1. Bankruptcy Developments
NCHER 2018 April Legal Meeting
Kari Barber, Corporate Counsel
ECMC Shared Services Company

2. Proposed Agenda Items I . Plan Language: student loan creditor may I?
income driven repayment plans
standard repayment options
rehabilitation
Dischargeability language
II. I object!
That’s not my signature
III. The Undue Hardship standard: Is it really “impossible” to discharge student loans?
Request for Information

3. Chapter 13 Plan Language Direct Payments to Student Loan Creditors
Higher Education Act v. Bankruptcy Code
Lender v. Guarantor Responsibilities
20 U.S.C. §1087(b)(9); 34 C.F.R. §
20 U.S.C. §1098(e); 34 C.F.R. §
iii. Executive Office of the U.S. Attorneys
Chapter 13 Template Language

4. Chapter 13 Plan Language, cont.
iv. Interest Subsidies
v. 11 U.S.C. §525
Open question as to whether Section includes all administrative options and servicing options during bankruptcy
vi. Consolidation as an alternative
Motion to Incur
vii. Rehabilitating while in Chapter Bankruptcy
34 C.F.R. §

5. Chapter 13 Plan Language, cont.
Post-bankruptcy Issues
i. Repurchase Lender
ii. 34 C.F.R. § (j)(“Mandatory purchase by a lender of a loan subject to a bankruptcy claim.”)
A Bankruptcy Court’s Perspective
i. In re Berry, Case No jw (Bankr. S.C ).
D. Official Chapter 13 Plan Form effective December 1, 2017.

6. Chapter 13 Plan Language, cont.
E. Language purporting to Discharge Federal Student Loans (or otherwise alter)
i. In re Johnson, Case No GMH (Bank. E.D. Wisc. Sept.29, 2017).
ii. In re Jordan, 555 B.R. 636 (Bankr. S.D. Ohio 2016).
iii. In re Stevens, Case No. 14–33862–svk, 2015 WL (E.D. Wisc. Dec. 14, 2015).
iv. Stoddard v. AES, Case No MH (Bankr. C.D. Ca. 2017).

7. Claim Objections Objection on basis of unenforceability
i. 34 C.F.R. § (e) claims bundled in a claim objection
Unenforceability v. Dischargeability – a distinction without a difference?
11 U.S.C.§101(5)(A): “right to payment”
11 U.S.C.§502(b)
But see, In re Hann, 711 F.3d 235 (1st Cir. 2013)
Jurisdiction: the threshold question

8. Claim objections, cont. 11 U.S.C.§523(a)(8)
ii. Bankruptcy Court Rule 3007: “A party in interest shall not include a demand for relief of a kind specified in Rule 7001 in an objection to the allowance of a claim … .”
11 U.S.C.§523(a)(8)
iii. Is a debtor first required to exhaust his or her administrative remedies pursuant to 34 C.F.R. § (e) prior to seeking relief from bankruptcy court?
In re Dorsey, 528 B.R. 137 (E.D. La. 2015)

9. Claim Objections, cont.
iv. 34 C.F.R.§ (e)(15): Discharge without an application

10. Undue Hardship Tests Brunner v. Totality of the Circumstances
i. Six of One, Half Dozen of the Other
ii. Same attacks on Brunner test
Presumptively Nondischargeable is not an absolute; it can be overcome.

11. Undue Hardship Tests, cont.
Payment pursuant to income-based repayment option in first Brunner prong analysis
In re Williams, Case No , 2018 WL (Bankr. N.D. Ill. Mar. 8, 2018)(“[Debtor] owes a monthly payment of $0, not $2,574, and there is no question he can “pay” that and still maintain a minimal standard of living.”).
In re Murray, 563 B.R. 52 (Bankr. D. Kan. 2016)(“But [an IDR] monthly payment, although affordable, would not constitute payment of the student loan debt.”).

12. Undue Hardship Tests, cont.
iii. In re Fern, 563 B.R. 1 (B.A.P. 8th Cir. 2017)(standing for the proposition that it can be “unfair” and stressful to a debtor to have sizeable debt looming for years).

13. Undue Hardship Tests, cont.
Tax Consequences? Not likely.
i. Not exclusively bankruptcy related, but relevant to income-driven repayment options discussion
ii. Uptick in concerns about potential tax consequences with income-driven repayment options.

14. Undue Hardship Tests, cont.
iii. Section 108 of the Internal Revenue Code excludes from gross income cancellation of debt income to the extent the taxpayer is insolvent immediately before the discharge. 26 U.S.C. § 108(a)(1)(B). Insolvency is defined by the IRS Code as the “excess of liabilities over the fair market value of assets” immediately before the debt is discharged U.S.C. § 108(d)(3).

15. Undue Hardship Tests, cont.
iv. New tax law added provision in Section 108(f) prohibiting inclusion in gross income any student loan amount that was discharged as a result of death or disability.
v. First borrower to complete terms of income-driven repayment plan will happen in 2018.
vi. Bankruptcy courts routinely fail to apply the insolvency analysis (or simply choose to ignore it). See e.g. In re Murray, 563 B.R. at 60.

16. Undue Hardship Tests, cont.
By way of example, assume $250,000 student loans are discharged. Taxpayer would receive a 1099C with $250,000 of cancellation of debt (COD) income reported to him.  
Insolvency before the discharge is $300,000
All $250,000 of COD income is excluded from Taxpayer’s income.
Taxpayer’s assets = $100,000
Taxpayer’s liabilities (including student loan debt) = $400,000
Insolvency before discharge is $200,000
Taxpayer can exclude $200,000 of the COD income but has to report $50,000 of income
Taxpayer’s assets = $200,000

17. Undue Hardship Tests, cont.
D. Jason Iuliano, Student Loans and Surmountable Access- to-Justice Barriers, 68 Florida Law Review 377 (2016).
Nearly 40% of debtors who attempted to discharge their student loans received either a full or partial discharge
Debtors with attorneys fared no better than pro se debtors
Judges applied undue hardship standard relatively consistently
Small number of debtors seek discharge
* Statistics from a 2007 bankruptcy population

18. Undue Hardship Tests, cont.
Student Loan Debtors Filing Bankruptcy in 2007*
Full/Partial Discharge (81)
Administrative Remedy (25)
No Relief (107)
Filing Adversary Seeking Discharge (213)
Not Filing Adversary Proceeding Seeking discharge (169,557)
Truth in Caller ID Act of no private right of action. State AG and FCC enforcement. Up to $10,000 per violation or 3x /day for continuing violation. Criminal fines
*Jason Iuliano, An Empirical Assessment of Student Loan Discharges and the Bankruptcy Undue Hardship Standard, 86 American Bankruptcy Law Journal 495 (2012).

19. Undue Hardship Tests, cont.
Request for Information (RFI)
i. The Department of Education is requesting public comment on factors to be considered in evaluating undue hardship claims asserted by student loan borrowers in adversary proceedings filed in bankruptcy cases.
ii. What might this signal? It is unclear from the RFI what may or may not be done with this information.

20. Bankruptcy Developments: Questions?
Kari Barber Corporate Counsel ECMC Shared Services Company (651)