Bankruptcy Bankruptcy MASFSA Conference 2007MASFSA Conference 2007

Grand Rapids, MichiganGrand Rapids, Michigan

Karen Reddick, Scott Medley, & Karen Reddick, Scott Medley, & Kevin Hunt…Kevin Hunt…

This should be FUNThis should be FUN..

DisclaimerDisclaimer

This presentation should be construed as an overview This presentation should be construed as an overview of the issues discussed and not as legal advice to of the issues discussed and not as legal advice to anyone attending this presentation or reading the anyone attending this presentation or reading the accompanying handout. Specific legal questions accompanying handout. Specific legal questions regarding these concepts and their application to any regarding these concepts and their application to any institution of higher education should be directed to institution of higher education should be directed to your institution’s legal counsel. PS-WE ARE NOT your institution’s legal counsel. PS-WE ARE NOT LAWYERS!!! THIS IS FOR INFORMATIONAL LAWYERS!!! THIS IS FOR INFORMATIONAL PURPOSES ONLY!! FYI-Karen flunked out of an PURPOSES ONLY!! FYI-Karen flunked out of an online law school. Scott couldn’t get accepted. Kevin online law school. Scott couldn’t get accepted. Kevin poses as an attorney to get out of parking tickets.poses as an attorney to get out of parking tickets.

This is a last minute informal review This is a last minute informal review and discussion subject to…and discussion subject to…

PartnershipPartnershipPartners share benefits and risks and that is why understanding the bankruptcy reforms Partners share benefits and risks and that is why understanding the bankruptcy reforms make institutions and collection agencies better and more successful partners.make institutions and collection agencies better and more successful partners.

Bankruptcy ReformBankruptcy Reform

What do you know What do you know today?today?

What is the whole story?What is the whole story?

Where are we headed?Where are we headed?

Finally, what applies Finally, what applies right now?right now?

BankruptcyBankruptcy

Just when we thought Just when we thought things couldn’t get more things couldn’t get more confusing Congress confusing Congress passed and the President passed and the President signed the “Bankruptcy signed the “Bankruptcy Abuse Prevention and Abuse Prevention and Consumer Protection Act Consumer Protection Act of 2005” (BAPCA – S. of 2005” (BAPCA – S. 256)256)

Passed – April 14, 2005Passed – April 14, 2005

Signed – April 20, 2005Signed – April 20, 2005

BankruptcyBankruptcy

The following slides are meant to highlight The following slides are meant to highlight bankruptcy issues specific to higher bankruptcy issues specific to higher education collections and how those education collections and how those specifics affect institutional decisions specifics affect institutional decisions regarding bankrupt accounts hopefully not regarding bankrupt accounts hopefully not confuse you more.confuse you more.

Bankruptcy BasicsBankruptcy Basics

Article I, Section 8 of the U.S. Constitution grants Article I, Section 8 of the U.S. Constitution grants Congress the power to create “uniform Laws on the Congress the power to create “uniform Laws on the subject of Bankruptcies throughout the United States.”subject of Bankruptcies throughout the United States.”

This completely preempts states from handling bankruptcy issues This completely preempts states from handling bankruptcy issues and therefore all bankruptcy laws and cases are federal.and therefore all bankruptcy laws and cases are federal.

The bankruptcy code is found at 11 U.S.C. The bankruptcy code is found at 11 U.S.C. § 101, § 101, et seq.et seq.

Fundamentally bankruptcy is to give debtors a “fresh start” and to Fundamentally bankruptcy is to give debtors a “fresh start” and to place creditors in an appropriate priority for re-payment.place creditors in an appropriate priority for re-payment.

Bankruptcy StatisticsBankruptcy StatisticsMiddle class - $25K - $99KMiddle class - $25K - $99K92% of 1.6 million filers for 92% of 1.6 million filers for year ending June 30, 2003 year ending June 30, 2003 were middle class.were middle class.More people filed bankruptcy More people filed bankruptcy last year than suffered a heart last year than suffered a heart attack, were diagnosed with attack, were diagnosed with cancer, or graduated from cancer, or graduated from college.college.More children will endure a More children will endure a bankruptcy than a divorce.bankruptcy than a divorce.In 1981 69K women filed for In 1981 69K women filed for protection – In 1999 500K protection – In 1999 500K women filed – an increase of women filed – an increase of 662%.662%.Statistics from ACA International’s websiteStatistics from ACA International’s website

Bankruptcy TermsBankruptcy Terms

PetitionPetition – A bankruptcy – A bankruptcy begins when a begins when a voluntaryvoluntary or or involuntaryinvoluntary petition for petition for relief is filed in bankruptcy relief is filed in bankruptcy court.court.

Automatic stayAutomatic stay – 11 – 11 U.S.C. U.S.C. § 362 – prohibits § 362 – prohibits “all entities” from “any act “all entities” from “any act to collect” a debt during to collect” a debt during the bankruptcy.the bankruptcy.

TrusteeTrustee – Appointed by – Appointed by the court as the fiduciary the court as the fiduciary of the consumer. They of the consumer. They either convert assets to either convert assets to cash and distribute the cash and distribute the money or manage the money or manage the consumer’s repayment consumer’s repayment plan under Chapter 13.plan under Chapter 13.

Bankruptcy ChaptersBankruptcy Chapters

Chapter 7 – LiquidationChapter 7 – Liquidation

Chapter 11 – Business ReorganizationChapter 11 – Business Reorganization

Chapter 12 – Farm ProtectionChapter 12 – Farm Protection

Chapter 13 – Individual ReorganizationChapter 13 – Individual Reorganization

Chapter 7 - LiquidationChapter 7 - Liquidation

Most commonMost commonLiquidation – there are asset and no asset casesLiquidation – there are asset and no asset casesIndividual may only file once every 8 years. This Individual may only file once every 8 years. This is an increase from every 6 years and becomes is an increase from every 6 years and becomes effective Oct. 17, 2005.effective Oct. 17, 2005.Priority of payment is established in the code Priority of payment is established in the code and basically reads that expenses are paid, then and basically reads that expenses are paid, then secured creditors and finally unsecured secured creditors and finally unsecured creditors.creditors.Roughly 3-6 months to receive a dischargeRoughly 3-6 months to receive a dischargeThe ship has sunk The ship has sunk

Chapter 13 – Wage EarnerChapter 13 – Wage Earner

Debtor, with the Trustee, sets up a re-payment plan through Debtor, with the Trustee, sets up a re-payment plan through Bankruptcy Court.Bankruptcy Court.Debtor has some regular income.Debtor has some regular income.There are limits on the amounts of secured and unsecured debt a There are limits on the amounts of secured and unsecured debt a consumer can have to file under Ch. 13.consumer can have to file under Ch. 13.The plan must provide for all future earnings to be subject to the The plan must provide for all future earnings to be subject to the supervision and control of the Trustee and must provide for full supervision and control of the Trustee and must provide for full payment of all secured claims.payment of all secured claims.Nondischargeable student debt remaining unpaid following the Nondischargeable student debt remaining unpaid following the discharge survives the bankruptcy and is collectible with allowable discharge survives the bankruptcy and is collectible with allowable interest. interest. See See Leeper v. Pa. Higher Educ. AssistanceLeeper v. Pa. Higher Educ. Assistance, 49 F.3d 98 (3, 49 F.3d 98 (3rdrd Cir. 1995), Cir. 1995), Educational Credit Management Corp. v. KielischEducational Credit Management Corp. v. Kielisch, 252 BR 338 (E.D. Va. 2000)., 252 BR 338 (E.D. Va. 2000).

Roughly 3-5 years to receive a discharge.Roughly 3-5 years to receive a discharge.The ship is sinking…you may be able to save itThe ship is sinking…you may be able to save it

DismissalDismissal

Trustee or a creditor may petition the Trustee or a creditor may petition the Bankruptcy Court for a dismissal.Bankruptcy Court for a dismissal.

Being dismissed means the debtor does Being dismissed means the debtor does not qualify, under the code, as bankrupt.not qualify, under the code, as bankrupt.

Bankruptcy Court may also dismiss a Bankruptcy Court may also dismiss a debtor for “substantial abuse” of the debtor for “substantial abuse” of the Bankruptcy Code.Bankruptcy Code.

The KEY – Dismissal The KEY – Dismissal ≠ Discharge≠ Discharge

DischargeDischarge

Generally a debtor receives a discharge from Bankruptcy Generally a debtor receives a discharge from Bankruptcy Court when they have met the requirements of the Code Court when they have met the requirements of the Code under the Chapter in which their bankruptcy was under the Chapter in which their bankruptcy was governed. All dischargeable debts are effectively governed. All dischargeable debts are effectively discharged and are no longer owed.discharged and are no longer owed.

IMPORTANT – Whether or not a debt is discharged is IMPORTANT – Whether or not a debt is discharged is governed by the Bankruptcy Code and by case law, but governed by the Bankruptcy Code and by case law, but not by the debtor or the creditor. not by the debtor or the creditor.

Have the student look at their Discharge Order with you. Have the student look at their Discharge Order with you. Show them that the court has not discharged the student Show them that the court has not discharged the student debt owed to your institution.debt owed to your institution.

Exceptions to DischargeExceptions to Discharge

11 U.S.C. 11 U.S.C. § 523(a)(8).§ 523(a)(8).

This definition has changed under the new This definition has changed under the new law effective Oct. 17, 2005. law effective Oct. 17, 2005. The change The change should prove to benefit institutions of should prove to benefit institutions of higher education.higher education.

Old 11 U.S.C. Old 11 U.S.C. § § 523(a)(8)523(a)(8)

““(a) A discharge under … this title does not discharge an (a) A discharge under … this title does not discharge an individual debtor from any debt—individual debtor from any debt— (8) for an (8) for an educational benefit overpaymenteducational benefit overpayment or loan or loan

made, insured or guaranteed by a governmental unit, made, insured or guaranteed by a governmental unit, or made under any program funded in whole or in part or made under any program funded in whole or in part by a governmental unit or nonprofit institution, or for by a governmental unit or nonprofit institution, or for an obligation to repay funds received as an an obligation to repay funds received as an educational benefit, scholarship or stipend, unless educational benefit, scholarship or stipend, unless excepting such debt from discharge under this excepting such debt from discharge under this paragraph will impose an undue hardship on the paragraph will impose an undue hardship on the debtor and the debtor's dependents” debtor and the debtor's dependents”

New 11 U.S.C. New 11 U.S.C. § 523(a)(8)§ 523(a)(8)

““(a) A discharge under … this title does not (a) A discharge under … this title does not discharge an individual debtor from any debt—discharge an individual debtor from any debt— (8) unless excepting such debt from discharge under (8) unless excepting such debt from discharge under

this paragraph would impose an undue hardship on this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for the debtor and the debtor’s dependents, for

(A)(i) an educational benefit overpayment or loan (A)(i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part or made under any program funded in whole or in part by a governmental unit or a nonprofit institution; orby a governmental unit or a nonprofit institution; or

New 11 U.S.C. New 11 U.S.C. § 523(a)(8) – cont.§ 523(a)(8) – cont.

(A)(ii) an obligation to repay funds received as an educational (A)(ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or benefit, scholarship, or stipend; or

(B) any other educational loan that is a (B) any other educational loan that is a qualified education qualified education loanloan, as defined in section 221(d)(1) of the Internal Revenue , as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual.”Code of 1986, incurred by a debtor who is an individual.”

The difference is the addition of the term The difference is the addition of the term ““qualified qualified education loaneducation loan”” as defined under federal law and as defined under federal law and whether this definition will clear some of the current whether this definition will clear some of the current questions in our industry about what type of debt is questions in our industry about what type of debt is discharged.discharged.

Internal Revenue Code Internal Revenue Code §§ 221(d)(2) 221(d)(2)

““qualified higher education expense is qualified higher education expense is defined to mean – defined to mean – ““the cost of attendancethe cost of attendance (as defined in (as defined in

section 472 of the Higher Education Act of section 472 of the Higher Education Act of 1965 as in effect on the day before the date of 1965 as in effect on the day before the date of enactment of this Act) as an eligible enactment of this Act) as an eligible educational institution…”educational institution…”

Section 472 of the HEASection 472 of the HEA20 U.S.C. 1087ll20 U.S.C. 1087ll

Cost of Attendance = Cost of Attendance = Tuition/Fees normally assessed a student Tuition/Fees normally assessed a student including materials and equipment for students including materials and equipment for students in the same course of study.in the same course of study.Books/Supplies/Misc. Personal ExpensesBooks/Supplies/Misc. Personal ExpensesRoom & BoardRoom & Board

The statute should be reviewed for the context of each item listed The statute should be reviewed for the context of each item listed above.above.

Clearly this definition is broader than the current interpretation.Clearly this definition is broader than the current interpretation.

The Future of 523(a)(8)The Future of 523(a)(8)

Some institutions will test current case law in an Some institutions will test current case law in an effort to implement the new definition and effort to implement the new definition and broaden the scope of 523(a)(8).broaden the scope of 523(a)(8).

Also, there may be technical amendments to the Also, there may be technical amendments to the law in an effort to clarify ambiguities.law in an effort to clarify ambiguities.

Many aspects of this will take some time to sort Many aspects of this will take some time to sort out through the courts.out through the courts.

What are other attorneys saying regarding this What are other attorneys saying regarding this analysis?analysis?

The Future of 523(a)(8)The Future of 523(a)(8)

While this body of law develops it is While this body of law develops it is important to look at what other attorneys in important to look at what other attorneys in the industry are saying.the industry are saying.

The consensus appears that be that the The consensus appears that be that the new language will at least maintain the new language will at least maintain the status quo and at most broaden the types status quo and at most broaden the types of institutional debt that are not discharged of institutional debt that are not discharged through bankruptcy.through bankruptcy.

The only way out!!The only way out!!

When you are holding a non-When you are holding a non-dischargeable student loan, the only way dischargeable student loan, the only way for the debtor to have that debt discharged for the debtor to have that debt discharged is to petition the court for an adversary is to petition the court for an adversary hearing and then to receive from a judge a hearing and then to receive from a judge a finding of “undue hardship.”finding of “undue hardship.”

Undue HardshipUndue Hardship

The Majority Test – See The Majority Test – See Brunner v. New York State Brunner v. New York State Higher Educ. Services Corp., Higher Educ. Services Corp., 831 F.2d 395 (2d Cir. 831 F.2d 395 (2d Cir. 1987).1987).

Three elements must be proven by a preponderance of the Three elements must be proven by a preponderance of the evidence.evidence.

Based on current income and expenses the debtor cannot maintain Based on current income and expenses the debtor cannot maintain a minimal standard of living.a minimal standard of living.

This situation is likely to persist for the duration of the repayment This situation is likely to persist for the duration of the repayment period.period.

A good faith effort has been made to repay the loans.A good faith effort has been made to repay the loans.

Often you will see an intervening circumstance that has Often you will see an intervening circumstance that has dramatically affected the debtor’s earning potential. dramatically affected the debtor’s earning potential.

Bankruptcy Abuse Prevention and Consumer Bankruptcy Abuse Prevention and Consumer Protection Act of 2005Protection Act of 2005

Passed by Congress on April 14, 2005 and Passed by Congress on April 14, 2005 and signed by President Bush on April 20, 2005.signed by President Bush on April 20, 2005.Takes affect on October 17, 2005.Takes affect on October 17, 2005.Overhauls many portions of the current Overhauls many portions of the current bankruptcy code and provides some additional bankruptcy code and provides some additional protection for creditors.protection for creditors.Many in the “consumer bar” are displeased and Many in the “consumer bar” are displeased and this bodes well for creditors.this bodes well for creditors.The first major revision to the Bankruptcy Code The first major revision to the Bankruptcy Code since 1987.since 1987.

BAPCA HighlightsBAPCA Highlights

Creditor may challenge a debtor’s eligibility Creditor may challenge a debtor’s eligibility under Chapter 7.under Chapter 7.A dismissal may result from debtor abuse.A dismissal may result from debtor abuse.Debtors under Ch. 7 must meet the median Debtors under Ch. 7 must meet the median income test and the means test. Failure to do so income test and the means test. Failure to do so creates a presumption of abuse.creates a presumption of abuse.Credit counseling is mandated.Credit counseling is mandated.Broader exemptions for retirement savings.Broader exemptions for retirement savings.Years increased from 6 to 8 for following a Ch. 7 Years increased from 6 to 8 for following a Ch. 7 with another Ch. 7.with another Ch. 7.

TranscriptsTranscripts

Does bankruptcy affect our policy of Does bankruptcy affect our policy of placing holds on transcripts?placing holds on transcripts?

This is specific to the jurisdiction of the This is specific to the jurisdiction of the bankruptcy and the case law should be bankruptcy and the case law should be reviewed to make an informed decision.reviewed to make an informed decision.

CASE LAW CASE LAW UPDATEUPDATE

-In re -In re Fields, Fields, 151 CBN 391 (Bankr. 6151 CBN 391 (Bankr. 6thth Cir. 2005) Cir. 2005)

Debtor filed for Chapter 7 relief less than 2 months after her Debtor filed for Chapter 7 relief less than 2 months after her student loans became due.student loans became due.

Debtor asked Court to discharge $129,801 in student loans she Debtor asked Court to discharge $129,801 in student loans she incurred while obtaining a Master of Science degree in health incurred while obtaining a Master of Science degree in health promotion.promotion.

The Bankruptcy Court found that the debtor failed to prove The Bankruptcy Court found that the debtor failed to prove undue hardship under the Brunner test, but that the substantial undue hardship under the Brunner test, but that the substantial amount of debt warranted partial discharge of her student loan.amount of debt warranted partial discharge of her student loan.

The Court stated that while she could pay some of the debt, her The Court stated that while she could pay some of the debt, her ability to repay it all “bordered on hopeless”.ability to repay it all “bordered on hopeless”.

CASE LAW UPDATE CASE LAW UPDATE --Barrett v. Educational Credit Management Corporation, Barrett v. Educational Credit Management Corporation, 337 337

B.R. 896 (B.A.P. 6B.R. 896 (B.A.P. 6thth Cir. 2006). Cir. 2006).

Debtor made no payments toward student loans due to economic Debtor made no payments toward student loans due to economic hardship deferments. hardship deferments.

Court held debtor met the “Brunner” good faith payment prong. Court held debtor met the “Brunner” good faith payment prong.

““Where there is no reasonable likelihood that the Debtor will ever be Where there is no reasonable likelihood that the Debtor will ever be able to repay his student loans, the IRCP fails to provide a reasonable able to repay his student loans, the IRCP fails to provide a reasonable alternative to a discharge for undue hardship.”alternative to a discharge for undue hardship.”

CASE LAW UPDATE CASE LAW UPDATE -Brunnell v. CITIBANK, -Brunnell v. CITIBANK, 356 B.R. 567, (Bkr. Ct. Dist. of 356 B.R. 567, (Bkr. Ct. Dist. of

Mass., December 8, 2006). Mass., December 8, 2006).

41 Year old divorced mother of 3 did not satisfy “undue hardship 41 Year old divorced mother of 3 did not satisfy “undue hardship burden” in regard to student loan debt exceeding $200,000.burden” in regard to student loan debt exceeding $200,000.

The debtor had a Master’s degree and was working toward a The debtor had a Master’s degree and was working toward a Ph.D. Ph.D.

The Court held that while debtor’s current level of income was The Court held that while debtor’s current level of income was not sufficient to make payments, the evidence demonstrated not sufficient to make payments, the evidence demonstrated that her prospects for a steady increase in income over time that her prospects for a steady increase in income over time were promising.were promising.

CASE LAW UPDATE CASE LAW UPDATE -French v. NCO Financial Systems, -French v. NCO Financial Systems, 2006 Bankr. LEXIS 2006 Bankr. LEXIS

2221 (Bankr. S.D.NY., Aug. 31, 2006).2221 (Bankr. S.D.NY., Aug. 31, 2006).

Court held that debtor failed to meet burden of “undue hardship” because Court held that debtor failed to meet burden of “undue hardship” because she failed to demonstrate additional circumstances indicating that her she failed to demonstrate additional circumstances indicating that her financial difficulties were likely to continue for a significant portion of financial difficulties were likely to continue for a significant portion of repayment period, and she did not demonstrate good faith effort to repay repayment period, and she did not demonstrate good faith effort to repay loans because she only made 20 months of payments in 14 years.loans because she only made 20 months of payments in 14 years.

--Kitterman v. Sallie Mae Servicing, L.P., Kitterman v. Sallie Mae Servicing, L.P., 349 B.R. 775 349 B.R. 775 (Bankr., W.D. of Kentucky, August 30, 2006). (Bankr., W.D. of Kentucky, August 30, 2006).

Court held that excepting student loans from discharge did not pose Court held that excepting student loans from discharge did not pose undue hardship where debtor chose to pursue employment in a field other undue hardship where debtor chose to pursue employment in a field other than the one in which he was educated, and because debtor failed to than the one in which he was educated, and because debtor failed to reapply for income contingent consolidation loan he did not make good reapply for income contingent consolidation loan he did not make good faith efforts to repay loan.faith efforts to repay loan.

CASE LAW UPDATE CASE LAW UPDATE --McKay v. The Vanderbilt University, McKay v. The Vanderbilt University, 2007 U.S. Dist. 2007 U.S. Dist.

LEXIS (Dist. of Oregon, March 19, 2007). LEXIS (Dist. of Oregon, March 19, 2007).

The Court held that debt acknowledged by an executed The Court held that debt acknowledged by an executed “Graduate and Professional Student Account and Deferment “Graduate and Professional Student Account and Deferment Agreement” qualified as a non-dischargeable student loan debt Agreement” qualified as a non-dischargeable student loan debt where the nature of the debt was to provide debtor with the where the nature of the debt was to provide debtor with the convenience of charging tuition and related educational convenience of charging tuition and related educational expenses to an account which would be paid monthly or late expenses to an account which would be paid monthly or late fees would be added.fees would be added.

Deferred amounts were to be paid in full by dates certain near Deferred amounts were to be paid in full by dates certain near end of each semester. The Court stated that “in addition to the end of each semester. The Court stated that “in addition to the convenience, the educational benefit to debtor was that she convenience, the educational benefit to debtor was that she could start classes without paying tuition upfront.could start classes without paying tuition upfront.

CASE LAW UPDATECASE LAW UPDATE

State of Mich. Vs. Hunt, Reddick, MedleyState of Mich. Vs. Hunt, Reddick, Medley

Dist. of Michigan May 22, 2007Dist. of Michigan May 22, 2007

Group attempted to give legal advice and Group attempted to give legal advice and something went horribly wrong…something went horribly wrong…

Questions?Questions?

In Conclusion….In Conclusion….

Thank you very much for your attention today. I hope a Thank you very much for your attention today. I hope a better understanding of the topics discussed will assist better understanding of the topics discussed will assist each institution in improving their overall approach to each institution in improving their overall approach to collections. Please feel free to contact us with any collections. Please feel free to contact us with any additional questions or concerns. All negative comments additional questions or concerns. All negative comments and remarks should be kept to yourself. However all and remarks should be kept to yourself. However all praise and admiration should be showered upon the praise and admiration should be showered upon the presenters in the form of cash:presenters in the form of cash:Autographs $5.00 Pictures with Autographs $10.00 on Autographs $5.00 Pictures with Autographs $10.00 on the North Concourse registration table.the North Concourse registration table.