Bankruptcy for the Bankruptcy for the Campus Based IndustryCampus Based Industry

Presenter: Mark R. Goodman

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2013 WEBINAR SERIES

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For the first time ever student loan debt in America has eclipsed credit card debt. According to the National Association of

Consumer Bankruptcy Attorneys, Americans now owe:

•$693 Billion in credit card debt•$730 Billion in car loans

•$870 Billion in student load debt

The Cost of Attending The Cost of Attending CollegeCollege

In all 50 states, there are graduates, drop-outs, those with advanced degrees that are buried in debt!

One in 14 students entering Student Loan repayment have been listed as “in default” within the first 2 years.

62% of all bankruptcies filed are due to medical bills.

Chapter 13 bankruptcies are on the rise as people try to save their homes. 1 of every 250 homes in the USA was lost in 2010 due to foreclosure.

10% of all student loan debt is in default.

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The Numbers Reflect the Current State of AffairsThe Numbers Reflect the Current State of Affairs

How can you protect your school when How can you protect your school when faced with such “alarming” statistics?faced with such “alarming” statistics?

The first U.S. bankruptcy laws were the opposite of what we know today: The first U.S. bankruptcy laws were the opposite of what we know today:

In the beginning, merchants filed against debtors for non-payment and a debtor’s assets would be seized and sold to pay his debts.

It took until 1893 to craft a bankruptcy law that would actually function as more than a band aid stuck on a bad economic spot.

The Bankruptcy Act of 1898 brought us into the modern era of liberal debtor treatment.

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Understanding what bankruptcy is and what it is not is step oneUnderstanding what bankruptcy is and what it is not is step one..

In the 1970’s, the government took a look at the perceived abuse of student loans in bankruptcy. It turned out that some students were actually financing their educations by taking out loans and filing bankruptcy on graduation. Successive Congressional overhauls attempted to fix the perceivedperceived problem.

The result of all the fixes in successive Congresses? Massive confusion and the need for a chart to know what was and was not dischargeable.

When the BACPA* was signed into law in October of 2005, the game changed. Student loan debt was no longer dischargeable UNLESS the borrower filed for a hardship discharge.

*Bankruptcy The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) (Pub.L. 109-8, 119 Stat. 23, enacted April 20, 2005

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A Helpful Discharge ChartA Helpful Discharge Chart

If a borrower filed: If a borrower filed:

Previous to September 30, 1977 The loan is dischargeable.

Between

September 30, 1977 and November 6, 1978

The loan may be discharged if the borrower was in repayment for five years prior to filing for bankruptcy.

Between

November 6, 1978 and August 13, 1979

Probably dischargeable due to “Congressional Oversight”.

Between

August 14, 1979 and May 27, 1991

The loan may be discharged if the borrower was in repayment five years prior to filing.

Between

May 28, 1991 and October 7, 1998

The loan may be discharged only if the borrower was in repayment for seven years prior to filing.

Between

October 8, 1998 and October 7, 2005

The loan may be discharged ONLY if the borrower files for hardship AND USUALLY has been in repayment for at least seven years.

Higher borrowing+ higher education costs+ fewer high paying jobs= MORE BANKRUPTCY FILINGS.

Young Americans now have the second highest rate of bankruptcy filing, just after those aged 35 to 44.

Nearly one in five 18-24 year olds is in “debt hardship” compared to only 12% in 1989.

It's not just students who are in trouble and cannot discharge It's not just students who are in trouble and cannot discharge student loans in bankruptcy.student loans in bankruptcy. Parent borrowing is up 75% since the 2005-06 school year with long Parent borrowing is up 75% since the 2005-06 school year with long term effects expected as parents are unable to repay their children’s term effects expected as parents are unable to repay their children’s loans. loans.

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How has bankruptcy reform changed things?How do the laws work?How do I handle bankruptcy filings?What are the latest changes to bankruptcy laws?What upcoming bankruptcy changes do I need to be aware of?

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The US Bankruptcy code was amended under BACPA to include “qualified The US Bankruptcy code was amended under BACPA to include “qualified education loans” in the exceptions to discharge.education loans” in the exceptions to discharge.

An “education loan” can fail to qualify for non-discharge-ability if:An “education loan” can fail to qualify for non-discharge-ability if:

It is used at a school that is a non-Title IV institution because it does not qualify. It is used for costs not included within the definition of cost of attendance. It is used for study abroad not under the purview of the home institution. It is used for a previous year’s school charges.

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523(a)(8)(b) changes the definition of a Qualified Education Loan to match the IRS definition.

The term “qualified education loan” means any indebtedness incurred by the taxpayer solely to pay qualified higher education. A.Which are incurred on behalf of the taxpayer, the taxpayer’s spouse, or any dependent of the taxpayer as of the time the indebtedness was incurred,B.Which are paid or incurred within a reasonable period of time before or after the indebtedness is incurred, C.Which are attributable to education furnished during a period which the recipient was an eligible student. Such term includes indebtedness used to refinance indebtedness which qualifies as a qualified education loan

(This does not include money borrowed from a relative or an employer plan) 10

Legalesespokenhere

The pertinent part of “qualified education expenses” means the cost of attendance (as defined in section 472 of the Higher Education Act of 1965, 20 U.S.C. 1087II).

Qualified education expenses include tuition, fees, special needs services, supplies and equipment in the case of a special needs beneficiary. It includes transportation but not buying a car or a computer UNLESS it is part of the usual requirements for the school or specific class.

The cost of room and board is a qualified education expense if the student is attending at least half-time.

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An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in the student aid programs administered by the Department of Education. (This category includes virtually all accredited public, nonprofit, and proprietary postsecondary institutions.)

At this point, this includes private loans granted by the school specifically to attend the school.

A school must be eligible but does not have to participate in federal student aid programs.

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Presumptively, ALL student educational debt is no longer dischargeable-- including tuition and fees.

If the debt incurred was "required of all students in the same course of study”, this could be construed as bookstore charges, lab fees and equipment purchases that are REQUIRED.

Be careful with fighting things like parking citations. Were they necessary to the student’s education?

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Bankruptcy Abuse and Consumer Protection Act

Schools should be using a promissory note for tuition debt to protect themselves.

The law is a living thing and can change at any time with a new precedent setting case in any of the Circuit Courts across the country.

Cover your assets with a note that has a signature, clearly indicates the debt is for educational purposes and lays out the expectations for repayment and any penalties for non-payment.

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TIP: Consult with your University Counsel about crafting an appropriate note for your institution.

The pendulum is swinging away from protecting lenders who must deal with defaulted borrowers who file for bankruptcy.It is swinging to consumer protection especially on the inability of borrowers to get good jobs and repay their loans. The focus is primarily on private loans from large guarantors, not schools lending their own funds.

Two leading bills are currently making their way through Congress:Two leading bills are currently making their way through Congress: H.R. 532 (Private Student Loan Bankruptcy Fairness Act of 2013) S. 114 (Fairness for Struggling Students Act of 2013)

If passed, the bills would allow grads to discharge student loans from If passed, the bills would allow grads to discharge student loans from privateprivate vendors like banks and Sallie Mae. Those with vendors like banks and Sallie Mae. Those with federalfederal student loans, however, student loans, however, would still be responsible to pay.would still be responsible to pay.

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Determine the type: Chapter 7 (liquidation) 13 (reorganization)

Your response will be determined by the type filed. FREEZE all accounts as of the date of the bankruptcy. Take a screen shot and save it for use to make sure everything is put back correctly after discharge notice is received.

Billing activity must stop immediately.Do not call, write or send bills to the borrower during the period of the “automatic stay”, also called “pendency”. You should cease collection efforts and notify your agencies to cease all collection activity.

Communicate only with the borrower’s attorney or the courts.

Understand that if you receive voluntary payments: You MUST notify the borrower’s attorney. The judge has control of all of the borrower’s assets during a bankruptcy. You do not want to be perceived as receiving favorable treatment. In most cases, you will be permitted to receive a payment or set up a payment plan because student debt is non-dischargeable.

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RELEASE transcripts if they are being held only for non-payment. BE VERY CAREFUL about not releasing transcripts! This is your chance to be BE VERY CAREFUL about not releasing transcripts! This is your chance to be PROACTIVE! If the borrower gets a transcript, perhaps she’ll have a job and PROACTIVE! If the borrower gets a transcript, perhaps she’ll have a job and resume repayment on her loans. Think POSITIVE!resume repayment on her loans. Think POSITIVE!

SET YOUR COURSE FOR SUCCESS:SET YOUR COURSE FOR SUCCESS:WRITE LETTERS to the borrower’s attorney and copy the trustee to acknowledge the bankruptcy and state the school’s position (or employ an attorney to do so).FILE a claim if directed to do so by the courts (almost never in Chapter 7’s and always in Chapter 13’s.).

NEVER IGNORE A NOTICE FROM THE COURTS!

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Student loans are considered “Self-executing” and you are not required by law to file a claim unless directed to do so by the courts. However, it is still a good idea to file a claim in Chapter 13 cases to make sure you are on the mailing matrix and receive notices regarding the case.

BEWARE! Some unscrupulous attorneys have hidden “plain language discharge” in Chapter 13 proposed payment plans. Get a copy of the plan, review it and make sure there is no language that says you agree to discharge the loan at the end of the bankruptcy—whether or not it is paid in full!

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Complete liquidation of debt All debtors non-exempt assets sold to pay debts Runs about 90 days Generally not necessary to file a claim Debtor is released from all dischargeable debt

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Debtors can usually keep their home (equity up to $22.975), personal property with a total value of $12,250 and 1 car with a value up to $3675.

They must give up: vacation homes, art work, electronic equipment, antiques, jewelry (except wedding rings ), boats, trailers, motorcycles and recreational equipment.

Chapter

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Under the newest rules some leftover balances may no longer be discharged at the end of the plan depending on purchase date and cost. Debtor keeps all property and makes payments on debts from money earned AFTER filing. Under BACPA, if income exceeds means to pay, the debtor may be required to provide adequate fiscal protection to creditors to prevent their security from depreciating faster than they are being paid off. All money goes to a trustee who distributes all funds. Regular installments are paid according to a plan approved by the court. Runs 3 to 5 years.Educational debt is non-secured and not a priority. Most loans are not paid in full by the end of the bankruptcy.

TIP-PROACTIVE AND POSITIVE: Contact the borrower’s attorney and request reaffirmation of the debt. Suggest a payment plan because the debt is not dischargeable. Rehabilitation may be an option to support a “Fresh Start”.

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For debtors with unsecured debts less than $336,900 and secured debts less than $1,101,650 (as of 1998) they MUST file a good faith plan to repay within 15-days of filing.

Bankruptcy Changes Can be Confusing for FilersBankruptcy Changes Can be Confusing for Filers

With BACPA, the way bankruptcies are filed has changed. Anyone filing a bankruptcy now has to go through financial counseling. You may talk to a bankruptcy petition preparer (not an attorney) or a Debt Relief Agency (attorney). You will receive a contract stating exactly what the service entails and its cost.

The laws are now so complex that filing is far more expensive—and who can file what has changed. To file for a Chapter 7 bankruptcy, you will have to go through financial counseling and tests to determine whether you qualify for a Chapter 7 or will be forced into a Chapter 13 bankruptcy.

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Before you can file for bankruptcy, you must calculate your median income by adding together your gross income for the six months prior to the current month and dividing it by 6. For example, if you are filing in July, you use January through June’s gross income numbers.

If your average monthly income using this test is below the average monthly income for a similarly sized family in your state, you pass the median income test and you may file either Chapter 7 or Chapter 13 without completing the means test .

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Under the new laws , the means and the median may confuse or refuse filers

The means test is used to look at whether you have enough “disposable income” to fund a Chapter 13. If the means test reveals that you have more than $100 left over at the end of the month, you will not be able to file Chapter 7 bankruptcy.

This test is often a hardship for families who must use IRS furnished numbers for household expenses. Because of where you live, you may spend $700 a month for food for your family of four. The IRS chart may allow you $574 for food. As an example, for means test purposes, you have $126 “available” to pay creditors in a Chapter 13.

The means test expense categories do not include allowances for student loans.Often a debtor will wind up showing they have money available when in reality they do not, meaning the “Fresh Start” is not a fresh start and student loans continue to lag in repayment.

If those in bankruptcy wish to be released fromstudent loans their only option is to file a Hardship Discharge.

Fail the Median? Meet the Means TestFail the Median? Meet the Means Test

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The only way out of repaying a federal student loan in bankruptcy is via a HARDSHIP DISCHARGE, it doesn’t happen often but it does happen.

It is an adversarial proceeding, and you will be notified before the case is heard.

Make sure you are on the mailing matrix for bankruptcy cases by communicating with the courts.

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Our immediate response when faced with a borrower filing Our immediate response when faced with a borrower filing bankruptcy is GET THE MONEY!bankruptcy is GET THE MONEY!

Take a step backTake a step backYou need to examine each case carefully before you respond to You need to examine each case carefully before you respond to determine your course of action:determine your course of action:

•How much is owed?How much is owed?•Do you have a SIGNED promissory note and proof of the debt in Do you have a SIGNED promissory note and proof of the debt in the case of A/R?the case of A/R?•How much is worth fighting for? How much is worth fighting for? •Do you know the borrower’s history? Do you know the borrower’s history?

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In every bankruptcy court in the U.S. the accepted standard to determine a student’s loans potential dischargeability is the now the Brunner Test (first used in a 1987 - by the U.S. Court of Appeals). This test requires a borrower/debtor to prove:This test requires a borrower/debtor to prove:(1)that the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for the debtor and dependents if forced to pay off student loans; (2) that 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 (3) that the debtor has made good faith efforts to repay the loans.*

* This is the downfall of many borrowers/debtors.

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Chapter 7: should not run more than 90 days in most cases. Check the borrower’s status after that time by contacting the borrower’s attorney if you don’t receive a discharge notice.

Chapter 13: may run from 2 to 5 years, don’t put them in limbo and forget about them! Check occasionally to see how the case is going and when it is expected to close.

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Public Access to Court Electronic Records (PACER) is an electronic public access service that allows users to obtain case and docket information from Federal Appellate, District and Bankruptcy courts, and from the U.S. Party/Case Index via the Internet. Links to all courts are provided from this web site. Electronic access is available by registering with the PACER Service Center, the judiciary's centralized registration, billing, and technical support center.

Yes, it does cost money, but not much.

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Attorney’s use this site and it is worthwhile for you to also gain access.

Courts are sending out discharge notices to creditors with the social security number partially masked, making it more difficult to identify a borrower.

Tip: Make sure you cross code borrowers that have filed bankruptcy with a married name.

Tip: Make sure the files are “tagged” as bankruptcy pending”

Check the bankruptcy files every 60 days so you do not miss an ending date.

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Put the account back into active billing status. Interest does accrue during bankruptcy and should be put back on as of the date the account was frozen, BUT the account should not reflect additional aging or months past due. Holds can go back on for non-payment.Send borrowers a letter apprising them of their return to repayment. This is a great time to offer rehab, so they can get the account current and keep their credit clean. Be prepared for confused borrowers who think “all dischargeable debts” includes their student loans.

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TIP: DEVELOP A LETTER TO SEND TO BORROWERS AFTER BANKRUPTCY EXPLAINING TIP: DEVELOP A LETTER TO SEND TO BORROWERS AFTER BANKRUPTCY EXPLAINING THE SCHOOL’S POSITION.THE SCHOOL’S POSITION.

An enrolled borrower who files for bankruptcy should have that loan closed immediately.

It will be included in the bankruptcy, but loans advanced after the date of filing will not. Give the borrower a new prom note and a new loan for additional advances.

A student can qualify for more loans even if the last ones were discharged in bankruptcy. A student may not be denied loans based on filing bankruptcy as long as any loans he has are current.

HOWEVER a school can consider the student’s post bankruptcy payment\performance as an indicator of willingness to repay the loan.

In School and in Bankruptcy?In School and in Bankruptcy?

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Don’t let debt accumulate. Begin debt collection early and be consistent! Have clearly WRITTEN POLICIES regarding your tuition/AR and private loans. Furnish them to students every year. Get those promissory notes in place! Remember students are allowed to inspect their records even if they owe money. This does not mean you have to give them a copy of their transcripts.

BE PROACTIVE!

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Establish a Promissory Note for Students who cannot prepay tuition and fees

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I am not an attorney and therefore this presentation is not intended as legal advice and does not replace the advice of your University Counsel. This presentation is intended for educational and informational purposes for the Campus based community.

I would like to thank my friends Edward L. Berger, Esquire (an active attorney for the Campus based community in Philadelphia, PA) and Roxanna Groves (now retired but having worked for a school, loan servicer and agency) for sharing their expertise on current Bankruptcy information

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Contact us at:

Mark Goodman 856-577-7703 (Pacific time zone) mgoodman@access-receivables.com

Pam Long 410-836-7465Pam.long@access-receivables.com

Kevin Gillespie 443-275-1713kgillespie@access-receivables.com