Bankruptcy and Student Loans: Another Infographic

The infographic below provides a summary of the student loan debt problem and the limitations of the current bankruptcy law to resolve that problem.  For a more in depth review of these issues see our previous post: Can bankruptcy help with my student loans?.



From: OnlineColleges.net

Reprinted from OnlineColleges.net.

Kelsey & Trask, P.C. provides this graphic for informational purposes only. We do not endorse nor claim endorsement from the source site or organization. Kelsey & Trask, P.C. is not responsible for any information contained therein, unless indicated specifically on that site.

What to do when you receive a Notice of Bankruptcy? Step 3: Identify Deadlines.

If you receive a Notice of Bankruptcy, it will contain certain deadlines and meeting dates.  The sample below shows where some of those deadlines will appear:

These dates are important because they limit what you can and cannot do in a case, and if you miss any of these deadlines you may have given up your rights to make certain objections or claims.  You should read the Notice carefully to make sure you understand all of the information contained therein.  To highlight some of these limits we have indicated them with red arrows in the sample Notice above.

Some of the important dates and limitations that appear on the Notice are as follows, in descending order as they appear on the Notice:

The date of filing:  This is the date that the debtors case was filed with the court and some of the other dates will depend on this date.

The meeting of creditors:  This is the date that the Section 341 Meeting of Creditors is first scheduled to take place.  The Creditor's Meeting is scheduled about 30 to 45 days after the bankruptcy petition is filed. At least seven days before this meeting, the debtor is required to provide to the trustee and any creditor requesting it a copy of their most recently filed tax returns and proof of income for the most recent 90-day period. The court-appointed Chapter 7 trustee will preside over this meeting. At the meeting, which the debtor is required to attend, the debtor will be asked to testify under oath as to the accuracy of the statements in the petition. Creditors have a right to attend this meeting and ask questions, though they are not required to.

Deadline to object to discharge or to challenge the dischargeability of certain debts:  
A creditor may object to the discharge of amounts owed to them by the debtor under certain circumstances. If a creditor objects to the discharge of any of the debts listed in the petition or schedules, such objection must be raised within 60 days after the first scheduled §341(a) Meeting of Creditors.  If you do not raise such an objection in a timely manner you risk waiving that right and having any such debt discharged.

Deadline to object to exemptions:  Certain property claimed by the debtor to be exempt (not reachable by creditors), may be claimed as exempt in error.  If that is the case, then that property might be used to pay creditors.  Once the §341(a) Meeting is concluded, creditors only have 30 days to object to these exemptions after which the trustee may (and likely will) release all of this exempted property back to the debtor.

Deadline for financial management course:  The debtor must take a financial management course within 60 days after the first scheduled §341(a) Meeting of Creditors, and if they don't they might not receive their discharge.

Automatic Stay: Immediately upon the filing date, an automatic stay prevents creditors from taking certain actions against the debtor.  If you violate the automatic stay you may be subject to sanctions and fines by the bankruptcy court.  You should ensure that you do not take any action against the debtor after the filing date without consulting with a bankruptcy attorney to ensure that you are not violating the automatic stay.

There may be other deadlines in cases that are different from the Chapter 7 no asset case in our example.  For example, in a case with assets there will also be a deadline for filing a Proof of Claim.    To ensure that you know all of the deadlines and meeting dates read your Notice carefully.

Once you understand what your deadlines are, the next step is to identify: What is your exposure to liability if the debtor receives their discharge?

Can bankruptcy help with my student loans?

Student loans have become a larger and larger portion of the average consumer's debt. As a country, our student loan debt is now higher than consumer spending debt. While consumer spending debt can typically be discharged in a bankruptcy, though, most student loan debt cannot.

As described in this infographic, student loan debt is exempt from many of the protections that consumers have available when it comes to other debts. If that seems unfair to you, then you're not alone. A few of our fellow legal bloggers have written some compelling posts on the necessity of changing the law on bankruptcy when it comes to student loans, and even the president has weighed in in favor of making a change.

However, until the law is changed, the current status is bleak for most. While a Chapter 13 plan can help you structure the payments and potentially stop wage garnishments, it will not reduce the overall debt, and at the end of the plan you may be back in the same position. In a Chapter 7, student loans are considered a non-dischargeable debt unless you can show "undue hardship." In the Brunner case, the U.S. Court of Appeals 2nd Circuit admits that that their is little help in the statute for defining what constitutes an "undue hardship."

The Court in that case required a three-part test to show undue hardship:

"(1) that the debtor cannot maintain, based on current income and expenses, a "minimal" standard of living for herself and her dependents if forced to repay the loans;

(2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and

(3) that the debtor has made good faith efforts to repay the loans."

Essentially this means that to discharge the debt you have to show that you can't pay the loan now, you tried to pay the loan, and it is not likely you will be able to pay the loan before you die. Many believe this test limits the benefits of the "undue hardship" clause to the elderly or terminally ill.

For most, the best option may not be bankruptcy at all, at least not to deal with student loan debt. Until and unless the law changes, the Income Based Repayment Plan available through the Department of Education is the only option for reducing the burden of student loans when a partial financial hardship exists.

If you still think this is unfair, tell congress that you want it changed.

Florida Case Provides Textbook Example of How to Handle a Discharge Violation

A case involving an elderly woman and egregious violations of the discharge has generated a bit of buzz in the blogosphere. I first noticed it here on the Huffington Post. I decided to write about this case because I was frustrated with trying to verify the posts and because I think ithe case offers a good example of how to efficiently deal with a discharge violation. The case is In re Anita Smith, No. 6:08-bk-01035, which can be found here.

What Happened

The Debtor filed a chapter 7 petition on February 15, 2008. One of the debts that she listed was a mortgage debt owing to Countrywide Home Lending. The debtor surrendered the property during the chapter 7. The Debtor received a discharge on June 6, 2008 and Countrywide received notice of the discharge. Bank of America acquired Countrywide and obtained a judgment of foreclosure upon the real property.

At some point, Bank of America began calling the Debtor to try to try to collect upon the debt. Neither the opinion nor the motion say when the calls started, but on June 24, 2010, the Debtor's lawyer sent a polite letter to Bank of America informing them that they were violating the discharge.

The calls continued. In fact, at least fifty calls were made after the first letter.

The Debtor's attorney sent a second letter on November 16, 2011. The second letter informed Bank of America that the Debtor "is 79 years old, in deteriorating health, and has been hospitalized recently."

The calls continued.

The Debtor called Bank of America twice in November and December 2011 to ask them to stop calling.

The calls continued. There were forty-nine calls during a three week period from November 16, 2011 to December 6, 2011.

At this point, Debtor's counsel filed a Motion to Reopen the Case and a Motion for Sanctions.

Bank of America did not appear for the sanctions hearing.

The Court's Ruling

The Court did not have any problem finding a violation of the discharge. It stated:

Bank of America's behavior was intentional, egregious, and extreme. It blatantly and willfully ignored the discharge injunction, despite having received multiple notices of the discharge and requests to discontinue its collection efforts. Bank of America acted in bad faith. Its repeated telephone calls to the Debtor were vexatious and oppressive. Bank of America committed ninety-nine separate willful violations of the Debtor's discharge injunction.

Opinion, p. 5.

The Court awarded actual damages of $10,000.00 for "significant aggravation, emotional distress, and inconvenience." Opinion, p. 5. The Court stated:

Emotional distress constitutes actual damages. (citation omitted). Emotional distress is expected to occur where the conduct is egregious or extreme. (citation omitted). Significant emotional distress is readily apparent where the conduct is egregious and corroborating medical evidence is not required. (citation omitted). Entitlement to emotional distress damages exists "even in the absence of an egregious violation, if the individual in fact suffered significant emotional harm and the circumstances surrounding the violation make it obvious that a reasonable person would suffer significant emotional harm. (citation omitted.).

The Debtor's emotional distress is readily apparent due to Bank of America's intentional, egregious and extreme conduct. She is not required to present corroborating medical evidence. (citation omitted).

Opinion, pp. 8-9.

The Court awarded actual damages of $10,000.00 and attorney's fees of $1,500.00.

What the Debtor and the Debtor's Attorney Did Right

My firm is in the unusual position that we both represent debtors in bankruptcy and defend debt collectors accused of violating the stay or the discharge. In the former capacity, it is not unknown to get hit with a complaint that goes on for pages and pages of boilerplate allegations based on a few isolated contacts with no cease and desist letter from counsel.

In this case, counsel sent not one but two cease and desist letters. In the second letter, counsel specifically informed Bank of America that his client was elderly and, as a result, very sensitive, to continued calls. Counsel also had the Debtor document the continuing violations. The Motion for Sanctions details forty-nine (49) specific violations, identifying them by date and time.

Debtor's counsel also showed considerable restraint in filing a motion for sanctions rather than a complaint. While many plaintiff's lawyers prefer to file an adversary proceeding, there is no reason why contempt cannot be dealt with by motion. In this case, the debtor's attorney was able to proceed from motion to written opinion in a mere six weeks with only five hours of attorney time. Debtor's counsel was able to obtain relief for his client in a prompt, efficient manner. In my opinion, counsel placed his client's well-being ahead of his ability to recover fees, which is commendable.


A Note on Accuracy in the Blogosphere

Blogs sometimes get a bad reputation. When my daughter was doing a research project recently, her professor forbade the use of blogs as authority on the basis that they were "just someone's opinion." At A Texas Bankruptcy Lawyer's Blog, I make it a practice to provide case citations and links to original documents so that the reader can verify the accuracy of my comments. In this case, neither the initial post from The Bankruptcy Law Network nor the followup on The Huffington Post, provided much information from which the facts could be verified. Indeed, it is entirely possible that we are writing about different cases. I found the case that I wrote about above by researching recent opinions from Judge Arthur Briskman involving Bank of America. However, the case that I wrote about involved ninety-nine (99) violations, while the other posts refer to a case with thirty-eight (38) violations. While the failure to provide attribution may have led me to a more egregious case, it could just as well have caused the reader to dismiss it as unsubstantiated rumor.