Bankruptcy Law & Student Loans

1. Bankruptcy Law & Student Loans Presented By: Monette Cope, Esq.

2. Introductions Monette Cope Junior Partner, ChicagoBankruptcy Group • (312) 782-9676 • mcope@weltman.com

3. WWR History 1930 1940 1950 1960 1970 1980 1990 2000 2011 Founded Gardner & Spilka Gardner, Spilka & Weltman Weltman, Weinberg & Associates Weltman, Weinberg & Reis Co., L.P.A. Alan Weinberg & Allen Reis Join Firm Maurice Weltman Joins Firm Robert Weltman Joins Firm Pittsburgh Philadelphia Columbus Brooklyn Ht Chicago Cleveland Cincinnati Detroit Grove City Ft. Lauderdale

4. 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. Skip Tracing Asset Searches Pre-suit Collections Collateral Recovery Demand Letters Complex Collections Loan Workouts Demand Letters B2B Collections Pre-suit Collections Collection Litigation Arbitration/Mediation Loss Mitigation Home Preservation Foreclosures Evictions Title & REO Fannie / Freddie Consumer Commercial Reaffirmations Relief from Stay Proof of Claim Adversary Claims Compliance Litigation Consumer Leasing Federal Court Lending Issues Loan Review Intl. Collections

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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)

14. 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

15. 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

16. 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.

17. 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

18. 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

19. 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 part-time jobs

20. Litigation Issues • Fact based cases • Quality of education, school closings • Partial Discharge • Proof of medical condition • Income/Expenses • Self imposed limitationss • Scope/quality of job search

21. Chapter 7 Bankruptcy

23. 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

24. 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

25. 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

26. 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

27. 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”

28. 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

29. Chapter 13

30. 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 Chapter 13 Plan

31. Creditors who oppose treatment in Ch13 plan must file an Objection to Confirmation Chapter 13 Plan

32. 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 Chapter 13 Plan

33. The Automatic Stay (11 U.S.C. 362)

34. 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 What Is The “Automatic Stay”?

35. Prevents any acts against a debtor to: 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 11 U.S.C. 362(a)

36. 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 pre-petition tuition. Cannot collect pre-petition tuition if debtor receives a discharge, but can refuse to register student, 11 U.S.C. 362(a)

37. 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 Co-Debtor Stay in Chapter 13

38. 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 Termination of Automatic Stay

39. 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 Motions for Relief from Stay

40. 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 Motions for Relief from Stay

41. 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 Chapter 13 – Co-Debtor Relief from Stay

42. Proofs of Claim

43. 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 Proofs of Claim

44. Requirements for inclusion of information 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 Proofs of Claim

45. Rule 3001: Proof of Claim

46. 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

47. 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.

48. 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/Supreme%20Court%202011/BK_Clean_Rules.doc

49. Supporting Information • Redact personal identifying information • Rule 9037

50. Rule 9037:Privacy Protection for Filings Made with the Court