July 6, 2020

Debt relief is now harder for students of for-profit colleges

[Cross-posted from The Hill]

By John Patrick Hunt

For-profit colleges are accused of deceiving students across the nation and leaving them with a legacy of student debt. Predatory schools allegedly targeted veterans for their GI benefits and also set their sights on lower-income communities and communities of color.

Now, new, controversial rules will make it more difficult for deceived student borrowers to get relief from their loans. The rules went into effect July 1, after President Trump — ignoring veterans and consumer groups — vetoed a resolution that would have stopped them.

More than 300,000 student borrowers have applied to the Department of Education for loan relief. based on school misconduct. The collapse of large chains of for-profit schools such as Corinthian CollegesITT, and the Art Institutes have highlighted allegations of false job placement statistics, misleading accreditation claims, deceptive claims about financial aid, and costs of attendance, and more.

After years of wrangling, in late 2018 a court ordered into effect rules the Obama administration had drafted to help deceived borrowers. But by that time, the department, now led by Secretary Betsy DeVos, was far along in drafting new rules. 

The DeVos rules make it harder for borrowers to get relief in many ways. One critical change is that the department can no longer handle similar claims in batches, for example providing relief to everyone who entered a program after the school lied about employment statistics. Now each individual borrower is on their own.

Moreover, those individual borrowers now must prove that the school made misrepresentation with the knowledge that it was false or with reckless disregard for the truth. An individual borrower usually will not be able to prove a school’s state of mind — the rules do not say how borrowers can get evidence on the point — so opponents of the new rules have aptly described them as imposing a “near-impossible” standard of proof. 

Although a pending lawsuit challenges the rules, its prospects are uncertain. With the Education Department abdicating its responsibility to protect student borrowers from fraud and deception, it is time to think about consumer bankruptcy as another avenue for relief. 

Despite a perception that it is impossible to escape student loans in bankruptcy, studies have found that 40-60 percent of borrowers who actually seek to do so enjoy at least some success. The main obstacle for the other 40-60 percent is the requirement, unique to student loans, that the borrower show “undue hardship” to get a discharge.

In evaluating undue hardship, courts typically look to factors such as the debtor’s age, health, and family responsibilities, as well as the repayment efforts the debtor has already made. By contrast, courts almost never consider whether the borrower was tricked into taking out the loan in the first place.

It is not entirely clear why this is so. Perhaps it is because courts developed their tests for undue hardship before enrollment at for-profit schools took off. For-profits reportedly have accounted for over 98 percent of higher education fraud complaints.

It is now time for a change. Bankruptcy courts should start to consider whether the school deceived the borrower into enrolling. Dictionaries tell us that the word “undue” means unjustifiably great. As between two borrowers, each of whom will suffer equally in trying to repay student loans, the one who was deceived has a stronger claim that hardship is “undue.”

The federal government makes most student loans, and it might be argued that the government is not responsible for schools’ misconduct. But since 1976, private consumer lenders have been responsible for sellers’ deception if the seller refers the buyer to the lender. Schools do more than “refer” students to federal student loans; they run the entire process of originating the loans under the department’s supervision.

Chapter 7 bankruptcy can affect credit scores, cause social stigma, and require the sale of the debtor’s property. It will not be an attractive option for all victimized borrowers.

However, many deceived borrowers must be in such financial distress that bankruptcy makes sense. Courts can apply bankruptcy law to offer a greater chance of relief than the DeVos rules do. And most importantly, bankruptcy courts can provide relief even if the political process in Washington, D.C is stalled.

Student loans are a source of rising anger and frustration, and loans arising from fraud are among the most infuriating. Bankruptcy courts must step in to help where the education department has failed.

July 15, 2019

Student loan borrowers are defaulting yearly -- how can we fix it?

[Cross-posted from The Hill]

Over a million borrowers defaulted on student loans last year. Many of those carrying this debt file for bankruptcy. In fact, an estimated one-third of bankruptcies involve student loans. But what many people might not know is that in bankruptcy, student loan debt is rarely forgiven. One researcher found that of over 230,000 student-loan borrowers who filed bankruptcy in 2007, under 450 — less than 0.2 percent — even tried to discharge their education loans. 

Presidential candidate Beto O’Rourke just proposed a large-scale debt-forgiveness program to help address the problem. Fellow candidates Sens. Elizabeth Warren (D-Mass.) and Bernie Sanders (I-Vt.) already offer such programs. But such relief will come, if at all, after the presidential election. In the meantime, bankruptcy should be a more readily available option for truly overwhelmed borrowers.

Congress is considering bills proposed by Warren and Sen. Richard Durbin (D-Ill.) and by Reps. John Katko (R-N.Y.) and Jerrold Nadler (D-N.Y.) that would make it easier for borrowers to escape, or discharge, student loans in bankruptcy. Recently, the House Judiciary Committee held hearings on student loan bankruptcy.

The bills would eliminate a requirement that applies to student loans and not to any other type of debt: To get a discharge, the student-loan borrower must undertake the daunting task of suing the creditor within the bankruptcy and proving that repayment would cause the borrower “undue hardship.” 

By severely restricting bankruptcy relief, the undue-hardship requirement undercuts the basic purposes of the student loan programs: equal access to higher education, benefiting society through educating the population, and helping students.

Excessive debt can undermine access to education. Research has shown that high undergraduate borrowing is associated with lower graduation rates and with not pursuing further education

Bankruptcy can help tear down this barrier. It is a fundamental premise of American bankruptcy law that bankruptcy discharge is a powerful remedy for discouragement caused by unmanageable debt, and that notion applies fully to education debt. 

The undue-hardship requirement also can interfere with education’s benefits to society. In a recent Florida case, the debtor worked at a Salvation Army shelter as a counselor to battered and abused women. According to the record, she was “at the top of her profession” and “unlikely to find other work in her field that would pay more.” 

The court refused to grant relief, no matter how low her standard of living. According to the court, a debtor cannot claim undue hardship if she “choose[s]” to work only in the field in which she was trained. The court effectively told the debtor to abandon her successful, if lower-paying, career to try to make more money to pay loans. It interfered not just with her own career choice, but with society’s ability to benefit from her education.

Finally, the undue-hardship requirement transforms an intended benefit into a high-stakes gamble. Congress intended borrowers to repay out of increased earnings, not to suffer because of failed educational investments

Of course, student loans can help borrowers by making education possible. But loans can also harm students. Researchers have found links between education debt and lower income, net worth, and probability of owning a house or car, as well as self-reported mental health, life satisfaction, and well-being

The harms can outweigh the benefits. For example, one bankrupt debtor borrowed over $50,000 for an information management master’s degree, could not find a job in the field, and worked as a telemarketer. The gamble did not pay off for him. 

Congress should enact legislation, such as that under consideration, to alleviate or eliminate the “undue hardship” requirement that obstructs bankruptcy relief for overwhelmed student borrowers. But even if Congress does not act, other actors should step in to limit the harm caused by the undue-hardship requirement.

The Department of Education makes the rules governing student loans issued under federal programs — the large majority of student loans outstanding. The department is considering changing those rules. It should, as others have suggested, adopt a policy of agreeing to discharge under certain defined circumstances that indicate severe hardship and inability to pay, such as when the debtor is disabled and has an income under 150 percent of the poverty level. By sparing such struggling borrowers the hassle of litigating a case in bankruptcy court and by providing clear rules, such a decision could help thousands each year. 

The courts have broad latitude to interpret “undue hardship.” They should move toward granting discharge more consistently and freely. For example, they should stop insisting that debtors abandon callings at which they have achieved success so that they can repay debts. Further, courts should allow discharge when the borrower cannot repay the loans within a reasonable time, such as 10 years, while maintaining a lifestyle well above the poverty level.

Thus, there are several ways to mitigate the undue-hardship requirement’s interference with achieving the student-loan programs’ goals. With over a million borrowers defaulting each year, the need for action — one way or another — is urgent.

 

July 15, 2019

Student loan borrowers are defaulting yearly -- how can we fix it?

[Cross-posted from The Hill]

Over a million borrowers defaulted on student loans last year. Many of those carrying this debt file for bankruptcy. In fact, an estimated one-third of bankruptcies involve student loans. But what many people might not know is that in bankruptcy, student loan debt is rarely forgiven. One researcher found that of over 230,000 student-loan borrowers who filed bankruptcy in 2007, under 450 — less than 0.2 percent — even tried to discharge their education loans. 

Presidential candidate Beto O’Rourke just proposed a large-scale debt-forgiveness program to help address the problem. Fellow candidates Sens. Elizabeth Warren (D-Mass.) and Bernie Sanders (I-Vt.) already offer such programs. But such relief will come, if at all, after the presidential election. In the meantime, bankruptcy should be a more readily available option for truly overwhelmed borrowers.

Congress is considering bills proposed by Warren and Sen. Richard Durbin (D-Ill.) and by Reps. John Katko (R-N.Y.) and Jerrold Nadler (D-N.Y.) that would make it easier for borrowers to escape, or discharge, student loans in bankruptcy. Recently, the House Judiciary Committee held hearings on student loan bankruptcy.

The bills would eliminate a requirement that applies to student loans and not to any other type of debt: To get a discharge, the student-loan borrower must undertake the daunting task of suing the creditor within the bankruptcy and proving that repayment would cause the borrower “undue hardship.” 

By severely restricting bankruptcy relief, the undue-hardship requirement undercuts the basic purposes of the student loan programs: equal access to higher education, benefiting society through educating the population, and helping students.

Excessive debt can undermine access to education. Research has shown that high undergraduate borrowing is associated with lower graduation rates and with not pursuing further education

Bankruptcy can help tear down this barrier. It is a fundamental premise of American bankruptcy law that bankruptcy discharge is a powerful remedy for discouragement caused by unmanageable debt, and that notion applies fully to education debt. 

The undue-hardship requirement also can interfere with education’s benefits to society. In a recent Florida case, the debtor worked at a Salvation Army shelter as a counselor to battered and abused women. According to the record, she was “at the top of her profession” and “unlikely to find other work in her field that would pay more.” 

The court refused to grant relief, no matter how low her standard of living. According to the court, a debtor cannot claim undue hardship if she “choose[s]” to work only in the field in which she was trained. The court effectively told the debtor to abandon her successful, if lower-paying, career to try to make more money to pay loans. It interfered not just with her own career choice, but with society’s ability to benefit from her education.

Finally, the undue-hardship requirement transforms an intended benefit into a high-stakes gamble. Congress intended borrowers to repay out of increased earnings, not to suffer because of failed educational investments

Of course, student loans can help borrowers by making education possible. But loans can also harm students. Researchers have found links between education debt and lower income, net worth, and probability of owning a house or car, as well as self-reported mental health, life satisfaction, and well-being

The harms can outweigh the benefits. For example, one bankrupt debtor borrowed over $50,000 for an information management master’s degree, could not find a job in the field, and worked as a telemarketer. The gamble did not pay off for him. 

Congress should enact legislation, such as that under consideration, to alleviate or eliminate the “undue hardship” requirement that obstructs bankruptcy relief for overwhelmed student borrowers. But even if Congress does not act, other actors should step in to limit the harm caused by the undue-hardship requirement.

The Department of Education makes the rules governing student loans issued under federal programs — the large majority of student loans outstanding. The department is considering changing those rules. It should, as others have suggested, adopt a policy of agreeing to discharge under certain defined circumstances that indicate severe hardship and inability to pay, such as when the debtor is disabled and has an income under 150 percent of the poverty level. By sparing such struggling borrowers the hassle of litigating a case in bankruptcy court and by providing clear rules, such a decision could help thousands each year. 

The courts have broad latitude to interpret “undue hardship.” They should move toward granting discharge more consistently and freely. For example, they should stop insisting that debtors abandon callings at which they have achieved success so that they can repay debts. Further, courts should allow discharge when the borrower cannot repay the loans within a reasonable time, such as 10 years, while maintaining a lifestyle well above the poverty level.

Thus, there are several ways to mitigate the undue-hardship requirement’s interference with achieving the student-loan programs’ goals. With over a million borrowers defaulting each year, the need for action — one way or another — is urgent.

April 5, 2011

New John D. Ayer Bankruptcy Chair Honors Leading Bankruptcy Scholar

Professor Emeritus Jack Ayer has long been recognized for his national leadership in bankruptcy law.  The John D. Ayer Bankruptcy Chair honors Professor Ayer for the lasting legacy he leaves in this area.  I was delighted to join other faculty in San Francisco yesterday evening to launch this chair.  Thanks to our hosts, the McNutt Law Group, who have spectacular offices overlooking the Bay and Yerba Buena Island.


 

January 12, 2011

Justice Kagan's Torture Memo:" It Can't Possibly Mean That"

Folks in the commentariat seems to believe the planets are in alignment as they read (or hear about) new-Justice Elena Kagan's first Supreme Court opinion. The topic is "bankruptcy," and the general sentiment seems to be that it is only fitting for the newbie to be handed an assignment so "unimportant."

In a narrow sense, they are right: the issue is a precise point of statutory interpretation (so precise you could be excused for wondering why the Court messes with it at all). That is: does the debtor get to deduct expenses for a car payment when he owns no car? On a hasty reading, the uninitiated reader might conclude that "yes, he does get the deduction." He might also conclude that the result is a bit silly but clarity and coherence have apparently never been part of Congress' brief.

Justice Kagan was not so easily fooled. She reads the statute a second time and finds that "the key word...is 'applicable'," and that the deduction just wasn't applicable in this case. Seven of her brethren (sic?) signed on. The opinion is a perfectly creditable piece of handiwork; you would expect no less from a first-tier Harvard law grad. From a more spacious vantage, however, the case really needs to be filed not under "bankruptcy" per se but under "statutory interpretation." And here, you might be tempted to wonder whether what they learn at the Harvard Law School is the art of torturing the statute until you extract a confession.

There's a back-story here that you'd never suss out of the opinion itself. Specifically, the language in question comes from the famous-all-over-town bankruptcy amendments of 2005, which made it much tougher for ordinary folks to get bankruptcy relief. Whether that's A Good Thing or not is the kind of issue on which, inevitably, tastes differ. But another issue, apart from substance, is quality of the statute as a piece of draftsmanship. Here there is much wider agreement: it's a mare's nest, a dog's breakfast, a can of worms, just about anything but the cat's meow. Cudgeling my brain, I can think of only one person who has ever gone on record as believing that the statute is carefully written.

No surprise, then, that an kind of cottage industry has developed in the lower courts since 2005 which you might call Saving Congress from Itself--more precisely, trying to read some sense into a statute which often doesn't make any sense. But this endeavor has not been purely technical. Rather, there seems to have developed a sense among the lower courts that what Congress intended to do was jam it to the debtor good and hard, and that if Congress didn't get it right the first time, then we must help them. Bankruptcy lawyers have fashioned a new canon of statutory interpretation: if the statute seems to favor the creditor, apply the statute; if it seems to favor the debtor, assume it's a mistake and favor the creditor anyway.

I wouldn't put Kagan in quite that camp. Her reading seems more rooted in the "Congress couldn't have said anything that stupid" school. And she obviously has a lot of company: the whole crew is on board. The whole crew, that is, with one exception: Antonin Scalia who ways in with a typical blunt assertion of a kind of plain-meaning rule (whatever Scalia may be willing to torture, you'd have to say that statutes are not on the list). As to bankruptcy issues, it's a fight he's had  before: famously with Justice Harry Blackmun and as recently as last spring, with Justice Samuel Alito.  From early in his career Scalia has made it clear that (at least on non-political, technical, issues) if Congress is determined to muck things up, he will let them muck away.

So we are left with the ironical conclusion that Justice Kagan, late darling of the left, begins her Supreme Court career by putting money in the pocket of the credit card companies. while the last man standing at the pass in defense of the beleagured debtor is Antonin Scalia.

Coda: I really don't mind the Chief Justice giving the newbie a fairly technical case on which she can win broad assent. I just hope it isn't a reflection on his view of Justice Kagan. Back in an earlier time, I remember that Chief Justice Warren Burger harbored contempt for at least two things: Justice Thurgood Marshall, and bankruptcy. So Marshall got to write bankruptcy opinions. They weren't bad opinions (Marshall had, after all, plenty of good clerks). But if that is going to be the Chief's attitude to bankruptcy cases, I suspect the Court is better off just not taking them at all.  

Second Coda:  My friend Bob thinks I am being unkind to Justice Marshall.   Maybe; I know that I take second place to  no one in my admiration of the old guy.  But I doubt that he really cared all that much about the priority of tax claims in Chapter X, or the fate of crooked securities entrepreneurs in Chicago.

[Coss-posted with some variations at Underbelly.]

October 26, 2010

Two Thoughts on the Mortgage Meltdown:A Plague o' Both Your Houses

I won't for a moment pretend to have read everything written on the topic but here are a couple of thoughts on mortgage meltdown that i haven't seen elsewhere.

One: the banks are going ballistic hanging tough over the question whether they should rewrite some of these deals so that buyers can stay in their homes. They've pretty well sandbagged HAMP and they talk about a possible Chapter 13 writedown amendment as if it were the End of Western Civilization as we Know it.

What this loses sight of is the question of what will happen if the banks don't get writedowns. For borrowers, this is a huge issue, of course. Either they get to stay in their homes or they do not. For banks, I suspect it is not a big deal. The point is: they are never going to see this money anyway.

Consider the debtor with a $400,000 loan on property worth $280,000. He's out of work and can't pay. He walks away, leaving a deficiency claim of $120,000. What then? In a nonrecourse state, the bank eats it as a matter of law: the bank is debarred from pursuing the debtor for the shortfall.

In a recourse state, the bank can sue the debtor for the shortfall, but I suspect in most cases it won't be worth the bother. The debtor either (a) goes bankrupt and discharges the shortfall claim; or (b) does not go bankrupt and just limps along judgdment-proof, i.e., with no assets to play the game.

The point is that in all three cases, the bank is no worse off than if it took a modification. Indeed I can think of only one way that modification changes things and that is it may allow the bank to get more. How can this be? The answer is that if it plays its cards right, the bank may be able to position the debtor where he is obliged (and willing) to pay a bit more than the bare minimum--in our case, say $290,000. If these are the right numbers, than the bank is better off taking a carefully-done rewrite than otherwise.

That's point one. Now onto point two. We hear a steady drumbeat of argument that the debtors ought to get relief because the subprime fandango was full of "massive fraud." Correct, the subprime fandango was full of massive fraud, but look as little closer. From what I hear, the main fraud claim is that the banks (or brokers for banks) structured deals based on grotesquely inflated estimates of the borrowers' ability to pay--faked data about income and employment,l for example. Sounds like fraud to me, but who is defrauded here? Maybe the buyers of this caca, who took it on the bank's recommendations. Maybe the shareholders, entering into the delusion that their agents the managers were spinning straw into gold and thus deserved massive bonuses.

But the borrower? Maybe he was lied to--e.g., when he was told that it was perfectly all right to declare his income at eight times its actual number. Yet for the life of me I can't understand why a grownup loose on the streets could be misled into believing that he could pay, say, a $3,600 monthly mortgage payment from his takehome down at the car wash. 

Sure, there are cases and cases. That's why we have courts and lawyers (and that is why, inter alia, it is so bogus for the banks to say that they ought to be able to foreclose without paperwork). I might add that I'd feel differently if we were dealing with people 26 years into a 30-year mortgage who got whipsawed by some unseen society-wide calamity. But people take chances; it is okay with me that they take chances, but if you take chances, there is a chance that you will loses.

So, a plague o' both your houses.   I don't think the banks are ever going to get their money back on this one and I don't think they deserve to.  On the other hand, I'm not losing much sleep over debtors who so eagerly bought into such a lunatic fandango.

Cross-posted at Underbelly.

October 2, 2010

The Bankruptcy Squeegee Guys

Kudos to Katy Porter for dropping a dime on the Justice Department for its indefensible decision to chime in on the side of the creditors before the Supreme Court in the MBNA case. Katy's post offers a crisp summary of the issue—it's a dispute over a fine point of interpretation in a bankruptcy statute. But the real point is the meta-issue, on which let me cut to the chase: the government has no dog in his fight, and so no good motivation spending its limited resources trying to to work the ref.

Except one—speculative, but I'm sure she's right: the US Trustee (an arm of Justice) wants it. For the past five years, the US Trustee has taken as its mission the task of policing debtors (and their attorneys) in bankruptcy cases. Making a Supreme Court argument that creditors could perfectly well make themselves—and at their expense—is fully in consistent with the role the US Trustee has assigned to itself.

A bit of background. For a long time, the US Trustee was an agency in search of a mission. Congress created the US Trustee in 1978 as a compromise on the issue of how to supervise bankruptcy cases. The deal was to leave case management in the hands of private parties with the US Trustee as a kind of supervisor.

Except from day one, it was clear that nobody knew quite what the US Trustee was supposed to supervise, and how. For years, they satisfied themselves with a lot of glorified paper-shuffling, helping to weed the dormant cases out of sclerotic dockets, for example. They did play a small role in policing attorney's fees and blowing the whistle on some of the more egregious instances of attorney misbehavior. They'd weigh in on the bigger, more visible, public company cases—but these were typically the cases where their participation was least needed, the relevant interests being so well protected

Along came the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) (Urk!). For those who haven't been keeping score—BAPCPA was a miscellaneous grab-bag of amendments to the Bankruptcy Code mostly designed to make life more difficult or expensive for individual debtors trying to get the protection of bankruptcy. It was shambolically drafted and only semi-coherent but just in passing I'd have to note that a lot of the substance made good sense: for a generation, bankruptcy had indeed functioned as kind of a debtor's playground and a bit more balance in the system was not the End of Western Civilization as we Knew It.

But some time during this process, behind some Steelcase desk on Mass. Avenue, the light dawned: beat up on debtors and you will not offend the powerful in Congress. Nor, of course, the creditors who might have supposed they would have to do their own work, and on their own dime. Anyway, coming out of the box, the newly transmogrified US Trustee presented itself—more or less unasked—not in a striped shirt with a whistle, but as the boy in blue with the badge. In some respects they make me think of the squeegee men who used to pop up unasked in Manhattan to clean your car windows. Okay, the comparison is not exact: in this case the customer is perfectly happy to have his window cleaned, especially since it is not he who will have to pay for it.

Again, before I get carried away—there is nothing intrinsically wrong with the goal of policing debtor misbehavior. Laws are laws and deals are deals. And as I've already said, I'm somewhat more tolerant than many of my bomb-throwing pals of some of the substantive innovations of the 2005 Act. But I'm remembering what Woodrow Wilson once said about Congress: Congress may do the right thing but never because it is the right thing. Something similar may be said of the bureaucracy. The US Trustee's campaign against debtors has far less to do with any question of substantive right than it does with institutional survival. The Justice Department should stop being the enabler here. It should abandon its position in the MBNA case and devote its resources to a more worthwhile or product—like, perhaps, the abolition or at least the severe scaling-back of the US Trustee.

Cross-posted at Underbelly.