Being sued on student loans? Demand documents to support the loan

A recent New York Times article reports that certain student loan creditors have had their cases dismissed because they could provide proof to support the loan, and to support that the plaintiff suing on the loan actually owned it. As Paperwork Goes Missing, 7-18-17, Private Student Loan Debts May Be Wiped Away . As the authors point out, these loans have been sold off or handed off to loan servicers who did not get and cannot find the supporting documents. Many cases have been dismissed. Nevertheless, many suits simply result in default judgments because the borrowers being sued did not bother to respond and demand paperwork, or go to trial. So the lenders may still file suit, to see what happens when they do.

The lesson? Demand to see the signed loan agreements, and the endorsed promissory notes or assignments to show who owns and has the right to sue to collect. Better yet, be sure to get or keep all your paperwork from the get-go, including documentation of all payments or notices of transfer.

A caution is in order here, though. Not all loans will suffer from this problem, and defending these cases will cost money. But it may often pay to demand that the lender provided the documents to support their claim in order to be paid. Many may ignore these requests. You have a right to see the documents.

Also, if you file a bankruptcy where creditors file claim, eg a Chapter 7 with “assets” or  a Chapter 13, you can challenge the student loan creditor’s claim and demand the same documents.

Since student loans are almost always non-dischargeable, it pays to make sure.

Student loans-dealing with a system stacked against the borrower

We recently came across this old piece in the New York Times: NY Times, 10/9/2015 “A Student Loan System Stacked Against the Borrower” .

It shows how people get trapped by crushing student loan debt, then have to deal with abusive collectors. Lately, this issue has gotten more attention, including a major piece in this month’s Consumer Reports.

If you are one of the people contemplating student loans, or if you have them, there are some important things to remember:

  1. Be careful and meticulous in keeping your own records. This starts with all the loan documents. If you signed it, demand a copy of the signed document right then and there.  Keep all correspondence and notices. Keep proof of every payment in hard copy. Keep notes of all communications. If you send something out, keep your own copy, and if possible keep proof that it was received. Keep your own ledger of payments.
  2. Especially, keep careful records of your dealings with debt collectors. If you encounter abusive tactics, these collectors could be subject to suit under the Fair Debt Collection Practices Act.
  3. Know the type of debt you are getting into. Federal loans are the best, and have the most options for abatement or eventual discharge. Some student loan debt, like that offered by the State of New Jersey, has no such provision, and indeed the recent reports are that the State agency is remorseless and inflexible in dealing with collections.
  4. Ask, and investigate on your own if there are any programs for deferment or abatement. Don’t expect that others will tell you, or even get it right.
  5. Remember that if you defer payment on a loan, that does not necessarily mean the interest doesn’t continue to pile up. If this is not the case, confirm it in writing.
  6. Almost every type of student loan is non-dischargeable in bankruptcy unless you can prove extreme hardship. This is likely hard to prove. Having good records (see above) is very important.
  7. While a bankruptcy may not discharge student loans, we have successfully used Chapter 13 to force the loan creditors into a reasonable and affordable payment plan, and to stop collections while this is going on. When the plan is completed, the debt is still there, but at least you do not have to deal with impossible demands for payment or harsh collection methods.

We are looking forward to the day when the system is not so stacked against the borrower. In the meantime, these steps can only help.

Can Student Loans Be Discharged?

It’s getting to the point, for many, where the cost of a college education is one of the biggest of life’s expenses, greater even than the cost of a home. Not surprisingly, as many college graduates struggle to find good jobs, many consider bankruptcy as an option to get their finances under control. The key question—can student loan payments be discharged in a federal bankruptcy filing?

Though many people don’t know it, there are limited circumstances where student loan payments can be wiped out under the bankruptcy law. Under what is known as the Brunner test (so named because of the U.S. Supreme Court case that laid down the principles for discharge of a student loan), you can discharge student loan obligations if you can demonstrate that repayment would cause you an “undue hardship.”

Under Brunner, a debtor can eliminate student loan debt by showing all of the following:

  • The debtor does not have sufficient income to maintain a minimal standard of living for himself/herself and dependents
  • The debtor has no reasonable prospect that the current financial situation is likely to change
  • The debtor has made a good faith attempt to pay off student loan debt

It’s important to understand that, without evidence to the contrary, most courts will presume that a debtor’s income will increase over time and that a debtor will be able to attain a minimal standard of living. Accordingly, any debtor seeking discharge of a student loan payment will need to affirmatively demonstrate that his or her situation is not likely to change. A debtor may introduce the following types of evidence to support that claim:

  • A mental or physical disability
  • Lack of education or training
  • Poor quality of education
  • Lack of job skills
  • Age of debtor

Exploring the options for income based repayment or discharge of student loans through various federal programs is a good idea and also a necessary first step. You can find information about what types of loans you have at this site: https://www.nslds.ed.gov/nslds/nslds_SA/. Information about federal student loan forgiveness and cancellation can be found here: http://studentaid.ed.gov/repay-loans/forgiveness-cancellation

If you resort to a bankruptcy, discharging student loans will require that you file a “bankruptcy lawsuit” in the bankruptcy seeking a judgment of dischargeability.  Achieving success is possible, but difficult at present. Hopefully courts or Congress will find a way to ease the path to dischargeability.

Contact Neuner & Ventura, LLP

We understand the stress, anxiety and confusion that can be associated with a potential bankruptcy filing. We offer a free initial consultation to every client. For an appointment, call Neuner & Ventura at 856-596-2828 or send us an e-mail. We do, however, reserve the right to charge a fee to review any work done by another attorney. Evening and weekend appointments are available upon request.

Representing Clients Across South Jersey

Student loans-a $2.5 trillion debtload-will the Supreme Court provide some relief?

For many years now, bankruptcy has provided no relief for virtually all student loans. The Bankruptcy Code makes them non-dischargeable except in cases of “undue hardship”, but Congress chose not to explain or define what that test might entail. Decades ago, when student loans could be discharged after 5 years, the 2d Circuit Court Appeals created a very high barrier to proving “undue hardship” under the “Brunner test”. That test has been adopted in many but not all other Circuit Courts of Appeal. Under that test, one must show almost no future capacity to pay, and show a good faith attempt to pay in the past.

Now, Bloomberg Business reports that a court case challenging the Brunner Test as unconstitutional may be headed to the US Supreme Court. “The Supreme Court may weigh in on a student debt battle”, October 19, 2015. The case was brought by a 57 year old recovering alcoholic, saddled with debt after business and law school. He lives with his mother and has been unable to find work due to a criminal record.

As the author points out, “It would be hard to overstate the significance of this case for people struggling with student debt. Student loans are the largest source of consumer debt aside from mortgages. The total amount of outstanding student debt is expected to double to $2.5 trillion in the next decade. One in four borrowers is either delinquent or in default on his or her student loans. A ruling in their favor would offer an escape from a type of debt that, until now, has followed even the most destitute borrowers to their deaths. A change in how loans are handled in bankruptcy would open the possibility of a fresh start for defaulted borrowers, who may see their loan balances balloon with fees and penalties while they don’t make any progress toward paying down their debt.

For the government, the stakes are about as high. If bankruptcy becomes a real option for people with student loans, the Education Department will have to contend with the reality that a good chunk of the $1 trillion-plus in outstanding debt is not ever going to be recovered.”

The Supreme Court does not have to agree to hear the case, but  may well do so, as this long-simmering problem has now evolved into a “split between the Circuits”, and may appeal to justices who dislike judge-made rules which cannot be supported by the language, structure and history of a statute.

Stay tuned.

Addressing Student Loan Debt with a Chapter 13 Bankruptcy

Restructuring Student Loan Debt in Chapter 13

If you’ve accumulated substantial student loan debt, but don’t have the income to pay it off, you may be considering bankruptcy as a way of managing your obligations. Student loan debt can, in limited circumstances, be discharged in Chapter 7, but the requirements are strict. For more information, see our blog on the hardship discharge of student loans. In most instances, a Chapter 13 bankruptcy can provide partial relief, by holding off collection of student loans in default while these loans get partially paid.

In a Chapter 13 bankruptcy, you have the opportunity to use a court sanctioned repayment plan over 3 to 5 years. In exchange, for the entire 3 to 5 year period, you get the benefit of the automatic stay, which prohibits creditors from calling, writing, filing legal action or taking any other measures outside of the bankruptcy to collect a debt from you. The automatic stay goes into effect immediately upon filing your petition. It is fully applicable to student loans. It continues as long as you are in bankruptcy, and for Chapter 13, as long as you are making payments according to your approved plan.

While any unpaid balance on such loans will still be due at the end of the plan, you will have hopefully paid down the loans based on your actual ability to pay, and not based on what a student loan debt collector or collection attorney demands of you.

With a Chapter 13 filing, you can get immediate relief from attempts to collect on your student loans. In addition, student loans are considered unsecured debts in a Chapter 13 proceeding, similar to medical expenses or credit card bills. Accordingly, they don’t have priority and do not have to be paid off in full as part of the petition. The amount you will be required to pay monthly will be based on how much income you have left after payments to secured creditors.

The specific benefits of a Chapter 13 when you have unmanageable student loan debt include:

  • The ability to stop aggressive student loan debt collectors for a period of time.
  • The ability to pay on your loans based on your income and ability, while you pay off other obligations, so that, once your bankruptcy is complete, you can better afford to make student loan payments

Contact Our Office

At Neuner & Ventura, LLP, we work hard to alleviate the stress, anxiety and confusion that come with a potential bankruptcy filing. We offer a free initial consultation to every client. We do, however, reserve the right to charge a fee to review any work done by another attorney. For an appointment, call us at (856) 596-2828 or send us an e-mail. Evening and weekend appointments are available upon request.

Representing Clients across South Jersey

Heading for bankruptcy? Paying your children’s college expenses could create “clawback” headaches for them and their college

Many parents in financial difficulty still place a priority on helping their children with tuition and other college expenses. While this is entirely understandable, parents who pay colleges for their adult children could be creating problems for both their children and the colleges if they later file for bankruptcy protection.

Recent reports in the Wall Street Journal and elsewhere have exposed a growing trend: bankruptcy trustees are suing colleges to “claw back” money paid by parents in bankruptcy. This has led the colleges to seek payment from the students, or to withhold transcripts until the money is repaid. It has even spawn a proposed bill in Congress to prevent bankruptcy trustees from filing such suits.

The underlying legal theory for such “claw-back” suits is not that novel. Trustees have the right and indeed the obligation to pursue getting back money or property that a debtor in bankruptcy has “fraudulently” transferred, so the money can be made available to pay creditors (and to pay the trustee and his attorneys). The payment need not have been done with actual intent to defraud creditors. It is sufficient if it was made without the parent/debtor getting “reasonably equivalent value” in return for what is paid, and if the payment was made at a time the parent was insolvent or unable to pay current or anticipated debts.

In essence, the trustees argue, the parents paying the college education expenses of an adult child are making a gift to that child. Gifts are by definition not made for “reasonably equivalent value”. They take away money that could have been used to pay the parent’s creditors.  Love and affection are not considered “reasonably equivalent value”.

If the parent takes out a loan or co-signs a student loan for the child but all the money goes to the child or her college, the effect is the same. It is still an avoidable gift.

Ironically, if the parent making the payment is required to do so under a divorce settlement incorporated into a divorce decree, the problem disappears. Why? Because the parent has a legal duty to pay that is enforceable by the divorcing spouse, and by making the payment the parent is relieved of part of that obligation. This is no different than when one pays a debt that is owed. The corresponding reduction in debt creates reasonable value in exchange.

Generally, in New Jersey, parents do not have a legal obligation (absent a divorce situation) to support their children after they achieve the age of majority or become “emancipated”.

There are ways around this problem for parents in financial difficulty. One option is to file bankruptcy first, then pay the college expenses out of future income or assets that are protected in bankruptcy (such as pensions or profit sharing plans),  after the bankruptcy is over. But for most people in this situation, they and their children need to have a sober and honest discussion about what is practical and in every one’s best interests in the long run.

Careful planning and advice of qualified professionals is a must. These are difficult decisions and should be thought through carefully as part of a broad based plan for getting a “fresh start”. With years of trustee and bankruptcy experience, we have the ability to help distressed parents sort it all out.

The Hardship Discharge for Student Loans

The Limited Circumstances Where You Can Discharge Student Loan Debt in Bankruptcy

Student with tabletIf you have overwhelming debt from financing a college education, you are not alone. According to recent studies, the average amount of debt college graduates face now exceeds $30,000. More than seven out of every ten graduates will have some type of debt. The average total student loan bill for graduates of for-profit colleges is nearly $40,000.

If you haven’t found a job that will allow you to repay that student debt, you may have considered bankruptcy as a way to get a fresh start. Unfortunately, it’s extremely difficult to discharge most student loan obligations in bankruptcy. Most, but not all “student loans” are made non-dischargeable unless you can prove “undue hardship”, which as we will see is a difficult test to pass.

Before we get to what you have to prove to get a student loan discharged, let’s clarify that not every loan which is used for education is made non-dischargeable. “Student loans” are those which were

  1. made, insured or guaranteed by a federal, state or other governmental unit;
  2. made under a program funded by a governmental unit or non-profit institution; or
  3. otherwise meet the tax qualifications for a “qualified education loan”; or
  4. arise from an overpayment of a scholarship, grant, stipend, or other educational benefit.

So the starting point is to find out what type of loan you have. Hopefully you saved or can get the loan papers. If your debt fits into one of the above categories, here’s what you need to demonstrate to have a chance of ridding yourself of student loan debt in a Chapter 7 proceeding.

The Undue Hardship Discharge

Under the generally-recognized “Brunner test” (named for a Supreme Court decision of that name, you must prove:

  • The you lack the financial resources to pay student loan debt and maintain a minimum standard of living
  • That you have tried, in good faith, to repay student loans
  • That there is no expectation that your financial situation will change for the foreseeable future

The determination that you lack the financial resources to repay student loans and have the basic needs of life is decided on a case by case basis, and can vary substantially. While the courts don’t necessarily require that you have no discretionary income, at least one court has held that a disposable income of less than $200 per month after expenses was not an undue hardship. It is a very hard test to meet.

New Jersey and Pennsylvania bankruptcy courts generally follow the Brunner test. Some other courts have applied what is called “the totality of the circumstances,” examining income, expenses, spending habits and other factors to determine whether the payment of student loan debt constitutes a dischargeable hardship.

The majority of courts hold that you must either discharge all of your student loan debt or none of it. Some, though, have approved or required a partial discharge of student loan debt based on hardship.

We recommend that clients with non-dischargeable student loans look into non-bankruptcy alternatives, including income-based repayment plans, and programs that discharge the loan after a period of time. These exist for federal loans, but not New Jersey state loans. In some cases, these valuable rights can be lost by use of a loan consolidation.

Another option is to use bankruptcy. While student loans may not be dischargeable, other debts may be, thus freeing up income to pay the student loans. We have also used Chapter 13 to create a five-year payment “breather” in which student loans get partially paid through the plan. While any unpaid balance on the student loans will still be due at the end of the plan, the “breather” can help get things back on track.

Contact Neuner & Ventura, LLP

To schedule an appointment, call our office at (856) 596-2828 or send us an e-mail. We do, however, reserve the right to charge a fee to review any work done by another attorney. Evening and weekend appointments are available upon request. There is no cost or obligation for your first meeting.

Representing Clients across South Jersey

The Best Option in Bankruptcy When You Have Student Loans

Overwhelmed by Student Loans? What’s Your Best Bankruptcy Option?

So you borrowed a lot of money to provide yourself with a college education, then you went out into the real world and found that getting a job can be tough. Maybe you experienced health problems, or went through a divorce. You may have considered bankruptcy as a way to get a fresh start, but you are uncertain whether you can use a bankruptcy petition to either discharge or restructure your student loans.

The General Rule

As a general rule, almost all student loan debts are not dischargeable in a bankruptcy proceeding. You can, however, seek to pay and satisfy student loan debt through a Chapter 13 filing. ,Your student loan debt will be treated as non-priority unsecured debt, similar to medical bills or credit card obligations. As such, when you put together your reorganization plan, during the 3 to 5 years of your Chapter 13 Plan your student loan creditors must accept the same pro-rata share of the amount you are able to pay all creditors. Unfortunately, if your plan does not provide for full payment of all unsecured debt, when the Chapter 13 bankruptcy period is over, you will still owe any remaining balance on your student loans. During the period of the bankruptcy, though, you may be able to delay or reduce student loan payments, and you won’t have to worry about any collection attempts.

The Hardship Exception

If you can show that you would incur an undue hardship if you have to pay your student loans, you may be able to have some or all of them discharged in a Chapter 7 proceeding. Most courts follow the Brunner test, a decision from New York, which allows discharge of student loan payments in bankruptcy only if you can show that you cannot maintain a minimal standard of living for you and your dependents if forced to pay your student loans, that your current financial condition is likely to continue for most of the repayment period, and that you have made a good faith effort to repay your student loans. In practical terms, this standard is hard to meet. The realityis that most federal bankruptcy courts take a conservative approach and discharge of student loan debt is extremely rare.

People who have student loans from schools that closed before the student completed studies, or made false certifications about the benefit of the program may have other means of getting a discharge of the student loan debt. Usually, these are trade and vocational schools.

Discharge and income based repayment plans available for most federal program student loans.

A better option for many people is to explore the programs available for most federal program student loans. The options here can include income based repayment plans or loan foregiveness after a period of years. People working for qualifying non-profit organizations or for certain government or public service fields may be eligible for a public service loan foregiveness. Death or disability are also possible grounds for loan foregiveness.

Whatever your situation, it is critical to collect together all the information about the type of loan program, the loan terms, and the account history. Hopefully you kept all this information. If not, try reaching out to the original school’s financial aid office.

Contact Neuner & Ventura, LLP

We understand the stress, anxiety and confusion that can be associated with a potential bankruptcy filing. We offer a free initial consultation to every client. For an appointment, call Neuner & Ventura at (856) 596-2828 or send us an e-mail. We do, however, reserve the right to charge a fee to review any work done by another attorney. Evening and weekend appointments are available upon request.

Representing Clients across South Jersey

Student Loan debt? Here are some resources and ideas

Student loans are one of the largest categories of consumer debt today. Many people are worried or struggling to pay these loans. Worse, any student loan under a government sponsored program or with government guarantees, AND private student loans that meet tax qualifications under section 221(d)(1) of the Internal Revenue Code are not dischargeable in bankruptcy.

However, there are programs that provide assistance with repayment or partial or full discharge of certain types of loans.

Federal loans have a variety of payment plans and options for those who qualify, including partial forgiveness of the loan, income contingent repayment plans, or extended payment terms, up to 25 years. These options are, at present, limited or non-existent for ParentPlus loans

Certain types of public service can qualify you for a partial discharge.

Loan consolidation is available, but has to be approached carefully. Done wrong it could result in loss of available repayment plan benefits.

Loan foregiveness may be available, especially if the loan was given to fund a trade school education where the school failed to pay a refund, falsified certain representations as to student benefit or made other false statements.

The first thing to do in these situations is to find or obtain the loan documents. A financial aid department may be a good resource. Better yet, when you take out the loans, be sure to keep all the paperwork and applications!

This area is complex and the results are very much a product of the particular type of loan and the facts. It never hurts to ask the government agency administering the loan program for advice and information. However, you should do your own research.

Here are some on-line resources we have heard about:

http://ibrinfo.org/

http://paybacksmarter.com/

For some people who are drowning in debt, a personal bankruptcy may be what is needed to eliminate other debt so more income can be devoted to repaying student loans.

 

Senate proposes new law to make some student loans dischargeable in bankruptcy

Student loans total about $1 trillion nationally. For many people they are the largest single debt obligation. There was a time when student loans could be discharged after 7 years. That was eliminated for student loans under federal or state loan programs. In 2005, Congress made even private student loans which were “tax qualified” non-dischargeable as well. As we have said before, this is an enormous burden for families, and it probably explains the explosive growth of tuition costs in the past decade.

Now, three Senators have introduced the Fairness for Struggling Students Act of 2013, which if passed would make only student loans made, insured, funded or guaranteed under a government program non-dischargeable. The accompanying statement points out that the private loans are a different animal, with different terms and few protections.

Whether this will pass is uncertain, but there is widespread recognition of the problem. Government programs do have “escape hatch” programs to reduce payments or even discharge loan obligations for those unable to pay them, or for those who meet certain government service requirements.

While laudable, this is not the entire solution. We support a program that would give student loans preferred status in Chapter 13, with a discharge upon meeting certain benchmarks, such as length of plan payment, or payment of a specified percentage.

Surely we should encourage and support people who seek advanced training or degrees. Such people are the key to future global competitiveness and economic security for all.

Anyone who is facing unmanageable student loan debt should explore their options. For many, this is not their only debt, and discharging other debt frees up income to pay these loans. Some loans have extended or income based repayment plans, or even non-bankruptcy hardship discharges. Our office has helped many such persons.

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