Dallas Bankruptcy Attorney Sharon Demarque’s Comment on Restoring Fairness to Student Loan Borrowers

by admin on August 28, 2011

Time to Restore Fairness to Student Loan Borrowers

Posted: August 27, 2011 | Author: Sharon Demarque | Filed under: Consumer Protection | Leave a comment »

It’s widely recognized that one of the most reliable means of attaining financial security is through education, including post-secondary education. But we also know that post-secondary education rarely comes cheap. And, in some cases, an educational opportunity that a student is led to believe will put him or her on the track to a better financial future is primarily a way to transfer money from the student or their parents (since they frequently co-sign) to the pockets of the educational institution or private lender  – leaving the student with a load of debt, but without the financial security they were seeking.

In most cases, our society encourages individuals to take risks that they believe will improve their financial prospects. That’s a key rationale for offering bankruptcy protections when things do not turn out as the individual had hoped. For instance, it’s good for us as a society when people are able to borrow money to work on inventions, to start new businesses, to invest in their own home, to go to college, or even to buy the right clothes for the job. But despite our best efforts, sometimes our inventions will not be profitable, our business will fail, our house will lose its value, we won’t be able to finish college or get a good paying job even with our degrees, or we’ll get laid off even though we dress and act professionally at work every day.

Because these outcomes are, at least to some extent, inevitable, it is important to provide those who want to take the risks with some degree of safety if the worst happens. Sure, we could just say “if you want to get the rewards, you have to accept the full weight of the negative consequences too.” But that wouldn’t be good for society as a whole or the individual because it would seriously discourage the risk-taking that is necessary for improvement and growth.

On the other hand, we don’t want to say, take whatever risks you want to and don’t worry about the consequences. Establishing that line is where bankruptcy law (among other things) comes in. Bankruptcy, as most people understand, is not an easy, no consequence, “get out of debt free” card. Most people who consider filing bankruptcy actually take too long weighing the costs and benefits and cause themselves some harm by waiting until later than they should have to file. (For example, they often wait until after they have spent everything in their IRA account, which they could have preserved for retirement in a bankruptcy case.)

So how does that fit in with student loans & bankruptcy? In our society, an education is so crucial to success that almost anyone will be willing to borrow whatever it takes to get a post-secondary education. On the whole, not getting a post-secondary education, unless one has some very special skill or apprenticeship opportunity, poses a more severe risk of financial insecurity than does taking out student loans that one might not be able to repay in the future. However, the undeniable truth is that some students will not be able to repay their student loans – just like some people will not be able to pay the money they borrowed to work on that invention, to buy that home, to start that new business, or to buy that new suit.

However, student loans — even student loans benefiting for-profit private institutions — cannot be discharged in bankruptcy like the debts incurred for all of those other reasons.[fn] Additionally, a person who has substantial student loans is often not even able to repay their student loans through a Chapter 13 bankruptcy repayment plan.

Prior to 2005, the bar on discharging student loans only applied to government loans or private loans funded by non-profit institutions. However, in 2005, that bar was extended to loans made by private lenders and benefiting private, for-profit schools. As the author of an editorial in yesterday’s NY Times (Relief for Student Debtors – NYTimes.com) noted: ”The country has a compelling interest in making it as difficult as possible for student borrowers to elude payment for federal loans. There was no reason for extending that protection to private lenders of student loans.” While, in either case, the inability to discharge student loans can pose an overwhelming hardship, a reasonable distinction exists where the source of the loans was public funds.

Fairness dictates that we put private student loan lenders in the same position as other private lenders – and private student loan borrowers in the same position as other individuals who take out loans from private institutions.  To this end, Senator Dick Durbin, Democrat of Illinois, and Representative Steve Cohen, Democrat of Tennessee, and others have introduced legislation to restore fairness in student lending. You can read more about the proposed legislation here.

fn. There are very rare cases in which courts have permitted discharge of student loans, such as when the debtor is completely disabled and has no prospect of working in the future.

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Reviewing the Client’s Budget is a Vitally Important Part of Attorney Representation In a Consumer Bankruptcy Case

by Raymond M. Schimmel on August 26, 2011

When I interview clients regarding their budget, I find that they often overlook many everyday expenses.  This creates a problem for both Chapter 7 and Chapter 13 clients.  In a Chapter 7 context missing expenses may mean that a false conclusion is reached that the client doesn’t qualify for Chapter 7 relief.  Simply put the law requires that a client pay back valid debts to the extent that they are able.  More specifically the court may determine that the debtor has “abused the bankruptcy system” and dismiss their case.  Dismissal of a case based on the idea that it is abusive to the bankruptcy system to let a debtor off the hook that really has the ability to repay their debts has a long history in the bankruptcy law.

This history goes back prior to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) where various federal several circuit courts of appeals established  per se rules regarding repayment.  Namely, where the debtor with primarily consumer related debts demonstrated the ability to repay their unsecured creditors a meaningful amount of money over time, standing alone, this  was sufficient to constitute abuse.  United States Trustee v. Harris, 960 F.2d 74 (8th Cir.1992); Zolg v. Kelly (In re Kelly), 841 F.2d 908 (9th Cir 1988).

Where abuse was found in the Chapter 7 case the court would order that the case  be either converted to Chapter 13 or dismissed.  In a Chapter 13 case the debtor is required to pay back all of their disposable income to their unsecured creditors for a time period of  three to five years depending on the debtor’s gross income.  So where you have a client who has underestimated or omitted legitimate expenses they invariably have put themselves in the untenable position of having to pay back money into a bankruptcy plan that they really can’t afford based on their necessary expenses.  This means that their bankruptcy plan will fail and their case will end up in an unnecessary dismissal.

After the passage of BAPCPA, Congress codified and quantified the per se rule expressed by the courts in cases like Harris and Kelly.  Congress enacted 11 U.S.C. § 707(b)(2) to this end.  Pursuant to 11 U.S.C. § 707 a means test was established to determine eligibility for a Chapter 7 bankruptcy.  The means test sets forth a statutory basis for determining whether a debtor is making improvident lifestyle choices and if so will limit expenses to a reasonable level as expressed by the Internal Revenue Service expense templates.  If a debtor does not pass the means test (barring compelling special circumstances) they will not qualify to file a Chapter 7 bankruptcy.  So is very important for the attorney to evaluate all of a debtor’s expenses in determining whether they qualify for a Chapter 7 bankruptcy.

Evaluating all of the expenses is not only critical in a Chapter 7 case.  It is also crucial in a Chapter 13 case. In a Chapter 13 case evaluating all of the expenses is important in determining what the required payment will be to the unsecured creditors.  To the extent the expenses are reasonable, again as limited by Internal Revenue Service expense templates and other applicable law, such expenses are deducted from the debtors budget in determining the required payment amount.  As is the case with the Chapter 7, where the Chapter 13 debtor underestimates their expenses they are invariably committing themselves to a bankruptcy payment that they cannot really afford and their bankruptcy plan is doomed to failure.

In conclusion, over many years of practice I have found that clients often tend to omit or underestimate the cost of the following expenses on their budgets:

1.   Bank charges (check printing, monthly checking account and atm fees)

2.    Hair care, nail care, cosmetics, and personal grooming products

3.    Summer camp and summer activities for children

4.    Annual tax return preparation fees

5.    Other accounting fees

6.    School lunches, tuition, activities, books and materials, school uniforms

7.    Ongoing legal fees

8.    Scouting

9.     Pet food, veterinary, pet grooming, pet insurance, and medicine.

10.    Christmas, anniversary and birthday gift

11.    Motor vehicle oil, registration, inspection, smog, tires, parking maintenance, car washes, On star payments, EZ pass costs.

12.    Cigarettes

13.     Un-reimbursed work expenses, shoe shines, uniforms, licensing, education, etc., membership dues in various professional and business organization

14.   Home landscaping and lawn care, HOA dues, pool care, homeowners insurance, home warranty payments, painting

15.   Postage, home office supplies, (computer, toner, ink, paper, software, updates)

16.   Home alarm system maintenance and fees.

17.   Contact lenses and solutions, non-prescription medications, antacids, toothpaste, whiteners, brush and floss, over the counter pain killers, cold and sinus medicine, allergy medicine, vitamins and supplements.

18.   Children’s allowance

19.  Monthly website subscriptions

20.  Gym/ YMCA fees.

21.  Music lessons for children

22.  Batteries

23.   Monthly magazine and newspaper subscriptions.

24.  Visitation costs non custodial and split custody children and travel to care for loved ones, support to family members not living with the debtor(s)

Reviewing the client’s budget is a vitally important part of attorney representation in a consumer bankruptcy case.  This review is best accomplished when the client is prepared.  Being prepared entails careful review of check registers and bank statements for at least twelve months preceding the filing of the bankruptcy case. Notes and tallies should be made during the review so that the required information is at the client’s fingertips as the budget is being prepared.  Careful legwork and communication between the attorney and client will help insure a positive outcome in the client’s bankruptcy case.

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Pretty Boy Floyd and Modern Bank Robbery

by Raymond M. Schimmel on August 20, 2011

Some will rob you with a six-gun, some with a fountain pen.  The money center banks are trying to work out a deal to reach a 25 billion dollar settlement for amnesty over fraud involving forged documents.
From Southern California Public Radio, Patt Morrision, July 21st, 2011 -   It started with questionable loans to questionably-leveraged homeowners during the height of the housing bubble; it resulted in hundreds of thousands of foreclosures, part of the fallout of the financial crisis of 2008 and a big reason why the economy continues to struggle; it might end in immunity for banks doing the foreclosing. At the end of last year several of the country’s biggest banks halted all foreclosures while they investigated charges of “robo-signing,” where foreclosure documents were processed in a sloppy and occasionally fraudulent manner. Attorneys general in all 50 states joined forces to investigate how banks were processing foreclosures and whether they were using shoddy paperwork and fudged documents to justify kicking homeowners out of their homes, threatening a massive civil suit against the five biggest banks. Reuters has been closely following the investigation of foreclosures and reports some troubling news for homeowners: not only has robo-signing activities continued but a possible settlement deal would include immunity from criminal prosecution for Bank of America, Wells Fargo, CitiGroup, JPMorgan Chase and Ally Financial. Reuters reports that the settlement deal would include payment of up to $25 billion in penalties and commitments to follow new rules and in exchange banks would get immunity from civil lawsuits from the states.
How apropos is Woody Guthrie’s song  ”Pretty Boy Floyd”  from the great depression.
“The Ballad of Pretty Boy Floyd” Woody Guthrie written during the Great Depression.

“As through this world I’ve rambled,
I’ve met lots of funny men…
Some rob you with a six-gun, some with a fountain pen.
But as through this world I’ve rambled,
As through this world I’ve roamed,
I never met an outlaw took a family from its home.”

Sounds relevant once again.  Pretty Boy Floyd – Woody Guthrie

youtube.com – Woody Guthrie Pretty Boy Floyd The Asch Recordings Vol. 4 (1944) www.woodyguthrie.com

What Are My Chapter 7 Options If I Owe Money On A Car Loan?

by Raymond M. Schimmel on August 19, 2011

The bankruptcy law allows Chapter 7 debtors various options when they owe money on their car loan. The first option is quite simple you give back or “surrender the vehicle” to the lender, and upon your bankruptcy discharge you will no longer owe the lender any more money for the car.

This is in contrast to what happens to you if you voluntarily give your car back to the lender where you have not filed bankruptcy. In the auto loan industry voluntarily giving back your car to the lender is known as a voluntary repossession. A voluntary repossession generally affects your credit the same way as an involuntary repossession. More importantly you will almost always owe a deficiency balance. The deficiency balance is calculated after your car is resold by the lender. The lender will normally resell your car at a public auto auction. At such an auction buyers are not allowed to first test drive the vehicle before they bid so they generally pay less for your car than would your neighborhood car dealer if you traded it in. In addition the auctioneer generally charges the seller a 30% commission against what is received from the winning bidder. The lender also factors other costs such as warehousing to store your car before auction, interest under your loan contract, legal fees, and the costs of transporting the car to the public auction. Usually after the car is sold you receive very little reduction in the balance of your loan that you still owe. Again surrendering the vehicle in bankruptcy is one way to avoid this harsh result.
The second option is called redemption. The bankruptcy law allows you to pay the lender the actual value of your car, this is known as the redemption amount. When you pay the lender the redemption amount they are ordered to relinquish their lien on your car. Any difference between the amount you owe on the loan and the value of your vehicle is discharged in your bankruptcy and you get to keep the car. Discharged is the legal word for being forgiven a debt by order of the bankruptcy court. So for example if you owe $15,000 on your car and it is only worth $7,500 you can pay the lender $7,500 and you will then own your car free and clear and the balance of the loan will be forgiven with your discharge in bankruptcy. There is a catch however. The lender must be paid the full redemption amount in one lump payment as ordered by the bankruptcy court upon proper motion by your lawyer. Sometimes my clients are able to ask family to help them accomplish this. In other cases a redemption loan can be arranged with a commercial lender. Since a “redemption loan” is considered very risky by commercial lenders rates are very high, so one must very carefully weigh whether this is a sound option based on costs and benefits. There is yet another problem with this approach if you are using a commercial lender you become liable to the new lender if you cannot pay back the new loan. Simply put you are still stuck with a deficiency problem.  If you can’t pay the new lender they will repossess your car and come after you for the redemption loan balance.
The third option is reaffirmation of the loan. This means that you sign papers to the affect that you agree to be fully liable on the car loan as if you never filed for bankruptcy. You will then be liable to keep paying on the contractual balance of your loan. There will be no discharge of your obligation when your bankruptcy case closes. You are now fully liable on your upside down car loan. In addition the bankruptcy judge overseeing your case may not agree to allow you to commit financial “hari kari.” If the judge does not accept your reaffirmation agreement, and the lender wants to take back your car, you could lose your car even if you are current on the loan. Without going into a great deal of detail on this post (the topic of a future post) the law is uncertain if you make a good faith attempt to reaffirm your car and have kept current on your loan as to whether the lender is permitted to still take back your car.

The last option is called ride-through.  Ride-through means that you continue to make your car payments, keep up your insurance, and keep the loan current, but refuse to sign a reaffirmation agreement.  This is the option that the majority of my clients choose.  Without reaffirming the loan your lender may not hold you responsible for a deficiency balance if you cannot repay the loan and you have received your bankruptcy discharge.  This is not to say that you can keep the car and not keep the payments current, the lender still has a lien where they may repossess your car if you don’t make the payments.  While this may seem to be the best of all worlds there is a catch to this approach.  Namely, the lender has the right to say no.  This option is not allowed in California based on a decision of Ninth Circuit Court of Appeals if the lender does not agree.  Most lenders are still willing to go along with this option even though they don’t have to because they would rather have your payments than have your car.   On the other hand a small number of lenders will stand on principle, and they will repossess your car if you do not reaffirm or redeem the loan.  Accordingly, when you decide on the ride-through option you are taking a calculated risk that you may lose your car in favor of not having to worry about a future deficiency if for example you lose your job.   This is where having an attorney with a lot of local practice experience can help with your decision, but if you choose this option there is no guarantee.

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Means Test — Income is Counted When Received not Earned

by Raymond M. Schimmel on August 18, 2011

The United States Bankruptcy Court for the Central District of California has held that “Current monthly income” consists of income received during the applicable six-month period, regardless of when it was actually earned or when the debtor’s services that led to the income were performed. In re Katz, —- B.R. ——, 2011 WL 1990813 (Bankr. C.D. Cal., May 20, 2011).  The timing of income creates both an opportunity and a trap for practitioners.  If the debtor has an unpaid bonus or large commission the timing of when the case is filed may be critical as to whether or not there is a presumption of abuse on the means test.  It is standard practice at my office to ask about anticipated fluctuation in income so that we may carefully plan accordingly.    GooglePlaces

 

 

How We Redact Confidential Client Information From Court Submitted Documents

by Raymond M. Schimmel on August 17, 2011

http://www.sti.nasa.gov/publish/redaction.pdf

We are required by the United States Bankruptcy Code, Bankruptcy Rules,  Local Bankruptcy Rules,  and the Local United States Trustee Bankruptcy Guidelines (San Diego) to publicly file various client documents.  We are also required to redact confidential information.  Specifically, we must redact: Social Security or taxpayer-identification numbers; dates of birth; names of minor children; and financial account numbers, in compliance with Fed. R. Bankr. P. 9037. This requirement applies to all documents, including attachments.”     We have found it useful to follow the guidance found in NASA instructions for redacting confidential information from electronic documents (link above).

With the amount of required supporting documents growing in a bankruptcy proceeding, along with the difficulty of passing the labor intensive costs along to our consumer bankruptcy clients, electronic redaction can be a means for helping reduce the cost burden.  It can also reduce the risk of an inadvertent disclosure of information.  In some cases however it will still be necessary to manually redact documents that don’t lend themselves to automated procedures.

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Are Inherited IRA Accounts Exempt In Bankruptcy?

by Raymond M. Schimmel on August 15, 2011

A case is now before the 9th Circuit Bankruptcy Appellate Panel, Mullen v. Hamlin, BAP No. 11-1083 to determine the issue as to whether an inherited IRA is exempt pursuant to 11 U.S.C. §522(b)(3), 11 U.S.C §522(d)(12) and limited to $1,095,000 by 11 USC § 522n. To date the majority of courts that have ruled on this issue have held in favor of allowing the exemption. Footnote 1.

In the majority of cases the opinion has rested on a plain language reading of 11 U.S.C. §522(d)(12) which imposes two requirements before the debtor may claim an exemption under that section: (1) the amount the debtor seeks to exempt must be retirement funds; and (2) the retirement funds must be in an account exempt from taxation under one of the provisions of the Internal Revenue Code. In their opinions these courts have concluded that both conditions are met with respect to an inherited IRA account.

The trustee appellant in Mullen v. Hamlin is trying to overturn the decision of the United States Bankruptcy Court for the District of Arizona. The trustees argument is based on a since overturned ruling from the U.S. Bankruptcy Court for the Eastern District of Texas in In re Chilton, 426 B.R. 612 (Bankr. E.D. Tex. 2011). The judge in Chilton ruled that inherited IRAs are not protected in bankruptcy because the funds in an inherited IRA “are not funds intended for retirement purposes.” As evidence of that, the judge pointed out that under Internal Revenue Service rules governing inherited IRAs, debtor Janice Chilton, who is turning 52, would have to either begin taking annual distributions from the $170,000 IRA she inherited from her mom this year, or deplete the entire IRA by 2013. (By contrast, there are elaborate IRS rules limiting when you can take money out of your own IRA. Chilton has since been overruled by the U.S. District Court for the Eastern District of Texas, Chilton v. Moser, 2011 WL 938310.

We believe that it is highly likely that the 9th Circuit Bankruptcy Appellate Panel will follow the majority and uphold the §522(d)(12) exemption as made applicable to opt out states like California pursuant to §522(b)(3). Stay tuned.

1. In re Nessa, 426 B.R. 312 (8th Cir. BAP 2010), In re Tabor, 433 B.R. 469 (Bankr. M.D. Pa. 2010), Bierbach v. Tabor, No. 10-cv-1580 (M.D. Pa. Dec. 2010) (unreported) (appeal pending), No. 10-4660 (3rd Cir.), In re Weilhammer, 2010 WL 3431465 (Bankr. S.D. Cal. Aug. 30, 2010); and in re Kuchta, 434, 463 B.R. 837 (Bankr. N.D. Ohio 2010).

Change in California Deficiency Law

by Raymond M. Schimmel on August 10, 2011

SB 485: No Deficiency Judgments After a Short Sale

The California Legislature approved and the Governor has signed SB 458, which will eliminate any deficiency judgments that a holder of a Mortgage Loan may have against a Borrower after a short sale of a dwelling of 1-4 units that has been approved by the holder is completed, and also provides that no deficiency shall be collected or requested. This legislation was passed as an urgency statute and became effective on July 15, 2011.

It follows SB 931 which went into effect on January 1, 2011 and added Section 580e to the California Code of Civil Procedure. That section provides that no holder of a Note secured by a first Deed of Trust could obtain a deficiency judgment against a Borrower when a dwelling of 1-4 units is sold in a short sale that has been approved by the holder. A short sale is a sale of the Secured Property for less than the remaining amount of the indebtedness due at the time of the sale with the written consent of the holder of the Deed of Trust. The written consent of the holder obligates the holder to accept the sale proceeds as full payment of the debt. The prohibition against deficiency judgments in SB 931 applied only to first Deeds of Trust but included non-owner-occupied as well as owner-occupied dwellings.

SB 458 expands the prohibition against deficiency judgments in Section 580e to junior Deeds of Trust on the Secured Property. It is also applicable to owner-occupied and non-owner-occupied dwellings. It does not apply when the property at issue is secured with multiple collateral (not solely the deed of trust or mortgage at issue).

Section 580e does not apply to Borrowers that are corporations, limited liability companies or limited partnerships.

I Wish I had a Time Machine

by Raymond M. Schimmel on August 10, 2011

I often encounter prospective clients who are regretting having selected the wrong attorney to represent them in their bankruptcy case. I often hear in dismay, “if I knew the trustee was going to try and sell my house, I would not have chosen to have filed a bankruptcy case in the first place.” Or, “my attorney said I could keep the investment annuity; he told me it would be completely exempt.” “He also didn’t tell me that the trustee would go after my mom to reimburse the estate for the money I borrowed and repaid her last year.” Unfortunately, many times when I get the call, I have the unenviable task of having to tell the client that we cannot undo the harm that has already been done. “I wish I had a time machine.” Let me illustrate with one of many examples that I have witnessed.

A few years ago I was asked by a civil litigation attorney to consult on a bankruptcy malpractice case. The bankruptcy attorney in the case had spent little or no time with his clients. The case had been prepared by the administrative staff with apparent nonexistent supervision. In addition, important communications by the clients were ignored both before and during the case. The attorney did not appear at the meeting of creditors. Instead he used an appearance attorney as was his practice. The appearance attorney was making a modest supplemental living in his semi-retirement by sitting outside of the trustee’s hearing room and doing appearances at these hearings as a hired gun. Most of his cases came from “bankruptcy mill” attorneys who filed high volumes of cases with minimal attorney involvement and little or no supervision over the work that was being performed by their non-attorney staffs. The appearance attorney was usually handed the file just prior to the hearing without any prior review. It was not unusual for the appearance attorney to be appearing in more than 30 cases in a day without ever having met the clients beforehand. The client had tried to communicate with the attorney that a relative had passed away and that hey had been left a house as their inheritance. The communications were ignored with disastrous consequences.

As a result of the missed communications the inheritance was not disclosed on the clients’ bankruptcy schedules. Upon discovery of the omission the trustee had the house turned over to the estate and sold to pay the creditors as well as the incurrence of large administrative expenses to be paid from the sale proceeds. In addition the case was turned over to the U.S. Attorney’s office for bankruptcy fraud, and the clients’ were charged.

After significant sums were paid on the criminal defense the charges were eventually dropped. The attorney was sued for legal malpractice and shortly thereafter the appearance attorney filed his own bankruptcy. I cannot emphasize the importance of having a competent attorney who is thorough, diligent and personally involved with your case.

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Common mistakes that are made by people before they file for bankruptcy

by Raymond M. Schimmel on April 27, 2011

Common mistakes that are made by people before they file for bankruptcy:

  1. 1) Paying relatives, friends, or other “insiders” back money owed to them. Why not?
    A family member, relative, or insider may be forced by court order to return any such money to a court appointed bankruptcy trustee.
  2. Excepting gifts of money or property of significant value before they file for bankruptcy.
    Why not? All of a debtor’s assets are considered property of the bankruptcy estate. To the extent that the property or money is not covered by a valid exemption it may be subject to turnover to a court appointed trustee in order to pay creditors of the estate.
  3. Giving away their property or belongings. Why not?
    The recipient of Property or belongings that are given away prior to bankruptcy may be forced by court order to return any such money to a court appointed bankruptcy trustee.
  4. Paying ahead or paying off balances on secured debts (loans for which there is collateral). Why not?
    Such payments may affect the eligibility to file bankruptcy under Chapter 7 and increase the payments under a Chapter 13. They can also make it so the underlying property can no longer be exempted since the equity in the property increased creating greater value for the estate. The net result is the value of the paid down or paid off asset may exceed the exemptions available and the loss of the asset.
  5. Continuing to borrow money or use their credit cards when they know they are no longer able to pay back their debts. Why not?
    Doing so may delay the filing of your bankruptcy petition and subject you to potential criminal bankruptcy fraud charges and make your debts non-dischargeable in bankruptcy.    GooglePlaces

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