Student Loans and Other Debts Not Dischargeable in Bankruptcy

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1 Student Loans and Other Debts Not Dischargeable in Bankruptcy Lon A. Jenkins Standing Chapter 13 Trustee for the District of Utah *With thanks to Hon. Kevin R. Anderson 1 Discharge 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 (2 nd 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 2 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 3 1

2 Differences Between Chapter 7 and Chapter 13 Chapter 7 Chapter 13 Type of Bankruptcy Liquidation Reorganization (for individual debtors) Who Can File? Individuals and Business Entities Disposable Income Must Be Low Enough to Pass the Chapter 7 Means Eligibility Restrictions Test How Long Does It Take to Receive a Discharge? Typically 3-4 Months What Happens to Trustee Can Sell All Nonexempt Property in Bankruptcy? Property to Pay Creditors Benefits Drawbacks Allows Debtors to Quickly Discharge Qualifying Debts and Get a Fresh Start Trustee Can Sell Nonexempt Property. Does Not Provide a Way to Catch Up on Missed Payments to Avoid Foreclosure or Repossession. Individuals Only (Including Sole Proprietors) Cannot Have More Than $394,725 of Unsecured Debt or $1,184,200 of Secured Debt Upon Completion of All Plan Payments (Usually 3-5 Years) Debtors Keep All Property But Must Pay Unsecured Creditors an Amount Equal to Value of Nonexempt Assets Allows Debtors to Keep Their Property and Catch Up on Missed Mortgage, Car, and Nondischargeable Priority Debt Payments Must Make Monthly Payments to the Trustee for 3-5 Years. May Have to Pay Back a Portion of General Unsecured Debts. 4 The Next Financial Crisis? 5 Student Loan Crisis Current Student Loan Debt $1,521,000,

3 $1.44 trillion in total student loan debt million individuals have student loans. Average balance is $30,100 Delinquency rate is 11.2% (90+ days). Average monthly payment is $ Student Loan Exponential Explosion! (10-fold increase since 2007) 8 Inflation Comparisons for Consumer Goods & Services Cost of Living 9 3

4 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 10 Seniors Seeing Largest Increase in Student Loan Liability (as co-signers?) 11 Co-Signer Survey Do you believe you understood the risks of co-signing? Yes 68.68% No 32.30% Has your credit score been negatively impacted? Yes 62.06% No 37.94% Is your child s student loan debt putting retirement in jeopardy? Yes 46.93% No 53.07% Have you helped your child make payments? Yes 74.82% No 25.18% Do you regret making the decision to co-sign? Yes 36.76% No 63,24% Source: Lendedu.com February 6,

5 Women Graduate with More Student Loan Debt Than Men American Association of University Women, May 2017 ( 13 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, 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

6 Overall Student Loan State Rankings Class of 2016 (Con t) 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 Debt Per Graduate By School Utah Schools 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% The Student Loan Report, October

7 Student Loans: Largest U.S. Cash Receivable In Trillions of Dollars Student Loans $1,001 Other Loans $201 Taxes $189 Misc. $179 Mortgages $117 Trade $67 Corp. Equities $33 Rate of Return to Gov t on Student Loans is 3.7% to 6.3% 19 Student Loans: Largest U.S. Cash Receivable Q Delinquency Rate by Debt Type 21 7

8 The Student Loan Collection Bonanza American taxpayers are paying $38 to collect every $1 of student loan debt (Bloomberg News, ) Since 2013, DOE has earmarked $4.2 billion to pay debt collectors (Bloomberg News, ) 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, ) 22 Professional 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 23 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 24 8

9 Student Loans in Bankruptcy: The Double Whammy! Non-dischargeable and non-priority, so not entitled to special treatment. Priority Child Support Priority Taxes Student Loans: Nondischargeable & Non-Priority 25 Evolution of Student Loan Nondischargeability in Bankruptcy Federal Concerns that Student easy availability Loans first of discharge become threatened the available integrity of 1958 educational loan programs 1960s-1970s Bankruptcy Code amended to provide discharge of student loans in repayment status for less than 5 years could be discharged for undue hardship 1978 Undue hardship is sole basis to discharge educational loan or benefit and 7 year time period eliminated 1998 Today s-1970s Concerns that recent graduates would immediately file bankruptcy to discharge their student loans 1976 Loans in repayment status for less than 5 years if court determined undue hardship 1990 Types of Student loans not dischargeable expanded and time extended to 7 years 2005 Nondischargeability expanded to include private student loans, as well as federal and federally-insured loans The 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" 27 9

10 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) 28 Hardship Discharge Brunner Test: debtor must establish these elements- 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 3 rd, 4 th, 5 th, 6 th, 7 th, 9 th, 10 th, and 11 th Circuits 29 Hardship 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 8 th Circuit (Long v. ECMC, 322 F.3d 549 (8 th Cir. 2003); likely 1 st Cir. In re Martin, Case No (Bankr. N.D. Iowa, February 16, 2018) (applying totality of circumstances test) 30 10

11 Possible Statutory Changes 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 31 ABI Consumer Committee Recommendations 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 32 11