Transcript Slide 1

Bankruptcy Law &
Student Loans
Presented By:
Monette Cope, Esq.
Introductions
Monette Cope
Junior Partner, Chicago
Bankruptcy Group
• (312) 782-9676
• [email protected]
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WELTMAN, WEINBERG & REIS CO., LPA
WWR History
1930
1940
Founded
Gardner &
Spilka
1950
1960
Gardner,
Spilka &
Weltman
Maurice
Weltman
Joins Firm
1970
1980
Weltman,
Weinberg &
Associates
2000
2011
Weltman,
Weinberg & Reis
Co., L.P.A.
Alan Weinberg &
Allen Reis
Join Firm
Robert
Weltman
Joins Firm
Cleveland
1990
Pittsburgh
Philadelphia
Columbus
Brooklyn Ht
Chicago
Cincinnati
Detroit
Grove City
Ft. Lauderdale
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WWR Full-Service Capabilities
Our range of services allows for the complete handling of files
and matters through each step of the collection, legal and
recovery process, utilizing one or more of our specialty
practice groups or a combination of our services.
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Skip Tracing
Loan Workouts
Loss Mitigation
Consumer
Compliance Litigation
Asset Searches
Demand Letters
Home Preservation
Commercial
Consumer Leasing
Pre-suit Collections
B2B Collections
Foreclosures
Reaffirmations
Federal Court
Collateral Recovery
Pre-suit Collections
Evictions
Relief from Stay
Lending Issues
Demand Letters
Collection Litigation
Title & REO
Proof of Claim
Loan Review
Complex Collections
Arbitration/Mediation
Fannie / Freddie
Adversary Claims
Intl. Collections
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11 U.S.C. 523(a)(8)
• “A discharge does not discharge an individual debtor from
any debt…unless excepting such debt from discharge
under this paragraph would impose an undue hardship on
the debtor and the debtor’s dependents, for—
– 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
– An obligation to repay funds received as an educational
benefit, scholarship or stipend; or
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11 U.S.C. 523(a)(8)
– Any other educational loan that is a qualified education loan,
as defined in section 221(d)(1) of the Internal Revenue Code
of 1986 [26 USCS § 221(d)(1)], incurred by a debtor who is
an individual
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History & Policy
• Student loans were originally dischargeable
• Legislators began restricting dischargeability because
students would graduate and immediately seek to
discharge student loans.
• 2005 BAPCPA rendered most student loans
nondischargeable
• Lenders risk providing a student with education and
employable job skills in return for repayment
• Cannot repossess an education
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Procedure
• “[A] proceeding to determine the dischareability of a
debt” is an adversary proceeding. Federal Rule of
Bkrcy Procedure 7001(6). Similar to a complaint:
answer date, discovery, trial
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United Student Loan Funds, Inc. v.
Espinosa, 130 S. Ct. 1367 (2010)
• Facts
– Espinosa signed student loans, filed Chapter 13 bankruptcy a
few years later
– His plan only included the principal amount, and stated the
interest would be discharged after the principal was repaid
– His creditors were served with the plan, and with the
deadlines for objecting
– The student loan creditor filed a proof of claim, for the total
amount including interest
– **but the creditor did not file an objection to the plan
– Espinosa’s plan was confirmed. Note: no adversary
proceeding. No finding of undue hardship. Apparently routine
confirmation
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United Student Loan Funds, Inc. v.
Espinosa, 130 S. Ct. 1367 (2010)
• Facts (cont.)
– One month later, trustee notified creditor that he would pay
according to the lower plan amount, rather than the claim
amount
– Creditor did not respond to the trustee
– Debtor made all payments
– Discharge
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United Student Loan Funds, Inc. v.
Espinosa, 130 S. Ct. 1367 (2010)
• Procedural History
– Creditor attempted collection, in accordance with traditional
practice since there was no adversary proceeding, and no
finding of undue hardship
– Debtor filed motion to enforce the discharge order
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United Student Loan Funds, Inc. v.
Espinosa, 130 S. Ct. 1367 (2010)
• After motions, appeals, etc… the law now is a little
clearer
– The creditor must file the objection to an improper plan
– Court’s analysis focused on the fact that a confirmation order
is like any other judgment. If it is appealed or challenged,
there are deadlines and procedures for doing so.
– In Chapter 13 cases, the creditors must read the plan and
properly object, timely
– Court did mention other remedies for a debtor inserting
improper provisions into a plan
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Undue Hardship-Brunner Factors
• All Circuits but 8th Circuit
– “Three-part showing:
– (1) that the debtor cannot maintain, based on current income
and expenses, a “minimal” standard of living for herself and
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 of the student loans; and
– (3) that the debtor has made good faith efforts to repay the
loans.”
Brunner v. New York State Higher Education Services Corp., 831
F.2d 395 (2nd Cir. 1987)
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Undue Hardship-Brunner Factors
• Most debtors can meet the first standard – They
cannot afford to repay the loans currently and
maintain a “minimal standard of living”
• The second standard requires “a certainty of
hopelessness” and cannot be of the debtor’s own
making. The “additional circumstances” must be
overwhelming
• Good faith looks at all the circumstances including
debtor’s attempts at repayment and whether the
debtor looked into repayment programs
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Weakening of Brunner
• 53 year-old woman lived with her 75-year-old mother
in a rural setting and applied for 200 jobs over 10
years and could not find employment.
• She had several degrees.
• Few jobs in her area
• She and her mother lived solely on governmental
assistance
• Refused to apply for federal repayment program that
would have rendered her monthly payments to $0
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Krieger v. ECMC F3d 882 (7th Cir. 2013)
• Court found debtor had “a certainly of hopelessness”
because she had not worked since 1986 despite her
efforts to find employment
• When she did work, she made only $12,000/year
• It was not bad faith not to apply for a federal
repayment program
– She would have a 25 year program which would accrue
interest
– She would not have to pay anything towards the loans under
the program
– The debt would be forgiven when she is 78 years old.
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Hedland v: ECMC 718 F3d 848 (9th Cir.
2013)
– Applied Brunner factors
– Fact that debtor’s spouse who was employed part-time
refused to seek full-time employment did not count against
debtor
– Expenses that are more than bare bones (cell phone, cable)
do not necessarily indicate lack of good faith as long as they
are a marginal portion of overall expenses
– Can show good faith even with less than diligent efforts to
explore repayment options
– Allows partial discharge
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Undue Hardship 8th Circuit
• Educational Credit Mgt. Corp. v. Jesperson 571 F.3d
775 (8th Cir. 2009)
– Under a “totality of the circumstances” test, a debtor who had
recently graduated from law school, and who qualified from
Dept of Ed.’s 25 year Income Contingent Repayment Plan,
could not discharge his student loans.
• Debtor’s past, present and reasonably reliable future
financial income
• Reasonably necessary living expenses
• Any other relevant facts and circumstances
– Fact specific, but hard burden to meet
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Conway v. National Collegiate Trust 495
B.R. 416 (8th Cir. BAP 2013)
• Weakens “totality of circumstances” test
– Court would not engage in speculation about “reasonably
reliable future expenses”
• But speculated that debtor would not have reasonably
reliable future expenses by looking at the debtor’s past
and present income.
– Court has no authority to grant partial discharge
• But court can consider whether or not each individual loan
presents an undue hardship
– Debtor only out of school for four years and working two parttime jobs
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Litigation Issues
• Fact based cases
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Quality of education, school closings
Partial Discharge
Proof of medical condition
Income/Expenses
Self imposed limitationss
Scope/quality of job search
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Chapter 7
Bankruptcy
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Automatic Stay
Automatic Stay
STOP
• Pending lawsuits and collection actions are stayed by
filing Ch7 by virtue of imposition of automatic stay,
with very limited exceptions
• Creditors must wait for discharge and closing of Ch7
case or affirmatively seek relief from automatic stay
and Trustee abandonment to continue with
foreclosure of lien rights in collateral
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Overview
• Essentially a liquidation used either by individuals or
businesses
• Debtor surrenders non-exempt property to a
bankruptcy trustee who then liquidates property and
distributes proceeds to debtor’s unsecured creditors.
In exchange, debtor is granted a discharge of debts
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Non-dischargeable Debt
• Certain types of debts are non-dischargeable by
operation of law
– Student loans
– Certain types of educational debt may be dischargeable
– Tuition not in the form of a loan
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Reaffirmation
• Reaffirmation of a debt causes claim to survive
bankruptcy discharge and debtor will remain
personally liable on note post-bankruptcy
• Substantial disclosures for Reaffirmation Agreements
– Creditors supply parties’ rights under agreement
– Debtors supply financial information to illustrate ability to
repay the debt
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Post BAPCPA
• Courts Scrutinize Reaffirmation Agreements
– Regularly required hearings for debtor to prove that he/she
possesses financial ability to pay the debt without imposing an
“undue hardship”
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Post BAPCPA
Asset Cases
• In event Trustee recovers assets for distribution to
creditors, unsecured creditors may share in
distributions by filing proof of claim. Secured
claimants may file an “unsecured” claim for either
– Projected deficiency balance on loan in event sale has not yet
occurred but lender believes it will suffer loss; or
– If sheriff sale or auction has already occurred, actual
deficiency balance
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Chapter 13
Chapter 13 Plan
Terms of Ch13 plan binding on all creditors upon
confirmation of plan by Court
• Carefully review your treatment in the plan
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–
–
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Is loan to be paid through plan
Is loan to be deferred
Correct monthly payment amount
Is loan to be discharged under plan
– Co-debtor treatment – may indicate need for co-debtor relief
Creditors who oppose treatment in Ch13 plan must file an
Objection to Confirmation
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Chapter 13 Plan
• Creditors who oppose treatment in Ch13 plan must
file an Objection to Confirmation
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Chapter 13 Plan
Terms of Ch13 plan binding on all creditors upon
confirmation of plan by Court
• Carefully review your treatment in the plan
–
–
–
–
Is loan to be paid through plan
Is loan to be deferred
Correct monthly payment amount
Is loan to be discharged under plan
– Co-debtor treatment – may indicate need for co-debtor relief
Creditors who oppose treatment in Ch13 plan must file an
Objection to Confirmation
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The Automatic Stay
(11 U.S.C. 362)
What Is The “Automatic Stay”?
• An automatic injunction which halts actions by
creditors to collect debts from debtor who filed for
relief under the bankruptcy code
• Takes effect ‘automatically’ when bankruptcy
case is filed
• Think big red stop sign
• Very few exceptions
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11 U.S.C. 362(a)
• Prevents any acts against a debtor to:
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–
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Commence or continue lawsuits against debtor
Enforce judgments against debtor or his/her property
Obtain possession of debtor’s property
Obtain or perfect liens against debtor’s property
Collect or recover claims against debtor
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11 U.S.C. 362(a)
• Provides exceptions and does not preclude actions
for:
– Withholding transcripts for non-payment of tuition
• May have to get relief from stay
– Refusing registration post-petition for non-payment of prepetition tuition.
• Cannot collect pre-petition tuition if debtor receives a
discharge, but can refuse to register student,
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Co-Debtor Stay in Chapter 13
• Pursuant to 11 U.S.C. 1301
• Applies to consumer debts only
• Automatic stay applies to co-obligors on loans with
bankrupt debtor and prevents actions by creditors
against non-filing co-obligor
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Termination of Automatic Stay
• Termination of automatic stay by operation of law
– Absent actions by creditor seeking relief from stay and/or
absent a multiple filer situation, automatic stay remains in
effect until:
• Discharge;
• Dismissal; or
• Closing of case, whichever occurs first
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Motions for Relief from Stay
• Creditor seeking to commence or continue with
foreclosure or repossession and sale must establish
that as a result of debtor’s failure to maintain current
payments on loan, creditor is not ‘adequately
protected’
• Creditor must also establish that little or no equity
exists for benefit of bankruptcy estate
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Motions for Relief from Stay
• In Ch7 cases, delinquency in payments is calculated
using both pre- and post-petition payment
delinquency
• In Ch13 cases, delinquency in payments is calculated
using only post-petition payments
– Pre-petition delinquency must be included as part of creditor’s
proof of claim and is paid by Ch13 Trustee as secured claim
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Chapter 13 – Co-Debtor Relief from Stay
• Creditor must obtain separate order for co-debtor
relief from stay in Ch13 cases where underlying note
was signed by both bankrupt debtor and non-filing
party
• In co-debtor relief from stay motion, creditor must
demonstrate:
– Co-debtor is obligated on debt
– Ch13 plan does not propose to repay debt in full
– Creditor will be harmed by continuation of co-debtor stay
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Proofs of Claim
Proofs of Claim
• Court form used for creditors to make claims in
bankruptcy cases filed by debtors, which ultimately
leads to establishment of rights of a creditor to receive
payment on debt in bankruptcy
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Proofs of Claim
• Requirements for inclusion of information
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–
–
–
–
–
–
–
–
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Case number
Court
Name of debtor
Creditor name and address
Amount and basis of claim
Last 4 digits of account number or other identifying number
Classification as secured/unsecured
Signature and date
Documents evidencing claim
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Rule 3001:
Proof of Claim
Supporting Information
• Claim Based on a Writing. When a claim, or an
interest in property of the debtor securing the claim, is
based on a writing, the original or a duplicate shall be
filed with the proof of claim. If the writing has been
lost or destroyed, a statement of the circumstances of
the loss or destruction shall be filed with the claim
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Supporting Information
• Additional Requirements in an Individual Debtor
Case; Sanctions for Failure to Comply. In a case in
which the debtor is an individual:
– If, in addition to its principal amount, a claim includes interest,
fees, expenses or other charges incurred before the petition
was filed, an itemized statement of the interest, fees,
expenses or charges shall be filed with the proof of claim.
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Supporting Information
– If the holder of a claim fails to provide any information required
by this subdivision (c), the court may, after notice and hearing,
take either or both of the following actions:
• Preclude the holder from presenting the omitted
information, in any form, as evidence in any contested
matter or adversary proceeding in the case, unless the
court determines that the failure was substantially justified
or is harmless; or
• Award other appropriate relief, including reasonable
expenses and attorney’s fees caused by the failure
– Source:
http:www.uscourts.gov/uscourts/RulesAndPolicies/rules/Supre
me%20Court%202011/BK_Clean_Rules.doc
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Supporting Information
– Redact personal identifying information
• Rule 9037
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Rule 9037:
Privacy Protection for Filings
Made with the Court
Redacted Filings
• Unless the court orders otherwise, in an electronic or
paper filing made with the court that contains an
individual’s social security number, taxpayer
identification number, or birth date, the name of an
individual, other than the debtor, known to be and
identified as a minor, or a financial account number, a
party or non-party making the filing include only:
– The last four digits of the social security number and taxpayer
identification number
– The year of the individual’s birth;
– The minor’s initials; and
– The last four digits of the financial account number
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Exemptions From the Redaction
Requirement
• The redaction requirement does not apply to the
following:
– A financial account number that identifies the property
allegedly subject to forfeiture in a forfeiture proceeding;
– The record of an administrative or agency proceeding unless
filed with a proof of claim;
– The official record of a state court proceeding;
– The record of a court or tribunal, if that record was not subject
to the redaction requirement when originally filed;
– A filing covered by subdivision (c) of this rule; and
– A filing that is subject to § 110 of the Code.
• Source: http://www.pacer.gov/privacy/bk.html
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Electronic Bankruptcy Notices
• http://ebn.uscourts.gov/
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Questions & Answers
• Any questions?
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Thank You
Monette Cope
Junior Partner, Chicago
Bankruptcy Group
email
[email protected]
phone
312.782.9676
www.weltman.com
wwrbankruptcy.com (blog)
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