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  1. Ninth Circuit Discharges Student Loan on Issue of First Impression

    July 9, 2015 by Shannon Doyle

    iStock_000036609624_SmallBy now we are all aware of the student debt crisis this country and the lack of relief available through bankruptcy. Borrowers have a huge hurdle when it comes to meeting the undue hardship test, and qualifying for a discharge of their student loan. While the government has addressed the problem through Income Based Repayment Plans, private student loans remain an extreme economic burden for millions of people.  While some Courts seem to be loosening the standard for a showing of undue hardship, the noose remains tight. However, there is some good news. In this case of first impression, the Ninth Circuit has found a loophole, allowing for the discharge of certain student loans without a showing of undue hardship.  In Meridian University vs. Christoff, BAP No. NC-14-2336-PaJuTa (9th Cir. B.A.P. February 29, 2015) (In re Christoff), the Ninth Circuit addresses whether tuition advanced to debtor by a for-profit college is excepted from discharge pursuant to §523(a)(8)(A)(ii).  Debtor, Tarra Nicole Christoff, attended Meridian University, a private for-profit California licensed institution offering studies in psychology. Meridian advanced tuition as credit to be repaid when debtor received her degree.  There was no third party lender and debtor did not receive any funds directly from Meridian. Debtor signed a few promissory notes which included interest on the unpaid balance of nine percent per annum, compounded monthly and was to be paid at $350.00 per month.  After completing the program, debtor made payments on the notes but subsequently defaulted and filed for chapter 7 bankruptcy.  Meridian filed an adversary proceeding against debtor claiming the debt was excepted from discharge under 11 U.S.C. §523(a)(8)(A)(ii).  The Bankruptcy Court granted debtor’s motion for summary judgment and held that debtor’s “loans” were not excepted from discharge under §523(a)(8)(A)(ii).  Meridian appealed and the Ninth Circuit BAP (“Panel”) affirmed.

    The question to be answered is: does 11 U.S.C. §523(a)(8)(A)(ii) require that actual funds be received by a debtor, or received from a third party to a for-profit post-secondary educational college in order for the student debt to qualify for an exception to discharge under that provision?   Section 523(a)(8)(A)(ii) does not discharge a debt, absent a showing of undue hardship for –

    “an obligation to repay funds received as an educational benefit, scholarship or stipend.” [emphasis added]

    Meridian argues that there need not be a physical exchange of funds for a debt to be considered “an obligation to repay funds received”.  Meridian relies on McKay v. Ingleson, 558 F.3d 888, 889 (9th Cir. 2009) (In re McKay), a pre-BAPCPA case which addressed the issue of whether an agreement between the debtor and Vanderbilt University, a non-profit institution, was a loan for purposes of §523(a)(8)(A)(i). At the time McKay was decided §523(a)(8)(A)(i) was simply §523(a)(8). This distinction becomes important in the Panel’s analysis of the current case. In McKay, the debtor and Vanderbilt University entered a contract wherein tuition and educational costs would be charged on an account and billed monthly. The debtor was to pay the bill at the end of each month or a late fee would incur. The Bankruptcy Court found the agreement created a “loan” as defined in §523(a)(8)(A)(i) (formerly §523(a)(8)). The Court concluded that an actual exchange of funds was not required to deem the agreement a “loan” that qualifies for the discharge exception because the debtor was allowed to attend classes. The Ninth Circuit affirmed relying on Johnson v. Mo. Baptist Coll. (In re Johnson), 218 B.R. 449 (8th Cir. BAP 1998), another pre-BAPCPA case which found that it is inconsequential whether debtor received actual funds – an  extension of credit is a “loan” under §523 (a)(8)(A)(i) and is a non-dischargeable debt.  The critical distinction in McKay and Johnson is that both of those universities were non-profit institutions, and therefore the applicable law relating to those agreements was §523(a)(8)(A)(i).  Section 523(a)(8)(A) (i), does not discharge a debt absent a showing of undue hardship 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 non-profit institution.” [emphasis added]

    Meridian then argues that the term “loan” as defined in §523(a)(8)(A)(i) is synonymous with the term “funds received” as described in §523(a)(8)(A)(ii) and since the Ninth Circuit has already determined that funds do not need to be exchanged in order for an agreement to be considered a “loan”, Meridian’s arrangement with the debtor constitutes a dischargeable student loan.

    Enter BAPCPA

    Prior to BAPCPA, there was only §523 (a)(8)(A) which provided that, absent a showing of undue hardship, a discharge would not apply to a debt 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 non-profit institution, or for an obligation to repay funds received as an educational benefit, scholarship, or stipend”

    After BAPCPA, there were three distinct sections of §523(a)(8) wherein Congress created (A)(i) added (A)(ii) and (B). The creation of new subsections A(i) and A(ii) separated the pre-BAPCPA §523(a)(8) language into two distinct subsections. Debtor argues that since Congress did not use the term “loan” in the newly created (A)(ii), it intended for the exception to discharge to extend to a different type of debt – one where the debtor “received funds”.  Therefore, Johnson and McKay don’t apply because those cases dealt with “loans” as defined in (A)(i), and not the newly created (A)(ii) which specifically leaves out the term “loan” and instead reserves the term “funds received”.

    The Panel further reviewed Ohio Univ. v. Hawkins (In re Hawkins), 469 F.3d 1316, 1317 (9th Cir. 2006).  While Hawkins was another pre-BAPCPA case, it construed the same language at issue in the current case. In Hawkins, Ohio University and the debtor contracted that admission to the medical school would be predicated on debtor practicing medicine in Ohio for at least five years after licensure, otherwise she would be subject to liquidated damages.  The Hawkins Court determined that the agreement was not a “loan “as described in §523(a)(8) because the agreement contained arbitrary repayment terms. The Court then had to decide if the agreement was “an obligation to repay funds received as an educational benefit” (under the second part of pre-BAPCPA §523(a)(8), now §523(a)(8)(A)(ii)).  The Court found the plain language to be clear. Funds received means funds received and since debtor did not receive funds, the debt did not meet the requirement for nondischargeability.

    The Panel ultimately agreed with the analysis in Hawkins and further agreed with debtor that when Congress severed §523(a)(8) it meant to distinguish “loans” made in connection with non-profit and government agencies from “funds received” by for-profit institutions clearly creating a prerequisite that funds be received from a for profit college in order to be classified as a nondischargeable student debt.  While this decision is sure to help many student borrowers seeking bankruptcy relief, undoubtedly the overall problem endures with nearly 1.2 trillion in student loan debt.  If we could just get Congress to pass Senator Durbin’s student loan bill, The Fairness for Struggling Students Act of 2015, we would be on our way to deactivating this student loan debt bomb in America.

     


  2. California Misappropriated $331 Million in Homeowners’ Funds

    June 16, 2015 by Shannon Doyle

    In 2012, California received $350 million as part of the Attorneys General National Mortgage Lenders credability_avoid_foreclosureSettlement. California’s Attorney General, Kamala Harris, negotiated that borrower assistance programs be covered under the settlement. As a result the settlement funds were earmarked to help troubled borrowers avoid foreclosure by providing counseling and educational services. However, state financial officials diverted a majority of the funds to help relieve California’s deficit by paying debts.  Three non-profit groups sued California, and on Friday a judge ruled that California is to refund $331 million to the settlement fund to be used for the specified purpose of helping homeowners avoid foreclosure. The three plaintiffs in the lawsuit were: The National Asian American Coalition, the COR Community Development Corporation and the National Hispanic Christian Leadership Conference.  According to the plaintiffs, there are “more than 800,000 borrowers in distress in California”. These groups further stated that they have reason to believe other states have also misused the funds, and they intend to take action where it is warranted.


  3. New Defense to Student Loan Repayments

    June 13, 2015 by Shannon Doyle

    Corinthian Colleges, Inc. was one of the largest for profit secondary education companies in the country. It fell into chapter 11 bankruptcy this spring amidst charges of fraudulent recruitment tactics including:  (1) luring students with false employment prospects, (2) encouraging students to lie on their federal aid forms, and (3) charging exorbitant fees. Its subsidiaries include the 150 year old Heald College, Everest, WyoTech, Everest University Online, and Everest College Phoenix.  According to an article in the Huff Post, about $3.6 billion in federal student loans were given to students of Corinthian Colleges since 2010. On June 8, 2015, the Department of Education (“DOE”) announced that these students may discharge their federal student loans if they were enrolled in a Corinthian school at or after June 20, 2014 and that school eventually closed. This new measure expands the prior relief which enabled Corinthian students to discharge their student loans if they left a school within 120 days of the school closing. For students who stayed at a school that was sold but feel they were still victims of fraud, and for those students who left a school before the June 20, 2014 deadline, realizing early on that they had been duped, there is a claim for fraud as a defense to repayment. The DOE’s new student loan debt relief guidelines call for a streamlined process for providing relief to this latter group of students.  The DOE is to appoint a Special Master to help those students facilitate the claim of fraud against their school. But what sort of red tape and bureaucratic obstacles will students have to overcome?  More information can be found at www.studentaid.gov/Corinthian. In the meantime, students raising this defense to repayment can get a forbearance on their student loan while their claim is reviewed. While this helps ease some of the huge student loan debt burdening our country, there is a long way to go. The DOE stated that is it committed to building a better debt relief system for all students who have been victims of abusive career colleges. We shall see.


  4. Set Client Expectations For A Smoother Bankruptcy Process

    June 10, 2015 by Shannon Doyle

    AutoImageWhen you retain a new consumer bankruptcy client, they are usually relieved that you will be resolving their problem. But what your client expects you to do and how they expect you to do it depends on how you set their expectations. If you don’t advise them that there are several steps along the way to discharge, you will see a decrease in client satisfaction. Let’s say your client has paid in full and the next step is to collect documents. Which of the following conversations would you prefer to have?

    Conversation One:

    Attorney:  Hi John, I’ve been trying to get a hold of you to collect the documents we need in order to proceed with your bankruptcy case.

    Client: What documents? I thought I already filed bankruptcy. I paid you six months ago.

    Attorney: You paid an initial retainer fee six months ago, and I just received your final payment last week. We are ready to move forward now and we need your pay stubs and some other documents in order to prepare your petition.

    Client: I gave those to you when we first met.

    At this point, attorney is afraid to even mention that client also needs to take the credit counseling class.

    Conversation Two:

    Attorney: Hi John, I’ve been trying to get a hold of you to collect the documents we need in order to proceed with your bankruptcy case. Do you still have the checklist I provided to you when we met?

    Client: Oh sorry, I’ve been really busy. Yes I have the checklist, I will gather the documents and get them to you.

    Attorney: Great, can you have them to me by the end of the day so we can start preparing your petition?

    Client: Yes I will work on that today.

    Attorney: Perfect, and it is also time to take your credit counseling class so once you email the documents to me, go to the website I provided you in your packet and take the class.

    Client: Ok I will do that.

    In the first conversation, client is confused and frustrated. Why? because he did not know what to expect. All he knew was that he hired an attorney to file his bankruptcy case and now he thinks his attorney isn’t doing a good job. In the second conversation, the client is apologetic and understands it is his responsibility to provide the attorney documents so the attorney can prepare his petition.

    So how do you create expectations for your clients? Simple, at the initial consult, explain that there are a several steps to getting a discharge. A great way to do this without overwhelming clients is to provide them with a timeline. This is a quick and easy reference for them to know each step of the way and keep them accountable for moving their case along.   Download a customizable timeline here and start including it in your initial consultation packages. Not only will this aid in a smoother process but it will also prompt your client’s memory of your initial discussion and help reduce client calls to your office.

    BK Timeline Template

     

     


  5. Consumer Credit Card Use Escalates

    June 8, 2015 by Shannon Doyle

    credit cardsAccording to the Wall Street Journal, consumer debt is on the rise. The increase in March and April of this year show an increase at an 11.57% annual rate. However, spending for cars and education slowed in pace. The increase in revolving debt could be a sign of an improving economy or a sign  that money is tight and people are leaning on credit cards. Either way, this is good news for bankruptcy attorneys because the more that consumers charge debt, the more bankruptcies are on the horizon.


  6. What happens to chapter 13 funds upon conversion to chapter 7?

    May 27, 2015 by Shannon Doyle

    Judge Striking Gavel While Holding Scale With MoneyIn Harris v. Viegelahn, 575 U.S. _______ 2015 (decided May 18, 2015), the Supreme Court decided in a unanimous decision that when a chapter 13 debtor converts to chapter 7 after confirmation, funds being held by the chapter 13 trustee are no longer property of the estate and must be returned to the debtor. In the Harris case, debtor filed a chapter 13 plan for the primary purpose of saving his home from foreclosure. Unfortunately, debtor was unable to maintain payments to his mortgage lender, and subsequently the lender foreclosed.  In the meantime, debtor continued to pay the chapter 13 trustee payments; however the trustee did not immediately disburse funds to creditors.  After losing his home, the debtor converted his case to chapter 7. Upon conversion, the trustee distributed the funds on hand to debtor’s counsel, herself and creditors. Debtor moved for a refund of the distributed funds. The bankruptcy court granted the motion and the district court affirmed. The Fifth Circuit reversed believing that the trustee’s duty to disburse funds to creditors becomes fixed upon receipt of the funds. Ultimately, the Supreme Court disagreed with the Fifth Circuit concluding that while the funds may have been property of the chapter 13 estate, the funds do not become property of the creditors until it is distributed to them.  Congress intended to exclude post-petition wages as property of the bankruptcy estate in a chapter 7 under 11 U.S.C. §348(f), so once the case was converted, the creditor’s right to the funds ended. What does this mean for bankruptcy attorneys? You may want to add language to your plan that the trustee is to disburse funds at least once a month thus reducing the risk of losing the opportunity to be paid legal fees when a trustee holds funds for months on end. Further, when converting a case for a chapter 13 client, you should get paid before the conversion takes place. In most of these cases your client isn’t making a mortgage payment and should have additional funds on hand to pay legal fees for the conversion of the case and/or for chapter 13 post-petition work. Just don’t forget to disclose these fees on the Statement of Financial Affairs when you file the amended schedules relating to the conversion. To read the full Harris decision, click here:  http://www.supremecourt.gov/opinions/14pdf/14-400_f2ah.pdf


  7. Protect Yourself (And Debtor) When Listing a Client’s Home Value

    May 20, 2015 by Shannon Doyle

    Protect Yourself (and Client) When Listing A Client’s Home Value

    home-page-houseThe last thing you ever want to happen is to have your client’s home sold in a Chapter 7 because of non-exempt equity.  But how do you determine a value? The simple answer is that YOU don’t. You are not an appraiser and you do not know the value. I have seen it happen at a 341(a) meeting where client says, “My attorney told me the value was X. He checked Zillow.”  Well, if Zillow is wrong so are you. Advising your client to use Zillow could be risky as Zillow is not always an accurate source for values. The best thing to do is properly advise your client you are relying on the value THEY PROVIDE YOU, and if they are not sure what the value is they should seek the advice of an agent who knows their neighborhood, or an appraiser who can provide them an accurate value in writing.  Of course, it can’t hurt to check Zillow and if the value of the property is significantly different than what the client believes it to be the more you want your client to get an expert opinion.  If the value is even close to being non-exempt, you want to fully advise your client of the risks and consider a Chapter 13.  At the end of the day, the only true way to determine value is by putting the house on the market. A trustee won’t care what your appraisal says. If the trustee thinks they can get more for the home they will list it, so be cautious when advising your clients about property values and always put your advice in a signed written memo.  I have attached a sample memo that I recommend you have your clients sign on every case with real property regardless of the value. Better safe than sorry.


  8. Debtors Lose Discharge After Five Years of Contributing All Disposable Income

    May 12, 2015 by Shannon Doyle

    Judge using his gavel

    A common scenario in a Chapter 13 case is for debtors to wipe out a junior mortgage that is wholly unsecured.  When proposing a Chapter 13 plan where you will be avoiding the junior mortgage, make sure you are including that lien in the unsecured debt pool. Otherwise, the distribution to unsecured creditors will be disproportionate to what is proposed in the plan, and as we saw in In re Schlegel, 526 B.R. 333 (B.A.P. 9th Cir. Feb. 25, 2015), the case will be dismissed despite the debtors having made five years of payments.  In the Schlegel case, the debtors proposed a Chapter 13 plan paying 48% to the unsecured creditors. Subsequently, debtors avoided a second mortgage but failed to add the avoided mortgage to their unsecured debt pool. With a much higher unsecured debt pool than initially proposed, the percentage to the unsecured creditors should have been reduced to what the debtors could afford after contributing all of their disposable income. However, the plan was never modified to make the adjustment.  This failure to modify caused the plan to be significantly underfunded.  The Ninth Circuit Bankruptcy Appellate Panel held that the debtors’ failure to pay the confirmed percentage distribution to unsecured creditors constituted a material default of the plan, and the Court denied a discharge.  This case is a reminder to Chapter 13 debtors’ attorneys to not only include avoided liens in the unsecured debt pool but be sure to review all claims, and don’t ignore those notices of intent to pay claims filed by the trustee. I can only image how upset the Schlegels were after five years of performing in a Chapter 13 plan only to be denied a discharge for a simple failure of their attorney to modify the plan.

     


  9. Avoid Cases From Being Closed Without A Discharge

    April 15, 2015 by Shannon Doyle

    angrycustomersI am sure we have all had it happen.  A client’s case gets dismissed without a discharge for failure to take the predischarge financial management course. Inevitably, the client will be upset claiming that you never told them to take the class. In order to avoid this problem you should take four opportunities to advise your client of the requirement:  (1) at the initial consultation as part of your retaining process and package, (2) at the time the client comes in to sign the petition and (3) as part of the petition package mailed to client after filing and (4) at the 341(a) Meeting of Creditors.

    Typically the credit counseling provider will send you flyers. Always include these as part of your retaining package. While you are explaining the process to the client, highlight the two classes with a red sharpie so the client can physically see you do it, pointing out  there will be a second class after the filing. (Most of the flyers come on that shinny paper so I found it easier to copy the flyer onto white copy paper to use the red sharpie).

    The second opportunity is when the client comes in to sign their petition.  Below you can download a memo that  I call the BK Memo. I recommend you use  it at every petition signing appointment.  Review it with the client, have them sign it and give them a copy. The BK Memo not only confirms that the client has reviewed the petition and agrees that all assets and liabilities are listed (a topic for another article) but reinforces the requirement to take the second class.  You will notice that the BK Memo states there is a $1,500.00 fee to reopen the case to file the predischarge financial management certificate. While you may not want to charge your client $1,500.00 to reopen the case, this figure tends to get their attention and be a good reminder to take the class.  In addition, you are protecting yourself from blame, and covering yours costs if the client does fail to take the class. Whatever you ultimately decide to charge, don’t forget there is a $260.00 filing fee to reopen a case. Another good practice tip is to tell your client to take the class BEFORE the 341(a) Meeting.  Getting it out of the way before the 341(a) Meeting eliminates you having another task to follow up on after the hearing.  The good news is that if your client does fail to take the class, the form motion itself is fairly simple and doesn’t require notice on the creditors.

    The third opportunity is to include the signed BK Memo in the petition package you send to your client with a copy of the filed petition and 341(a) Meeting instructions.

    Finally, prior to going to the 341(a) Meeting, check to see if your client has taken the class. If not, remind them at the Meeting to take the second class (or let your appearance attorney know to remind them). If the client has taken the class, you can give your client the good news that everything looks good and there is nothing left to do but wait for the discharge.


  10. Let’s Hope the Supreme Court Gets it Right

    by Shannon Doyle

    On March 24, 2015, the Supreme Court heard oral argument on OLYMPUS DIGITAL CAMERAwhether a debtor in a chapter 7 bankruptcy proceeding may strip a wholly unsecured junior mortgage.  While debtors in the Eleventh Circuit have had this right (and hopefully keep it), the rest of the country was limited to the Supreme Court’s decision in  Dewsnup v. Timm, 502 U.S. 410, which held that 11 U.S.C. §506(d) did not permit a debtor to strip down a lien to the current value of the collateral.  However, the facts in Dewsnup related to a claim that was partially underwater.  Debtors in the two cases currently before the Supreme Court, Bank of America, N.A. v. Toledo-Cardona and Bank of America, N.A. v. Caulkett,  argue that Dewsnup doesn’t apply to cases where the claim is completely underwater. While overall the justices seemed to express skepticism that Congress intended 506(d) to apply only to partially underwater mortgages, we  can only hope the Supreme Court gets it right and allows lien stripping in chapter 7 cases. Click here for a transcript of the oral argument. http://www.supremecourt.gov/oral_arguments/argument_transcripts/13-1421_986b.pdf


eBankruptcy Assistants, Inc. does not engage in the unauthorized practice of law. We never give your clients legal advice. All case analyses’ are done in a consulting capacity for the attorney of record. We do not represent individual debtors. We work solely for bankruptcy attorneys.