Student Loans in Bankruptcy 2014 NCHER Fall Legal Meeting September 26, 2014 - Washington, DC Presented by: Alane A. Becket Becket & Lee, LLP Malvern, PA abecket@becket-lee.com

Legal Issues in Bankruptcy Undue hardship litigation Student loans in Chapter 13 Proposed Plan Form for Chapter 13 Proposed deadline for POCs Effect of Claim objections

Evolution of Non-Dischargeability 1976: Discharge of student loans in bankruptcy prohibited for first 5 years of repayment unless debtor could establish undue hardship. 1990: Discharge exception extended to 7 years. 1998: Code amended to provide that federally guaranteed student loans could not be discharged at all absent showing of undue hardship. 2005: discharge exception extended to all education loans.

Statutory Authority 11 U.S.C. § 523(a)(8): a discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) does not discharge an individual debtor from any debt: (8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for – (A) (i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or (ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or (B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual …

Burdens Lender: must establish the existence of the debt and that it is in one of the non-dischargeable categories Educational nature: based upon “substance of the transaction”, i.e., the stated purpose of the loan, not how proceeds were actually used Debtor: must prove undue hardship

Brunner Test for Undue Hardship Brunner v. New York State Higher Educ. Servs. Corp., 831 F.2d 395 (2d Cir. N.Y. 1987) 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; 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 that the debtor has made good faith efforts to repay the loans.

A Minimal Standard of Living Shelter Basic utilities Food and personal products Vehicles and associated costs Health insurance Recreation

Is the Debtor’s Financial Condition Likely to Persist? Temporary hardship or a “certainty of hopelessness”? Career choices and future success

Good Faith Efforts to Repay Efforts measured by efforts to: obtain employment minimize expenses maximize income History of repayment? Use of alternate repayment options

Erosion of Brunner Brunner v. New York State Higher Educ. Servs. Corp., 831 F.2d 395 (2d Cir. N.Y. 1987) Filed bankruptcy 7 months after receiving her Masters degree 2 months later, after expiration of 9 month grace period, sought discharge of student loans Made no attempt to pay whatsoever Only proved that she was currently unable to meet her expenses Court found her skilled, capable and without dependents NB: state of law when Brunner was decided – non-dischargeable for the first 5 years absent undue hardship

Erosion of Brunner (contd.) Krieger v. Educational Credit Management Corp., 713 F.3d 882 (7th Cir. 2013) Debtor lived in a rural area with her 75-year-old mother. Her only income was government assistance and she had applied for 200 jobs over ten years without success. The bankruptcy court found that the Debtor had made a good faith effort to repay her loans, even though she had not applied for a federal repayment plan. Under such a repayment plan, her payments would have been zero and her loan discharged after 25 years.

Erosion of Brunner (contd.) Hedlund v. Educational Resources Institute Inc., 718 F.3d 848 (9th Cir. 2013) The Ninth Circuit cited the Debtor’s efforts to obtain employment, maximize income, and minimize his expenses. A spouse’s unwillingness to work full time cannot count against the good faith of the borrower Discharging only a portion of the student loans is possible Expenses that are more than bare bones (for example, for cell phones and cable service) do not necessarily indicate a lack of good faith, as long as they are a marginal part of the borrower’s overall financial picture, and A borrower can show a good faith attempt to repay even with less-than-diligent efforts to explore repayment options.

Erosion of Brunner (contd.) Roth v. Educ. Credit Mgmt. Corp. (In re Roth), 490 B.R. 908 (B.A.P. 9th Cir. 2013) Debtor’s failure to enroll in the income based repayment plan, attempt a disability discharge or any other workout was not an indicator of bad faith Lack of payment is not dispositive when debtor does not have means to pay, even if IBRP would require $0 payment NB: Concurring opinion which recommends the totality of the circumstances be adopted

Selected Issues in Hardship Litigation Quality of education, school closings Partial discharge Proof of medical conditions Timing of litigation in Chapter 13 cases Effect of claim disallowance Alternate means to discharge

Procedural Issues in Undue Hardship Litigation – AP required? A judicial determination of undue hardship is required - 11 U.S.C. § 523(a)(8) Fed. Rule Bankr. P. 7001(6) Makes actions to determine the dischargeability of debt adversary proceedings and requires a summons and complaint be served on the non-moving party

Procedural Issues in Undue Hardship Litigation – AP required? (contd.) Effect of a provision in a confirmed plan purporting to discharge otherwise non-dischargeable student loan debt. Can confirmation be voided? Is the creditor entitled to any relief? In re Espinosa, 559 U.S. 260 (2010) Summons and complaint: No Hearing: No Judicial determination of undue hardship: No Notice: Yes

Procedural Issues in Undue Hardship Litigation – AP required? (contd.) Legal errors are corrected on appeal A confirmation order is binding despite legal error; however, “…[T]he Code makes plain that bankruptcy courts have the authority--indeed, the obligation--to direct a debtor to conform his plan to the requirements of §§ 1328(a)(2) and 523(a)(8). … We acknowledge the potential for bad-faith litigation tactics. But expanding the availability of relief under Rule 60(b)(4) is not an appropriate prophylaxis.”

Procedural Issues in Undue Hardship Litigation – Timing of AP When is an undue hardship AP ripe? Statutory text Chapter 13 vs. Chapter 7 Early in a case, a discharge is remote and speculative Until a Chapter 13 discharge has occurred or is imminent, is there a case or controversy relating to discharge that a bankruptcy court may decide? Change in circumstances – relevant time for examination Is feasibility of a plan relevant? Debtor’s counsel considerations

Payment of Student Loans in Chapter 13 Student loan repayment as a special circumstance to rebut the presumption of abuse or as a deduction Separate classification of student loans Payment as long term debt via 1322(b)(5) vs Separate classification via 1322(b)(5) and (10) In re Leser, 939 F.2d 669 (8th Cir 1991) The discrimination has a reasonable basis The debtor can carry out a plan without the discrimination The discrimination is proposed in good faith The degree of discrimination is directly related to the basis or rationale for the discrimination

The Proposed National Form Plan

The Proposed National Form Plan (contd.)

The Proposed National Form Plan (contd.)

The Proposed Changes to Bankruptcy Rules Rule 3002(c): Proof of claim bar date From: 90 days after the first date set for the meeting of creditors To: 60 days after the order for relief or conversion to chapter 12 or 13

Effect of an Objection to a Student Lender’s POC Disallowance from payment through the estate vs. a decision on the merits Substantive vs. non-substantive objections Disallowance by default and proposed orders Hann v. ECMC, 711 F.3d 235 (1st Cir. 2013) In re Crawford

Statute of Limitations Stanley CRAWFORD, Plaintiff - Appellant, versus LVNV FUNDING, LLC, et al., Defendants - Appellees.   No. 13-12389   UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT   2014 U.S. App. LEXIS 13221 July 10, 2014 A Proof of Claim filed for a debt on which the statute of limitations has passed is a violation of the Fair Debt Collection Practices Act.

Implications of Crawford Applies only in 11th Circuit Applies only to “debt collectors” subject to the FDCPA Suit can be brought in bankruptcy court or federal district court FDPCA has a one year SOL

Alane A. Becket Becket & Lee LLP Malvern, PA abecket@becket-lee.com