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***

The Future of Bankruptcy Courts Through the Supreme Court Opinions

I feel like a groupie at a rock concert knowing that Erwin Chemerinsky was going to speak.  Lawyers know this name because he wrote many of the books and treatises we used in law school.  I thought about battling the judges, trustees and other lawyers in the room so I could have a “selfie” with the great professor, but I chickened out.  I”m left with great notes and a deeper understanding of Constitutional Law, a subject Mr. Chemerinsky could, no doubt, recite in his sleep.

Last month I wrote on this topic, here, from the perspective of the attorneys and judge who were in the trenches.  Now, I turned my attention to one of a Constitutional perspective through the eyes of the great professor.  Article 3, Section 1 of the United States Constitution reads,

“The judicial Power of the United States, shall be vested in one supreme Court, and in such inferior Courts as the Congress may from time to time ordain and establish. The Judges, both of the supreme and inferior Courts, shall hold their Offices during good Behavior, and shall, at stated Times, receive for their Services a Compensation which shall not be diminished during their Continuance in Office.”

We’ll talk about what ‘good behavior’ means in another article.  For now, professor Chemerinsky took us on a long an winding road through the Supreme Court’s history of rulings on judicial powers beginning with Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 72 (1982) which held that bankruptcy courts were unconstitutional because of their ability to adjudicate state law claims. “This is where the story begins,” said Prof. Chemerinsky. He was quick to discuss the cases in the context of the times they were decided.  In 1982 I was still in high school, but the Court wanted to send a clear message to Congress at the time. They made a plenary distinction.

In my last article I discussed whether consent or waiver might solve the problem, allowing our bankruptcy judges to issue orders on state court claims.  However, the conversation needs to focus on whether the issues are core, meaning they arise or are “core” to bankrupt estate, such as a fraduluent transfer or preference claim as brought forth in Stern v. Marshall, 131 S.Ct. 2594 (2001).

In the end, the professor channeled his late grandmother who would make predictions about the gender of babies in pregnant women.  If she was right, she would talk about it Ad nauseam.  If she was wrong, it was never discussed again.  I really enjoyed his learned opinion with specific judges and how they have ruled on prior cases.  Using a ‘past peformance will yield similar future results’ approach, Prof. Chemerinsky believes the outcome in Wellness Intern. Network Ltd. v. Sharif, 376 F.3d 720 (7th Cir. 2013) will be to overturn the 9th Circuit Bellingham case and rule that consent is not sufficient.   Until then, we in the Ninth Circuit get implied consent. What are your thoughts?

Debt Forgiveness Plan

Do you have very old debt lingering on your credit report?  In California, if it has been more than four years since you first became delinquent; i.e., iStock_000044144728Smallmissed a payment, then the debt collector can no longer sue you to collect on that debt.  HOWEVER, that doesn’t mean that the debt is forgiven, or that the debt is not owed. Under both the Fair Debt Collections Practices Act and the Fair Credit Reporting Act, debt collectors can continue to collect the debt owed long after the statute of limitations (the time period a debt collector has to sue on a debt owed) has expired.  In fact, that collection can remain on your credit report for seven (7) years after you first became delinquent.

I agree with Liz Weston’s ( answer in her recent column where she explains, “. . .there’s no forgiveness for most debt. It’s legally owed until it’s paid, settled or wiped out in bankruptcy.” I see clients who want to move on with their financial lives and buy a home or car, but are declined due to these pesky old debts that linger on their credit reports.  Even though many of them are old and the creditor can no longer sue, the consumer still owes the debt and the collection sits on their credit report.  So, what plan is there for debt forgiveness?

The answer is always; it depends.  Every situation is different.  Time and timing are the most important factor in deciding a course of action.  If you’re like most folks these days, you live in the instant gratification age and want results NOW!  If you’re being sued, or have far too many credit lines in collections, then time may not be your friend. Unfortunately, quick results come at a price that likely includes filing bankruptcy.  Otherwise, if you can wait for time to pass, a full seven (7) years later, your credit report should be clear of the negative items.

Bankruptcy Lawyer Publishes Book to Help Consumers Become Debt Free


The book, 5 Steps to Freedom From Debt, published on Amazon on August 29, 2014 promises to deliver a simple system that anyone can follow to make the right choice to eliminate uncontrolled debt. It is essentially my consultation in an expanded version and in writing.  In this book I provide the process I take with prospective clients and boil it down to fit their individual financial goals.  While getting free from debt is a very individual path, there are only a few effective ways to get there.  I believe that all options must be considered before taking action.

As an advocate for a debt free America, I felt it was time to write the book on the options people have when it comes to effectively dealing with debt.  In five steps, you too, can become debt free. Here are the steps:

1.  Know Your Numbers

2.  Set Up Your Financial Goals

3.  Explore All Your Options For Getting Out of Debt

4.  Consult with Your Professionals

5.  Make a Well Informed Decision

The sooner you take action and consult with professionals like a bankruptcy lawyer and your accountant, for example, the more options you will have in getting out of debt.  Another important point is to make a decision from all available information because financial mistakes have a compound effect on your future and retirement. The book is available now on Amazon.  Christine A. Wilton, Esq. is only licensed to practice law in California and cannot provide debt relief outside the state.

Private Student Loan Taken For Struggling Addict Entitled To Bankruptcy Discharge

I’ve been quietly at work on a book for lawyers on effective ways of helping clients with both federal and private student loans, Discharging Student Loans in Bankruptcy.  Lately, I’ve been running up against National Collegiate Student Loan Trust and their California attorneys at Patenaude & Felix.  I am working with clients in both state court and bankruptcy court to sift through the issues presented by the alleged creditor and whether they have a right to collect a debt, if any, they believe my clients owe.  I assert they have no right to collect; and I’ll tell you why I believe it.

On the surface, many lawyers and much of the media commentary on student loans explains they are nearly impossible to discharge in bankruptcy because of the debtor generally must prove Undue Hardship by suing his/her lender under 11 U.S.C. 523(a)(8). I’m going below the surface of Undue Hardship and looking into the Limitations on Exception to Discharge of Private Student Loans. From this article, I am looking at loans that are NOT qualified education loans:

Some of the more common ways in which an education loan may fail to satisfy the requirements
of a qualified education loan include:
1. Use at a college that is not a Title IV institution (i.e., a college that is subject to a program participation agreement under 20 USC 1087ll).
2. Use for costs not included within the definition of cost of attendance or in excess of the expected family contribution (or cost of attendance minus aid received).
3. Use for study abroad not approved for credit by the home institution.
4. Use for rental or purchase of equipment, materials or supplies that are not required by the institution.
5. Use for purchase of a computer without obtaining an adjustment to cost of attendance from the college for the cost of the computer.
6. Use for a previous year’s school charges.

So, if you are among the many parents who have taken loans to help your child struggling with addiction, then these loans MAY be discharged in bankruptcy!  If you decide not to file for bankruptcy and National Collegiate sues you, there may be other defenses. It’s important to consult with an attorney that understands collections defenses, student loans, securitization to create a strategy that is right for you.

Ninth Circuit Appellate Panel Overturns the BAP; Approves Wells Fargo Freeze Policy

We have been following the Mwangi case since 2010 when we first heard of Wells Fargo placing a “temporary administrative pledge,” known as a “freeze” on a debtor’s bank account after it discovered that they had filed bankruptcy. You can read the first article here and the follow up article here.


After filing for bankruptcy, the debtor’s bank accounts held at Wells Fargo Bank, N.A. froze the accounts.  Each night, Wells Fargo combs their system for all newly filed Chapter 7 bankruptcy cases that match up with their account holders and places a, “temporary administrative pledge,” on the accounts. Wells Fargo believed, and I agree, that the money held in the bank accounts became property of the bankrupt estate upon filing of the case.

The Issue

Whether Wells Fargo violated the Automatic Stay provisions of 11 U.S.C. 362 when it froze the debtor’s bank accounts after they filed for bankruptcy.

Stay Not Violated By Wells Fargo Says Ninth Circuit

Stay Not Violated By Wells Fargo Says Ninth Circuit

Procedural History

Debtors filed a motion in the bankruptcy court seeking sanctions pursuant to 11 U.S.C. § 362(k) against Wells Fargo, based on Wells Fargo’s alleged intentional violation of the automatic stay provisions in §§ 362(a)(3) and (a)(6). The bankruptcy court denied this motion, concluding that Wells Fargo could not have violated the automatic stay because (1) the automatic stay applies only to property of the bankruptcy estate, and exempt property never becomes estate property; and (2) Wells Fargo took no action to collect, assess, or recover any prepetition claim against the Debtors.

The Debtors appealed to the Bankruptcy Appellate Panel (“BAP”), which reversed the bankruptcy court. Mwangi v. Wells Fargo Bank, N.A. (In re Mwangi I), 432 B.R. 812, 816 (9th Cir. BAP 2010). First, the BAP rejected Wells Fargo’s argument that the Supreme Court’s decision in Citizens Bank of Maryland v. Strumpf, 516 U.S. 16 (1995), authorizes Wells Fargo’s policy of “temporary administrative pledges.” According to the BAP, Strumpf authorizes a bank to impose a temporary administrative hold only to preserve setoff rights, and in this case, Wells Fargo denied any intent to protect setoff rights. In re Mwangi I, 432 B.R. at 820. Second, the
BAP found that the Debtors had an inchoate interest in the account funds, which remained part of the bankruptcy estate. Id. at 820–21. Third, the BAP held that 11 U.S.C. § 522’s right to claim exemptions in estate property bestows standing on debtors to pursue sanctions for violations of § 362’s automatic stay provisions. Id. at 822–23. Fourth, the BAP held that Wells Fargo had violated 11 U.S.C. § 362(a)(3) by exercising control over estate property. Id. at 823–24. The BAP reasoned that the turnover provisions of the Bankruptcy Code are self-effectuating and that the Debtors were not required to take any action to ripen their interest in the account funds before asserting a violation of § 362’s automatic stay provisions. Id. at 824. Finally, the BAP remanded the case to the bankruptcy court to determine whether Wells Fargo’s retention of the account funds was reasonable and, if not, whether the Debtors had suffered damages. Id. at 825.

This case moved from the Bankruptcy Court, Bankruptcy Appellate Panel, then to the District Court, only to jump to its death in the Ninth Circuit on appeal.


The panel held that the debtors could not state a claim for willful violation of the automatic stay provision of 11 U.S.C. § 362(a)(3), which proscribes “any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.” You can read the entire court opinion here.

Moral of the Story

  • Don’t bank where you owe money!
  • If you bank at Wells Fargo, move your money BEFORE you file for bankruptcy!
  • Always consult with several attorneys BEFORE you hire them because not all attorneys know. 
  • Other banks may start freezing bank accounts.

When Life Gives You Lemons: OC Edition

From religion to politics; housing, transportation and food, the epic failures of the economic recession have delivered some real big lemons to the OC [Orange County]. No sector of the economy was left untouched and so many lives have been impacted in this recent wave of sour fruit. In July, the OC Metro Magazine’s (@OCMetro) article entitled, Orange County’s Biggest Lemons highlighted some of the OC’s hellacious failures and explained, “what we learn from failure is often the most important business lesson of all.” I say that it is the hard times that shape us all.  As the Kelly Clarkson song goes, “What doesn’t kill you makes you Stronger,” and I agree.

Make lemonade out of life's lemons

Make lemonade out of life’s lemons

I focus here on the personal lessons that mirror the financial failures my clients face because it’s only a matter of time when a case of lemons is likely to show up on your doorstep.  When it does, what will you do with all those lemons?  Will you delay making any decision and end up with a case of rotten lemons?, or, will you take immediate action to squeeze them all by hand, add sugar and water and enjoy the fruits of your labor when there is lemonade?

Financial mismanagement and family infighting caused the collapse of the Crystal Cathedral dynasty built by Dr. Robert Schuller.  Who doesn’t have family infighting?  Don’t pass on your incredibly successful business to your children, unless they are ready to take over and build upon your success.  The family finance lesson is that the entire family must be on board with a financial plan or you’ll end up with a saboteur in your midst who might sink the ship!  I like to include both spouses in talks about bankruptcy and debt relief because when everyone is on the same page, success happens faster.

The OC Metro article highlights some of the biggest bankruptcies our nation has ever seen and the it seems that the epicenter of the mortgage meltdown happened in Irvine, California where many of the mortgage brokerage houses enjoyed the ride up. We are left with the biggest lesson of all.  There are no ‘get rich quick’ schemes.

Lessons to live by

  1. Live on less what what you make
  2. Save cash for emergencies, not credit cards
  3. Save for retirement and NEVER borrow from it
  4. Don’t tap the equity in your home
  5. Use what you have before you buy more

A Medical Bankruptcy May Soon Discharge Student Loans

Cited as the Medical Bankruptcy Fairness Act of 2014, S.2471 is a Bill recently introduced in the Senate, June 12, 2014. The iStock_000011906030Smallproposed Bill would Amend the Bankruptcy Code to include definitions for a “medically distressed debtor” and allow a discharge of their student loan debt without the current requirement of filing an adversary proceeding to prove Undue Hardship. The “new” legislation would help those who have incurred medical debts during the three (3) years before filing bankruptcy that is greater than 10% of their adjusted gross income or $10,000; and received no domestic or family support; or which caused a reduction in income or unemployment.

The only other way to discharge federal student loans is through an administrative discharge, which requires a total and permanent disability.  The bankruptcy requirement would be a lesser burden on debtors with medical issues, but who are not totally and permanently disabled. Also, the Bankruptcy Code would include both federal and private student loans, unlike the federal administrative discharge.  Once again, bankruptcy may provide a more complete solution to debt problems.

Given the volume of potential cases I am presently consulting on where the potential debtors possess very strong cases supporting Undue Hardship.  However, these potential clients lack the financial resources to hire me to represent them in litigation against their lenders to prove their cases.  The passing of this Bill would lift an enormous burden off the backs of these clients who have suffered personally, financially; remain a burden on family, friends and the community; and who deserve a Fresh Start.

Supreme Court Bankruptcy Trilogy & Bankruptcy Judge’s Inferiority Complex

In the Beginning

In Stern v. Marshall,131 S. Ct. 2594 (2011), this Court held that Article III of the United States Constitution precludes Congress from assigning certain “core” bankruptcy proceedings involving private state law rights to adjudication by non-Article III bankruptcy judges. Applying Stern, the court of appeals for the Ninth Circuit held that a fraudulent conveyance action is subject to Article III. The court further held, in conflict with the Sixth Circuit, that the Article III problem had been waived by petitioner’s litigation conduct, which the court of appeals construed as implied consent to entry of final judgment by the bankruptcy court. The court of appeals also held, in conflict with the Seventh Circuit, that a bankruptcy court may issue proposed findings of fact and conclusions of law, subject to a district court’s de novo review, in “core” bankruptcy proceedings where Article III precludes the bankruptcy court from entering final judgment. The court of appeals’ decision presented the following questions, about which there is considerable confusion in the lower courts in the wake of Stern:
  1. Whether Article III permits the exercise of the judicial power of the United States by bankruptcy courts on the basis of litigant consent, and, if so, whether “implied consent” based on a litigant’s conduct, where the statutory scheme provides the litigant no notice that its consent is required, is sufficient to satisfy Article III.
  2. Whether a bankruptcy judge may submit proposed findings of fact and conclusions of law for de novo review by a district court in a “core” proceeding under 28 U.S.C. 157(b).

In The Middle

In Executive Benefits Insurance Agency v. Arkinson, 573 U.S. ___ (June, 2014) (In re Bellingham) the Court held, “[W]hen a bankruptcy court is presented with such a claim, the property court is to issue proposed findings of fact and conclusions of law. The district court will then review the claim de novo and enter judgment. This approach accords with the bankruptcy statute and does not implicate the constitutional defect identified by Stern.” Read more about the issues Here. The Court passed on the ‘consent’ issue because even if the Bankruptcy Court’s entry of judgment was invalid, the District Court’s de novo review and entry of its own final judgment cured any error, eliminating any issue on consent. Just call it ‘judicial efficiency.’

little wizardOur judges are taking these issues very seriously on the grounds that they could either clear or determine matters pending before their court.  In federal court, Constitutional Article III judges receive lifetime tenure.  The Constitution allows them to create inferior judicial officers, which gave us both Magistrate and Bankruptcy judges.  The magnitude of these decisions with the fallout of Stern is nothing short of monumental in terms of potentially undermining the bankruptcy system as we know it. We have Article III federal judges needing additional courtroom space, so they stake their claim in the current bankruptcy courtrooms.  At the foundation are federal budget concerns that loom and ultimately impact the federal judiciary with bankruptcy courts experiencing more severe cuts as the economy improves and bankruptcy filings shrink.

In the End

Next up, Wellness Int’l Net-Work, Ltd. v. Sharif, 727 F.ed 751 (7th Cir. 2013), which was decided while Bellingham was pending. “Wellness is Nutty,” said Prof. John Pottow at Central District Consumer Bankruptcy Attorney Association’s (CDCBAA) First Annual James T. King Bankruptcy Symposium entitled In re Bellingham:  From the Insiders.  Prof. John Pottow of University of Michigan School of Law presented along with Hon. Richard Paez, Ninth Cir. Court of Appeals; and Hon. Meridith Jury, U.S. Bankruptcy Court, Riverside Divsion and B.A.P. Panel Judge with Jon Hayes, President of CDCBAA and of the firm Simon Resnik Hayes, LLC.

The Court granted certiorari and will hear the issues of (1) Whether the Bankruptcy court has the statutory power, under Section 157, to enter final judgment where the plaintiff is seeking a ruling that the debtor is the alter ego of a trust, i.e., is it a cor matter?; and (2) Can the parties consent to entry of final judgment here, i.e., can the right to require an Article III court to hear the matter be waived?

The issues here look to be very narrow, if the Court were to opine solely as they relate to this case.  This would leave us with the lower courts to continue to wind through varying interpretations as they arise.  Where do you think these issues are headed?