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.

I bring this case to your attention for several reasons.  First, you should recognize that Chapter 7 trustees are very conscious of the likelihood that a certain percentage of debtors will fail to disclose assets.  While it may seem that your Chapter 7 trustee is not paying much attention to any particular case, I suspect that trustee training programs provide trustees with profiles of the types of debtors likely to omit important information as well as resources to search for evidence of hidden assets.

In the Texas debtor’s case I wonder how he thought that a vehicle sale would be missed by the trustee, given that vehicle liens are public record, as are vehicle registrations.

These days almost any sale of real estate or motor vehicles will generate a paper trail of tax forms, insurance records and title documents.  Further I have personally seen situations where an unhappy ex-wife or a former friend will draft a “poison pen” letter to the trustee will allegations about improper activities by a bankruptcy debtor.

Second, be aware that Chapter 7 trustees and the U.S. trustee like to pursue fraud cases periodically to send a message to debtors and debtors’ lawyers that the trustees are paying attention.   Bankruptcy lawyers may be tempted to say “don’t worry about it,” to avoid extra expense and complication but playing fast and loose with disclosure rules can create major problems for both debtors and their lawyers.

Occasionally I meet with a client who may say something like “between you and me, no one knows this but….”    This type of statement is the last thing that any bankruptcy lawyer wants to hear.  From my perspective that client is really saying “I am thinking about committing a federal crime and I want you to help me.”  My license to practice law is not worth the fee for any one case and I have and will continue to decline representation for any client who wants to use my office to file inaccurate schedules.

Nobody likes to surrender assets, especially in a bankruptcy case that may have come about because of factors beyond one’s control (such as a layoff, unfair treatment by a lender, a lawsuit judgment that you did not know about).   In most bankruptcy cases you will not lose in assets.   However, losing a few hundred or thousands of dollars is a far better fate than federal prison.

Mr. Espinoza’s story began in 1988.  Sensing that airline baggage handling was not a great long term career, Mr. Espinoza enrolled  in a technical school to learn computer drafting and design, and he financined his education with a student loan.  Unfortunately, he was not able to find a job using his new education and he found himself in a financial bind when American Airlines froze wages and reduced his hours.

By 1992, Mr. Espinoza found himself living paycheck to paycheck and unable to pay down his $13,000 student loan.  At that point, he contacted a lawyer and filed a Chapter 13 bankruptcy.   The Chapter 13 plan prepared by Mr. Espinoza’s lawyer provided for full payment of the balance due on the student loan over the term of the plan but it did not provide for payment of $4,000 in accrued interest or for future interest.

The student loan lender was given notice of this plan provision and did not object.  The bankruptcy judge to whom Mr. Espinoza’s case was assigned issued an order of “confirmation” that formally approved the plan.   Mr. Espinoza dutifully sent in his trustee payments and approximately 5 years later, after payments were made per the confirmed plan, the judge issued a “discharge order” declaring debtor Espinoza free and clear of all debt.

In 2003 and 2004, Mr. Espinoza’s student loan creditor renewed its efforts to collect the student loan debt interest.  The creditor contends that the Bankruptcy Code does not permit the discharge of any part of student loan debt unless the debtor files a special lawsuit in his bankruptcy case to ask for a finding of “undue hardship.”  The creditor contends that a bankruptcy  judge cannot discharge student loan debt or interest on a student loan debt through a confirmation order in the absence of a hardship discharge finding.

The United States government, 24 states and the student loan lending industry are supporting the student loan creditor in this case.   You can read the court documents and more information about the Espinoza case by clicking on the link.  The Supreme Court’s decision in this case is expected within the next few months.

I will be very surprised if the Court rules in favor of the Espinoza position.  The Bankruptcy Code seems fairly clear in placing the burden of showing undue hardship on the debtor – to make a non-dischargeable debt dischargeable because the lender did not object to a provision buried in a Chapter 13 plan seems contrary to the plain language of the code.  It will be interesting to see what happens.

UPDATE:  in March, 2010, the Supreme Court ruled in favor of Mr. Espinoza, but on very narrow grounds.   The Court noted that the bankruptcy judge erred in confirming Mr. Espinoza’s plan without first finding “undue hardship,” but also found that the student loan creditor waited too long to try to correct this error.  The Court specifically suggests that its ruling in this case does not have broad applicability and thus the “plan provision” tactic should not be used by debtors to bypass the “undue hardship” laws.

Federal government involvement in the student loan business means that collection resources not available to regular creditors come into play.   There is one statute that permits student loan creditors to garnish wages without the need to first go to court.   Student loan claims can also offset tax refunds.

Blog reader Janet describes an all too common scenario as follows:

I am unemployed and have defaulted student loans.  I was married last April and my husband’s tax return was offset as a lovely wedding gift.  I am researching how to file for bankruptcy for my other debts and also looking into how to prove “undue hardship” regarding the student loans.

In the meantime, we were curious about whether or not my husband’s wages could be garnished?  Since I am unemployed, this would devastate us.

Also, once I get a job, if they are garnishing my husband’s wages, would they be able to garnish mine as well — at the same time?

Here is my response: as noted above, student loan creditors can seize tax refunds and garnish wages.  If Janet gets a job, she would also be subject to wage garnishment.  There is no law that prevents both spouses in a marriage from being subjected to wage garnishment simultaneously.

I also would not get my hopes up too much about a hardship discharge of student loans in bankruptcy.  As noted in my March 3, 2009 post, student loan hardship discharges are very difficult to get.

This is a situation where Janet and her husband need to redouble their efforts to get their student loans paid off or back into a liveable payment plan.  Bankruptcy and consumer protection law offer very little in the way of relief.

In January, 2008, these audits were halted because the U.S. Trustee ran out of money for this program.  Now, according to Jill Michaux of the Bankruptcy Law Network blog, debtor audits are back.  You can read Jill’s post and the links therein to learn more about this audit program.

What actually happens during an audit?

If you are selected for an audit, the U.S. Trustee sends you a notification that you and your attorney will be contacted by an outside accounting firm.  The firm will send you a notice asking for things like:

• Pay stubs for you and your spouse for the six months prior to the month you filed your bankruptcy petition
• Bank account statements for six months, with explanations for all deposits over $500
• Income tax returns including all schedules and forms for the previous two years
• Divorce documents, including property settlement and child support orders
• Self employment documents
• Proof of school expenses
• Proof of child care expenses
• Proof of food expenses
• Proof of transportation expenses

Once you get this information to the auditor, he will analyze this information and compare it to the information set out in your petition.

In the first eight months of the audit program, 1631 audits were completed.  Of those, 29% of the cases audited were found to have at least one material misstatement.  12% of the audits resulted in a Report of No Audit.  The U.S. Trustee statistics do not tell us how significant any of these misstatements are. (Thanks to Peter Orville of the Bankruptcy Law Network for his series of posts about Audits).

When the program was active, only a few of my cases were selected for audits.  After providing a lot of paper, the audit was concluded with no problem.  On the other hand, these audits required me to spend a lot of unexpected time gathering and reviewing documents.  As such, I have changed my fee contract to provide for an additional fee for any case selected for an audit.  It continues to puzzle me whether members of Congress truly understand that people who are filing bankruptcy most likely don’t have a lot of money available for attorney’s fees, yet every change to the law increases this burden.

The second course, which is the subject of this post, is the "ticket out."  Known as the "financial management course," this educational requirement involves education about budgeting, interest rates and other financial managment tools that will, hopefully, keep you out of bankrutpcy in the future.

In a Chapter 7 case, you are supposed to complete your financial  management course within 45 days from the 1st date set for your  Section 341 meeting of creditors hearing.  In a Chapter 13 case, you must complete the financial managment course prior to making your last Chapter 13 payment or prior to the closing of your case.

If you do not complete your financial managment course requirment and file your certificate of completion (your attorney will file this for you), you will not be eligible for a discharge.

In my practice I recently represented a Chapter 7 debtor who did not complete her course prior to her case being closed and we had to reopen her case for the sole purpose of filing the financial  management course certificate.  So far, it appears that most bankruptcy judges will permit such reopenings, but be aware that there is a filing fee to do this as well as an attorney’s fee for the time involved.

Most of the vendors who provide pre-filing debt counseling will also provide financial managment courses as well.  The list of vendors that I provide to my clients can be found on my BankruptcyWorksheet web site.

I always advise my clients to get the Financial Management course out of the way.  You are not likely to think about this requirement 4 years into your Chapter 13 and the only notice set out by the clerks’ office is done a couple of months into your case.

The Financial  Managment course can be taken by phone or over the Internet and it will last only a few hours.  I would be interested to hear from anyone who has taken this course to get your observations and thoughts about its value.

Because credit card lenders are particularly sensitive to unusual patterns of debt and access to credit shortly before bankruptcy, there is a good chance that this $10,000 new debt in my example would generate an objection and discharge challenge.

One of the Chapter 7 trustees on the panel in the Northern District of Georgia emailed me to note an additional issue.  Remaining with our example, the act of tranferring the $10,000 debt to Citibank would serve as a payoff to Discover.  Under the preference rules, the payment of an antecedent (old) debt to Discover within 3 months of filing would be considered a preferential transfer.  The Chapter 7 trustee would then have the right to demand that the recently paid off creditor – Discover – remit the $10,000 to the trustee for distribution as part of the bankruptcy estate.

In this scenario would the debtor end up facing both a discharge complaint from Citibank because of the new debt and as well as a discharge complaint from Discover since the the $10,000 had to be forfeited to the trustee?

The Chapter 7 trustee who wrote me says that she is not aware of any examples where the paid off creditor (Discover in our example) came after the debtor to recoup its loss.  But such a scenario is certainly possible.

If you are a debtor or debtor’s lawyer and have been faced with this situation, please let me know what happened in your case.

Technorati Tags: credit card balance transfers, preference issues, Chapter 7 trustees, bankruptcy estate

As a practical matter, however, I rarely have problems with bad checks less than $200.  I suspect that for most vendors it is not worth the hassle of pursuing criminal charges for such a small amount, especially when the person writing the bad check has just filed for bankruptcy.

However, it is certainly possible for an angry vendor to pursue criminal charges.  The larger the bad check, the greater the likelihood that you would face a criminal problem.   I therefore advise my clients that they should strongly consider finding the money to pay any vendor to whom a bad check was issued.

Wendell’s Bankruptcy Law Network post also discusses Chex Systems, which is a type of credit reporting system that collects data on bad checks.   Wendell notes that a bad Chex Systems report may create problems for you in getting a bank account after bankruptcy – in fact, a history of bad checks may be more damaging to your bank account chances than the bankruptcy itself.   Read Wendell’s post for more information about Chex Systems, how to get a Chex Systems report and some suggestions about how to reduce the negative impact of bad checks.

The big picture here is that bad checks are a different type of debt that can have serious repurcussions (i.e. jail time or a crimimal record).  Bankruptcy cannot cure a bad check.  Understanding the consequences of a bad check may help you decide which bills to pay if you have limited cash available.

Technorati Tags: bad checks, Chex Systems, bankruptcy and bad checks, Bankruptcy Law Network blog

Of course, I did not want the person to go to jail and did not obtain any promissory note or security agreement at the time the funds were wired to the bank’s fraud recovery department.

I have not yet obtained a promissory note and mortgage as I assume it could now be disallowed by the trustee because the money was disbursed in mid-February and I’ll bet there’s a "consideration" issue now.

What do you recommend?  Is it too late to get a note and/or secure the debt.  The friend has yet to file Chapter XIII yet.

Would there be any priority in my payment becuase I kept the person out of jail?

–Michael

Jonathan Ginsberg responds:  Michael, as you said in your email – "no good deed goes unpunished."   I do not represent creditors so I would advise you to find a lawyer who regularly represents creditors in Chapter 13 claims.  Typically lawyers who represent used car dealers or high risk vehicle finance companies would have a lot of experience regarding possible objections to Chapter 13 cases since they file objections all the time .

I have no doubt that creditor lawyers and Chapter 13 trustee attorneys read this blog – perhaps one of my colleagues at the bar could post a comment or email me with more insight.

Your predicament serves as an important lesson to anyone who ever considers loaning money to friends or family.  If you make these loans, especially in an emergency situation, be prepared to lose the money, your friends or both.

Technorati Tags: treatment of personal loans in bankruptcy, objections to chapter 13 confirmation

One out of every 250 cases will be audited.  Debtors and their counsel will have 21 days to provide:

• six months of pay advices
• six to twelve months of bank statements
• a copy of your divorce decree (if applicable)
• two to four years of tax returns
• copies of titles or deeds to real estate 
• other financial information

if this information is not provided or if it is incomplete, your discharge may be denied. 

In my office I plan to ask my clients for this information at the time the case is filed. 

Technorati Tags: random case audits in bankruptcy, denial of discharge, united states trustee, random audit