Thursday, October 29, 2009

Bankruptcy Plan Cannot Favor Student Loan Creditors and Discriminate Against Other Unsecured Creditors

Case Law Update:

In re Knecht, 410 B.R. 650 (Bankr. D. Montana 2009). A bankruptcy debtor filed chapter 13 bankruptcy and proposed a repayment plan that would cause the student loan creditor to be the only unsecured creditor to receive any money. Specifically, the debtor sought confirmation of the repayment plan which proposed to pay more than $36,000 to the student loan creditor while paying nothing to the other unsecured creditors. The trustee objected asserting that the proposed plan unreasonably “discriminated” among unsecured creditors.


The bankruptcy court sustained the trustee’s objection and denied confirmation, holding that the student loan debtor had failed to satisfy the burden of proving that the repayment plan’s separate classification of student loan debt did not unfairly discriminate against the other unsecured creditors.

The court believed that a student loan creditor cannot create a chapter 13 plan that allows a student loan debtor to repay student loans “out of the hide” of other unsecured creditors. Instead, the other unsecured creditors must be paid their pro rata share. For example, let’s assume a debtor owes both $36,000 in student loan debt and another $36,000 in credit card debt. Now, if that debtor would file a plan calling for unsecured creditors to receive $36,000, then the student loan creditor would only be receiving $18,000 while the credit card creditors would also be receiving the other $18,000. Clearly this result is not as beneficial to a debtor because the $18,000 paid to the credit card creditor would be wasted since any unpaid credit card debt would be discharged---whether $18,000 is still owed or the full $36,000 is still owed; moreover, this result is not as beneficial because the $18,000 of unpaid student loan debt would survive the bankruptcy and have to be repaid--- absent a separate adversary complaint proving undue hardship.


Your Bankruptcy Advisor Blog
By: Attorney Robert Schaller (Bob's bio) of the Schaller Law Firm

Bob is a member of the National Bankruptcy College Attorney Network, American Bankruptcy Institute and the National Association of Consumer Bankruptcy Attorneys.

For information about Chapter 7 bankruptcy Click Here

For information about Chapter 13 bankruptcy Click Here

You are invited to contact Attorney Schaller at 630-655-1233 or visit his website at http://www.schallerlawfirm.com/to learn about how the bankruptcy laws can help you.

NOTE: Robert Schaller looks forward to the opportunity to talk with you about your legal issues. But please remember that all information on this blog is for advertising and general informational purposes only. Please read Bob's disclaimer.

I recommend that you review a few other blogs that may be of interest to you. These blogs are identified in the right column and are set forth below: bankruptcy issues blog; bankruptcy and family law issues blog; bankruptcy and employment issues blog; and bankruptcy and student loan issues blog.

Participation in Deferral Payment Program Does Not Preclude Student Loan Bankruptcy Discharge

Case Law Update:

In re Booth, 410 B.R. 672 (Bankr. E.D. Wash 2009). A chapter 7 bankruptcy debtor brought an adversary complaint against a student loan creditor seeking discharge of the student loan debt pursuant to Section 523(a)(8) of the Bankruptcy Code alleging that an “undue hardship” would result if the debtor had to repay the student loan debt. Prior to filing bankruptcy, the debtor had participated in a student loan deferral payment program. As a result of the program and debtor’s deteriorating financial position, the student loan creditor established a zero dollar per month short-term repayment plan with the balance to be paid much later. Nevertheless, debtor filed for bankruptcy and sought a complete discharge of all the student loan debt.


The student loan creditor opposed the complete discharge of the student loan debt. In fact, the creditor filed a motion for summary judgment seeking an order finding the student loan debtor NOT eligible for a bankruptcy discharge AS A MATTER OF LAW because the deferral payment program had granted debtor a zero dollar per month short-term repayment plan. In short, the student loan creditor believed that the debtor could not establish “undue hardship” as a matter of law since debtor had agreed to a zero dollar short-term repayment plan and therefore no hardship existed, much less “undue” hardship.

The Court rejected the student loan creditor’s argument and denied the motion for summary judgment. The court noted the difference in relief granted by both options: (a) the bankruptcy discharge offered permanent relief by eliminating the student loan debt forever, whereas (b) the deferral payment program only offered short-term relief with the balance coming due later. Next, the court focused on the factual review given by both options: (a) the bankruptcy court would review the facts of each case on a case-by-case basis to determine if the repayment of the student loan debt would result in an undue hardship upon the debtor, whereas, (b) the deferral payment program gave no individual review, instead relying upon a formula to determine loan payments.

The conclusion is that the student loan debtor was allowed to go forward with the bankruptcy case and will be offered an opportunity to prove that the payment of the student loan debt would be an undue hardship on the debtor and debtor’s dependents.


Your Bankruptcy Advisor Blog
By: Attorney Robert Schaller (Bob's bio) of the Schaller Law Firm

Bob is a member of the National Bankruptcy College Attorney Network, American Bankruptcy Institute and the National Association of Consumer Bankruptcy Attorneys.

For information about Chapter 7 bankruptcy Click Here

For information about Chapter 13 bankruptcy Click Here

You are invited to contact Attorney Schaller at 630-655-1233 or visit his website at http://www.schallerlawfirm.com/to learn about how the bankruptcy laws can help you.

NOTE: Robert Schaller looks forward to the opportunity to talk with you about your legal issues. But please remember that all information on this blog is for advertising and general informational purposes only. Please read Bob's disclaimer.

I recommend that you review a few other blogs that may be of interest to you. These blogs are identified in the right column and are set forth below: bankruptcy issues blog; bankruptcy and family law issues blog; bankruptcy and employment issues blog; and bankruptcy and student loan issues blog.

Wednesday, October 28, 2009

Student Loan Debt tops $90,000

The American Bar Association published an article by Debra Cassens Weiss recently about a report issued by the US Government Accountability Office ("GAO").  According to the GAO, the average student loan debt for graduates of private law schools has risen to $91,506 in 2007-2008.  I presume the amount is even higher in this current economy.



Your Bankruptcy Advisor Blog
By: Attorney Robert Schaller (Bob's bio) of the Schaller Law Firm

Bob is a member of the National Bankruptcy College Attorney Network, American Bankruptcy Institute and the National Association of Consumer Bankruptcy Attorneys.

For information about Chapter 7 bankruptcy Click Here

For information about Chapter 13 bankruptcy Click Here

You are invited to contact Attorney Schaller at 630-655-1233 or visit his website at http://www.schallerlawfirm.com/to learn about how the bankruptcy laws can help you.

NOTE: Robert Schaller looks forward to the opportunity to talk with you about your legal issues. But please remember that all information on this blog is for advertising and general informational purposes only. Please read Bob's disclaimer.

I recommend that you review a few other blogs that may be of interest to you. These blogs are identified in the right column and are set forth below: bankruptcy issues blog; bankruptcy and family law issues blog; bankruptcy and employment issues blog; and bankruptcy and student loan issues blog.

Saturday, October 3, 2009

Congress Rethinking Dischargeabilty of Private Student Loans

As Congress and the White House move to alter bankruptcy code to make it more equitable to consumers, a House subcommittee began a reconsideration Wednesday of how bankruptcy law treats private student loan debt.


Rep. Steve Cohen (D-Tenn.), chair of the House Judiciary Subcommittee on Commercial and Administrative Law, held a hearing to initiate legislation reversing a 2005 change in federal bankruptcy law that, he said, gave private student loan lenders a “favorable, unusual” advantage over borrowers, as well as in comparison to the issuers of most other kinds of consumer loans. "Hopefully it’ll be bipartisan and if not, you know, we’ll just have to forge ahead and do what’s right.”After the hearing, he formally announced plans to file legislation to “give private student loan borrowers more equitable treatment during the bankruptcy process.”

Rep. George Miller (D-Calif.), chairman of the House Education and Labor Committee, hailed the drafting of new legislation as meeting “a growing need to protect students from financially riskier private student loans and predatory lending practices,” especially with rising college costs and an unemployment rate approaching 10 percent.

The subcommittee’s senior Republican, Rep. Trent Franks of Arizona, seemed receptive to some reform of the private student loan industry, but cautioned that if the bill passed last week “isn’t the death knell of private student lending, ending the favorable treatment student loans receive under bankruptcy code certainly could be.”

Bankruptcy law bars virtually all borrowers from discharging their private student loan debt, even as most other forms of consumer debt -- including auto loans, credit card debt and mortgages -- can be discharged through bankruptcy proceedings. The only exceptions are made in cases of “undue hardship.”

Though federally guaranteed student loans usually cannot be cancelled or discharged in bankruptcy cases either, they do come with fixed interest rates, flexible payment plans and other consumer protections that generally make them less onerous for borrowers. Private student loans are one of the riskiest ways to pay for college. These loans are not financial aid any more than using a credit card to pay for tuition or books are financial aid.

Even so, students are turning to the loans to make up the gap between federal student loans (which top out at $12,500 per academic year for independent undergraduates in the last two years of study) and the ever-rising costs of tuition and fees at American colleges and universities. According to calculations by Asher’s organization, two-thirds of all graduates of four-year colleges have student loans, averaging $23,200 in federal and private loans, and a third of students who earned a bachelor’s degree in 2007-8 took out a private student loan during their time in college. Fourteen percent of all U.S. undergraduates took out a private student loan in that academic year, up from 4 percent in 2003-4.

Last year, as the House voted to reauthorize the Higher Education Act, Congressman Davis proposed an amendment that would have allowed borrowers filing for bankruptcy to discharge their private student loans as part of that process, so long as the loan had required repayment for at least five years. The measure failed in a 236 to 179 vote. Cohen’s bill will probably be modeled after Davis’s amendment.

Facing Bankruptcy

Over the course of earning a bachelor’s degree, a student at a particularly pricey institution receiving little or no grant aid could end up borrowing $100,000 or more in private loans, said Brett Weiss, a consumer bankruptcy lawyer who testified before Congress on behalf of the NACBA. It’s “unfair,” he said, for other loans of that magnitude, like mortgages, to be forgiven in bankruptcy proceedings while student loans are not.

J. Douglas Cuthbertson, a lawyer who represents financial institutions in federal consumer financial litigation for the McLean, Va.-based law firm Miles & Stockbridge, warned of debtors filing for bankruptcy almost solely on student loans, as was sometimes the case before 1976, when Congress barred discharge of student loans within five years of college graduation. A 1990s change to bankruptcy code made the minimum seven years, and the 2005 code revision made it all but impossible to have student loan debt canceled.

Franks and Rep. Howard Coble (R-N.C.), the two only members of their party at the hearing, voiced support for Cuthbertson’s argument, the same one that has been used by Republicans whenever changes to bankruptcy law have been considered.

But Weiss cited a 1970s study by the Government Accountability Office that found that less than 1 percent of all matured student loans had been discharged in bankruptcy and dismissed Republican concerns about widespread manipulation of the bankruptcy code.

The notion that “people who view bankruptcy as an easy option … is so far from the reality, it’s just absolutely dead wrong,” he said. “Student loans are not primary factors for bankruptcy filings. Student loans are sort of in the mix.… People very, very rarely file for bankruptcy because of a student loan.”

Defining 'Undue Hardship'

The only chance borrowers have to discharge their private student loans during bankruptcy proceedings comes by being able to demonstrate “undue hardship,” a term that has not been concretely defined by Congress and is up for varied interpretations by bankruptcy judges.

Rafael I. Pardo, an associate professor at the Seattle University School of Law who has done extensive studies on student loans and their discharge in bankruptcy, called on Congress “to clarify the undue hardship standard.”

Courts generally go through long investigations to determine whether debtors have faced exceptional challenges, such as physical or mental disabilities, a lack of job skills or an absence of future earning potential. Final rulings are up to the discretion of judges, Asher of the Institute for College Access and Success said, and much more likely to happen with the benefit of “a high-priced attorney.”

All four experts who testified voiced support for Congress to create its own definition of “undue hardship,” which could be easily used to evaluate all bankruptcy cases involving student loans.

Democrats and Republicans on the subcommittee were all receptive to the formulation of a definition. Source: Jennifer Epstein


Your Bankruptcy Advisor Blog
By: Attorney Robert Schaller (Bob's bio) of the Schaller Law Firm

Bob is a member of the National Bankruptcy College Attorney Network, American Bankruptcy Institute and the National Association of Consumer Bankruptcy Attorneys.

For information about Chapter 7 bankruptcy Click Here

For information about Chapter 13 bankruptcy Click Here

You are invited to contact Attorney Schaller at 630-655-1233 or visit his website at http://www.schallerlawfirm.com/to learn about how the bankruptcy laws can help you.

NOTE: Robert Schaller looks forward to the opportunity to talk with you about your legal issues. But please remember that all information on this blog is for advertising and general informational purposes only. Please read Bob's disclaimer.

I recommend that you review a few other blogs that may be of interest to you. These blogs are identified in the right column and are set forth below: bankruptcy issues blog; bankruptcy and family law issues blog; bankruptcy and employment issues blog; and bankruptcy and student loan issues blog.

Thursday, October 1, 2009

Change in Student Loan Programs

The House voted 253-171 recently to dismantle a major federal student loan program and use the billions of dollars in resulting savings to provide more money to lower-income college students, according to a CongressDaily report. The bill will end the Federal Family Education Loan Program and originate all federally backed student loans through the Education Department's Direct Loan Program. Ending FFEL would be a serious blow to student lenders across the country, many of which rely heavily on business generated from government-backed loans. The bill would restrict the role of loan giants like Sallie Mae and Nelnet to servicing loans from the Education Department. President Obama proposed the change in his FY10 budget request, and CBO estimated it would save $80 billion over 10 years. The plan is cheaper because it ends subsidies to student lenders and because the government can borrow money more cheaply than private entities. However, the House rejected the second half of the Obama proposal, which would have made spending on Pell Grants for the neediest college students mandatory rather than discretionary. The bill passed by the House does increase spending on Pell Grants by $43 billion, upping the annual grant maximum to $5,550 in 2010 and to $6,900 by 2019. The bill also indexes increases in the maximum grants to the Consumer Price Index plus 1 percent.

Your Bankruptcy Advisor Blog
By: Attorney Robert Schaller (Bob's bio) of the Schaller Law Firm

Bob is a member of the National Bankruptcy College Attorney Network, American Bankruptcy Institute and the National Association of Consumer Bankruptcy Attorneys.

For information about Chapter 7 bankruptcy Click Here

For information about Chapter 13 bankruptcy Click Here

You are invited to contact Attorney Schaller at 630-655-1233 or visit his website at http://www.schallerlawfirm.com/to learn about how the bankruptcy laws can help you.

NOTE: Robert Schaller looks forward to the opportunity to talk with you about your legal issues. But please remember that all information on this blog is for advertising and general informational purposes only. Please read Bob's disclaimer.

I recommend that you review a few other blogs that may be of interest to you. These blogs are identified in the right column and are set forth below: bankruptcy issues blog; bankruptcy and family law issues blog; bankruptcy and employment issues blog; and bankruptcy and student loan issues blog.

Bankruptcy Legislation Being Considered to Discharge Student Loan Debt

As Congress and the White House move to alter the bankruptcy code to make it more equitable to consumers, a House subcommittee began a reconsideration recently of how bankruptcy law treats private student loan debt.


Rep. Steve Cohen, chair of the House Judiciary Subcommittee on Commercial and Administrative Law, held a hearing to initiate legislation reversing a 2005 change in federal bankruptcy law that, he said, gave private student loan lenders a “favorable, unusual” advantage over borrowers, as well as in comparison to the issuers of most other kinds of consumer loans. "Hopefully it’ll be bipartisan and if not, you know, we’ll just have to forge ahead and do what’s right.”

After the hearing, he announced plans to file legislation to “give private student loan borrowers more equitable treatment during the bankruptcy process.”

Rep. George Miller, chairman of the House Education and Labor Committee, hailed the drafting of new legislation as meeting “a growing need to protect students from financially riskier private student loans and predatory lending practices,” especially with rising college costs and an unemployment rate approaching 10 percent.

The subcommittee’s senior Republican, Rep. Trent Franks of Arizona, seemed receptive to some reform of the private student loan industry, but cautioned that if the bill passed last week “isn’t the death knell of private student lending, ending the favorable treatment student loans receive under bankruptcy code certainly could be.”

Bankruptcy law bars virtually all borrowers from discharging their private student loan debt, even as most other forms of consumer debt -- including auto loans, credit card debt and mortgages -- can be discharged through bankruptcy proceedings. The only exceptions are made in cases of “undue hardship.”

Though federally guaranteed student loans usually can’t be discharged in bankruptcy cases either, they do come with fixed interest rates, flexible payment plans and other consumer protections that generally make them less onerous for borrowers. Private student loans are one of the riskiest ways to pay for college. Those loans are not financial aid any more than using a credit card to pay for tuition or books are financial aid.

Even so, students are turning to the loans to make up the gap between federal student loans (which top out at $12,500 per academic year for independent undergraduates in the last two years of study) and the ever-rising costs of tuition and fees at American colleges and universities. According to calculations by Asher’s organization, two-thirds of all graduates of four-year colleges have student loans, averaging $23,200 in federal and private loans, and a third of students who earned a bachelor’s degree in 2007-8 took out a private student loan during their time in college. Fourteen percent of all U.S. undergraduates took out a private student loan in that academic year, up from 4 percent in 2003-4.

Facing Bankruptcy

Over the course of earning a bachelor’s degree, a student at a particularly pricey institution receiving little or no grant aid could end up borrowing $100,000 or more in private loans. It appears unfair to some people that other loans of that magnitude, like mortgages, to be forgiven in bankruptcy proceedings while student loans are not.

Defining 'Undue Hardship'

The only chance borrowers have to discharge their private student loans during bankruptcy proceedings comes by being able to demonstrate “undue hardship,” a term that has not been concretely defined by Congress and is up for varied interpretations by bankruptcy judges.

Courts generally go through long investigations to determine whether debtors have faced exceptional challenges, such as physical or mental disabilities, a lack of job skills or an absence of future earning potential. Final rulings are up to the discretion of judges, Asher of the Institute for College Access and Success said, and much more likely to happen with the benefit of “a high-priced attorney.”

All four experts who testified voiced support for Congress to create its own definition of “undue hardship,” which could be easily used to evaluate all bankruptcy cases involving student loans. Democrats and Republicans on the subcommittee were all receptive to the formulation of a definition.


Your Bankruptcy Advisor Blog
By: Attorney Robert Schaller (Bob's bio) of the Schaller Law Firm

Bob is a member of the National Bankruptcy College Attorney Network, American Bankruptcy Institute and the National Association of Consumer Bankruptcy Attorneys.

For information about Chapter 7 bankruptcy Click Here

For information about Chapter 13 bankruptcy Click Here

You are invited to contact Attorney Schaller at 630-655-1233 or visit his website at http://www.schallerlawfirm.com/to learn about how the bankruptcy laws can help you.

NOTE: Robert Schaller looks forward to the opportunity to talk with you about your legal issues. But please remember that all information on this blog is for advertising and general informational purposes only. Please read Bob's disclaimer.

I recommend that you review a few other blogs that may be of interest to you. These blogs are identified in the right column and are set forth below: bankruptcy issues blog; bankruptcy and family law issues blog; bankruptcy and employment issues blog; and bankruptcy and student loan issues blog.

Invitation to Readers

Welcome to my blog! I am attorney Robert Schaller and I have designed this blog to communicate general bankruptcy information to people who have unmanageable student loan debt and are considering bankrutpcy as a tool to get a "fresh start" in life debt free.


This blog will provide information on relevant topics relating to student loans and bankruptcy.  Some postings will discuss legislation or other topical issues, while other postings will review relevant case law.
You can find three types of assistance with this blog. First, you can SUBSCRIBE to this blog by completing the box to the right of this post. By doing so, you will be receiving automatically interesting and timely bankruptcy information in each of my future blog postings. Second, you can review past and future blogs at any time by clicking the "archive" link in the column to the right of this posting. Third, you are invited to submit a question by utilizing the "question" box in the column to the right of this posting.
I look forward to a mutually beneficial relationship with you.


Your Bankruptcy Advisor Blog
By: Attorney Robert Schaller (Bob's bio) of the Schaller Law Firm

Bob is a member of the National Bankruptcy College Attorney Network, American Bankruptcy Institute and the National Association of Consumer Bankruptcy Attorneys.

For information about Chapter 7 bankruptcy Click Here

For information about Chapter 13 bankruptcy Click Here

You are invited to contact Attorney Schaller at 630-655-1233 or visit his website at http://www.schallerlawfirm.com/to learn about how the bankruptcy laws can help you.

NOTE: Robert Schaller looks forward to the opportunity to talk with you about your legal issues. But please remember that all information on this blog is for advertising and general informational purposes only. Please read Bob's disclaimer.

I recommend that you review a few other blogs that may be of interest to you. These blogs are identified in the right column and are set forth below: bankruptcy issues blog; bankruptcy and family law issues blog; bankruptcy and employment issues blog; and bankruptcy and student loan issues blog.