With apologies to Paul Simon:

     You Just slip out the back, Jack
     Make a new plan, Stan
     You don’t need to be coy, Roy
     Just get yourself free
     Hop on the bus, Gus
     You don’t need to discuss much
     Just drop off the key, Lee
     And get yourself free
            50 Ways to Leave Your Lover

Until you get the property out of your name, you are still responsible for it, a fact recently pointed out by my colleague, Jay Fleischman.  You have to do something to get that property out of your name so you can walk away with peace of mind.  How do you do it?

As the song time suggests there are a myriad number of ways to transfer the title out of your name.  Maybe there aren’t 50 ways, but here are a few:

First, you can contact your lender to see if they would accept a Deed in Lieu of Foreclosure.  In this case, you would execute a deed transferring the property back to the lender.  Once recorded in the Land Records, you no longer own the property.  Some banks are offering a payment to homeowners to voluntarily leave their homes in a “Cash for Keys” program.  This saves the lender the time and expenses of foreclosing the property and physically putting you out on the street.  After all, time is money and in some ways, it is far cheaper to offer you money to move.  But most importantly, it takes ownership of the poreprty out of your name so you are no longer responsible for it.

Another way is a Short Sale.  A short sale is selling the priority to a third party for less than you owe.  This can be a long and difficult process because your lender will want proof of value, proof that the buyer is not related to you in any way and will insist on knowing exactly how much they will get out of the sale.  There are other details as well, like whether or not the lender is going to require some additional payment from you or whether they will allow deduction of the closing costs and attorneys fees out for he sale proceeds before they get their check.  Again, the most important part of this is that the property is transferred out of your name.

These first two steps can be taken either before or after a bankruptcy.  If after a bankruptcy discharge, you need to remember that you have discharged your debt to the lender so there is no need to pay the lender anything. But you can also use the bankruptcy process to enforce a surrender of the poperty to the lender.

In Chapter 13, this will be a component of your Plan.  Some jurisdictions allow surrender simply by saying so in the plan.  In other jurisdictions, several motions need to be filed first.  These might include a Motion to Determine the value of the secured interest.  This is important because if the lender’s debt is more than the value of the property, the lender may have a partially unsecured claim in your case which will need to be paid in the plan after surrender.  You would should include surrender language in you plan with a proposed instrument to be recorded giving up your ownership the property. Once all of this is approved by the Court, you can record the instrument eliminating your ownership in the property.  Poof!  Gone.

In Chapter 7, this can be a little trickier, but the Code provides that you must indicate your intention to redeem, reaffirm or surrender the property so it might be best to file a Motion indicating surrender and get the bankruptcy court to approve a deed or release transferring the property back the lender.  Again procedures will differ according to your jurisdiction.

There are others ways too, but :urban myths” of how this is done could get you into criminal trouble.  As always, it is important to consult a competent bankruptcy lawyer in your jurisdiction.

That’s the cry of the “debt settlement” industry.  They claim that they will help you rid yourself of debt without bankruptcy. If you avoid the out-right crooked companies, can they do it?  Sure…

But at what cost?

There are two types of these companies. One, simply takes a portion of your monthly income, negotiates with your credit card companies to stop or lower interest, and, in return, makes a monthly payment to each company.  After several years of those payments your debts will be gone.  Assuming, of course that you can make all the monthly payments to the credit negotiator and assuming you don’t incur any new debt. Oh yes, you’ll pay them a percentage of your income to do this – often several hundred dollars or more a year.

The other type of company takes a monthly payment from you and saves it.  They notify your creditors that they are working to get them paid.  Then, once they have 50% or more of the balance owed a credit card company; they negotiate to pay off the card in full for that percentage.  This usually works although it’s nothing you can’t do yourself; and you are paying a monthly fee to allow the company to do this for you.  Since it can take several years to raise enough money to do this and the negotiating company is being paid monthly this can be quite costly.  And, of course, if you miss a payment or two, you’ll still be liable for the credit card balances.

Meanwhile, whichever of the above programs you use, your credit score won’t improve until everything is paid off.

Don’t be fooled by the claims of “nonprofit” companies.  These credit negotiators may not be a “for profit company,” but you’ll still pay for the service at a hefty monthly amount.

Now let’s compare those programs with a simply bankruptcy.  You’ll pay your attorney a one-time fee – often less than $2,000 – and your debts will be gone in 3 to 4 months.

And you’ll start rebuilding your credit score right away.

image credit: Steve Rhode

Remember, when you were a child, you assumed that anything written in a book was true.

And then, as you got older, you realized that there were books in print  that said utterly opposite things.  Both couldn’t be true, yet there they were, in print.

And then came the internet, and anyone with a computer could became an author.

I know, because 14 years ago I sat down to write about bankruptcy for the internet public.  Four pages became 160, and then I started writing here too.  Bankruptcy law is as complex as the people who need bankruptcy, and then the law changed and it became even more so.  There’s lots to tell you about.

But if you are looking for bankruptcy information on the internet, the assumption that authors are necessarily authorities is dangerous.

Just because it’s in print doesn’t make it so

There are no words that strike more terror into my heart than when a client says “I’ve been researching bankruptcy on the internet.” Invariable, what follows that statement is wrong.

I’ve spend a fair amount of time lately playing the truth squad with misinformation I’ve found on the internet.

• when bankruptcy lawyers get the basics wrong
• when supposed teachers of lawyers get it wrong
• when those peddling alternative remedies get it wrong

Be a savvy consumer of bankruptcy information

The rules for evaluating information about the law are the same as testing the credibility of any other kind of material.

1. Consider the source:  is there an “about us” page with some credentials?  How long has the author been a bankruptcy lawyer?  How much of her time is spent in this field?
2. Identify the author’s self interest:  bankruptcy lawyers think bankruptcy is a fine remedy for debt.  Those selling debt management or some other solution want to scare you away from bankruptcy.  Some new bankruptcy lawyers want to get clients regardless of their skill sets.
3. Beware of sweeping statements:  we lawyers joke among ourselves that often the answer to a legal question is, “it depends”.  Lots in this field depends on the facts of your situation.
4. Consult multiple sites:  test what you learn against several sources.  If the information is accurate, you will find it replicated on many sites.

Approach internet research as arming you with questions to test, rather than conclusions to act on, when you meet with an experienced lawyer.

Image courtesy of Lorena 

You walk into bankruptcy to get rid of your mortgage. You walk out still owning real estate. How’s that happen?

It’s almost a joke – when does surrender not mean surrender? It’s not a funny joke, but one nonetheless.

Here’s the tip: when you surrender property in Chapter 7 bankruptcy, you’re doing nothing more than indicating a willingness to let it go. You’re not actually handing it off to anyone.

When you go through Chapter bankruptcy, you’re looking to discharge your obligations. In return, you’re surrendering your property that’s not considered exempt under the bankruptcy laws as applied in your state.

There is, however, nothing in the law that requires the bankruptcy trustee to take the property. Rather, the trustee’s goal is to liquidate and sell property that will yield a financial benefit to the creditors. If he or she looks at something and doesn’t think it’s financially worth it to sell, then no liquidation occurs.

In addition, discharging your personal obligation to repay the mortgage doesn’t mean the bank magically becomes the owner. Rather, the bank’s got to get title to the property either by foreclosure, deed-in-lieu of foreclosure, short sale, or other legal means.

Unless and until the bank takes action and takes back title to the house, however, it’s still legally yours. You’re not personally liable to the bank for any deficiency on the mortgage, but you do own the property.

That means you’ve got to comply with all local laws regarding ownership. Keep the sidewalks clear of debris, trim the trees out front, and the like. If you get a citation after you bankruptcy is filed, you’re going to be on the hook for it.

If we’re talking about a condo or house with a homeowners’ association then you’re going to remain liable for all post-bankruptcy HOA charges. Once again, this is still legally your place.

In the end, it’s for you to realize the impact of your decision to surrender. Take the steps necessary to protect yourself, but also recognize that your liability for some things may not end until the deed is signed over.

Common courtesy and respect are essential life skills.

It never ceases to amaze me as to how people act in bankruptcy court regardless if it is the attorney, debtors or creditors.  As with all things in life, common courtesy and respect are skills that will take you far.  But sometimes what I think should be second nature to people are things that others just don’t think about or simply don’t know because no one has ever shared this knowledge with them. So please allow me to share some bankruptcy courtroom etiquette with you.

“Please” and “thank you” are always good basic starters.  Think about how wonderful you feel when you go to hold the door for someone and they say “thank you”.  It kinda gives you a warm fuzzy feeling inside.  The same thing is true if you are dealing with your attorney, the judge or the trustee.  All these people are human beings who liked to be treated with kindness and acknowledged that you are on their turf taking their time.  Even if the judge and trustee are not courteous to you, you should still exhibit basic manners and say please and thank you.  Why?  Because it is a sign of respect.  You are in the judge’s courtroom and he or she is the one in charge.  You are asking for their help to accomplish your goal in regaining financial control and one of the best ways to do this is to show respect.

I always instruct my clients that they should say yes sir and no sir along with please and thank you.  It is a matter of showing respect for the chain of command and the position that the trustee and judge holds.  For those of you who do not think this makes a difference I would humbly disagree.  A client of mine was at a 341 meeting.  This meeting lasted for what seemed like forever and a day.  It was so long that not only were all the debtors complaining but so were the attorneys and the comments could be heard by the trustee.  The trustee was doing her job and it was not her fault that the docket was over stacked.  So Murphy’s Law kicked in and anything that could go wrong did go wrong.

My debtor did exactly what I asked.  He removed his hat when he entered the courtroom.  He remained silent and patiently waited for his turn.  When it was his turn as the last person on the docket, he replied either yes ma’am or no ma’am.  Then he thanked her for her time, which he did on his own.  She thought for a couple of moments and replied:  “You know that you have equity in the guns and I was going to think about taking them.  However, I have noticed that you have been very courteous throughout these entire proceedings and I think good behavior should be rewarded.  Therefore, I am choosing to abandon my interest in your guns.”  To which my debtor replied, “thank you ma’am.”

Was it a big victory?  It was to my debtor.  He was advised that he may have to give up his hunting guns but it is in the sole discretion of the trustee.  So he walked away from the 341 meeting happy as lark as he was able to keep his guns and be totally debt free.  The price of the guns?  I think it was maybe $900, maximum.  Who knows what they would have brought at an auction.  Common courtesy and respect saved the day and the guns.

The question that comes up is about the dress.  How do I dress for court?  Always ask your attorney as local standards may vary.  In Kansas and Missouri, the dress code is casual to business casual.  Jeans are fine unless they have holes in them.  So wear long pants and a clean shirt.  If your pants require a belt, wear one.  Sagging isn’t it illegal but it can be considered disrespectful not to mention you look funny walking like a penguin up to the podium.  Unless you are working for UPS, FedEx or the Post Office please do not appear in shorts.  If it is a uniform, that is fine but if it is not, it is disrespectful.  If you are wearing a hat and you are male, remove it unless you wear one for religious reasons. If you are in the medical profession and appear in scrubs it is okay because it is a uniform.  The judges and trustees are aware that many people are coming from work and/or do not own a suit.  However there is a fine between casual and being down right disrespectful.

No matter what courtroom you appear in always stand as the judge enters or leaves the courtroom unless instructed otherwise.  If you are not sure what to do,  watch the attorneys in the court.  If the attorneys stand up at the beginning and ending of the court session so should you.  My last tip is if you chew gum, don’t for the meeting.  There is nothing more nerve bending than someone who is cracking their gum while being questioned.  If you must chew gum spit it out right before you go up to the podium or table.  If you absolutely must chew it, tuck it away so you do not crack your gum. People do not think that the judge and trustee notice these behaviors but they do.

As it states in the Good Book under Matthew 7:12 do onto others as you would want done onto you.  Think about how much better the world would be if all us practiced common courtesy and respect.

These tips are not going guarantee that you will have a perfect case nor does it guarantee a perfect experience.  These tips are just one more tool in your arsenal to help you obtain you goal of regaining financial control.

Remember that knowledge is power and the more knowledge you have about the etiquette of the court the more power you will have to gain the respect of your judge and trustee.

Georgia bankruptcy filers got two pieces of good news this past week – the Governor has signed Senate bill 117 increasing the bankruptcy homestead exemption from $10,000 to $21,500, and the median income tables for Georgia families has been adjusted upwards, reversing a steady downward trend.

By far, the new homestead exemption is the most significant of these two events.   Georgia, like several other states, has opted out of the federal exemption statute, substituting in its place Georgia Code Section 44-13-100.  For the past 10+ years, Georgia permitted bankruptcy filers to shelter or exempt $10,000 of equity in real estate ($20,000 for a  married couple filing jointly).

On May 2, 2012 Governor Nathan Deal signed into law a bill that increased the real estate exemption from $10,000 to $21,500 (the available exemption for married couples increases from $20,000 to $43,000).

The updated law does not, however, change the wildcard exemption at O.C.G.A. 44-13-100(a)(6) which allows debtors to shelter $600 in any property plus up to $5,000 in unused real estate exemption.  The wildcard exemption, therefore remains limited to $5,600 for an individual filer and $11,200 for a married couple filing jointly.

The effect of the increased homestead exemption will help more struggling families qualify for Chapter 7 without jeopardizing any equity they may have accumulated.  Chapter 13 debtors will also benefit because it will be easier to satisfy the liquidation test, which is one of the requirements for a confirmable Chapter 13 plan. The liquidation test (also known as the “best interest of creditors” test) mandates that in Chapter 13, unsecured creditors must receive at least what they would have obtained in a Chapter 7 liquidation of non-exempt property.  Since debtors can now shelter twice as much real estate equity, they will necessarily have less non-exempt real property.

The May 1, 2012 updates to the median income tables used in bankruptcy filings will also benefit Georgia debtors.  Reversing a multi-year trend of lower household income figures, the May 1, 2012 numbers have increased.  A family of 4 can now earn up to $66,250 without triggering the means test, compared to $64,223 prior to May 1.

These two changes will help more people squeeze into Chapter 7 and will slightly reduce the mathematical demands inherent to Chapter 13 calculations.

While these particular changes are limited to Georgia, the dynamic nature of bankruptcy law applies to filers in every jurisdiction.  Perhaps you met with a bankruptcy lawyer 2 years ago to discuss filing, but decided to hold off because you risked losing assets or because a proposed Chapter 13 payment was too high.  Fast forward two years and your equity in real and personal property may have decreased significantly, the median income numbers for your state may have gone up to your benefit, and your state may have passed a law that increases the options available to debtors.

Federal and state legislators are under a great deal of pressure from constituents to jump start the housing market and easing the rules on filing bankruptcy is one way to unclog the system.  The only way you will know for sure if there have been bankruptcy changes that benefit you is to pick up the phone and call you knowledgeable bankruptcy lawyer.  If your jurisdiction is served by a Bankruptcy Law Network lawyer, do not hesitate to make that call!

Filing a chapter 13 bankruptcy case is sometimes necessary because of having debts which can’t be discharged in chapter 7, having non-exempt property, or having too much income to file chapter 7.  When you make the decision to file a chapter 13 case, be sure you consider your options regarding the financing on your motor vehicle.  If you don’t give this careful thought, you might end up falling into the chapter 13 “car trap.”

A chapter 13 lasts for either three or five years, depending on whether your income is above or below your state’s median income for a household of your size.  While it is certainly possible to obtain financing for a vehicle loan during the three to five years you are in chapter 13, it is much easier to do before the chapter 13 is filed.  Also, you are sure to get better credit terms for a vehicle loan obtained before the case is commenced.

The chapter 13 “car trap” springs into existence when you file chapter 13 having an older car that might not survive for the duration of the case — or, even worse, having such an older car which is subject to a hefty car loan on the date you file chapter 13.  The car trap springs its jaws on you when, midway through the chapter 13, your older car dies or becomes expensive to maintain, forcing you to consider taking out a car loan to once again have reliable transportation.

It is easy to see how this is a financially painful trap: you are already paying what you can afford each month into your chapter 13 payment plan.  Where will you get the additional funds to pay for a new monthly car payment?  For many, finding the money for new car payment in the middle of a chapter 13 case could be difficult or even impossible.

Thankfully, the chapter 13 car trap can be avoided by careful planning undertaken before the case is filed.

Step One: consider whether your vehicle is in good enough condition to last for the entire duration of your chapter 13 case.  If your vehicle can last that long with no problems, then the chapter 13 car trap is unlikely to spring on you, and you can forget about this entire issue.  However, if your vehicle is not likely to give you safe, reliable transportation for the whole time you are in chapter 13, the car trap can be avoided by proceeding as explained below.

Step Two: get yourself a car that will last all the way through your chapter 13 case.  This most likely will mean that you will need to take out a loan to purchase a new, or newer, vehicle.  The payments should last for the entire duration of the case.  This way, you can either pay for the car loan yourself (outside the chapter 13 plan), or your chapter 13 plan monthly payment will cover the cost of paying for the car in full.  Either way, you get to keep the newly purchased vehicle, and your unsecured creditors will simply receive a smaller level of repayment in your case.  Additionally, you are obtaining the new vehicle with no impact on your monthly cash flow.  This is because either your chapter 13 payment is being reduced doller-for-dollar by the new car payment, or your chapter 13 plan payment includes the car loan payment and your other creditors simply get less money.

Avoiding the chapter 13 car trap in this manner requires in-depth guidance from your bankruptcy lawyer to avoid any claim by the trustee that you incurred the new car loan in bad faith.  However, this should not be a problem because the U.S. Supreme Court, in Milavetz v. United States, 2010 U.S. Lexis 2206 (2007), specifically approved the idea of incurring a debt just prior to a bankruptcy filing, so long as you intend to pay the debt in full and don’t incur the debt with a bankruptcy motive.  It is important that the new vehicle be necessary, within reason, for the maintence of your household or getting to and from work.  The new vehicle purchase must also be motivated by your need for reliable transportation, and not by your impending chapter 13 filing.

If your not-so-reliable vehicle is subject to an existing car loan, your chapter 13 plan will most likely provide that you will surrender that car as part of the chapter 13 filing, and that the lender will have an unsecured claim, fully dischargeable in the chapter 13 case.  Also, it is almost certainly better to avoid trading in your older vehicle to obtain the newer vehicle.

Photo courtesy of Anthony DeLorenzo, http://www.flickr.com/photos/delorenzo/2688406674/.

On February 22, 2012, the Court issued the In re:  Bowden decision.  The Bowden decision will affect the way attorneys and their clients approach reaffirmation agreements in the Eastern District of North Carolina (EDNC).

First, a little background.  What is a “reaffirmation agreement?”  A reaffirmation agreement is a contract between a debtor and a creditor.  The debtor agrees to be responsible for that debt as if he never filed bankruptcy on that particular debt.  See glossary. By agreeing to personal liability for the debt, if there is a default later on, the debtor can be sued as if the debt never went through bankruptcy.

Though any debt can be reaffirmed, most reaffirmed debts are secured debts–that is, there is collateral associated with the debt.  Typically, debts involving cars are reaffirmed because, in many districts, the car creditor takes the view that if the debt is not reaffirmed, the debtor is in default by filing bankruptcy and as soon as certain timelines run, the creditor may seek to repossess the collateral, i.e. car, even though the debtor is making the payments.  See link here.

Entering into a reaffirmation agreement is serious business–so much so that, in order for there to be a valid reaffirmation agreement, the bankruptcy court must approve it.  The court has an obligation to assure itself that the reaffirmation agreement represents a voluntary act by the debtor and that the reaffirmed debt will not pose an undue hardship on the debtor or his dependents.  The bankruptcy court may or may not approve a proposed reaffirmation agreement based on the circumstances presented to it.  If the court disapproves the proposed reaffirmation agreement, then the agreement is void.

Another player in the reaffirmation process is the debtor’s attorney.  The debtor’s attorney also has a portion of the agreement to consider and possibly sign.  The debtor’s attorney must certify that (1) the reaffirmation agreement is a fully informed and voluntary agreement by the debtor; (2) the agreement does not impose an undue hardship on the debtor or his dependents; and (3) that the attorney fully advised the debtor as to the legal effect and consequences of the reaffirmation agreement and default under the agreement.  If the attorney does not sign the certification, the court will undertake the inquiry to ensure that the debtor knows what he is getting into.

One of the major consequences of entering into a reaffirmation agreement, particularly with vehicles, is that often the amount owed exceeds what the car is worth.  Therefore, if the debtor enters into a reaffirmation agreement for a car and later defaults, the creditor can then repossess the car, sell the car, and if money is still left owing, sue the debtor for the deficiency.  Because of this, it is very important not to take any reaffirmations lightly.  See here.

Because of the seriousness of a reaffirmation agreement, many attorneys would request that the court disapprove of the reaffirmation agreement as “not in the debtor’s best interests.”  If the reaffirmation agreement was disapproved by the court, then the debtor could get a “ride-through” on the debt.

A “ride-through” allows the debtor to maintain the payments on the vehicle yet extinguish the debtor’s personal liability for the debt.  As long as the debtor remains current and keeps the vehicle properly insured, the creditor cannot repossess the vehicle just because the debtor’s personal liability was extinguished.  A “ride-through” is very important because, for example, the debtor had a car that was worth $15,000 yet he owed $23,000 on the debt.  If the debtor did not reaffirm the debt but, after his chapter 7 case, later defaulted, got his car repossessed and sold, the creditor could not sue the debtor for the $8,000.00 deficiency.  Naturally, most debtors’ counsel try to achieve a “ride-through” if possible (also a “ride-through is not available in all districts).

With the Bowden decision, if the attorney strikes through any of the certifications required under 11 U.S.C. § 524(c), then the certification on its face is invalid and the reaffirmation agreement is unenforceable.  Because the debtor took all the steps required to reaffirm the debt but the attorney, in exercising his or her independent judgment, did not make the required certifications, the debtor will then get the “ride-through” pursuant to In re:  Hardiman, 398 B.R. 161 (Bankr. E.D.N.C. 2008) without further judicial action.  For different treatment in other district, see here.

In terms of practice, can strike through certain portions of the certification submit the reaffirmation agreement to the court.  The court will not schedule a hearing but will disapprove the reaffirmation and the debtor will then be able to “ride-through” the car debt.

It seems pretty clear to me that student loan debt has reached crisis proportions.  I’ve posted about the growing amount of student loan debt, which now exceeds credit card debt, and the increasing attention drawn to the issue by politicians, protesters, and the media.  The simplest and most direct solution to the problem is to allow some (not all, but some) student loan debt to be discharged in bankruptcy.  Here’s why I think that is the only logical, effective, solution to the problem.

To start, I’ll need to go backwards.  Stay with me, I’ll only take a minute.  Bankruptcy exists as a matter of federal policy for one simple reason–it is good for all of us.  The idea of a bankruptcy discharge (or forgiveness of debt) grows out of the recognition that when an otherwise honest person is saddled with more debt than he can ever repay, it is better to forgive that debt and allow him to become, once again, a productive member of society.  That works out better for all of us than the alternatives: jail him, or deny him the opportunity work, or deny him the incentive to work because he gains no benefit.  The idea of a bankruptcy discharge also recognizes that punishing an honest but unfortunate debtor also makes that debtor’s dependents wards of the state, all of which costs the rest of us more than if we let people periodically discharge their debts.

I could talk all day about this idea, which actually goes back to Bible times, when the ancients recognized the humanity, but also the practicality, of allowing periodic forgiveness of debt.  For now, though, I’ll just leave it at this:  bankruptcy exists because as a society we recognize that it is not productive to keep people enslaved to debt.  People who are struggling to pay overwhelming debt can’t do a lot of the things we want them to do.  They can’t spend money.  They can’t save money.  They can’t buy homes.  They can’t keep the homes they have.  They can’t save for retirement.  They can’t become entrepreneurs, so they aren’t able to create jobs for others.  They can’t send their own children to college.  And if the debt is overwhelming enough, it is even a disincentive to work at all–why work just to pay debt?  Just think about the experience of the Soviets on collective farms, which proved that people will work harder when they get to keep the fruits of their labors.

Student loan debt is like any other debt.  If you are trying to pay back overwhelming student loan debt, you can’t do any of those things.  You can’t save, you can’t contribute, you can’t be entrepreneurial.   So why treat student loan debt differently?  The short answer is that student loan lenders have really good lobbyists.  That is true; otherwise how do you account for the fact that currently it is easier to discharge tax debt owed to the IRS than student loan debt?

I’ll be honest, though.  That’s an oversimplification.  There is a difference between student loan debt and other types of debt.  In theory, student loan debt allows you to prepare yourself to earn more money.  So it makes sense that it would be harder to discharge student loan debt  than, say, medical bills.  Should you be able to borrow for your education, and before reaping the benefit of that education, discharge student loans in bankruptcy?  No, of course not.  What doesn’t make sense, however, is that student loan debt can never be discharged.

The student loan crisis, like the mortgage crisis we have been living with for the last few years, is largely the result of incentivizing (if that is a word) the wrong parts of the equation.  Like mortgages, student loans have been packaged and sold as investments, and because they can’t be discharged in bankruptcy, they are attractive to investors.  So, originators have the incentive to make the loans.  Since there are lenders who want to make the loans, colleges and universities have the incentive to raise tuition or admit more students.  (Traditional colleges and universities are guilty of chasing these dollars, but for-profit institutions have sprung up like mushrooms, and some are guilty of deceptive practices.)  And because the money is available and everyone “knows” that you get a better job if you have a college education, students take out the loans without a cost-benefit analysis.  Notice that no one in the process is looking at the end result:  will this college education fit the borrower for a job that will earn enough to pay back the loan?  Stephen Gordon puts it really well:

If you want a good job (the thinking went) there really wasn’t much of a choice. You went and you paid whatever price they put in front of you.

But what’s the advantage of a good job if the salary difference between that job and a non-college-level job is lost servicing student debt? It’s a reasonable question that has become more pressing as the amount of student debt required to get an education has risen.

Should the borrower be asking this question?  Absolutely, but many of these borrowers are teenagers, or twenty-somethings.  After all, part of the reason you go to college is to hone your critical thinking skills.  Students are reassured by guidance counselors and student advisers that borrowing is the norm, and that they are “investing” in themselves.  But the lenders and the colleges bear responsibility for critical thinking in another way as well.  Should you lend a kid who is majoring in social work (not picking on social workers, but not a lot of high-paying jobs out there for you guys) $120,000 for an undergraduate degree?  I’m thinking no.  Many institutions of higher learning (to give them a dignity they may not deserve) oversell the earning capacity of their graduates, and I am sorry to say that law schools may be among the worst offenders.  Other practices increase the amount of borrowing far beyond that necessary for tuition and books, like institutions that encourage students to borrow for living expenses instead of working, or give kids debit cards that draw down their student loans.

Borrowers’ potential for bankruptcy represents a kind of risk for lenders – a risk that encourages lenders to be efficient about whom they lend money to.  And this efficiency may lead to results in the interests of both borrowers and lenders.  Due to this risk, the lender needs to determine how likely the borrower will be to pay him back, and the lender’s evaluation of this risk can lead to him not lending too much money to the borrower, thereby preventing the borrower from getting over his head in debt.

Allowing some student loan debt to be discharged in bankruptcy would force lenders to re-order their priorities, and conduct a traditional analysis of whether a particular loan makes sense.  Dischargeability of student loans will also require investors buying student loans (or ratings agencies rating those investments) to consider the real possibility of default and discharge.  (That risk already exists, because you can’t get blood out of a turnip.  The non-dischargeability of those loans just allows a convenient blindness on the part of those who want to believe student loans are low- or no-risk investments.)  When student loan lenders no longer have the incentive to make loans no matter what the risk, perhaps colleges will no longer feel free to raise tuition and admit ever-larger classes (and build a for-profit college on every street corner).

Ironically, this targeting might make education more — not less — affordable.  There is a limit to what students and their families can currently pay, and, by limiting the ability of some to borrow against their future, regulators might suggest to colleges and universities that the spigot of ever-more money might be turned off.  This economic pressure might encourage universities to be more efficient with their own spending, thereby slowing the rate of tuition growth.  Increased lending standards might encourage students to be more prudent with their own money.  Higher standards might raise hard questions.  A student might ask herself whether she should go to a low-ranked private university for four years or instead spend her first two years at a much more affordable community college before transferring to another university.  The end result for the student’s employment prospects might be the same, but the debt accumulated along the way might be very different under those two scenarios.

Whether student loans are dischargeable after a certain period of time, or whether they are dischargeable based on some factor of the debtor’s income, or a combination of the two, discharging student loans is a lifeline to those saddled with unreasonable debt, and it makes sense for all of us.  A change in the law is the only way to keep a whole generation of student loan debtors solvent and productive, and protect the rest of us from the next bubble.

When I started writing about student loans, I really didn’t intend to make it a series, but I find I still have more to say.  So next I’m going to post about the current law and hardship discharge, or what Russ DeMott calls the “very, very disabled standard.”

Photo: iStock/RonBailey

Recently there was a case where several debtors asked a Bankruptcy Court to approve a lease agreement as if they were re-affirmation agreements.  From a procedural standpoint re-affirmation agreements require Bankruptcy Court intervention and lease assumptions do not, and therefore, the Courts denied this process.  In the past, several Bankruptcy Courts allowed this process, but in the recent case of In Re Perlman, Judge John K. Olson of the Southern District of Florida argues against the idea of seeking Court approval of lease agreements.  Judge Olson believes that the process of seeking Court approval of Lease Agreements is a waste of the Court’s time and resources and the Clerk’s office’s time and resources.

Let’s start with lease assumptions.  Under the Bankruptcy Code 365(p)(2), the debtor can offer to assume a lease.  The lessor must decide whether it wants to enter into the lease assumption agreement.  If the lessor does not want to continue in the lease, it can do nothing and the lease will be deemed rejected and any debt associated with the lease will be discharged.  If the lessor decides that it would agree with the debtor assuming the lease, it will contact the debtor and terms will be negotiated.

Under 11 U.S.C. 365(p)(2) (A), the lessor can contact the debtor to discuss terms of the lease assumption.  Once the parties agree to the terms a writing is necessary to memorialize the deal.  It is rather straightforward and simple.  There are no time frames outlined by the Code.  Unlike a re-affirmation agreement, the bankruptcy code does not require judicial review of the agreement or approval.

A re-affirmation agreement is quite different.  These agreements are governed by 11 U.S.C. 524.  When a Debtor is represented by an Attorney in a bankruptcy proceeding, there must be proper disclosures before the agreement is presumed to be valid, the re-affirmation agreement must be signed and filed with the Bankruptcy Court before the Discharge is granted.   At times, the Bankruptcy Court must hold a hearing to determine if the requirements of 11 U.S.C. 524 are being complied with.

The point Bankruptcy Judge Olson was trying to make was that each type of agreement has it’s own procedure and requires certain actions by the debtor and counsel.  I believe that the Judge was attempting to tell lessors and debtors that the practice of attempting to get judicial approval of a lease as a tactical advantage in a negotiation or for whatever reason will only result in the clerk’s office wasting time and the Court wasting time.