Bankruptcy Case Update: Student Loan Discharge

In a recent decision out of the Central District of Illinois, the Court held that while a debtor's prior, sporadic payments on her student loans were likely all that she could afford, given that she was unemployed, her unexplained failure to participate in the income contingent repayment plan (ICRP), along with her extreme hesitance to consider jobs outside her chosen field of study and admission that, after unsuccessfully applying for such jobs, she had effectively given up looking for work, precluded a finding that the debtor had made the requisite "good faith" effort to repay her student loans and prevented her from obtaining an "undue hardship" discharge of this debt. To find that the debtor had made a "good faith" effort to repay her student loans, based on the fact that the debtor had paid off one of these loans with proceeds of a divorce settlement and made sporadic payments on others, the bankruptcy court, at a minimum, had to correctly explain why the ICRP or a similar program was a bad deal for that particular debtor, and could not simply dismiss her admitted unwillingness to participate in the ICRP as "not dispositive."

Educational Credit Management Corp. v. Krieger

Estate Planning Is For Everyone

      There a giant misconception that estate planning is just for the rich. Growing up, before becoming an attorney I used to have a false belief of estate planning. When I heard “estate planning”, I envisioned some millionaire sitting down with an attorney coming up with ways of how to hide money in Island countries and writing five hundred page trust documents that keep his money out of the hands of the government forever while showering his family with wealth.

      I could not have been more wrong. Estate planning is making sure that not only are your assets distributed in the way you wish when you pass, but that the end of your life wishes are emphatically published to all so that there is no confusion, strife, or bickering among your family.

      The primary instruments that are used for estate planning are: Will, Power of Attorney, Power of Attorney for Health Care, and a Living Will.

       The Powers of Attorney give a person who you appoint the power to take care of your finances and health care decisions if you reach a state of mental incapacity, whether from illness or injury. You can put restrictions on your attorney-in-fact or give him free reign. Usually this power goes to a spouse or other family member.

     The Living Will, also known as an “affirmative directive”, authorizes, or does not authorize, the withholding of artificially provided food, water, or other nourishment or fluids if the patient reaches a terminal state with no reasonable medical expectation of recovery.

       All of these documents are affordable for everyone, but so many people do not have these drawn up either because of the misconception that “Estate Planning” is for the very wealthy, or do not like to dwell on the end of their life. Make the smart decision and call an estate planning to get these documents executed to prevent hassles and inter-family strife at the end of your life.

Student Loans and Hardship Test

Recent Case Updated from the 9th Circuit:
In re Jorgensen 2012 WL 3963339

       Under the Brunner “undue hardship” test, a debtor seeking discharge of student loan debt must prove that (1) she cannot maintain, based on current income and expenses, a minimal standard of living for herself and her dependents if required to repay the loans, (2) additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period, and (3) the debtor has made good faith efforts to repay the loans.

       The Court of Appeals held that the lower Bankruptcy court did not abuse its discretion by refusing to discharge $8,045.02 of Chapter 7 debtor's approximately $36,285 in student loan debt; the court refused to discharge $6,050 because debtor would not be paying rent during the five and one-half months that she was teaching abroad and she did not satisfactorily explain why the excess $6,050 was necessary to maintain a minimal standard of living, and the court refused to discharge $1,995.02 because debtor purchased a new vehicle prior to her trip and her car payment while abroad was not necessary to maintain a minimal standard of living.

Voided Mortgages in Bankruptcy

      Currently the hottest issue in Bankruptcy law, at least here in Nashville, TN, is stripping mortgages from a person's home. In order for any creditor to be paid in a Chapter 13 bankruptcy, the creditor must file a Proof of Claim. For unsecured creditors, such as credit cards and medical bills, the creditor merely has to file a Proof of Claim form and they are entitled to payment, and it is the burden of the debtor to rebut the presumption that he owes that debt. However, for creditors with collateral securing their loan, such as mortgages and car liens, the creditor must attach with their Proof of Claim, documentation that proves the claim is in fact secured. So for a mortgage, the bank with the mortgage must attach the Deed of Trust and the Promissory Note.

       Now, the collapse of the housing market for the past five years has unveiled many “mistakes” and “errors” of the banking mortgage industry. Once a homeowner signed a mortgage with a local bank or even a national/global bank, many of those mortgages were bundled, sold, and traded multiple times. However, the actual physical documents that were signed cannot be found because many of these transactions were done electronically. Therefore, in Bankruptcy Court, when the Proof of Claim for a mortgage is filed and the documents are not attached, or the documents attached have the name of a different bank on them, then the claim gets disallowed. Subsequently, section 506(d) of the Bankruptcy Code provides that to the extent that a secured claim is not allowed the lien securing that claim on the property is void. Thus, if the Bank cannot prove that they own the mortgage with a Deed of Trust and Promissory Note then the claim is disallowed, and then the lien may be stripped.

       Now, for a Bankruptcy attorney, I am going to discuss some strategies when this issue arises. First, the bankruptcy attorney must follow the Proof of Claims Deadline. When we receive the Notice of the Meeting of Creditors, on it is published the Deadline for Creditors to file Proof of Claims. We mark our calendars for these deadlines. According to our Local Rules, here in Middle Tennessee, the debtor has 30 days beyond this deadline to file a proof of claim on behalf of the creditor. So once this deadline approaches, we check to see if the secured creditors of a case filed their Proof of Claim. If they didn't we file one on their behalf. Obviously, we do not have the Deed of Trust or the Promissory Note, so shortly thereafter the Trustee of the case files a Motion to Disallow that claim. Next, we file with the Trustee an agreed order to hold the funds provided in the plan meant for the mortgagee, that way if the documents arise during litigation, the trustee has been holding those funds so the debtor doesn't fall behind in her payments.

       Now is when we file our adversary proceeding against the alleged mortgagee with the lien to strip the lien pursuant to section 506(d). Also, an attorney must be sure to properly serve the complaint on the bank pursuant to Rule 7004. Another good strategy, is when/if the bank responds with an answer, is to request discovery, production of documents, or subpoena the bank to produce the Note and Deed of Trust. Thus, if the bank cannot provide the documents, then the lien is stripped, or if the bank refuses to supply them, as a strategy to avoid saying the documents cannot be found, then you can ask for sanctions.

Property Taxes in Bankruptcy

      I wrote a post a few months ago on Property taxes is bankruptcy because we argued the case and the decision had yet to come down. Well, a couple of weeks after that post was written we the judge issued his opinion and the decision was split, partially granted and partially denied. 

      First, we won on the issue that "penalities" are not "fees, costs, or charges" that could be allowed for the secured creditor.  Therefore, a debtor's delinquent property taxes would be charged a 12% interest rate and not an 18% interest rate; moreover, the secured claim would only grow at 12% and not 18%.  One part of the decision the judge added in, and it was not argued by us nor the Metro Trustee's office, but was argued in the Chapter 13 Trustee's brief.  That issue was the fact that since, in this case, the debtor was solvent the Metro Trustee's office should be allowed an unsecured claim of the 6% penalty, but only from the date of filing to the date of the confirmation order.