Monthly Archives: May 2013

Legislation May Allow Private Student Loans to be Discharged in Bankruptcy

By Ryan C. Wood

Student loans are currently non-dischargeable in bankruptcy. What this means is that even if you file for bankruptcy you will still have to pay for your student loans after receiving a discharge in the bankruptcy case. They do not get wiped out along with all your other discharged unsecured debts. This rule applies to both federal subsidized and private student loans. See 11 U.S.C. ยง523(a)(8).

One form of limited relief from this strict rule is what is called the Brunner Test adopted by some of the circuit courts. This test was taken from Brunner v. New York State Higher Education Services, 831 F.2d 395 (2nd Circuit, 1987). The Brunner Test states that student loans will be dischargeable if (1) you cannot maintain, based on your current income and expenses, a minimal standard of living if you are forced to repay the student loans, (2) these circumstances are likely to continue for a significant portion of the repayment period for the student loans, and (3) you have made good faith efforts to repay the loans. The courts have taken a very strict approach when determining whether the student loans are discharged. This three prong Brunner Test is very hard to pass for most people. It is very frustrating as a bankruptcy lawyer to not be able to provide complete relief for people who really need it. That is includes the burden of educational loan debt they cannot afford.

On February 6, 2013, Tennessee Democratic Representative Steve Cohen introduced H.R. 532 in the House of Representatives. There are currently 29 other Democratic cosponsors for the bill. The bill is called the Private Student Loan Bankruptcy Fairness Act of 2013. This bill will essentially render private student loans dischargeable with all the other unsecured debts such as credit card debt, medical bills, personal loans, and payday loans. There is no need to prove undue hardship. This bill says nothing about the federal student loans though, so they will still be non-dischargeable in bankruptcy even if this bill passes. H.R. 532 will undo the changes that the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 brought. Prior to BAPCPA, private student loans were dischargeable in bankruptcy along with all other general unsecured debts. Only federally subsidized student loans were non-dischargeable at that time.

The Private Student Loan Bankruptcy Fairness Act of 2013 could provide needed debt relief for people with huge student loan debts. Student loan debts are currently out of control and are a burden for many recent graduates that have a lot of debt and cannot find a job. H.R. 532 has currently been referred to the Subcommittee on Regulatory Reform, Commercial and Antitrust Law. If the bill makes it past the committee it will be presented for a vote in the House of Representatives. The House has more Republicans than Democrats so we would need some of these Republicans to vote for the bill in order to pass. If you support this bill I would highly recommend you contact your representatives to vote for the bill. Public pressure goes a long way.

If the Private Student Loan Bankruptcy Fairness Act of 2013 becomes the law of the land and you have a lot of private student loans to discharge, you should immediately contact an experienced bankruptcy attorney to help you discharge those student loans in your area.

Lien Stripping

By Ryan C. Wood

One of the most valuable tools of filing a Chapter 13 bankruptcy case is the ability to strip off a wholly unsecured junior lien from your real property. It does not matter whether it is for your primary residence or an investment property. The relevant factor is the value of the property. If the value of your property is worth less than your first mortgage, then junior mortgages and liens are unsecured and the liens may be stripped off in your Chapter 13 bankruptcy case. The liens have to be completely unsecured in order to be stripped off. If even a small portion of the lien is secured by some value it will not be stripped. Here is an example: First mortgage is $300,000, second mortgage is $100,000, judgment lien of $20,000. If the house is worth $250,000, the second mortgage and judgment lien may be stripped. If the house is worth $401,000, none of the liens may be stripped.

Obviously the ability to strip off unsecured junior liens from the property would help a lot of homeowners if this is available to them. The fair market value of the house is the biggest element in determining whether you can strip off the junior liens from the property. Your bankruptcy attorney may require you to obtain an appraisal of your home before filing the bankruptcy case. In order to strip off the junior liens from the property you need to file a motion (or adversary proceeding depending on the jurisdiction in which you filed your bankruptcy case) with the court to value the property. If the property valued is less than the first mortgage then you will be able to strip off the junior liens. So how does the court value the property? The valuation of the property is determined on a case by case basis.

If there is a huge difference between the home value and the first mortgage (for example, if the house is worth $200,000 and the first mortgage is $300,000) there will most likely not be a debate. However, if the value of the property is fairly close to the amount owed on the first mortgage there may be a debate on both sides as to the value of the property. The junior lien holders will of course allege that the value of the property is higher than the first mortgage and you and your bankruptcy attorney will argue that the value of the property is lower than the first mortgage. The judge will take a look at both sides and base his decision on what evidence is in front of him to determine the value (for example, is the valuation of the property coming from an appraiser. If there was an appraiser, how many years experience does he have in the field, and what area is he most familiar with).

One very important issue when looking at the value of the property is the date of the valuation. The judge would most likely place more weight on an appraisal that was more recent in time than another appraisal. But what exactly is the date that the judges look at to determine the value of the property? This is especially important because the value of property can fluctuate significantly in a short amount of time. Is it the date the petition was filed? The date the motion to value hearing is held? The date that the Chapter 13 plan is confirmed? The date may impact the ability to strip the junior liens especially if property values are on the rise. If the property increased in value to an amount that is higher than the first mortgage after the date the petition was filed and the judge believes that the value of the property should be taken at the time of the motion to value hearing, then the lien strip could be dead in the water. Unfortunately, the Ninth Circuit does not shed any light on what date should be used. Each case is looked at on a case by case basis with the judges look at what the purpose of the valuation is.