Tuesday, November 13, 2012
When Michele Fitzgerald and her daughter, Jenni, go out for dinner, Jenni pays. When they get haircuts, Jenni pays. When they buy groceries, Jenni pays.
It has been six years since Ms. Fitzgerald — broke, unemployed and in default on the $18,000 in loans she took out for Jenni’s college education — became a boomerang mom, moving into her daughter’s townhouse apartment in Hingham, Mass.
Jenni pays the rent.
For Jenni, 35, the student loans and the education they bought have worked out: she has a good job in public relations and is paying down the loans in her name. But for her mother, 60, the parental debt has been disastrous.
“It’s not easy,” Ms. Fitzgerald said. “Jenni feels the guilt and I feel the burden.”
There are record numbers of student borrowers in financial distress, according to federal data. But millions of parents who have taken out loans to pay for their children’s college education make up a less visible generation in debt. For the most part, these parents did well enough through midlife to take on sizable loans, but some have since fallen on tough times because of the recession, health problems, job loss or lives that took a sudden hard turn.
And unlike the angry students who have recently taken to the streets to protest their indebtedness, most of these parents are too ashamed to draw attention to themselves.
“You don’t want your children, much less your neighbors and friends, knowing that even though you’re living in a nice house, and you’ve been able to hold onto your job, your retirement money’s gone, you can’t pay your debts,” said a woman in Connecticut who took out $57,000 in federal loans. Between tough times at work and a divorce, she is now teetering on default.
In the first three months of this year, the number of borrowers of student loans age 60 and older was 2.2 million, a figure that has tripled since 2005. That makes them the fastest-growing age group for college debt. All told, those borrowers owed $43 billion, up from $8 billion seven years ago, according to the Federal Reserve Bank of New York.
Almost 10 percent of the borrowers over 60 were at least 90 days delinquent on their payments during the first quarter of 2012, compared with 6 percent in 2005. And more and more of those with unpaid federal student debt are losing a portion of their Social Security benefits to the government — nearly 119,000 through September, compared with 60,000 for all of 2007 and 23,996 in 2001, according to the Treasury Department’s Financial Management Service.
The federal government does not track how many of these older borrowers were taking out loans for their own education rather than for that of their children.
But financial analysts say that loans for children are the likely source of almost all the debt. Even adjusted for inflation, so-called Parent PLUS loans — one piece of the pie for parents of all ages — have more than doubled to $10.4 billion since 2000. Colleges often encourage parents to get Parent PLUS loans, to make it possible for their children to enroll. But many borrow more than they can afford to pay back — and discover, too late, that the flexibility of income-based repayment is available only to student borrowers.
Many families with good credit turn to private student loans, with parents co-signing for their children. But those private loans also offer little flexibility in repayment.
The consequences of such debt can be dire because borrowers over 60 have less time — and fewer opportunities — than younger borrowers to get their financial lives back on track. Some, like Ms. Fitzgerald, are forced to move in with their children. Others face an unexpectedly pinched retirement. Still others have gone into bankruptcy, after using all their assets to try to pay the student debt, which is difficult to discharge under any circumstances.
The anguish over college debt has put a severe strain on many family relationships. Parents and students alike say parental debt can be the uncomfortable, unmentionable elephant in the room. Many parents feel they have not fulfilled a basic obligation, while others quietly resent that their children’s education has landed the family in such difficult territory.
Soon after borrowing the money for Jenni’s education, Ms. Fitzgerald divorced and lost her corporate job. She worked part-time jobs and subsisted on food stamps and public assistance.
“I don’t really feel guilt, but I do know that this is all because of a loan taken out on my behalf,” said Jenni, who has a different last name and agreed to be interviewed only if it would not be disclosed. “I asked my mother to move in with me, because I couldn’t stand it that she was living in a place with no heat and a basement that kept flooding.”
The unusual arrangements, and strained family dynamics, can be awkward. Like Jenni, many with student debt problems agreed to be interviewed only on the condition that they not be identified because they did not want to expose their financial troubles.
“It makes you feel like a failure as a parent, to be unable to help your children and to have all your hard work end in a pile of debt,” said one New Jersey man, who took out a second mortgage of $280,000 to help cover his children’s college costs. “I sent my older kids to private colleges, and I was happy to do it because it’s how you help them get started off. But I can’t do it for the youngest, and I haven’t even been able to start the conversation with him.”
Ms. Fitzgerald said she had little hope of a comfortable old age. She has no health insurance. She knows that the odds of finding a good job in her 60s, with no college degree, are slim — and she knows that the government will take part of her Social Security, in payment of her debt, which she said had now ballooned to about $40,000 because of penalties for nonpayment. At one point, she said, the Internal Revenue Service seized a $2.43 tax refund.
Jenni has volunteered to take on her mother’s debt, but Ms. Fitzgerald has refused, saying it is her legal and moral obligation, and anyway, Jenni has her own loans to pay off — about $220 a month — and not much discretionary income. The very suggestion that Jenni might take on her debt annoys her.
“Don’t you think she is doing enough for me now by supporting me a hundred percent, financially, by my living with her and her extending her resources?” Ms. Fitzgerald asked. “The whole idea was for her to get a college education so she can succeed in life; it is hard enough just to do that without being burdened with her mother’s welfare, like I was her child.”
Jenni occasionally jumped in with explanations or clarifications, as she and her mother sat in the living room discussing their situation. When Ms. Fitzgerald talked of being depressed last year, so overwhelmed by the cartons of documents and dunning letters that she threw them all out, Jenni said gently, in an almost maternal tone, “But you’re doing much better now.”
Many young people live with deep guilt that their education has pushed their parents into debt, and perhaps ruined their credit rating. Even those who do not know exactly how much money their parents have, or how much they owe, worry about how their debt will affect their parents’ lives.
One 27-year-old man from East Texas, who earned a bachelor’s degree in California, is now nearing graduation with another bachelor’s degree, in Russian literature, from Columbia University. He said he did not know how much debt he and his mother had accumulated in the course of his educational wanderings, sounding almost paralyzed by the prospect of talking to her about it.
“I should know how much I owe, and it’s sad that I don’t,” he said. “I feel like I’m standing on the train track and I can hear the rumble of the train coming, and I don’t know how hard the train will slam into me.”
In one extreme case, student debt, and the constant creditor calls, were mentioned in a suicide note by the stepfather of a young law school graduate. The guilt has been crushing for the graduate.
Teresa Tosh, 56, a mother of five who works for the county government in Tulsa, Okla., had co-signed large graduate and law school loans for one of her sons, Jacob, who has a different last name. In total, he owes more than $200,000 on his federal loans, in addition to more than $100,000 on the private student loans his mother co-signed.
But like many recent law graduates, Jacob had trouble finding a job, and when he finally found one, an hour from home, the salary was nowhere near enough to cover loan payments. Creditor calls to both Jacob and to his mother became more and more frequent.
Jacob talked to the collectors when they called, and tried to work out payments as best he could. But shortly after one call ended, he and his mother said, the phone would ring again: another collection agent, in another part of the country. Ms. Tosh’s husband, George, a Vietnam veteran who worked from home, concluded that Jacob was lying about trying to work things out, deceiving Ms. Tosh, ruining her credit and leaving her holding the bag.
The household tension grew intense, and in July 2010, Mr. Tosh shot himself, leaving a note saying that he could no longer stand the incessant calls from Sallie Mae, one of the lenders.
“Jake has destroyed us. You can’t tell me that sally mae is getting paid when they keep calling all day, every day,” he said in a note to his wife. “I can’t even answer the phone in my own home no more. I can’t live like this no more.”
Ms. Tosh said she was “not naïve enough to think the Sallie Mae calls were the only reason” that her husband killed himself. “But they were adding a lot of stress,” she said. “They’d never stop calling.”
A few months after the suicide, Jacob moved to Dallas and got a document-review job. The pay is not enough to meet his loan payments — or even full interest — but his creditors agreed to let him make partial-interest-only payments for two years. While his balance continues to grow, that arrangement protected his mother from payment demands for two years.
“It’s made my life so much more stressful and guilt-filled because I know that it affects her,” Jacob said. “I barely have enough money to pay the bills, but if I miss by a day, they call her.”
Jacob pays about $1,200 a month toward the debt, more than he pays for rent. He and his mother are carefully rebuilding their relationship, after a period of great tension. Ms. Tosh traveled to Dallas for his birthday.
“She’s been really good about it,” Jacob said. “It’s always there, but she doesn’t bring it up.”
Copyright 2012 The New York Times Company. All rights reserved.
Thursday, November 01, 2012
As we have discussed in prior e-mails, based on the depressed market for real estate in New York City and the surrounding areas, many co-ops, condos and houses are "underwater." As we have discussed, "underwater" means that the value of the property is less than the amount of the mortgages and tax liens that encumber the property. Let's start with an example to illustrate the point:
Three years ago an individual bought a house for $750,000. The first mortgage on the house is $650,000 and there is a second mortgage on the house for $50,000. A recent appraisal valued the house at $600,000. Since the appraised value of the house ($600,000) is less than the amount of the mortgages that encumber the house ($650,000 + $50,000=$700,000), the house is "underwater" and the second mortgage is totally unsecured. What can a client do under this fact pattern?
In bankruptcy, if the home owner files for Chapter 13 bankruptcy, then they may avoid the second mortgage for $50,000 pursuant to §1322(b)(2) of the Bankruptcy Code. This result is allowed by the Second Circuit in Pond v. Farm Specialist Realty (In re Pond), 252 F. 3d 122 (2001). When the second mortgage of $50,000 is voided, it is no longer deemed to be a second mortgage against the house; but it is in fact an unsecured claim, and must be treated as such in a Chapter 13 Plan. In order to obtain this result, the homeowner or homeowners must file for Chapter 13 bankruptcy. They must have the property appraised to determine its value and then they must commence an adversary proceeding (litigation in the Bankruptcy Court) pursuant to Rule 7001(2) of the Federal Rules of Bankruptcy Procedure to determine the value of the property and the mortgage and to have the mortgage voided.
The next issue is whether a homeowner can accomplish this result in a Chapter 7 bankruptcy, which results in a "fresh start" and the liquidation of debts. Interestingly, in the Eastern District of New York (which is Brooklyn, Queens, Long Island and Staten Island), there is a split among the bankruptcy judges as to whether a Chapter 7 debtor can strip off a second mortgage in a property that is underwater. Judge Eisenberg has ruled in two cases ( In re Lavelle, 2009 WL 4043089 (Bankr. E.D.N.Y. 2009) and Smoot v. Wachovia Mortgage (In re Smoot), 465 B.R. 730 (Bankr. E.D.N.Y. 2011)) that a Chapter 7 debtor can strip off an unsecured second mortgage. Judge Grossman in Pomilio v. MERS (In re Pomilio), 425 B.R. 11 (Bankr. E.D.N.Y. 2010) has rules that the strip off of a second mortgage is not allowed in Chapter 7 bankruptcy cases.
Accordingly, owners of property that is "underwater" should consider a bankruptcy filing to void their second mortgage if they desire to retain the property in the bankruptcy. Any individuals or clients that have questions regarding the strip off of mortgages in bankruptcy should contact Jim Shenwick.