Monthly Archives: April 2014

Student Loans, Auto Default Clauses: or, Everything Old is New Again

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I was recently discussing issues with student loans, and private student loans in particular, with a staffer for one of my Congressmen. The staffer said something along the lines of, but isn’t student loan debt good debt? My response? Student loans, especially private student loans, may be the worst kind of debt – even worse than credit cards. His expression was fun. He did keep his coffee off his tie, though. Points for that.

There are a lot of reasons I’m not just real gung ho on student loans – especially private student loans. One of those reasons has been getting some press this week. Here is a link to a NY Times article on auto default clauses in private student loans. There have been several others recently, but this was the first one I saw.

http://m.washingtonpost.com/business/economy/us-agency-urges-private-lenders-to-ease-automatic-default-rules-on-student-loans/2014/04/21/d06adeee-c97f-11e3-95f7-7ecdde72d2ea_story.html

Most private student loans require a co-signer, usually a parent or grandparent. Many of those loan documents also include language known as an auto default clause. An auto default clause means that the loan is deemed to be in default if a particular event happens – EVEN IF PAYMENTS ON THE LOAN ARE CURRENT. The current press is about auto default clauses that trigger an event of default if the co-signer files for bankruptcy or dies.

To be quite blunt:
Bad news – Dad is dead.
More bad news – your student loans are now being reported in default to the credit reporting agencies, even though you’ve never missed a payment.

There is a good argument that the an auto default triggered by a bankruptcy filing of the co-signer is unenforceable, and I foresee some interesting litigation on that issue. The death of the co-signer, though, is going to be valid unless some lawyer who is far more creative than I am comes up with something I haven’t thought of.

A lot of the NY Times article referenced above has to do with encouragement from the Consumer Financial Protection Bureau for lenders (or, more accurately the loan servicers) to find ways to avoid placing otherwise performing loans into default status. There are a number of problems with that encouragement. First of all, it is just that, encouragement. I am not aware of any authority the CFPB has to require anything. Second, the same problem is showing up here that we had getting loan modifications during the mortgage crisis. Most of these loans have been securitized. The entity that the borrower deals with (Sallie Mae, AES, etc.) isn’t actually the lender. They are the servicer, they just manage the loans on behalf of the ultimate investors, and they do so pursuant to the terms of a contract that limits their ability to modify the loans.

Part of the securitization process is taking a large body of loans, pooling them together and using their income stream to support payments to investors who invest in the large pool. To do that, the individual loans that go into a pool must share certain qualities; and one of the qualities that makes a pool of loans like this more attractive to investors is the presence of co-signers – or, having more than one person responsible for repaying the loans. So, encouragement from the CFBP is nice, but I don’t think I will hold my breath on seeing any real changes here.

Of course, the real victims are the college graduates who are making their loan payments and then find out that the interest rate on a car loan is going to be sky high or they can’t qualify for a mortgage; why? Because their student loans are in default – yea, the ones they are PAYING every month.

I’m sorry, but that sucks.

They took out those loans (for the most part) when they didn’t have a lot of experience with financial products. Their parents (or grandparents) signed. Their school told them to sign. So, they signed. Even if they read the fine print, they very well might not have realized with an automatic event of default means. Their school should have. Their parents (or grandparents) should have, and they might have; but they saw no other (or no better) way to pay for college.

There isn’t much I can do about people dying; but filing bankruptcies for people who might have co-signed student loans is part of my job. I’m currently thinking through some ideas with other attorneys to mitigate the consequences of a bankruptcy filing when the debtor has co-signed private student loans. Keep in touch.

Elaine

 

 

Filing Fees – and They Say There is No Inflation

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There are three things that you have to pay for when you file for bankruptcy. They are: the attorneys fee, the filing fee and the credit counseling fee. The attorneys fee is pretty self-explanatory. The filing fee is paid to the Court at the time that the case is filed. It will probably look like you are paying this to your attorney; because you will pay it by handing your lawyer the money; but your lawyer will then pay the Court when he files your case. The credit counseling fee is ultimately paid to the pre-petition credit counseling company that you use to do your mandatory pre-petition credit counseling course. This you may pay directly, and you may pay it to your lawyer so that your lawyer can pass it on. Regardless, ultimately, you are the one paying for these things.

What brought this subject to mind this week is that the Administrator of the Courts just announced an increase in filing fees. A bankruptcy filing fee is generally divided between the Court for services provided by the Court and its clerk and the Trustee for services provided in administering your case. This increase is all going to the Courts.

The two most common filing fees for consumer debtors both went up $29 apiece, which is a substantial jump. What makes this a bit of a shocker is that fees just went up in November, 2011. Here is how fees have changed over just the last few years.

………………..  3/2006                Pre 11/2011                          2011 – 5/31/2014                      6/1/2014
Ch. 7                   $209                         $299                                         $306                                          $335
Ch. 13                 $194                          $274                                        $281                                           $310

There are all kinds of reasons and explanations for the increases, but the bottom line remains that it is becoming more and more expensive to file for Bankruptcy. I’ve practiced in many areas of law during the last 24 years, and I remain very proud of the Bankruptcy bar’s dedication to keeping attorneys fees as low as possible. When you file a Bankruptcy, you are filing a highly specialized, Federal Court case; and in most cases it will be substantially cheaper than any other significant legal event you have ever been a party to.

Bankruptcy attorneys were the first to really embrace automation. We have gotten very good at efficiently explaining complex legal concepts to our clients. That is not to say that Bankruptcy attorney fees haven’t gone up. The 2005 Bankruptcy Reform Act pretty well doubled the amount of work required to file a Bankruptcy and sent the lawyer’s liability soaring. Needless, to say – fees went up. Although I will say that they haven’t gone up in this office since then.

Elaine

 

How Long Before They Repo My Car?

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I get asked this question a lot, and the answer varies pretty widely depending on the facts. Most commonly, though, I am asked this question by someone who needs to file for Bankruptcy and has made the decision that he cannot afford to keep his car. In other words, the client is going to surrender his interest in the car to the car lender during the bankruptcy.

There are a number of options in a Chapter 7 Bankruptcy for dealing with secured debt (i.e., debt that is secured by a lien on a piece of property, like a car loan or a mortgage). One of them is to surrender the property to the lender. So, the question being asked is really – so, how does that surrender thing work and how long does it take anyway?

Well, that depends.

I’m a lawyer, you were expecting a definite answer?

When the bankruptcy is filed the Debtor files a Statement of Intent that states what he intends to do with his secured debt. So, in this case, the Debtor will indicate that he intends to surrender the vehicle. However, at the instant that the case is filed the Automatic Stay goes into effect, and that stays (or temporarily stops) all collection activity against the debtor or property of the debtor – including the car in this illustration. So, even though the Debtor is indicating his intention to surrender his car to the lender, the lender can’t take it; because taking it would be an effort to collect a debt, and that is prohibited by the Automatic Stay. Are we having fun yet? Thought so.

Now the ball is in the lender’s court. They can either wait until the Bankruptcy is over with and then repossess the vehicle., or they can file a Motion with the Bankruptcy Court asking the Court to lift the automatic stay and abandon any interest that the Bankruptcy estate might have in the vehicle. The creditor can do that as soon as he learns of the Bankruptcy filing or not until later. It isn’t uncommon for creditors to wait until after the First Meeting of Creditors, which is generally about 30 days post-petition, to file their motion. Given these facts, once that motion is filed, it will be granted in about 3 or 4 weeks – kind of depending on how excited the creditor’s lawyer is to get it done. The net effect of this motion being granted is the Bankruptcy Court gives the creditor permission to collect his debt against the property – not the debtor, just the property. The stay remains in effect as to the Debtor, and assuming that no objections to discharge are granted; the stay will be replaced by the discharge injunction at the conclusion of the Bankruptcy. The discharge will prohibit the car lender from EVER trying to collect money from the debtor again. The creditor is welcome to the car, because he has a lien on it; but that is all he gets.

After the creditor gets permission to repossess the car, and he will – eventually. Some creditors will have someone out looking for it the next day. Others take longer to get around to it. In my office I point out to my clients that they don’t want to be driving this car if a repo guy might be looking for it. Walking out of the grocery store with ten sacks of groceries including 2 gallons of ice cream and finding no car to put them in is not a situation most of my clients want to find themselves in. So, I will generally arrange for the debtor to deliver the car to the lender. Not everyone does it that way.

The long and the short of this is that even if you want to give the car back it will take just under a month or . . . longer, to do so. On the other hand, if the Debtor wants to keep the car as long as possible, that is a completely different analysis and one that is going to vary widely depending on the specific facts, the creditor involved and even the court in which the case is filed.

Elaine

Judgments, Judgment Liens and Bankruptcy

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Any discussion of judgments and judgment liens is by necessity State specific. These are creatures of State law, and State law varies widely with respect to both judgments and judgment liens. Bankruptcy is governed by Federal law, but the Bankruptcy Code defers to State law frequently, and that is true with respect to how the Bankruptcy Code interacts with judgments and liens. So, always be sure you understand the underlying State law before assuming you understand anything about judgments, judgment liens or how they are affected by a Bankruptcy.

A Judgment is the result of a lawsuit. In a collection case the judgment will specify the amount of money that the Defendant owes to the Plaintiff. A judgment creates a lien when it is recorded in County records and attaches to a piece of property. In Oklahoma judgment liens can only attach to real property (i.e., land). Tax liens (which arise by Statute rather than as the result of a lawsuit) can, and do, attach to anything owned by the Debtor. What a lien does is it gives the lienholder special rights to get paid from the proceeds if and when the property to which the lien is attached is sold.

Some liens can be foreclosed by the lien holder. Some liens cannot be. If the lien can be foreclosed, then the judgment creditor (or lien holder) can effectively force the sale of the property so that its lien can be satisfied from the sales proceeds. If a lien cannot be foreclosed, for instance, a judgment lien attached to the judgment debtor’s homestead; then, the lien holder can only sit back and hope that the debtor chooses to sell the property. At that point, assuming that the lien is still viable, the judgment creditor is entitled to be paid out of the sales proceeds.

A Bankruptcy filing does affects judgments and liens in a number of ways. First of all, if a lawsuit has been filed, but the judgment has not yet been entered; a Bankruptcy filing will stay the lawsuit and prohibit the entry of the judgment. If the judgment has already been taken but not yet recorded, the recording of the judgment will be stayed by the bankruptcy filing.

More generally, by the time the bankruptcy is filed the judgment has already been taken and recorded. At that point if the Debtor owns real estate in the County in which the judgment was recorded, then the judgment has created a lien on the real estate. If the Debtor does not own real estate in the County in which the judgment has been recorded, then no lien has been created. This is a point that countless title attorneys miss.

Once a judgment has been recorded on real estate it can be removed in a Bankruptcy if the real estate it is attached to is exempt, which generally means the debtor’s homestead; and if the lien impairs the homestead exemption. In most cases in Oklahoma a judgment lien will always impair the exemption if it is attached to a homestead. That is certainly not the case in other States, and there are exceptions in Oklahoma, especially if the Debtor used exemptions other than Oklahoma’s State law exemptions when filing the Bankruptcy.

That does not mean, however, that filing a Bankruptcy automatically removes judgment liens from your homestead. First, a motion to avoid the lien must be filed. The motion must be served on the judgment credtior, among others; and that motion must be granted. The vast majority of such motions are granted, and in many cases obtaining good service is the hardest part of the process. Still, if it isn’t done and the order doesn’t issue, then the motion will remain attached to the debtor’s homestead. Oh, and when this Order issues, make sure it is recorded in County records where future title attorneys can find it.

The first problem arises when this isn’t done, the bankruptcy is discharged, and the case closes. This generally happens, because either the Debtor didn’t tell the bankruptcy attorney about the judgment or didn’t pay for the additional work necessary to have the lien avoided. In this case, it is generally possible to reopen the Bankruptcy case to avoid the lien. This is substantially more expensive than doing it when the case is still open. It also gives the judgment creditor an extra argument that the motion to avoid should not be granted. However, these motions are still generally successful. The biggest problem here is that the home owner generally finds out about the judgment lien when trying to close a sale of the house. The time necessary to reopen the case, give notice to all creditors, have a trustee reappointed, file the motion, get proper service o the creditor, and get the order entered frequently means that the buyer has lost interest and moved on.

The other possible problem is that the title company’s title attorney doesn’t understand the effect of a Bankruptcy discharge. Yes, this is really a problem. Here is the most common scenario. A couple files for Bankruptcy. They do NOT own any real estate at the time. There are judgments against them, but they are not liens; because there is no real estate for them to attach to. The Debtors’ bankruptcy attorney correctly does not file motions to avoid the judgment liens, because you cannot avoid a lien that doesn’t exist. The case discharges and closes. Several years later the Debtors decide to buy a house. The title company won’t issue title insurance, because the judgment liens (that don’t exist) weren’t properly avoided in their Bankruptcy. In other words the title company basically tells these people that their bankruptcy lawyer screwed up and now they will never be able to buy a house, because these pre-bankruptcy judgments will attach to any real estate they buy – ever (or until the judgments expire).

I really hate getting these phone calls.

Ok. Here is the skinny. Section 524 of the United States Bankruptcy Code says:

(a) A discharge in a case under this title –

(1) voids any judgment at any time obtained, to the extent that such judgment is a determination of the personal liability of the debtor with respect to any debt discharged under section 727, 944, 1141, 1228, or 1328 of this title, whether or not discharge of such debt is waived;

That is pretty much the last word on this issue. Once a discharge is entered, and the debtor’s liability for the underlying debt is discharged; the judgment is VOID – not voidable, not weakened, not asleep. It is dead. Dead judgments cannot attach to after-acquired property.

Elaine