Bankruptcy can help in a lot of ways. One less well-known benefit is to free up a copy of a college transcript to use for employment or future school applications, when you can’t afford to pay the college back right now.
As of 2013, Americans owe more in student loan debt than credit cards. And a growing portion of that debt is in default. In some cases, your former college will be a servicer of those loans for a state lender. Or the college is owed money from some other account, like room and board or part of tuition. In those cases, the college will sometimes hold the transcript hostage to satisfaction of the debt or at least reasonable payment arrangements.
You can’t blame the college for trying to do its part to support the financial system that keeps it alive. But when the former student files bankruptcy, the rules change. When the bankruptcy is filed, an automatic stay is typically created. As described in many articles on this site, the stay prevents a creditor from taking any action to collect the debt owed without the court’s permission.
The automatic stay is a broad and powerful tool. Sometimes judges even forget how important it can be. In March 2013, Judge Dwight Williams in Alabama did not. He concluded that a college withholding a transcript to force payment of a debt was a violation of the stay and the only question was what damages would be ordered.
The judge concluded that it did not matter that the student loan owed to the college (as servicer) was would not be wiped out in the bankruptcy. It mattered that the college continued to use this tool to “encourage” payment. And that’s enough to get the college into trouble.
So keep this in mind. Getting your transcript freed up may not be a good enough reason to consider bankruptcy. As we say, don’t drive a nail with a sledgehammer. But if your debt load is a problem — which is likely if you have college loan problems — then it may be worth exploring how bankruptcy could benefit you.
Photo: Union College Commencement, 1925
In this article I will explain a few basic details about conventional and prepackaged Chapter 11 bankruptcy cases.
Conventional bankruptcy: This is usually when a business files bankruptcy in a response to a crisis. However, when a business files bankruptcy without at least some prior negotiation with creditors, no one can really be sure how a case will turn out. For example, many businesses have bank loans, and those banks have blanket liens on all the business’ assets, including cash and accounts receivable. Just to run its basic affairs after the bankruptcy, the business will need to seek permission of the creditor to use that so-called “cash collateral”. Also, the business may have filed bankruptcy as a result of a liquidity crisis and may need new cash just to continue operations. The debtor may need to quickly find and seek approval of debtor in possession (“DIP”) financing just to keep the lights on and the doors open.
Prepackaged bankruptcy: A prepackaged bankruptcy eliminates much of the uncertainty of entering Chapter 11. In this model of bankruptcy, the business negotiates agreements with creditors before the bankruptcy which are legally binding in the bankruptcy case. Section 1126(b) of the Bankruptcy Code specifically contemplates this type of case by providing that someone who accepts or rejects a plan before a Chapter 11 is deemed to have also accepted or rejected it within the bankruptcy case.
There are various reasons for attempting to enter Chapter 11 with a creditor-supported plan in hand. Some reasons relate to general uncertainty and cost; others can relate to requirements in many bond or loan syndication agreements that require unanimous consent by holders outside of bankruptcy to modify the debt. This can make bankruptcy sometimes the only practical way to re-write a loan, even if almost all creditors agree to the modification. This is because that in bankruptcy a class of claims is deemed to approve a plan as long as a majority of creditors in a class and 2/3 of the dollar amount in the class vote for the plan.
Another key advantage to a prepackaged Chapter 11 case is that the bankruptcy is short, minimizing its impact on the ongoing operations of the business. A prepackaged case can often be concluded in 30-60 days. It can also be cheaper than a conventional case because it is shorter, there is less court involvement, and certain aspects of a conventional bankruptcy are not present (for example, a creditors’ committee is not always appointed, especially if unsecured creditors and executory contracts are not impaired under the plan, which is often the case in a prepackaged bankruptcy).
There is also a hybrid of a conventional and prepackaged case called a “prenegotiated” bankruptcy. In this type of case the business may have reached plan-support deals with some but not all creditors.