets will go to pay unsecured creditors on a pro- rata basis. In a typical "no asset" case, there will not be any non- exempt assets and, accordingly, unsecured creditors will not receive any distribu:on. Case Administra:on (Why does it take so long?) Debtor will obtain, aher the administra:on of the case, a General Discharge Order of all dischargeable debts.

7 Determina=on of Dischargeability Student loans and other educa:onal benefits are not dischargeable. This change, the elimina:on of the seven (7) year period, became effec:ve with all bankruptcy pe::ons filed on or aher October 1, 1998.

8 Determina=on of Dischargeability Con t. Student loan or educa:onal benefit are only dischargeable if excep:ng the debt from discharge will impose an undue hardship on the debtor and the debtor's dependents. Defini:on of a Student Loan

9 Types of Loans that are generally not dischargeable: Perkins loans Private Educa:onal Loans Guaranteed Loans Sallie Mae Ins:tu:onal Loans made by eligible educa:onal ins:tu:ons

10 Types of Student debt that is dischargeable: Parking Fees Dorm Expenses Ins:tu:onal Loans made by trade or technical schools as they do not meet the defini:on of an eligible educa:onal ins:tu:on

11 Post- Bankruptcy Proceedings. Student loans/receivables are presump:vely non- dischargeable. (Some receivables depending based on jurisdic:on.) Adversary Complaint to determine dischargeability must be filed. The court will have a hearing to make a determina:on as to the dischargeability of the debt.

12 Ins=tu=onal Strategy in Chapter 7 cases. Only file Proof of Claim if case is an "asset case. Contact debtor's avorney and advise of non- dischargeability if appropriate. If school has ar:culated policy of withholding records of defaul:ng students, do not automa:cally change this if student files for bankruptcy.

13 Chapter 13 Individual Reorganiza=on

14 Determina=on of Dischargeability. Student obliga:ons to repay loans, overpayments or other educa:onal benefits are not dischargeable. Undue Hardship Excep:on Even though debt non- dischargeable, during pendency of Chapter l3 (may be up to five (5) years), no ac:on can be taken. If pe::on filed prior to October 1, 1998 and debt in repayment more than seven (7) years will be discharged.

15 Ins=tu=onal Strategy in Chapter l3 cases. File Proof of Claim! Must file proof to receive payment through plan. Failure to file Proof of Claim will not affect non- dischargeability of student loan debt. Contact debtor's avorney and advise debt non- dischargeable. It is possible for debtor to pay student loan during pendency of Chapter 13 case, "outside" the plan. This must be confirmed by Trustee and Court.

16 Resource: To view bankruptcy filings and documents, use this link to the Pacer website. Registra:on is free with a small user fee and $.10/page charge: hvp://

17 Please Submit Any Ques=ons Now You may use the Chat Feature to do this For legal ques:ons: Ed Berger For bankruptcy collec:on inquires on accounts placed with ERS: Kim Allway **Reminder, always consult your legal counsel for state specific bankruptcy statutes.

18 Thank You! Your AVendance has been appreciated. We will have a recording of today s session posted on our website at the end of the week

19 ERS Webinars Presents: Bankruptcy and How It Affects Student Debt I. INTRODUCTION A. Nature and Purpose of Bankruptcy Laws. l. Give debtor a "fresh start." 2. Protection from creditors. B. Statutory Authority. l. The United States Constitution in Article I, Section 8 grants Congress the power to enact laws governing bankruptcy. 2. Bankruptcy Reform Act of Higher Education Act Technical Amendments, The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (Public Law 109-8). Effective date 10/17/05 C. Effect on Student Loans and Receivables. l. Excepted from discharge. 2. Reconcile with fresh start and protection from creditors. Continued availability and solvency of educational loan programs outweigh fresh start and protection from creditors. D. Notice of Filing, Section 341 Meeting of Creditors and Automatic Stay Pursuant to Section

20 l. Cease all billing and collection activity. Note that interest will continue to accrue and is collectible, as is principal, if debt is non- dischargeable. Leeper v. Pa. Higher Educ. Assistance, 49 F.3d 98 (3rd Cir. 1995), Educational Credit Management Corp. v. Kielisch, 252 BR 338 (E.D.Va.2000), U.S. v. Rushing, 287 B.R. 343 (D. N.J. 2002). 2. Centralize information and decisions. a. Have all other offices and departments at school forward notices to you immediately; b. Loan servicer or collection agencies should immediately forward notices to you. II. DISTINGUISHING DIFFERENT TYPES OF AVAILABLE BANKRUPTCY RELIEF A. Chapter 7 - Liquidation B. Chapter 11 - Business Reorganization C. Chapter 13 - Individual Reorganization III. CHAPTER 7 - LIQUIDATION A. The debtor will liquidate all non- exempt assets (if any). B. Proceeds from any non- exempt assets will go to pay unsecured creditors on a pro- rata basis. C. In a typical "no asset" case, there will not be any non- exempt assets and, accordingly, unsecured creditors will not receive any distribution. D. Case Administration - (Why does it take so long?) 1. Approximately ninety (90) days after the first date scheduled for the Section 34l Meeting of Creditors, unless a creditor objects, the Court will grant the debtor's General Discharge of all dischargeable debts. 2

21 2. In a case where debtor has non- exempt assets, such as real estate, stocks, C.D.'s, horses, etc., the trustee will liquidate and then distribute to creditors. Can take many months. Discharge Order not entered until all distributions are made. E. Debtor will obtain, after the administration of the case, a General Discharge Order of all dischargeable debts. F. Determination of Dischargeability l. Student loans and other educational benefits are not dischargeable pursuant to Section 523(a)(8). This provision is self- executing (or self- effectuating) and no requirement that creditor take any affirmative steps. Can sit back, await discharge and then collect. See In re Clarke 266 B.R. 301 (Bktcy. E.D. Pa. 2001). 2. This change, the elimination of the seven (7) year period, became effective with all bankruptcy petitions filed on or after October 1, a. For bankruptcies filed prior to October 1, 1998, the seven (7) year period is calculated from the date the loan first became due after the expiration of any grace periods. (1) From grace end date, count number of months in repayment until date of bankruptcy filing. It is the grace end date that triggers the calculation not date first payment due. See In re Scott, 213 B.R. 159 (D.Neb. 1997). (2) Do not count any months during which student was in deferment status. (3) If months total 84 or more, obligation is dischargeable. b. Deferments, postponements, forbearance, etc. are considered suspensions of the repayment period and are not calculated in the seven (7) year period. Note that unilateral action by the lender is not effective to toll the seven (7) year period. The retro- active application of a forbearance agreement, executed after the 7 (seven) year period expired, will not qualify as an "applicable suspension of the repayment period" for purposes of non- dischargeability. 3

22 c. The pendency of a previous bankruptcy filing will suspend the seven (7) year period. for proposition that while creditor was stayed from enforcing student loan obligation due to prior bankruptcy, the duration of prior bankruptcy should not be included when calculating seven (7) year period. d. In the situation where a student has an old student loan and then consolidates it by signing a new promissory note, the old debt ceases to exist - in fact was paid off by the consolidation loan. For purposes of calculating the seven (7) year period, the date repayment commences on the new consolidation loan is the pertinent date. 3. Student loan or educational benefit only dischargeable if excepting the debt from discharge will impose an undue hardship on the debtor and the debtor's dependents. a. Congress did not define "undue hardship." (a) (b) (c) Debtor cannot maintain minimal standard of living for self and dependents if forced to repay the loans, based on current income and expenses; Circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period. Debtor has made good faith efforts to repay the loans. 4. Definition of a Student Loan. 523(a) 8 of the Bankruptcy Code indicates what types of indebtedness will be entitled to the non- dischargeability protection of the Code. a. 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. [See 523(a)(8)(A)(i)]; 4

23 Types of Loans that are generally not dischargeable: Perkins loans Private Educational Loans ECMC Loans Sallie Mae USAF Loans Institutional Loans made by eligible educational institutions Types of Student debt that is dischargeable: Parking Fees Dorm Expenses Institutional Loans made by trade or technical schools as they do not meet the definition of an eligible educational institution The type of institution also determines the dischargeablity of the debt. An eligible educational institution are nonprofit institution, any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986 [see section 538(a)(8) of the Bankruptcy Code]. G. Post- Bankruptcy Proceedings. l. Student loans/receivables are presumptively non- dischargeable until Adversarial Complaint is filed to determine dischargeability due to hardship. Accordingly, upon receipt of the General Discharge Order, normal collection activity can be resumed. 2. If the student loan debt or educational benefit is determined to be non- dischargeable after the hearing on the debtor's Adversarial Complaint to Determine Dischargeability Based on Hardship, normal collection activity can be resumed upon receipt of the Order denying the requested hardship discharge. 3. If the student loan debt or educational benefit is determined to be dischargeable due to the fact that it has been in repayment for more than seven (7) years prior to the filing of the debtor's Petition (in cases commenced prior to October 1, 1998), or upon the Bankruptcy Court's findings that the debt should be discharged based on "undue hardship," upon receipt of either the General Discharge Order in the first instance, or the Court's Order 5

24 granting hardship, in the second instance, the institutional lender can take the appropriate steps to write the loan off as discharged in bankruptcy, thereby eliminating this obligation from its default rate calculations. H. Institutional Strategy in Chapter 7 cases. l. Only file Proof of Claim if case is an "asset case." 2. Contact debtor's attorney and advise of non- dischargeability if appropriate. 3. If school has articulated policy of withholding records of defaulting students, do not automatically change this if student files for bankruptcy. a. If debt is dischargeable, must take down hold. b. If debt is non- dischargeable, during the pendency of the case, even if hold was in place prior to the bankruptcy filing, should honor transcript requests, etc. or face monetary sanctions for violating the automatic stay. See In re Mumin 374 B.R. 149 (Bankr. E.D.Pa. 2007). c. If debt is non- dischargeable, upon receipt of General Discharge Order continue hold. See Johnson v. Edinboro State College, 728 F.2d l63 (3rd Cir. l984). IV. CHAPTER 13 - INDIVIDUAL REORGANIZATION A. Determination of Dischargeability. l. Student obligations to repay loans, overpayments or other educational benefits are not dischargeable. a. This change, the elimination of the seven (7) year period, became effective with all Bankruptcy Petitions filed on or after October 1, 1998! b. For cases filed prior to October 1, 1998, in calculating the seven (7) year period, use the same formula as set forth for Chapter 7 cases above. See III F.2.a. 6

25 c. Undue Hardship Exception. (1) Logically should be more difficult to prove "undue hardship" since debtor is, by definition, able to pay something pursuant to repayment plan. Se In re Raisor, 180 B.R. 163 (Bkrtcy.E.D. Tex. 1995). Court found three major elements which must exist to prove "undue hardship:" 1) debtors cannot maintain minimal standard of living for selves and dependent based on then current income and expenses; 2) additional circumstances exist indicating state of affairs likely to persist for most of repayment period; and 3) debtors have made good faith efforts to repay. Completion of Chapter 13 is looked at. But see In re Goranson, 183 B.R. 52 (Bkrtcy.W.D. N.Y. 1995). (2) As to the 3rd (third) element, good faith efforts to repay, courts have held that failure to make any payments towards loan itself (as opposed to plan payments) does not automatically mean debtor fails this test. See Matter of Rivers, 213 B.R. 616 (Bkrtcy. S.D.Ga. 1998) Debtor was "unable" to make loan payments, hence no lack of good faith. (3) At least one court has held that rather than use same standard as in Chapter 7 cases, a "totality of the circumstances" test is appropriate. See In re Strauss, 216 B.R. 638 (Bkrtcy. N.D. Cal. 1998). 2. Even though debt non- dischargeable, during pendency of Chapter l3 (may be up to five (5) years), can take no action. Upon receipt of Discharge Order, may commence regular collection efforts. (Note, may receive payments from Trustee. Credit those as you would any payments.) 3. If petition filed prior to October 1, 1998 and debt in repayment more than seven (7) years (exclusive of pay period interruptions), will be discharged. Upon receipt of Discharge Order, write off balance as discharged in bankruptcy. 7

26 B. Institutional Strategy in Chapter l3 cases. l. File Proof of Claim! a. Must file proof to receive payment through plan. b. Failure to file Proof of Claim will not affect non- dischargeability of student loan debt. In re Gallick, 292 B.R. 830 (Bkrtcy W.D. Pa. 2003). 2. Review Chapter 13 Plan and object as needed. See IV F.1d(2) above. 3. Contact debtor's attorney and advise debt non- dischargeable (if appropriate). Suggest increase of plan payments. 4. Note that the courts are reluctant to allow a debtor to discriminate against general unsecured creditors. While it may be to the advantage of the school and the debtor to have the claim paid l00% through the bankruptcy plan, and all other unsecured creditors paid l0%, the Bankruptcy Court may take the position that it is unfairly discriminatory against general creditors whose debts are dischargeable. See In re Taylor, l37 B.R. 60 (Bkrtcy Ct. W.D. Oklahoma l992) and In re Saulter, l33 B.R. l48 (Bkrtcy W.D. Mo. l99l). 5. It is possible for debtor to pay student loan during pendency of Chapter 13 case, "outside" the plan. This must be confirmed by Trustee and Court. See In re Benner, 156 B.R. 631 (Bkrtcy. D. Minn 1993). RESOURCE: To view bankruptcy filings and documents, use this link to the Pacer website. Registration is free with a small user fee and $.10/page charge: **Reminder, always consult your legal counsel for state specific bankruptcy statutes. 8