As the holiday season gets fully into swing here
in midtown Manhattan, we at Shenwick & Associates wanted to take
this time to wish you a happy, safe and warm holiday season and a very
happy and healthy 2015. We also
wanted to thank you for your friendship, your business, your referrals
and your trust in us. Personal and business bankruptcies and workouts
are keeping us busy as 2014 draws to a close. We're here for you now
and in the upcoming year,
and we look forward to working with you.
We also wanted to update you on the fascinating case of Santiago-Monteverde v. Pereira (In re Santiago-Monteverde), which we've previously discussed
here. When we last wrote about this case, the
Second Circuit Court of Appeals had certified the following question to the
New York State Court of Appeals:
Whether a debtor‐tenant possesses a property interest in the protected
value of her rent‐stabilized lease that may be exempted from her
bankruptcy estate pursuant to New York State Debtor and Creditor Law
Section 282(2) as a
"local public assistance benefit"?
In a
decision issued on November 20th, the New York State Court of
Appeals held in a 5-2 vote to answer the question in the affirmative.
Writing for the majority, Judge Abdus-Salaam held that "[t]he
rent-stabilization program has all of
the characteristics of a local public assistance benefit" and "[w]hile
the rent-stabilization laws do not provide a benefit paid for by the government, they do provide a benefit conferred by the government through regulation
aimed at a population that the government deems in need of protection."
The 2nd Circuit Court of Appeals still needs to issue its decision in
the next few months, but this ruling finally settles that
rent–stabilized and rent–controlled tenants in New York State no longer
have to fear losing their leases when
considering a Chapter 7 bankruptcy. Any persons having questions about
personal bankruptcy or the Santiago-Monteverde v. Pereira (In re Santiago-Monteverde) case should call Jim Shenwick.
Happy holidays and happy 2015 from Shenwick & Associates!
Wednesday, December 24, 2014
Tuesday, November 25, 2014
Offers in compromise
Here at Shenwick & Associates, many of our personal bankruptcy clients have issues with tax debts that they're looking for our guidance on. The issue of taxes in bankruptcy is a complex one that we've covered in a prior post.
However, there are many circumstances in which taxes are not dischargeable in bankruptcy, including taxes that were recently assessed or for which a tax return was recently filed. One alternative for debtors who are looking to either reduce or pay their tax debts that aren't dischargeable in bankruptcy is an offer in compromise (OIC). OICs are available to both individuals and businesses.
In evaluating an OIC, the IRS will consider several factors, including:
- Ability to pay;
- Income;
- Expenses; and
- Asset equity.
Preparation of an OIC package requires a detailed listing of the debtor's
income, expenses and assets. The process starts by preparing a
Form 433-A (OIC) (Collection Information Statement for wage earners and
self–employed individuals). The Form 433-A (OIC) is an eight page form in
which the debtor must list all of his or her financial information and
calculate their future remaining income. Along with any available individual
equity in assets and available business equity in assets, this becomes the
basis for the debtor's offer amount to the IRS.
Based on these results, the debtor will submit a Form 656 (Offer in Compromise) along with the appropriate backup Collection Information Statement, a non–refundable $186 application fee and an initial payment (also non–refundable).
Keep in mind that there are some factors that may make a debtor ineligible for an offer in compromise:
Based on these results, the debtor will submit a Form 656 (Offer in Compromise) along with the appropriate backup Collection Information Statement, a non–refundable $186 application fee and an initial payment (also non–refundable).
Keep in mind that there are some factors that may make a debtor ineligible for an offer in compromise:
- The debtor must not be in an open bankruptcy proceeding;
- The debtor must have filed all required federal tax returns;
- The debtor must have made all estimated tax payments; and
- The debtor must have submitted all required federal tax deposits (if they are self–employed and have employees)
Monday, November 24, 2014
Daily News: State court sides with tenants, says rent stabilized leases can’t be seized in bankruptcy
By Glenn Blain
ALBANY - New York's highest court handed a victory to tenants in rent stabilized apartments Thursday when it ruled their leases could not be seized as assets in bankruptcy proceedings.
The Court of Appeals, in a 5-2, decision sided with a 79-year-old Manhattan widow's argument that her rent-stabilized lease was a public assistance benefit and not an asset that could be liquidated as part of her bankruptcy case.
"When the rent-stabilization regulatory scheme is considered against the backdrop of the crucial role that it plays in the lives of New York residents, and the purpose and effect of the program, it is evident that a tenant's rights under a rent-stabilized lease are a local public assistance benefit," Judge Sheila Abdus-Salaam wrote in the majority decision.
The decision stems from the bankruptcy case of Mary Veronica Santiago-Monteverde, who has lived in her 7th St. apartment for more than 40 years and was forced to file for bankruptcy after the death of her husband in 2011.
During the bankruptcy proceedings, Santiago-Monteverde’s landlord offered to purchase her interest in the lease and the bankruptcy trustee accepted the deal.
"The decision will maintain the status quo as it has existed in New York for decades — so that a bankruptcy filing will not disrupt the residency of a rent-paying tenant in a rent-subsidized apartment. This should finally put the question to rest,” said Columbia Law School Professor Ronald Mann, who represented Santiago-Monteverde.
Copyright 2014 NYDailyNews.com. All rights reserved.
ALBANY - New York's highest court handed a victory to tenants in rent stabilized apartments Thursday when it ruled their leases could not be seized as assets in bankruptcy proceedings.
The Court of Appeals, in a 5-2, decision sided with a 79-year-old Manhattan widow's argument that her rent-stabilized lease was a public assistance benefit and not an asset that could be liquidated as part of her bankruptcy case.
"When the rent-stabilization regulatory scheme is considered against the backdrop of the crucial role that it plays in the lives of New York residents, and the purpose and effect of the program, it is evident that a tenant's rights under a rent-stabilized lease are a local public assistance benefit," Judge Sheila Abdus-Salaam wrote in the majority decision.
The decision stems from the bankruptcy case of Mary Veronica Santiago-Monteverde, who has lived in her 7th St. apartment for more than 40 years and was forced to file for bankruptcy after the death of her husband in 2011.
During the bankruptcy proceedings, Santiago-Monteverde’s landlord offered to purchase her interest in the lease and the bankruptcy trustee accepted the deal.
"The decision will maintain the status quo as it has existed in New York for decades — so that a bankruptcy filing will not disrupt the residency of a rent-paying tenant in a rent-subsidized apartment. This should finally put the question to rest,” said Columbia Law School Professor Ronald Mann, who represented Santiago-Monteverde.
Copyright 2014 NYDailyNews.com. All rights reserved.
Thursday, November 13, 2014
NY Times: Debts Canceled by Bankruptcy Still Mar Consumer Credit Scores
By Jessica Silver-Greenberg
In the netherworld of consumer debt, there are zombies: bills that cannot be
killed even by declaring personal bankruptcy.
Tens of thousands of Americans who went through bankruptcy are still
haunted by debts long after — sometimes as long as a decade after — federal
judges have extinguished the bills in court.
The problem, state and federal officials suspect, is that some of the nation’s
biggest banks ignore bankruptcy court discharges, which render the debts void.
Paying no heed to the courts, the banks keep the debts alive on credit reports,
essentially forcing borrowers to make payments on bills that they do not legally
owe.
The practice — a subtle but powerful tactic that effectively holds the credit
report hostage until borrowers pay — potentially breathes new life into the pools of
bad debt that are bought by financial firms.
Now lawyers with the United States Trustee Program, an arm of the Justice
Department, are investigating JPMorgan Chase, Bank of America, Citigroup and
Synchrony Financial, formerly known as GE Capital Retail Finance, suspecting the
banks of violating federal bankruptcy law by ignoring the discharge injunction, say
people briefed on the investigations.
The banks say that they comply with all federal laws in their collection and sale of debt.
Still, federal judges have started to raise alarms that some banks are
threatening the foundations of bankruptcy.
Judge Robert D. Drain of the federal bankruptcy court in White Plains said in
one opinion that debt buyers know that a bank “will refuse to correct the credit
report to reflect the obligor’s bankruptcy discharge, which means that the debtor
will feel significant added pressure to obtain a ‘clean’ report by paying the debt,”
according to court documents.
For the debt buyers and the banks, the people briefed on the investigations
said, it is a mutually beneficial arrangement: The banks typically send along any
payments that they receive from borrowers to the debt buyers, which in turn, are
more willing to buy portfolios of soured debts — including many that will wind up
voided in bankruptcy — from the banks.
In bankruptcy, people undergo intense financial scrutiny — every bank
account, bill and possession is assessed by the bankruptcy courts — to win the
discharge injunction, which extinguishes certain debts and grants a fresh start.
The heavy toll of personal bankruptcy, which can tarnish a credit report for a
decade and put some loans out of reach, is worthless, bankruptcy judges say, if
lenders ignore the discharge.
At the center of the investigation, the people briefed on it said, is the way
banks report debts to the credit reporting agencies. Once a borrower voids a debt
in bankruptcy, creditors are required to update credit reports to reflect that the
debt is no longer owed, removing any notation of “past due” or “charged off.”
But the banks routinely fail to do that, according to the people briefed on the
investigation, as well as interviews with more than three dozen borrowers who
have discharged debts in bankruptcy and a review of bankruptcy records in seven
states.
The errors are not clerical mistakes, but debt-collection tactics, current and
former bankruptcy judges suspect. The banks refuse to fix the mistakes, the
borrowers say, unless they pay for the purged debts. And many borrowers end up
paying, given that they have so much at stake — the tarnished credit reports
showing they still owe a debt can cost them a new loan, housing or a job. The
Vogts, a couple in Denver, for example, paid JPMorgan $2,582 on a debt that was
discharged in bankruptcy because they needed a clean credit report to get a
mortgage.
There are many more who make payments on debts that they no longer legally
owe, but never alert anyone because they do not realize the practice is illegal or
cannot afford to litigate.
Humberto Soto, a 51-year-old unemployed hospital worker who went through
bankruptcy in 2012, said he was almost one of those people who paid. In January,
he was rejected for a Brooklyn apartment after the housing agency pulled his
credit, which was tarnished by $6,411 on a Chase credit card, according to a letter
from the agency, a copy of which was reviewed by The New York Times.
When he called JPMorgan, Mr. Soto said, he was told that the black mark
would remain unless he paid. “It was either pay or lose the apartment,” he said.
But after his bankruptcy lawyer explained the situation to the rental agency, Mr.
Soto ultimately did not pay. (He got the apartment.)
JPMorgan and the three other banks declined to comment for this article,
citing pending litigation in federal bankruptcy court in White Plains.
But the banks have offered defenses in court documents filed in conjunction
with those lawsuits brought by Charles Juntikka, a bankruptcy lawyer in
Manhattan, and George F. Carpinello, a partner with Boies, Schiller & Flexner.
Those lawsuits — seeking class-action status on behalf of the borrowers — accuse
the banks of bolstering the value of their debt by refusing to erase debts that were
discharged in bankruptcy.
The banks have moved to throw out the lawsuits, arguing that they comply
with the law and accurately report discharged debts to the credit agencies. Their
lawyers have argued that the banks typically sell off debts to third-party debt
buyers, and have no interest in recouping payments on the stale debts.
Some bankruptcy judges, however, have questioned whether the banks’ sale of
the debts is precisely what the problem is.
Judge Drain, who is presiding over the cases, posited that the banks’ ability to
sell the soured debts depends on ignoring the bankruptcy discharge in order to
collect money from people who don’t have to legally pay it.
In July, the judge refused to throw out the lawsuit against JPMorgan, saying
that the “complaint sets forth a cause of action that Chase is using the inaccuracy
of its credit reporting on a systematic basis to further its business of selling debts
and its buyer’s collection of such debt.”
During a hearing last year on a related case, transcripts show, Judge Drain
said, “I might refer this, if the facts come out as counsel’s alleging, to the U.S.
attorney,” for criminal prosecution.
Newly unsealed court documents reviewed by The Times illustrate how the
banks handle payments from borrowers on stale debts, including those voided in
bankruptcy. In contracts with debt buyers that were filed with the court, the banks
outline the steps they will take when payments are made on charged-off debts.
In one contract between FIA Card Services, a subsidiary of Bank of America,
and a debt buyer, the seller can keep any payments it receives 18 months or later
after the sale. Before then, the contract shows, the lender will send any payments
to the debt buyer.
Another contract between JPMorgan and a debt buyer allows the bank to keep
a percentage — the exact amount is redacted in the court’s copy of the contract —
of any payments sent in on the debts.
Those contracts shed light on the shadowy market of soured debts, including
tens of billions of dollars that were voided in bankruptcy. Some banks sell off long
overdue bills, which eventually wind up being extinguished in bankruptcy after the
sale, for steeply discounted prices to debt buyers.
None of the banks specifically outline how much of their overdue loans are
sold to debt buyers, but a review of publicly traded debts buyers like the PRA
Group in Norfolk, Va., shows that the sums of bad debt bought and sold are vast.
Since 1996 the company has bought more than 36 million accounts with a face
value of $81.3 billion. Roughly 16 percent of those accounts — with a face value of
$23.4 billion — are bankruptcy debts.
If the United States Trustee’s office determines the banks have violated
bankruptcy law, say the people briefed on the investigations, they could audit the
lenders and extract steep penalties.
The costs are more immediate for people like Bernadette Gatling, a
46-year-old hospital administrator whose credit report is still marred by Chase
credit-card debts that were voided in bankruptcy three years ago. Since being laid
off in March, Ms. Gatling said she has lost one job opportunity after another
because potential employers pull her credit report.
“It’s just so unfair,” she said.
Copyright 2014 The New York Times Company. All rights reserved.
In the netherworld of consumer debt, there are zombies: bills that cannot be
killed even by declaring personal bankruptcy.
Tens of thousands of Americans who went through bankruptcy are still
haunted by debts long after — sometimes as long as a decade after — federal
judges have extinguished the bills in court.
The problem, state and federal officials suspect, is that some of the nation’s
biggest banks ignore bankruptcy court discharges, which render the debts void.
Paying no heed to the courts, the banks keep the debts alive on credit reports,
essentially forcing borrowers to make payments on bills that they do not legally
owe.
The practice — a subtle but powerful tactic that effectively holds the credit
report hostage until borrowers pay — potentially breathes new life into the pools of
bad debt that are bought by financial firms.
Now lawyers with the United States Trustee Program, an arm of the Justice
Department, are investigating JPMorgan Chase, Bank of America, Citigroup and
Synchrony Financial, formerly known as GE Capital Retail Finance, suspecting the
banks of violating federal bankruptcy law by ignoring the discharge injunction, say
people briefed on the investigations.
The banks say that they comply with all federal laws in their collection and sale of debt.
Still, federal judges have started to raise alarms that some banks are
threatening the foundations of bankruptcy.
Judge Robert D. Drain of the federal bankruptcy court in White Plains said in
one opinion that debt buyers know that a bank “will refuse to correct the credit
report to reflect the obligor’s bankruptcy discharge, which means that the debtor
will feel significant added pressure to obtain a ‘clean’ report by paying the debt,”
according to court documents.
For the debt buyers and the banks, the people briefed on the investigations
said, it is a mutually beneficial arrangement: The banks typically send along any
payments that they receive from borrowers to the debt buyers, which in turn, are
more willing to buy portfolios of soured debts — including many that will wind up
voided in bankruptcy — from the banks.
In bankruptcy, people undergo intense financial scrutiny — every bank
account, bill and possession is assessed by the bankruptcy courts — to win the
discharge injunction, which extinguishes certain debts and grants a fresh start.
The heavy toll of personal bankruptcy, which can tarnish a credit report for a
decade and put some loans out of reach, is worthless, bankruptcy judges say, if
lenders ignore the discharge.
At the center of the investigation, the people briefed on it said, is the way
banks report debts to the credit reporting agencies. Once a borrower voids a debt
in bankruptcy, creditors are required to update credit reports to reflect that the
debt is no longer owed, removing any notation of “past due” or “charged off.”
But the banks routinely fail to do that, according to the people briefed on the
investigation, as well as interviews with more than three dozen borrowers who
have discharged debts in bankruptcy and a review of bankruptcy records in seven
states.
The errors are not clerical mistakes, but debt-collection tactics, current and
former bankruptcy judges suspect. The banks refuse to fix the mistakes, the
borrowers say, unless they pay for the purged debts. And many borrowers end up
paying, given that they have so much at stake — the tarnished credit reports
showing they still owe a debt can cost them a new loan, housing or a job. The
Vogts, a couple in Denver, for example, paid JPMorgan $2,582 on a debt that was
discharged in bankruptcy because they needed a clean credit report to get a
mortgage.
There are many more who make payments on debts that they no longer legally
owe, but never alert anyone because they do not realize the practice is illegal or
cannot afford to litigate.
Humberto Soto, a 51-year-old unemployed hospital worker who went through
bankruptcy in 2012, said he was almost one of those people who paid. In January,
he was rejected for a Brooklyn apartment after the housing agency pulled his
credit, which was tarnished by $6,411 on a Chase credit card, according to a letter
from the agency, a copy of which was reviewed by The New York Times.
When he called JPMorgan, Mr. Soto said, he was told that the black mark
would remain unless he paid. “It was either pay or lose the apartment,” he said.
But after his bankruptcy lawyer explained the situation to the rental agency, Mr.
Soto ultimately did not pay. (He got the apartment.)
JPMorgan and the three other banks declined to comment for this article,
citing pending litigation in federal bankruptcy court in White Plains.
But the banks have offered defenses in court documents filed in conjunction
with those lawsuits brought by Charles Juntikka, a bankruptcy lawyer in
Manhattan, and George F. Carpinello, a partner with Boies, Schiller & Flexner.
Those lawsuits — seeking class-action status on behalf of the borrowers — accuse
the banks of bolstering the value of their debt by refusing to erase debts that were
discharged in bankruptcy.
The banks have moved to throw out the lawsuits, arguing that they comply
with the law and accurately report discharged debts to the credit agencies. Their
lawyers have argued that the banks typically sell off debts to third-party debt
buyers, and have no interest in recouping payments on the stale debts.
Some bankruptcy judges, however, have questioned whether the banks’ sale of
the debts is precisely what the problem is.
Judge Drain, who is presiding over the cases, posited that the banks’ ability to
sell the soured debts depends on ignoring the bankruptcy discharge in order to
collect money from people who don’t have to legally pay it.
In July, the judge refused to throw out the lawsuit against JPMorgan, saying
that the “complaint sets forth a cause of action that Chase is using the inaccuracy
of its credit reporting on a systematic basis to further its business of selling debts
and its buyer’s collection of such debt.”
During a hearing last year on a related case, transcripts show, Judge Drain
said, “I might refer this, if the facts come out as counsel’s alleging, to the U.S.
attorney,” for criminal prosecution.
Newly unsealed court documents reviewed by The Times illustrate how the
banks handle payments from borrowers on stale debts, including those voided in
bankruptcy. In contracts with debt buyers that were filed with the court, the banks
outline the steps they will take when payments are made on charged-off debts.
In one contract between FIA Card Services, a subsidiary of Bank of America,
and a debt buyer, the seller can keep any payments it receives 18 months or later
after the sale. Before then, the contract shows, the lender will send any payments
to the debt buyer.
Another contract between JPMorgan and a debt buyer allows the bank to keep
a percentage — the exact amount is redacted in the court’s copy of the contract —
of any payments sent in on the debts.
Those contracts shed light on the shadowy market of soured debts, including
tens of billions of dollars that were voided in bankruptcy. Some banks sell off long
overdue bills, which eventually wind up being extinguished in bankruptcy after the
sale, for steeply discounted prices to debt buyers.
None of the banks specifically outline how much of their overdue loans are
sold to debt buyers, but a review of publicly traded debts buyers like the PRA
Group in Norfolk, Va., shows that the sums of bad debt bought and sold are vast.
Since 1996 the company has bought more than 36 million accounts with a face
value of $81.3 billion. Roughly 16 percent of those accounts — with a face value of
$23.4 billion — are bankruptcy debts.
If the United States Trustee’s office determines the banks have violated
bankruptcy law, say the people briefed on the investigations, they could audit the
lenders and extract steep penalties.
The costs are more immediate for people like Bernadette Gatling, a
46-year-old hospital administrator whose credit report is still marred by Chase
credit-card debts that were voided in bankruptcy three years ago. Since being laid
off in March, Ms. Gatling said she has lost one job opportunity after another
because potential employers pull her credit report.
“It’s just so unfair,” she said.
Copyright 2014 The New York Times Company. All rights reserved.
Tuesday, October 28, 2014
Full stop at the intersection of marijuana and bankruptcy law
Here at Shenwick & Associates, we counsel our
clients to avoid violating any laws and regulations. While our
colleagues of the criminal defense bar may lose work from such advice,
it keeps our disciplinary record
clean, our malpractice insurance premiums low and our clients out of
trouble.
However, that's not always possible when dealing with marijuana, which remains a Schedule I substance under the federal Controlled Substances Act (which means that the federal government considers to have a high potential for abuse, no currently accepted medical use in treatment in the United States and there is a lack of accepted safety for use under medical supervision. In contrast, 23 states and the District of Columbia have enacted medical marijuana laws, and two states ( Colorado and Washington State) have taxed and regulated marijuana for adult non–medical use. This November, Oregon, Alaska and the District of Columbia will be voting on the adult non–medical use of marijuana.
This fundamental conflict between federal law and state law has had unusual consequences for marijuana entrepreneurs. Due to an obscure provision of the Internal Revenue Code, marijuana businesses aren't able to deduct ordinary and necessary business expenses from their federal taxable income. And despite the issuance of new, highly restrictive guidelines by the Financial Crimes Enforcement Network in February on how banks can provide services to marijuana businesses without violating their obligations under the Bank Secrecy Act, marijuana businesses remain largely dependent on cash.
The latest example of the problems that the conflict between state and federal law can cause impacts one of main practices–bankruptcy and creditors' rights (we also have a residential and commercial real estate practice). In August, a United States Bankruptcy Judge in Denver dismissed the Chapter 7 case of Frank and Sarah Arenas. Mr. Arenas is in the business of wholesale marijuana production and distribution. The UST's motion to dismiss the case was based on Bankruptcy Judge Tallman's holding in a prior Chapter 11 Colorado bankruptcy case, In re Rent-Rite Super Kegs West Ltd.
In reviewing the United States Trustee's motion to dismiss and the Debtors' motion to convert the case to a case under Chapter 13 of the Bankruptcy Code, Bankruptcy Judge Tallman held that the Chapter 7 Trustee assigned to the case couldn't take control of Mr. Arenas' assets or liquidate his inventory without "directly involving [the Chapter 7 Trustee] in the commission of federal crimes." Similarly, the Debtors couldn't convert their case to one under Chapter 13 of the Bankruptcy Code (which would allow them to pay off debts over time) because the plan would be funded "from profits of an ongoing criminal activity under federal law" and involve the trustee in distribution of funds derived from violation of the law. Section 1325(a)(3) of the Bankruptcy Code requires that a bankruptcy court find that a plan is "proposed in good faith and not by any means forbidden by law" to be confirmable. Bankruptcy courts in California and Oregon have issued similar holdings.
In practice, this means that creditors of marijuana businesses should avoid involuntary bankruptcy filings against marijuana businesses, but may look to state law alternatives to bankruptcy, such as foreclosure under the Uniform Commercial Code, assignment for the benefit of creditors, composition and receivership.
However, that's not always possible when dealing with marijuana, which remains a Schedule I substance under the federal Controlled Substances Act (which means that the federal government considers to have a high potential for abuse, no currently accepted medical use in treatment in the United States and there is a lack of accepted safety for use under medical supervision. In contrast, 23 states and the District of Columbia have enacted medical marijuana laws, and two states ( Colorado and Washington State) have taxed and regulated marijuana for adult non–medical use. This November, Oregon, Alaska and the District of Columbia will be voting on the adult non–medical use of marijuana.
This fundamental conflict between federal law and state law has had unusual consequences for marijuana entrepreneurs. Due to an obscure provision of the Internal Revenue Code, marijuana businesses aren't able to deduct ordinary and necessary business expenses from their federal taxable income. And despite the issuance of new, highly restrictive guidelines by the Financial Crimes Enforcement Network in February on how banks can provide services to marijuana businesses without violating their obligations under the Bank Secrecy Act, marijuana businesses remain largely dependent on cash.
The latest example of the problems that the conflict between state and federal law can cause impacts one of main practices–bankruptcy and creditors' rights (we also have a residential and commercial real estate practice). In August, a United States Bankruptcy Judge in Denver dismissed the Chapter 7 case of Frank and Sarah Arenas. Mr. Arenas is in the business of wholesale marijuana production and distribution. The UST's motion to dismiss the case was based on Bankruptcy Judge Tallman's holding in a prior Chapter 11 Colorado bankruptcy case, In re Rent-Rite Super Kegs West Ltd.
In reviewing the United States Trustee's motion to dismiss and the Debtors' motion to convert the case to a case under Chapter 13 of the Bankruptcy Code, Bankruptcy Judge Tallman held that the Chapter 7 Trustee assigned to the case couldn't take control of Mr. Arenas' assets or liquidate his inventory without "directly involving [the Chapter 7 Trustee] in the commission of federal crimes." Similarly, the Debtors couldn't convert their case to one under Chapter 13 of the Bankruptcy Code (which would allow them to pay off debts over time) because the plan would be funded "from profits of an ongoing criminal activity under federal law" and involve the trustee in distribution of funds derived from violation of the law. Section 1325(a)(3) of the Bankruptcy Code requires that a bankruptcy court find that a plan is "proposed in good faith and not by any means forbidden by law" to be confirmable. Bankruptcy courts in California and Oregon have issued similar holdings.
In practice, this means that creditors of marijuana businesses should avoid involuntary bankruptcy filings against marijuana businesses, but may look to state law alternatives to bankruptcy, such as foreclosure under the Uniform Commercial Code, assignment for the benefit of creditors, composition and receivership.
Monday, October 27, 2014
NY Times: Years After the Market Collapse, Sidelined Borrowers Return
By Tara Siegel Bernard
Tracy S., 59, a technical writer for a large bank, divorced her husband just as the
housing market spiraled downward. They were forced to sell their home, just
outside Phoenix, for less than they owed, and the bank agreed to absorb the
difference, about $25,000.
“Our ability to pay and our credit was perfectly fine, but neither of us could
keep the house individually,” she said. Ultimately the house sold for about
$175,000, or 21 percent less than they originally paid.
Three years after the short sale, Tracy is a homeowner once again. She bought
a three-bedroom house for $190,000 in another Phoenix suburb this year, and
qualified for a traditional mortgage with a 20 percent down payment.
“I believed and was told that I was not going to get a mortgage for the first two
years after the short sale,” she said, asking that her last name not be used to
protect her privacy. “But after that, I hadn’t really planned and didn’t think I
would be able to get a mortgage.”
So far, she has been in the minority. Through the end of last year, only a tiny
sliver of borrowers tarnished by foreclosures and short sales during the economic
downturn had bought homes again, according to a study by Experian, one of the
Big Three credit reporting bureaus. These borrowers are generally locked out of
the mortgage market for two to seven years, depending on their circumstances.
But now, four years since foreclosures and short sales peaked in the Great
Recession, millions of former borrowers have spent the required amount of time
on the sidelines, which means they have cleared at least one of the major hurdles
required to qualify for another government-backed mortgage. Whether the rest of
their financial lives have sufficiently recovered — or whether they even want the
burden of a new mortgage — are still open questions. But there is early evidence
that some former borrowers are slowly returning.
“We certainly have heard from a number of lenders that boomerang buyers
are coming back,” said Michael Fratantoni, chief economist at the Mortgage
Bankers Association. He added that the situation varied across the country
because the foreclosure process takes longer in certain states.
Bank of America, one of the nation’s largest lenders, said that of all its
approved loans and loan applications from January through September, only
about 1 percent came from consumers with short sales or foreclosures. But some
mortgage brokers report that more people are calling: Deb Klein, senior mortgage
loan officer at Cobalt Mortgage in Chandler, Ariz., said 10 to 15 percent of the
loans she closes are for people with distressed home sales in their recent past. For
Rick Cason, of Integrity Mortgage near Orlando, Fla., it is two to three loans out of
every 10. Erik Johansson, a mortgage lender in Chicago, calls it a “steady drip that
has been increasing over time.”
There is a range of different requirements for obtaining new loans. In August,
for instance, Fannie Mae tweaked its rules for borrowers who went through short
sales and those who voluntarily signed a home over to a lender (through what is
known as a deed in lieu). Fannie said it would continue to permit loans as soon as
two years after those events hit borrowers’ credit reports, as long as they could
document that something like a job loss or a divorce pushed them over the
financial edge. (They also need a down payment of at least 5 percent.)
But if they cannot prove they had a financial hardship, consumers must now
wait four years after the event. (Previously, borrowers without hardships could get
a loan after two years with at least a 20 percent down payment, or after four years
with at least 10 percent.) Someone who went through a foreclosure must wait
seven years after it was completed, or as little as three years with “extenuating
circumstances” (and make a 10 percent down payment). Freddie Mac has similar
guidelines, but it requires a 10 percent down payment for seven years across the
board.
Many lenders have tighter rules, regardless of what Fannie and Freddie
permit. And Bank of America, Wells Fargo and JPMorgan Chase all said they had
decided not to participate in the Federal Housing Administration’s Back to Work
program, where borrowers who experienced some form of financial upheaval, such
as a job loss, may be able to get a loan backed by the agency just a year after the
loss of a home. (Normally, the F.H.A. requires borrowers to wait three years.)
Since the program’s inception in August 2013, a mere 337 borrowers had received
loans through September.
Still, the pool of potential so-called boomerang buyers has increased: 3.5
million borrowers lost homes to foreclosure between 2006 and 2010 and an
additional 757,500 went through short sales, according to RealtyTrac, which
means they are all at least four years from the event. At least 5.3 million are
estimated to have met the period required for loans backed by the F.H.A., which
has less onerous rules but generally more costly fees and insurance.
“The behavior of these potential boomerang buyers will be a big part of
shaping the U.S. housing market going forward,” said Daren Blomquist, vice
president at RealtyTrac. “The bigger question now becomes how many have the
stomach for homeownership again and how many will stay as long-term renters.”
Only a small fraction of people had actually qualified for new mortgages
through last year: Of the nearly 5.43 million owner-occupied homes that were
foreclosed on after 2007, only 2.1 percent of the borrowers, or 114,100, had
repurchased a primary home through the end of 2013, according to Experian,
which reviewed 10 percent of its 220 million credit files.
And of the nearly 809,000 short sales on owner-occupied homes that
occurred after 2007, 44,300 or almost 5.5 percent of the owners bought another
through the end of 2013.
Tammy and Mike Trenholm completed a bankruptcy in 2009 and a
foreclosure in 2010. But in March, they bought a five-bedroom home in the
Atlanta suburbs for $300,000. They qualified for a loan through a program backed
by the Department of Veterans Affairs, which is more forgiving than other
programs: It will generally evaluate borrowers two years after a bankruptcy or
foreclosure.
Their housing troubles started in Charleston, S.C. They bought a
five-bedroom for $570,000 in 2005, when the housing market was still skybound.
The next year, they bought an empty lot on their block to build a new house. They
planned to sell the old one, making some money in the process. “But it didn’t turn
out that way,” Ms. Trenholm said.
Their contractor made several expensive errors. And by the time the new
house was ready, the market had collapsed and they could not sell their older
home for enough money. They ultimately had to file for bankruptcy, and the new
house was foreclosed on. That took a toll on their credit scores, which are
recovering. “It was a matter of enough time passing,” Ms. Trenholm said.
Even with the passage of time, for many former borrowers, the experience is
still fresh. “I see a lot of people coming back into it with eyes wide open,” said
Angel Johnson, a real estate agent with Redfin in Phoenix. “They can get a loan,
but they are still spooked.”
Copyright 2014 The New York Times Company. All rights reserved.
Tracy S., 59, a technical writer for a large bank, divorced her husband just as the
housing market spiraled downward. They were forced to sell their home, just
outside Phoenix, for less than they owed, and the bank agreed to absorb the
difference, about $25,000.
“Our ability to pay and our credit was perfectly fine, but neither of us could
keep the house individually,” she said. Ultimately the house sold for about
$175,000, or 21 percent less than they originally paid.
Three years after the short sale, Tracy is a homeowner once again. She bought
a three-bedroom house for $190,000 in another Phoenix suburb this year, and
qualified for a traditional mortgage with a 20 percent down payment.
“I believed and was told that I was not going to get a mortgage for the first two
years after the short sale,” she said, asking that her last name not be used to
protect her privacy. “But after that, I hadn’t really planned and didn’t think I
would be able to get a mortgage.”
So far, she has been in the minority. Through the end of last year, only a tiny
sliver of borrowers tarnished by foreclosures and short sales during the economic
downturn had bought homes again, according to a study by Experian, one of the
Big Three credit reporting bureaus. These borrowers are generally locked out of
the mortgage market for two to seven years, depending on their circumstances.
But now, four years since foreclosures and short sales peaked in the Great
Recession, millions of former borrowers have spent the required amount of time
on the sidelines, which means they have cleared at least one of the major hurdles
required to qualify for another government-backed mortgage. Whether the rest of
their financial lives have sufficiently recovered — or whether they even want the
burden of a new mortgage — are still open questions. But there is early evidence
that some former borrowers are slowly returning.
“We certainly have heard from a number of lenders that boomerang buyers
are coming back,” said Michael Fratantoni, chief economist at the Mortgage
Bankers Association. He added that the situation varied across the country
because the foreclosure process takes longer in certain states.
Bank of America, one of the nation’s largest lenders, said that of all its
approved loans and loan applications from January through September, only
about 1 percent came from consumers with short sales or foreclosures. But some
mortgage brokers report that more people are calling: Deb Klein, senior mortgage
loan officer at Cobalt Mortgage in Chandler, Ariz., said 10 to 15 percent of the
loans she closes are for people with distressed home sales in their recent past. For
Rick Cason, of Integrity Mortgage near Orlando, Fla., it is two to three loans out of
every 10. Erik Johansson, a mortgage lender in Chicago, calls it a “steady drip that
has been increasing over time.”
There is a range of different requirements for obtaining new loans. In August,
for instance, Fannie Mae tweaked its rules for borrowers who went through short
sales and those who voluntarily signed a home over to a lender (through what is
known as a deed in lieu). Fannie said it would continue to permit loans as soon as
two years after those events hit borrowers’ credit reports, as long as they could
document that something like a job loss or a divorce pushed them over the
financial edge. (They also need a down payment of at least 5 percent.)
But if they cannot prove they had a financial hardship, consumers must now
wait four years after the event. (Previously, borrowers without hardships could get
a loan after two years with at least a 20 percent down payment, or after four years
with at least 10 percent.) Someone who went through a foreclosure must wait
seven years after it was completed, or as little as three years with “extenuating
circumstances” (and make a 10 percent down payment). Freddie Mac has similar
guidelines, but it requires a 10 percent down payment for seven years across the
board.
Many lenders have tighter rules, regardless of what Fannie and Freddie
permit. And Bank of America, Wells Fargo and JPMorgan Chase all said they had
decided not to participate in the Federal Housing Administration’s Back to Work
program, where borrowers who experienced some form of financial upheaval, such
as a job loss, may be able to get a loan backed by the agency just a year after the
loss of a home. (Normally, the F.H.A. requires borrowers to wait three years.)
Since the program’s inception in August 2013, a mere 337 borrowers had received
loans through September.
Still, the pool of potential so-called boomerang buyers has increased: 3.5
million borrowers lost homes to foreclosure between 2006 and 2010 and an
additional 757,500 went through short sales, according to RealtyTrac, which
means they are all at least four years from the event. At least 5.3 million are
estimated to have met the period required for loans backed by the F.H.A., which
has less onerous rules but generally more costly fees and insurance.
“The behavior of these potential boomerang buyers will be a big part of
shaping the U.S. housing market going forward,” said Daren Blomquist, vice
president at RealtyTrac. “The bigger question now becomes how many have the
stomach for homeownership again and how many will stay as long-term renters.”
Only a small fraction of people had actually qualified for new mortgages
through last year: Of the nearly 5.43 million owner-occupied homes that were
foreclosed on after 2007, only 2.1 percent of the borrowers, or 114,100, had
repurchased a primary home through the end of 2013, according to Experian,
which reviewed 10 percent of its 220 million credit files.
And of the nearly 809,000 short sales on owner-occupied homes that
occurred after 2007, 44,300 or almost 5.5 percent of the owners bought another
through the end of 2013.
Tammy and Mike Trenholm completed a bankruptcy in 2009 and a
foreclosure in 2010. But in March, they bought a five-bedroom home in the
Atlanta suburbs for $300,000. They qualified for a loan through a program backed
by the Department of Veterans Affairs, which is more forgiving than other
programs: It will generally evaluate borrowers two years after a bankruptcy or
foreclosure.
Their housing troubles started in Charleston, S.C. They bought a
five-bedroom for $570,000 in 2005, when the housing market was still skybound.
The next year, they bought an empty lot on their block to build a new house. They
planned to sell the old one, making some money in the process. “But it didn’t turn
out that way,” Ms. Trenholm said.
Their contractor made several expensive errors. And by the time the new
house was ready, the market had collapsed and they could not sell their older
home for enough money. They ultimately had to file for bankruptcy, and the new
house was foreclosed on. That took a toll on their credit scores, which are
recovering. “It was a matter of enough time passing,” Ms. Trenholm said.
Even with the passage of time, for many former borrowers, the experience is
still fresh. “I see a lot of people coming back into it with eyes wide open,” said
Angel Johnson, a real estate agent with Redfin in Phoenix. “They can get a loan,
but they are still spooked.”
Copyright 2014 The New York Times Company. All rights reserved.
Wednesday, October 01, 2014
Asset Protection strategies
Here at Shenwick & Associates, many of our
clients are understandably concerned about how to protect their assets
from creditors––especially their home. While there are limits on how
much asset protection we can
provide clients when presented with an immediate crisis (i.e. a
foreclosure sale), with advance planning, there are several strategies
debtors can use to protect their most valuable asset. Let's look at a
few of these asset protection
techniques and devices:
1. The homestead exemption. Most, but not all states provide a homestead exemption (for example, New Jersey has no state law homestead exemption, forcing debtors to use federal bankruptcy exemptions, which are currently $22,975 per debtor, to retain any equity in their home). On the other end of the protections spectrum are states like Texas and Florida, which place no limit on home equity that can be protected from creditors. In New York State, the homestead exemption varies by region of the state, but for downstate counties, the homestead exemption is $150,000 per debtor. While that's a significant amount, given the value of real estate in the New York metropolitan area, many homeowners have much more equity in their homes than can be protected under the homestead exemption.
2. Ownership of your house as tenants by the entirety. There are several ways that two or more persons can own property–as joint tenants, as tenants in common or as tenants by the entirety. While any people can own any property in a tenancy in common or a joint tenancy, ownership as tenants by the entirety is limited to:
a. The state you live in must recognize this form of property ownership (New York and New Jersey do, but Connecticut does not).
b. You must be married to your co–tenant; this type of ownership is strictly limited to married couples.
c. The property must be must be your personal residence.
d. The tenants by the entirety must take title to the property at the same time and with the same deed.
In a tenancy by the entirety, neither spouse may voluntarily, or involuntarily, convey their interest in the home without the consent of the other. This rule places the home out of the reach of the creditors of one of the spouses. However, there are some circumstances in which the protections of tenancy by the entirety won't protect debtors:
a. Joint and several debts of the spouses;
b. Divorce; and
c. Death
3. Limited liability companies (LLCs) and family limited partnerships (FLPs). These two types of entities can be useful to hold real estate in. However, there are some potential drawbacks of owning a primary residence via a LLC or a FLP. For example, loss of tax benefits–when a property is owned by natural persons, mortgage interest is deductible, and when the home is sold, $250,000 of capital gains per person (or $500,000 for a couple) is exempt from capital gains taxes. Unless only one of the spouses owns all of the interests in a LLC or FLP, those tax benefits will be lost–and in a recent case, a court set aside the protections of a LLC even when only one spouse owned all of the membership interests in the LLC. Therefore, this may not be optimal for protecting a primary residence.
4. A qualified personal residence trust (QPRT). This is a special type of irrevocable trust that is designed to hold and own your primary or secondary residence. However, while having your residence owned by a QPRT has both asset protection and estate planning benefits, there are also some drawbacks. For example, you don't own your home anymore, and after the term of thrust ends, you will have to pay fair market rent to the beneficiaries of the QPRT.
5. More complex asset protection strategies. These may include getting a loan and/or a mortgage (or additional mortgages) to reduce the value of the equity in your home as much as possible (a so called "debt shield") and using a domestic asset protection trust or asset protected investments (such as annuities and whole or universal life insurance policies) to repay the lender.
As you see, asset protection strategies can get quite complex, and using entities such as LLCs, FLPs and trusts takes time to implement, which is why you should start planning right away to protect your assets, and not wait for a crisis like a judgment or foreclosure to strike. To protect your most precious assets for yourself and the ones you love, please contact Jim Shenwick.
1. The homestead exemption. Most, but not all states provide a homestead exemption (for example, New Jersey has no state law homestead exemption, forcing debtors to use federal bankruptcy exemptions, which are currently $22,975 per debtor, to retain any equity in their home). On the other end of the protections spectrum are states like Texas and Florida, which place no limit on home equity that can be protected from creditors. In New York State, the homestead exemption varies by region of the state, but for downstate counties, the homestead exemption is $150,000 per debtor. While that's a significant amount, given the value of real estate in the New York metropolitan area, many homeowners have much more equity in their homes than can be protected under the homestead exemption.
2. Ownership of your house as tenants by the entirety. There are several ways that two or more persons can own property–as joint tenants, as tenants in common or as tenants by the entirety. While any people can own any property in a tenancy in common or a joint tenancy, ownership as tenants by the entirety is limited to:
a. The state you live in must recognize this form of property ownership (New York and New Jersey do, but Connecticut does not).
b. You must be married to your co–tenant; this type of ownership is strictly limited to married couples.
c. The property must be must be your personal residence.
d. The tenants by the entirety must take title to the property at the same time and with the same deed.
In a tenancy by the entirety, neither spouse may voluntarily, or involuntarily, convey their interest in the home without the consent of the other. This rule places the home out of the reach of the creditors of one of the spouses. However, there are some circumstances in which the protections of tenancy by the entirety won't protect debtors:
a. Joint and several debts of the spouses;
b. Divorce; and
c. Death
3. Limited liability companies (LLCs) and family limited partnerships (FLPs). These two types of entities can be useful to hold real estate in. However, there are some potential drawbacks of owning a primary residence via a LLC or a FLP. For example, loss of tax benefits–when a property is owned by natural persons, mortgage interest is deductible, and when the home is sold, $250,000 of capital gains per person (or $500,000 for a couple) is exempt from capital gains taxes. Unless only one of the spouses owns all of the interests in a LLC or FLP, those tax benefits will be lost–and in a recent case, a court set aside the protections of a LLC even when only one spouse owned all of the membership interests in the LLC. Therefore, this may not be optimal for protecting a primary residence.
4. A qualified personal residence trust (QPRT). This is a special type of irrevocable trust that is designed to hold and own your primary or secondary residence. However, while having your residence owned by a QPRT has both asset protection and estate planning benefits, there are also some drawbacks. For example, you don't own your home anymore, and after the term of thrust ends, you will have to pay fair market rent to the beneficiaries of the QPRT.
5. More complex asset protection strategies. These may include getting a loan and/or a mortgage (or additional mortgages) to reduce the value of the equity in your home as much as possible (a so called "debt shield") and using a domestic asset protection trust or asset protected investments (such as annuities and whole or universal life insurance policies) to repay the lender.
As you see, asset protection strategies can get quite complex, and using entities such as LLCs, FLPs and trusts takes time to implement, which is why you should start planning right away to protect your assets, and not wait for a crisis like a judgment or foreclosure to strike. To protect your most precious assets for yourself and the ones you love, please contact Jim Shenwick.
Thursday, September 18, 2014
NY Times: New York State and City Join Effort to Shield Stabilized Leases
By Mireya Navarrro
New York City
and state officials have thrown their weight behind an elderly widow
fighting to keep her rent-stabilized lease from becoming an asset with
which to pay off her creditors, arguing that it would undermine the
safeguards that both bankruptcy and rent laws are supposed to provide.
In
a brief filed jointly this week with the state’s Court of Appeals,
lawyers from the state attorney general’s office and New York City’s Law
Department said that, under current law, a lease for a rent-regulated
apartment is not property that can be sold. Such a lease, they argued,
amounts to a public benefit, just like disability or unemployment
benefits, that is exempted from a bankruptcy estate and cannot be seized
as an asset in a personal bankruptcy.
The
friend of the court brief filed by the state and the city underscores
the importance of a case that bankruptcy lawyers say poses a major risk
to New Yorkers who seek protection and happen to live in rent-stabilized
apartments. The case, the brief argues, also threatens to circumvent
rent-stabilization laws enacted by both the city and the state. It comes
at a time of high demand for affordable housing amid the steady loss of
rent-regulated apartments to market-rate conversions.
“Rent-stabilized
housing provides millions of vulnerable New Yorkers with the guarantee
of an affordable place to live,” said Matt Mittenthal, a spokesman for
Eric T. Schneiderman, the New York State
attorney general. “State law simply does not allow the benefits that
come with that crucial program to be seized and sold in a bankruptcy.”
The
bankruptcy case was brought in 2011 by Mary Veronica Santiago, 79, who
has lived in a two-bedroom apartment in the East Village of Manhattan
for more than 50 years and who sought Chapter 7 protection after
accumulating a debt of $23,000, mostly in credit card bills.
Ms.
Santiago was not behind on her $703 rent, but her landlord, who was not
among her creditors, stepped into her bankruptcy case with an offer to
buy her rent-stabilized lease and produce the money to pay off her debt.
The bankruptcy trustee in charge of marshaling her assets, John S.
Pereira, accepted the offer. But Ms. Santiago, fearing her eventual
eviction despite an agreement to let her stay in her apartment,
challenged that decision.
After
both a bankruptcy court and a Federal District Court sided with the
bankruptcy trustee, Ms. Santiago appealed to the United States Court of
Appeals for the Second Circuit, which for the first time will weigh in
on whether a rent-stabilized lease can be treated as an asset in
bankruptcy cases, like a car or a piece of land.
But
before ruling on the matter, the federal court sent the case to the New
York Court of Appeals in March to decide on a question of state law:
whether the lease is exempt from a tenant’s assets for the purposes of
bankruptcy proceedings.
A
lawyer for Mr. Pereira said that trustees, who get a commission on the
assets they are able to gather, have an obligation to marshal all assets
to get a debt paid. Under federal bankruptcy law, states can decide
which assets can be exempted from an estate. Mr. Pereira’s lawyer argues
that the state does not specify rent-stabilized leases in such a list
of exemptions and that the State Legislature did not intend to include
them.
“If
the city and state now believe that these leases should be included,
the appropriate way to deal with this issue is by enacting legislation
addressing rent-stabilized leases in the context of an individual’s
bankruptcy estate,” the lawyer, J. David Dantzler Jr., said.
But
the city and the state said that such an exemption already existed,
under public benefits, and that the “state law has long barred creditors
from enforcing a money judgment against the value of a rent-stabilized
lease.”
In
their brief, the officials noted that rent-stabilized tenants have a
median income “appreciably lower” than tenants paying the market rate,
and that without rent law protections, “the result would be a metropolis
largely consisting of the very rich and very poor.”
The
trustee has proposed an arrangement in which the landlord would pay Ms.
Santiago’s debt, pay the trustee and his lawyer, and allow her to live
out her years in her apartment.
Copyright 2014 The New York Times Company. All rights reserved.
Monday, March 31, 2014
NYT: Disabled Borrowers Trade Loan Debt for a Tax Bill From the I.R.S.
By Tara Siegel Bernard
Frank, now 66, lost his job as director of sales of a telecommunications company.
His wife, to whom he had been married for 36 years, died just two months later.
He was still grieving when he learned that he had kidney cancer. The tumor
was operable, but the exam brought to light a long list of other serious problems,
including a pulmonary embolism and a heart-rhythm disorder.
That was in 2009, in the depths of the recession, and finding a new job was
difficult. Two years later, after struggling to pay medical bills not covered by
insurance and other debts, Frank filed for bankruptcy. But that did not erase the
giant pile of federal Parent Plus loans that he had taken out to help put his three
children through college. Since he could no longer work, Sallie Mae, the loan
servicer, ultimately suggested applying for a disability discharge, which would
cancel the debts.
He qualified, and last July, his loans, which had ballooned to $150,000 in
forbearance, were wiped away. “I felt like a Buick had been lifted off my
shoulders,” said Frank, who lives in upstate New York.
But much to his surprise, he received another bill. In January, the Internal
Revenue Service sent him a tax form, known as a 1099-C, which said that the loan
amount had to be treated as income. According to his calculations on TurboTax,
his tax bill for this year is about $59,000.
“If I am not capable to work due to a medical disability to pay the student
loan, how am I supposed to work to pay the taxes?” said Frank, who agreed to discuss his situation only if his full name was not published. “Now I am somewhat
panicked.”
After much criticism, the Department of Education has made it easier in
recent years for disabled borrowers to have their federal student loans discharged.
But now, as more people are qualifying for loan forgiveness, many of them are
running into an unexpected consequence: They are often shocked to learn that
they basically exchanged one debt for another, according to consumer advocates
and tax and credit specialists.
While millions of debts — including credit cards and mortgages — are
canceled each year, the group of borrowers whose loans have been discharged
because of a “total and permanent disability” has grown sharply to more than
115,700 in 2013, from nearly 61,600 in 2011 and fewer than 15,000 in 2008,
according to the Department of Education. But under current tax law, the amount
of debt forgiven is generally taxable, so some disabled borrowers end up with tax
bills they cannot afford.
Borrowers who can prove they were insolvent may be able to ease the tax
burden, but may not be able to eliminate it. And many people do not even know
this exception exists. The insolvency calculation is notoriously complex,
particularly for people who are dealing with medical problems or the death of a
child, consumer advocates said, which is another instance in which student loan
debts may be discharged.
“The government gives with one hand, while taking back with the other,” said
Mark Kantrowitz, a senior vice president and publisher of Edvisors, an
informational website about paying for college. “Morally, if debt is canceled
because of the borrower’s inability to pay due to disability, the corresponding tax
debt should also be forgiven.”
The tax debt is generally a small fraction of the overall debt, but it can present
a great burden because it is due in one lump sum instead of being spread over
time, he added.
“Many borrowers don’t even realize it’s going to be a taxable event,” said
Persis Yu, a lawyer at the National Consumer Law Center who works on the
Student Loan Borrower Assistance Project. “The collateral damage definitely has
potential broad impact. There is the issue of finding affordable housing if they do
have to sell assets to pay for this liability. One of our other concerns is because some people will have this included in their adjusted gross income, they could lose
public benefits.”
In some instances canceled debts are not taxable, including debts canceled in
bankruptcy. And student loans may not be taxable for borrowers who work for a
specific period in certain professions, for example.
Insolvency is another exception. Borrowers who can illustrate that they were
insolvent — that is, their total liabilities exceeded the value of their assets — could
potentially lessen or even eliminate the tax burden. The amount of taxable income
can be reduced, but only to the extent of the insolvency.
In other words, if a borrower’s debts exceed assets by $25,000, but a $50,000
loan is forgiven, tax would still be owed on $25,000. “Insolvency is insufficient to
protect many vulnerable borrowers,” Ms. Yu said.
In Frank’s case, when he factors his insolvency in that calculation, he said he
would still owe nearly $25,000 in federal and state taxes. He needed the help of a
tax lawyer to arrive at that reduced figure, which he said the I.R.S. may or may not
accept.
Canceled debts are treated as income “to prevent people from using this as a
loophole: lend someone money, they buy something of value, then cancel the debt
and they don’t have to report that money as income,” explained Gerri Detweiler, a
credit specialist with Credit.com. “But unfortunately very vulnerable borrowers are
being swept up in this. They find themselves suffering from a variety of illnesses,
unable to work, and having to deal with the I.R.S.”
The consequences of not paying are serious. The I.R.S. has the authority to
garnish wages, bank accounts and other property, such as automobiles or
retirement savings accounts. The agency can also garnish Social Security and
pension payments, and can file a federal tax lien, which is attached to all property
an individual may own, specialists said. The I.R.S. will also add penalties and
interest to the bill.
If a taxpayer does not pay the amount owed, the I.R.S. will send a bill, which
is the start of the automated collections process. If the borrower cannot work
something out through that process and does not pay, the borrower will receive a
final notice, which says the agency intends to collect what is owed and gives 30
days to comply, said Daniel J. Pilla, a tax litigation consultant and the author of
“How to Eliminate Taxes on Debt Forgiveness,” (Winning Publications, 2013). The letter also notifies individuals of their right to appeal, he added, a process that
stops the collections process.
A few other options are available for people who cannot afford to pay the bill.
If the amount owed is less than $50,000, they can apply for a monthly payment
plan online, according to the I.R.S., or request a plan by filing Form 9465 (people
who owe more than $50,000 must file that form ). Some taxpayers may also
qualify for an “offer in compromise,” where the I.R.S. agrees to settle the tax bill
for less than the full amount.
Mr. Pilla said taxpayers could also try to prove that their monthly income was
consumed by necessary living expenses, which may cause the I.R.S. to deem the
debt “currently not collectible.” “That means they will press the hold button on the
collection machine,” he added.
Some organizations, including the National Council of Higher Education
Resources, a trade group representing student loan servicers and other
organizations, have brought the tax issue to the attention of members of Congress,
but it has not yet gained traction, said Tim Fitzgibbon, vice president for debt
management services at the group.
For now, people who find themselves with large tax obligations have to figure
out how to best navigate the process on their own or with professional help, which
can be hard to find. The I.R.S.’s free tax preparation service for low- and
moderate-income people is not equipped to handle the complexities.
Frank said the tax lawyer he hired to help him negotiate with the I.R.S. was
going to cost him $3,000 to $5,000, and he is making plans to sell his home. “I
have to go through this process,” he said, “which is going to be laborious and expensive."
Copyright 2014 The New York Times Company. All rights reserved.
Monday, January 27, 2014
NYT: A Lawyer and Partner, and Also Bankrupt
By James B. Stewart
Anyone who wonders why law school applications are plunging and there’s
widespread malaise in many big law firms might consider the case of Gregory M.
Owens.
The silver-haired, distinguished-looking Mr. Owens would seem the
embodiment of a successful Wall Street lawyer. A graduate of Denison University
and Vanderbilt Law School, Mr. Owens moved to New York City and was named a
partner at the then old-line law firm of Dewey, Ballantine, Bushby, Palmer &
Wood, and after a merger, at Dewey & LeBoeuf.
Today, Mr. Owens, 55, is a partner at an even more eminent global law firm,
White & Case. A partnership there or any of the major firms collectively known as
“Big Law” was long regarded as the brass ring of the profession, a virtual
guarantee of lifelong prosperity and job security.
But on New Year’s Eve, Mr. Owens filed for personal bankruptcy.
According to his petition, he had $400 in his checking account and $400 in
savings. He lives in a rental apartment at 151st Street and Broadway. He owns
clothing he estimated was worth $900 and his only jewelry is a Concord watch,
which he described as “broken.”
Mr. Owens is an extreme but vivid illustration of the economic factors roiling
the legal profession, although his straits are in some ways unique to his personal
situation.
The bulk of his potential liabilities stem from claims related to the collapse of
Dewey & LeBoeuf, which filed for bankruptcy protection in 2012. Even stripping
those away, his financial circumstances seem dire. Legal fees from a divorce
depleted his savings and resulted in a settlement under which he pays his former
wife a steep $10,517 a month in alimony and support for their 11-year-old son.
But in other ways, Mr. Owens’s situation is all too emblematic of pressures
facing many partners at big law firms. After Dewey & LeBoeuf collapsed, Mr.
Owens seemingly landed on his feet as a partner at White & Case. But he was a full
equity partner at Dewey, Ballantine and Dewey & LeBoeuf. At White & Case, he
was demoted to nonequity or “service” partner — a practice now so widespread it
has a name, “de-equitization.”
Nonequity partners like Mr. Owens are not really partners, but employees,
since they do not share the risks and rewards of the firm’s practice. Service
partners typically have no clients they can claim as their own and depend on
rainmakers to feed them. In Mr. Owens’s case, his mentor and protector has long
been Morton A. Pierce, a noted mergers and acquisitions specialist and prodigious
rainmaker whom Mr. Owens followed from the former Reid & Priest to Dewey,
Ballantine to Dewey & LeBoeuf and then to White & Case.
“It’s sad to hear about this fellow, but he’s not alone in being in jeopardy,”
said Thomas S. Clay, an expert on law firm management and a principal at the
consulting firm Altman Weil, which advises many large law firms. “For the past 40
years, you could just be a partner in a firm, do good work, coast, keep your nose
clean, and you’d have a very nice career. That’s gone.”
Mr. Clay noted that there was a looming glut of service partners at major
firms. At the end of 2012, he said, 84 percent of the largest 200 law firms, as
ranked by the trade publication American Lawyer, had a class of nonequity or
service partners, 20 percent more than in 2000. And the number of nonequity
partners has swelled because firms have been reluctant to confront the reality that,
in many cases, “they’re not economically viable,” Mr. Clay said.
Scott A. Westfahl, professor of practice and director of executive education at
Harvard Law School, agreed that service partners faced mounting pressures.
“Service partners need a deep expertise that’s hard to find anywhere else,” he said.
“Even then, when demand changes, and your specialty is no longer hot, you’re in
trouble. There’s no job security.” He added that even full equity partners were
feeling similar pressures as clients demanded more accountability. “Partners are
being de-equitized,” he said, as Mr. Owens was. “That’s a trend.”
Mr. Owens specializes in financing and debt structuring in mergers and
acquisitions, a relatively narrow expertise where demand rises and falls with the
volume of merger and acquisition deals that his mentors generate. Former
colleagues (none of whom would speak for attribution) uniformly described him as
a highly competent lawyer in his specialty and, as several put it, “a lovely person”
who relishes spending time with his son. But he does not seem to be the kind of
alpha male — or female — who can generate revenue, bring in clients and are
generally prized by large law firms.
At Dewey & LeBoeuf, Mr. Owens’s name was perennially among a group of
partners who were not making enough revenue to cover their salaries and
overhead, according to two former partners at the firm. But each time, the
powerful Mr. Pierce, then the firm’s vice chairman, protected Mr. Owens, they
said.
“He was very good at what he knew,” a former Dewey & LeBoeuf partner said.
“But he wasn’t built to adapt. To make it as a law firm partner today, you have to
periodically reinvent yourself.”
As partners were leaving Dewey & LeBoeuf in droves as it neared bankruptcy
in 2012, Mr. Pierce went to White & Case. Mr. Owens followed, but this time as a
salaried lawyer, not an equity partner, even though he has the title of partner.
A spokesman for White & Case said Mr. Owens and Mr. Pierce had no
comment. Neither did the firm.
Mr. Owens has been well paid by most standards, but not compared with top
partners at major firms, who make in the millions. (Mr. Pierce was guaranteed $8
million a year at Dewey & LeBoeuf.) When Mr. Owens first became a partner at
Dewey, Ballantine, he made about $250,000, in line with other new partners. At
Dewey & LeBoeuf, his income peaked at over $500,000 during the flush years
before the financial crisis. In 2012, he made $351,000, and last year, while at
White & Case, he made $356,500. He listed his current monthly income as
$31,500, or $375,000 a year. And he has just over $1 million in retirement
accounts that are protected from creditors in bankruptcy.
How far does $375,000 a year go in New York City? Strip out estimated
income taxes ($7,500 a month), domestic support ($10,517), insurance ($2,311), a
mandatory contribution to his retirement plan ($5,900), and routine expenses for
rent ($2,460 a month) transportation ($550) and food ($650) and Mr. Owens
estimated that he was running a small monthly deficit of $52, according to his
bankruptcy petition. He has gone back to court to get some relief from his divorce
settlement, so far without any success.
In his petition, Mr. Owens said he didn’t expect things to get any better in
2014.
And they could get worse. The most recent deal on White & Case’s website in
which Mr. Owens played a role was the relatively modest $392 million acquisition
of the women’s clothing retailer Talbots by Sycamore Partners, in which Mr.
Owens (working with Mr. Pierce) represented Talbots. That deal was announced in
May 2012. The White & Case spokesman did not provide any examples of more
recent deals.
“In almost any other context, $375,000 would be a lot of money,” said
William Henderson, a professor at the Indiana University School of Law and a
director of the Center on the Global Legal Profession. “But anyone who doesn’t
have clients is in a precarious position. For the last 40 years, all firms had to do
was answer the phone from clients and lease more office space. That run is over.
The forest has been depleted, as we say, and firms are competing for market share.
Law firms are in a period of consolidation and, initially, it’s going to take place at
the service partner level. There’s too much capacity.” He added that law firm
associates and summer associates had also suffered significant cuts, which has
culled the ranks of future partners.
All this “has had a huge effect on law school enrollment,” Professor
Henderson said.
Mr. Clay, the consultant, said many firms had been slow to confront the
reality that successful service partners were probably going to need to work more
hours than rainmakers, not fewer, to justify their mid- to high-six-figure salaries.
Many of them “seem to have felt they had a sinecure,” Mr. Clay said. “They’re well
paid, didn’t have to work too hard, they had a nice office, prestige. It’s a nice life.
That’s O.K., except it’s not the kind of professional life that will do much for a firm.
These nonequity positions were never meant to be a safe place to rest and not
work as hard as everyone else.”
And these lawyers may have to give up the pretense that they’re law firm
partners. In his bankruptcy petition, Mr. Owens describes himself as a “contract
attorney,” which has the virtue of candor.
“From a prestige standpoint, being called a partner is something that’s very
important to people,” Mr. Westfahl observed. “Lawyers tend to be very
competitive, and like all people, titles and status matter. But to the outside world,
where people think all partners are equal, it’s deceptive. And inside the firm,
everyone knows the real pecking order. When people see that partners are treated
disparately, it causes unnecessary dissonance and personal frustration.”
Copyright 2014 The New York Times Company. All rights reserved.
Anyone who wonders why law school applications are plunging and there’s
widespread malaise in many big law firms might consider the case of Gregory M.
Owens.
The silver-haired, distinguished-looking Mr. Owens would seem the
embodiment of a successful Wall Street lawyer. A graduate of Denison University
and Vanderbilt Law School, Mr. Owens moved to New York City and was named a
partner at the then old-line law firm of Dewey, Ballantine, Bushby, Palmer &
Wood, and after a merger, at Dewey & LeBoeuf.
Today, Mr. Owens, 55, is a partner at an even more eminent global law firm,
White & Case. A partnership there or any of the major firms collectively known as
“Big Law” was long regarded as the brass ring of the profession, a virtual
guarantee of lifelong prosperity and job security.
But on New Year’s Eve, Mr. Owens filed for personal bankruptcy.
According to his petition, he had $400 in his checking account and $400 in
savings. He lives in a rental apartment at 151st Street and Broadway. He owns
clothing he estimated was worth $900 and his only jewelry is a Concord watch,
which he described as “broken.”
Mr. Owens is an extreme but vivid illustration of the economic factors roiling
the legal profession, although his straits are in some ways unique to his personal
situation.
The bulk of his potential liabilities stem from claims related to the collapse of
Dewey & LeBoeuf, which filed for bankruptcy protection in 2012. Even stripping
those away, his financial circumstances seem dire. Legal fees from a divorce
depleted his savings and resulted in a settlement under which he pays his former
wife a steep $10,517 a month in alimony and support for their 11-year-old son.
But in other ways, Mr. Owens’s situation is all too emblematic of pressures
facing many partners at big law firms. After Dewey & LeBoeuf collapsed, Mr.
Owens seemingly landed on his feet as a partner at White & Case. But he was a full
equity partner at Dewey, Ballantine and Dewey & LeBoeuf. At White & Case, he
was demoted to nonequity or “service” partner — a practice now so widespread it
has a name, “de-equitization.”
Nonequity partners like Mr. Owens are not really partners, but employees,
since they do not share the risks and rewards of the firm’s practice. Service
partners typically have no clients they can claim as their own and depend on
rainmakers to feed them. In Mr. Owens’s case, his mentor and protector has long
been Morton A. Pierce, a noted mergers and acquisitions specialist and prodigious
rainmaker whom Mr. Owens followed from the former Reid & Priest to Dewey,
Ballantine to Dewey & LeBoeuf and then to White & Case.
“It’s sad to hear about this fellow, but he’s not alone in being in jeopardy,”
said Thomas S. Clay, an expert on law firm management and a principal at the
consulting firm Altman Weil, which advises many large law firms. “For the past 40
years, you could just be a partner in a firm, do good work, coast, keep your nose
clean, and you’d have a very nice career. That’s gone.”
Mr. Clay noted that there was a looming glut of service partners at major
firms. At the end of 2012, he said, 84 percent of the largest 200 law firms, as
ranked by the trade publication American Lawyer, had a class of nonequity or
service partners, 20 percent more than in 2000. And the number of nonequity
partners has swelled because firms have been reluctant to confront the reality that,
in many cases, “they’re not economically viable,” Mr. Clay said.
Scott A. Westfahl, professor of practice and director of executive education at
Harvard Law School, agreed that service partners faced mounting pressures.
“Service partners need a deep expertise that’s hard to find anywhere else,” he said.
“Even then, when demand changes, and your specialty is no longer hot, you’re in
trouble. There’s no job security.” He added that even full equity partners were
feeling similar pressures as clients demanded more accountability. “Partners are
being de-equitized,” he said, as Mr. Owens was. “That’s a trend.”
Mr. Owens specializes in financing and debt structuring in mergers and
acquisitions, a relatively narrow expertise where demand rises and falls with the
volume of merger and acquisition deals that his mentors generate. Former
colleagues (none of whom would speak for attribution) uniformly described him as
a highly competent lawyer in his specialty and, as several put it, “a lovely person”
who relishes spending time with his son. But he does not seem to be the kind of
alpha male — or female — who can generate revenue, bring in clients and are
generally prized by large law firms.
At Dewey & LeBoeuf, Mr. Owens’s name was perennially among a group of
partners who were not making enough revenue to cover their salaries and
overhead, according to two former partners at the firm. But each time, the
powerful Mr. Pierce, then the firm’s vice chairman, protected Mr. Owens, they
said.
“He was very good at what he knew,” a former Dewey & LeBoeuf partner said.
“But he wasn’t built to adapt. To make it as a law firm partner today, you have to
periodically reinvent yourself.”
As partners were leaving Dewey & LeBoeuf in droves as it neared bankruptcy
in 2012, Mr. Pierce went to White & Case. Mr. Owens followed, but this time as a
salaried lawyer, not an equity partner, even though he has the title of partner.
A spokesman for White & Case said Mr. Owens and Mr. Pierce had no
comment. Neither did the firm.
Mr. Owens has been well paid by most standards, but not compared with top
partners at major firms, who make in the millions. (Mr. Pierce was guaranteed $8
million a year at Dewey & LeBoeuf.) When Mr. Owens first became a partner at
Dewey, Ballantine, he made about $250,000, in line with other new partners. At
Dewey & LeBoeuf, his income peaked at over $500,000 during the flush years
before the financial crisis. In 2012, he made $351,000, and last year, while at
White & Case, he made $356,500. He listed his current monthly income as
$31,500, or $375,000 a year. And he has just over $1 million in retirement
accounts that are protected from creditors in bankruptcy.
How far does $375,000 a year go in New York City? Strip out estimated
income taxes ($7,500 a month), domestic support ($10,517), insurance ($2,311), a
mandatory contribution to his retirement plan ($5,900), and routine expenses for
rent ($2,460 a month) transportation ($550) and food ($650) and Mr. Owens
estimated that he was running a small monthly deficit of $52, according to his
bankruptcy petition. He has gone back to court to get some relief from his divorce
settlement, so far without any success.
In his petition, Mr. Owens said he didn’t expect things to get any better in
2014.
And they could get worse. The most recent deal on White & Case’s website in
which Mr. Owens played a role was the relatively modest $392 million acquisition
of the women’s clothing retailer Talbots by Sycamore Partners, in which Mr.
Owens (working with Mr. Pierce) represented Talbots. That deal was announced in
May 2012. The White & Case spokesman did not provide any examples of more
recent deals.
“In almost any other context, $375,000 would be a lot of money,” said
William Henderson, a professor at the Indiana University School of Law and a
director of the Center on the Global Legal Profession. “But anyone who doesn’t
have clients is in a precarious position. For the last 40 years, all firms had to do
was answer the phone from clients and lease more office space. That run is over.
The forest has been depleted, as we say, and firms are competing for market share.
Law firms are in a period of consolidation and, initially, it’s going to take place at
the service partner level. There’s too much capacity.” He added that law firm
associates and summer associates had also suffered significant cuts, which has
culled the ranks of future partners.
All this “has had a huge effect on law school enrollment,” Professor
Henderson said.
Mr. Clay, the consultant, said many firms had been slow to confront the
reality that successful service partners were probably going to need to work more
hours than rainmakers, not fewer, to justify their mid- to high-six-figure salaries.
Many of them “seem to have felt they had a sinecure,” Mr. Clay said. “They’re well
paid, didn’t have to work too hard, they had a nice office, prestige. It’s a nice life.
That’s O.K., except it’s not the kind of professional life that will do much for a firm.
These nonequity positions were never meant to be a safe place to rest and not
work as hard as everyone else.”
And these lawyers may have to give up the pretense that they’re law firm
partners. In his bankruptcy petition, Mr. Owens describes himself as a “contract
attorney,” which has the virtue of candor.
“From a prestige standpoint, being called a partner is something that’s very
important to people,” Mr. Westfahl observed. “Lawyers tend to be very
competitive, and like all people, titles and status matter. But to the outside world,
where people think all partners are equal, it’s deceptive. And inside the firm,
everyone knows the real pecking order. When people see that partners are treated
disparately, it causes unnecessary dissonance and personal frustration.”
Copyright 2014 The New York Times Company. All rights reserved.
Thursday, January 02, 2014
NYT: Loan Monitor Is Accused of Ruthless Tactics on Student Debt
By NATALIE KITROEFF
Stacy Jorgensen fought her way through pancreatic cancer. But her struggle was just beginning.
Before she became ill, Ms. Jorgensen took out $43,000 in student loans.
As her payments piled up along with medical bills, she took the unusual
step of filing for bankruptcy, requiring legal proof of “undue
hardship.”
The agency charged with monitoring such bankruptcy declarations, a
nonprofit with an exclusive government agreement, argued that Ms.
Jorgensen did not qualify and should pay in full, dismissing her
concerns about the cancer’s return.
“The mere possibility of recurrence is not enough,” a lawyer
representing the agency said. “Survival rates for younger patients tend
to be higher,” another wrote, citing a study presented in court.
There is $1 trillion in federal student debt today, and the possibility
of default on those taxpayer-backed loans poses an acute risk to the
economy’s recovery. Congress, faced with troubling default rates in the
past, has made it especially hard for borrowers to get bankruptcy relief
for student loans, and so only some hundreds try every year. And while
there has been attention to aggressive student debt collectors hired by
the federal government, the organization pursuing Ms. Jorgensen does
something else: it brings legal challenges to those few who are
desperate enough to seek bankruptcy relief.
That organization is the Educational Credit Management Corporation,
which, since its founding in Minnesota nearly two decades ago, has been
the main private entity hired by the Department of Education to fight
student debtors who file for bankruptcy on federal loans.
Founded in 1994, just after the largest agency backstopping federal
student loans collapsed, Educational Credit is now facing concerns that
its tactics have grown ruthless. A review of hundreds of pages of court
documents as well as interviews with consumer advocates, experts and
bankruptcy lawyers suggest that Educational Credit’s pursuit of student
borrowers has veered more than occasionally into dubious terrain. A law
professor and critic of Educational Credit, Rafael Pardo of Emory
University, estimates that the agency oversteps in dozens of cases per
year.
Others have also been highly critical.
A panel of bankruptcy appeal judges in 2012 denounced what it called
Educational Credit’s “waste of judicial resources,” and said that the
agency’s collection activities “constituted an abuse of the bankruptcy
process and defiance of the court’s authority.”
Representative Steve Cohen, a Tennessee Democrat who has introduced a
bill to limit predatory tactics, said, “The government should hold its
agents to the highest standards, and I don’t know that we’ve been doing
that.”
He added that the government has a special responsibility to use “a standard that’s reasonable.”
The case that caused the bankruptcy judges to accuse the agency of abuse
concerned Barbara Hann, who took a particularly drawn-out beating from
Educational Credit. In 2004, when Ms. Hann filed for bankruptcy,
Educational Credit claimed that she owed over $50,000 in outstanding
debt. In a hearing that Educational Credit did not attend, Ms. Hann
provided ample evidence that she had, in fact, already repaid her
student loans in full.
But when her bankruptcy case ended in 2010, Educational Credit began
hounding Ms. Hann anew, and, on behalf of the government, garnished her
Social Security — all to repay a loan that she had long since paid off.
When Ms. Hann took the issue to a New Hampshire court, the judge
sanctioned Educational Credit, citing the lawyers’ “violation of the
Bankruptcy Code’s discharge injunction.”
Educational Credit went on to appeal the sanctions twice, earning a
reprimand from Judge Norman H. Stahl of the United States Court of
Appeals for the First Circuit, who agreed with the bankruptcy judges
that the agency “had abused the bankruptcy process.”
Asked for comment, Educational Credit responded that the case was not
related to undue hardship and that it was based on “complicated issues
of legal procedure.”
Another case dating from 2012 involved Karen Lynn Schaffer, 54, who took
out a loan for her son to attend college. Her husband, Ronney, had a
steady job at the time.
But Mr. Schaffer’s hepatitis C began to flare up, and he was found to
have diabetes and liver cancer. He became bedridden and could no longer
work.
Ms. Schaffer said she did her best to cut expenses. She began charging
her adult son rent, got loan modifications for her mortgages and cut
back on watering the yard and washing clothes to save on utilities. She
woke up at 4 every morning to take care of her husband before leaving
for a full day at a security job.
But Educational Credit said Ms. Schaffer was spending too much on food
by dining out. According to Ms. Schaffer, that was a reference to the
$12 she spent at McDonald’s. She and Mr. Schaffer normally split a
“value meal,” a small sandwich and fries.
“I was taking care of Ron and working a full-time job, so lots of times I
didn’t have time to fix dinner, or I was just too darn tired,” Ms.
Schaffer said in an interview. The lawyers also suggested she should
charge her son for using their car, require him to pay more in rent and
rent out the other room in their house.
Asked for comment, Educational Credit said that Ms. Schaffer “did not
meet the legal standard for undue hardship,” and that she declined an
income-based payment plan. Her lawyer argued that the plan would treat
any forgiven loans as taxable income at the end of the repayment period
so it was not a viable option.
Supporters of the agency’s tactics say they are necessary to hold
borrowers accountable. “For every dollar that the aggressive
debt-collection firm fails to recoup, that’s a dollar that someone else
is going to have to pay,” said G. Marcus Cole, a law professor at
Stanford University.
Professor Cole added that if it were easy to discharge student loans in
bankruptcy, lenders would simply not lend money to students without
clear assets or prospects. “We need a standard like that to be able to
allow students who can’t afford an education to be able to borrow,” he
said.
The Educational Credit Management Corporation is the product of a
scandal that almost brought down the government’s student loan program
two decades ago. In 1990, the Higher Education Assistance Foundation,
the nation’s largest student loan guarantee agency for federal loans,
announced that it had become insolvent, evidence that no one was paying
very close attention to where student loans went, and whether they were
ever paid off.
“The high default rates had a particularly high impact with the press,”
said Frank Holleman, deputy secretary of education at the time.
Lawmakers began arming the Department of Education with a set of
unprecedented collection tools, including the ability to garnish
debtors’ wages and Social Security, and appropriate their tax rebates.
The changes helped cut default rates from a high of 22 percent in 1990 to around 10 percent in the 2011 fiscal year.
But critics of Educational Credit said it had stepped over a line
between legitimate efforts to collect on defaulted loans and legal
harassment.
“We should be outraged when a student-loan creditor like E.C.M.C. can
use bulldog tactics to scare away someone who has a legitimate claim for
relief,” said Professor Pardo, who has analyzed hundreds of adversary
proceedings involving the nonprofit. “Part of the outrage is that
ultimately E.C.M.C. is defending the federal government’s interest.”
Professor Pardo called the agency’s tactics a “war of attrition, death by a thousand cuts.”
Asked to respond, Educational Credit issued a statement saying that its
practices strictly follow federal law and that it strives to avoid
lengthy court proceedings by working with borrowers to help them apply
for income-based repayment plans. When appropriate, it said it “consents
to a discharge as an undue hardship.” It acknowledged that some cases
are “close calls.”
Chris Greene, a spokesman for the Department of Education, said that the
department offers flexible repayment options and believes that
Educational Credit complies with the law and government policies. He
said that if there was evidence of wrongdoing, the department would
investigate.
One of the places where Educational Credit has had the biggest impact
has been to shape the meaning of the phrase “undue hardship,” the
standard required since the 1970s for relief from student debt. In 2009,
for example, the agency persuaded the United States Court of Appeals
for the Eighth Circuit to adopt stricter standards. One argument it made
was that if student borrowers seeking bankruptcy could qualify for a
repayment plan tied to their incomes they were, by definition,
ineligible for relief.
The dissenting judge, Kermit E. Bye, said the decision “improperly
limits the inherent discretion afforded to bankruptcy judges when
evaluating requests” for relief. He also said the new standards
subjected debtors to a higher burden of proof than was actually required
by law.
These and other changes have been regretted by others as well.
“We thought we were doing God’s work,” said David A. Longanecker, a
former Department of Education official, referring to efforts to
strengthen collection. “We didn’t realize the full extent to which our
actions would lead to some activities that would be unfair to
borrowers.”
Copyright 2014 The New York Times Company. All rights reserved.
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