bankruptcy

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Dept. of Ed.: Undue Hardship = Certainty of Hopelessness or Total Incapacity

The federal government through the Department of Education has entered the fray over what constitutes a hardship sufficient to discharge student loans in bankruptcy.  In an amicus brief filed in support of student loan creditor, ECMC, the government argues that student loans may be discharged only when the debtor’s situation evidences a “certainty of hopelessness.”  Murphy v. U.S. Dept. of Educ., No. 14-1691 (1st Cir. filed July 29, 2015).  Citing a Fifth Circuit decision, DOE suggests that debtors “must specifically prove total incapacity in the future to repay debt for reasons not within his control.” In calling for a standard that requires total incapacity or a certainty of hopelessness, the government’s position is more extreme than that taken by some of the circuit courts of appeal.

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Ninth Circuit Overturns Sternberg

The Ninth Circuit Court of Appeals issued an en banc decision “that 11 U.S.C. § 362(k) authorizes an award of attorney’s fees reasonably incurred in a debtor’s prosecution of a suit for damages to provide redress for a violation of the automatic bankruptcy stay.” America’s Servicing Co. v. Schwartz-Tallard (In re Schwartz-Tallard), ___ F.3d. ___, No. 12-60052 (Oct. 14, 2015). In so holding, the court overruled Sternberg v. Johnston, 595 F.3d 937 (9th Cir. 2010), which held that section 362(k) “allowed a debtor to recover only those fees incurred to end the stay violation itself, not the fees incurred to prosecute a damages action.” [Read more…] about Ninth Circuit Overturns Sternberg

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CFPB Reports on Student Loan Servicer Failures

The CFPB has come out with a report detailing roadblocks to federal and private student loan repayment caused by student loan servicers’ sloppy practices. The report states that “41 million Americans collectively owe more than $1.2 trillion in student loan debt, making student loan debt the second-largest class of consumer debt behind mortgages.” One in four student loan borrowers are delinquent or in default on student loans. The CFPB received more than 30,000 responses to its notice to student loan borrowers requesting comments on student loan servicing.

Reported problems include:

  1. Difficulty accessing information about loan accounts and repayment programs,
  2. Incorrect information or inaccurate billing statements that are difficult to correct,
  3. Surprise fees and lost benefits caused when servicer changes result in lost account records, new policies or disrupted administration of accounts,
  4. Inaccurate payoff statements or surprise bills demanding extra payments,
  5. Incorrect classification as in default upon the death of a co-signer even though payments are current,
  6. Application of payments to costs and fees rather than to loan repayment.

Servicing problems raise concerns about whether debtors who fulfill the requirements for income-based lower monthly payment plans are receiving information about those plans, or are instead being steered into less-advantageous, short-term options like forbearance. The report noted that servicer mishandling of student loans may adversely affect older people, veterans and consumers with disabilities, disproportionately.

The report makes a number of recommendations intended to provide a roadmap for reform, including:

  1. Consistent, industry-wide, standards for the servicing market,
  2. Federal and state enforcement of consumer protection laws to hold servicers accountable,
  3. Requiring servicers to provide timely, accurate, information about loan repayment and alternative payment plans,
  4. Greater transparency including publication of servicer-level information on loan performance.

The CFPB offers a guide to navigate the repayment options through its Repay Student Debt tool.

CFPB Student Loan Servicing Report Sept 2015

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Harsh McCoy Rule Rejected in Late Tax Return Cases

The bankruptcy court for the district of New Jersey bucked the current trend, and “agree[d] with those decisions that hold that the timing of the filing is not a factor in determining whether the document meets the definition of a ‘return.’”In re Davis, No. 14-26507 (Bankr. D. N.J. Sept. 29, 2015). See also, In re Maitland, 531 B.R. 516 (Bankr. D. N.J. 2015). [Read more…] about Harsh McCoy Rule Rejected in Late Tax Return Cases

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Ninth Circuit Permits Lien-Voidance in Chapter 20

In an elegant opinion employing judicial tools of plain text reading, simple logic, and historical context, the Ninth Circuit joined the “Fourth and Eleventh Circuits in concluding that Chapter 20 debtors may permanently void liens upon the successful completion of their confirmed Chapter 13 plan irrespective of their eligibility to obtain a discharge.” HSBC Bank v. Blendheim (In re Blendheim), No. 13-35412 (Oct. 1, 2015). [Read more…] about Ninth Circuit Permits Lien-Voidance in Chapter 20

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Caulkett Does Not Apply in Chapter 13

Following the decision in Bank of America, N.A. v. Caulkett, 575 U.S. ___, 2015 WL 2464049 (June 1, 2015), that wholly unsecured liens could not be stripped off in chapter 7, there was a flurry of concern that courts, at the behest of trustees and creditors, would revisit the issue of lien-stripping in chapter 13. That fear is quietly being laid to rest.

Strip-down of partially secured liens in Chapter 7 was prohibited by Dewsnup v. Timm, 502 U. S. 410 (1992), and the Caulkett decision extended that holding to wholly unsecured liens. In chapter 13, however, appellate courts have consistently found that the reasoning in the decision in Nobelman v. American Savings Bank, 508 U. S. 324 (1993), which also prohibits strip-down of partially secured liens, permits strip-off of wholly unsecured liens. The difference is that, unlike chapter 7, where the Dewsnup Court found that section 506(d) does not provide a mechanism for lien-stripping, chapter 13 has its mechanism in section 1322(b) for stripping off unsecured liens.

Since this summer’s decision in Caulkett, courts have largely, and correctly, found that that case does not apply in chapter 13 lien-strip cases. See, e.g., Green Tree Servicing v. Wilson, No. 14-9543 (S.D. N.Y. June 5, 2015) (“The recent Supreme Court decision on lien stripping, Bank of America, N.A. v. Caulkett, does not affect the Bankruptcy Court’s order granting the Pond motion because Caulkett only applies in the Chapter 7 context.”); Kresl v. Beneficial Nebraska, No. 15-8016 (Bankr. D. Neb. Sept. 24, 2015); Osbourn v. Wells Fargo Financial Bank, No. 12-80485, Adv. Pro. 15-8007 (Bankr. D. Neb. Sept. 21, 2015); In re Ricci-Breen, No. 14-22798 (Bankr. S.D. N.Y. Aug. 31, 2015); Young v. Green Tree Servicing, No 14-41518, Adv. Pro. 15-4016 (Bankr. D. Neb. Aug. 18, 2015); Landron v. Banco Popular de Puerto Rico Oriental Bank, No. 13-7968 (Bankr. D. P.R. June 25, 2015) (all recognizing that Caulkett limited to chapter 7).

But, lest anyone get too comfortable with these cases, see, Davis v. Springleaf Financial Services, No. 15-4020 (Bankr. S.D. Ga. Sept. 9, 2015) (speculating in dictum that the decision in Caulkett could cause a change in current lien-stripping law in chapter 13).

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Plan May Vest Surrendered Property in Creditor

The bankruptcy court for the Eastern District of New York confirmed the debtors’ chapter 13 plan which provided for surrendering their residential property and vesting title in the creditor over that creditor’s objection. HSBC Bank v. Zair, No. 14-74456 (Bankr. E.D. N.Y. Aug. 13, 2015).

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CFPB Penalizes Two Largest Debt Buyers

In a September 9, 2015, press release, the CFPB announced that it took action against the nation’s two largest debt buyers and collectors: Encore Capital Group and Portfolio Recovery Associates. Encore’s subsidiaries, also named in the action, are Midland Funding LLC, Midland Credit Management, and Asset Acceptance Capital Corp. Together, the two companies have bought over $200 billion in defaulted loans.

The Bureau found that both companies bought debts that “were potentially inaccurate, lacking documentation, or unenforceable. Without verifying the debt, the companies collected payments by pressuring consumers with false statements and churning out lawsuits using robo-signed court documents.” The all-too-familiar list of wrongdoing includes attempts to collect on debts that they knew were inaccurate or unenforceable using meritless lawsuits that they expected to, and often did, win by default, in violation of the FDCPA and the Dodd-Frank Wall Street Reform and Consumer Protection Act. They lied to consumers about their legal burdens and threatened litigation that was, in fact, not being considered. They harassed consumers with phone calls before 8:00 a.m. and after 9:00 p.m. and, in some instances, made collection calls to the consumer over 20 times in two days.

The enforcement action consists of requiring both entities to stop reselling debts, stop collection efforts concerning unverified debts, ensure accuracy when filing lawsuits, provide information to consumers such as the name of the creditor and charge-off balance, provide original documentation of the debt, use accurate affidavits, and cease collections efforts on time-barred debts.

Encore was ordered to pay up to $42 million in refunds and to dismiss all pending lawsuits or cease collection efforts on judgments involving misrepresentation.

Portfolio was ordered to pay $19 million in refunds where it made similar legal claims and where it collected payments on default judgments for debts that were barred by the statute of limitations.

Finally, Encore was ordered to pay $10 million and Portfolio $8 million to the CFPB; ‘s Civil Penalty Fund.

The Encore consent order can be found at: http://files.consumerfinance.gov/f/201509_cfpb_consent-order-encore-capital-group.pdf

The Portfolio Recovery Associates consent order can be found at: http://files.consumerfinance.gov/f/201509_cfpb_consent-order-portfolio-recovery-associates-llc.pdf