Bankruptcy of Your Student Loans

Bankruptcy of Your Student Loans

Sunday, December 27, 2015


The student loan situation is on the verge of a catastrophic collapse!  At no time in history has there been anything that even comes close the amount of "unsecured" money borrowed by the public; the student loan crisis is rapidly approaching $1.3 Trillion Dollars!

Everyone has borrowed money.  Even growing up you asked your parents or your friends to lend you some money with the promise to pay them back.  Most parents are smart enough to know that they probably won't see that money again.  Your friends tend to think that you will be a good enough person to repay the money they loaned you, as they probably are thinking that if they lent you some cash when you asked, perhaps when they need money, you will re-pay the favor?

As an adult, you may find the need to borrow money from someone besides mom and dad or the kid you shared a locker with at school.  In high school you might have found the need to work to earn some extra spending money, because, well... because mom and dad's weekly allowances just weren't meeting the need?  

Having a job is great, your'e getting some experience and "learning some responsibility" as they say, but having a car to get to and from work and to go other places would be the ultimate!  So you head down to the local used car lot and find that little honey and "your 1st car".

The dealer makes it sound so great, and tells you that you can purchase your baby with no money down and the payments will be affordable.  Besides you have a job, and this will prove how responsible you can be; won't your parents be "so" proud?  The process only takes a short while, sign a few papers, and viola you have the keys and your'e on the road!

Borrowing money to pay for your 1st car was simple and exciting.  The dealer said that the title to the car will held as "collateral" on the loan as security in case you are unable to make the required payments.  No biggie, you plan on making the payments and making them on time, so no worries about that.  Besides, you plan to work more and even hope to trade that car in for a newer one in the near future.  And listen, if you can't pay it off, they will just take the car back and sell it to someone else.

When we talk about lending or borrowing money we use the term credit and debit. Credit generally is the term associated with where or who the money is coming from. A creditor is the person or entity that is doing the lending. As the one borrowing, you are named as the debtor.  And as you pay on the borrowed money, the payments are considered debits to your account balance; thus the term "debit".  If you have a debit card, you know that the money is instantly paid out of a bank account, usually a checking account that you have funds in.

There are several types of credit and it may help to try and define them. For example you may hear the term "Consumer Credit"?  Well basically consumer credit is the credit (or should we say the ability to purchase or pay) used by consumers to purchase non-investment goods or services that are consumed and whose value depreciates quickly" 

Non-investment consumable goods are things like food, clothing, entertainment, cell phones, your internet service, and other short-life items you buy on a regular basis.  You may use a credit card to make these kinds of purchases, and that type of buying using credit is referred to as "revolving credit", because for a lack of a better explanation, it seems to continue to happen repeatedly on a very short cycle.

Besides revolving credit there is also what is called "Non-revolving Consumer Credit". Non-revolving consumer credit includes car loans and student loans.  In 2014 is was reported that non-revolving consumer debt amounted to $2.4 Trillion Dollars. As stated in the first paragraph, student loans account for $1.3 Trillion Dollars, nearly half of all of the non-revolving consumer credit debts outstanding.

The total of all Consumer Debt for both the Revolving and Non Revolving Consumer Credit debt in America is reported to be a staggering $3.3 Trillion.  Again, the student loans owed are a full one-third of that total.  Remember this... car loans are secured by a title, while student loans are fully unsecured.

Now there is another segment of the credit business which also needs a quick glance; the home and commercial mortgage market.  Purchases of real estate like homes, condos, and commercial properties all fall into the mortgage business.  A mortgage is simply the loan of money to purchase a property where the lender holds title to the property until the mortgage (or loan) is paid off. In other words, the property is the borrower's collateral and the property "secures" the loan.  If the buyer fails to make the payments, the lender forecloses on the property and takes it back or re-sells the property, much the same as the car dealer would do.

The total money in the mortgage marketplace is also very significant, however borrowing in the mortgage business has seen a slight reduction recently in total dollars being borrowed. Mortgages were reported at the end of 2014 to be at $13.43 Trillion Dollars and this secured debt total has actually come down from a 2008 all-time high of $14.72 Trillion.  Compare this to the increase reported in the total student loan debt, which continues to climb upward.

So what about "unsecured debts"?  Student loans are essentially categorized as unsecured debt. Meaning there is nothing tangible securing the loan and the lender is loaning the money on the promise to pay only.  Back when student loans first became the norm, the U.S. Government enlisted the help of banks and financial institutions to help students get a college education by offering direct loans to students and providing the money to the banks. 

These Government programs included "grants" and loans funded by Congress in the form of Education Bills and establishment of programs like the Perkins Loan Program, and the Federal Direct Student Loan Program (now re-named the William D. Ford Federal Direct Loan Program) and a host of other programs including Pell Grants, Parent Loans, etc, etc.

Once the Federal Government realized the scope of the size and the complexity of the monster they created, the Department of Education sought help to manage and administer the student loan program.  Initially the responsibility to process education loans and track student debtors and money lent fell upon the individual colleges and universities, who themselves were ill prepared to become lenders, bank managers and accountants overnight.  Nearly overnight another government monster had been created.

Overwhelmed with those tasks, the schools quickly opened the business up to outside enterprises that operated as "servicing agencies" under rigid government rules and regulations.  Agencies who then hired thousands of people and yet while operating under the banner of non-profits, received millions and millions of dollars of taxpayer money to do the bookkeeping for the U.S. Department of Education.  Today the monster is out of control.

The most frightening aspect of all of this, is that no one is doing anything to reign in the beast. All the Federal Government has done is to continue to loan money in larger and larger amounts.  There are no credit checks, no background checks, no attempts made to assess the ability of the borrower to be able to pay off the loans, and yes, no collateral required.

The number of student loans increased nearly 85% since the 2008 recession, and the estimate is that over 40 million people owe student loans.  While a report in USA Today claimed that about 39% of those loans are in deferment status and the other 61% are in repayment, I seriously question those statistics as they fail to mention the percentage of loans that are in default!  In fact checking the internet I found the default rate to be stated at nearly 14%.  

Again, I personally believe those numbers are not the facts.  I tend to believe that the Department of Education is deliberately reporting false information in an attempt to hide the truth, that the student loan crisis is a lot bigger than the congress and the public is being told!  One only has to do some simple research - and while you are at it include a search on how many students are going through bankruptcy to discharge their loans by way of an Adversary Proceeding.  There are thousands of cases under the Undue Hardship Clause, 11 USC §523(a)(8), and hundreds of thousands of dollars of student debt being discharged.

What it amounts to is the government is gambling with taxpayer money, betting on the future ability of the borrower to be gainfully employed and re-pay thousands and tens of thousands of dollars once they graduate.  What they have failed to do is have any tangible jobs waiting!

I recently read an article where the by-line was "It's the Economy Stupid", which is a phrase attributed to former President Bill Clinton during the 1992 presidential campaign.  Today's economy is in my humble opinion, on the verge of a total collapse. How in the world can this nation continue to go down the path it is on without taming the debt monsters?  

The recent passage of the debt ceiling bill has America now at $18 trillion dollars of "unsecured debt" to the world banking federations; essentially the Federal Reserve which is as many fail to know NOT a government banking institute, but a privately funded and operated bank owned by the rich and elite of the world.  The Federal Reserve basically runs the printing press at the U.S. Treasury and prints money like there is no end to it.

Well, there is an END COMING!  The bubble is going to burst.  One of the largest bubbles about to pop is the student loan bubble.  I am of the opinion, it can no longer be sustained, the Department of Education has tried to hold this together for way too long.  The truth is out! 

The number of loans overdue and in serious default has never been higher, the age of debtors has never been higher, the dollar amounts owed and unpaid has never been higher.
Yet the U.S. Department of Education (DOE) is either in complete denial or in complete conspiracy mode.  

Last time I wrote about one of the newest schemes available to delinquent student loan borrowers, called the REPAYE program.  For decades now the DOE has offered forms of repayment avenues to help struggling students extend the payment schedule.  All I see is that the DOE has realized the monster is too big to contain, and that giving the monster a little longer rope, might ease the inevitable attack, death and destruction hiding in the bushes. 

When the monster rises up, take notice... and don't say I didn't warn you!  In the meantime, if you cannot see any way out of the woods, consider learning about 11 USC §523 (a) (8).

My future blogs are going to provide more valuable help in what you need to know and just how it can be done.  You are not alone, there are thousands right now who need a way out!

Happy (debt free) New Year!

Yours truly,
Bob Preston

Wednesday, December 23, 2015


Merry Christmas and Happy New Year!

The President and the United States Department of Education has just unwrapped a gift for every college student who ever took out loans to get an education - But beware! Sometimes the gift wrapping is much more attractive than the present. This one should be opened with extreme care, or as I will suggest, left under the tree!

Effective December 17th, 2015 President Obama's "Revised Pay as You Earn" aka REPAYE is now an "option" available in the gift sack of what I can only describe as the White Elephant Gift of the Year!

REPAYE is the latest repayment scheme and like the other loan payment programs attempts to "help" struggling debtors.  My idea of help must be different from the President and the Department of Education, because I see more problems with this plan than any viable aid to the debtors.

Once again the Department of Education (DOE) decorates and wraps up the plan in a display of glittering ribbons and bows - and you guessed it "there are plenty of strings attached" and the surprise revealed inside could be non-returnable.

The gloss and glitter appeal is laid out in the attraction that the plan is a "fit-all" plan.  No matter how old the debt is, regardless of the debtor's income, and with the lure of only having to pay 10% of discretionary income for only 20 years, everyone is eligible for this fantastic gift!

But wait!  Hold your horses (or reindeer)!  Yes... you can be sure - there is some "coal" in the stockings here.  Not everything that glitters is Gold(en). Doing a "sneak-peak" when no one is looking often reveals what is under the fancy wrappings.

In the case, we find a few unfavorable things in the box.  First, to be eligible for this new plan the borrower cannot be in default on the loan(s).  Second REPAYE is not available for student who have taken out private loans.  Direct Loans yes, private funded no.

Yes you can have a federal loan for a for-profit school or trade school, then roll it into a  Direct Loan -  it will then be eligible for REPAYE. So REPAYE is open to students with for-profit schools and trade or technical schools if their loans are consolidated, a process that is part of enrollment in most all of the ICR (income contingent repayment) plans.

Third, while REPAYE is open to anyone who has loans granted under the former Federal Family Education Loan Program (FFEL) system or via Perkins (whereby the money originated from banks who backed the loans, changes made in 2010 made DOE the lender and holder of the notes, making the borrower a pawn of the Federal Government); in order for the borrower to get into REPAYE they must agree to a consolidation and convert those loans into a Direct Loan (William D. Ford Direct Loan Program - owned and operated by the DOE in Washington, DC).

Fourth, Parent PLUS loans are not eligible for inclusion in  REPAYE, and must be paid under the terms agreed to by the lender and borrower.  

Fifth, while REPAYE seduces the borrower with such tinsel as removing the "Partial Hardship" requirement that was an eligibility requirement in prior programs, the fact remains that this repayment scenario takes the original 10-year term and extends it to 20 years! Well, yes, twenty years for undergraduate degrees.... but 25 years for graduate degrees.

Sixth danger! Beware of "The Old Bait and Switch".  Your Uncle's gift to you is this... yes you can switch into REPAYE from any of  the (4) older income-driven plans.  However, rub the sand out of your sleepy eyes first! Because any unpaid interest will be added to your loan principle which of course causes interest to accrue on a higher loan balance, and if you do consolidate your FFEL into REPAYE, all previous payments no matter how many years made, do not count towards the 20 or 25 year pay off period to earn  the promise of so-called "forgiveness".

Seventh drawback... REPAYE participants must update their income status annually. Now who wants to bet that if you fail to do so, and the Feds check your IRS returns and the income has changed, that they will cancel the plan and demand immediate pay-off?  Just thinking here... and knowing the "Grinch" as I do, I could see that happening to spoil someones Christmas.

Oh, and married borrowers can no longer "exclude" their spouses income!  That means you must include it in the yearly report, and pay accordingly based on combined incomes!

Finally, Santa and the DOE have one more trinket in their bag!  DEBT FORGIVENESS!
Yes, Virginia there is a Santa Claus!  But this Elf has a real treat in store for those who fall for this gimmick.

While stuck in a 20 or 25-year repayment plan and paying on those loans based on your income and having Big Brother checking in on your earnings, taking a mere 10% of your wages (until Big Brother changes the percentage?); the debtor glides along with visions of sugar plums and loan forgiveness dancing in their heads, only to come to face-to-face with Scrooge the collector!  Yep! And this Scrooge does not get a change of heart!

At the end of REPAYE, with the loan forgiven, the debtor is fully responsible for the TAXES on the amount forgiven!  Ho! Ho! Ho! 

(Can you agree there is nothing Merry about this? -- I think I will take the lump of coal, thank you very much!)

Sunday, December 20, 2015

Undue Hardship Discharge Prevails Over Income Based Repayment Defense

While the U.S. Department of Education has made a history in the last few decades by taking the stand that student debtors who file for bankruptcy be required to agree to some form of income-based repayment plan, a recent case has poked a big hole in that hot air balloon defense!

Settled on November 10th, 2015, Abney v. United States Department of Education, Michael Kevin Abney, prevailed in his Adversary Proceeding under 11 U.S.C. §523(a)(8) proving undue hardship and successfully discharged nearly $38,000.00 in principle and interest for four years of education even though he did not earn a degree.

Michael Abney, age 40, is a divorced delivery truck driver living on a net income per month of just $1,183.00. Mr. Abney is at or near the poverty level for sure; over the life of his loan, he has been homeless, for a time living in the cab of his truck.  Abney has been hospitalized for stress and treated for depression, and currently does not own a car, his monthly expenses outweigh his income by a negative $203.00 a month - which most likely is a gross understatement of his true financial condition?

Abney was not trying to get out of paying for his education!  In fact he paid $11,000.00 before falling into default status on the original loan amount stated as approximately $25,000.00.  Life events hit Mr. Abney like a tidal wave.  Unable to graduate with a degree, Abney divorced and paying child support, had to find work to maintain a minimalist way of life.  Costly divorce and child visitation fights and costly legal fees regarding these litigation efforts, along with medical bills and a default judgement owed to Bank Of America, forced Abney into Bankruptcy with nearly $116,000.00 in unsecured debts.

The bankruptcy case was filed in the Eighth Circuit which applied the Totality of Circumstances Test in order to justify the proof of Undue Hardship.  Under that test the court looks at these factors: "(1) Total present and future incapacity to pay debts for reasons not within the control of the debtor; (2) whether the debtor has made a good faith effort to negotiate a deferment or forbearance of payment; (3) whether the hardship will be long-term; (4) whether the debtor has made payments on the student loan; (5) whether there is permanent or long-term disability of the debtor; (6) the ability of the debtor to obtain gainful employment in the area of study; (7) whether the debtor has made a good-faith effort to maximize income and minimize expenses; (8) whether the dominate purpose of the bankruptcy petition was to discharge the student loan; and (9) the ratio of student loan to total indebtedness" Yes, nine (9) criteria must be met in this test!

And yet, Abney prevailed under the Totality of Circumstances Test.  Perhaps because the Department of Education (DOE) was bent on getting Abney to agree to an Income-Based Repayment Program?   While the Eight Circuit Court has frequently agreed with the DOE stating that "the availability of the IBRP is a factor to be considered", this time, the court "rejected the DOE's argument that the mere availability of the IBRP made it impossible for Mr. Abney to show undue hardship.... (h)olding that eligibility for a program such as IBRP ipso facto leads to denial of an undue hardship would deprive the Court of the discretion granted by §523(a)(8)."

There!  The Court took a stand against the Behemoth known as the DOE - and at least in this case, has taken back its discretionary right to decide against a plan that provides no "Fresh Start" for the debtor; the judge making these conclusions: "Mr. Abney (has) established the unlikelihood that he would ever have sufficient income to enable him to pay anything toward the student loans. With respect to (the) hardships engendered by the IBRP (program) the Court (finds) :1) participation would require Mr. Abney to 'rehabilitate' the loans with nine monthly payments of more than $5; 2) there was potential harm to Mr. Abney's credit rating and access to employment and housing by virtue of the continued existence of the unpaid debt; 3) the debt would continue to accrue interest, and; (4 even if the debtor successfully completed the IBRP and had the debt forgiven, he would suffer the tax consequences of debt forgiveness which would not apply if the debt were discharged in bankruptcy. 
To the extent that the debtor might be able to put away money for retirement, the tax consequence of debt would eliminate that possibility." (emphasis added)

As a final pin prick into the DOE's balloon, the Court said: "Mr. Abney (has) made every effort humanly-possible to pay his child support and student loans.... the mere availability of the IBRP is of no help to the debtor's current or future situation but, rather imposes additional burdens on him". (emphasis added)

AMEN!  Can I get an Amen?

Source:  National Consumer Bankruptcy Rights Center, dated December 14, 2015.