What happens to my student loan debt in a chapter 13?

25 April 2013

It depends.  Student loan debt is not dischargeable in bankruptcy, generally, under chapter 7 or chapter 13.  So, as opposed to other unsecured debt, like credit card debt, it will still be owed at the end of the chapter 13 plan.  This makes student loan debt quite unique and a topic of ongoing concern in bankruptcy circles, especially now when student loan debt is such a prevalent problem in today’s society.  But there may be some hope (read on).

Here are the mechanics.  Student loan creditors, like other creditors, will need to file a claim in the chapter 13 to get paid.  When they do, they will be entitled to the pro rata share any unsecured creditor is to receive from the chapter 13 trustee from the chapter 13 payments.  Since a student loan usually requires a certain monthly payment, sometimes this means that the student loan will not receive enough to maintain the payments.  Although certain collection activity is prohibited during the chapter 13, this can still lead to late fee and other charges as well and a not-so-good balance when the chapter 13 ends.

This has led bankruptcy attorneys to try and create a solution to this problem within the law, and legal creativity, if you will, has been employed with some success.  The challenge is whether student loan debt can be separately classified.  You see, bankruptcy separates debts/claims into classes.  Student loans would normally be classified as a regular unsecured debt and treated as described above.  The only difference usually is that it will not be dischargeable.  Most bankruptcy judges have decided that that is not enough to separately classify student loan debt so it receives more than the other unsecured creditors during the chapter 13.  But a minority has.  The legal question involves the interplay between § 1322(b)(1), which does not allow for classification to “discriminate unfairly” against any class and § 1322(b)(5), which allows for the curing and maintenance of claims that the last payment due on is after the last payment of the proposed chapter 13 plan.  Whether it is possible for you depends on the prevailing interpretation in your district.

However, there are some situations that have been deemed to be different enough to allow student loans to be separately classified and therefore receive regular payments (or some other treatment) during the plan.  In one case, a bankruptcy court decided that not allowing the debtor to make the regular payments would result in the debtor owing more in student loans at the end of the case then at the beginning.  In re Webb, 370 B.R. 418 (Bankr. N.D. Ga. 2007).  One case in Massachusetts also employed similar reasoning in part.  In re Machado, 378 B.R. 14 (Bankr. D. Mass. 2007).  In another case, the debtor’s optometry license, and thus ability to work in that profession, required debtor to be current his student loan.   In re Kalfayan, 415 B.R. 907 (Bankr. S.D. Fla. 2009).  The court also noted that the unsecured creditors would benefit from the debtor keeping the license as well.  In another case, separate classification was permitted when it enabled the debtor to participate in the Public Service Loan Forgiveness Program and eliminate a significant amount of student loan debt through that program.  In re Pracht, 464 B.R. 486 (Bankr. M.D. Ga. 2012). 

In the event that you are considering filing a chapter 13 and have student loan debt we invite you to consider our office for representation and give us a call.

Bankruptcy audits and their recent indefinite suspension.

25 April 2013

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 gave the US Trustee’s office the power to audit consumer bankruptcy cases for fraud and abuse.  It was to identify “material misstatements” to root out fraud and abuse.

 

The way it worked in practice in the past was that an accounting firm notified the debtor that the case had been selected for audit.  The notice would request certain documents, such as tax returns, bank statements, and pay advices (pay stubs) to be provided within a certain period of time.  If you did not provide the documents/information, there was a problem.  Upon receipt of the documents/information, the accounting firm conducted the audit, presumably performing the same calculations the debtor and his attorney would perform, and assess whether there were material misstatements.  In the US Trustee’s 2012 it described what the auditors do.  It stated in part: 

 

An audit consists of a comparison between selected items on a debtor’s originally filed bankruptcy papers and documents produced by the debtor at the request of the audit firm. Audit firms also conduct at least two searches using commercially and publicly available database services to look for unreported assets and to verify the market value of assets. 

            There are 2 ways that a bankruptcy case can be audited.  One is simply random.  The other is called an exception audit.  The US Trustee’s report described the 2 types of audits in this way:

Random audits are selected randomly from all consumer bankruptcy cases within a federal judicial district. In contrast, cases designated for exception audit must meet specific criteria established by the USTP. These criteria are based on income or expenditures greater than a statistical norm for the district where the case was filed, as specified under uncodified section 603(a)(2)(C) of the BAPCPA.

The US Trustee’s 2012 annual report shows that material misstatements were found in about 16% of consumer cases that were randomly audited and in 31% of cases selected for an exception audit. A material misstatement was found in twenty-five percent of case overall.  Although this does not mean that the US Trustee’s office took substantive action upon the finding of a material misstatement, such as seeking to object to the debtor’s discharge, but it certainly is something you want to avoid if you are a debtor. 

 

In March of this year the US Trustee’s office made the following announcement, in part, concerning audits:

As authorized in Section 603(a) of Public Law 109-8, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), the United States Trustee Program (USTP) established procedures for independent audit firms to audit petitions, schedules, and other information in consumer bankruptcy cases. Pursuant to 28 U.S.C. § 586(f), the USTP contracted with independent accounting firms to perform audits in cases designated by the USTP.

Due to budgetary constraints, the USTP has indefinitely suspended its designation of cases subject to audit and has notified the independent accounting firms performing the audits.

 . . . .

            Despite the fact that audits have been suspended for now, an audit is just one component of the bankruptcy system designed to ensure that debtors are honest, forthcoming, and accurate.  It is still imperative to make sure a debtor handles a filing correctly.  In the event that you are considering engaging an attorney to represent you in a bankruptcy, please feel free to call.

How the Eaton decision applies to future cases and why legal arguments need to be presented carefully.

8 April 2013

Massachusetts Lawyers Weekly contains a column titled THIS WEEK’S DECISIONS that presents a summary of recent court decisions.  This author was recently reading the March 11, 2013, edition and came upon two apparently conflicting decisions that each applied a new rule handed down in the now well known Eaton decision.  In Eaton, the Massachusetts Supreme Judicial Court ruled that a party foreclosing by way of a power of sale (through Mass. Gen. Laws c. 244 § 14) must hold both the mortgage and the note or be the note holder’s authorized agent prior to the notice of sale/foreclosure in order to foreclose.  Eaton v. Federal Nat’l. Mort. Ass’n, 462 Mass. 569 (June 22, 2012).  In each case, the homeowner raised the Eaton rule and argued that the foreclosure was (or going to be) invalid.  The real issue was whether the Eaton rule applied to their case.  This is because contrary to how cases are usually to be applied, the legal rule established in the Eaton decision is to apply prospectively, that means only after the Eaton case was decided, which was on 22 June 2012. 

 

In both cases, the notices of sale/foreclosure were made before the Eaton case was decided on 22 June 2012, and presumably, the foreclosing party did not hold the note and mortgage, so it would appear that the foreclosing party was violating the Eaton rule that said the foreclosing party needs to have both the note and mortgage.  The first case, HSBC Bank USA, N.A. v. Norris, applied the Eaton rule and found in favor of the homeowner.  HSBC Bank USA, N.A. v. Norris, Mass. App. Ct. No. 11-P-1916, decided Feb. 28, 2013 (unpublished).   The bank argued that Eaton did not apply because it was to only apply prospectively, but the court rejected the bank’s argument and applied the Eaton rule. 

The second case, Kitner v. Mortgage Lenders Network USA, Inc., decided in favor of the bank and found, in part, that the Eaton rule did not apply because Eaton was only to apply prospectively (after 22 June 2012).  Kitner v. Mortgage Lenders Network USA, Inc.,  Docket No.  MICV 2001-02078, Mass. Sup. Ct., decided Feb. 8, 2013). 

Keep in mind that these decisions seem to conflict as they were issued just about the same time (hence they appeared in the same issue of Massachusetts Lawyers Weekly).  It would also seem that Norris was decided incorrectly and the Kitner case was decided correctly because in both cases the notices of sale/foreclosure occurred prior to when Eaton was decided, so the Eaton rule requiring the bank to hold the note would not apply to it.

            However, like many legal issues it takes a closer look to see the differences and not leave the matter with a mistaken understanding. Only after this author probed further and accessed the entire Norris decision from a different source, and was not just operating with the summary that appeared in Massachusetts Lawyers Weekly, was the significant difference discovered.  The timing was different.  In the Norris case the homeowner was making the same argument in his appeal as the argument made in the appeal process in Eaton.  For this reason, although Eaton was decided first and was to be applied prospectively, the Appeals Court ruled it would be unfair to treat Norris any differently than Eaton simply because Norris’ case was issued by an appellate court later.  And in Eaton, although it was applied prospectively, the new rule was applied to Eaton himself.  With this in mind, the Appeals Court decided, it should apply to Norris himself as well.  This is different than the Kitner case where the legal argument was being made after the Eaton decision was issued. 

          The initial take away is that Eaton applies prospectively and unless your legal argument has already been made, for a foreclosure that occurred prior to 22 June 2012, the foreclosing party did not need to have the note in addition to the mortgage.

            The rationale expressed in the Norris decision may seem somewhat esoteric.  But it is not just these cases and the Eaton rule and how it applies that this post is about.  The last and more important point is about what is necessary to avoid a legal misunderstanding.  A misunderstanding is likely to occur when someone is not able to see the differences between factual situations and legal decisions or between factual situations a person is experiencing and the factual situations that were at hand in certain legal decisions.  Not seeing the differences occurs for various reasons, including failure to put the time and energy into studying the issue (like what would of happened to this author today if further investigation was not undertaken) and unfamiliarity with the legal system.  What happens frequently is a person observes a legal result and assumes that the same result will occur for them and fails to recognize or appreciate the aforementioned differences.

In the event that you are facing a legal matter and seek help in discerning such differences or want to know how a certain rule or law will apply in your case, feel free to give us a call.