Getting From Point A to Point B With Money

A to B

Taking a trip is exciting. You have a staring place [“Point A”] and a destination [“Point B”]. Along the way, is the “journey.” Getting from Point A to Point B is simple when it’s a road trip because we look at a map, or nowadays, we’ll just plug in our destination into our GPS system, and the road to our destination appears before us.  Thinking in terms of a trip or vacation, we see that the journey itself can be just as important.  For example, if it’s a road trip, you might want to plan stops along the way.  However, when we turn to our more important life decisions, we’ll likely want a shorter journey; like the quicker, better, and faster way to either end a medical issue or financial issue; right? Getting from Point A to Point B is something we do all the time, yet we don’t always apply it in the context of goals, desires or personal journeys. Let’s discuss getting from Point A, where you’re in debt; to Point B, the destination of being completely out of debt.

Some would say that knowing where you are is the most important point.  Maybe you’ve heard, “You’ve gotta start somewhere.” Well, I say that there is place than where you are financially, to make a decision to get out of debt. I say the Point A, in this equation, is the decision to get out of debt, not the fact that you’re in debt. This is because I’m beginning to think that there aren’t too many people with enough desire to end their suffering of too much debt to even take the journey from Point A to Point B, and live life without debt. Once you’ve decided to take that journey to get out of debt, the road to Point B can be paved with uncertainty, fear, confusion and landmines.

There are so many choices to make in terms of how to get out of debt, that many people are paralyzed and do nothing at all, which is also a decision, if you ask me. What I wonder is, why would you make the decision to get out of debt without exploring all of your options?  Why would someone choose a longer, more expensive route to their destination, than the next person.  I’ve discussed options for getting out of debt here, and here. There are a limited number of ways to get out of debt, many of which don’t event eliminate debt.  Two such options; “doing nothing,” and “borrowing money,” only make matters worse when trying to get out of debt. Many of my clients have tried these first, only to come to me for bankruptcy later.

Another popular option are these debt consolidation, or debt settlement companies. At first, paying less than you owe on a debt sounds like a good idea.   Say you have a $10,000.00 credit card debt that you’ve been able to negotiate 1/2 off.  Now, you only owe $5,000.000.  If you had $5,000.00 available, it might be a simple solution.  But don’t be surprised that tax bill at the end of the year for the portion of the debt that was cancelled.  So, debt settlement requires a large payment and likely a tax bill.  I believe that debt settlement is right for those who have funds readily available and where filing bankruptcy is not an option.  The biggest problem with debt settlement or consolidation of debts is the credit repair that must follow.

The least popular option for getting out of debt is, for the most part, the cheaper, better, and faster way to get out of debt; Bankruptcy.  If you haven’t already clicked on the links in the second paragraph, take a moment now to do it.  In those articles, I run through the math on the savings by pointing out that someone who files a Chapter 7 bankruptcy, which is a liquidation case where you make no more debt payments, saves the most money and eliminates their debts immediately.  Even someone who pays back their debts in full in a Chapter 13 repayment plan bankruptcy, can save tens of thousands of dollars over any other route toward freedom from debt. What I can’t seem to figure out is why more folks don’t ask themselves the question of which route will get them out of debt faster and for less money.

A colleague and friend of mine, Ron Drescher, Esq., (@rondrescher) who practices bankruptcy on the east coast, wrote a book entitled, File Bankruptcy and Get Rich. I think he’s right.  Some very wealthy folks have filed bankruptcy before they struck it rich.  Dave Ramsey filed bankruptcy and had a bad experience, so he started his business on a mission to help others avoid bankruptcy.  Walt Disney filed bankruptcy before Disneyland. JCPenny filed bankruptcy.  Donald Trump has filed six times on several of his businesses. I think you would be surprised at the people who are now doing well financially, after dumping their debts off at bankruptcy court.

Finally, at some time, you may reach Point B.  Whether you get there by paying off your debts in full and on your own, or file bankruptcy, you’re there.  How you get there can be the difference of both time and money.  This reminds me of a trip I took to San Francisco that once took 12 hours.  My husband had planned the trip and scheduled a flight from Los Angeles (LAX) to San Francisco (SFO) airport.  What he didn’t know at the time is that SFO gets socked in with fog and our flight was delayed.  Then, due to a mechanical problem, our flight was returned and we then needed to hustle and catch another flight.  Driving there at this point would have shaved off both time and money for us. Had my husband known about the inherent weather problems, he could have easily booked the flight to Oakland and we could have taken the train over to the city. The moral of the story is that having enough information to make a well informed decision, not only as to setting the desired goal (“Point B”), but the path to getting there must also be considered.

Debt Jubilee Brings End To Debt Threats

In today’s Los Angeles Times, Tom Petruno’s (@tpetruno) article entitled, Debt Threat Looms, again, he warns us of inevitable business cycles and where the economy is headed.  You see, in order for the economy to move full steam ahead, we need to continue to spend money.  The problem with that concept is that we’re so buried in debt, we can’t spend any more.  Besides, many American’s incomes have not kept pace with increased costs of goods and services.  Even the government’s efforts to keep interest rates low, has not helped. It’s not a matter of “if,” but rather, “when.”

According to the article, ancient Babylonian kings had a special too at their disposal when economic or social conditions turned dicey: They would declare “debt jubilee” and instantly wipe out borrower’s loans, allowing average people deep in debt to start over with a clean slate.  Sounds too good to be true? That is bankruptcy; a fresh start for the honest,  but unfortunate debtor.  And, remember the talk about business cycles? The business cycle is the fluctuation in economic activity that an economy experiences over a period of time. A business cycle is basically defined in terms of periods of expansion or recession. [Source: Investopedia] In decades past, a business cycle would occur every 5 years or so. Then, a cycle increased to about every 7 years when the credit card was invented and became a household name. The last business cycle lasted 10 years because of the toxic mortgages that were sold en mass to many who could not afford them. Interestingly, a debtor is permitted to file bankruptcy One (1) time every Eight (8) years, which correlates to this “Debt Jubilee” put on by the Babylonians.

The major holdup seems to be student loans. Student loan debt has more than doubled since 2006 and now totals $1.35 Trillion dollars. In the wake of this looming crisis, there are rumors of a forgiveness of federal student loans; a defense to repayment of your student loans for the bad acts of your school, may soon become a viable; the ability to request loan forgiveness due to a school’s illegal action. [Source: The Hill] If this new loan forgiveness option becomes effective, then we may also open more doors for bankruptcy hardship discharge standards for discharging student loans in bankruptcy.

An argument could be made for the discharging to student loans on Undue Hardship when illegal actions of third parties make your education useless, or your degree worthless.  This would support an argument under the Second prong of the Brunner test, which requires circumstances beyond the debtor’s reasonable control, to be present, such that it makes it impossible for the repayment of his loans. I’ll take that argument into bankruptcy court.

So, while the economy continues to sputter along and you continue kicking your can of debt down the road, I’ll wait for your call. Rethink bankruptcy as an option for getting out of debt quickly and cheaply.  Think about this in terms of numbers. You want to legally satisfy your debt obligations. Wouldn’t you want the cheaper, better, faster way out of debt? The more quickly you eliminate debt, the more quickly you can accelerate savings and retirement. My philosophy is this: If it will take you more than 5 years to get out of debt, then you should consider filing bankruptcy. The chart below shows how long it will take to pay off just $30,000.00 with a nationally average interest rate of 15% and a monthly payment of $500.00. It will take 9 years to pay off that debt and you’ll have paid $55,797.00 to do it.

Loan comparison calculator1
From the chart above, we can see that someone who files for a Chapter 13 debt repayment plan in bankruptcy can still repay 100% of what they owe. They can not only save over $25,000.00, they’ll have saved more than 4 years time too!  Now, imagine the person who has completed their bankruptcy case and continued to save $500.00 during the remainder of time that the person in their own debt repayment plan outside bankrutpcy needed to finish his payoff plan.  We get the chart below, assuming a 5% interest rate of return on their savings.

Loan comparison calculator2

Now, it looks enticing, but what about your credit report?  After all, you’ve worked so hard to build credit and you’ve heard that bankruptcy ruins your credit, right?  For more information on rebuilding credit after bankruptcy, go here. Purely from a numbers standpoint, if you choose to take the road of actual full repayment, you’re essentially saying that your credit score is worth an investment, by you, of $25,000.00 and an extra 4 years.  Looking at the time value of money, the same $500.00 saved over the time lost, assuming an interest earned at 5%, that 4 years cost you an additional $28,965.00.  You mean to tell me that your credit score is worth more than $50,000.00!?? I bet that guy who filed bankruptcy and paid off his debts in full is glad he went that way, thanked his bankruptcy lawyer with a cup of coffee and now refers his friends to get out of debt faster because they see how happy he is and doesn’t need credit cards anymore because he has an emergency fund. *Protip: Your credit score does nothing more than tell the world how well you manage debt.

Life is nothing more than the sum of every decision/choice you ever made and those decisions that were made for you. You cannot change yesterday, but you can certainly impact your tomorrow by deciding how much time you are willing to invest and how much money you are willing to pay to eliminate your debt once and for all time. Then, what’s your next plan? If 4 years equals $28,000.00, would you reconsider your strategy for getting out of debt? If your friend asked you for advice, would you share this information with them?

Private Loans For Unaccredited School Not Student Debt in Bankruptcy

iStock_000009397541XSmallI was just talking with a friend of mine the other day, Damon Day; and he was mentioning that he is seeing more and more folks all across the country, who have attended these unaccredited schools and carrying an enormous amount of student debt.  I mentioned to him that I’ve already been in the bankruptcy court rodeo over private student loans that do not even qualify as an education loan under the Bankruptcy Code. In In re Schwartz, the court granted summary judgment in favor of the debtor to discharge their private education loan on the grounds that it was not a “qualified education loan” under the Bankruptcy Code.

Another recent case came down in April, In re Decena, No. 15-72903; Decena v. Citizens Bank, Adv. no. 15-8275, 2016 WL 1371031 (Bankr. E.D.N.Y. Apr. 4, 2016), in which a New York woman won her bid to erase $160,000 in education related debt after a bankruptcy judge concluded that private loans to attend a foreign, unaccredited medical school do not qualify as nondischargeable student loans under bankruptcy law. The court analyzed both the “educational benefit” and “qualifed education loan” sections under 11 U.S.C. 523(a)(8).

‘Qualified Education Loan’

In order to be considered a “qualified education loan“, an education loan must satisfy all of the following requirements:

a. The debt must be incurred “by a debtor who is an individual”, per 11 USC 523(a)(8)(B).

b. The debt must be “incurred solely to pay qualified higher education expenses”, per 26 USC 221(d)(1) by cross-reference from 11 USC 523(a)(8)(B). Mixed used loans, such as credit card debt or home equity loans, are not eligible, per example 6 of 26 CFR 1.221-1(e)(4). Even education loans are not eligible if they are incurred to pay for expenses other than qualified higher education expenses.

c. The debt must be incurred on behalf of a student who is either the debtor, the debtor’s spouse, or the debtor’s dependent (eligible to be claimed as an exemption on the debtor’s income tax return, per 26 CFR 1.221-1(b)(2)) at the time the indebtedness was incurred, per 26 USC 221(d)(1)(A) by cross-reference from 11 USC 523(a)(8)(B).

d. The debt must be “paid or incurred within a reasonable period of time before or after the indebtedness is incurred”, per 26 USC 221(d)(1)(B) by cross-reference from 11 USC 523(a)(8)(B). The regulations at 26 CFR 1.221-1(e)(3)(ii)(B) provide for a safe harbor of 90 days before or after the academic period to which the expenses relate. It is possible that a longer period of time would still be considered reasonable based on the relevant facts and circumstances, per 26 CFR 1.221-1(e)(3)(ii), but use of a loan to pay for a previous year’s school charges would generally not qualify unless there were extenuating circumstances.

e. The debt must be “attributable to education furnished during a period during which the recipient was an eligible student” per 26 USC 221(d)(1)(C) by cross-reference from 11 USC 523(a)(8)(B). To be an eligible student, the student must be enrolled at least halftime in a Title IV institution and be degree-seeking. Study abroad is only eligible to the extent that it is approved for credit by the home institution.

There is a two-tiered analysis: first, whether a debt is an educational “ loan ” and, if it is, then whether it meets the Internal Revenue Code definition of “qualified education loan,” In re Oliver, 499 B.R. 617 (Bankr. S.D. Ind., 2013); see also, Inst. of Imaginal Studies v. Christoff (In re Christoff) (Bankr. N.D. Cal., 2014). An eligible educational institution is that which is described and eligible to participate in a program under Title IV of the Higher Education Act of 1965, as amended. 26 U.S.C. §25A(f)(2). Wills v. Sallie Mae; (Bankruptcy Court S. D. Ind. 4-23-2010; Case #08-80404, Adversary Proceeding #08-58043; decision April 23, 2010)

In the Decena case, the judge determined that the debtor attended an unlicensed and unaccredited medical school not found on the Federal School Codes List for the school year attended. What this means is that if you’re wondering whether you attended an unaccredited school, a simple google search using the terms, “Federal School Codes List” followed by the school year you attended, you’ll see the entire list of eligible schools.  If you find your school on that list, then it was accredited at the time you attended and you would NOT be eligible to discharge your education loans under this section of the Bankruptcy Code. However, if your school is NOT on the list, then it might be worth exploring your bankruptcy option to discharge your legal obligation to repay that debt.

‘Educational Benefit’

Judge Grossman, in Decena, said it was less clear whether Decena’s loans fell under Section 523(a)(8)(A)(ii), which precludes discharge of “an obligation to repay funds received as an educational benefit, scholarship, or stipend,” acknowledging that some courts found that this Section’s reference to “educational benefits” includes loans, but he declined to follow that line of cases. He wrote, “Section 523(a)(8)(A)(ii) is not a ‘catch-all’ provision designed to encompass any educational claim arising out of any transaction that bestows an educational benefit on a debtor.”

He concluded that since Congress specifically mentioned loans in Subsection 523(a)(8)(A)(i), but not 523(a)(8)(A)(ii), it intended to refer only to conditional stipends, veteran benefits and other cash-benefit programs that are distinct from traditional student loans and therefore found that Decena’s loans satisfied this Section.

What’s Next?

The future of student loans in bankruptcy will still require an adversary proceeding (a lawsuit) in which the debtors must ask the bankruptcy court to order their student debt obligations discharged in bankruptcy.  Finding a qualified bankruptcy lawyer that understands the Rules of Bankruptcy Procedure and litigation will prove more difficult. This means that not only will consumers be required to file a bankruptcy case, they will need to file a lawsuit against their creditors and ask the court to determine each student debt obligation to be discharged.  Don’t be discouraged if the institution is accredited because there is still the Undue Hardship bankruptcy discharge that no longer requires a medical condition to satisfy.

With more than $1.3 Trillion dollars in student loan debt, we should continue to see more of these bankruptcy cases.  Bankruptcy practitioners whose practices have declined since the recession, are being called upon to deepen their skills and broaden the scope of their practices to include a more thorough review of their client’s cases to provide a more complete solution.  My request:  STOP TELLING CLIENTS THAT STUDENT LOANS CANNOT BE DISCHARGED IN BANKRUPTCY BECAUSE IT’S NOT TRUE!!

Thank You

Source:  Rutter Group Practice Guide/Bankruptcy News, May, 2016


New and Improved Student Loan Bankruptcy Discharge

Getting rid of those pesky, overwhelming student loans in bankruptcy just got a bit easier, thanks to a case in which an attorney won a bid to shed $250,000 in student debt. The case is In re Barrett, No. 14-43516; Barrett v. U.S. Department of Education Direct Loan Servicing Center et al., Adv. No. 14-4161, 2016 WL 549377 (bankr. N.D. Cal. Feb. 10, 2016).

Mr. Barrett was an attorney with a spotty work history who was burdened by nearly $250,000 in student loan debt.  At age 56, he had years of negative income despite great effort to find employment, according to the facts of the case. Judge Novak found that Barrett “lives a spartan life,” noting that he had been driving the same car since 2003.  Other facts noted by the court include:  expenses exceeded income supplemented by food stamps; no assets to liquidate; no savings or retirement; and he made more than 12 years of payments on the student loans.

Judge Novak wrote, “Simply, a law degree and years of practice do not equate to a living wage,” adding that, “If Barrett has been unable to establish a viable law practice after 28 years of practice, it is a fool’s errand to presume that his 29th or 30th year will be any different.”

As you could have guessed, counsel for the government argued that the debtor should have instead applied for the Income-Based/Income Contingent repayment plans found here. The court maintained, “Given Barrett’s other good-faith efforts, his failure to pursue an income-contingent repayment plan is not damming.”  I agree that these “administrative” remedies are not required before seeking an undue hardship discharge of student loans in bankruptcy. It’s a start, before coming to bankruptcy, but by no means is it a requirement for making a good faith effort to repay student loans.  See In re Birrane, 287 B.R. 490, 495 (9th Cir. BAP 2002); Williams v. ECMC 341 B.R. 62 (2003).

A bankruptcy discharge of student loans is not impossible, but rather, requires:

  1. That you can find an attorney competent and willing to take your case or you file without a lawyer;
  2. That you not only file for bankruptcy, but also you must file an adversary proceeding (a lawsuit) during your bankruptcy case, for a bankruptcy court order that specifically allows the student loan debt to be included in your bankruptcy discharge;
  3. You Must Pass the Test (The Brunner Test), if you’re in California:
    • You must have a present undue hardship and filing under Chapter 7 of the Bankruptcy Code might generally satisfy this requirement; AND
    • You have circumstances beyond your reasonable control, that are likely to persist; AND
    • You have made a “Good Faith Effort” to repay your student loans.

I’ve mentioned in the past that medical conditions were a great way to satisfy the requirement that additional circumstances exist that would otherwise prevent the borrowers to repay their student loans.  However, with the Barrett case, we can see that a dismal and spotty career, coupled with enormous student loan debt, can now support an undue hardship discharge of student loans.

I’m excited to see if this would encourage more attorneys to help their clients discharge their student loans and if more folks might seek a bankruptcy discharge due to the overwhelming disparity between what they owe on their student loans as compared to the income they earn as a result of a stumbling economy, lower wages, and non-existent jobs.

Here’s my #Protip to lawyers when considering an undue hardship case for student loans:

  • Has a combination of both federal and private loans
  • Loans are in “good standing;” in deferment, forbearance, repayment, IBR, ICRP, etc.
  • debtor cannot afford to live a minimal lifestyle AND repay her student loans at the same time
  • the amount of the debt far exceeds income (If the student loan debt looks like a mortgage, and the debtor is making less than median income, I would consider an assertion of undue hardship is present)
  • debtor has maximized income AND minimized expenses in every conceivable way
  • other circumstances exist, that are beyond the debtor’s reasonable control and likely to persist for at least 10 years
  • caring for ill/disabled self, or family members
  • debtor has medical conditions that prevent more income, less expenses, and repayment

As of today, the total amount of student loan debt in the United States is $1,363 TRILLION DOLLARS. Source U.S. Debt Clock. Student loan debt will continue to rise unless we stop runaway student tuition during a debilitating economy, at least. We also need to reduce collections costs and abusive debt collection practices among the loan servicers and default servicers. Finally, seriously, do I have to mention that we need to focus your education toward future economic needs rather than the whims of Millennials?  I just said it.

On a positive note, I have seen more of these “for profit” colleges and schools, have had their ability to accept federal student loans removed.  When the Feds come for an audit, these shoddy schools fold under the pressure, leaving students with useless degrees and mountains of debt.  I would consider these cases for bankruptcy as well, after exploring all options.  If the school closed while the student was actively enrolled, there is an administrative remedy available to students, here.

Last month, the Wall Street Journal reported that More Than 40% of Student Borrowers Aren’t Making Payments. Another article provides a deeper look at the issue, citing that more than 16% of borrowers are currently in default on their student loans.

I would NOT advocate for a government controlled “free” education system because we need innovation to move our economy forward and I believe government control would stifle such creativity. I would, however, advocate for Not-for-profit, charter schools that provide quality education at a reasonable rate, based on a determination of what is reasonable.  Hey listen, if my fees are under scrutiny by the courts, so should yours, Mr. ILiveInAnIvoryTower!




Let’s Make A Deal; Debt Collectors!

Today we’re going to play a game that I love.  Negotiations with debt collectors! Also known as debt settlement. In the recent Los Angeles Times article, Making a Deal with Debt Collectors, by Liz Weston, she provides such a shallow and generic approach that I am immediately propelled into blog writing mode.  This article is my in depth response and never to be humbled opinion on getting out of debt by paying less than what is owed, which is the art of debt settlement.

Here’s what the reader wrote to liz:

Dear Liz: After struggling financially for seven years, I’m getting a good lawsuit settlement.  After taxes, I’ll be set. I want to pay my bills, but the actual company-for example, the credit card company, not some bill-collecting clowns that threatened me with “the sheriff will come over and arrest you” or “your brother and sister will inherit your debt” and other lies. I also don’t want to pay these inflated fees from bil collectors that have no rhyme or reason and sound like they are throwing darts at a numbers board. Finally, I’ve asked a couple of the bill collectors to provide me with the name and contact at the original company so I can verify that they have authorization. But with data being compromised every day, how do I know they are legit?

While Ms. Weston covers the basics in her response to this reader, I must start with the elephant in the room.  This reader, like many of my clients, are struggling financially for YEARS.  I get it that this reader was in litigation and just got a hefty settlement.  This is where I start. I really wish folks would stop struggling with debts for so long because they lose something that can never be regained; TIME.

Validate That Debt

Before we ever consider repaying a debt in any manner, we must first answer the question of whether we even owe the money. Let’s talk about debt and third party debt collectors.  Generally, a debt is sold to a third party debt collector when you have fallen behind on payments; hence the struggling part.  This reader could have eliminated that struggle with a structured and 0% interest pay plan in bankruptcy, making it an important contender in the game of getting out of debt. Here’s an important tip:  late payments and collections have a greater impact on your credit score than the act of filing for bankruptcy. That’s because bankruptcy eliminates the debt; and when there is no debt to credit line, credit scores increase.

The first step in dealing with a third party debt collector that you did not originally borrow money from is to Validate the Debt.  This can be done with letters provided by the CFPB.  What’s important is to be clear of your intent in the letter. Also important is that you only send this letter when you believe you do not owe the debt; cannot determine the validity of the debt from your credit report; or the third party collector will not provide the information to you over the telephone.

Time Barred Debt Collections

The Creditors don’t want you to be informed, but with the internet, information about time limits that creditors have to sue you to collect on a debt is known as the Statute of Limitations.  This time limit varies by state and in California, it is four (4) years from the date you last used the credit, or the date of your last payment; whichever is later. Once this time has passed, the creditor loses many of their rights, but can still send letters and call you.  However, any payments on your part AFTER this time has passed are now VOLUNTARY.

Set Up a Payment Plan

A payment plan bankruptcy can eliminate many, if not all debts within five (5) years, and you might not be required to pay back 100% of all your debts. In fact, credit card debts in a payment plan under Chapter 13 of the Bankruptcy Code can be paid anywhere from 0% to 100%, based upon your ability to pay.  That means that we look at your budget to be certain we have included lesser known expenses, so that all contingencies are addressed for a longer term payment plan.  So, in the first sentence, this reader could have been on a payment plan for five years, so that when that lawsuit settlement arrived, they could enjoy it free and clear and DEBT FREE. If it will take you longer than five years to get out of debt, then call a bankruptcy lawyer immediately! Bonus:  All debts discharged in bankruptcy incur NO INCOME TAX CONSEQUENCES!

Negotiate and Settle Those Debts

The best way to avoid bankruptcy is to negotiate and settle debts.  That is, to pay less than what you owe.  Ms. Weston’s article will refer readers to a website that provides advice from someone who is NOT an attorney.  I take offense to much of the advice given by supposed ‘experts’ giving legal advice when they are not lawyers!  Pro Tip:  ONLY LAWYERS CAN GIVE LEGAL ADVICE!  However, just about anyone can help negotiate and settle debts, though I find that my leverage as a bankruptcy lawyer gets me better deals than most. Also, the older and more stale the debt is, the better the deal.  However, you must be willing to sacrifice credit score points to get the best deals.

Also keep in mind that when you settle a debt for less than what is owed, the creditor may issue an IRS form 1099 on the cancelled debt and you MAY OWE TAXES ON THE CANCELLED DEBT. So, let’s say you owe $10,000.00 on a credit card and you negotiate to pay half, or $5,000.00.  Not only will you pay $5,000.00 to get out of debt, but you’ll likely owe income taxes on the part that you didn’t pay.

Christine’s Tips

  • Determine whether the debt is even owed;
  • explore all your options for getting out of debt;
  • create a plan of attack that will get you to your goal quickly, effectively, and efficiently;
  • pay as little as possible to accomplish this goal to save for the important things in life


National Collegiate Student Loan Trusts: California Update

Even though private student loans make up a fraction of the overall student loan debt in the United States, they pose a threat to our future economy for several reasons. First, nearly all of these loans are co-signed, which means we have multiple borrowers that have taken responsibility for repayment.  I’ve seen parents, in-laws, ex-spouses and even grandmas signing for these debts.  Second, and in particular, National Collegiate does not fight fair in courts all over the country because they are obtaining default judgments without one shred of credible evidence they even have the right to collect on these loans. Lastly, our state court judges are NOT going to give you a FREE loan just because this Plaintiff cannot prove their case.

In fact, I was just on trial against National Collegiate last month and made the following arguments:

Except as otherwise provided by statute, “every action must be prosecuted in the name of the real party in interest . . .” Code of Civil Procedure § 367; see also Cloud v. Northrop Grumman Corp. (1998) 67 Cal.App.4th 995, 1004. Generally, the real party in interest is the person who has the right to sue under the substantive law. It is the person who owns or holds title to the claim or property involved, as opposed to others who may be interested or benefitted by the litigation. Gantman v. United Pac. Ins. Co. (1991) 232 Cal.App.3d 1560, 1566.

National Collegiate Student Loan Trust 2007-3(“National Collegiate”) is a third party securitized trust pool of student loans and does not extend credit directly to the public. This requires it to prove that it is the valid assignee of the debt alleged. Under Rowena F. Cockerell v. Title Insurance and Trust Company, “[t]he burden of proving an assignment falls upon the party asserting rights there under.”

Rowena F. Cockerell v. Title Insurance and Trust Company (1954) 42 Cal 2d 284, 292, see also Mission Valley East, Inc. v. County of Kern (1981) 120 Cal. App. 3d 89, 97 (“the assignment must describe the subject matter with sufficient particularity to identify the rights assigned.”) and Jonathan Cobb v. San Francisco Residential Rent Stabilization and Arbitration Board (2002) 98 Cal App 4th 345, 352. As National Collegiate alleges that they are an assignee of the debt alleged, National Collegiate must prove that a valid assignment occurred in order to establish standing.

Article 9 of the Uniform Commercial Code (“UCC”) applies in this case, pursuant to the terms of the contract that is the subject of this litigation.  UCC section 9-102(1)(b) provides that UCC Article 9 applies “to any sale of accounts or chattel paper.” See In re Amex-Protein Development Corporation, 504 F. 2d 1056 – Court of Appeals, 9th Circuit 1974.  Unless a transaction is specifically excluded, Revised Article 9 generally applies to consensual security interests in personal property or fixtures, the sale of accounts, chattel paper, payment intangibles or promissory notes.[1]         Whether a writing is properly characterized as an instrument under the UCC is a question of law, In re Commercial Money Center, Inc., 392 B.R. 814 (B.A.P. 9th Cir., 2008).

The perfection rules of Revised UCC Article 9 apply not just to security interests for loans but also to sales of chattel paper and payment intangibles. Nev.Rev.Stat. § 104.9109(1)(c) (with inapplicable exceptions, “this article applies to… (c) a sale of accounts, chattel paper, payment intangibles, or promissory notes”) (emphasis added). In re Commercial Money Center, Inc., 350 B.R. 465 (B.A.P. 9th Cir., 2006), which supersedes all prior case law and state statutes as to sales of payment intangibles (mortgage loans) and promissory notes (§ 9-109; §§ 1-102 & 103); § 9-309(4): automatic perfection against third parties and requires complete chain of title (§ 9-203(b)(2)); this means that the seller cannot transfer more than it owned.

Initially, a note is owned by the payee to whom it was issued. If that payee seeks either to use the note as collateral or sell the note outright to a third party in a manner not within Article 3,28 Article 9 of the UCC governs that sale or loan transaction and determines whether the purchaser of the note or creditor of the payee obtains a property interest in the note. See UCC § 9–109(a)(3).

Within the Ninth Circuit, the agent must have actual possession of the collateral in order for the secured party to have a perfected security interest pursuant to UCC § 9-313. Heinicke, 543 F.2d at 701-02; Huffman v. Wikle (In re Staff Mortgage & Inv. Corp.), 550 F.2d 1228, 1230 (9th Cir.1977).30 See also Fogler v. Casa Grande Cotton Finance Co. (In re Allen), 134 B.R. 373, 376 n. 5 (9th Cir. BAP 1991). In re Commercial Money Center, Inc., 392 B.R. 814 (B.A.P. 9th Cir., 2008)

A secured party or its agent takes actual possession when the collateral is physically transferred to the secured party or its agent. Raiton v. G & R Props. (In re Raiton), 139 B.R. 931, 936 (9th Cir. BAP 1992) (defining “possession” under former Cal. Com.Code § 9-305). By having the agent take actual possession of the collateral, notice is provided to prospective third-party creditors that the debtor “`no longer has unfettered use of [the secured party’s] collateral.'” Heinicke, 543 F.2d at 702 (quoting In re Copeland, 391 F.Supp. 134, 151 (D.Del.1975)); Huffman, 550 F.2d at 1230.  In re Commercial Money Center, Inc., 392 B.R. 814 (B.A.P. 9th Cir., 2008)

In In re Veal, 450 B.R. 897, 11 Cal. Daily Op. Serv. 7989, 2011 Daily Journal D.A.R. 9592 (B.A.P. 9th Cir., 2011) neither AHMSI nor Wells Fargo was the initial payee of the Note. Due to this fact, each was required to demonstrate facts sufficient to establish its respective standing. In this regard, facts that would be sufficient for AHMSI are different from those that would be sufficient for Wells Fargo. As to Wells Fargo, it had to show it had a colorable claim to receive payment pursuant to the Note, which it could accomplish by showing that it had some ownership or other property interest in the Note. As to AHMSI, as it sought a distribution from the estate in payment of the Note, it had to show that it was a “person entitled to enforce” the Note, or was the agent of such a person.

In this present case, National Collegiate Student Loan Trust, 2007-3 (“NCSLT”) has admitted that they do not possess, nor have they ever taken possession of the original of the Non-Negotiable Credit Agreement that is the subject of this litigation. [See Plaintiff response to Defedant RFP SET ONE ¶3; and RFP ¶14; Special Interrogatory response ¶9]. Further, it cannot prove that the original document flowed from the original lender, through each link in the chain, and eventually landed in the trust. Therefore, NCSLT has no standing to bring this action.  [1] California Commercial Code, Section 9109(a)

At trial, I was forced to cross examine National Collegiate’s witness (even though she brought no evidence to support that she was an agent of the Plaintiff, or servicer) and got their Securities Exchange Free Writing Prospectus admitted into evidence, which provides this relevant and important information:

“Custodial Responsibility. The PHEAA servicing agreement requires that PHEAA for each student loan hold the credit agreement or promissory note and related documents on behalf of the trust until five years after the earlier of the date such student loan is paid in full or such student loan is deconverted. PHEAA must maintain all original physical credit agreements or promissory notes in a fire resistant vault equipped with a security locking system. In addition, microfilm or electronic records of all promissory notes and related documents are maintained on-site at PHEAA’s servicing center located at 1200 North Seventh Street, Harrisburg, Pennsylvania 17102 and at an off-site facility, at least 100 miles from the PHEAA servicing center, in a fire resistant vault with a security locking system. All credit agreements or promissory notes are stored at all times in a state other than the State of Louisiana.” [Defendant’s Exhibit 21]

I also brought up the point that their Truth in Lending Act Disclosures remain always unsigned, and clients are testifying that they have never received such notice.  This is important because the disclosure is where the interest terms and other accounting terms are.  Without this, the lender cannot prove that the amount they are seeking is correct.

On cross examination, National Collegiate’s witness had no personal knowledge of this prospectus, even though she claimed to be a document custodian for the trust!!!  Having accomplished what I thought were an impossible task, I felt like I adequately attacked her credibility.  After closing, the judge instructed that he would rule one way or the other and sent us into the hall for a discussion. In the hallway, we were able to significantly reduce the amount to more than 90% off what they initially asked for in their complaint. Next time, I’ll remove the case to federal court and see if that makes a difference in the outcome.  Why?  Because after we settled, we inquired with the judge how he would have ruled and he said he would have ruled in favor of the Plaintiff!!!  He also admitted to me that he was not up to speed on these UCC Article 9 arguments.  Thanks for the hat tip judge and I’ll make a federal case out of it then!

File Bankruptcy Without A Lawyer? New, Longer Forms Not Helpful

New Bankruptcy Forms are overwhelming.

New Bankruptcy Forms are overwhelming.

Here in the Central District of California, nearly 25% of all bankruptcy filings are made without a lawyer.  Things recently got a little bit easier for this crowd in our courts; allegedly.  This is an important issue with our courts as demonstrated by this open letter to our attorneys to volunteer to help these folks; Open Letter from Chief Judge Sheri Bluebond. I am happy to report that I intend and have already sent my E-mail to give some of my time this year, so look for me in Santa Ana, if you’re without a lawyer. Last month, in an effort to “help” the growing population of debtors filing bankruptcy without a lawyer, our Courts have decided that longer forms, with more self help is the answer.  Many consumer lawyers disagree that this will ease the burden on our courts.  Be sure to see the comments section of this article by Steve Rhodes (@getoutofdebtguy) over at the Huffington Post.

Here’s what’s new:  FORMS.  That’s right, we have new, “easier to read” forms, allegedly.  These new forms provide a substantial amount of self help because when an individual files bankruptcy without an attorney, they burden the court system by taking more time at hearings and in the courtroom in educating and assisting these individuals.  The additional support provided in these forms makes them longer and more laborious. I assert that with these new forms, I suspect that debtors without lawyers will now be held to a higher standard due to the additional information given. This means that trustees will continue to direct these debtors to consumer attorneys when their homes, cars and bank accounts are in jeopardy of being sold to pay creditors.  What about that vacation rental you forgot to list?  Did you forget to list all your debts?  Any changes to your bankruptcy schedules is not as simple as whiting out the prior form and resubmitting it, but rather a complex process with cover sheets, service forms, additional filing fees, and the knowledge of how to correct or what changes to make. Correcting mistakes yourself may end up costing more than hiring an attorney to help you from the start.  Yes we make it look easy, but that’s only because we do it professionally, know the rules and have relationships that you don’t.

Another great new tool is now available to Pro Se (meaning, without a lawyer) debtors:  eSR (Electronic Self Representation). This process is intended to help navigate through the forms more easily. Now, you can file your bankruptcy case online, without an attorney.  Keep in mind this path is for Chapter 7 bankruptcy ONLY.  The reason for this is that filing a Chapter 13 Bankruptcy case is strongly discouraged, due to the complexity and statistically, there is a nearly 100% fail rate for those debtors without a lawyer.  Here are just a few of the common problems in filing bankruptcy without a lawyer:  the failure to file required documents, resulting in dismissal; filing a chapter which may not be correct for the debtor’s circumstances; choosing incorrect property exemptions; unnecessarily filing bankruptcy in the first place; not filing the required credit counseling or financial management certificate; being unable to answer or adequately defend an action seeking to deny discharge; and not understanding the significance of certain motions or adversary actions. There are so many pitfalls that I have not listed here that would likely scare the pants off a scarecrow!

Lastly, we also have for you, Notice and Service by Electronic Transmission.  This means that you can elect to have bankruptcy notices sent to you via E-Mail.  A review of our Local Bankruptcy Rule 9036-1, a debtor requesting notice delivery by email vial the Debtor Electronic Bankruptcy Noticing (DeBN) program only consents to delivery of orders and notices delivered by the Bankruptcy Noticing Center.  All other parties, including trustees and attorneys, must continue to serve you via the U.S. Mail. If you are married, it may be wise to only sign one spouse for this service and keep the other spouse on regular mail service so you get the best of both worlds here and won’t miss any important information about our bankruptcy case.

Here are my pro tips for the “Do-it-yourself” folks:  You must complete the prefiling credit counseling course BEFORE you file your bankruptcy case.  For a list of court approved courses, click here. If you choose to go it alone, you’ll need to understand the processes and procedures, so watch those videos and read the rules of the court.  If you get into trouble at any time during your case, you can always consult with an attorney.  THE TRUSTEE MAY BE A LAWYER, BUT THEY ARE NOT YOUR LAWYER.  Do not ask the trustee for advice, they won’t and cannot give you any.

I recently received a call from a women who had been trying to stop a foreclosure sale and filed a Chapter 7 bankruptcy case without a lawyer. When the lender came in to her case, asking the court for relief from the automatic stay so they could continue the foreclosure sale, the woman lost on that motion and the Order included “in rem” language, which meant that any other bankruptcy proceeding would NOT apply to her property, IF the order is recorded in the county records.  Before the Order was recorded by the lender, she had her husband file a Chapter 13 case without an attorney.  He filed a skeleton petition, which gives him 14 days to complete the remainder of required schedules or his case would be dismissed.  After she had done all this herself, she called me for a consultation.  During our conversation, I discovered that she had failed to disclose assets of her husband in her bankruptcy case and that the house that they are trying to save has no equity.  I declined to offer representation in her Chapter 7 case because I know that if the trustee found out about the home that was not disclosed, that they would likely take and sell it to pay creditors. Still interested in going to court without a lawyer?

I’m just waiting for the day that Costco opens up a law school and gets into the business of legal forms, like Legal Zoom because I somehow fear that the movie, Idiocracy from 2006 will come true.  There, I just revealed my secret fear.  I feel better now. Try the new forms for yourself and get back to me on how your bankruptcy case went.  I would love to hear from you.  Lawyers across the country are standing by to assist you when things don’t go the way you thought they would.  Many consumer protection, debt relief, bankruptcy lawyers offer free consultations to their prospective clients.

2016 New Year’s Resolutions Infographic

Treat your New Year’s resolutions like goals and then take regular action steps each day to help you reach your goals this year. It’s important to write your goals down and then take some action toward those goals.  For instance, if you’re desire is to get out of debt, then you must write down how much debt you have and to whom that debt is owed.  Then, look at your household budget, which is your income and then your expenses.  Working within your budget, you’re looking for where you can cut expenses, so that you’ll have extra money to pay down debts.  If there is no money left over, then you should consider filing bankruptcy to end to pain and suffering of being in debt without a way out. A Chapter 7 Bankruptcy case will get you a fresh financial start within 4 to 6 months without any payment plan.

Maybe you’ve worked your budget, but can only squeeze $100.00 a month to pay down your debts and you know it’s not enough to pay off your debts within five (5) years.  There’s a second reason to consider a bankruptcy repayment plan under Chapter 13 of the Bankruptcy Code.

Whether you have no money or very little money in that budget, you can still get out of debt in less than five years by choosing your goal, talking with a professional that can help you get there and decide how quickly you want to get there.  I recommend getting out of debt quickly to save for what really matters in life.

Pros & Cons: Married Filing Separately

tumblr_mqt36aMAmv1qhub34o1_540If you are married and considering Chapter 7 or Chapter 13 bankruptcy, you have additional issues to think about. To start, you’ll have to decide which option works best for you: filing a joint bankruptcy or an individual bankruptcy petition. For most couples, joint bankruptcy will protect more of your property and discharge more debts. But not always. And if you are divorcing or already divorced, you should know how bankruptcy will affect things like child support and debts you both cosigned.  Here are my Pros and Cons of being married and filing an individual bankruptcy case.


  • The non-filing spouse gets their debts discharged like a “free ride” through bankruptcy, without having to participate.
  • The benefit to having only one spouse file bankruptcy is that the non-filing spouse remains eligible to file bankruptcy and can do so during the time her spouse is ineligible because you can only file bankruptcy once every eight (8) years.
  • The non-filing spouse gets rid of debt while maintaining a higher credit score and preserving at least one spouse’s credit score.


  • The creditors don’t seem to get it right and may go after the non-filing spouse to collect on debt that has been discharged in their spouse’s bankruptcy filing.  Never fear, here in the Central District, we have case law that supports the non-filing spouse.
  • If, and/or when the creditors mess up, then it takes a little effort to get them to stop and cooperate.
  • All of your spouse’s assets and their income are part of the bankrupt estate and must be listed on your bankruptcy papers.

It’s important to explore all of your options for getting out of debt as quickly and economically as possible to begin saving for the important things in life. While it is possible to file an individual bankruptcy case without your spouse, they may still feel the impact of a bankruptcy filing.  A free consultation with a bankruptcy attorney will help clarify your best strategy.

Photo source:  Jimmy Fallon (@jimmyfallon) of The Tonight Show

Options For 2nd Mortgages After Bankruptcy

Here’s a question posted recently over at

“We had a Chapter 7 bankruptcy discharged two(2) years ago. We have a second mortgage that we haven’t paid on in 2.5 years that has a $95,000 balance. We have not had any communication with the lender. Would like to know what our options are and the repercussions that are in the future.”

Here are some options when there is a second mortgage lien lingering after discharge. CAVEAT:  I am only licensed in California and have just learned that laws vary by state.  Please contact a local attorney in your area for more details and perhaps even more options.  Find a local lawyer here.

It’s important to know that a bankruptcy discharge eliminates your legal obligation to pay debts owed.  When it comes to mortgages, there are two parts:  the mortgage debt, and a lien against the property.  What this means is that the mortgage debt is discharged, but the lien will survive, unless it has been avoided (“stripped”), or otherwise ordered by the court to be removed.

  • Negotiate The Removal of the Lien:  After bankruptcy we no longer consider the balance owed as the negotiation point, but rather, the price to get the lender to strip the lien because the debt is no longer owed.  That’s why the borrowers in this scenario have gotten away with not paying this second mortgage for more than two years after a bankruptcy discharge.  I’ve seen as much as 90% discount on these loans, regardless of how much equity the home has. The goods news here is that all debts discharged in bankruptcy incur NO TAXES.  So, you won’t have to pay taxes on this cancelled debt AFTER BANKRUPTCY.
  • File a Chapter 13 to Fully Remove the Lien:  If the value of your home is equal to or less than what you owe on the First Mortgage, then you can qualify to Avoid the Junior Lien (also known as a “Lien Strip”) in a Chapter 13 bankruptcy case.  You’ll treat the junior mortgage like any other unsecured creditor and make payments over five (5) years.  Once complete, the lien will be removed; whether you get a discharge or not.
  • Do Nothing and the Lien Will Be Paid Upon Sale of the Home:  The mortgage debt obligation may be gone, but the lien can sit there indefinitely until you either sell or refinance the house. So, if there is no money to negotiate and pay to have the lien remove, just leave it alone.  Call an attorney immediately, if you receive any legal notices regarding this mortgage, or, if the lender tries to foreclose.
  • Refinance:  Why would you pay full price to refinance a loan you’re not obligated to pay after discharge?  The answer lies in whether there are funds available to negotiate.  Can you tell I’m a big fan of negotiation?

I believe that making a well informed decision requires the gathering of all the facts and consulting with professionals to get the best possible outcome as economically possible.  In other words, I prefer the cheaper, better, faster way to get to a goal, but that usually comes after I have explored all options and potential outcomes.