Tuesday, August 25, 2015
Student loan debt and bankruptcy update
Here at Shenwick & Associates, many of our bankruptcy clients (especially younger ones) have outstanding student loans. Although the Bankruptcy Code doesn't contain an express prohibition against discharging student loans in bankruptcy, the bar to doing so is very high. Most (but not all, as we'll discuss below) appellate courts, follow the standard laid out in Brunner v. New York State Higher Education Services Corp. The debtor must show that: (1) he or she cannot maintain, based on current income and expenses, a minimal standard of living for the debtor and dependents if forced to pay off the student loan; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loan; and (3) that he or she has made good faith efforts to repay the loans.
Unfortunately for debtors in New York, Connecticut and Vermont (whose federal courts are under the jurisdiction of the Second Circuit Court of Appeals), the Brunner test remains good law and will do so until either the Second Circuit or the Supreme Court overrules Brunner or Congress amends the Bankruptcy Code. However, in the 28 years since Brunner, the standard has increasingly come under attack. An article in The New York Times last month discussed some of the debtors who have fought to get their loans discharged in bankruptcy and the judges who have dissented from Brunner.
The article focused on two cases from 2013, Krieger v. Educational Credit Management Corp. (In re Krieger) (7th Cir.) and Roth v. Educational Credit Management Corp.(In re Roth) (B.A.P. 9th Cir.). In In re Krieger, the debtor lived in a rural area of Illinois and cared for her elderly mother while unsuccessfully searching for paralegal work for a decade. Despite the slim likelihood the debtor would be able to repay any of her $25,000 student debt, the loan holder argued that she should enroll in an income-based repayment program. In an opinion written by the influential Judge Frank Easterbrook (who was Chief Judge at the time) discharging the debtor's student loan debts, Judge Easterbrook claimed that the Brunner standard was threatening to supersede the "undue hardship" provision of Bankruptcy Code § 523(a)(8) and convert it into a "certainty of hopelessness."
That same month, a similar decision was issued in In re Roth. In this case, the 64 year old debtor had acquired $33,000 of student loan debt (which ballooned to $95,000 in default) acquired years earlier, citing a variety of physical and mental ailments. She successfully discharged her medical debt in bankruptcy, but had to commence an adversary proceeding to prove "undue hardship," copying statutes at a local law library and watching episodes of "Law and Order." The Bankruptcy Appellate Panel held that "failure to negotiate or accept an alternate payment plan is not dispositive" of a finding of good faith. And in a concurring opinion, Judge Pappas pointed out that both § 523(a)(8) and student loan borrowing have changed since 1987, calling Brunner "a relic of times long gone."
Until Brunner is legislatively or judicially overruled, consider some of these student loan debt strategies, and contact Jim Shenwick for an analysis of your student loan and other debts.
Thursday, July 23, 2015
Supreme Court denies the ability of a Chapter 7 debtor to strip away an unsecured second mortgage
In a recent bankruptcy decision, Bank of America v. Caulkett, the Supreme Court denied a chapter 7 debtor's attempt to strip away or discharge an unsecured second mortgage in a chapter 7 bankruptcy filing.
The debtor, Mr. Caulkett, owned a house in Florida. The house was subject to a first mortgage in the amount of $183,264, the house had a fair market value of $98,000 and was subject to a second mortgage in the amount of $47,855, that was held by the Bank of America.
Mr. Caulkett's position was that since the Bank of America second mortgage was "underwater", or totally unsecured, the second mortgage should be stripped away or discharged in the chapter 7 bankruptcy filing like a credit card debt.
The Supreme Court, relying on an earlier decision known as Dewsnup denied the Debtor's claim stating that the outcome in Caulkett was controlled by Dewsnup . Although in a footnote by Justice Thomas, Justice Thomas noted that from its inception Dewsnup has been the target of criticism. Additionally during oral argument one of the Justices asked the Debtor if they were seeking to overturn Dewsnup and counsel for the debtor said no. In the future a debtor may seek to have Dewsnup overturned based on this footnote.
Notwithstanding the Caulkett decision which involved a chapter 7 bankruptcy case, a debtor may still be able to strip off or discharge an unsecured second mortgage or home equity loan in a chapter 13 bankruptcy case. Homeowners whose houses are underwater and subject to a second mortgage, may want to seek a consultation to determine their options with Jim Shenwick.
Monday, July 20, 2015
NY Times: Judges Rebuke Limits on Wiping Out Student Loan Debt
By TARA SIEGEL BERNARD
On a typical day in her last job, Janet Roth left home at 4 a.m. each day and drove 40
miles to a tax preparation office in Glendale, Ariz. When she finally got back home,
she had less than an hour before starting her 6 p.m. shift decorating cakes at
Walmart. She worked until midnight, giving her just a few hours to sleep before
starting all over again.
Ms. Roth, 68, worked in many jobs over the years, but she never made quite
enough to pay back the $33,000 she borrowed years earlier for an education degree
she couldn’t afford to complete, and certainly not the $95,000 it ballooned to in
default.
She filed for bankruptcy, wiping out five figures in medical debts. But erasing
student loans requires initiating a separate legal process, where borrowers must
prove that paying the debt would cause an “undue hardship.”
To prepare her case, she copied down statutes at a local law library and watched
episodes of “Law and Order.” Her efforts paid off: Ms. Roth’s loans were discharged
in 2013.
That Ms. Roth, now living on Social Security, managed to succeed in what is known
as a notoriously difficult process is not even the most remarkable aspect of her case.
Instead, the ruling captured the attention of other judges and legal scholars
because of a judge’s bluntly worded written opinion that rebuked the widely adopted
hardship standard used to determine whether a debtor is worthy of a discharge.
The judge, Jim D. Pappas, in his concurring opinion for the bankruptcy
appellate panel decision in the United States Court of Appeals for the Ninth Circuit,
said the analysis used “to determine the existence of an undue hardship is too
narrow, no longer reflects reality and should be revised.”
He added: “It would seem that in this new, different environment, in
determining whether repayment of a student loan constitutes an undue hardship, a
bankruptcy court should be afforded flexibility to consider all relevant facts about
the debtor and the subject loans.” But the current standard, he wrote, “does not
allow it.”
Judge Pappas isn’t the only critic. Although plenty of cases still hew closely to a
strict interpretation of the test, some judges and courts have signaled in recent years
that they believe the rigid standard — known as the Brunner test — should be
reconsidered, even if they are still bound to it now.
“The world has changed,” said Michael B. Kaplan, a federal bankruptcy judge for
the District of New Jersey, who criticized the standard in an opinion article.
“Certainly, the costs of education and the level of student loan indebtedness has
exploded.”
Because the bankruptcy code never defined “undue hardship,” the courts
needed to develop their own definition. Most courts adopted the Brunner test, which
originated from a precedent-setting ruling in 1987, in which a woman named Marie
Brunner filed for a discharge of her debt less than a year after she completed a
master’s degree.
To stop debtors from trying to prematurely cancel their debts, the case laid out a
three-pronged test: Individuals must prove they made a good-faith effort to pay the
loan by finding work and minimizing their expenses. Debtors must also show they
could not maintain a minimal standard of living based on their income and expenses
if they had to repay the debt.
But then, in arguably the most challenging prong, the court must consider
whether that situation is likely to persist for a significant part of the repayment
period — which essentially requires the judge to predict the debtor’s future, ensuring
what some courts have described as a “certainty of hopelessness.”
“How do you prove things won’t change for the better in the future?” said Daniel
A. Austin, associate professor at Northeastern University School of Law.
Bankruptcy scholars and judges said the test made sense at the time it was
adopted because even if debtors could not pass the test, their debts — which were far
more modest then — would automatically be discharged in bankruptcy five years
after their repayment period started.
But the legal landscape has changed substantially since then. Before 1977,
student loans could be discharged in bankruptcy alongside other debts like credit
card balances. Congress toughened the law in 1976, adding the five-year period, and
again in 1990, when the waiting period was extended to seven years.
In 1998, the waiting period was eliminated. So now, all debtors must prove
undue hardship to erase their student debts. (In 2005, Congress added private
student loans to the mix of federal education debt that could not be discharged, even
though the loans are not backed by the government.)
“You can see why courts would have developed a harsh standard in those cases
where consumers had sought discharge of loans soon after they came due, without
waiting five or seven years,” said John Rao, a lawyer with the National Consumer
Law Center. “But it is kind of ridiculous to be applying the same standard now when
there is no longer a right to an automatic discharge.”
Another noteworthy case, also from 2013, involved a “destitute” paralegal
named Susan Krieger, then about 53, who lived in a rural area of Illinois with her
mother, according to court documents. Ms. Krieger received a bachelor’s degree in
legal studies and a paralegal certificate, graduating when she was 43. But after a
decade-long search, she couldn’t find a job.
The Educational Credit Management Corporation, the guaranty agency hired to
battle student debtors in court, argued that Ms. Krieger should enroll in an
income-based repayment program, even though she probably wouldn’t end up
paying anything. Ms. Krieger’s remaining balance of about $25,000 was eventually
discharged.
But it was the written opinion of a well-regarded judge in the Krieger case,
questioning the application of the Brunner test, that has been repeatedly cited by
other judges. In the ruling, Frank H. Easterbrook, then chief judge for the United
States Court of Appeals for the Seventh Circuit, seemed to signal that requiring
debtors to prove their futures were “hopeless” was taking the undue hardship
standard too far.
He wrote that it was important not to allow “judicial glosses,” like the language
in the Brunner case, “to supersede the statute itself.”
Rafael I. Pardo, a bankruptcy law professor at Emory Law, said Judge
Easterbrook’s opinion was a reminder to other courts that carried a lot of weight. “If
this highly respected, highly cerebral conservative judge is saying this, that is a big
deal,” he added. “It is a clarion call that some judges should be more forgiving when
applying the law.”
Judge Easterbrook and Judge Pappas weren’t the first to criticize the Brunner
standard. That distinction may belong to Judge James B. Haines Jr., who spent 25
years as federal bankruptcy judge in Maine before retiring in 2013. In an opinion in
2000, he said that some courts reach too far in trying to define undue hardship.
He said he never felt shackled by Brunner’s three-prong test because the higher
court in his jurisdiction never adopted that standard, leaving him free to consider
another standard, whereby judges can consider the “totality of the circumstances.”
“Throughout my time on the bench, I heard many student loan cases,” said
Judge Haines, now a professor at Maine University School of Law. “The totality of
the circumstances test gave me sufficient structure, with a fair ability to balance all
pertinent facts.”
Many of those facts have become more dire over the last decade. Among debtors
filing for bankruptcy with student loans, the average amount of student debt has
doubled to nearly $31,000 in 2014 from $15,350 in 2005, according to an analysis by
Professor Austin of Northeastern. But perhaps more important, student loans as a
percentage of the filer’s annual gross income have also increased substantially. In
2014, 16 percent of all bankruptcy filers had student loans that totaled more than 50
percent of their annual income, compared with 5.4 percent in 2005.
This year, President Obama instructed several governmental agencies to review,
by Oct. 1, whether the treatment of student loans in bankruptcy should be altered.
Congress could tweak the bankruptcy code, perhaps reinstating a waiting period
before debts can be canceled. Judge Kaplan, in New Jersey, said perhaps 10 or 15
years was the right number. Otherwise, the existing hardship standard could be
overridden if a circuit court hears a case en banc, meaning all of the judges in a
circuit decide together.
All of those are long shots, for the time being. A larger part of the problem is
that only a tiny percentage of debtors attempt to discharge their student loans in
bankruptcy, perhaps because of the perception that it isn’t possible or is too hard.
But debtors’ best chance at having their student loans wiped away may simply
be to try.
© 2015 The New York Times Company. All rights reserved.
On a typical day in her last job, Janet Roth left home at 4 a.m. each day and drove 40
miles to a tax preparation office in Glendale, Ariz. When she finally got back home,
she had less than an hour before starting her 6 p.m. shift decorating cakes at
Walmart. She worked until midnight, giving her just a few hours to sleep before
starting all over again.
Ms. Roth, 68, worked in many jobs over the years, but she never made quite
enough to pay back the $33,000 she borrowed years earlier for an education degree
she couldn’t afford to complete, and certainly not the $95,000 it ballooned to in
default.
She filed for bankruptcy, wiping out five figures in medical debts. But erasing
student loans requires initiating a separate legal process, where borrowers must
prove that paying the debt would cause an “undue hardship.”
To prepare her case, she copied down statutes at a local law library and watched
episodes of “Law and Order.” Her efforts paid off: Ms. Roth’s loans were discharged
in 2013.
That Ms. Roth, now living on Social Security, managed to succeed in what is known
as a notoriously difficult process is not even the most remarkable aspect of her case.
Instead, the ruling captured the attention of other judges and legal scholars
because of a judge’s bluntly worded written opinion that rebuked the widely adopted
hardship standard used to determine whether a debtor is worthy of a discharge.
The judge, Jim D. Pappas, in his concurring opinion for the bankruptcy
appellate panel decision in the United States Court of Appeals for the Ninth Circuit,
said the analysis used “to determine the existence of an undue hardship is too
narrow, no longer reflects reality and should be revised.”
He added: “It would seem that in this new, different environment, in
determining whether repayment of a student loan constitutes an undue hardship, a
bankruptcy court should be afforded flexibility to consider all relevant facts about
the debtor and the subject loans.” But the current standard, he wrote, “does not
allow it.”
Judge Pappas isn’t the only critic. Although plenty of cases still hew closely to a
strict interpretation of the test, some judges and courts have signaled in recent years
that they believe the rigid standard — known as the Brunner test — should be
reconsidered, even if they are still bound to it now.
“The world has changed,” said Michael B. Kaplan, a federal bankruptcy judge for
the District of New Jersey, who criticized the standard in an opinion article.
“Certainly, the costs of education and the level of student loan indebtedness has
exploded.”
Because the bankruptcy code never defined “undue hardship,” the courts
needed to develop their own definition. Most courts adopted the Brunner test, which
originated from a precedent-setting ruling in 1987, in which a woman named Marie
Brunner filed for a discharge of her debt less than a year after she completed a
master’s degree.
To stop debtors from trying to prematurely cancel their debts, the case laid out a
three-pronged test: Individuals must prove they made a good-faith effort to pay the
loan by finding work and minimizing their expenses. Debtors must also show they
could not maintain a minimal standard of living based on their income and expenses
if they had to repay the debt.
But then, in arguably the most challenging prong, the court must consider
whether that situation is likely to persist for a significant part of the repayment
period — which essentially requires the judge to predict the debtor’s future, ensuring
what some courts have described as a “certainty of hopelessness.”
“How do you prove things won’t change for the better in the future?” said Daniel
A. Austin, associate professor at Northeastern University School of Law.
Bankruptcy scholars and judges said the test made sense at the time it was
adopted because even if debtors could not pass the test, their debts — which were far
more modest then — would automatically be discharged in bankruptcy five years
after their repayment period started.
But the legal landscape has changed substantially since then. Before 1977,
student loans could be discharged in bankruptcy alongside other debts like credit
card balances. Congress toughened the law in 1976, adding the five-year period, and
again in 1990, when the waiting period was extended to seven years.
In 1998, the waiting period was eliminated. So now, all debtors must prove
undue hardship to erase their student debts. (In 2005, Congress added private
student loans to the mix of federal education debt that could not be discharged, even
though the loans are not backed by the government.)
“You can see why courts would have developed a harsh standard in those cases
where consumers had sought discharge of loans soon after they came due, without
waiting five or seven years,” said John Rao, a lawyer with the National Consumer
Law Center. “But it is kind of ridiculous to be applying the same standard now when
there is no longer a right to an automatic discharge.”
Another noteworthy case, also from 2013, involved a “destitute” paralegal
named Susan Krieger, then about 53, who lived in a rural area of Illinois with her
mother, according to court documents. Ms. Krieger received a bachelor’s degree in
legal studies and a paralegal certificate, graduating when she was 43. But after a
decade-long search, she couldn’t find a job.
The Educational Credit Management Corporation, the guaranty agency hired to
battle student debtors in court, argued that Ms. Krieger should enroll in an
income-based repayment program, even though she probably wouldn’t end up
paying anything. Ms. Krieger’s remaining balance of about $25,000 was eventually
discharged.
But it was the written opinion of a well-regarded judge in the Krieger case,
questioning the application of the Brunner test, that has been repeatedly cited by
other judges. In the ruling, Frank H. Easterbrook, then chief judge for the United
States Court of Appeals for the Seventh Circuit, seemed to signal that requiring
debtors to prove their futures were “hopeless” was taking the undue hardship
standard too far.
He wrote that it was important not to allow “judicial glosses,” like the language
in the Brunner case, “to supersede the statute itself.”
Rafael I. Pardo, a bankruptcy law professor at Emory Law, said Judge
Easterbrook’s opinion was a reminder to other courts that carried a lot of weight. “If
this highly respected, highly cerebral conservative judge is saying this, that is a big
deal,” he added. “It is a clarion call that some judges should be more forgiving when
applying the law.”
Judge Easterbrook and Judge Pappas weren’t the first to criticize the Brunner
standard. That distinction may belong to Judge James B. Haines Jr., who spent 25
years as federal bankruptcy judge in Maine before retiring in 2013. In an opinion in
2000, he said that some courts reach too far in trying to define undue hardship.
He said he never felt shackled by Brunner’s three-prong test because the higher
court in his jurisdiction never adopted that standard, leaving him free to consider
another standard, whereby judges can consider the “totality of the circumstances.”
“Throughout my time on the bench, I heard many student loan cases,” said
Judge Haines, now a professor at Maine University School of Law. “The totality of
the circumstances test gave me sufficient structure, with a fair ability to balance all
pertinent facts.”
Many of those facts have become more dire over the last decade. Among debtors
filing for bankruptcy with student loans, the average amount of student debt has
doubled to nearly $31,000 in 2014 from $15,350 in 2005, according to an analysis by
Professor Austin of Northeastern. But perhaps more important, student loans as a
percentage of the filer’s annual gross income have also increased substantially. In
2014, 16 percent of all bankruptcy filers had student loans that totaled more than 50
percent of their annual income, compared with 5.4 percent in 2005.
This year, President Obama instructed several governmental agencies to review,
by Oct. 1, whether the treatment of student loans in bankruptcy should be altered.
Congress could tweak the bankruptcy code, perhaps reinstating a waiting period
before debts can be canceled. Judge Kaplan, in New Jersey, said perhaps 10 or 15
years was the right number. Otherwise, the existing hardship standard could be
overridden if a circuit court hears a case en banc, meaning all of the judges in a
circuit decide together.
All of those are long shots, for the time being. A larger part of the problem is
that only a tiny percentage of debtors attempt to discharge their student loans in
bankruptcy, perhaps because of the perception that it isn’t possible or is too hard.
But debtors’ best chance at having their student loans wiped away may simply
be to try.
© 2015 The New York Times Company. All rights reserved.
Wednesday, May 20, 2015
NY Times: Bank of America and JPMorgan Chase Agree to Erase Debts From Credit Reports After Bankruptcies
By Jessica Silver-Greenberg
Two of the nation’s biggest banks will finally put to rest the zombies of consumer debt — bills that are still alive on credit reports although legally eliminated in bankruptcy — potentially providing relief to more than a million Americans.
Bank of America and JPMorgan Chase have agreed to update borrowers’ credit reports within the next three months to reflect that the debts were extinguished.
The move is a victory for borrowers whose credit reports have been marred as a result of the reported debts, imperiling their job prospects and torpedoing their chances of getting new loans.
The change by the banks emerged this week in Federal Bankruptcy Court in White Plains, where the two banks, along with Citigroup and Synchrony Financial, formerly GE Capital Retail Finance, face lawsuits accusing them of deliberately ignoring bankruptcy discharges to fetch more money when they sell off pools of bad debt to financial firms.
The lawsuits accuse the banks of engineering what amounts to a subtle but ruthless debt collection tactic, effectively holding borrowers’ credit reports hostage, refusing to fix the mistakes unless people pay money for debts that they do not actually owe.
It is not the only pressure. Lawyers with the United States Trustee Program, an arm of the Justice Department, are investigating the banks, said several people briefed on the inquiry, about whether the banks are deliberately flouting federal bankruptcy law.
In an apparent, if oblique, reference to the inquiry, a lawyer for Synchrony Financial told the judge at a hearing this year that the lender was under “investigation” by the Justice Department.
JPMorgan, Synchrony Financial and Bank of America declined to comment for this article.
But the banks have offered defenses in court documents, arguing that they comply with the law and accurately report discharged debts to the credit agencies. Their lawyers have also argued that the banks typically sell off debts to third-party debt buyers and have no stake in recouping payments on the overdue bills. The banks’ practices were the subject of a front-page article in The New York Times.
Without admitting any wrongdoing, lawyers for JPMorgan Chase and Bank of America agreed to ensure that bankruptcies were registered on credit reports. A lawyer for JPMorgan Chase, according to court documents, said that by August the bank would ensure that all debts discharged in Chapter 7 bankruptcy were correctly recorded.
Late last year, Synchrony Financial agreed to provide similar relief, at least on a temporary basis.
Under federal law, once a borrower has erased a debt in bankruptcy, banks are required to update the credit reports to indicate that the debt is no longer owed, and remove any notation of “past due” or “charged off.”
Bank of America promised to go further, agreeing to fundamentally change the way the bank reports all the stale debts that are sold to financial firms. For all credit-card debts sold since May 2007, court records show, the bank will remove any marks on consumers’ credit reports. That way, a lawyer said, “should a previously sold credit card account go through a bankruptcy discharge,” the mark will already be gone.
Together, the decisions could help more than one million Americans.
They are people like Bernadette Gatling, a hospital administrator, who went through bankruptcy to void debts she owed on Chase credit cards. While the process was grueling, she said, she thought it would offer her a second chance.
She was floored in March 2014 when three years after bankruptcy, she found that her credit report was still marred by the seemingly unvanquishable debts.
“I lost job after job because of this,” she said, adding that potential employers would suddenly stop calling once they viewed her credit report.
There has been a fierce battle over the lawsuits, brought by Charles Juntikka, a bankruptcy lawyer in Manhattan, and George F. Carpinello, a partner with Boies, Schiller & Flexner.
Judge Robert D. Drain, who is presiding over the cases, has repeatedly refused the banks’ requests to throw out the lawsuits. In July, when he refused to dismiss the case against JPMorgan, he said, “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.”
At a hearing in April, transcripts show, the judge criticized Citigroup for not changing the way it reports debts to the credit reporting agencies. “I continue to believe there’s one reason, and one reason only, that Citibank refuses to change its policy,” the judge said. The reason, the judge went on, is “because it makes money off of it.”
In a statement, a spokesman for Citigroup said the bank “takes this issue very seriously,” adding that the bank has made a proposal to the plaintiff’s lawyers “consistent” with what the other banks have proposed.
In the hearing this week, lawyers for Citigroup indicated that they were on the brink of making a change similar to what Bank of America and JPMorgan Chase have agreed to, an alteration that could change the credit reports of tens of thousands of people. For many borrowers, the credit report is the difference between getting a job and being turned down.
With so much at stake, borrowers are willing to do almost anything — even pay debts that they worked hard to discharge in bankruptcy.
Diane Torres, who went through bankruptcy in 2010, said she was on the verge of becoming one of the people who paid for debts she no longer owed. The only thing that stopped her, Ms. Torres said, was that she could not afford it.
The problems began, Ms. Torres said, when she applied for a job with a credit union and was told that her credit report showed she had two delinquent accounts — one on a Chase credit card and the other on a credit card from GE Money Bank. Unless she fixed the problem, Ms. Torres said, she would not get the job.
When she contacted both lenders, Ms. Torres said, she was told that unless she paid, the debts would remain as charged off.
“I felt desperate,” she said. “It was urgent that I pay these debts or else I would not get the job that I really needed.” But after, at the suggestion of her bankruptcy lawyer, she provided the credit union with a record that she had voided the debts in bankruptcy, she got the job.
Two of the nation’s biggest banks will finally put to rest the zombies of consumer debt — bills that are still alive on credit reports although legally eliminated in bankruptcy — potentially providing relief to more than a million Americans.
Bank of America and JPMorgan Chase have agreed to update borrowers’ credit reports within the next three months to reflect that the debts were extinguished.
The move is a victory for borrowers whose credit reports have been marred as a result of the reported debts, imperiling their job prospects and torpedoing their chances of getting new loans.
The change by the banks emerged this week in Federal Bankruptcy Court in White Plains, where the two banks, along with Citigroup and Synchrony Financial, formerly GE Capital Retail Finance, face lawsuits accusing them of deliberately ignoring bankruptcy discharges to fetch more money when they sell off pools of bad debt to financial firms.
The lawsuits accuse the banks of engineering what amounts to a subtle but ruthless debt collection tactic, effectively holding borrowers’ credit reports hostage, refusing to fix the mistakes unless people pay money for debts that they do not actually owe.
It is not the only pressure. Lawyers with the United States Trustee Program, an arm of the Justice Department, are investigating the banks, said several people briefed on the inquiry, about whether the banks are deliberately flouting federal bankruptcy law.
In an apparent, if oblique, reference to the inquiry, a lawyer for Synchrony Financial told the judge at a hearing this year that the lender was under “investigation” by the Justice Department.
JPMorgan, Synchrony Financial and Bank of America declined to comment for this article.
But the banks have offered defenses in court documents, arguing that they comply with the law and accurately report discharged debts to the credit agencies. Their lawyers have also argued that the banks typically sell off debts to third-party debt buyers and have no stake in recouping payments on the overdue bills. The banks’ practices were the subject of a front-page article in The New York Times.
Without admitting any wrongdoing, lawyers for JPMorgan Chase and Bank of America agreed to ensure that bankruptcies were registered on credit reports. A lawyer for JPMorgan Chase, according to court documents, said that by August the bank would ensure that all debts discharged in Chapter 7 bankruptcy were correctly recorded.
Late last year, Synchrony Financial agreed to provide similar relief, at least on a temporary basis.
Under federal law, once a borrower has erased a debt in bankruptcy, banks are required to update the credit reports to indicate that the debt is no longer owed, and remove any notation of “past due” or “charged off.”
Bank of America promised to go further, agreeing to fundamentally change the way the bank reports all the stale debts that are sold to financial firms. For all credit-card debts sold since May 2007, court records show, the bank will remove any marks on consumers’ credit reports. That way, a lawyer said, “should a previously sold credit card account go through a bankruptcy discharge,” the mark will already be gone.
Together, the decisions could help more than one million Americans.
They are people like Bernadette Gatling, a hospital administrator, who went through bankruptcy to void debts she owed on Chase credit cards. While the process was grueling, she said, she thought it would offer her a second chance.
She was floored in March 2014 when three years after bankruptcy, she found that her credit report was still marred by the seemingly unvanquishable debts.
“I lost job after job because of this,” she said, adding that potential employers would suddenly stop calling once they viewed her credit report.
There has been a fierce battle over the lawsuits, brought by Charles Juntikka, a bankruptcy lawyer in Manhattan, and George F. Carpinello, a partner with Boies, Schiller & Flexner.
Judge Robert D. Drain, who is presiding over the cases, has repeatedly refused the banks’ requests to throw out the lawsuits. In July, when he refused to dismiss the case against JPMorgan, he said, “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.”
At a hearing in April, transcripts show, the judge criticized Citigroup for not changing the way it reports debts to the credit reporting agencies. “I continue to believe there’s one reason, and one reason only, that Citibank refuses to change its policy,” the judge said. The reason, the judge went on, is “because it makes money off of it.”
In a statement, a spokesman for Citigroup said the bank “takes this issue very seriously,” adding that the bank has made a proposal to the plaintiff’s lawyers “consistent” with what the other banks have proposed.
In the hearing this week, lawyers for Citigroup indicated that they were on the brink of making a change similar to what Bank of America and JPMorgan Chase have agreed to, an alteration that could change the credit reports of tens of thousands of people. For many borrowers, the credit report is the difference between getting a job and being turned down.
With so much at stake, borrowers are willing to do almost anything — even pay debts that they worked hard to discharge in bankruptcy.
Diane Torres, who went through bankruptcy in 2010, said she was on the verge of becoming one of the people who paid for debts she no longer owed. The only thing that stopped her, Ms. Torres said, was that she could not afford it.
The problems began, Ms. Torres said, when she applied for a job with a credit union and was told that her credit report showed she had two delinquent accounts — one on a Chase credit card and the other on a credit card from GE Money Bank. Unless she fixed the problem, Ms. Torres said, she would not get the job.
When she contacted both lenders, Ms. Torres said, she was told that unless she paid, the debts would remain as charged off.
“I felt desperate,” she said. “It was urgent that I pay these debts or else I would not get the job that I really needed.” But after, at the suggestion of her bankruptcy lawyer, she provided the credit union with a record that she had voided the debts in bankruptcy, she got the job.
Associated Press: Study: Bankruptcies soar for senior citizens
By Associated Press
ST. AUGUSTINE, FLA. — First
came the health problems. Then, unable to work, Ada Noda watched the
bills pile up. And then, suffocating in debt, the 80-year-old did
something she never thought she'd be forced to do.
While the bankruptcy filing rate for those under 55 has fallen, it has soared for older Americans, according to a new analysis from the Consumer Bankruptcy Project, which examined a sampling of noncommercial bankruptcies filed between 1991 and 2007.
The older the age group, the worse it got — people 65 and up became more than twice as likely to file during that period, and the filing rate for those 75 and older more than quadrupled.
"Older Americans are hit by a one-two punch of jobs and medical problems and the two are often intertwined," said Elizabeth Warren, a Harvard Law School professor who was one of the authors of the study. "They discover that they must work to keep some form of economic balance and when they can't, they're lost."
That's precisely what happened to Noda. She worked all her life, on a hospital's housekeeping staff, and later selling boat tickets to tourists. She cut corners when she needed to but always paid the bills she neatly logged in a ledger.
"I was born during the Depression," she said. "I paid the bills whether I ate or didn't, whether I went to the doctor or not."
"I'd go to bed and all I had on my mind was bankruptcy," she said. "I had nothing left."
Noda's car was repossessed, but her trailer home wasn't in jeopardy because her daughter owns it. While she's covered by Medicare and receives $968 in Social Security each month, she relied on her job for other expenses. She had no choice but to get help from Jacksonville Legal Aid and declare bankruptcy.
Most bankruptcies are still filed by people far younger than Noda, but the percentage the younger filers make up has fallen over the 16-year period, according to the Consumer Bankruptcy Project analysis, which will be published in the Harvard Law and Policy Review in January.
In 1991, the 55-plus age group accounted for about 8 percent of bankruptcy filers, according to the study, which looked at more than 6,000 cases filed in 1991, 2001 or 2007. By last year, filers 55 and over accounted for 22 percent.
Each age group under 55 saw double-digit percentage drops in their bankruptcy filing rates over the survey period, older Americans saw remarkable increases. The filing rate per thousand people ages 55-64 was up 40 percent; among 65- to 74-year-olds it increased 125 percent; and among the 75-to-84-year-old set, it was up 433 percent.
A number of factors are contributing to the increase. Higher prices for ordinary consumer goods have hit seniors on fixed budgets. For older Americans living below the poverty level, or not far above, a safety net likely doesn't exist for economic setbacks such as medical problems. And some fall prey to scams that cripple their finances.
Warren noted increasing numbers of Americans are entering their retirement years with significant debt and are still paying off mortgages. She said it was wrong to assume that lives of luxury are bankrupting seniors; rather, they're incurring debts to meet needs such as medical treatment.
"There's no evidence that the problem is consumerism," the professor said.
Nor is there a significant aging trend to blame. While the country is set to experience a notable age shift in the coming years, no major one took place between 1991, when the average age was 33, and 2007, when it was 36.
Frank and Hazel Peters lived frugally their entire 53-year marriage. They always rented a home but decided after the husband's retirement from a factory job that they would cash in his 401(k) and buy a manufactured home down a gravel road in tiny Hastings, a town of cornfields and potato farms.
But they fell victim to fraud when they tried to fix a plumbing problem that had black, sulphur-smelling water coming through the pipes of their new home without enough funds to fall back on. They declared bankruptcy.
Bankruptcy, tough no matter a person's age, is especially hard when you don't have many years left to recover. Warren said some seniors fear telling their families because they're afraid they'll be put in a nursing home if they're seen as unable to take care of their affairs.
Many who file also express a sense of relief.
Wilona Harris, 71, filed bankruptcy two years ago because of medical bills she and her husband accrued.
"This phone rang all the time. It made you not even want to pick up. Sometimes you think, 'Let me go jump off a bridge somewhere,'" Harris said at her Jacksonville home. "You have to cry and try and figure out what in the world could I do."
At least now, Harris says, she can fall asleep without crying.
Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
Wednesday, April 29, 2015
Reforming how credit reporting agencies do business
Here at Shenwick & Associates,
many clients seeking our help with bankruptcy and debt relief have
credit issues. Although many of these issues may be related to
nonpayment or late payment of bills, at least part of the blame lies
with the credit reporting agencies (Equifax, Experian and TransUnion),
whose negligent reporting practices in reporting have led to many
consumers receiving credit reports that are riddled with errors. In
addition to our bankruptcy practice, we also offer credit repair
services.
Last month, New York State Attorney General Eric Schneiderman announced a settlement after a three year investigation of the credit reporting agencies that would represent a radical change in the way they do business. Provisions of the settlement include:
Last month, New York State Attorney General Eric Schneiderman announced a settlement after a three year investigation of the credit reporting agencies that would represent a radical change in the way they do business. Provisions of the settlement include:
- Moving away from an automated credit dispute resolution process to using specially trained employees;
- Establishing a six month waiting period before reporting medical debts on a credit report (which are often caused by delayed insurance payments or other disputes);
- Removing medical debts from a credit report after the debt is paid by insurance; and
- Publicizing the availability of free yearly credit reports from each agency through this website. The agencies will also have to provide a free report to consumers who experience a change in their credit reports after initiating a dispute.
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