Bar News - July 19, 2017
Federal Practice, Bankruptcy & International Law: Practical Tips for Attorneys Representing Clients with Education Debt
By: Laura Devine
The total student loan debt in the United States has recently reached more than $1.3 trillion. Student loan debt is pervasive and impacts both our colleagues in the bar as well as clients and potential clients. Many individuals now seek legal advice relating to this debt in the context of advice on repayment, incurring the debt, and relating to insolvency and potential bankruptcy.
I interviewed Richard Gaudreau, a solo practitioner in Salem, NH, who represents many clients in the student loan debt sphere, to learn about his perspective on these issues and share some practical tips with Bar News readers.
How did you first become involved in the nuanced issues of student loan law?
I have been practicing as a bankruptcy attorney for most of my career. About five years ago, I represented a client who successfully completed her Chapter 13 Plan and obtained a discharge. During the case, Educational Credit Management Corporation (ECMC) filed a proof of claim (POC) for a student loan that my client believed to be paid. I objected to the claim. After an evidentiary hearing, the court sustained my objection and found that ECMC was owed $0.
After the case closed, ECMC attempted to collect on the loan again and alleged that the claims order only precluded ECMC from collecting money in the plan. ECMC argued that the claims order did not discharge the debt because it was not a discharge-ability complaint order. Research disclosed that ECMC had gotten away with this tactic in quite a few other cases. In those cases, the debtor framed the complaint against ECMC as a violation of the discharge injunction (which clearly states that student loans are excepted from discharge).
To avoid this, I framed the complaint as a violation of the claims objection order, and argued it was a final order entitled to enforcement standing alone under res judicata principles. I figured if no debt is owed, then there is nothing left to discharge. The New Hampshire Bankruptcy Court agreed and sanctioned ECMC. The Bankruptcy Appellate Panel (BAP) affirmed this order and issued a decision that accused ECMC of “abusing the bankruptcy process.” The First Circuit affirmed in the 2013 case Hann v. ECMC. For a time, I thought I would get to argue my first US Supreme Court case, but ECMC never sought certiorari.
Are student loans dischargeable in bankruptcy?
That is a difficult question. A lawyer should not assume private student loans are non-dischargeable unless a detailed analysis is conducted. A debt labeled “student loan” is not necessarily non-dischargable debt pursuant to 523(a)(8) of the Bankruptcy Code and Section 221(d)(1) of the Internal Revenue Code. If a lawyer finds a loan believed to be automatically dischargeable in a bankruptcy, absent agreement by the loan-holder, a declaratory judgment in the bankruptcy court may be necessary.
Adversary proceedings are more commonly used, although difficult to win. Under the Bankruptcy Code, student loans are non-dischargeable unless excepting such debt would impose an “undue hardship” on the debtor and the debtor’s dependents. The code does not define “undue hardship,” and the two most common tests used are the Brunner test and totality of the circumstances test. The Brunner test evolved in the 1980s at a time when student loans were automatically dischargeable in bankruptcy after five years. Federal loans now have no statute of limitations, although private student loans do. Many courts are moving to the more lenient totality of the circumstances test.
Are there other ways to help a student loan borrower in Bankruptcy Court?
Student loan debts last many years, so finding proofs of payment on student loans can be daunting. Trying to unwind the morass of assignment and payment information can be difficult. The procedure for objecting to claims can be used effectively. By filing a proof of claim (POC), a lender submits to the jurisdiction of the bankruptcy court. If there is a balance dispute, the burden of proof rules can be more favorable for a borrower in bankruptcy court than in state court. As long as a debtor presents substantial evidence to rebut a POC, the burden shifts back to the claimant to establish the validity of its claims by a preponderance of the evidence.
As in Hann, objections can be used to challenge the validity of the debt. I had one case where an ex-spouse had forged debtor’s name to $150,000 in private student loans for their children during the marriage. Debtor filed an objection to two of the lender’s POCs with proof of the forgery. In the claims objection process, the court ultimately found that the underlying contract was void and sustained the objection. In another case, POCs filed by National Collegiate Student Loan Trusts, a securitized lender, were disallowed for lack of standing because it could not prove that it owned the debt. This order will be helpful in state court litigation.
What potential obstacles should a practitioner be aware of with respect to a client with student loan debt?
It depends on whether the borrower has federal or private loans. Federal loans have more payment plans but have harsher enforcement tools. Federal loans can garnish a borrower’s wages without a court order. The Department of Education can garnish up to 15 percent of social security and seize tax refunds. Repayment plans are generally tied to income, but only if there is no default.
Payments on private student loans are determined by the note, regardless of the ability to pay at a lender’s sole discretion. The most common phone call I get is about dealing with demands from a private student lender for an amount a borrower cannot afford. Strategic default is a tactic some borrowers are forced to consider. Private student loans have a statute of limitations. I had one client who escaped private student loans by waiting until the SOL had run.
Are there any tips you can give to Baby Boomers who are getting older and have Parent PLUS loans from helping their children through school?
I had a retired client on a fixed income with $200,000 of Parents Plus loans who was told on multiple occasions he did not qualify for an Income Driven Repayment plan. The payment of $700 to $1,200 per month was impossible. He was never told that he could qualify for an Income Contingent Repayment plan merely by consolidating his Parents Plus loans into a direct loan from the DOE. He did so and his payment became $0.
Are there any steps that an attorney should advise a client about, to protect his or her Social Security check?
The IRS has guidelines for when Social Security is considered taxable income. The IRS allows someone on Social Security to earn a limited amount before Social Security becomes taxable. I am not a tax lawyer, but from what I understand, Social Security will not be taxable unless a taxpayer goes over that amount. When Social Security is nontaxable, it is not counted by the DOE in calculating an income payment plan, which can lead to a payment of $0.
Is there anything else you would like to share?
Educational debt is being bundled together and sold to investors, much like mortgage backed securities, the same investment model that contributed to the economic collapse in 2008. The student loan debt crisis has become a drag on the economy. The legal protections afforded student loan debt can make its collection a merciless process and force lawyers into being more creative to level the playing field. It is a work in progress.
Laura D. Devine is a civil litigation associate at Boyle¦Shaughnessy Law in Manchester, NH and graduate of the 2017 NHBA Leadership Academy. She previously practiced bankruptcy law.