USA Today gets its numbers from a web site publisher named Mark Kantrowitz, who publishes two scholarship matching services called FinAid.org and FastWeb.com.  I was unable to independently verify Mr. Kantrowitz’ numbers but if you Google “total credit card debt in U.S.” and “total student loan debt in the U.S.” you will get numbers in the range quoted in the USA Today article.

I actually thought that a more interesting element of this issue has to do with the monthly repayment numbers facing borrowers.  The USA Today article suggests that $30,000 of student loans, payable at 6.8% interest over ten years would amount to $350 per month.  At this level of debt, the average person would need to earn at least $42,000 per year.

In my practice I have frequently seen student loan debt far in excess of $100,000, with monthly payments over $1,000.

In a bankruptcy context, student loan debt is not dischargeable except in cases of “undue hardship.”  In the Northern District of Georgia, “extreme hardship” has essentially been limited to student loan debtors who have a medical issue that prevents them from working.   At this point in time, debtors in the Northern District have not been successful in arguing for hardship discharge on the grounds that they cannot find a job that pays enough to support their student loan obligations.  There was a recent Supreme Court decision involving student loans and bankruptcy, but that case did not address the substantive issue of what constitutes “undue hardship.”

Student loan debts create an additional problem for means test calculations in Chapter 7 cases.   In cases involving “above median” debtors, there is no line item for student loans in the means test.  This means that attorneys have to put our clients’ monthly student loan payment at Part VII of the Means Test (the part for Additional Expense Claims).    If this “additional expense” is the only thing bringing your disposable income number below the presumption of abuse, you will likely face an objection by the U.S. Trustee.

In Chapter 13, debtors can include student loan debt into their Chapter 13 plan but the plan will not pay accrued interest, meaning that after the case is over, the debtor will get a bill for several thousand dollars to cover this interest.  Further, given the complications of means test calculations, it is often not feasible to pay student loan debt in a Chapter 13 plan.

Outside of bankruptcy, student loan creditors usually take a very aggressive approach towards collection.  They know that student loan debt is not dischargeable in bankruptcy, they know that the IRS will withhold tax refunds to pay it, and they know that there are special rules which allow for wage garnishment without the need for a lawsuit.

It is therefore no surprise to me that student loan debt issues have engendered such anger, especially among young adults how have entered the working world and who are having trouble finding jobs.

In one part of her speech, Ms.  Brite turned to the graduates and said  “now I am going to offer you some words of advice that I wish someone had said to me when I was leaving high school.”   One of the points she made I think is applicable to everyone, not just high school students.

“Stay away from credit cards,” said Ms. Brite.  “When you get to college, you will see tents set up by the credit card companies.  They will offer you frisbees and t-shirts and free food to entice you to sign up for a credit card.  They’ll tell you that a credit card will help you build up your credit and you can use it only for emergencies.   Don’t believe it.   You will be tempted to decide that an emergency takes the form of a pizza at 2 in the morning, or putting your entire fraternity’s dinner on your card because no one has cash.  Credit cards will mess you up.”

I hope that each and every one of the graduates in my son’s class heard these words of wisdom and I wish this advice could be included in the “welcome to school” packets given to incoming freshman.

Over the years I see dozens of young adults in their late 20′s and early 30′s who are still dealing with thousands of dollars of college years credit card debt and the associated damaged credit ratings.   It is so easy to find oneself behind the proverbial eight ball, and digging out from a credit hole is a lot more difficult than avoiding the problem in the first place.

If your son or daughter recently graduated from high school, congratulations on an accomplishment and a milestone.   Let your graduate know that while college isn’t exactly the real world, they now have assumed the capacity to get themselves in adult level financial trouble. As uninteresting as household budgeting ten years hence may seem, they most definitely do not want their college aged mistakes to lead them to a bankruptcy lawyer’s office in the future.

In one situation, a homeowner attempted to refinance his mortgage, only to discover that two unpaid medical bills totaling less than $50 had caused his credit score to drop.  As a result of the lowered credit score the refinancing bank demanded over $4,000 in closing costs.

In another situation, less than $500 of medical debt reported to a collection agency disqualified a homeowner from a favorable interest rate, which would have resulted in tens of thousands of extra interest charges.

In many of these situations, the consumer never knew about the unpaid medical debt – the provider simply turned the claim over to a collection agency which immediately reported it to the credit reporting agencies as delinquent debt.

According to the Journal, “otherwise well-qualified borrowers with good loan-to-value ratios and steady employment are increasingly finding it difficult to refinance because of medical billing mistakes marring their credit.”

If you or a loved one has been in the hospital, you probably know that a single visit can result in five, ten or even more bills from separate vendors – the hospital, the hospital pharmacist, the anesthesiologist, the ambulance service, etc.  I do not find it surprising at all that a patient would not know about one or more bills.

I think that an important point here has to do with the cascading effect of negative credit.   Even a small late payment on an account can result in a dramatic lowering of your credit score.  Other creditors will receive electronic notice about your lowered credit score and when permitted, they will increase your interest rate, lower your credit limit and increase penalties and fees.

Lenders Often Cause Delinquencies by Changing Terms Unexpectedly

On more than one occasion I have met with a potential bankruptcy client who was forced into Chapter 7 or Chapter 13 because of changed terms, not because of any delinquency.   These changed terms can arise from a tiny delinquency – like the unknown, unpaid medical bill issue discussed in the WSJ story, or for other reasons.  Recently I met with a small business owner who was completely current on his personally guaranteed revolving line of business credit.  His bank was taken over by another bank which conducted an audit and, without warning, the business loan was “called in.”

One minute, my client was operating a viable, functioning small business that was current on its obligations – and literally within a matter of days, that business was shut down by a bank for no apparent reason.

The point here: examine your credit reports regularly and challenge even tiny delinquency reports as the damage to your credit will arise from the existence of the delinquency as opposed to the amount of the late payment.  Even small downgrades to your credit score can result in a negative debt snowball.

Unicredit employees dressed like sheriff’s deputy’s and “served” papers resembling lawsuits on consumers

Unicredit issued fake “court notices” for hearings and depositions

Unicredit built a fake courtroom, complete with a fake judge, where debtors would be intimidated into providing access to bank accounts or surrendering car titles

The Pennsylvania attorney general has shut down Unicredit and has filed suit against the company seeking restitution for harmed consumers.

What can we learn from the Unicredit story?  First, you should always be very suspicious of anyone who threatens legal proceedings, implies that you have no right to challenge a debt or suggests that you must resolve a debt issue immediately.  Under Georgia law, at least, a lawsuit must be served by a sheriff’s deputy (who has identification) or a process server.  After service you have 30 days to file a response.   No judgment will be issued any faster than 45 days after service – 30 days to file a response and 15 days to open a default by paying court costs and filing fees (which amount to less than $200).

Secondly, sheriff’s deputies are not in the business of collecting debts.   Their job is to serve papers only.  If the person who looks like a deputy starts discussing the merits of the lawsuit against you, a red flag should go up.

Third, recognize that collection agents are not your friends and they are not on your side.   Do not believe anything a collection agent tells you.   When in doubt, call a bankruptcy lawyer – we will always talk to you over the phone at no charge.

According to credit card industry analysts, the CARD Act of 2009 will eliminate over $390 million in fees for credit card issuers.  Not surprisingly, the credit card companies do not intend to walk away from this fee income.  For every fee and penalty eliminated by the CARD Act, credit card issuers are finding replacements.   For example the annual fee for many cards has been increased, sometimes dramatically.  Card issuers are also sending corporate card applications (called “professional cards”) to consumers.  Corporate cards are not included in the CARD Act.

The Wall Street Journal recently ran a story explaining how the credit card companies intends to recoup their lost fee income.   The bottom line: the CARD Act of 2009 will eliminate some consumer-unfriendly tactics used by the credit card companies, but it will trigger an equal number of new consumer-unfriendly tactics.  Caveat Emptor.

• You are, or have gone through a bankruptcy proceeding
• You are insolvent either before filing a bankruptcy or while your petition is pending;
• You have not paid a dischargeable debt

Let’s take a closer look at what the Code actually says.  Pay particular attention to the different language that applies to government employers vs. private employers.

Section 525 of the Bankruptcy Code contains the following language:

As to governmental units:

[with limited exceptions] a governmental unit may not deny, revoke, suspend, or refuse to renew a license, permit, charter, franchise, or other similar grant to, condition such a grant to, discriminate with respect to such a grant against, deny employment to, terminate the employment of, or discriminate with respect to employment against, a person that is or has been a debtor under this title or a bankrupt or a debtor under the Bankruptcy Act, or another person with whom such bankrupt or debtor has been associated, solely because such bankrupt or debtor is or has been a debtor under this title or a bankrupt or debtor under the Bankruptcy Act, has been insolvent before the commencement of the case under this title, or during the case but before the debtor is granted or denied a discharge, or has not paid a debt that is dischargeable in the case under this title or that was discharged under the Bankruptcy Act.

As to private employers:

No private employer may terminate the employment of, or discriminate with respect to employment against, an individual who is or has been a debtor under this title, a debtor or bankrupt under the Bankruptcy Act, or an individual associated with such debtor or bankrupt, solely because such debtor or bankrupt—

(3) has not paid a debt that is dischargeable in a case under this title or that was discharged under the Bankruptcy Act.

As you can see, the restrictions on discrimination are not identical.

Specifically the limitation on governmental action against insolvent or bankrupt employees or job applicants includes the following prohibitions:

• deny employment to
• terminate the employment of
• discriminate with respect to employment against

By contrast the limitations on private employers against insolvent or bankruptcy employees includes the following prohibitions:

• terminate the employment of
• discriminate with respect to employment against

Now I have not litigated this issue – but I think that a private employer could make a strong argument that the Bankruptcy Code does not forbid denying employment to an insolvent or bankruptcy individual who is applying for a job.

Further, as Mr. Balena points out, if you are applying for a job as an “at will” employee, a prospective employer does not have to explain why he is not hiring you – it can be for any reason.  I can’t imagine that too many employers would specifically put into writing that you are not being hired because of your credit issues.

In my view, within the context of private employment, Section 525 protections have much more relevance to an employee who already has a job as opposed to a job applicant.  Further, I think that Section 525 is somewhat of a toothless tiger in that few employers would specifically identify a bankruptcy as the sole reason for termination (note the language “solely because”).

As a practical matter, I cannot recall the last time I observed or even heard of a bankruptcy debtor facing termination or a refusal to hire because of a bankruptcy filing.  The sheer numbers of bankruptcy filings in the Northern District of Georgia, for example, are such that almost every company of any size has had one or more employees go through the bankruptcy process.  Still, I counsel my clients that Section 525 offers very little in the way of real protection and that there is some risk, even if it is small, that their bankruptcy filing could have a negative impact on employment.

Two of the protections provided by the FDCPA include:

• a prohibition against communicating with a debtor when the collection agency employee does not identify himself as a debt collector; and
• communicating about your debt with third parties

The 11th Circuit Court of Appeals (which provides controlling precedent for Georgia) recently issued an important decision that struck down a somewhat bizarre argument by a debt collector regarding phone messages.  This case benefits consumers by clarifying the rules about telephone messages by bill collectors.

The case of Edwards v. Niagara Credit Solutions involved a situation in which the debt collector (Niagara) left “bare bones” messages on a phone answering machine asking Ms. Edwards to call back about an “important matter.”

Niagara argued that its employee did not identify itself as a debt collector because someone other than the debtor might hear the message, thus violating the “third party communications” prohibition.

The 11th Circuit rejected Niagara’s argument, stating that it is not permissible to violate one provision of the FDCPA in order to comply with another provision.   The Court further noted that the FDCPA does not guarantee a debt collector the right to leave answering machine messages.

What does this mean to you?  If an unknown party leaves you a message asking that you call about an “important matter” you should save the message and contact a lawyer knowledgeable about FDCPA actions.   If a debt collector leaves you a message and identifies himself as a representative of a collection agency or otherwise discusses a debt that you may owe, save that message as well.  You may have a cause of action for damages.

I may be on the right track in obtaining more information.  One of my new colleagues at Solo Practice University (where I teach a class about creating a Social Security disability practice) is an attorney in New York who has actually represented clients and has obtained mortgage modifications.  She will be teaching a class about real estate law at SPU and I hope to be able to pick her brain about mortgage modifications.

In the meantime, here is a link to a recent blog post that Stefanie wrote entitled The Top 5 Loan Modification Myths.   I hope that more solid information from legitimate professionals who understand mortgage modification becomes available so I can bring it to you in the pages of this bankruptcy blog.

What, then, are the alternatives to bankruptcy if you are struggling with out-of-control debt?

One of the best known but least understood solutions to debt is known as “debt settlement.”  In general terms, debt settlement refers to a process by which you or a representative negotiates with a creditor for:

• a lower balance/forgiveness of debt
• a reduced interest rate
• a reduced monthly payment
• some or all of the above

Unfortunately it is easy to speak of debt settlement in the abstract – as always “the devil is in the details.”   Here are my observations:

1. debt settlement is possible.  I have negotiated on behalf of clients to reduce balances, monthly payments, and interest rates.   Others have done it as well.  A few months back I began corresponding with a filmmaker named Kenny Golde who built up a great deal of credit card debt financing a picture he was directing and who was able to negotiate a settlement of most of his debt.   Kenny is also an enterprising entrepreneur and he wrote a book about his experiences called Settle Your Credit Cards.   Available directly from the author as a download costing $19, Kenny’s discussion of the debt settlement process is required reading for anyone who is thinking about wading into these waters.
2. you will need cash to make a settlement work.  Settlements of debts will range between 25% to 70% on the dollar.  If you are able to negotiate a settlement you will need to forward the lump sum directly to the creditor or creditor’s representative.  Do not expect any payment plans in the debt settlement process.
3. you will need to follow a procedure whereby you receive unambiguous written documentation of the settlement before you tender money.   If you do not document your negotiations and final resolution, you may very well end up facing renewed demands for money after you finalize your settlement and issue your lump sum.   Any ambiguity in the terms will come back to haunt you and a verbal deal is useless.
4. you will have a great deal of difficulty finding a live person with authority to speak to you.  Credit card companies and collection agencies intentionally make it difficult for you to reach a person in authority.  They know that if they can keep you on the phone for hours, waiting to speak to a “manager” or on hold you will grow frustrated and less demanding.   I have written before about the psychology of debt collection and I can assure you that the executives who set up the procedures to settle debts use every trick in the book when it comes to maximizing their recovery.
5. if you have multiple accounts, credit card or otherwise, you will find it exceedingly difficult to manage simultaneous negotiations.   Creditor “A” does not care about your dealings with creditor “B” and if you have a finite pot of money, you will find that every creditor wants as much as it can get without regard to your reality.   The phrase “herding cats” comes to mind.
6. debt negotiators will pressure you to move fast.  They will offer a deal but insist that the money be wired to them within a few hours.   This is part of the psychology being used against you and is designed to increase your stress and result in a better recovery for the creditor.
7. not every lender will agree to negotiate at all.  Some credit card companies, for example, may offer a 10% reduction but that is it.  They would rather sue you than work out a deal.
8. your best window for negotiation often occurs when you are three to four months delinquent.  Most credit card lenders will not talk to you if you are current.  This means that you will have to endure two to three months of daily phone and letter harassment before you can even start a meaningful negotiation.
9. many of the debt settlement companies you hear advertise on the radio or TV are ripoffs.  Some are outright fraudulent while others charge a large up front fee and do little more than a legitimate agency like Consumer Credit Counseling (which, by the way, is funded by the credit card companies).

My conclusion is that debt settlement is possible but it takes a lot of work and a great deal of intestinal fortitude.   It is probably a task best handled by a third party representative, but lawyers are expensive and legitimate and cost-effective debt settlement companies can be difficult to find.  I would like to see some sort of independent arbitration or mediation entity created that could pre-qualify debtors and then get every creditor into a room to hammer out a deal.   At this point I don’t see any real desire on the part of credit card lenders to formalize or publicize debt settlement so for the time being it is every man for himself.

A negotiated debt settlement constitutes one viable alternative to bankruptcy.  In a debt settlement negotiation, you or an agent working on your behalf contacts your creditors to work out a payment plan for your debts.  A true debt settlement involves a reduction of both your total debt as well as the interest payments.

I occasionally get involved in a debt settlement although you really do not need an attorney.  I do recommend that you engage the services of a third party to negotiate your debt – given the antagonistic and  personal nature of this type of negotiation it is very difficult to speak to a risk manager at a credit card company about your own debt.

If you do get involved in these negotiations yourself, prepare yourself.  A few months ago I began corresponding with a gentleman named Kenny Golde who found me by reading this blog.  Kenny is a filmmaker who lives in California and he chronicled his personal experience settling over $200,000 of debt for $30,000.  You can read more about Kenny and buy his book by visiting Kenny Golde’s web site.  Kenny sent me a review copy of his book and he describes in detail what he experienced – if you are thinking about engaging an a debt negotiation, I highly recommend that you read Kenny’s book.  Kenny also hosts a blog which contains several detailed articles about debt settlement and negotiation.

I also came across a helpful post on Minnesota consumer protection lawyer Sam Glover’s Caveat Emptor blog.  His May 7, 2009 post entitled Deal With Your Debt – Negotiate a Settlement offers several helpful suggestions about a good strategy for settling debt.

Obviously debt settlement does not work for everyone – as a practical matter you will need access to a lump sum of cash either immediately or within a few months, and you will need the intestinal fortitude to deal with harassing phone calls and letters, and outright lies by collectors playing the old “good cop, bad cop” routine.  And there can be tax consequnces to settling debt as debt forgiveness may be taxable debt.  But if debt settlement works for you, it generally beats bankruptcy.