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.

NYT: Disabled Borrowers Trade Loan Debt for a Tax Bill From the I.R.S.

By Tara Siegel Bernard

Six months after his wife learned that she had a rare vascular disease of the brain,
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.

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.

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.

Santiago-Monteverde v. Pereira

As many readers of our Cooler e-mails and blog posts are aware, one of the hottest current topics in personal bankruptcy is the treatment of rent–stabilized leases in Chapter 7 personal bankruptcy cases. Earlier this month, the New York Times had an excellent front page article entitled “Widow's Bankruptcy Case Poses Risk to Rent-Stabilized Tenants.” The case is captioned Santiago-Monteverede v. Pereira and involves 79 year old Mrs. Mary Veronica Santiago-Monteverede, who has lived in a two bedroom rent stabilized apartment in the East Village for 50 years and is paying monthly rent of $703, while the market rate for the unit would be $2,000 to $2,500 per month.

Ms. Santiago-Monteverede filed Chapter 7 bankruptcy to discharge $23,000 of debt, none of which was owed to her landlord. Her landlord made an offer to purchase her lease from Chapter 7 Bankruptcy Trustee John S. Pereira, which he accepted.  The sale of the lease was subsequently challenged by Ms. Santiago-Monteverde’s attorneys.  The U.S. Bankruptcy Court for the Southern District of New York and the U.S. District Court for the Southern District of New York both ruled in favor of the Bankruptcy Trustee, and the case is now pending before the 2nd Circuit Court of Appeals, where oral arguments were held on September 23^rd.

This is the first Chapter 7 personal bankruptcy rent–stabilized case to reach the 2nd Circuit Court of Appeals. Please keep monitoring our Cooler e-mails and blog, and when the 2nd Circuit Court of Appeals issues a decision and order, we will report on it. Again, debtors who live in apartments with rent–stabilized leases need to proceed with extreme caution in deciding whether to file for bankruptcy. Jim

NYT: Widow’s Bankruptcy Case Poses Risk to Rent-Stabilized Tenants

By MIREYA NAVARRO

After her husband died, Mary Veronica Santiago fell behind on her bills, and the creditors began to call.

So two years ago, she took refuge in bankruptcy, hoping to have her debts wiped away. But far from providing a fresh start and peace of mind, the Chapter 7 filing thrust Mrs. Santiago, 79, who lives in the East Village, into the center of a case that bankruptcy lawyers say poses a major risk to her and the millions of other New Yorkers who live in rent-stabilized apartments.

The issue, pending before the United States Court of Appeals for the Second Circuit, is whether a rent-stabilized lease can be treated as an asset in a personal bankruptcy, just like a car or a piece of land, and used to pay off creditors.

The trustee overseeing Mrs. Santiago’s bankruptcy thinks so. If that position is upheld, bankruptcy lawyers who are closely monitoring the case say it would make it easier for landlords to evict rent-stabilized tenants if they file for bankruptcy, even when, like Mrs. Santiago, they pay their rent. At a time when housing affordability and income inequality have been driving the debate in the mayoral race, the bankruptcy case could add another element of uncertainty to New York City’s efforts to preserve housing for people with low incomes.

Mrs. Santiago has lived for 50 years in a two-bedroom apartment near Tompkins Square Park, in a neighborhood where unregulated apartments rent for thousands more a month than Mrs. Santiago’s rent of $703. Her main income is a Social Security check and, under normal bankruptcy proceedings, her lawyers said, she would have avoided repaying the $23,000 she owes because she had no assets.

“I got scared,” she said, noting that her creditors “threatened that they were going to take me to court.”

But as her case was nearing conclusion, her landlord stepped in with an offer to buy her rent-stabilized lease and produce the funds to pay off her debt. (Mrs. Santiago’s landlord is not among her creditors, but he was notified of the bankruptcy as a matter of course.) The bankruptcy trustee in charge of marshaling her assets accepted the offer, and that decision, challenged by Mrs. Santiago’s lawyers, has been upheld by both a bankruptcy court and a Federal District Court.

In New York City, there were 11,500 individual bankruptcy filings in the 12 months ending June 30, federal bankruptcy court figures show. How many of them involved people with rent-stabilized leases is not tracked by the court.

Rent stabilization laws, a defining element of New York real estate for decades, limit rent increases and allow automatic lease renewals and even survivor’s rights to tenants. In recent years, rent-stabilized leases have been deemed assets in some bankruptcy proceedings.

Now, for the first time, a federal appeals court is being asked to weigh in. The widow’s lawyers argue that a rent-stabilized lease is a public assistance benefit, just like Social Security or disability payments, and should be exempt from the bankruptcy estate. Treating it like an asset, the lawyers said in court documents, undermines the intent of rent-stabilization laws in New York designed to protect tenants deemed in need of assistance with housing.

“This is not what bankruptcy is about,” said Kathleen G. Cully, one of Mrs. Santiago two pro bono lawyers. “What’s next? Are they going to start going after food stamps?”

The case, Mary Veronica Santiago-Monteverde v. John S. Pereira, has drawn the interest of bankruptcy experts and legal aid lawyers who see it as a threat to the housing stability of many low-income New Yorkers. Mrs. Santiago’s case was argued before the appeals court last month by Ronald J. Mann, a law professor at Columbia University and a bankruptcy specialist who has argued cases before the United States Supreme Court.

New York’s unique rent laws and expensive real estate market make a rent-stabilized lease particularly prized. In New York City, 44 percent of the rental units are rent-stabilized and an additional 2 percent are governed by the more restrictive rent-control regulations, according to figures from the Furman Center for Real Estate and Urban Policy at New York University. At least 2.2 million people live in more than a million rent-regulated units in the city, the center said.

Legal aid lawyers who are also watching the Santiago case say the rent laws are essential to help maintain affordable housing in the city — the median income for rent-stabilized tenants is $37,000, compared with $52,260 for market-rate tenants, figures from the city’s Housing and Vacancy Survey show. Some bankruptcy lawyers say they are advising clients with rent-stabilized leases not to file for Chapter 7 bankruptcy or risk being left homeless.

“It’s an unfair money-grab,” said David B. Shaev, the New York state chairman of the National Association of Consumer Bankruptcy Attorneys. “To remove this foundation, this safety net, it’s unconscionable.”

The trustee in Mrs. Santiago’s case, Mr. Pereira, has an obligation to marshal all assets to get her debt paid, said his lawyer, J. David Dantzler Jr. (The trustees, who are not government employees, receive a commission on the assets they are able to gather.) He said that New York law did not intend for leases to be exempt from bankruptcy estates and that any change to that effect should be left up to the state’s lawmakers.

“This is about a fear of what could happen in the future to other tenants in rent-stabilization apartments,” he said. “Our view is that that’s a question for the New York Legislature, not the courts.”

But no one should think that bankruptcy is a painless process, he said. “If you file for bankruptcy, there are consequences.”

The trustee in Mrs. Santiago’s case has proposed an arrangement in which the landlord would pay her debt, pay the trustee and his lawyer, and allow Mrs. Santiago to live out her years in her apartment at a similar rent under a non-rent-stabilized lease “with no succession rights” that could otherwise have allowed her to pass the apartment on to her 50-year-old son, a personal trainer who lives with her and helps support her.

Her lawyers opposed the proposal.

In the realm of consumer bankruptcies, Mrs. Santiago’s is small. She owes mostly credit card companies, she said in an interview. But after her husband, Hector Santiago, died in 2011 she could not keep up with the payments.

The couple moved into their ground-floor apartment in a five-story brick building on East Seventh Street in 1963. Mr. Santiago was the superintendent of their building and of several others in the neighborhood.

The landlord is a limited-liability company whose owner, James V. Guarino, referred questions to his lawyer. The lawyer, Lawrence M. Gottlieb, said in an e-mail that the company “has no intentions of selling the lease or dispossessing Ms. Santiago or renting out the unit for market rent.”

At home, in the cluttered apartment where her family has celebrated weddings, birthdays and holidays, and where her ill husband died at age 80, Mrs. Santiago said she regretted filing for bankruptcy. Her lawyers have reassured her that she has a good chance of prevailing, but first thing every morning, Mrs. Santiago said, she checks her front door for an eviction notice.

“I’m afraid to find a white paper on my door,” she said with her head down, tearing up as she tugged at the edges of her plastic-covered chair.

Copyright 2013 The New York Times Company.  All rights reserved.

NYT: Patients Mired in Costly Credit From Doctors

By JESSICA SILVER-GREENBERG

The dentist set to work, tapping and probing, then put down his tools and delivered the news. His patient, Patricia Gannon, needed a partial denture. The cost: more than $5,700.

Ms. Gannon, 78, was staggered. She said she could not afford it. And her insurance would pay only a small portion. But she was barely out of the chair, her mouth still sore, when her dentist’s office held out a solution: a special line of credit to help cover her bill. Before she knew it, Ms. Gannon recalled, the office manager was taking down her financial details.

But what seemed like the perfect answer — seemed, in fact, like just what the doctor ordered — has turned into a quagmire. Her new loan ensured that the dentist, Dr. Dan A. Knellinger, would be paid in full upfront. But for Ms. Gannon, the price was steep: an annual interest rate of about 23 percent, with a 33 percent penalty rate kicking in if she missed a payment.

She said that Dr. Knellinger’s office subsequently suggested another form of financing, a medical credit card, to pay for more work. Now, her minimum monthly dental bill, roughly $214 all told, is eating up a third of her Social Security check. If she is late, she faces a penalty of about $50.

“I am worried that I will be paying for this until I die,” says Ms. Gannon, who lives in Dunedin, Fla. Dr. Knellinger, who works out of Palm Harbor, Fla., did not respond to requests for comment.

In dentists’ and doctors’ offices, hearing aid centers and pain clinics, American health care is forging a lucrative alliance with American finance. A growing number of health care professionals are urging patients to pay for treatment not covered by their insurance plans with credit cards and lines of credit that can be arranged quickly in the provider’s office. The cards and loans, which were first marketed about a decade ago for cosmetic surgery and other elective procedures, are now proliferating among older Americans, who often face large out-of-pocket expenses for basic care that is not covered by Medicare or private insurance.

The American Medical Association and the American Dental Association have no formal policy on the cards, but some practitioners refuse to use them, saying they threaten to exploit the traditional relationship between provider and patient. Doctors, dentists and others have a financial incentive to recommend the financing because it encourages patients to opt for procedures and products that they might otherwise forgo because they are not covered by insurance. It also ensures that providers are paid upfront — a fact that financial services companies promote in marketing material to providers.

One of the financing companies, iCare Financial of Atlanta, which offers financing plans through providers’ offices, asks providers on its Web site: “How much money are you losing everyday by not offering iCare to your patients?” Over the last three years, the company’s enrollment has grown 320 percent. Another company posted a video online that shows patients suddenly vanishing outside a medical office because they cannot afford treatment. The company offers a financing plan as a remedy, with the scene on the video shifting to a smiling doctor with dollar signs headed toward him.

A review by The New York Times of dozens of customer contracts for medical cards and lines of credit, as well as of hundreds of court filings in connection with civil lawsuits brought by state authorities and others, shows how perilous such financial arrangements can be for patients — and how advantageous they can be for health care providers.

Many of these cards initially charge no interest for a promotional period, typically six to 18 months, an attractive feature for people worried about whether they can afford care. But if the debt is not paid in full when that time is up, costly rates — usually 25 to 30 percent — kick in, the review by The Times found. If payments are late, patients face additional fees and, in most cases, their rates increase automatically. The higher rates are often retroactive, meaning that they are applied to patients’ original balances, rather than to the amount they still owe.

For patients, the financial consequences can be dire.

Ms. Gannon said she was happy with her dental care, despite the cost, and there was no suggestion that Dr. Knellinger had done anything wrong. But attorneys general in a several states have filed lawsuits claiming that other dentists and professionals have misled patients about the financial terms of the cards, employed high-pressure sales tactics, overcharged for treatments and billed for unauthorized work.

The New York attorney general’s office found that health care providers had pressured patients into getting credit cards from one company, CareCredit, a unit of General Electric, which gave some providers discounts based on the volume of transactions. Patients, the investigation found, were misled about the terms of the credit cards, and in some instances, duped into believing that they were agreeing to a payment plan with dental offices when, in fact, they were being pushed into high-cost credit.

In June, CareCredit reached a pact with Eric T. Schneiderman, the New York attorney general, to improve protections for consumers, and a spokeswoman said the company “does not incentivize providers to have patients open accounts” or give referral fees to providers.

In Ohio, the attorney general has sued the operators of several hearing aid clinics, claiming that they misled customers about using medical credit cards to pay for batteries and warranties.

Cameron P. Kmet, a chiropractor in Anchorage, Alaska, said he had stopped offering medical cards. “One missed payment can really ruin a patient’s life,” he said. Mr. Kmet now runs a company that administers payment plans directly between providers and patients, with annual interest rates around 8 percent.

Regarding medical credit cards, Mr. Kmet said he had urged providers to ask themselves “whether this is something that you would recommend to a family member or friend.” The answer, he said, is usually no.

While medical credit cards resemble other credit cards, there is a critical difference: they are usually marketed by caregivers to patients, often at vulnerable times, such as when those patients are in pain or when their providers have recommended care they cannot readily afford. In addition to G.E., large banks like Wells Fargo and Citibank, as well as several specialized financial services companies, offer credit through practitioners’ offices.

The growth of this form of consumer credit is difficult to quantify because data on medical credit cards specifically, as opposed to credit cards generally, is unavailable. But credit cards of all types are playing a growing role in financing medical care. In 2010, people in the United States charged about $45 billion in health care costs on credit cards, according to the consulting firm McKinsey & Company.

“When the economy got worse, our business got better,” said Katie Kessing, an iCare spokeswoman. 

In 2010, a little more than a thousand dentists offered the iCare finance plan — a program that requires patients to pay 30 percent down as well as a fee of 15 percent of the total procedure cost. The number of participating providers has since risen to 4,200. Russell A. Salton, the chief executive of Access One MedCard, a credit card company in Charlotte, N.C., said demand for specialized cards — the MedCard has an annual interest rate of 9.25 percent — is driven by providers interested in removing an “obstacle to providing valuable care.” The company says the number of hospitals offering its credit cards has grown about 25 percent a year in recent years.

While neither national medical or dental associations have formal policies, ADA Business Enterprises, a profit-making arm of the American Dental Association that connects dentists and businesses, endorses G.E.’s CareCredit, whose cards are used by more than seven million people nationwide.

“Cardholders tell us they like using CareCredit because it gives them the ability to plan, budget and pay for certain elective health care procedures over time,” said Cristy Williams, the spokeswoman for CareCredit. She said the company had improved consumer protections, going so far as to telephone “senior cardholders with significant first transactions to confirm their understanding of the program and terms.”

She said roughly 80 percent of patients who opted for the deferred interest paid off their debts before they were charged any interest. She and others in the industry said the credit cards and credit lines had helped patients afford otherwise prohibitively expensive care not paid for at all, or in its entirety, by insurance providers.

But state authorities and care advocates in California, Florida, Illinois, Michigan and elsewhere say that older people — many of them grappling with dwindling savings and mounting debt — are running into trouble with medical credit cards and loans.

“The cards prey on seniors’ trust,” said Lisa Landau, who heads the health care unit at the New York attorney general’s office.

Minnesota’s attorney general, Lori Swanson, is investigating the use of medical credit cards, which she said could come with “hidden tripwires and other perils.”

Interviews with patients, along with the review of contracts and lawsuits, show just how significant those perils can be.

Carl Dorsey, 74, recalled his experience at Aspen Dental Management, a nationwide chain that has come under scrutiny for its practices. Mr. Dorsey said that after a dentist at Aspen’s office in Seekonk, Mass., told him that he needed dentures, at a cost of $2,634, he was urged to take out a medical credit card. He was charged the full cost upfront, financial statements reviewed by The Times show. Mr. Dorsey, who made about $800 a month working as a used-car salesman, in addition to receiving Social Security, has since fallen behind on his payments. The lapse set off a penalty interest rate of nearly 30 percent. Mr. Dorsey said he was being pursued by debt collectors.

“This whole ordeal has been devastating,” said Mr. Dorsey, who along with other patients is part of a civil lawsuit filed against Aspen in a federal court in upstate New York. He said he still needed dentures, noting that the ones he received from Aspen were unusable.

Diane Koi-Thompson said that her father, Harold Koi-Than, did not realize that he had signed up for a CareCredit card during a dental visit. She said Mr. Koi-Than, 82, was shocked when a company representative called his home near Niagara Falls, N.Y., saying he had missed a payment. “My dad had no idea he had a credit card, let alone that he was behind on it,” Ms. Koi-Thompson said. She said her father was upset because he is normally meticulous with his finances and thought his memory was failing. Mr. Koi-Than, through a family member, was able to cancel the credit card.

The industry’s growth is being driven by people seeking dental care and devices like hearing aids, which are not covered by Medicare.

Dental care is a large and expensive gulf, according to Tricia Neuman, the director of Medicare policy research at the Kaiser Family Foundation. The new federal health care law, she said, will not change that. “Lack of dental coverage remains a huge concern and expense,” Ms. Neuman said.

Working with care providers, financial services companies have rushed to fill the void. To make medical cards attractive, some companies offer them without checking patients’ credit histories. The cards can be arranged in minutes, with no upfront charges. Such features are attractive selling points.

“Your patient does not require good credit,” First Health Funding of Salt Lake City, Utah says on its Web site. On the site of another lender, the words “No Credit Check” flash in bright letters. First Health Funding did not respond to requests for comment.

Lawyers and others who assist patients say such features make it easy for people who are already on a weak financial footing to take on new debt.

“Ultimately, this credit facilitates a bad financial decision that will haunt a patient because it adds to indebtedness,” said Ellen Cheek, who runs a legal help line for older people through Bay Area Legal Services in Tampa, Fla.

Such critics also say that because there are no industrywide standards for pricing care — costs vary from practice to practice — the cards could encourage providers to charge more for treatment.

Brian Cohen, the lawyer representing Mr. Dorsey, said the cards enabled providers to “bill whatever they want for care, regardless of whether the cost is reasonable.”

State authorities say health care finance in general, and medical credit cards in particular, are a growing worry. In 2010, Aspen Dental, the chain where Mr. Dorsey signed up for a card, reached a settlement with Pennsylvania authorities over claims that, among other things, it had failed to tell patients that missing a payment would mean the rate would rocket from zero to nearly 30 percent. A review of court records and online forums shows hundreds of customer complaints against Aspen, which is based in Syracuse. A civil case brought on behalf of customers is pending in a federal court in upstate New York.

Kasey Pickett, a spokeswoman for Aspen, which is fighting the lawsuit, said the accusations were “entirely without merit.”

Aspen provides mandatory training for office employees who discuss financing with patients, according to Ms. Pickett. “We know that for many patients,” she said, “the availability of third-party financing may be the only way that they are able to afford the care they need.”

 

Copyright 2013 The New York Times Company.  All rights reserved.