A New Student Loan Discharge Case allowing the Discharge of $200,000 in Student Loans

 

A New Student Loan Discharge Case allowing the Discharge of $200,000 in Student Loans 

The 10th Circuit U.S. Court of Appeals in McDaniel v. Navient, has issued a ruling allowing the discharge  of  a debtor/borrower’s $200,000 in private student loan debt, in a Chapter 7 bankruptcy case.

An article about the case can be found at https://www.forbes.com/sites/adamminsky/2020/09/02/court-allows-bankruptcy-discharge-of-200000-in-student-loans/#90f402734fd9

In this email, we will review the facts of the case, the ruling and its applicability to individuals filing for bankruptcy in the SDNY and the EDNY.

It is estimated that the amount of student loan debt in the United States is presently $1.5 trillion. 

In McDaniel v. Navient, the U.S. Court of Appeals for the 10th Circuit affirmed a  bankruptcy court’s decision that $200,000 of a Debtor’s private student loan debt could be discharged.

What are private student loans? Monies borrowed from a private bank without a government guaranty, rather than money borrowed from a government agency or subject to a government guaranty.

Generally, to discharge student loan debt, a borrower files for chapter 7 bankruptcy and then commences an “adversary proceeding” (a lawsuit within the context of a bankruptcy case) seeking to discharge the student loans based on a concept known as “undue hardship”. 

The “undue hardship test” resulted from a bankruptcy case involving a debtor named  Brunner and the case held that in order to show undue hardship to discharge a student loan, the debtor would need to show three factors:

1. That if the Debtor were required to repay the student loan, the borrower would not be able to maintain a minimal standard of living?

2. That  the borrowers financial difficulties (that  prevent the borrower  from repaying the student loan)  are expected to continue into the future? and 

3. The borrower  made efforts to repay the   student loan prior to  filing for bankruptcy, but were unable to do so?

While the Brunner Test is  easy  to explain on paper, in practice the cost to commence and pursue this litigation is expensive and many debtor’s with student loan debt do not attempt to discharge their student loans in a chapter 7 bankruptcy filing. 

In the McDaniel case the  Debtor had  $120,000 in private student loans and she said  that Navient would not work with her to create  an affordable repayment schedule. 

Ms. McDaniel’s filed for  bankruptcy (she did not attempt to discharge her student loans) and after her case ended, Navient added additional interest and fees to her balance. She then made a motion to reopen her   bankruptcy case to have the Bankruptcy Court rule as to whether her  private student loans were dischargeable in bankruptcy.

The Bankruptcy Court then ruled that the monies sought to be discharged  were not “an obligation to repay funds received as an educational benefit” because the amount borrowed exceeded the cost of attendance at school. 

As a result the monies were not a student loan and the undue hardship did not apply and the student loans were dischargeable as regular debt in the chapter 7 bankruptcy case.

Navient appealed, and the 10th Circuit Court of Appeals affirmed the lower bankruptcy court’s decision. 

What is the take aware for student loan borrowers in this district?

First, the decision only applies to Colorado, New Mexico, Oklahoma, Utah, and Wyoming (10th Circuit). However, since the decision was from a Court of Appeals, bankruptcy courts in this district may affirm or adopt the Court’s  ruling and reasoning. 

Second,  the ruling may only affect the dischargeability of private student loans, not public student loans and the vast majority of student loans are public.

Third, the ruling may only apply to private student loans that exceed the cost of attendance at a school,  rather than all private student loans.

Fourth, bankruptcy is a court of equity and bankruptcy judges are aware of the amount of student loan debt outstanding and the hardship that it causes borrowers and their families and they are sympathetic to debtor’s attempting to discharge their student loans to get the “fresh start” in bankruptcy. 

Fifth, the Brunner Test dates back to 1987 and its holding and applicability to 2020 have been challenged by many bankruptcy experts. 

Sixth, student loan debtors with the right fact patterns should consider filing for chapter 7 bankruptcy and attempting to discharge their student loans.  Jim Shenwick

 

Court Allows Bankruptcy Discharge Of $200,000 In Student Loans

This article originally appeared at https://www.forbes.com/sites/adamminsky/2020/09/02/court-allows-bankruptcy-discharge-of-200000-in-student-loans/#21bf3dee34fd

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Court Allows Bankruptcy Discharge Of $200,000 In Student Loans

Adam S. Minsky, Esq.


A new ruling by a U.S. appeals court has affirmed the cancellation of a borrower’s $200,000 in private student loans.


In McDaniel v. Navient, the U.S. Court of Appeals for the 10th Circuit affirmed a lower bankruptcy court’s determination that a borrower’s private student loan debt could be discharged in bankruptcy.


The bankruptcy code treats student loan debt differently from most other forms of consumer debt, such as credit cards and medical bills. Borrowers must generally prove that they have an “undue hardship” in order to discharge their student loan debt in bankruptcy. These restrictions initially only applied to federal student loans, but were subsequently expanded to cover private student loans following the passage of a 2005 bankruptcy reform bill.


The “undue hardship” standard applied to student loan debt is not adequately defined in statute, so bankruptcy judges have established various tests (which vary by jurisdiction) to determine discharge eligibility. In order to show that they meet this standard, borrowers must initiate an “adversary proceeding,” which is essentially a lawsuit within the bankruptcy case that is brought against the borrower’s student loan lenders. Through the adversary proceeding, the borrower must present evidence showing that they meet the undue hardship standard, while the student lenders present opposing evidence. The adversary proceeding can be a long and invasive process for borrowers, and can get quite expensive for those who retain a private attorney. Student loan lenders may also have significantly more resources than borrowers, which can give them an edge in the litigation. As a result, many student loan borrowers are unsuccessful in proving undue hardship, and many others don’t even try.


The recent ruling from the 10th Circuit could change this.

The borrower in the case had taken out $120,000 in private student loans. When she became unable to afford the monthly payments, she said that Navient would not work with her to provide an affordable repayment schedule (private student loans are not eligible for federal income-driven repayment plans). She eventually went into bankruptcy. After her bankruptcy ended, Navient added on tens of thousands of dollars in additional interest, leaving her in an even worse position and causing her to pay even more money to Navient. She ultimately then petitioned the bankruptcy court to reopen the bankruptcy case to rule that the private student loans were, or should have been, discharged.


Rather than basing the decision on the undue hardship standard, the bankruptcy court found that the private student loans at issue did not even fall within the “undue hardship” provision of the bankruptcy code in the first place. The bankruptcy court held that the borrower’s private student loans were not “an obligation to repay funds received as an educational benefit” within the meaning of the bankruptcy code because they “were not made solely for the ‘cost of attendance’” at the borrower’s school.


Navient appealed, and the 10th Circuit Court of Appeals affirmed the lower bankruptcy court’s decision. Furthermore, the court rejected Navient’s argument that these private student loans were covered by the discharge exemptions provided by the 2005 reforms to the bankruptcy code.


The ultimate impact of this decision remains to be seen. While the case could set important precedent and be cited in future bankruptcy cases, that precedent would (for the time being, at least) be limited only to the 10th Circuit’s jurisdiction, which includes Colorado, New Mexico, Oklahoma, Utah, and Wyoming. Bankruptcy scholars have also suggested that the ruling may only affect the dischargeability of private student loans that either exceed the cost of attendance at an accredited school or private student loans from non-accredited schools, rather than all private student loans.


Nevertheless, the decision is an important ruling, and serves as a reminder that pursuing a bankruptcy discharge of student loan debt is not a lost cause, despite the many hurdles.

Small-Business Failures Loom as Federal Aid Dries Up

This article first appeared in the New York Times on 9\1\20 at https://www.nytimes.com/2020/09/01/business/economy/small-businesses-coronavirus.html

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Small-Business Failures Loom as Federal Aid Dries Up

Many owners face tough choices after a federal loan program and other government moves to bolster the economy have run their course.


Maurice Brewster’s company shuttled tech workers to and from work in the Bay Area. He has pursued new sources of revenue, but is not sure the operation can survive beyond the end of the year.

Maurice Brewster’s company shuttled tech workers to and from work in the Bay Area. He has pursued new sources of revenue, but is not sure the operation can survive beyond the end of the year.Credit...Jamie Cotten for The New York Times

By Ben Casselman    Sept. 1, 2020


The United States faces a wave of small-business failures this fall if the federal government does not provide a new round of financial assistance — a prospect that economists warn would prolong the recession, slow the recovery and perhaps enduringly reshape the American business landscape.


As the pandemic drags on, it is threatening even well-established businesses that were financially healthy before the crisis. If they shut down or are severely weakened, it could accelerate corporate consolidation and the dominance of the biggest companies.


Tens of thousands of restaurants, bars, retailers and other small businesses have already closed. But many more have survived, buoyed in part by billions of dollars in government assistance to both businesses and their customers.


The Paycheck Protection Program provided hundreds of billions in loans and grants to help businesses retain employees and meet other obligations. Billions more went to the unemployed, in a $600 weekly supplement to state jobless benefits, and to many households, through a $1,200 tax rebate — money available to spend at local stores and restaurants.


Now that aid is largely gone, even as the economic recovery that took hold in the spring is losing momentum. The fall will bring new challenges: Colder weather will curtail outdoor dining and other weather-dependent adaptations that helped businesses hang on in much of the country, and epidemiologists warn that the winter could bring a surge in coronavirus cases.


As a result, many businesses face a stark choice: Do they try to hold on through a winter that could bring new shutdowns and restrictions, with no guarantee that sales will bounce back in the spring? Or do they cut their losses while they have something to salvage?


For the Cheers Replica bar in Faneuil Hall in Boston, the answer was to throw in the towel after nearly two decades in business.


“We just came to the conclusion, if we’re losing that much money in the summertime, what’s the winter going to look like?” said Markus Ripperger, president and chief executive of Hampshire House, the bar’s parent company.


Many businesses that failed in the early weeks of the pandemic were already struggling, had owners nearing retirement or were otherwise likely to shut down in the next couple of years. Those closing down now look different.


Cheers was a longstanding, successful business with access to capital and owners willing to invest to keep it going. But the bar, built to resemble the one on the 1980s sitcom, depended heavily on tourist traffic that collapsed during the pandemic.


The company’s three other restaurants, which include the original Cheers bar on Beacon Hill that was the inspiration for the show, remain in business. But Mr. Ripperger said he was worried about what a winter resurgence of the virus might mean.


The owners of the Cheers Replica bar in Boston, which depended heavily on tourist traffic, have decided to close after nearly two decades in business.

The owners of the Cheers Replica bar in Boston, which depended heavily on tourist traffic, have decided to close after nearly two decades in business.Credit...Kayana Szymczak for The New York Times

“We’re on life support now, and if we have to go through another shutdown or more restrictions, it’s going to be even worse for a lot more restaurants that are just barely scraping by,” he said.


On Friday, the Commerce Department reported that consumer spending rose only modestly in July after two months of resurgence and remained below pre-pandemic levels. Economists warn that without the $600 a week in extra unemployment insurance, spending is likely to slow further this fall.


Data from Homebase, which provides time-management software to small businesses, shows that roughly 20 percent of businesses that were open in January are closed either temporarily or permanently. The number of hours worked — a rough proxy for revenues — is down by even more during what should be the year’s busiest period. Both figures have stalled or turned down in recent weeks.


Small businesses have grown more pessimistic as the pandemic has dragged on. In late April, about a third of small businesses surveyed by the Census Bureau said they expected it to take more than six months for business to return to normal. Four months later, nearly half say so, and a further 7.5 percent say they do not expect business ever to bounce back fully. About 5 percent say they expect to close permanently in the next six months.


The ultimate damage could be much greater. In a recent survey by the National Federation of Independent Businesses, a small-business lobbying group, 21 percent of small businesses said they would have to close if conditions did not improve in the next six months. Other private-sector surveys have found similar results.


Widespread business failures could cause lasting economic damage. Nearly half of American employees work for businesses with staffs under 500, meaning millions of jobs are at stake. And while new businesses would inevitably spring up to replace those that close, that process will take far longer than simply reopening existing businesses.


“The consequences to allowing a tidal wave of closures is we will make every aspect of the recovery harder,” said John Lettieri, president and chief executive of the Economic Innovation Group, a Washington research organization.

There could also be longer-run implications. Despite high-profile bankruptcies in the retail industry and other sectors, many large corporations have been able to solidify their position during the pandemic: demanding concessions from landlords, borrowing billions of dollars at low interest rates and leveraging sophisticated supply chains and distribution systems to reach suddenly homebound customers. Small businesses, which usually have less access to credit and rely more heavily on foot traffic, have been struggling to survive.


“I can survive because I’m betting on another stimulus package,” said Candace Combs, who runs the In-Symmetry Spa in San Francisco with her brother. “But without that, we start to really teeter.

The challenge has been particularly acute for Black-owned businesses, which were more than twice as likely to close down in the early months of the pandemic than small businesses over all, according to research from the Federal Reserve Bank of New York. Black-owned businesses were more likely to be in areas hit hard by the virus, had less of a financial cushion and were less likely to have established banking relationships, which put them at a disadvantage in seeking loans under the emergency Paycheck Protection Program in the critical first weeks that the aid was available.


By the time they got access to the federal money, “many Black-owned businesses were already out of business,” said Ron Busby, president and chief executive of the U.S. Black Chambers. “We just couldn’t make it that long.”


Maurice Brewster is hanging on. He runs Mosaic Global Transportation, a California company that was growing quickly before the pandemic running the private buses that shuttled tech workers between their San Francisco homes and their suburban office campuses.


Those campuses have been all but empty since March, and many companies aren’t planning to bring workers back until next year. Other parts of Mr. Brewster’s business — providing transportation for conventions, wine tours and other events — are also suffering.


To survive, Mr. Brewster, who is Black, has slashed costs and sought new lines of business, including delivering packages for Amazon — “anything to get the vehicles moving and get some revenue coming in the door,” he said.


Mr. Brewster says he is confident he can make it through the end of the year. After that, he doesn’t know.


“You just can’t go a year unless you have just an endless pool of money to sustain you until March or April of 2021,” he said. “A lot of us are going to go out of business.”


Economists say there is time to limit the damage. Despite a rocky start, the Paycheck Protection Program eventually paid out more than half a trillion dollars in loans and probably saved many businesses from failure, according to research from economists at the University of Illinois and Harvard. But the program lapsed in August, and if Congress doesn’t move soon to replace it, the earlier effort could end up delaying failures rather than preventing them.


Many experts still expect Democratic and Republican leaders to reach a deal on an aid package that includes support for small businesses, but a new, large-scale program seems increasingly unlikely.


“Why didn’t we use the time that P.P.P. bought us to design the kind of program that would be commensurate with the national challenge that we’re facing?” Mr. Lettieri, of the Economic Innovation Group, asked. “That’s all P.P.P. was. It was a mechanism to buy time. It was never the long-term solution.”


A paycheck protection loan helped keep In-Symmetry Spa afloat early in the pandemic. But the money is long gone, and the San Francisco spa hasn’t been allowed to reopen. Nearby storefronts are boarded up, and Candace Combs, who has run the spa with her brother for two decades, said she doubted that many of those businesses were coming back.


“I can survive because I’m betting on another stimulus package,” Ms. Combs said. “But without that, we start to really teeter.”