Preference Law Changes under Subsection 547(j) of the Bankruptcy Code

A Bankruptcy Trustee may not recover payments made to a landlord concerning commercial rent arrears or to a supplier, on or after March 13, 2020, resulting from workouts before the bankruptcy filing,  under new Section 547(j) of the Bankruptcy Code.  

These changes were made pursuant to the Consolidated Appropriations Act of 2021. 

Congress made these changes to the bankruptcy code in an effort to encourage commercial landlords and suppliers to engage in workouts with tenants and customers due to the pandemic, by mandating that these payments would not be deemed preferential, if they were made after March 13, 2020. 

The new law will remain in effect for two years, ending on December 27, 2022. 

These changes to the law will prevent Chapter 7 bankruptcy trustees from commencing preference actions against commercial tenants or suppliers that meet the above requirements of the law.

My Law Firm has been involved in many workouts where our clients have raised the issue of whether accommodations given to debtor(s) can be recovered by bankruptcy trustees if those debtors later file for Chapter 7 bankruptcy. 

Although the bankruptcy code did provide defenses before the law change, such as the ordinary course of business and/or the new value exception to a preference, these law changes now provide certainty against preference actions in these types of workouts.

If you have questions regarding preference actions, you should contact Jim Shenwick at (212) 541-6224 or jshenwick@gmail.com to discuss the facts or strategies involved in those cases. 

 

 

Drivers Sue Over Sky-High NYC Taxi License Costs

This article was first reported at Courthousenews. The url is https://www.courthousenews.com/drivers-sue-over-sky-high-nyc-taxi-license-costs/

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BROOKLYN (CN) — Taxi cab drivers are seeking more than $2.5 billion from the New York City Taxi & Limousine Commission, saying they paid artificially inflated prices for their taxi medallions, collectively losing hundreds of millions as a result.




The class action RICO suit, filed Tuesday in the Eastern District of New York, accuses the TLC of running a 13-year scheme to defraud those who bought medallions, which are the metal plates required for taxi drivers to work legitimately.




New York City made $855 million from auctioning off medallions and charging a 5% transfer tax on each transaction, the 105-page complaint says.




Because of the scheme, prices rose drastically under former New York City Mayor Michael Bloomberg, a named defendant in the suit. Between 2004 and 2014, costs jumped from $200,000 in 2001 to more than $1 million in early 2014.




The sky-high prices, drivers were reassured, were worthwhile. Commission representatives told them that the medallions were as “good as gold,” the suit claims, and that the purchase was secure because TLC has a “monopoly” over taxis in New York.




The first named plaintiff, Alec Soybel, says that TLC Chief Executive Officer Matthew Daus had told him that buying a medallion was a “once-in-a-lifetime opportunity” to become a middle-class American and enjoy a “worry-free retirement.”




“Daus further stated that purchasing a medallion was ‘what the American dream is all about,’” the suit says.




The suit further alleges that TLC was aware that inflated prices were plunging drivers underwater.




According to the suit, an internal 2010 report by a TLC policy analyst found that medallion owners were barely earning enough to pay for their medallion loans and operating costs.




The report estimated that a driver would have to earn more than $91,000 annually to service a 15-year mortgage on the badge, plus costs.




“Thus, by 2010, it was already clear that medallions were grossly inflated, and that medallion loans at such inflated prices were unsustainable,” the complaint reads. But TLC did not release that report publicly until June 2019.




Now, drivers say they are at a loss. Soybel is “saddled with a suffocating debt that he has no way of ever paying off,” according to the complaint.




Last year, New York Attorney General Letitia James launched an investigation of the TLC, accusing the commission of charging inflated prices and forcing drivers who bought them to clock obscene hours to make ends meet.




“What’s worse is that the TLC knew their actions were affecting some of the city’s most financially exposed immigrant families,” the attorney general said at the time.




James dropped the matter in February of this year, saying that a lawsuit could take years, and that a bailout for the drivers would be a better option. State legislators have also discussed a potential bailout. The drivers are picking up where she left off.




“Our lawsuit seeks to finish the job that AG James started,” said Jon Norinsberg, attorney for the taxi drivers, in an email to Courthouse News.




Norinsberg said the attorney general “did a great job exposing the fraudulent and deceptive practices engaged in by the TLC and City of New York,” and that the plaintiffs’ own investigation confirmed and expanded upon those findings.




“We are seeking to recover full restitution for all medallion owners, many of whom owe hundreds of thousands of dollars because of TLC’s fraudulent scheme,” Norinsberg said, “which directly led to the collapse of the medallion market.”




Neither the TLC nor New York City’s legal department immediately responded to requests for comment on Tuesday afternoon.

The Bankruptcy Chapter 11 Subchapter V debt limit of $7,500,000 has been extended for 1 more year to March 2022

The Bankruptcy Chapter 11 Subchapter V debt limit of $7,500,000 has been extended for 1 more year to March 2022. The House passed a bill, which was signed by President Biden this week. Any clients, attorneys or accountants who have questions about Subchapter V Bankruptcy should contact Jim Shenwick 212 541 6224  jshenwick@gmail.com

Client Feedback regarding services provided by Shenwick & Associates in a Chapter 7 Bankruptcy Filing March 19, 2021

" Thank you so much.

What a journey.

It was a pleasure to have you as my attorney!!

Thank you thank you thank you.

 Best,

 Susan"

Subchapter V Chapter 11 Debt Limit of $7,500,000 extend for 1 more year to March 27, 2022 Based on House Vote-read post below

In accordance with a bill recently passed by the House, the Chapter 11, Subchapter V Debt Increase from $2,700,00 to $7,500,000 has been extended for another year to March 27, 2022. It was scheduled to expire on March 27, 2021.
Now, the bill heads to the Senate where it is expected to pass.
If you have any questions regarding Subchapter v please contact Jim Shenwick 212 541 6224 jshenwick@gmail.com

A Simple Guide To How NYC Is Screwing Up Giving Debt Forgiveness To Taxi Drivers Jalopnik

This article originally appeared in Jalopnik. A link to the article is below.

https://jalopnik.com/a-simple-guide-to-how-nyc-is-screwing-up-giving-debt-fo-1846478059

A Simple Guide To How NYC Is Screwing Up Giving Debt Forgiveness To Taxi Drivers

Raphael Orlove

The New York City government has set aside $65 million of federal stimulus money to fix the debt crisis among taxi drivers after days, weeks, months of yellow cab protests shutting down bridges and highways. Instead of giving money to the drivers in need, it’s bailing out rich lenders instead, including a big hedge fund in Connecticut.

This is meant to be a simple explainer so I will not attempt to understand or make sense of the city’s decision to bail out lenders not drivers. I can only lay out the dramas involved.

Taxi Drivers Are In Debt, And The City Is Responsible

Here in New York, you don’t just paint your car yellow and start picking people up off the street. You need a special taxi medallion for your car to be a taxi and pick up hails, and the city limits the number of medallions out there. As you can imagine, with limited supply and strong demand, the value of a medallion could rise. As Uber and Lyft have completely reshaped the taxi landscape here in the city, that value plummeted, and yellow cab drivers are now underwater, struggling to pay off loans on medallions now worth a fraction of what they started as.

Over the past two decades, the city not only watched as these prices skyrocketed, but encouraged it. To put some figures on that, medallion prices shot up 455 percent from 2001 to 2014 (the last city auction for medallions), as the New York Times reported, only to quickly drop again. That meant medallions “went from $200,000 in 2002 to over $1 million in 2014, then crashed to less than $200,000 soon after,” as City and State NY put it.

Under both the Bloomberg and De Blasio administrations, the city made $855 million off of those values, as the NY Times reported in 2019. A new NY Times feature lays out how the city helped:

As The New York Times reported in a series of articles, a group of taxi industry leaders had artificially inflated the price of a medallion to more than $1 million from about $200,000. They channeled immigrant drivers into loans they could not afford, creating a buying spree that drove up the price of the permits, and then extracted hundreds of millions of dollars before the bubble burst.

During the bubble, government officials worsened the problems by exempting the industry from regulations. The city also chose to fill budget gaps by selling medallions and running ads promoting the permits as “better than the stock market.”

The city sold those medallions, profited off of them. Now it’s the drivers who are suffering. As NPR put it in 2018, “cities made millions selling taxi medallions, now drivers are paying the price.”

It’s also the city that helped create drivers’ debt, so its job is easy: forgive the debt. What has the city done? Bailed out the lenders instead.

What’s The City’s Plan?

Let drivers borrow $20,000 to pay their medallion debt, and they can borrow another $9,000 for other monthly payments.

What Does This Accomplish?

With some drivers hundreds of thousands of dollars in debt, it doesn’t accomplish a lot! All it does, basically, is funnel a bunch of money to big lenders without helping drivers.

How The City Is Bailing Out Lenders Not Drivers

It’d be hard for me to even think up a plan of debt forgiveness that bails out rich lenders not poor drivers, but that’s exactly what the city is planning. Speaking with news outlet Business of Business, Bhairavi Desai, leader of the profit union New York Taxi Workers Alliance, laid out the way the city is bailing out lenders using the hedge fund Marblegate as an example. Marblegate is based in Greenwich, Connecticut (drivers drove all the way there in protest last year) and is the largest holder of medallion loans, as Business of Business reports.

Here’s how the city bails out lenders not drivers by funneling its relief money right back to them, as Desai explains:

In 2018 [Marblegate] bought about 300 taxi medallions, hedging their bets on the struggling industry; Uber and Lyft (which don’t require medallions) were just flourishing. Since February 2020, Marblegate started to purchase the medallion loans from lenders.

In the proposal that the city just announced, medallion owners can borrow $20,000 from the city at zero interest, but it must be used as leverage to negotiate debt restructuring. So, the city’s plan is to essentially loan owner/drivers $20,000 that they can then turn around and offer to the lender, Marblegate, or banks, or credit unions, with no concessions from the lenders as to what the new balance would be on these loans. 

Not only is the city directing its stimulus through the drivers to the lenders, it is doing it with no guarantee that the loans will be meaningfully paid down.

How Much Debt Are We Talking About Here?

“The city’s plan is not nearly enough to bail out the drivers, who each owe about $500,000 in loans on average,” as the NY Times put it recently.

Why The City Is Bailing Out Lenders Not Drivers

The De Blasio administration is experiencing a lame duck year, with city elections coming November 2021. Current officials will be looking for work, and it doesn’t look like they want to become cabbies. “Many of them come out of finance,” Desai puts it. “They’re making their plans to go back into finance.” Securing a bailout for a big operation like Marblegate doesn’t look bad on that resume.

What The Taxi Drivers Want

What the Taxi Workers Alliance plan entails is for the city to write down the loans to $125,000 and bail out the drivers it has helped send spiraling into debt. The lenders still get paid, but the drivers are in the clear, as Desai explains:

Our proposal has been that the city set up a backstop—if the hedge fund or bank reduced the debt to $125,000, the City of New York would guarantee it, 100% of delinquency. The medallion owners are protected and the banks and hedge fund would be guaranteed $125,000, even if the debt is $300,000 for example.

Marblegate can only collect amounts like $300,000 if people own assets; they’re hedging their bets on enough of the drivers having assets.




Even in the [worst] case scenario, our plan would end up costing the city $75 million over 20 years. Our plan is more fiscally sound and would be life-saving. Their plan costs more and does absolutely nothing, offers no relief.

The City Is Still Under Pressure

This crisis has been going on for years, and it is on the back of protests and direct pressure from other parts of the city government. The protests have not stopped (we are in the seventh day of protests from the Taxi Workers Alliance, with some very good looking food being made in solidarity), and the threat of a lawsuit isn’t cleared, either. New York state attorney general Letitia James threatened to sue the city for $810 million last year, but dropped the suit in late February 2021 in favor of supporting the Taxi Workers Alliance plan. It’s possible that the city is not completely off the hook, though as the New York Times currently reports:




The city could still face a lawsuit from the state attorney general, Letitia James, whose office investigated the crisis in response to the Times series and found the city was chiefly responsible. Ms. James announced last year that unless the city bailed out cabdrivers, she would sue the city for $810 million and give it to drivers. Her office did not respond to a request for comment about whether the mayor’s plan answered her findings.

City comptroller Scott Stringer was also at the protests calling for the Taxi Workers Alliance proposal

PPP Loans, Debtor in Possession Financing, Chapter 11 Debtors and Subchapter V Debtors

As several readers of our emails and blogs know, Congress has passed a new form of Chapter 11 bankruptcy for small business debtors. Details about this kind of bankruptcy filing can be located at our blog at https://shenwick.blogspot.com/search?q=subchapter+v

When a company files for bankruptcy, frequently they will need debtor in possession financing to remain in business and reorganize. While the Bankruptcy Code provides for a debtor in possession financing, our experience and the experience of many of our clients have been that debtor in possession financing is very difficult for small businesses to obtain after they file for Chapter 11 bankruptcy. This circumstance should be contrasted with large publicly traded companies that file for Chapter 11 bankruptcy, in which a market exists to provide those companies with a debtor in possession financing.

 

After the Paycheck Protection Program (the "PPP") was established in The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), enacted on March 27, 2020, many bankruptcy attorneys, financial advisors and accountants believed that PPP money may be a source of debtor in possession financing for  Chapter 11 debtors and Subchapter V debtors.

The CARES Act extended PPP loans to Subchapter V small business debtors, but unfortunately not to Chapter 11 debtors.

 

The CARES ACT further allows that PPP loans will be offered only if the SBA Administrator in its discretion sends a letter to the Director of the Executive Office for United States Trustee allowing  PPP loans in bankruptcy-unfortunately to date, the SBA has not sent that letter.

Due to the SBA administrator not sending that letter, it is unclear as to whether small business subchapter fee debtors will qualify for PPP loans.

Qualification may be based upon whether the Subchapter V Debtor received a 1st PPP loan, whether the loan was repaid or forgiven, or whether the SBA suffered a loss as a result of the 1st PPP loan.

Alison Bauer at Foley Hoag LLP wrote a great article on March 10, 2021 on this topic: “PPP Loans and Small Business Debtors in Bankruptcy”, which can be found at

https://www.jdsupra.com/legalnews/ppp-loans-and-small-business-debtors-in-5140892/

As a result, Chapter 11 debtors are not eligible for PP pay loans.

Subchapter V debtors may qualify for PPP loans, but they must proceed with caution and they may want to contact their bank or other banks that are processing PPP loans to determine whether they would qualify for a loan if they file for Subchapter V bankruptcy.

Individuals with questions about subchapter V Bankruptcy should contact Jim Shenwick at 212-541-6224 or jshenwick@gmail.com

 

 

NYC Pledges $65 Million of Taxi Aid That Drivers Call ‘Horrible’

This article first appeared at Yahoo Finance and link is below.

https://finance.yahoo.com/news/nyc-pledges-65-million-taxi-163158992.html



NYC Pledges $65 Million of Taxi Aid That Drivers Call ‘Horrible’


Henry Goldman
Tue, March 9, 2021, 11:31 AM·1 min read




(Bloomberg) -- New York City is creating a $65 million fund to help taxi medallion owners, but drivers called the plan “a disgraceful betrayal from a city that already has blood on its hands.”

The proposal, funded with federal stimulus money, will offer $20,000 loans to help restructure debts on taxi medallions, and as much as $9,000 in debt payment support, said Taxi and Limousine Commissioner Aloysee Heredia Jarmoszuk.

“I think this new plan will be a difference maker for many drivers,” Mayor Bill de Blasio said Tuesday.


But Bhairavi Desai, executive director of the 21,000-member Taxi Workers Alliance, said the plan is “horrible” and “does absolutely nothing for us.”

“It’s a cash bailout for lenders while we are left to drown in debt, foreclosure & bankruptcy,” Desai said in a Twitter post. “No debt forgiveness. No collective solution. No justice.”

In response, the mayor said, “It’s very easy to call for plans that aren’t going to work. Our job is to come up with solutions that will actually work.”

Read more here: N.Y. Attorney General Seeks $810 Million From NYC for Taxi Fraud and here: Suicides, Traffic Hell in NYC Spur Second Look at Uber’s Growth

The market for taxi operating permits known as medallions has collapsed with the onset of the digital ride-hailing industry, leaving thousands of drivers facing financial ruin. Several have committed suicide.

The Alliance has called on the city to help convince and incentivize lenders to restructure their debt.

AG Letitia James won’t sue NYC over taxi medallion debt

This article originally appeared in politicalsay on February 19, 2021 at https://politicsay.com/ag-letitia-james-wont-sue-nyc-over-taxi-medallion-debt/

AG Letitia James won’t sue NYC over taxi medallion debt


New York Attorney General Letitia James has abandoned her threat to sue New York City into providing financial relief to taxi drivers burdened by debt from medallions purchased at inflated costs at city-sponsored auctions, her office said Thursday.


James had threatened to sue last February — warning the city and its Taxi and Limousine Commission that it had 30 days to fork over the money.

But 30 days came and went and James did not take action. On Thursday, her office argued a lawsuit would take years to settle, delaying financial benefits for drivers.

Instead, James has endorsed a proposal from the New York Taxi Worker’s Alliance to write medallion loans down to $125,000.

“This proposal would provide a fiscally fair and responsible way to support the recovery of the taxi medallion industry by guaranteeing loans written down to no more than $125,000, which is why I have been working with the city to approve it since last year,” James said in a statement to Crain’s.

“This relief package not only lays out the best way to support the needs of a community that has been economically devastated right now without burdensome and drawn-out litigation, but will help to ensure justice is finally delivered for thousands of medallion owners.”

Last year’s threat to sue came after an investigation by the AG’s office concluded that the city made “over $855 million” off medallion auctions between 2002 and 2014, despite knowing as early as 2011 that the medallions were selling at higher than their actual value.

Drivers have demonstrated for months in support of NYTWA’s relief proposal. A competing plan from U.S. Congressman Ritchie Torres (D-The Bronx) proposed to re-peg the value of medallions at $250,000.

NYTWA Director Bhairavi Desai lamented the decision not to pursue the city in court, but welcomed James’ support for her group’s bailout plan.

“We know it’s because of technicalities and status of limitations, but it doesn’t make it less painful and infuriating that so many ex-city officials have gotten away with destroying drivers’ lives,” Desai told The Post.

“Our proposal is the only way forward, not just for survival but also for an ounce of justice.

Student Loan Forgiveness Myths

This article originally appeared on Forbes on February 16, 2021 the article can be found at:
https://www.forbes.com/sites/markkantrowitz/2021/02/16/student-loan-forgiveness-myths/?sh=36f6097450c5

Student Loan Forgiveness Myths





Borrowers and policymakers have been urging President Joe Biden and Congress to forgive student loan debt. Student loans are complicated and confusing. This has contributed to many misconceptions about student loan forgiveness. Some of these myths support student loan forgiveness and some oppose it.

Let’s debunk some of the more common student loan forgiveness myths.


There are many misconceptions and myths about student loan forgiveness. GETTY
President Biden Will Forgive All Student Loans

This myth asserts that President Biden will forgive all student loans.

Senator Bernie Sanders proposed forgiving all student loans, not President Joe Biden.

Even if Congress were to pass legislation forgiving student loans, it is likely to fall short of forgiving all student loans. The Health and Economic Recovery Omnibus Emergency Solutions Act (HEROES Act), which passed the U.S. House of Representatives but did not pass the U.S. Senate, proposed forgiving up to $10,000 in student loans per borrower. President Biden has said that he supports $10,000 in student loan forgiveness per borrower.

Due to the cost, Congress is likely to limit the forgiveness in various ways, such as limiting it to borrowers who are experiencing economic distress, borrowers who owe less than $10,000 and borrowers who earn less than $125,000.
The President Can Forgive All Student Loans

This myth claims that the President can forgive all student loans through executive order.

A few policymakers have stated that the President (actually, the Secretary of Education) has the legal authority to forgive all student loans.
MORE FOR YOU

Student Loan Cancellation Less Likely If Stimulus Checks Get Cut

3 Reasons Why Biden Excluded Student Loan Relief From Stimulus – And What It Means For Borrowers

Biden Comes Out Against $50,000 In Student Loan Forgiveness - But Supports This Amount, Instead

This false assertion is based on a misreading of the waiver authority in the Higher Education Act of 1965 [20 USC 1082(a)(6)], taken out of context. The waiver authority, which applies only to loans made under the Federal Family Education Loan (FFEL) and Federal Perkins Loan programs, is limited to operating within the scope of the statute. Specifically, when Congress authorizes a loan forgiveness program, such as Public Service Loan Forgiveness, Teacher Loan Forgiveness or the Total and Permanent Disability Discharge, the U.S. Department of Education has the authority to forgive student loans as authorized under the terms of these loan forgiveness programs.

Also, the parallel terms clause in the Higher Education Act of 1965, which requires Direct Loan program loans to have the same terms and conditions as FFEL program loans, does not apply to waiver authority, which is not part of the terms and conditions of the loans.

Only Congress has the power of the purse. The executive branch cannot spend money that has not been appropriated by Congress. Congress can pass legislation to forgive student loans, but without this legislation, the President does not have the legal authority to issue blanket student loan forgiveness.

The waiver authority also does not apply to private student loans.
The Legal Authority for the Payment Pause and Interest Waiver Can Be Used to Forgive Student Loans

Some people claim that President Trump used the waiver authority to implement the payment pause and interest waiver, setting a precedent that could be used to forgive student loans.

President Trump did not identify the legal authority used to implement the payment pause and interest waiver in his executive memo, but there are three possibilities that do not rely on a misreading of the general waiver authority.


The statutory definition of the economic hardship deferment provides the Secretary of Education with the authority to create other eligibility criteria for the economic hardship deferment. [20 USC 1085(o)(1)(B)]
The regulations for the Direct Loan program allow the Secretary of Education to provide administrative forbearance “due to a national military mobilization or other local or national emergency.” [34 CFR 685.205(b)(8)]
The Heroes Act of 2003 authorizes the Secretary of Education to ensure that “recipients of student financial assistance under Title IV of the Act who are affected individuals are not placed in a worse position financially in relation to that financial assistance because of their status as affected individuals” in connection with a war or other military operation or national emergency. Affected individuals include individuals who “suffered direct economic hardship as a direct result of a war or other military operation or national emergency.” [20 USC 1098bb(a)(2)(A)]


Student Loan Forgiveness Will Stimulate the Economy

This myth claims that “student debt cancellation can … give a boost to our struggling economy through a consumer-driven economic stimulus that can result in greater home-buying rates and housing stability.”

Forgiving student loan debt yields an annual financial impact that is about 6% of the amount forgiven, corresponding to the amount borrowers are actually paying on their student loans.

Student loan payments total about $100 billion a year, approximately 0.4% of GDP. (For comparison, the cost of the payment pause and interest waiver is about $60 billion a year.) Forgiving all student loan debt will yield a smaller positive impact on the economy in the short term than other stimulus efforts.

Student loan forgiveness will also not have a big impact on home-buying rates.

According to research by Federal Reserve economists, a $1,000 increase in student loan debt before age 23 causes “a decrease of about 1.5 percentage points in the homeownership rate,” which is the “equivalent to a delay of 2.5 months in attaining homeownership.” This effect, however, disappears by the time borrowers enter their early thirties. Thus, student loan debt affects only the timing of homeownership, not the attainment of homeownership.

Student loan debt outstanding is one-sixth of mortgage debt outstanding. A similar ratio applies to comparisons of student loan and mortgage balances and loan payment amounts.

Based on data from 2017 follow-up to the 2016 Baccalaureate and Beyond longitudinal study (B&B:16/17), the average student loan payment among Bachelor’s degree recipients is $306, compared with an average car payment of $392 and an average mortgage payment of $1,254. The average rent payment for borrowers who don’t own homes is $875, yielding a difference of $379, which is greater than the average student loan payment.
Student Loan Forgiveness Will Provide Immediate Financial Relief

This myth claims that student loan forgiveness will provide immediate financial relief to millions of student loan borrowers who are experiencing economic distress because of the pandemic and recession.

Forgiving less than the full amount owed might not yield much of an immediate impact because it will change the remaining time in repayment but not the monthly payment amount. This is especially true of borrowers in income-driven repayment plans, where the loan payments are based on the borrowers’ income and not the amount they owe. Even with $50,000 in student loan forgiveness, more than 40% of borrowers in income-driven repayment plans will still owe some student loan debt.

Thus, student loan forgiveness provides long-term financial relief but not necessarily short-term financial relief.

The payment pause and interest waiver, on the other hand, provides immediate financial relief.
Student Loan Forgiveness Will Solve the Student Loan Problem

This myth claims that student loan forgiveness is a solution to the student loan problem.

There really isn’t a student loan problem, so much as a college completion problem. Students who drop out of college are four times more likely to default on their federal student loans than borrowers who graduate, and represent more than two-thirds of the defaults. Borrowers who drop out of college have the debt, but not the degree that can help them repay the debt.

Most borrowers who graduate are able to repay their student loans. Only 0.1% of Bachelor’s degree recipients and 1.1% of Associate’s degree recipients default on their federal student loans.

Forgiving student loans will not increase the number of students enrolling in college. It will not increase the number of students graduating from college. It will not make college more affordable.

The average federal student loan debt of borrowers who are in default on their federal student loans is about $22,000.
Student Loan Forgiveness Will Close the Racial Debt Gap

This myth claims that student loan forgiveness is the best way to address racial disparities in student loan debt.

Students who attend Historically Black Colleges and Universities (HBCUs) are twice as likely to borrow to pay for college. They also graduate with 25% more student loan debt. Their student loan payments represent a greater share of income.

But, forgiving $50,000 in student loan debt per borrower is not the most effective way of closing the racial debt gap. Only 18% of the financial benefit from blanket student loan forgiveness will go to Black or African-American borrowers. Instead, why not just forgive the student loan debt of all borrowers who attended HBCUs? This student loan debt was caused, in part, by chronic underfunding of these institutions. The cost of this forgiveness is about $30 billion.
The Federal Government Can’t Forgive Private Student Loans

This myth asserts that the federal government can’t forgive private student loans, just federal education loans.

The Truth in Lending Act [15 USC 1650(e)] bans prepayment penalties on private education loans. The Higher Education Act of 1965 [20 USC 1083(a)(14)] bans prepayment penalties on federal education loans, including those held by private lenders.

So, Congress could pass a law to forgive private student loans by appropriating funds to pay off the loan balances.

This would cause losses for the lenders and investors in student loan securitizations, since they would not receive the future interest revenue they were expecting, just par value for the loans.

Lenders might respond by no longer offering private student loans or by charging higher interest rates.
All Student Loan Forgiveness Is Tax-Free

This myth claims that all student loan forgiveness is tax-free.

Some student loan forgiveness is tax-free and some is taxable.

Generally, if student loan forgiveness is provided by the loan program, it is tax-free if the loan forgiveness requires the recipient to work in certain professions for a specified period of time. Examples include Public Service Loan Forgiveness and Teacher Loan Forgiveness.

Certain student loan discharges are also tax-free. These include the death and disability discharges (through December 31, 2025), closed school discharges, false certification discharges, unpaid refund discharges and the borrower defense to repayment discharge.

Employer-paid student loan repayment assistance programs, or LRAPs, are also tax-free through the end of 2025.

Otherwise, the cancellation of debt is treated like taxable income to the borrower under current law. It is as though someone provided the borrower with income to pay off the debt. Thus, the forgiveness after 20 or 25 years in an income-driven repayment plan is taxable.

The IRS will forgive tax debts when the taxpayer is insolvent (total debt exceeds total assets). A borrower who has been in an income-driven repayment plan for two decades is likely to be insolvent. But, there are no guarantees that the tax debt will be forgiven.
Student Loans Can Be Discharged in Bankruptcy

This myth asserts that student loan forgiveness is not necessary because student loans can be discharged in bankruptcy.

Bankruptcy discharge of student loans is very rare.

There is an exception to bankruptcy discharge of student loans unless the debt imposes an “undue hardship” on the borrower and the borrower’s dependents. This is a very harsh standard, requiring a current and future inability to repay the debt while maintaining a minimal standard of living. One bankruptcy court judge referred to it as requiring “a certainty of hopelessness.”

Certain other types of student loans, such as bar study loans and residency/relocation loans, can also be discharged because they are not considered to be qualified education loans.
The Federal Government Has Never Previously Forgiven Student Loans

This myth asserts that the federal government generally does not forgive student loans.

The source of this myth is the very low approval rates for public service loan forgiveness and borrower defense to repayment discharges. Only about 3% of borrowers who applied for public service loan forgiveness have been approved. Some of those borrowers were not eligible for loan forgiveness (yet) and the loan servicer miscounted the number of qualifying payments for other borrowers. A similarly low percentage of borrower defense to repayment claims were approved by the Trump Administration.

But, borrowers do qualify for other types of loan forgiveness. About 37,000 teachers qualify for teacher loan forgiveness each year. About 4,700 borrowers qualify for an automatic closed school discharge each year.
Student Loan Forgiveness Creates A Moral Hazard

This myth asserts that student loan forgiveness creates a risk of moral hazard.

Moral hazard occurs when a student borrows to the limit because they expect their student loans to be forgiven.

Most student loan forgiveness programs cap the amount of forgiveness per borrower, thereby limiting the potential for moral hazard.

The main exceptions are public service loan forgiveness and income-driven repayment plans. Public service loan forgiveness cancels the remaining debt after the borrower has made 120 qualifying payments. The income-driven repayment plans cancel the remaining debt after 240 or 300 loan payments. A borrower must have very low income for a decade or longer to qualify for some loan forgiveness.

Blanket student loan forgiveness is likely to be a one-time event and the amount of loan forgiveness is likely to be limited.
Obama Student Loan Forgiveness

This myth claims that borrowers are eligible for Obama Student Loan Forgiveness after paying down 10% of their student loan debt or satisfying other easy criteria.

There is no such thing as “Obama Student Loan Forgiveness.” This is a name used by some student loan scams who say that they will help you apply for student loan forgiveness, if you pay them an up-front fee. The promised loan forgiveness never materializes. Changing an up-front fee for credit repair, including student loan forgiveness, violates federal and state consumer protection laws. The Federal Trace Commission (FTC) and several state attorneys general cracked down on such advance-fee loan scams in Operation Game of Loans.

Often, these scams describe a fictional loan forgiveness program that garbles characteristics of Public Service Loan Forgiveness (PSLF) and certain income-driven repayment plans.

Public Service Loan Forgiveness was created by the College Cost Reduction and Access Act of 2007, during the Bush Administration, not the Obama Administration. The loan forgiveness program became effective on October 1, 2007, before President Obama took office. This law also created income-based repayment, which became available starting on July 1, 2009. Neither of these programs were ever called Obama Student Loan Forgiveness.

Private student loans are not eligible for Public Service Loan Forgiveness or income-driven repayment.

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Mark Kantrowitz




I am Publisher of PrivateStudentLoans.guru, a free web site about borrowing to pay for college. I am an expert on student financial aid, the FAFSA, scholarships, 529…

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Bankruptcy Subchapter V Debt Limits

 

In February 2020, Congress passed a new law establishing a new small business bankruptcy filing subchapter, known as “Subchapter V”. The original debt limit for Subchapter V was $2.7 million, however, in March 2020, the CARES Act increased the debt limit to $7.5 million for one year. 

Unless Congress renews the $7.5 million debt limit established last March, the debt limit will revert back to $2.7 million on March 27, 2021.

Subchapter V was designed to be a fast track, cheaper alternative, to traditional chapter 11’s for business. The law is extremely helpful for restaurants, retailers, and other small businesses who prefer reorganization to liquidation or shutting down. 

In a prior blog post at we discussed many of the benefits of Subchapter V:  

https://shenwick.blogspot.com/search?q=subchapter+v   

If a small business has debt that exceeds $2.7M and they want to file under Subchapter V, they must file their bankruptcy petition on or before March 27, 2021, unless Congress raises the debt limit.  

Any individuals or businesses with questions about Subchapter V should contact Jim Shenwick: (212) 541-6224; jshenwick@gmail.com

FICO and Personal Bankruptcy

 FICO and Personal Bankruptcy

When clients contact me for a consultation with respect to a personal bankruptcy filing, they will often ask how this could impact their FICO score. My reply is that the impact of a filing on their FICO score is of secondary importance; how to rehabilitate their credit after filing, is of primary importance.

A wonderful article regarding one’s FICO score was recently published at Groovy Post and can be found at:     https://www.groovypost.com/explainer/what-is-a-fico-score-why-important/?utm_source=newsletter&utm_medium=email&utm_campaign=daily 

Reader’s with questions regarding FICO should review this post.

Generally, a bankruptcy filing results from a “triggering event” such as being sued, losing a lawsuit and being subject to a judgment, failure to make a payment on credit cards, or defaulting on car lease payments. A person contemplating a bankruptcy filing usually has a FICO score of 550 to 650 and is unable to get credit.

Accordingly, a chapter 7 bankruptcy filing would not lower the FICO score since it is already low. 

However, a chapter 7 bankruptcy filing can increase a person’s ability to obtain credit. Yes, let me repeat, a chapter 7 filing can make a person more credit-worthy. 

Why? For two reasons: 1) one can only file for chapter 7 bankruptcy once every eight years and 2) the bankruptcy filing cleans up one’s personal balance sheet: liabilities are discharged in and exempt assets are kept.

Banks are aware of these factors and are thus more likely to loan money to a debtor after a bankruptcy filing with credit rehabilitation than before a filing.

So how does a debtor rehabilitate their credit? 1) By getting a secured credit card, charging the card and repaying it, and finally asking the bank or credit card company to increase their credit limit. 2) By working, reducing their expenses, and saving as much money as possible.

For these reasons, filing for bankruptcy and rehabilitating one’s credit is more important than the impact of chapter 7 bankruptcy on one’s FICO score.

People with questions regarding FICO and credit rehabilitation should contact:

Jim Shenwick, jshenwick@gmail.com, (212) 541-6224 

New York State Uniform Voidable Transactions Act

New York has adopted a new  Uniform Voidable Transactions Act (“NYUVTA”), to replace New York State’s existing fraudulent conveyance law, which was over 100 years old.

NYUVTA is effective as of April 4, 2020. Transfers that occurred prior to April 4, 2020 are governed by NYS former fraudulent conveyance law.

NYUVTA can be found at N.Y. Debt. & Cred. Law §§ 270-281

NYUVTA provides for a 4 year statute of limitation, unlike NYS’s former  fraudulent conveyance law, which provided for a 6 year statute of limitations. 

NYUVTA also provides for a period of one year after the transfer in question to avoid a transfer to an insider—similar to the Bankruptcy Code’s insider preference reach back period of one year prior to the petition date, under 11 U.S.C. § 547(b)(4)(B)

NYUVTA eliminates the “good faith” element of a fraudulent transfer and adopts the “reasonably equivalent value” requirement of the Bankruptcy Code. 11 U.S.C. 548  

NYUVTA provides for a cause of action to avoid transfers to an insider if the insider had reasonable cause to believe that the debtor was insolvent. N.Y. Debt. & Cred. Law §274(b).

Insolvency. Plaintiffs pursuing fraudulent transfer claims to collect unsatisfied judgments will now be required to prove insolvency in connection with a fraudulent transfer claim. 

Burden of Proof.  NYUVTA provides that a creditor challenging a transfer bears the burden of establishing the elements of its claim by a preponderance of the evidence, rather than the higher "clear and convincing evidence" standard under the former fraudulent conveyance law.

Presumption of Insolvency. NYUVTA provides that consistent with section 303(h)(1) of the Bankruptcy Code,  any nonpayment of debts subject to "bona fide dispute" is not presumptive of insolvency; and (ii) expressly provided that the burden to rebut this presumption falls on the "party against whom the presumption is directed.

Conflict of Law. NYUVTA provides that the law of a debtor's place of business or if the business is conducted in more than one state, the place in which the business had its chief executive office, at the time that a transfer was made, applies to claims under NYUVTA. 

Attorneys Fees. Section 276(a) of NYUVTA allows for the award of reasonable attorney fees as an additional amount required to satisfy the creditors’ claim.

Foreclosure Sale and Reasonably Equivalent Value. Section 272(b) of NYUVTA provides that reasonably equivalent value is given “if the person acquires an interest of the debtor in an asset pursuant to a regularly conducted, non-collusive foreclosure sale

For questions regarding NYS new Voidable Transaction law please contact Jim Shenwick 212 541 6224 jshenwick@gmail.com

Guarantee of Leases in New York State and their application when Tenants want to terminate or exit a Lease

  

 

 

 

 

At Shenwick & Associates, we are receiving many calls and emails these days from clients regarding leases which they would like to terminate and the principals' exposure for guarantees and good guy guarantees associated with those leases.

Most commercial tenants in New York City are organized as either corporations or LLCs and those entities are the tenant on the commercial office lease. Almost all landlords in New York City will require a principal or principal’s of the corporation or LLC to guarantee the lease.

There are two types of lease guarantees in New York. A full or complete guarantee for the payment of rent or a “good guy guarantee (“GGG”)”, which is a specialized type of guarantee, which can limit the payment of the guarantor under the lease, if certain conditions enumerated in the GGG are met.

Under the full or complete guarantee, for example if the tenant fails to make lease payments for 6 months and owes $50,000 for rent and additional rent under the lease, the Landlord can demand that the guarantor pay those monies and if payment is not made, the Landlord can sue the guarantor for $50,000.

The second type of guarantee which is known as a good guy guaranty limits the principal’s exposure under the guarantee if certain conditions are met. To be a “good guy” means that the tenant vacates the space and delivers possession to the Landlord without litigation.

An example of how GGG operates is provided below.

The GGG provides that the principal’s financial exposure under the GGG terminates when: 1. the tenants sends notice to the Landlord that it is vacating the leased space (the usual notice required is 90 to 120 days), 2. the tenant must be current on its payment of rent and additional rent, when it sends the notice to the Landlord or current on rent when it vacates the space, 3.the space must be left “broom clean” and 4. keys for the office must be delivered to the Landlord.

Under this scenario, if all 4 conditions are satisfied, the guarantor is released from liability under the Lease. However, if the 4 conditions are not satisfied the guarantor’s liability continues until the lease expires.

If the tenant is unable to pay the rent due under the lease when it vacates the principal will often pay the rent for the tenant to terminate the GGG.

It should be noted that just because the tenant vacated the space, the lease is not terminated and the tenant remains liable for rent until the lease terminates. If the tenant does not pay the rent, the landlord can sue the tenant but not the guarantor.

Under that scenario, the tenant will either close its business or file for chapter 7 bankruptcy.

As can be seen from the above examples, a GGG is a more limited form of guarantee.

The statute of limitations for a landlord to commence an action under a guaranty under New York State law is 6 years. CPLR 213(2)

Under New York custom and practice, the guarantee whether it is a regular guarantee or a GGG can be incorporated into the lease or it can be a separate document.

Under certain limited circumstances based on a NYC administrative law, certain guarantees are void see New York City Administrative Code §22-1005, which provides for the suspension of certain contractual obligations between March 7 and Sept. 30, 2020. The law is applicable to leases for restaurants, bars, retail establishments and other similar non-essential businesses that were required to cease operations due to various COVID-19-related executive orders issued by the Governor. If a guarantor can avail themselves of that law, then the guarantor may be able to avoid liability even if the tenant does not pay rent under the lease.

From a landlord’s perspective once they obtain possession of their space, they need to determine based on cost benefit analysis if they want to sue the tenant or the guarantor for rent that is due and owing. The landlord will consider the cost of litigation (legal fees and court costs) and the ability to collect on a judgment, if one is obtained.

Due to the covid virus, many Landlords are taking a wait and see attitude and not commencing lawsuits immediately, as they may have in the past.

A tenant that wished to vacate a lease should have the lease and the guarantee reviewed by an experienced attorney and the tenant and guarantor need to develop a strategy to deal with the landlord.

Any clients having questions regarding a terminating a lease or with respect to a guarantee or good guy guarantees should contact Jim Shenwick at 212-541-6224 or email him at jshenwick@gmail.com. Jim Shenwick negotiates commercial leases, practices debtor creditor law and bankruptcy law.

NYC Comptroller Backs Proposed Taxi Medallion Bailout Program

 https://patch.com/new-york/new-york-city/nyc-comptroller-backs-proposed-taxi-driver-bailout-program

Originally appeared on the Patch.com

 

 

New York City Comptroller Scott Stronger has backed a proposal that would bail out taxi drivers burdened with exorbitant debt owed on medallions and worsened by the coronavirus pandemic. (Courtesy of Tim Lee)

NEW YORK CITY — New York City Comptroller and mayoral hopeful Scott Stringer has put his weight behind a proposal from the New York Taxi Workers Alliance that aims to bail out thousands of taxi drivers drowning in medallion debt amid the coronavirus pandemic.

The plan would write down outstanding loans on medallions to $125,000 and offer up funds to ensure drivers in default can sell a medallion and recuperate all or part of its cost, Stringer announced at a news conference on Thursday.

The plan would also reduce the interest on outstanding loans for medallions taxi and offer drivers a way out of the industry without landing in a financial sinkhole, he said.

"For decades, driving a cab in New York City was a road to the middle class for immigrants from around the world," Stringer said in a news conference. "But today, the medallion that once promised prosperity and stability is now a financial sinkhole."

Should a driver default on a medallion, the city would take back the medallion and place a minimum bid equivalent to the amount owed on it before offering it for sale on the free market, guaranteeing purchase of any medallions that borrowers default on.

The taxi workers alliance estimates the plan could cost the city up to $75 million, a rather small amount compared to the $810 million lawsuit Attorney General Letita James filed against the city in February for inflating the value of medallions.

The proposal also calls for monthly loan payments to be capped at less than $800 and for interest rates to be kept at or below 4 percent.

New York Taxi Workers Alliance executive director Bhairavi Desai said the bailout is the last chance the industry has to weather the pandemic, which has drastically decreased ridership and left cab drivers in a financial lurch for months.

"It is the only way drivers, the yellow cab industry is going to survive," Desai said.

Ricardo Lopez, who has driven taxis for 40 years in New York City, said he is hopeful the plan goes through. He is facing bankruptcy as he works to continue making payments on his medallion.

"I paid $60,000 [for my medallion] 40 years ago and have been paying on and off until today," Lopez said. "We are in bankruptcy, literally. If I don't get any help directly, I'm going to go out of this business soon because I can't afford it anymore. The streets are empty."

Taxi drivers in New York City watched their fares dry up as the coronavirus pandemic gave way to stay-at-home orders and business closures earlier this year.

Although ridership has been on a steady increase since the city ground to a standstill in March and April, taxi industry revenue remains down some 81 percent from where it was in 2019, the New York Times reports. Ridership was also down by about 70 percent in September compared to the year prior.

Stringer said while the proposal cannot increase ridership in the face of a pandemic, it can right a wrong and save New York City families staring down the barrel of financial ruin.

"Predatory lenders took drivers for a ride and left families in a wreckage of financial distress and despair," Stringer said. "We have a fiscal and moral obligation to make this right—and embracing this plan is a start."

 

 

 

Pandemic Pushes N.Y.C. Cabbies to the Brink: ‘I Can’t Hold On’

https://www.nytimes.com/2020/11/12/nyregion/nyc-taxi-drivers-coronavirus.html 

Originally appeared on  The New York Times

While some businesses have adapted to virus restrictions, the yellow cab industry is especially suffering.

 

In September, an average of 3,257 yellow cabs and 575 green cabs operated each day, according to city data. In both cases, that was about 70 percent lower than in September 2019.Credit...Karsten Moran for The New York Times

Before the coronavirus arrived in New York, yellow taxis were an enduring symbol of the city’s hustle, crowding the streets of Midtown Manhattan, ferrying passengers to airports and carrying tourists to boutique hotels. But eight months into the pandemic, the industry lies almost entirely crippled.

Revenue for the taxi industry is down 81 percent over the same period a year ago, according to the latest city data. That is better than in the worst days of the pandemic in March and April — but not by much.

Even as some parts of city life have returned, reliable sources of taxi passengers have not. Offices, especially in Midtown, are closed. Tourism is virtually nonexistent, and the airports are mostly empty.

“I can’t hold on, not like this,” said Vinod Malhotra, who owns his cab and has driven for 27 years through terrorist attacks, natural disasters and economic calamities. He made it through the pandemic’s peak in New York, too, but as the crisis slogs on, he is on the brink of bankruptcy. “I can make it maybe one more month, maybe two.”

Ride-hailing companies, such as Uber and Lyft, also took a hit when the city largely shut down in the spring. But they have bounced back more quickly. Revenue is now about a third lower than last year, and the chief executive of Uber, Dara Khosrowshahi, said last week on a call with investors that city ridership outside of commuting hours had returned to normal.

Bruce Schaller, a former city transportation official, said customers might be using taxis less because they believed they were more of a health risk, even though that was not the case.

“I think taxis feel like more of a public space than an Uber car or Lyft car,” he said.

Almost all drivers in every sector stopped working altogether during the peak, city data shows, in part because of the possibility of getting sick on the job, a threat that was magnified by the deaths of dozens of drivers. In a recent survey by the New York Taxi Workers Alliance, nearly half of drivers said either they or someone in their home had contracted the virus.

While many drivers were out of work, they relied on the federal government’s enhanced unemployment program, which paid $600 a week in addition to state benefits.

But those federal benefits ended over the summer, as did some other programs that kept cabdrivers afloat, including initiatives that paid taxi drivers meals to homes and provide rides for essential workers during overnight subway closures.

Aloysee Heredia Jarmoszuk, the head of the city Taxi and Limousine Commission, which oversees yellow cabs and ride-hailing companies, said the industry was steadily recovering, albeit slowly. “The pandemic hit for-hire transportation hard, but every month since March has seen increases in trips across all segments,” she said.

Still, drivers of both yellow cabs and the green cabs that operate outside of Manhattan have been reluctant to return to work. In September, an average of 3,257 yellow cabs and 575 green cabs operated each day, according to city data. In both cases, that was about 70 percent lower than in September 2019.

Several fleet owners said they had called drivers to beg them to return. Some offered discounts letting drivers rent out cabs for half the normal rate, or less. Recently, they said, drivers have begun returning.

Drivers who own their own cabs have returned even more slowly.

“My job isn’t safe. I don’t know who has had the Covid, and there are no customers anyway,” said Andrew Chen, 53, an immigrant from Burma, now Myanmar, who has owned his own cab since 2006. “So I just stay home.”

Now, a knockout punch may be coming for those drivers, who bought the city permits called medallions that allow them to own and operate a cab.

As The New York Times has reported, hundreds of drivers were already squeezed before the pandemic after being channeled into large, exploitative loans they could not afford in order to buy their medallion. Lenders suspended collections for months during the worst of the virus, but some have started to demand payments.

“People talk about the state of the taxi industry the same way they talk about the election: ‘This is the existential moment.’ But this time, it really is,” said Bhairavi Desai, who has represented drivers since the 1990s as the head of the Taxi Workers Alliance. “It really is.”

 

Bhairavi Desai, the head of the New York Taxi Workers Alliance, was planning to announce a new proposal to help cabdrivers.Credit...Amr Alfiky/The New York Times

In January, a city task force proposed a $500 million bailout for drivers in loans. In February, the New York State attorney general, Letitia A. James, said her office would sue the city for $810 million and use the money to compensate drivers.

That momentum evaporated as the virus exploded across the city.

On Thursday, Ms. Desai plans to unveil a proposal that could eliminate hundreds of millions of dollars owed by medallion owners and would cost the city a maximum of $75 million, much less than in previous plans.

Under the proposal, lenders would agree to reduce the amount owed by each borrower to $125,000, repaid over 20 years with a 4 percent interest rate. That structure would lower monthly payments to under $800. In return, lenders would receive a guarantee that the city would pay for any medallion loan that fails because of nonpayment, an assurance that experts say could win over lenders.

The plan is supported by Scott M. Stringer, the city comptroller and mayoral candidate. He said in a statement it could actually save taxpayer money by protecting the city from the attorney general’s lawsuit.

“This breakthrough proposal offers a responsible and necessary approach to relieve crushing debt for drivers and reduce ballooning costs for taxpayers,” he said.

City Council Speaker Corey Johnson, who has previously supported a bailout, said the Council would review the proposal but suggested that the city, whose budget has been decimated by the pandemic, may not be able to pay for a rescue package on its own. A spokesman for Mayor Bill de Blasio pointed out that the mayor has said the federal government should fund any bailout.

Several lenders who would have to agree to the deal declined to comment. They have denied wrongdoing, blaming the industry’s problems on Uber and Lyft.

The largest holder of loans now is Marblegate Asset Management, a private equity firm that bought thousands of them earlier this year. It has not collected payments during the pandemic, a spokesman said, and has voluntarily forgiven $70 million in debt.

Mr. Malhotra, the cabdriver, emigrated to New York from India in the early 1990s and bought his medallion in 2011 for $640,000. He now owes Marblegate about $435,000, he said.

He still drives 12 hours a day, six days a week, he said, but lately has had to wait longer and longer between customers. He is barely making enough to support his wife and three children, and he cannot make loan payments. He fears getting a call from his lender.

He said he might have to file for bankruptcy and surrender his medallion to a large fleet. Others are in the same situation. If nothing happens soon, he said, the city could lose an entire generation of cabby owner-drivers.

“We need help, and nobody is helping,” he said. “So day by day, it will go more down. And then it will just be gone.”

For Millions Deep in Student Loan Debt, Bankruptcy Is No Easy Fix

https://www.nytimes.com/2020/11/07/your-money/student-loans-bankruptcy.html 

Originally appeared on The New York Times

 It’s an extremely difficult debt to discharge, and only a few hundred people a year even try. Here are the stories of some who succeeded —mostly.

With two mortgages, three children and $83,000 in student loan debt, the financial strain finally became too much for George A. Johnson and Melanie Raney-Johnson.

New bills kept piling up: The couple had to buy another car when Mr. Johnson wrecked one in a snowstorm, but their insurance didn’t fully pay off the totaled vehicle. Old debts never seemed to get any smaller, either: A mortgage modification they spent months working on fell through when the bank lost their paperwork.

And their student debt, an albatross born of aspiration, grew heavier each month.

Bankruptcy was the only way out.

“It was not an easy decision,” Ms. Raney-Johnson said of filing for bankruptcy in 2011. “It was a feeling of despair, for sure.”

 

Bankruptcy gives over 700,000 debtors a fresh start every year. Bills for credit cards and medical expenses can be wiped away by a few strokes of a judge’s pen, and debts that don’t vanish are reduced.

But student loan debts don’t go away as easily. For decades, politicians have slowly made them harder to discharge, while differing standards in courts across the country mean a debtor’s chances can depend on where he or she lives.

The few debtors who attempt it are subjected to a morality play unlike anything else in the world of personal finance: so-called adversary proceedings, where they must lay themselves bare in court as opposing lawyers question how much they pay for lunch or give to their church.

The Johnsons tried anyway. They had borrowed about $45,000 for Mr. Johnson’s degree in sociology at the University of St. Mary in Kansas and Ms. Raney-Johnson’s pursuit of a bachelor’s degree from the University of California, Davis. Unable to pay, they had received permission to put off their payments, but their balance nearly doubled as interest charges continued to pile up.

Mr. Johnson lost his job after they filed for bankruptcy and, unable to afford a lawyer, Ms. Raney-Johnson prepared their case. She remembers how she felt when they arrived at the Robert J. Dole Federal Courthouse in Kansas City, Kan., on a sunny September day seven years ago.

“My heart was beating, and I was sweating,” said Ms. Raney-Johnson, now in her mid-40s and a billing supervisor for a federal agency.

In 2015, the year the Johnsons got their ruling, 884,956 personal bankruptcy cases flowed through the courts. Only 674 sought to discharge student debt, according to a recent analysis by Jason Iuliano, assistant law professor at Villanova University.

The New York Times reviewed dozens of cases in which a judge issued a published opinion — the Bankruptcy Class of 2015 — to understand the pains and payoffs five years later. Some debtors are on a better course. But for others, the struggles never went away — or came back after they thought they were free.

Rising Costs, Rising Debts

Bankruptcy begins with debt, and student loans are the second-biggest form of household debt in the United States. More than 43 million borrowers hold over $1.6 trillion in student loans, a sum that has more than tripled in 13 years. It exceeds what Americans owe on credit cards or auto loans and trails only mortgages.

Sixty-two percent of students who graduated from nonprofit colleges in 2019 had student loan debt, according to an Institute for College Access & Success analysis. Their average balance was $28,950 — not including borrowing by their parents.

Many struggle mightily to pay: Before the government’s coronavirus relief efforts paused federal student loan payments, 7.7 million borrowers were in default and nearly two million others were seriously behind.

The solution has been a public-policy patch job.

About eight million additional borrowers use income-driven repayment plans, which can be challenging to enter.  And while the plans lower payments, borrowers accrue interest on the unpaid difference. The debt is eventually forgiven — usually after 20 or 25 years — but the forgiven amount is taxable income.

 A related program forgives the federal student loan debts of public-service workers, tax free, after 10 years, but it has been deeply troubled. Borrowers have made payments for years only to learn they were in the wrong kind of payment plan. It got so bad that Congress had to create a separate pot of money to try to fix it.

The election could give momentum to a change: President-elect Joseph R. Biden Jr. — who supported a 2005 law that made private student loans harder to discharge — has vowed to change the loan rule back if elected. But few Republicans have voiced support for a plan to change bankruptcy rules. A House bill  has one Republican co-sponsor, Representative John Katko of New York, but the Senate's version, led by Senator Richard J. Durbin of Illinois, has only Democratic support.

All the student debt poses a problem. Its weight, experts say, has macroeconomic effects, dragging on homeownership and small-business formation. But the fallout goes beyond simple economics.

There is also a mental toll.

 

 Noelle DeLaet said she had sent out hundreds of résumés but couldn’t get a better-paying job.Credit...Terry Ratzlaff for The New York Times

‘No Way Out’

 

Noelle DeLaet earned a bachelor of fine arts degree from Nebraska Wesleyan University in 2008 — the teeth of the Great Recession. She tacked on another year for a degree in English to make herself more attractive to employers. Perhaps in publishing, she thought.

She left school with $110,000 in debt: roughly $27,000 from the federal government and the rest in private loans co-signed by her mother. The $810 monthly bill, set to climb when the payment plan on one private loan expired, soon overwhelmed her.

Ms. DeLaet, now 34, landed in the child welfare field as a foster care review specialist in Lincoln, Neb. — rewarding, but not lucrative. She sent out hundreds of résumés for better-paying jobs and pleaded with her lenders to reduce her payments. Soon, the creditors started in on her mother and put her on the verge of bankruptcy, too.

 Ms. DeLaet’s breaking point came in May 2012 when she ran up against the $4,000 limit on her credit card while trying to buy a burrito at a Mexican grocery. She felt so helpless at times that she considered suicide.

“I looked all over Google for some sort of support group for others going through this,” Ms. DeLaet said. “I felt like there was no way out.”

 When Ms. DeLaet squared off in court against her student-loan creditors, they quibbled with the $12 she spent each month on recycling. She should have tried harder for a promotion, they argued. Or moved somewhere else for more money.

Judge Thomas L. Saladino bristled at that idea. In his opinion, he wrote that she lived in the state’s second-largest city, “as good a place as any to seek a better-paying job.”

The judge discharged about $119,000 in private loans, and an additional $23,000 was forgiven by one of her lenders. But her $27,000 in federal loans stuck: She’s paying those back through an income-driven repayment plan costing about $260 a month. Because she works at a nonprofit, her debt should eventually disappear via the Public Service Loan Forgiveness program.

For Ms. DeLaet, the process was worth it: She has married her boyfriend, had two children and bought a home. Her mother is an “amazing” grandmother, she said, although they still cannot discuss the past.

 “It is an untouchable subject,” she said.

Rumors and Rules

The transformation in the bankruptcy rules began in 1976, with unfounded rumors.

A handful of legislators claimed to have heard about a parade of young doctors and lawyers who were trying to game the system and shed their debts while embarking on lucrative careers. The lawmakers toughened the rules, largely preventing borrowers from seeking a discharge within five years of graduation. The rules only got tougher over the next three decades.

Borrowers must show that their student loans are an “undue hardship” — a standard interpreted differently, depending on where you live. Some judicial circuits, including those in Nebraska, where Ms. DeLaet filed, have the judge review a “totality of the circumstances” for the debtor and make a decision.

Other jurisdictions employ a less flexible standard, the Brunner test, named for the case that established it. Judges must answer three questions affirmatively to discharge the debt. First, has the debtor made a good-faith effort to repay the loans? Second, is the debtor unable to maintain a minimal standard of living while making the payments? And, finally, is the debtor’s situation likely to persist?

But even jurisdictions that use the Brunner test apply it differently. Some require the judge to find that the borrowers have a "certainty of hopelessness" in paying off their debt. Other jurisdictions do not.

Here, the Johnsons may have benefited from geographic good fortune.

‘Virtual Lifetime Servitude’

Lawyers for the Educational Credit Management Corporation — a nonprofit that collects defaulted loans on behalf of the federal government — examined how the Johnsons spent their $2,100 monthly income.

Every expense was scrutinized, including Ms. Raney-Johnson’s $35 monthly union dues, her $100 retirement contribution and $215 to repay loans from her retirement plan. None, the nonprofit’s lawyers argued, were necessary to maintain a “minimal standard of living.”

 In his opinion — written more than a year after hearing arguments — Judge Robert D. Berger disagreed. He wrote that the U.S. Court of Appeals for the 10th Circuit, which covers Kansas, had shifted from the most rigid interpretation of the three-part test, which he described as “an unfortunate relic.”

Judge Berger wasn’t sure how the Johnsons were subsisting at all based on their income, and he said courts shouldn’t rely on “unfounded optimism” about a debtor’s future.

“It is disconsonant with public policy and bankruptcy’s fresh start to leave debtors in virtual lifetime servitude to student loans,” he wrote.

The judge discharged their student loans: $83,000 in debt, wiped away.

“I was ecstatic,” Ms. Raney-Johnson said of the moment she received the decision letter. “I probably said some curse words.”

Their good fortune didn’t last.

 

 Pam Monroe saw education as a way to obtain independence she hadn’t had before.Credit...Joseph Rushmore for The New York Times

Laughs Over Lunches

 

Opposing lawyers — whether they work for the federal government or for private lenders — are tenacious. Their approach can feel like bullying, if not humiliation.

When Pamela Monroe went to an Arkansas bankruptcy court in 2015, she was 57 with a student-loan balance of about $56,000. She was working in the fragrance section of a Dillard’s department store, and her lunch habits — like $6.10 at Taco Bell and $12.72 at Olive Garden — were a focus of intense interest.

 Eating out, Ms. Monroe testified, was her primary form of recreation and a midday necessity: Co-workers would sometimes steal colleagues’ lunches from the break room.

“They laughed about that when I told them,” she said. “I felt at that moment like I was a cornered animal and they were poking sticks at me.”

Ms. Monroe said she had spent her life making choices that others seemed to dictate — marrying two years out of high school and becoming a mother, as her parents seemed to want. After two divorces, she reached for higher education in a bid for independence.

She graduated from the University of Arkansas-Fort Smith with a communications degree and pursued a master’s in speech language pathology. She didn’t finish that program, leaving her with the debt but not the advanced degree. And she couldn’t seem to break out of low-paying work.

“I would have loved to pay them back,” Ms. Monroe said. “But I never could, because nobody ever saw any value in me.”

 Judge Ben Barry found Ms. Monroe’s restaurant spending excessive, but noted that she had changed jobs frequently seeking higher pay. Her income, he wrote in his opinion, about doubled between 2010 and 2015, to over $26,000.

But even a reduced budget he outlined would not leave her enough money to make her student loan payments, so he discharged just over half of her student loans.

She would most likely have been paying that off until she was in her 80s. But last year, Ms. Monroe, now 63 and dealing with osteoarthritis and other health problems, received a disability discharge for the rest of her debt.

Now all she wants to do is live out her days in her $510-a-month apartment in a retirement community. “It has a sprinkler system and an elevator, very safe,” she said.

But she hasn’t stopped thinking about the way the system and its actors — like the lawyer on the opposite side in her case — seemed to render judgment on her life choices.

“I didn’t do anything wrong,” she said. “I was just living, but I got in trouble for eating.”

Back to Haunt Them

In 2016, the Johnsons learned their loan discharge was being appealed by lawyers for Educational Credit Management Corporation.

Paradoxically, they were worse off because their financial situation had improved: Ms. Raney-Johnson earned a promotion, and Mr. Johnson, now in his mid-40s like his wife, found a stable government job. A year after discharging their loans, Judge Berger concluded that the couple could now “easily” maintain a minimal standard of living and reinstated their debt — which had ballooned even more because of interest charges.

Preparing to send their own children to college, the Johnsons requested another forbearance. Their balance continues to grow: It’s roughly $104,000 today.

Ms. Raney-Johnson took the final class she needed for her biology degree over the summer. But the debt was already piling up for the next generation. Their oldest, a college sophomore, expects to owe about $45,000 when she graduates. Their middle child, a high school senior, is looking at colleges now. Ms. Raney-Johnson said she and her husband — who are putting about $5,000 a year toward their daughter’s tuition — would try to remain in forbearance for now.

In August, they received a notice about an income-driven repayment plan, which would start out costing about $550 a month. From there, the cost depends on many factors, including job changes, raises and eligibility for forgiveness programs. If they’re able to get into the public service program, the debt could go away a decade after they start paying. If not, the bills could continue coming for about 20 years — right around the time the Johnsons will be trying to retire.

The experience, Ms. Raney-Johnson said, has been “disheartening.” She and her husband had run up against opposition that could keep going with little regard for time or expense, knowing that they couldn’t.

“It feels like getting screwed over by someone with a lot more power and money,” she said.