Student Debt and a Push for Fairness

Student Debt and a Push for Fairness
By RON LIEBER
Published: June 4, 2010
at http://bankruptcy.lawyers.com/consumer-bankruptcy/Student-Loans-In-Bankruptcy.html

If you run up big credit card bills buying a new home theater system and can’t pay it off after a few years, bankruptcy judges can get rid of the debt. They may even erase loans from a casino. But if you borrow money to get an education and can’t afford the loan payments after a few years of underemployment, that’s another matter entirely. It’s nearly impossible to get rid of the debt in bankruptcy court, even if it’s a private loan from for-profit lenders like Citibank or the student loan specialist Sallie Mae.

This part of the bankruptcy law is little known outside education circles, but ever since it went into effect in 2005, it’s inspired shock and often rage among young adults who got in over their heads. Today, they find themselves in the same category as people who can’t discharge child support payments or criminal fines.

Now, even Sallie Mae, tired of being a punching bag for consumer advocates and hoping to avoid changes that would hurt its business too severely, has agreed that the law needs alteration. Bills in the Senate and House of Representatives would make the rules for private loans less strict, now that Congress has finished the job of getting banks out of the business of originating federal student loans.

With this latest initiative, however, lawmakers face a question that’s less about banking than it is about social policy or political calculation. At a time when voters are furious at their neighbors for getting themselves into mortgage trouble, do legislators really want to change the bankruptcy laws so that even more people can walk away from their debts?

There are two main types of student loans. Under the proposed changes, borrowers would remain on the hook for federal loans, like Stafford and Perkins loans, as they have been for many years. To most people, this seems fair because the federal government (and ultimately taxpayers) stand behind these loans. There are also many payment plans and even forgiveness programs for some borrowers.

In 2005, however, Congress made the bankruptcy rules the same for the second kind of debt, private loans underwritten by profit-making banks. These have no government guarantees and come with fewer repayment options. Undergraduates can also borrow much more than they can with federal loans, making trouble more likely.

Destitute borrowers can still discharge student loan debt if they experience “undue hardship.” But that condition is nearly impossible to prove, absent a severe disability.

Meanwhile, the volume of private loans, which are most popular among students attending profit-making schools, has grown rapidly in the last two decades as students have tried to close the gap between the rising price of tuition and what they can afford. In the 2007-8 school year, the latest period for which good data is available, about one third of all recipients of bachelor’s degrees had used a private loan at some point before they graduated, according to College Board research.

Tightening credit caused total private loan volume to fall by about half to roughly $11 billion in the 2008-9 school year, according to the College Board. Tim Ranzetta, founder of Student Lending Analytics, figures it fell an additional 24 percent this last academic year, though his estimate doesn’t include some state-based nonprofit lenders.

There is no strong evidence that young adults would line up at bankruptcy court in the event of a change. That gives Democrats and university groups hope that Congress could succeed in making the laws less strict.

In Congressional hearings on the efforts to change the rule, last year and then in April, no lender was present to make the case for the status quo. Instead, it fell to lawyers and financiers who work for them. They made the following points.

Bankruptcys Would Rise: At the April hearing, John Hupalo, managing director for student loans at Samuel A. Ramirez and Company, made the most obvious case against any change. “With no assets to lose, an education in hand, why not discharge the loan without ever making a payment to the lender?” he said.

Once you set aside this questionable presumption of mendacity among the young, there are actually plenty of practical reasons why not. “People don’t like to go through bankruptcy,” said Representative Steve Cohen, Democrat of Tennessee, who introduced the House bill that would change the rules. “It’s not like going to get a milkshake.”

Andy Winchell, a bankruptcy lawyer in Summit, N.J., likens student loan debt to tattoos: They’re easy to get, people tend to get them when they’re young, and they’re awfully hard to get rid of.

And he would remind clients of a couple of things. First, you generally can’t make another bankruptcy filing and discharge more debt for many years. So if you, in essence, cry wolf with a filing to erase your student loans, you’ll be in a real bind if you then face crushing medical debt two years later.

Then there’s the damage to your credit report. While it doesn’t remain there forever, the blemish can have an enormous impact on young people trying to establish themselves with an employer or buy a home.

Finally, you’re going to have to persuade a lawyer to take your case. And if it seems that you’re simply shirking your obligations, many lawyers will kick you out of their offices. “It’s not easy to find a dishonest bankruptcy attorney who is going to risk their license to practice law on a case they don’t believe in,” Mr. Winchell said.

Sallie Mae can live with a change, so long as there’s a waiting period before anyone can try to discharge the debts. “Sallie Mae continues to support reform that would allow federal and private student loans to be dischargeable in bankruptcy for those who have made a good-faith effort to repay their student loans over a five-to-seven-year period and still experience financial difficulty,” the company said in a prepared statement.

While there is no waiting period in either of the current bills, Mr. Cohen said he could live with one if that’s what it took to get a bill through Congress. “Philosophy and policy can get you on the Rachel Maddow show, but what you want to do is pass legislation and affect people’s lives,” he said, referring to the host of an MSNBC news program.

BANKS WOULDN’T LEND ANYMORE Private student loans are an unusual line of business, given that lenders hand over money to students who might not finish their studies and have uncertain earning prospects even if they do get a degree. “Borrowers are not creditworthy to begin with, almost by definition,” Mr. Hupalo said in an interview this week.

But banks that have stayed in the business (and others, like credit unions, that have entered recently) have made adjustments that will probably protect them far more than any alteration in the bankruptcy laws will hurt. For instance, it’s become much harder to get many private loans without a co-signer. That means lenders have two adults on the hook for repayment instead of just one.

BORROWING COSTS WOULD RISE They probably would rise a bit, at least at first as lenders assume the worst (especially if Congress applies any change to outstanding loans instead of limiting it to future ones). But this might not be such a bad thing.

Private loans exist because the cost of college is often so much higher than what undergraduates can borrow through federal loans, which have annual limits. Some lenders may be predatory and many borrowers are irresponsible, but this debate would be much less loud if tuition were not rising so quickly.

So if loans cost more and lenders underwrite fewer of them, people will have less money to spend on their education. Some fly-by-night profit-making schools might cease to exist, and all but the most popular private nonprofit universities might finally be forced to reckon with their costs and course offerings.

Prices might come down. And young adults just getting started in life might be less likely to face a nasty choice between decades of oppressive debt payments and visiting a bankruptcy judge before starting an entry-level job.

www.familymaritallaw.com

Mortgage Loans Discharged In Chapter 7 Bankruptcy

Mortgage loans can be discharged in Chapter 7 bankruptcy proceedings so that homeowners no longer have to worry about paying an expensive loan when their income has dropped. But with a discharge, the owners will not be able to keep their house, as the bank will receive the collateral back as a result of the loan being eliminated. So there must be other reasons for owners to consider this tactic, since it does not actually save the house.

The main benefit of doing this is that homeowners are able to stop foreclosure from moving any further along in the legal process, meaning no more court documents, lawsuit paperwork, sheriff sale dates, or eviction hearings. Even if the borrowers move out of their house before the foreclosure process is complete, the courts will still move ahead with the necessary procedures to sell the house to satisfy the mortgage lien. Discharging the mortgage through bankruptcy ends this sequence of events.

Another important reason to consider filing Chapter 7 to eliminate the mortgage and move out of the house is the possibility of avoiding deficiency judgments after foreclosure. Although few banks sue again after the sheriff sale for any difference between what was owed and what the property sold for, it may be best just to discharge the mortgage and not worry about any further lawsuits regarding this property.

Bankruptcy is an important legal defense that homeowners have against unmanageable debt burdens and aggressive collections efforts, whether they are from credit cards, collection agencies, or mortgage companies. Collectors will never give up trying to go after a debt, and every day of the foreclosure process can be a nerve-wracking experience. Although the social stigma of bankruptcy may be severe, many debtors will liberated and generally much feel better with a fresh start and no extra debt.

www.FamilyMaritalLaw.com

Are people who file for bankruptcy "using the system"?

As a bankruptcy attorney, I was asked by a criminal law attorney whether I thought people were acquiring debt with the intention of discharging it in bankruptcy. I assured this attorney that this was NOT the case. The overwhelming majority of clients we have had and have are devastated by having to file for bankruptcy. There may be a few that “work the system”, but that is the exception.

Furthermore, I can also vouch through my experience that the majority of people who are on unemployment compensation would much rather be working. They are making a minimal amount of money on unemployment which doesn’t even begin to cover the income they received when they were working. Without even the income to pay their living and food expenses, unpaid debt starts accruing and creditors add fees and raise interest rates and the amount owed increases rapidly, making it even more impossible to pay back. It’s a no win situation.

My advice if you are falling behind on paying your debt is that you do not use equity from your homestead or use funds from your retirement accounts as both of these assets are usually exempt in bankruptcy. In essence, if you cannot pay your bills, do not devastate yourself even more financially by using up assets which you may keep if you must file for bankruptcy. I have seen too many clients who have done so and they are destitute. Many of these people should be retired, but they don't have the means to retire.

Beware of Foreclosure Rescue Scams. Help is Free!

There is never a fee to get assistance or information about the Making Home Affordable program from your lender or a HUD-approved housing counselor.

For a HUD-approved counselor, visit: http://www.hud.gov/offices/hsq/sfh/hcc/fc

Beware of any person or organization that asks you to pay a fee in exchange for housing counseling services or modification of a delinquent loan.

Beware of anyone who says they can “save” your home if you sign or transfer over the deed to your house. Do not sign over the deed to your property to any organization or individual unless you are working directly with your mortgage company to forgive your debt.

Never make your mortgage payments to anyone other than your mortgage company without their approval.

Reasons to Delay or Speed Up Your Bankruptcy Filing

There are many factors to consider when deciding when you should file for bankruptcy. Here are a few common reasons for delaying or speeding up a bankruptcy filing.

Reasons to Delay a Bankruptcy Filing

Your income recently decreased. One good reason to delay a filing is if your income over the last six months puts you over the means test limit but a recent decrease in your income would put you under the limit if you waited a month or two to file. Remember, the means test is based on your average gross income received during the six-month period just prior to the month you file. So, if you file in October you would average your income during the months of April through September.

You face foreclosure but the sale is not yet scheduled. An impending foreclosure is another reason to delay you filing (or speed it up, see below). If the foreclosure sale hasn't been scheduled yet, you may want to delay your filing until the sale is both scheduled and close to taking place. This tactic will result in a delay of the sale for at least two months and sometimes longer, which will give you an extra couple of months of payment-free shelter.

Certain credit card use. Still another reason to delay filing is if you used a credit card within the previous 90 days or obtained cash advances within the previous 70 days. If the credit card charges totaled more than $550 on any one card and were for luxuries, or the advances on any one card exceeded $850, the creditor can obtain a court ruling that the charges or advances will not be discharged in your bankruptcy. If you have recent charges or cash advances that might survive your bankruptcy you should consider delaying your filing until the three month or 70-day period has expired.

Other reasons. Other common reasons you might want to delay filing are:

•you made preferential payments to creditors (wait 90 days or one year to file, depending on the type of creditor)
•you transferred property for less than fair value within the past two years and the property is valuable enough that the bankruptcy trustee may go after it (typically over $1,000)
•you had a previous bankruptcy case dismissed within the past year (or in some cases within the previous 180 days)
•you are seeking a mortgage modification (the bankruptcy may bring the modification process to a screeching halt)
•you are seeking to discharge back income taxes (wait until three years have passed since the taxes first became due or until two years have passed since you filed a return), or
•you filed a previous bankruptcy in which you obtained a discharge (wait until you are eligible to file again).
Reasons to Speed Up Your Bankruptcy Filing

Sometimes, you'll want to file for bankruptcy right away. If your income greatly increased during the last few months, but was much lower during the previous three or four months, the sooner you file the better your chance of passing the means test. Also, if your house is in foreclosure and the sale is scheduled and you want to delay the sale, you should file for bankruptcy immediately.

To learn more about choosing the right time to file for bankruptcy, see Nolo's article Should I File Bankruptcy Now or Wait? Or visit, Nolo's Bankruptcy Center for articles, FAQs, Legal Updates, books, and software on bankruptcy.

http://www.bankruptcyforeclosureblog.com/2010/11/timing-your-bankruptcy-filing.html

http://www.FamilyMaritalLaw.com

States to Unveil Joint Probe Into Foreclosures

If the states have their way, mortgage companies will have to revamp the way they handle foreclosures, pay penalties for violations and expand help to homeowners on the verge of foreclosure.

The top law enforcement officials of states around the country are already weighing the outlines of a potential settlement with the industry, said Iowa Attorney General Tom Miller, who will lead the investigation. The inquiry will be announced Wednesday morning.

http://www.aolnews.com/nation/article/states-to-unveil-joint-probe-into-foreclosures/19672006

http://www.FamilyMaritalLaw.com

Bank of America Halts Foreclosures in 50 States

WASHINGTON – Potential flaws in foreclosure documents are threatening to throw the real estate industry into a full-blown crisis, as Bank of America on Friday became the first bank to stop sales of foreclosed homes in all 50 states.

The move, along with another decision on foreclosures by PNC Financial Services Inc., adds to growing concerns that mortgage lenders have been evicting homeowners using flawed court papers.

See the following link:

http://news.yahoo.com/s/ap/20101008/ap_on_bi_ge/us_foreclosure_mess

http://www.familymaritallaw.com/CM/Bankruptcy/Foreclosure-What-Are-YourRights.asp