A Look Back At 2014: California Homeowners Edition

As the year comes to a close, I get a little nostalgic and look back at articles I’ve written through the year.  This year, California homeowners faced the expiration of the Mortgage Debt Relief Act, which may still linger in Congressional uncertainty. Home values have stalled, leaving many with persistent negative equity, while many struggle to keep up with their adjustable mortgage payments after they have “adjusted.”

Here’s a look back at articles for California’s homeowners:

I hope that next year brings you joy and equity. I wish for financial stability and increased home values for all. May you find peace and comfort.  I hope these articles help guide your difficult financial decisions and help you toward financial freedom from debt. Most of all, I wish you the Happiest of Holiday Seasons.

Should I Pay A Bogus Bill To Save My Credit Rating?

You Can Have an Excellent Credit ScoreI definitely have heated opinions every Sunday when I read Liz Weston’s (@lizweston) “Money Talk” articles.  She’s a journalist who has published books on money, so she’s an expert right? Well, she definitely tries to help, while avoiding the unauthorized practice of law because she is not a lawyer.  Recently, a reader asked whether they should pay a bill they don’t owe to save their excellent credit rating.  You know what I think?  I think your blood pressure is the most important number to protect, not your credit score, but I digress.

Ms. Weston’s response, here,  to this reader seems decent, “pay the bill, then sue in small claims court.”  This will save the credit score, but it certainly does not exhaust the consumer’s full potential legal remedies.  I’ll pick up where Weston leaves this poor consumer.  My Answer:  After you’ve written to everyone and their brother, contact a consumer protection attorney who sues debt collectors under the Fair Debt Collections Practices Act for attempting to collect on such bogus debts.  This is a federal law so it applies throughout the U.S.  Sue the university, and the third party debt collector.  If the debt shows up on your credit report in error, you also get the protections of the Fair Credit Reporting Act, which would force the credit bureaus to remove the derrogatory trade line; sue the credit bureaus too.

Bottom line is don’t take bogus debt lying down.  Fight back with a consumer protection attorney.  Each violation under these federal laws will cost the creditors a statutory fine of $1,000.00, plus attorney fees and costs, which only grows if they blatantly fail to act after you’ve tried to get them to correct their error.  And the moral of the story is that no good deed goes unpunished.  The story behind this problem started with volunteerism.

Questions can be sent to my office at 5011 Argosy Avenue, Suite 3, Huntington Beach, CA 92649, or by E-mail to: assistantberta@gmail.com

Zillow Says You Still Owe More Than Your Home Is Worth

Negative equity, a term that means that the amount owed on all mortgages is more than the market value; also known as “underwater.” Home equity is the difference the current resale value of the home and the total mortgage debt owed. According to Zillow, 9.7 million Americans still have a problem with negative equity and are holding on to underwater homes. The Forbes article looked at the Zillow data and noted that the most troubled homes are valued at less than $100k, in the lower tier of values. This is despite the recent equity boom since the foreclosure crash of 2008.

Underwater homes where the debt owed exceeds the value cannot be sold on the regular market; cannot be refinanced to reduce interest rates; and have no cash value to the homeowners trying to wait and see when their equity may come back.  Especially troubling are those whose negative equity exceeds 25% or more of the value.  This begs the question:  How long would you continue to pay on a home that may never fully recover from the negative equity? 

12% of California homeowners still don’t have any equity in their homes.  I believe that as some of those toxic mortgages begin to adjust from the teaser “interest only” terms to full repayment, we will see these owners forced into a short sale, or loan modification, if they qualify. However, with every dark cloud there is a silver lining. Bankruptcy may strip off a junior mortgage for negative equity homes. Bankruptcy may also eliminate potential income tax consequences of a short sale, if the Mortgage Debt Relief Act is not continued.

Taking Stock of the Student Loan Crisis

Numbers of the Mind

I’m using real numbers as taken from the U.S. National Debt Clock as of Tuesday, November 4, 2014. You can watch the numbers move at a dizzying pace, here. It frustrates me when journalists and others in the media use inaccurate numbers to describe their perspective on how the U.S. economy is “improving.”  After staring at the debt clock for a few minutes and reading my take on the numbers, you decide where your economy is headed and why student loan debt remains a crisis situation.

  1. Student loan debt is now greater than $1.3 Trillion
  2. Median household income in 2014 dropped by $200 per year as compared to the year 2000 to $28,544.00
  3. Total personal debt increased 99% since 2000, nearly double the amount of personal debt in 14 years
  4. Federal spending has increased 98% since 2000
  5. Real unemployment is 5.9% nationwide and 7.4% in California. Actual number of unemployed: 18,161,224
  6. Nearly 50% of the U.S. population receives some form of government assistance!

Reuters declared that the student loan crisis is over according to this article by blogger John Haskell (@John_e_Haskell) from Maine.  His article details the evidence that supports that eventually no one will have the ability to repay this enormous student loan debt. Even as jobs begin to return to the U.S., incomes will remain competitive with China, which means that American workers will make less than in the past. It’s really simple math; when income drops, so must spending.  Look at the numbers one more time and notice that federal spending has nearly doubled, and so has personal debt, while average household incomes have dropped.  These numbers spell B-A-N-K-R-U-P-T-C-Y! If it’s good enough for General Motors to file more than once, then it’s good enough for every American whose debt has increased because their income dropped!

They Went Broke and Lived Happily Ever After

Freedom - happy free couple in car

I’ve been wondering recently about how my clients are doing long after their bankruptcy case ends and the debt is gone.  Then, I happened upon Bryan Fears’  (@fearsnachawati) article, File Bankruptcy and Live Longer and read a few positively surprising results that began to answer my questions about life after bankruptcy. Unfortunately, the article did not have a link to the source and study, but have no fear, I got that for you. The research article entitled, Debt Relief and Debtor Outcomes: Measuring the Effects of Consumer Bankruptcy Protection, found here, although a very technical and dry title, has some fabulous results for those who have filed bankruptcy.

The study focused on Chapter 13 Bankruptcy cases, which are a court approved repayment program for consumer debtors.  500,000 bankruptcy filings were studied and matched to administrative tax and foreclosure data to estimate the impact of Chapter 13 bankruptcy protection on subsequent outcomes.

“The Bankruptcy Act is…of public as well as private interest, in that it gives the honest bu unfortunate debtor…a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of pre-existing debt.” -U.S. Supreme Court, Local Loan Co. v. Hunt, 292 U.S. 234 (1934)

Bankruptcy’s surprising effects on consumers:

  1. Increased earnings
  2. Incentive to work/Stay employed
  3. Live longer
  4. Lower stress
  5. Stop home foreclosure
  6. Stop wage garnishment & Bank levies
  7. Increased financial stability

In contrast, the study explains that if a case is Dismissed, the consumer experiences large and persistent drops in earning after filing bankruptcy. So, what does all this mean to someone looking to get out of debt?  It means that a court approved debt repayment program under Chapter 13 of the Bankruptcy Code provides control and financial stability (and a 0% interest on unsecured debts in repayment) by fixing the monthly repayment amount based on an affordable budget. One of bankruptcy’s best protections is to stop collections efforts, foreclosure, and wage garnishment.  Besides, who doesn’t want to increase their income, reduce stress and live longer?

Time-Barred Debt Collections and FDCPA

iStock_000044144728Small“Tick-tock” goes the clock on a creditor’s legal ability to collect on a debt owed.  Known as the Statute of Limitations, state laws that vary in each state, limits the time a creditor has to file a law suit to collect a debt. If they do not sue in time, the debt is no longer legally enforceable.  This is what the debt collectors don’t want you to know.  In California, the Statute of Limitations is Four (4) years on a written agreement from the last activity date.  The last activity date is the last time the credit was used, or the date of last payment, whichever is later.  The Fair Debt Collections Practices Act (“FDCPA“) prohibits, among other things, “any false, deceptive, or misleading representation or means in connection with the collection of any debt.” 15 U.S.C. 1692e. So, what does all this mean to you?

1.  Debts do not automatically go away after four (4) years.  In fact, the debt can be collected indefinitely.  However, after the Statute of Limitations has passed, debt collectors can no longer sue to collect.  They also cannot make false representations or threaten to sue you in order to get you to pay up.

2.  The debt will stay on your credit report for seven (7) years from the date of first delinquency.  So, even if a debt collector cannot sue, they can still collect the debt and it will stay on a credit report until seven years has passed.

3.  Those calls and letters may still keep coming long after the Statute of Limitations has run because debt collectors are still allowed to collect the debt; FOREVER.

4.  The ONLY way to eliminate debt is to pay it in full; negotiate and settle for less than what you owe; or file bankruptcy.

It’s important to understand your rights and the rights of creditors when working to eliminate debt and improve credit scores so that you can move on with your financial life.  Be sure to consult with your tax preparer as some decisions make cause income tax to you.  Remember that any debts discharged in bankruptcy do not incur income taxes.

California Homeowner’s Guide To Stop Foreclosure

Buying a house is the single most expensive purchase we make during our lives.  It’s stressful and time consuming to go through the escrow process to get those keys.  Then, there is the time and cost of maintaining that home while keeping up with those mortgage payments, which may or may not include taxes and insurance.  After working so hard to buy a home, it’s no wonder that homeowners want to fight even harder to keep their home when faced with foreclosure.  Over the years, I’ve written extensively on the options that homeowners have and wanted to share my favorite articles on this topic.  But first, here is A Homeowner’s Guide to Foreclosure in California by the Department of Real Estate.

Here are my Top Five Articles as your guide to stop foreclosure:

  1. Five Ways To Stop A Foreclosure
  2. When Should You Walk Away From Your Mortgage
  3. Bankruptcy as a Home Saving Device
  4. Foreclosuregate:  California Edition
  5. Keeping Your Home When Filing Bankruptcy

As the economy continues to slowly recover and home equity returns, it may seem as though America’s financial troubles are behind it.  However, as we begin the 4th Quarter of 2014, we are seeing an uptick in foreclosure filings that may signal a time for California homeowners to take action on their defaulted mortgages one way or another. Always consult with your realtor, bankruptcy lawyer and tax advisor before deciding which option is right for you.  Making a well-informed decision is key to future financial success.

More Things Student Loan Lawyers Ask Borrowers Who File Bankruptcy

This post stems from an article in the Wall Street Journal entitled, “5 Things Student Loan Lawyers Ask Borrowers Who File For Bankruptcy.” As one of the few lawyers in this country to recently take on such lawyers for the creditors, I’ve got a few more questions to add to this list.

Why didn’t you adjust your lifestyle before the loans were even due?

In a historical line of questioning in my client’s case, Schaffer v. ECMC, 2:10-bk-64135-RN , counsel for Defendant, Educational Credit Management Corporation (“ECMC”) began questioning my clients about their lifestyle prior to the Parent Plus loans they took for their son’s education even became due. After my objection, counsel explained that the debtors should have been adjusting their lifestyle in advance of the loans becoming due.  The court responded that they had no such legal obligation.

Your current health conditions were caused by past behavior, weren’t they?

The Ninth Circuit in United Student Aid Funds, Inc. v. Pena (In re Pena), 155 F.3d 1108 (9th Cir. 1998) has adopted the test set forth in Brunner v. New York State Higher Educ. Svcs. Corp. (In re Brunner), 831 F.2d 395 (2nd Cir. 1987) as the test to be applied in determining whether a student loan is dischargeable under Section 523(a)(8).

Under Prong 2 of the Brunner test, the debtor must prove circumstances beyond their reasonable control.  Generally, medical conditions that are likely to persist can satisfy this burden.  In the Schaffer case, counsel for ECMC began questioning my clients about their past lifestyle in a futile attempt to connect current health conditions to past lifestyle choices.  Their point, the debtors past lifestyle choices were within their reasonable control and therefore the current conditions were self-induced and thus not beyond their control.  The debtor’s husband was totally and permanently disabled suffering from liver cancer and on a liver transplant list at the time of trial.

Are “those” expenses really necessary?

This is a usual and customary strategy for creditor’s counsel because much of the arguments are about whether the borrowers have the ability to pay their student loan debts.  Back to the Schaffer case, the debtor held life insurance policies; two on her husband.  Not only did opposing counsel argue that she should cut this expense, if it wasn’t cut, he wanted the proceeds to pay the debt.  It may not have been so difficult borrowing the money, but this unconscionable attempt to collect on a debt borders on “disgusting.” Needless to say, her husband was dying and that money would be required for her future financial support after losing her husband’s household contributions.

Also, it didn’t matter in this case, how many ways the creditor’s attorney were to try to “slice” the budget, these debtors had a net monthly income of $-739.42.  Not only would opposing counsel need to cut the budget to eliminate this deficit, he would need to generate and additional $197.05, per month, which constituted an income sensitive repayment plan, which most Parent Plus loans do not qualify. Dining out at Taco Bell when you’re exhausted from caring for your family after a full-time job is not unnecessary.  A cell phone can be medically necessary when you’re not at home and your ill family member may need you, or doctors wanting to reach you for appointments and updates.

I advise all debtors seeking to discharge student loans in bankruptcy that they need to be ready to testify at trial.  A great student loan lawyer for the consumers will properly prep their cases and clients by really learning and understanding their clients.  Consumer lawyers need to be ready for the audacity of the creditor’s counsel and the lengths they will go to keep those pesky student loans from being discharged.

Student Loans Through A Concise History of Bankruptcy Amendments

History of 11 U.S.C. § 523(a)(8)

The Debate

The student loan exception to discharge has a fairly short, but interesting, history. Congress first established the Guaranteed Student Loan Program under the auspices of the Higher Education Act of 1965. Designed to meet “the challenge of keeping the college door open to all students of ability. . . .”, the Program guaranteed federally-backed, low-interest loans to qualifying students. S.Rep. No. 89-673 (1965), reprinted in 1965 U.S.C.C.A.N. 4027, 4055.

Reports of students discharging their educational obligations first emerged in the early 70′s. Neither the Bankruptcy Act nor the provisions governing the student loan programs specifically prohibited the discharge of student loans.3 Stories proliferated of students discharging their educational obligations on the eve of lucrative careers. Notwithstanding the isolated and inflammatory nature of these incidents, the popular portrayal of the “deadbeat” student debtor proved both compelling and enduring.4

In 1970, Congress created the Commission on the Bankruptcy Laws of the United States to propose changes to then-existing bankruptcy laws. Among other items on its agenda, the Commission addressed the treatment of educational loans under the Bankruptcy Act. In 1973, recognizing the “threat to the continuance of educational loan programs,” the Commission issued a report recommending limitations on the dischargeability of student loans. Report of the Commission on the Bankruptcy Laws of the United States, H.R. Doc. No. 93-137, 93d Cong., 1st Sess., pts. 1 & 11 (1973). The Commission’s proposal prohibited any discharge of educational obligations during the first five years of repayment unless the debtor demonstrated hardship: “The Commission . . . recommends that, in the absence of hardship, educational loans be nondischargeable unless the first payment falls due more than five years prior to the petition.” Id.

Educational Amendments of 1976

Three years later, Congress visited the dischargeability issue. Congressional testimony

[218 BR 452]
emphasized the role of federal funding in facilitating postsecondary education:

The Committee recognizes the massive contribution to financing postsecondary educational opportunity made in the ten years of operation of the GSLP. No other program of the Federal Government has been as successful in expanding financial resources to support educational expenses of our citizens. As roughly one in every fifty American citizens has benefited from this program, its massive success in serving its purposes should not be diminished. However, such high levels of participation and the need to expand educational opportunity have created both program growth and opportunity for abuse which have threatened to destroy this fine record of success.

S.Rep. No. 94-882, at 19 (1976), reprinted in 1976 U.S.C.C.A.N. 4713, 4731.

Unlike the house and Commission proposals which incorporated a hardship provision for students seeking to discharge their educational obligations inside the five-year period, the Senate advocated absolute nondischargeability during the first five years of repayment:

The Committee bill seeks to eliminate the defense of bankruptcy for a five-year period, to avoid the situation where a student, upon graduation, files for a discharge of his loan obligation in bankruptcy, then enters upon his working career free of the debt he rightfully owes. After a five-year period, an individual who has been faithfully repaying his loan may really become bankrupt. He should not be denied this right. . . .

S.Rep. No. 94-882, at 32 (1976), reprinted in 1976 U.S.C.C.A.N. 4713, 4744.

The Senate eventually receded from its position and Congress adopted the Commission’s recommendations in section 439A of the Education Amendments of 1976. Section 439A (a) provided that:

A debt which is a loan insured or guaranteed under the authority of this part may be released by a discharge in bankruptcy under the Bankruptcy Act only if such discharge is granted after the five-year period (exclusive of any applicable suspension of the repayment period) beginning on the date of commencement of the repayment period of such loan, except that prior to the expiration of that five-year period, such loan may be released only if the court in which the proceeding is pending determines that payment from future income or other wealth will impose an undue hardship on the debtor or his dependents.

Education Amendments of 1976, Pub.L. No. 94-482, § 439A(a), 90 Stat. 2081, 2141 (codified at 20 U.S.C. § 1087-3 (1976) (repealed 1978)).

Bankruptcy Reform Act of 1978

Congress was again called upon to address the dischargeability of student loans when it passed the Bankruptcy Reform Act of 1978. The Act fostered considerable debate and even produced a bicameral split. Although the original Senate bill codified the Commission’s recommendation limiting the dischargeability of student loans, the House bill advocated dischargeability. In endorsing the equal treatment of student loans, the House noted the exaggerated and anecdotal evidence on which the Commission’s original proposal was based:

The rate of educational loans discharged in bankruptcy has risen dramatically in recent years. However, the rise appears not to be disproportionate to the rise in the amount of loans becoming due or to the default rate generally on educational loans. The rise has been slightly higher than the rise in the bankruptcy rate overall. The sentiment for an exception to discharge for educational loans does not derive solely from the increase in the number of bankruptcies. Instead, a few serious abuses of the bankruptcy laws by debtors with large amounts of educational loans, few other debts, and well-paying jobs, who have filed bankruptcy shortly after leaving school and before any loans became due, have generated the movement for an exception to discharge.

H.R.Rep. No. 95-595, at 133 (1978), reprinted in 1978 U.S.C.C.A.N. 5963, 6094.

Notwithstanding the controversy, Congress adopted the Senate bill, enacting

[218 BR 453]

Public Law 95-598 and creating a new Title 11 of the United States Code. Under the new provision, debtors were not discharged from any debt:

(8) to a governmental unit, or a nonprofit institution of higher education, for an educational loan, unless —

(A) such loan first became due before five years before the date of the filing of the petition; or

(B) excepting such debt from discharge . . . will impose an undue hardship on the debtor and the debtor\’s dependents. . . .

11 U.S.C. § 523(a)(8) (1978).

1979 Stop-Gap

The repeal of § 439A and its replacement by 11 U.S.C. § 523(a)(8) created a gap in the student loan exception to discharge. Although § 439A was repealed on November 6, 1978, 11 U.S.C.A. § 523(a)(8) did not take effect until October 1, 1979, creating nearly an eleven-month period during which student loans were, at least in theory, dischargeable. On August 14, 1979, Congress enacted Public Law 96-56 to fill the gap. Public Law 96-56 effectively resurrected 439A by amending § 17a of the Bankruptcy Act and applying its provisions “to any proceeding commenced under the Bankruptcy Act during the period beginning on the date of enactment of this Act and ending October 1, 1979.” Act of Aug. 14, 1979, Pub.L. No. 96-56, 93 Stat. 387. As amended, § 17a provided an exception to discharge for:

a loan insured or guaranteed under the authority of part B of title IV of the Higher Education Act of 1965 (20 U.S.C. § 1071 et seq.) unless (a) the discharge is granted after the five-year period (exclusive of any applicable suspension of the repayment period) beginning on the date of commencement of the repayment period of such loan, or (b) the discharge is granted prior to the expiration of such five-year period and the court determines that payment from future income or wealth will impose an undue hardship on the bankrupt or his dependents.

11 U.S.C. § 35(a)(9) (repealed Oct. 1, 1979). The committee report accompanying the bill emphasized Congress’ continuing commitment to impose limitations on the dischargeability of student loans:

Section 1 of the bill closes the inadvertent “gap” created when the applicable section of the Higher Education Act of 1965 prohibiting discharge of student loans was repealed as of November 6, 1978, and its replacement section in title 11 was not made effective until October 1, 1979. Congress obviously did not mean to create a gap and at all times held to the principle of nondischargeability of student loans as was found in section 439A of the Higher Education Act of 1965.

S.Rep. No. 96-230, at 3 (1979), reprinted in 1979 U.S.C.C.A.N. 936, 938.

Amendments to 11 U.S.C. § 523(a)(8)

In the years following its enactment, amendments to 11 U.S.C. § 523(a)(8) have clearly reflected a congressional design to further limit the dischargeability of educational obligations.

1979 Amendment

In addition to closing the gap created by the early repeal of § 439A, in 1979 Congress also expanded the types of loans protected from dischargeability under 11 U.S.C. § 523(a)(8). Pub.L. No. 96-56, § 3(1) (1979). In particular, the new amendment corrected the different treatment of profit-making and nonprofit institutions of higher education under § 523(a)(8):

Because new 11 U.S.C. 523(a)(8) applies only to debts for educational loans owing to a governmental unit or to a nonprofit institution of higher education, it has a very uneven effect upon the student loan programs administered by the Department of Health, Education, and Welfare. For example, National Direct Student Loan (NDSL) funds are administered by both nonprofit and profit-making institutions of higher education. Under the new law, a student who obtained an NDSL loan from a profit-making institution of higher education would be free to have that loan discharged in bankruptcy. In contrast, a student who obtained an NDSL loan from

[218 BR 454]

a nonprofit institution of higher education would be subject to the prohibitions contained in the new law.

S. Rep. No. 96-230, at 1-2 (1979), reprinted in 1979 U.S.C.C.A.N. 936, 936-37.

Furthermore, the 1979 amendment excluded deferment periods from calculation of the repayment period. Pub.L. No. 96-56, § 3(2) (1979). Congress enacted the amendment primarily to prohibit debtors from deferring payments for the nondischargeability period:

Loan programs typically provide periods of deferment during which a borrower\’s obligation to repay his loan is suspended. Using the Guaranteed Student Loan Program as an example, a student may defer repayment for an unlimited time if the student resumes study, for up to three years if the student serves in the Armed Forces, the Peace Corps or VISTA, and for up to one year if the student is unemployed. Therefore, it is possible for the first five years of the repayment period on a student\’s loan to run without the student having an actual repayment obligation during all of that period.

S.Rep. No. 96-230, at 3 (1979), reprinted in 1979 U.S.C.C.A.N. 936, 938.

1984 Amendments

In 1984, Congress again expanded the scope of 11 U.S.C. § 523(a)(8) by deleting language limiting dischargeability protections to loans issued by nonprofit institutions of higher education. Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub.L. No. 98-353, § 454(a)(2), 98 Stat. 375.5

1990 Amendments

In 1990, Congress expanded the period of repayment from five to seven years. Federal Debt Collection Procedures Act of 1990, Pub.L. No. 101-647, § 3621(2), 104 Stat. 4933.6 Finally, the Student Loan Default Prevention Initiative Act of 1990 applied § 523(a)(8) to Chapter 13 cases.7

The Debate Continues

In 1994, Congress again created a commission to review bankruptcy laws. In its October 20, 1997 report, the National Bankruptcy Review Commission recommended to Congress that the exception to discharge for student loans be eliminated:

The Commission recommends that Congress eliminate section 523(a)(8) so that most student loans are treated like all other unsecured debts. In so doing, the dischargeability provisions would be consistent with federal policy to encourage educational endeavors. The Recommendation would also address the numerous application problems that have resulted from the current nondischargeability provision. No longer would Chapter 13 debtors who made diligent efforts to repay be penalized after completing a plan with thousands and thousands in compounded back due interest. Litigation over “undue hardship” would be eliminated, so that the discharge of student loans no longer would be denied to those who need it most.

Report of the National Bankruptcy Review Commission, § 1.4.5 (October 20, 1997).

Judicial Interpretations of the Word “Loan”

One of the most oft-cited definitions of “loan” can be found in the Second Circuit’s opinion in In re Grand Union Co., 219 F. 353

[218 BR 455]
(2d Cir.1914). In In re Grand Union Co., the Second Circuit defined a loan as:

A contract by which one delivers a sum of money to another and the latter agrees to return at a future time a sum equivalent to that which he borrows. `In order to constitute a loan there must be a contract whereby, in substance one party transfers to the other a sum of money which that other agrees to repay absolutely, together with such additional sums as may be agreed upon for its use. If such be the intent of the parties, the transaction will be considered a loan without regard to its form.\’

Id. at 356 (citing 39 Cyc. 296).

A number of courts, invoking the Second Circuit’s “sum of money” language, hold that a loan does not arise unless and until there is an actual advance of money to the debtor. For example, in DePasquale v. Boston Univ. Sch. of Dentistry (In re DePasquale), 211 B.R. 439 (Bankr.D.Mass.1997), Boston University allowed the debtor to attend classes without prepaying her tuition bill. When the debtor filed bankruptcy, the university sought to have the balance determined non-dischargeable under 11 U.S.C. § 523(a)(8). The court concluded that the university’s acquiescence in the debtor’s continued attendance without prepayment did not satisfy the definition of a loan since no money had changed hands: “A loan involves more than an extension of credit. It is the furnishing of money or other property by a lender to a borrower.” Id. at 441.

Likewise, in New Mexico Inst. of Mining & Tech. v. Coole (In re Coole), 202 B.R. 518 (Bankr.D.N.M.1996), the court concluded that a loan for § 523(a)(8) purposes had not arisen when the debtor merely incurred expenses on his student account: “The plain meaning of `loan’ is that a sum of money must change hands.” Id. at 519; see also Dakota Wesleyan Univ. v. Nelson (In re Nelson), 188 B.R. 32, 33 (D.S.D.1995) (holding that charges for “tuition, room and board, and other services” incurred by student debtor on an open account “cannot be categorized as an `educational benefit overpayment’ or as a `loan.’”).

Some of these cases seem to turn on the absence of a written agreement executed contemporaneously with the extension of credit. See DePasquale, 211 B.R. at 442 (distinguishing In re Merchant Andrews Univ. v. Merchant (In re Merchant), 958 F.2d 738 (6th Cir.1992), where “the debtor had signed forms evidencing the amount of her indebtedness before she registered for classes, much like one signs a promissory note before receiving an advance of funds.”) (emphasis added); In re Nelson, 188 B.R. at 33 (“The University’s choice to allow the debtor to continue to attend classes without signing a note or making payment cannot amount to a loan. . . .”) (emphasis added); Seton Hall Univ. v. Van Ess (In re Van Ess), 186 B.R. 375, 377 (Bankr.D.N.J.1994) (“Nor does it appear that the Debtor and the university entered into any written agreement which provided terms for the payment of the . . . tuition.”) (emphasis added).

Many courts have rejected the more formulaic definition of the word “loan” in favor of a flexible construct which emphasizes the substance of the transaction and the underlying intent of the parties. In United States Dep’t of Health and Human Servs. v. Avila (In re Avila), 53 B.R. 933 (Bankr.W.D.N.Y. 1985), the court adopted the following definition of “loan”:

Repeatedly, it has been observed that a loan may exist regardless of the form of a transaction. Loans have been found to exist in transactions that were arguably purchases, and in transactions that were arguably transfers in trust. Loans have been found, for the purpose of usury laws, when a bank advances money and the transaction is `in substance\’ a loan. Loans, in substance, have been found when the issue is relevant to whether a corporation\’s actions have been ultra vires, and when the issue is relevant to the duty of fair dealing of one who receives money.

Id. at 936 (citations omitted).

The circuit courts which have addressed the issue have also adopted a broad definition of the word “loan.” For example, in United States Dep’t of Health and Human Servs. v. Smith, 807 F.2d 122 (8th Cir.1986), the Eighth Circuit held that funds received

[218 BR 456]
pursuant to the Physician Shortage Area Scholarship Program satisfied the statutory definition of a loan. In Smith, the debtor sought to discharge benefits received under the Program, which required him to practice in physician shortage areas after graduation. Students who failed to fulfill their practice obligations were required to repay the funds. Notwithstanding their conditional nature, the Eighth Circuit held that the scholarships were loans: “We follow the weight of authority that `a loan is no less a loan because its repayment is made contingent.’” Id. at 125 (quoting Island Petroleum Co. v. Commissioner of Internal Revenue, 57 F.2d 992, 994 (4th Cir.1932)).

In Andrews Univ. v. Merchant (In re Merchant), 958 F.2d 738 (6th Cir.1992), the Sixth Circuit ruled that a university’s extensions of credit constituted a loan for § 523(a)(8) purposes. In reaching its conclusion, the court observed that the debtor had executed a promissory note prior to matriculation: “In this case the debtor signed forms evidencing the amount of her indebtedness before she registered for class. She received her education from the University by agreeing to pay these sums of money owed for educational expenses after graduation. The credit extensions were loans for educational expenses.” Id. at 741.

A number of courts have concluded that even short-term, unmemorialized extensions of credit constitute loans for § 523(a)(8) purposes. See Najafi v. Cabrini College (In re Najafi), 154 B.R. 185 (Bankr.E.D.Pa.1993) (holding that student who was allowed to register and attend classes without prepaying tuition received a nondischargeable loan); University of New Hampshire v. Hill (In re Hill), 44 B.R. 645 (Bankr.D.Mass.1984) (holding that university’s provision of short-term credit to student awaiting receipt of loan proceeds constituted a loan under 11 U.S.C. § 523(a)(8)).

In deciding whether a particular transaction qualifies as a loan, courts also consider the intent of the parties. See In re Merchant, 958 F.2d at 740 (“If such be the intent of the parties, the transaction will be considered a loan without regard to its form.”) (quoting In re Grand Union Co., 219 F. at 356); In re Hill, 44 B.R. at 647 (noting that it was the debtor’s “intention to pay the University the proceeds of his Higher Education Loan when received.”); In re Avila, 53 B.R. at 937 (noting that the “intent of both parties was to create an obligation which would require repayment.”); Midland Ins. Co. v. Friedgood, 577 F.Supp. 1407, 1413 (S.D.N.Y.1984) (“A critical issue in the determination of whether a transaction was a loan is whether the intent to make a loan was present.”).

Dictionary Definitions of “loan”

In the absence of a statutory ambiguity, courts are required to apply the plain meaning of the term at issue. See NLRB v. Amax Coal Co., 453 U.S. 322, 329, 101 S.Ct. 2789 2794, 69 L.Ed.2d 672 (1981) (“Where Congress uses terms that have accumulated settled meaning under . . . common law, a court must infer, unless the statute otherwise dictates, that Congress meant to incorporate the established meaning of these terms.”). Most of the courts that require an actual advance of money rely on dictionary definitions which define loans exclusively in these terms. However, our review of a number of sources (admittedly not exhaustive) has turned up a number of definitions which easily encompass Johnson’s debt to the College.

Black’s Law Dictionary defines a “loan” as “anything furnished for temporary use to a person at his request, on condition that it shall be returned, or its equivalent in kind, with or without compensation for its use.” Black’s Law Dictionary 936 (6th ed.1990). Webster’s Third International Dictionary defines a loan similarly, as “something lent for the borrower’s temporary use on condition that it or its equivalent be returned.” Webster’s Third New International Dictionary 1326 (Philip Babcock Gove ed., 1993).

Although the definitions imply money as the subject of the loan transaction, they do not necessarily anticipate or even require an actual exchange of funds between the lender and the borrower. Notably, Black’s Law Dictionary also defines a loan as “the creation of debt by the lender’s payment of or agreement to pay money to the debtor or to a third party for the account of the debtor. . . .”

[218 BR 457]
Black’s Law Dictionary 936 (6th ed.1990) (emphasis added). The definitions do not require an exchange of funds at all. See id. (“`Loan’ includes . . . the creation of debt by a credit to an account with the lender upon which the debtor is entitled to draw immediately. . . .”) (emphasis added); see also West’s Legal Thesaurus/Dictionary 464 (William P. Statsky ed., 1986) (including among its definitions of loan an “advance, credit, accommodation or allowance. . . . “).

Applying these definitions to the facts before us, we conclude that the arrangement between Johnson and the College constitutes a loan. Johnson’s promise to remit the cost of tuition to the College in exchange for the opportunity to attend classes created a debtor/creditor relationship. She signed a promissory note to evidence her debt. By allowing Johnson to attend classes without prepayment, the College was, in effect, “advancing” funds or credits to Johnson’s student account. Johnson drew upon these advances through immediate class attendance. It is immaterial that no money actually changed hands.

Source:  In re Johnson, 218 B.R. 449 (B.A.P. 8th Cir., 1998)

Mortgage Servicing Statements in Bankruptcy Fraught With Errors

Stars HouseWhat happens when you take a homeowner who defaults on their mortgage into bankruptcy to stop the foreclosure sale?  You get a situation that is disease ridden with errors.  Katie Porter (@MsKatiePorter) recently wrote about this over at Credit Slips (@CreditSlips) in her article, What do bankruptcy mortgage servicing and Ebola have in common? where she explains that at least you can only get Ebola once, unlike the recurring problems with mortgage servicing in bankruptcy.  Here’s why.

The moment a bankruptcy case is filed, the mortgage is deemed current.  This should mean that the foreclosure sale is removed from the sale trustee’s website so that the consumer stops receiving the ridiculous amount of mail solicitations warning of the sale of their.  More importantly, the mortgage servicer must stop adding late fees, inspection fees and other costs to the mortgage statement after the bankruptcy case is filed.

The amount of money owed to the lender that is equal all the payments missed by the homeowner, are put into a court approved plan payment under Chapter 13 of the Bankruptcy Code.  This allows the homeowner up to five (5) years to get current on their mortgage and save their home from foreclosure.  These ‘plan’ payments are in addition to the homeowner beginning to make their regular mortgage payments directly to the lender.  The problem is that the servicers continue to hold the mortgage in default in their system and continue to add fees and costs during bankruptcy.  Here is how we fix this.

Here in the Central District, near the end of a client’s Chapter 13 case, we can ask the Court to deem the client’s mortgage as CURRENT UPON DISCHARGE.  This means that if the court approves this request, the client’s mortgage is current once their case is completed.  Afterwards, if the client sees any fees and/or costs that are added to their loan after bankruptcy, the servicer is violating a court order that is enforceable.

***Disclaimer:  This only applies to Chapter 13 cases***