Not a Solution. Obama’s Student Loan Reform Not Enough

Student loan attorney Joshua Cohen (@studentloanlaw) writes an excellent critique of the Obama administration’s new executive order to lower student loan payments. The order will extend eligibility for the Pay-As-You-Go (PAYE) program that was previously only available to students who started borrowing after 2007 and who took out a new loan after 2011.  Those time restrictions are now lifted.  The extension is scheduled to go into effect at the end of 2015.

This is not a solution, it is a bandage. It doesn’t make college more affordable. It doesn’t cap maximum loan amounts. It doesn’t create underwriting standards. It doesn’t return bankruptcy or other consumer protections to federal student loans. It doesn’t address the private student loan debacle (you know, the loans that supposedly have underwriting standards that allow an 18 to 22 year old to rack up $100,000 in debt with no credit history, ropes in a relative as a co-signer, offers no flexible repayment terms, and is also exempt from discharge in bankruptcy? The real killer of the economy in my opinion). It doesn’t even apply to all federal student loans (Parent PLUS loans are not eligible)!  This is, at best, a baby step forward.

Cohen makes several strong points.

  • There is no maximum cap on student loans.  Schools and banks may pile on as much debt as they want without any underwriting standards at all.  There needs to be some minimal connection between the amount being borrowed and the ability to repay the debt.  Yes, we want to give all Americans the chance to improve themselves through education, but at some point there has to be a limit and an underwriting standard.
  • Private Student Loan Nightmare.  Prior to the Bankruptcy Reform act of 2005, Private Student Loans were dischargeable in bankruptcy.  Since 2005 banks have dramatically increased the amount of private student loans made and, unlike Federal student loans, private loans do not have income based repayment plans.  The level of frustration experienced by borrowers seeking to repay these debts is extremely high.
  • Parent PLUS Loans not eligible for the new plan.  The number of parents I see with student loan debt is amazing these days.  Folks who should be saving for retirement are commonly holding $50,000 or more of parent loans whose children graduate from college only to obtain a $10 per hour job.
  • These loans are having a dramatic impact on our economy by crowding out other forms of borrowing, such as mortgage loans, car loans and other loans that trigger economic activity. Young graduates are overly burdened by loans that prevent them from buying homes, starting businesses and families.  Is this good for America?

Student loan debt now exceeds $1.2 trillion and this figure is projected to increase steadily in the next decade.

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Taking the Offensive on Debt Buyer Lawsuits

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If you are reading this article, there is a good chance you have been sued by a junk debt buyer such as Midland Funding, Encore Capital, Portfolio Recovery, Cavalry SPV, CACH LLC, Midland Credit Management, LVNV Funding LLC, or Unifund CCR Partners.  These are companies that purchase delinquent credit card debts for generally 3 to 7 cents on the dollar.

Debt buyers typically buy nothing more than a list of names and balances owed without any real proof of the debt.  By that I mean they do not acquire a signed copy of the credit card contract or a record of all payments and charges made to an account.  They lack an explanation of how charges were assessed from month to month and almost never can provide a copy of the many amendments made to the credit card agreement.  In short, they generally lack any proof of the debt.  In fact, the seller of the debts usually states that there is absolutely no guarantee that the debts are actually valid.

Why would a debt buyer spend millions to purchase unverified debts?  Because 95% of the time when they sue for payment the debtor does not file a written Answer to the lawsuit and they obtain a Default Judgment for the entire balance due, whether they can prove the debt or not.  The debt buying industry is founded on volume and default judgments.  They don’t have to prove their case because nobody makes them.

So, if you have been smart enough to file a written answer to the debt buyer lawsuit, what happens next?  Well, in a surprising number of cases the debt buyer will just let the case get dismissed.  However, my general experience is that the debt buyer’s attorney will send you a variety of discovery documents in the form of Interrogatories, Requests for Admissions and a Motion to Produce Documents.  It is extremely important to respond to these requests within 30 days.  Failure to respond will allow the debt buyer’s attorney to seek a Summary Judgment .

Although filing a written Answer to a lawsuit and responding to discover is absolutely essential, if is this all you do you are missing a key element to your defense.  You are playing an entirely defensive game and are forgetting the most important factor or these lawsuits:  the debt buyer has the burden of proof and generally cannot prove their case.  You need to play offense.  You need to make them respond to questions and to admit or deny basic facts and to produce documents.  And if they cannot respond to your questions and requests, maybe you should file the motion for Summary Judgment.

Here are some questions you may want to ask the debt buyer’s attorney:

  • Identify every person who has or may have personal knowledge of the claims, defenses, or allegations in this lawsuit, including all persons you may call as a witness at trial.
  • Identify all documents you claim demonstrate Defendant’s consent to be obligated on the account.
  • Identify all documents you claim entitle you to ownership of the account.
  • State all transactions on the account. Include in your answer the following: All late charges assessed to the account, and the date of each charge; All over-limit charges to the account, and the date of each charge; All charges to the account, including cash advances, and the date of each charge; and All payments to the account, and the date of each payment.
  • Explain in detail how you calculated the total amount due on each date a statement was sent to Defendant.

In addition to asking questions (what lawyers call “Interrogatories”), demand that they send you every documents regarding the account, including the contract, amendments to the contracts, every billing statement, and all other documents relevant to the litigation.

After sending all this to the debt-buyer’s attorney, mark your calendar for 30 days later.  Did you receive a response?  If not call the debt buyer’s attorney.   It might be a good time to chat about a reasonable settlement.  They filed a lawsuit with no proof of the debt, and that is outrageous.  Put them on the defensive.  Why shouldn’t their attorney be sanctioned for filing a frivolous lawsuit?  How is this not a violation of the Fair Debt Collection Practices Act (FDCPA) to file a lawsuit with no proof of the debt?  Shake them up.  Turn the tables on them. Play offence.

* Image courtesy of Flickr by Paul De Los Reyes

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How to Request a Stay of Foreclosure in Nebraska

Foreclosure comes in two forms:  Judicial and Non-judicial.  Judicial foreclosure proceedings are lawsuits filed in the District Court of Nebraska against the property owner to determine the amount owed and, if the owner is in default, it results in a publicly advertised Sheriff Sale of the real property.  The homeowner receives a Summons from the Sheriff along with a copy of the foreclosure lawsuit showing the amount due.  The homeowner has the right to dispute the amount owed and to seek an accounting of the loan and to demand proof that he bank has the right to foreclose.  Once the Court has determined the amount due and the right of the bank to foreclose, a Decree of Foreclosure is entered and the bank may then proceed to schedule public auction that is conducted by the County Sheriff.

A great advantage to homeowners caught in a judicial foreclosure proceeding is the availability of applying for a Stay of Foreclosure, something that is not available in the non-judicial Trustee Sales. 

In Nebraska, the homeowner in a judicial foreclosure proceeding has the right to seek a Stay of Foreclosure Request of either three, six or nine months, depending on how many years are left to pay off the mortgage.  The closer the loan is to being paid off, the longer the stay.   What that means is that the homeowner can delay the Sheriff Sale for 3, 6 or 9 months if they request a stay in writing to the Court.

If the mortgage loan matures in more than 20 years (which means that you have owned the home for less than 10 years if you have a traditional 30-year mortgage), then the stay is for 3 months.  If the mortgage loan matures in less than 20 years but more than 10 years, the stay is 6 months.  If the loan matures in less than 10 years, the stay is 9 months.  Again, you must file with the Clerk of the Court a written application to stay the foreclosure, and the application must be filed within 20 days after the Decree of Foreclosure is entered.  See Nebraska Revised Statute, Section 25-1506(a).

Is there a disadvantage to applying for a Stay of Foreclosure?  Yes, and it is a very real disadvantage if you are disputing the amount owed or the bank’s right to foreclose.  “When a defendant requests a stay of sale pursuant to § 25-1506, the defendant is precluded from appealing from the foreclosure decree. Production Credit Assn. of the Midlands v. Schmer, 233 Neb. 785, 448 N.W.2d 141 (1989); Federal Farm Mtg. Corporation v. Ganser, 145 Neb. 589, 17 N.W.2d 613 (1945); Ohio Nat. Life Ins. Co. v. Baxter, 139 Neb. 648, 298 N.W. 530 (1941); Carley v. Morgan, 123 Neb. 498, 243 N.W. 631 (1932); Ecklund v. Willis, 42 Neb. 737, 60 N.W. 1026 (1894); McCreary v. Pratt, 9 Neb. 122, 2 N.W. 352 (1879). A request for a stay of sale is also a waiver of any prior error in the proceedings. Id.”  Deutsche Bank National Trust Co. v Siegel, 777 N.W.2d 259, 279 Neb. 174, 182 (Neb. 2010).

So, getting an extra three to nine months to live in the home is great, but if the homeowner really wants to litigate the amount due and the bank’s right to foreclose it may be better to seek the protection of Chapter 13 bankruptcy rather than to surrender precious rights by filing for a stay of foreclosure.  But if all you are asking for is a few months to move then requesting a stay of foreclosure may be just the break you need.

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Filing Bankruptcy Stop Utility Shut-Off

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As I write this blog post in December, the thermometer has climbed to a scorching 15 degrees Fahrenheit on the snow blown Nebraska plains.   It occurs to me that this may be a good time to discuss how filing bankruptcy in Nebraska can stop a utility shut-off.

Section 366 of the Bankruptcy Code provides that “a utility may not alter, refuse, or discontinue service to, or discriminate against . . . the debtor solely on the basis of the commencement of a case under this title or that a debt owed by the debtor to such utility for service rendered before the order for relief was not paid when due.”

Upon the filing of a bankruptcy case, the utility cannot shut off its service.  However, the utility will require the debtor to pay a new security deposit within 20 days to continue future service.

YOU MUST PROVIDE A NEW SECURITY DEPOSIT WITHIN 20 DAYS TO CONTINUE SERVICE.

After the bankruptcy case is filed the utility company will demand a new security deposit be paid within 20 days.  The security deposit is typically based on the average monthly utility bill over the last 12 months of service.  Failure to pay the new security deposit will result in a utility shut-off.

SHOULD YOU FILE BANKRUPTCY ON THE UTILITY COMPANY?

Sometimes it is a bad idea to list a utility company as a creditor in bankruptcy.  For example, if you owe $50 to the electric company and elect to list this debt in the bankruptcy case, you may have to pay a new security deposit of $200 within 20 days.  Or perhaps you have already worked out an arrangement with the utility to repay $25 of the past due bill each month and it is probably more affordable to pay that small amount each month than to come up with a new security deposit.

WATCH OUT FOR SERVICE AT OTHER PROPERTIES.

If you receive utility service at more than one location (perhaps you own a business or rental properties), listing the utility as a creditor for a bill owed by one of your properties may result in a new security deposit being demanding based on the service provided to all of your properties.

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Documents Needed to File Bankruptcy in Nebraska

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Tax Returns.     The bankruptcy trustee must review the last two (2) tax returns filed.  If you have lost your returns, complete IRS Form 4506.  If you have not filed your tax returns, do so now.  The bankruptcy case will automatically be dismissed if you fail to file any tax return due in the past four years.

Paycheck Stubs & Other Income Statements.  Six months of paycheck stubs or some type of report provided by your employer showing wages for the past six months.  Even though your most recent paystub tells us how much you have earned, bankruptcy attorneys must prepare a special report (called the “Means Test”) that shows your income for the past six months.  Child support or Social Security or Retirement income statements are also necessary.  In short, your attorney needs all documents proving your income.  If you are self-employed, then provide a Profit & Loss Statement for the past 6 months.

Bank Statements.    Six months of bank statements from every account you are on is required.

Credit Counseling Certificate.  Before you can file bankruptcy you must obtain a pre-bankruptcy credit counseling certificate.

Bills, Lawsuits, Collection Letters, etc.   Provide your attorney with copies of all your bills, collection letters, and lawsuits.  In short, we need the name and address of every creditor.  Write down the name and address of bills you are missing.  The basic power of bankruptcy is to notify your creditors that you filed and that they can no longer contact you.  If the creditor is not notified the bankruptcy is ineffective.

Divorce Decrees.  It is extremely important to provide your attorney with a copy of your divorce decree.  Special notice must be given to your ex-spouse if you are paying a Domestic Support Payment (i.e., child support or alimony).  If your ex-spouse owes you money, that is an asset that must be reported on the bankruptcy schedules.

Retirement Accounts.    Provide a recent statement showing the balances of your retirement accounts.

Claims Against Others.  List all claims for injuries, worker’s compensation, auto accidents, etc.  Warning:  If you fail to list a claim you have against someone else on the bankruptcy schedules, you may forfeit the claim.  If you can sue someone for any reason, tell your bankruptcy attorney and list the claim on your list of property.

Life Insurance.    If you have a life insurance policy that has a “cash surrender value” provide a statement of the surrender value.  Whole or Universal policies usually have a cash value.

Home Appraisals & Tax Statements.  Provide a copy of your most recent real estate tax assessment statement or home appraisal.

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Responding to a Court Summons in Nebraska

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If you have been served with a court summons in Nebraska, it is imperative that you respond to the lawsuit correctly.  Here is what you need to do:

  • File a WRITTEN REPLY to the lawsuit with the Clerk of the Court.  The summons typically says that an “appropriate response” must be issued within 30 days.  What does that mean?  (No, calling up the plaintiff’s attorney office and giving them a piece of your mind is not enough.)   What this means is that you must file a written reply, you must sign the reply, and it file it with the Clerk of the Court within 30 days.
  •  A standard reply form is usually provided by the Clerk of the Court. (Here is a link to the Appearance & General Denial form.)  Write your name, address, phone number, the case number and then sign the form.  Have the Clerk of the Court then file your response in the court record.  You should also mail a copy to the creditor’s attorney.  An even better response form is found here.
  •  Demand an Accounting.  Send the attorney for the creditor a letter to demand a list of all the payments and charges to your account.
  • Request for Production of Documents.  Request all the documents relevant to the case, including the contract, billing statements, correspondence, etc.  Many creditors, especially credit card debt buyers, do not have the documents to prove you owe the debt.
  • Affirmative Defenses: You may want to assert certain affirmative defenses, such as the Statute of Limitations which bars claims that are too old.  In Nebraska the Statute of Limitations on a written contract is typically 5 years from the date of last payment and 4 years for an oral contract.
  • Countersuit: Perhaps you have a claim against the creditor.  If the doctor suing for unpaid medical bills committed malpractice, you should ask the court to give you compensation for the damages caused.
  • Seek Legal Advice:  Ask an attorney review your written reply.  Believe it or not, most attorneys are really nice people and they don’t mind taking a quick look at what you have written.
  • Negotiate the Debt.  One of the main benefits to filing a written response to a lawsuit is that it makes the creditor more willing to negotiate the debt.  Contact the creditor’s attorney (here is a link to find the attorney’s phone and email address) and make an offer.  Most creditors will accept a reasonable settlement offer.

Failure to respond to a court summons within the time allows will result in the creditor obtaining a “default judgment.”  A bill collector that obtains a Default Judgment has the power to garnish up to 25% of your paycheck and all of the money in your bank account.  Filing a written response with the Court will prevent a Default Judgment from being entered.

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Court Limits Right to Avoid Auto Liens.

The Nebraska Bankruptcy Court has issued a new opinion that limits the ability of debtors to avoid non-purchase money liens in motor vehicles.  (A non-purchase money auto lien is created when a loan is given by a bank or finance company that is secured to a car title but the loan was not used to purchase the vehicle. Using a paid off car as collateral for a loan results in a non-purchase money lien.) In the case of In re Cardwell, the Court ruled that a debtor may not utilize the “Tool of the Trade” exemption of Nebraska statute 25-1556 to avoid such liens unless the vehicle is actually used in the debtor’s trade.

87687793The statute provides that  a debtor may exempt “the debtor’s interest, not to exceed an aggregate fair market value of two thousand four hundred dollars, in implements, tools, or professional books or supplies held for use in the principal trade or business of such debtor or his or her family, which may include one motor vehicle used by the debtor in connection with his or her principal trade or business or to commute to and from his or her principal place of trade or business.”

In the Cardwell case, the debtors owned a 2006 Pontiac Montana worth $1,200 and a 1992 Ford F-150 pickup truck worth $800.  The paid vehicles were pledged to First State Bank for a loan with a balance of $24,466.  After the bankruptcy case was filed, their attorney filed a motion seeking to avoid the lien of the bank.

Bankruptcy Code Section 522(f) allows debtors to avoid a lien in property subject to a nonpurchase-money security in any implement, professional books, or tools of the trade of the debtor or the trade of a dependent of the debtor.  The problem in Cardwell is that neither debtor was self-employed and although they used the vehicles to commute to and from work, they did not use the vehicles to perform their jobs.  As the court noted, the vehicles were used solely for personal purposes and to commute to work.  Therefore, the Court ruled that the vehicles did not qualify as “tools of the trade” as is required under 522(f) to avoid liens.

This is a devastating ruling for debtors who have pledged their vehicle to acquire high interest rate Title Loans.  For decades, Nebraska bankruptcy attorneys have used this statute to return car titles, but now they will have to limit this procedure to cases where a debtor can show the vehicle is actually used in their trade.

Importantly, what the Court did not state is how much a debtor must use a vehicle in their job to enable them to avoid nonpurchase-money liens.  For example, paralegals in our law firm frequently use their vehicles to make trips to the Post Office or to file documents in the courthouse.  Is that enough use to invoke the avoidance power?  Nebraska bankruptcy attorneys will need to emphasize how a debtor utilizes their vehicle in their job to gain access to the lien avoidance power.

The Court made reference to 8th Circuit cases that will guide bankruptcy attorneys in future cases.   “Although Cleaver did not reach the ultimate issue of whether the vehicle in that case was in fact a tool of the trade, it did state “[t]he Eighth Circuit has adopted a test to determine whether a vehicle is a tool of the trade, and that is: ‘the reasonable necessity of the item to the debtor’s trade or business.’” 407 B.R. at 358 (citing Prod. Credit Assoc. of St. Cloud v. LaFond (In re LaFond), 791 F.2d 623, 627 (8th Cir. 1986) (quoting Seacord v. Commerce Bank of Blue Hills (In re Seacord), 7 B.R. 121 (Bankr. W.D. Mo. 1980)). In making that determination, a court should consider (1) the intensity of the debtor’s past business activities; (2) the sincerity of the debtor’s intention to continue the business; and (3) evidence that the debtor is “legitimately engaged in a trade which currently and regularly uses the specific implements or tools . . . on which lien avoidance is sought.” LaFond, 791 F.2d at 626 (citations omitted). A car that is used solely for commuting is not a tool of the trade. In re King, 451 B.R. 884, 887 (Bankr. N.D. Iowa 2011) (stating, “It is fairly well settled that a car used only for commuting purposes cannot be considered a tool of debtor’s trade.”) (citations omitted).”

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Court Makes Big Changes in Chapter 13 Fees

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How much does it cost to file Chapter 13?  I have answered that question for nearly 20 years, and it seems that about every 5 years the local court rules provide a different answer.  Well, the Nebraska Bankruptcy Court rolled out yet another compensation system for debtor’s attorneys effective December 1, and this time I think the Court got it right.

To start with, a $281 court fee is due when the case is filed.  If the debtor cannot afford to pay all of that fee at once, the Court will allow a debtor to pay $75 with the filing of the case and the remaining balance of $206 within 90 days typically.  In addition, most bankruptcy attorneys charge for credit reports they purchase.  However, attorney fees are usually paid out over the term of the 3 to 5 year payment plan, although some attorneys charge a portion of that fee up front.

Bankruptcy courts have used a variety of compensation systems over the years.  In the past attorney fees were determined by an itemized statement of time expended by the debtor’s attorney that was submitted to the Court for approval.  The problem with that system is that some attorneys were charging vastly different hourly rates and spending much more time to complete routine tasks.  As a result, some attorneys were being paid not on the basis of what they actually did for their client but rather on how well they could prepare billing statements.

Other courts have utilized a Flat Fee system that awarded a set amount of compensation at the beginning of the case and did not allow attorneys to apply for additional compensation when they performed new legal tasks, such as amending the payment plan when the debtor’s income changed or suspending payments when they became unemployed or injured.  The obvious problem with that system is that it does not encourage attorneys to provide ongoing support to their clients and some attorneys neglected the case after their fees were paid.

Nebraska has traditionally employed a hybrid system that allowed attorneys to choose whether they would bill hourly for their services or they could accept a flat fee.  Three years ago the Court created a system that allowed a flat fee upon approval of the Chapter 13 payment plan and then allow additional services to be billed out at an hourly rate.  However, I believe the Court has been administratively burdened by reviewing all these fee applications, so now there is a new system.  It is actually a system I recommended to the Court three years ago.

Appendix N of the Nebraska Local Rules not provides for a Flat Fee (what the Court calls a “No Look Fee”) upon approval of the payment plan.  Then, if additional services are provided later on in the case, the Court has provided a list of standard compensation awards for a variety of services, like amending the plans or suspending payments or filing motions to sell property.  At last I think the Court has achieved a good balance between creating a simple system to administer which provides standard compensation for standard services while at the same time providing attorneys a reward for providing ongoing services.   At last the interest of the Courts, the debtors and their attorneys are aligned.

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