Student Loans and Other Debts Not Dischargeable in BankruptcyUtah Bankruptcy Filings 7/16/2018 1 Student Loans and Other Debts Not Dischargeable in Bankruptcy Lon A. Jenkins Standing

Utah Bankruptcy Filings 7/16/2018

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Student Loans and Other Debts Not Dischargeable in

Bankruptcy

Student Loans and Other Debts Not Dischargeable in

Bankruptcy

Lon A. Jenkins

Standing Chapter 13 Trustee for the District of [email protected]

*With thanks to Hon. Kevin R. Anderson

Lon A. Jenkins

Standing Chapter 13 Trustee for the District of [email protected]

*With thanks to Hon. Kevin R. Anderson1

Discharge in Bankruptcy – Why it MattersDischarge in Bankruptcy – Why it Matters

� For most debtors, obtaining a discharge is the primary goal of filing bankruptcy- - discharge is “the foundation upon which all other portions of the Bankruptcy Code are built” Anderson v. Credit One

Bank, N.A., ___ F.3d ___ (2nd Cir. 2018)

� Once a discharge is granted, creditor is permanently enjoined from seeking to collect debt by the discharge injunction of 11 U.S.C. §524

� Unless . . . . Debt is deemed to be nondischargeable

� Discharge in Chapter 7 case is granted in approximately 90 days

from filing

� Discharge in Chapter 13 case is granted in three to five years from filing

� For most debtors, obtaining a discharge is the primary goal of filing bankruptcy- - discharge is “the foundation upon which all other portions of the Bankruptcy Code are built” Anderson v. Credit One

Bank, N.A., ___ F.3d ___ (2nd Cir. 2018)

� Once a discharge is granted, creditor is permanently enjoined from seeking to collect debt by the discharge injunction of 11 U.S.C. §524

� Unless . . . . Debt is deemed to be nondischargeable

� Discharge in Chapter 7 case is granted in approximately 90 days

from filing

� Discharge in Chapter 13 case is granted in three to five years from filing

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Examples of Nondischargeable Debts(11 U.S.C. §523(a))

Examples of Nondischargeable Debts(11 U.S.C. §523(a))

� Certain Taxes

� Money or Property Received by False Representation or Fraud

� Debts Arising from Defalcation When Acting in a Fiduciary Capacity, Embezzlement or Larceny

� Willful or Malicious Injury to Another Entity or Entitiy’s Property

� Fine or Penalty Payable to and for the Benefit of a Governmental Unit

� Unless Excepting Such Debt from Discharge Would Impose and Undue Hardship, Student Loans

� Death or Personal Injury Caused by Debtor’s Operation of a Motor Vehicle Which Operation Was Unlawful Because Debtor Was Intoxicated

� Domestic Support Obligations

� Certain Taxes

� Money or Property Received by False Representation or Fraud

� Debts Arising from Defalcation When Acting in a Fiduciary Capacity, Embezzlement or Larceny

� Willful or Malicious Injury to Another Entity or Entitiy’s Property

� Fine or Penalty Payable to and for the Benefit of a Governmental Unit

� Unless Excepting Such Debt from Discharge Would Impose and Undue Hardship, Student Loans

� Death or Personal Injury Caused by Debtor’s Operation of a Motor Vehicle Which Operation Was Unlawful Because Debtor Was Intoxicated

� Domestic Support Obligations

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Differences Between Chapter 7 and Chapter 13Differences Between Chapter 7 and Chapter 13

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Chapter 7 Chapter 13

Type of Bankruptcy LiquidationReorganization (for individual debtors)

Who Can File? Individuals and Business EntitiesIndividuals Only (Including Sole Proprietors)

Eligibility Restrictions

Disposable Income Must Be Low Enough to Pass the Chapter 7 Means Test

Cannot Have More Than $394,725 of Unsecured Debt or $1,184,200 of Secured Debt

How Long Does It Take to Receive a Discharge? Typically 3-4 Months

Upon Completion of All Plan Payments (Usually 3-5 Years)

What Happens to Property in Bankruptcy?

Trustee Can Sell All Nonexempt Property to Pay Creditors

Debtors Keep All Property But Must Pay Unsecured Creditors an Amount Equal to Value of Nonexempt Assets

Benefits

Allows Debtors to Quickly Discharge Qualifying Debts and Get a Fresh Start

Allows Debtors to Keep Their Property and Catch Up on Missed Mortgage, Car, and Nondischargeable Priority Debt Payments

Drawbacks

Trustee Can Sell Nonexempt Property. Does Not Provide a Way to Catch Up on Missed Payments to Avoid Foreclosure or Repossession.

Must Make Monthly Payments to the Trustee for 3-5 Years. May Have to Pay Back a Portion of General Unsecured Debts.

The Next Financial Crisis?5

Current Student Loan Debt

$1,521,000,000

Student Loan CrisisStudent Loan Crisis

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� $1.44 trillion in total student loan debt.

� 44.2 million individuals have student loans.

� Average balance is $30,100

� Delinquency rate is 11.2% (90+ days).

� Average monthly payment is $351.

� $1.44 trillion in total student loan debt.

� 44.2 million individuals have student loans.

� Average balance is $30,100

� Delinquency rate is 11.2% (90+ days).

� Average monthly payment is $351. 7

Student Loan Exponential Explosion!Student Loan Exponential Explosion!

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(10-fold increase since 2007)

Inflation Comparisons for Consumer Goods & ServicesInflation Comparisons for Consumer Goods & Services

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Cost of Living


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Massive Student Loan Debt Impacts Household Behavior

Massive Student Loan Debt Impacts Household Behavior

� Borrowers Evidence a Decrease Home Ownership

� Delay in Home Ownership (longer to accumulate down payment)

� Delay Starting Families

� Delay in Saving for Retirement

� Borrowers Evidence a Decrease Home Ownership

� Delay in Home Ownership (longer to accumulate down payment)

� Delay Starting Families

� Delay in Saving for Retirement

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“Seniors” Seeing Largest Increase in Student Loan Liability (as co-signers?)

“Seniors” Seeing Largest Increase in Student Loan Liability (as co-signers?)

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Co-Signer Survey Co-Signer Survey

� 1. Do you believe you understood the risks of co-signing?

� Yes 68.68% No 32.30%

� 2. Has your credit score been negatively impacted?

� Yes 62.06% No 37.94%

� 3. Is your child’s student loan debt putting retirement in jeopardy?

� Yes 46.93% No 53.07%

� 4. Have you helped your child make payments?

� Yes 74.82% No 25.18%

� 5. Do you regret making the decision to co-sign?

� Yes 36.76% No 63,24%

� Source: Lendedu.com February 6, 2018

� 1. Do you believe you understood the risks of co-signing?

� Yes 68.68% No 32.30%

� 2. Has your credit score been negatively impacted?

� Yes 62.06% No 37.94%

� 3. Is your child’s student loan debt putting retirement in jeopardy?

� Yes 46.93% No 53.07%

� 4. Have you helped your child make payments?

� Yes 74.82% No 25.18%

� 5. Do you regret making the decision to co-sign?

� Yes 36.76% No 63,24%

� Source: Lendedu.com February 6, 2018

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Women Graduate with More Student Loan Debt Than MenWomen Graduate with More Student Loan Debt Than Men

13American Association of University Women, May 2017(http://www.aauw.org/research/deeper-in-debt/)

American Women Currently Hold 2/3 of All Student Loan Debt

American Women Currently Hold 2/3 of All Student Loan Debt

WHY?� Parents Help Daughters Less

-in one survey 50% of boys only households had saved for college while 35% of girls only households had

� More Women attend college

-women earn 56% of all bachelor’s degrees

The Pay Gap

-on average women earn 81 cents for every dollar earned by men

Growing Interest

-consequence of the “pay gap”: with more expendable income, men can chip away at student loan debt and interest quicker

cnbc.com March 13, 2018

WHY?� Parents Help Daughters Less

-in one survey 50% of boys only households had saved for college while 35% of girls only households had

� More Women attend college

-women earn 56% of all bachelor’s degrees

The Pay Gap

-on average women earn 81 cents for every dollar earned by men

Growing Interest

-consequence of the “pay gap”: with more expendable income, men can chip away at student loan debt and interest quicker

cnbc.com March 13, 2018

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Overall Student Loan State Rankings Class of 2016

Overall Student Loan State Rankings Class of 2016

� Highlights:

�National average per graduate: $17,126

�Nationally, 61.22% of students graduated with student loan debt

�Utah students had the lowest average student debt per graduate

�Public school grads – average $16,066; Private school grads – average $19,257

� The Student Loan Report, October 2017

� Highlights:

�National average per graduate: $17,126

�Nationally, 61.22% of students graduated with student loan debt

�Utah students had the lowest average student debt per graduate

�Public school grads – average $16,066; Private school grads – average $19,257


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Overall Student Loan State Rankings Class of 2016 (Con’t)

Overall Student Loan State Rankings Class of 2016 (Con’t)

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Top Five –

� Utah $7,545

� Wyoming $11,420

� Arizona $11,564

� New Mexico $11,788

� California $12,002

Bottom Five -

� Delaware $21,259

� Connecticut $21,348

� Minnesota $21,665

� South Dakota $23,641

� Pennsylvania $24,622

Top Five –

� Utah $7,545

� Wyoming $11,420

� Arizona $11,564

� New Mexico $11,788

� California $12,002

Bottom Five -

� Delaware $21,259

� Connecticut $21,348

� Minnesota $21,665

� South Dakota $23,641

� Pennsylvania $24,622

*Average per graduate, not per borrower. Includes those graduating debt-free.The Student Loan Report, October 2017

Debt Per Graduate By SchoolDebt Per Graduate By School

�Utah Schools


�Utah Schools

� The Student Loan Report, October 2017 17

School Name Avg Debt Per Grad % of Grads w/ Debt

Brigham Young University $3,941 26%

University of Utah $8,222 39%

Southern Utah University $8,615 51%

Weber State University $9,693 44%

Utah State University $10,810 47%

Utah Valley University $11,352 51%

Dixie State University $12,864 81%

Westminster College $17,961 59%

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Student Loans: Largest U.S. Cash ReceivableStudent Loans: Largest U.S. Cash Receivable

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In Trillions of Dollars

Student Loans $1,001Other Loans $201Taxes $189Misc. $179Mortgages $117Trade $67Corp. Equities $33

Rate of Return to Gov’t on Student Loans is 3.7% to 6.3%

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Student Loans: Largest U.S. Cash Receivable

Q1 2017

Delinquency Rate by Debt TypeDelinquency Rate by Debt Type

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The Student Loan Collection “Bonanza”

The Student Loan Collection “Bonanza”

� American taxpayers are paying $38 to collect every $1 of student loan debt (Bloomberg News, 5-19-17)

� Since 2013, DOE has earmarked $4.2 billion to pay debt collectors (Bloomberg News, 5-19-17)

� Collection agencies are paid $1,710 for every loan which is “rehabilitated” and $150 for every “consolidated” – but rehabilitation is often short-lived

� Lawsuits against defaulting borrowers are rampant

� Recently, collection lawsuits are encountering the same problem mortgage servicers have met in the past several years: missing documentation, incomplete files, gaps in chain of title, inaccurate or insufficient affidavits, robo-signing (New York Times, 7-17-2017)

� American taxpayers are paying $38 to collect every $1 of student loan debt (Bloomberg News, 5-19-17)

� Since 2013, DOE has earmarked $4.2 billion to pay debt collectors (Bloomberg News, 5-19-17)

� Collection agencies are paid $1,710 for every loan which is “rehabilitated” and $150 for every “consolidated” – but rehabilitation is often short-lived

� Lawsuits against defaulting borrowers are rampant

� Recently, collection lawsuits are encountering the same problem mortgage servicers have met in the past several years: missing documentation, incomplete files, gaps in chain of title, inaccurate or insufficient affidavits, robo-signing (New York Times, 7-17-2017)

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Professional Licenses At Risk: Non-Renewal or RevocationProfessional Licenses At Risk: Non-Renewal or Revocation

� In 19 States default in payment of student loans may result in revocation or non-renewal of professional or other state-issued licenses

� In 19 States default in payment of student loans may result in revocation or non-renewal of professional or other state-issued licenses

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Repayment Alternatives: Income-Driven Repayment Plans

Repayment Alternatives: Income-Driven Repayment Plans

� Income-Based Repayment

� Pay As You Earn Plans

� Revised Pay As You Earn Plans

� Income Contingent Repayment Plans

� Public Service Loan Forgiveness

� Drawbacks: (1) Not available for private loans; (2) annual income recertification; (3) negative amortization; (4) not all debtors eligible; (5) debt forgiveness leads to tax consequences

� Income-Based Repayment

� Pay As You Earn Plans

� Revised Pay As You Earn Plans

� Income Contingent Repayment Plans

� Public Service Loan Forgiveness

� Drawbacks: (1) Not available for private loans; (2) annual income recertification; (3) negative amortization; (4) not all debtors eligible; (5) debt forgiveness leads to tax consequences

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Non-dischargeable and non-priority,so not entitled to special treatment.

PriorityChild Support

PriorityTaxes

Student Loans:Nondischargeable &

Non-Priority

Student Loans in Bankruptcy: The Double Whammy!

Student Loans in Bankruptcy: The Double Whammy!

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1958 1960 1965 1970 1976 1985 1990 1998 2005 2018

Federal Student

Loans first become available

Concerns that easy availability

of discharge threatened the

integrity of educational loan

programs1960s-1970s

Bankruptcy Code amended to provide

discharge of student loans in repayment status for less than 5

years could be discharged for undue

hardship1978

Undue hardship” is sole basis to

discharge “educational

loan or benefit” and 7 year time

period eliminated1998 Today

Concerns that recent graduates

would immediately file bankruptcy to

discharge their student loans

1960s-1970s

Loans in repayment status

for less than 5 years if court determined

undue hardship

1976

Types of Student loans not

dischargeable expanded and

time extended to 7 years

1990Nondischargeability

expanded to

include private student loans, as

well as federal and federally-insured

loans

2005

Evolution of Student Loan Nondischargeability in Bankruptcy

Evolution of Student Loan Nondischargeability in Bankruptcy

1958

The Chapter 13 Repayment ConundrumThe Chapter 13 Repayment Conundrum

� Even if student loan not in default when bankruptcy filed, loan is put into administrative forbearance – automatic stay prevents creditor from collecting, giving notices or communicating with the debtor

� Student loan debt is general unsecured debt – debt will be paid pro rata with other unsecured debt under plan

� Pro rata distribution will likely be less than scheduled monthly student loan payment – debtor may well owe more after paying 3- 5 year chapter 13 plan than before bankruptcy

� 11 U.S.C. §1322(b)(1) forbids separately classifying unsecured claims to provide better treatment to certain claims (i.e. student loan) – such treatment is “unfair discrimination"

� Even if student loan not in default when bankruptcy filed, loan is put into administrative forbearance – automatic stay prevents creditor from collecting, giving notices or communicating with the debtor

� Student loan debt is general unsecured debt – debt will be paid pro rata with other unsecured debt under plan

� Pro rata distribution will likely be less than scheduled monthly student loan payment – debtor may well owe more after paying 3- 5 year chapter 13 plan than before bankruptcy

� 11 U.S.C. §1322(b)(1) forbids separately classifying unsecured claims to provide better treatment to certain claims (i.e. student loan) – such treatment is “unfair discrimination"

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The Chapter 13 Repayment Conundrum (Con’t)The Chapter 13 Repayment Conundrum (Con’t)

� Recently, some courts have permitted separate classification of student loan debt in a chapter 13 plan to permit greater distributions to student loan creditors –

� -advances “fresh start” policy of bankruptcy

� -nondischargeable nature of student loan debt justifies separate classification

� -if other unsecured creditors will not be significantly disadvantaged by separate classification, discrimination is not “unfair”

� -student loan debt may be “cured and maintained” as long-term debt under section 1122(b)(5)

� Recently, some courts have permitted separate classification of student loan debt in a chapter 13 plan to permit greater distributions to student loan creditors –

� -advances “fresh start” policy of bankruptcy

� -nondischargeable nature of student loan debt justifies separate classification

� -if other unsecured creditors will not be significantly disadvantaged by separate classification, discrimination is not “unfair”

� -student loan debt may be “cured and maintained” as long-term debt under section 1122(b)(5)

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Congress did not define “undue hardship”

(1) Debtor cannot, based on current income and expenses, maintain a minimal standard of living for debtor and dependents if forced to repay

(2) This state of affairs is likely to persist for a significant portion of the repayment period (“certainty of hopelessness”) test; and

(3) Debtor has made a good faith, but ineffectual, attempt to repay the student loan.

Adopted by 3rd, 4th, 5th, 6th, 7th, 9th, 10th, and 11th

Circuits

Hardship DischargeHardship Discharge

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Brunner Test: debtor must establish these elements-

Hardship DischargeHardship Discharge

“Totality of Circumstances” Test:

Court considers –

� (1) the debtor’s past, present and reasonably reliable future financial resources

� (2) a calculation of the debtor’s and dependents reasonably necessary living expenses

� (3) any other relevant facts and circumstances surrounding the debtor’s bankruptcy case

� Adopted by 8th Circuit (Long v. ECMC, 322 F.3d 549 (8th Cir. 2003); likely 1st

Cir.

� In re Martin, Case No. 16-01077 (Bankr. N.D. Iowa, February 16, 2018) (applying totality of circumstances test)

“Totality of Circumstances” Test:

Court considers –

� (1) the debtor’s past, present and reasonably reliable future financial resources

� (2) a calculation of the debtor’s and dependents reasonably necessary living expenses

� (3) any other relevant facts and circumstances surrounding the debtor’s bankruptcy case

� Adopted by 8th Circuit (Long v. ECMC, 322 F.3d 549 (8th Cir. 2003); likely 1st

Cir.

� In re Martin, Case No. 16-01077 (Bankr. N.D. Iowa, February 16, 2018) (applying totality of circumstances test)

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� Allow discharge of private student loans (2005 amendments made

private student loans nondischargeable).

� Allow maintenance payments to student loans in Chapter 13 cases.

� Loosen “unfair discrimination test.”

� Allow discharge of student loans after passage of time – 7, 10, 20

years?

� BUT . . . Congressional action unlikely; DOE policies may provide

best avenue for relief to student loan borrowers

Possible Statutory ChangesPossible Statutory Changes

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� Improve access to competent bankruptcy legal advice

� Allow payment of student loan debt through Ch 13 plan (IDR Plans)

� Promote court-sponsored mediation programs – standards for when DOE should forego litigation

� Amend section 523(a)(8) to strike “undue” from the “undue hardship standard

� Amend to provide a statutory standard for a hardship discharge – “bright line rule”

� Congress and/or Courts should focus on “totality of circumstances” test - debtor’s past, present, and projected future financial resources and reasonable and necessary living expenses for the debtor and dependents.

� Allow “separate classification;” carve-out similar to co-signed obligations

ABI Consumer Committee Recommendations

ABI Consumer Committee Recommendations

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Documents

Student Loans and Other Debts Not Dischargeable in BankruptcyUtah Bankruptcy Filings 7/16/2018 1 Student Loans and Other Debts Not Dischargeable in Bankruptcy Lon A. Jenkins Standing