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Student Loans and Other Debts Not Dischargeable in Bankruptcy

Learn about the importance of obtaining a discharge in bankruptcy and the types of debts that are not eligible for discharge. Explore the impact of student loan debt and its implications on household behavior.

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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 ljenkins@ch13ut.org *With thanks to Hon. Kevin R. Anderson

  2. 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 ___ (2nd 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

  3. 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

  4. Differences Between Chapter 7 and Chapter 13

  5. The Next Financial Crisis?

  6. Student Loan Crisis Current Student Loan Debt $1,521,000,000

  7. $1.44 trillion in total student loan debt. • 44.2 million individuals have student loans. • Average balance is $30,100 • Delinquency rate is 11.2% (90+ days). • Average monthly payment is $351.

  8. Student Loan Exponential Explosion! (10-fold increase since 2007)

  9. Inflation Comparisons for Consumer Goods & Services Cost of Living

  10. 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

  11. “Seniors” Seeing Largest Increase in Student Loan Liability (as co-signers?)

  12. Co-Signer Survey • 1. Do you believe you understood the risks of co-signing? • Yes 68.68% No 32.30% • 2. Has your credit score been negatively impacted? • Yes 62.06% No 37.94% • 3. Is your child’s student loan debt putting retirement in jeopardy? • Yes 46.93% No 53.07% • 4. Have you helped your child make payments? • Yes 74.82% No 25.18% • 5. Do you regret making the decision to co-sign? • Yes 36.76% No 63,24% • Source: Lendedu.com February 6, 2018

  13. Women Graduate with More Student Loan Debt Than Men American Association of University Women, May 2017(http://www.aauw.org/research/deeper-in-debt/)

  14. 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, 2018

  15. 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 2017

  16. 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 Overall Student Loan State Rankings Class of 2016 (Con’t) *Average per graduate, not per borrower. Includes those graduating debt-free. The Student Loan Report, October 2017

  17. Debt Per Graduate By School • Utah Schools • The Student Loan Report, October 2017

  18. 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 Q1 2017

  20. Delinquency Rate by Debt Type

  21. The Student Loan Collection “Bonanza” • American taxpayers are paying $38 to collect every $1 of student loan debt (Bloomberg News, 5-19-17) • Since 2013, DOE has earmarked $4.2 billion to pay debt collectors (Bloomberg News, 5-19-17) • 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, 7-17-2017)

  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. Student Loans in Bankruptcy: The Double Whammy! Non-dischargeable and non-priority,so not entitled to special treatment. Priority Child Support Student Loans: Nondischargeable & Non-Priority PriorityTaxes

  25. Evolution of Student Loan Nondischargeabilityin Bankruptcy Bankruptcy Code amended to provide discharge of student loans in repayment status for less than 5 years could be discharged for undue hardship Undue hardship” is sole basis to discharge “educational loan or benefit” and 7 year time period eliminated Federal Student Loans first become available Concerns that easy availability of discharge threatened the integrity of educational loan programs 1980 2019 Today 1958 Today 1998 1978 1960s-1970s 1958 1960 1965 1970 1976 1985 1990 1998 2005 2018 2005 1960s-1970s Nondischargeability expanded to include private student loans, as well as federal and federally-insured loans 1990 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 Types of Student loans not dischargeable expanded and time extended to 7 years

  26. 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. 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” • Debtor cannot, based on current income and expenses, maintain a minimal standard of living for debtor and dependents if forced to repay • This state of affairs is likely to persist for a significant portion of the repayment period (“certainty of hopelessness”) test; and • Debtor has made a good faith, but ineffectual, attempt to repay the student loan. • Adopted by 3rd, 4th, 5th, 6th, 7th, 9th, 10th, and 11th 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 8th Circuit (Long v. ECMC, 322 F.3d 549 (8th Cir. 2003); likely 1st Cir. • In re Martin, Case No. 16-01077 (Bankr. N.D. Iowa, February 16, 2018) (applying totality of circumstances test)

  30. 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

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