Judge Thorne in In re: Cleveland L. Carr, Debtor. In re: Antoinette L. Lindsey, Debtor., No. 17-25013, 2018 WL 1750540 (Bankr. N.D. Ill. Apr. 10, 2018) examined whether contracts between debtors and their attorneys supported plan provisions providing for payment of counsel's fees prior to or concurrently with payment of secured auto lenders.  Debtor provided an affidavit asserting that he was informed of the precise terms of the accelerated compensation s well as the detrimental effect it would have on the early plan payments on the car loan; resulting in it being much more difficult for him to keep his vehicle if the case were dismissed early.  In another case included in the same decisions, In re Lindsey, the debtor provided for preconfirmation adequate protection to the lender of $25/month with post-confirmation payments increasing to $500/month.     The chapter 13 trustee objected that 1) secured creditors were not being paid in equal monthly payments, 2) the attorneys have not shown that they have benefited the estate, 3) the attorneys breached their fiduciary duty to their clients by not disclosing that they would be paid ahead of other creditors; particularly the auto lenders; and 4) the attorneys violated a local rule by coming to an agreement with their clients concerning their compensation and the agreements were not then reduced in writing, signed by both parties, and filed with the court.  The Court initially found that accelerated payment of attorneys fees is permissible under the Bankruptcy Code.   Section 1325(a)(5) provides in relevant part that:with respect to each allowed secured claim provided for by the plan— (A) the holder of such claim has accepted the plan; (B) ... (iii) if— (I) the property to be distributed pursuant to this subsection is in the form of periodic payments, such payments shall be in equal monthly amounts; and (II) the holder of the claim is secured by personal property, the amount of such payments shall not be less than an amount sufficient to provide to the holder of such claim adequate protection during the period of the plan; or (C) the debtor surrenders the property securing such claim to such holder ....whereas Section 1326(b) provides in relevant part that:Before or at the time of each payment to creditors under the plan, there shall be paid— (1) any unpaid claim of the kind specified in section 507(a)(2) of this title.   Under §1326(b) initial payments to administrative expenses cannot commence on a date later than the date on which initial payments to creditors begin.  The query then is whether plan can propose a lower payment to secured creditor until attorneys fees are paid?  Then, does it matter if the secured creditor objects to such treatment?  The majority of courts have found that the secured creditor's failure to object to such treatment satisfies §1325(a)(5)(A) when the creditor was properly noticed.  Finding no such objections were filed in these cases, the trustee's objection as to equal payment provision was overruled.  The trustee's objection on good faith grounds was also overruled, in that there is no per se rule against plans that propose payment of attorneys fees prior to payment of the auto lender.   In re Crager, 691 F.3d 671, 675-76 (5th Cir. 2012).     In ruling on the trustee's objections to compensation, the Court initially found that there is no requirement that the chapter 13 debtors' attorneys' fees benefit the estate.  Until 1978 counsel were permitted to have their fees paid from the estate as an administrative expense only if they could demonstrate that their services had provided a 'clear and substantial benefit to the bankruptcy estate'.  This was changed with the 1978 enactment of the Bankruptcy Reform Act and the 1994 amendment to §330; resulting in the general rule that while chapter 7 attorneys can only be compensated from the estate when their services benefit the estate; §330(a)(4) permits compensation to chapter 12 and 13 attorneys based on the benefit and necessity of such services to the debtor regardless of separate benefit to the estate.  Upon allowance by the court, such fees become an administrative expense, requiring payment in full prior to or concurrently with payments to creditors.  The court noted the trend from lodestar fee computations to presumptively reasonable fees, and found a $4,000 presumptively reasonable fee in their district.   Next the Court examined whether counsel's fiduciary duty required disclosure of the negative ramifications of an early dismissal on the interest of the debtor where fees are paid on an accelerated basis.  The Court found disclosure was required prior to or simultaneously with entering the retention agreement that if a case were dismissed early, it could substantially impair the debtor's ability to keep their vehicle.  This requirement is found under Illinois state law rather than bankruptcy law, as the relationship between private lawyers and their clients is a local concern.  However, a violation of such duty may render the compensation sought excessive and unreasonable.  Even as to presumptively reasonable fees, a reasoned objection shifts the burden of proof back on the fee-claimant who must establish the reasonableness of such fees under §330.    The attorney-client relationship is a fiduciary relationships as a matter of law.  When counsel places their own personal interest above that of the client, counsel is in breach of the fiduciary duty by reason of the conflict.   Horwitz v. Holabird & Root, 212 Ill. 2d 1, 9, 816 N.E.2d 272, 277 (2004) (quoting RESTATEMENT (SECOND) OF AGENCY § 14N, cmt. a, at 80 (1958)).  On the other hand fees due under contract  has a more limited role as to fiduciary duty; and the fact that counsel seeks to be paid for services in chapter 13 under contract does not create a conflict of interest.    Treating the compensation issue as a matter of contract, and given the minimal fees received prior to filing, it is clear the parties anticipated payment of the fees through the plan, as permitted under §330.  Under Illinois law even a fiduciary relationship can exist even before a retainer contract in certain situations, such as the attorney-client relationship.  RESTATEMENT (SECOND) OF AGENCY § 390 cmt e. (1958).  This  duty requires full disclosure of the compensation under the fee contract and consequences thereof.   The application of the pre-retention fiduciary duty is based on three reasons.  1) The debtors are debtors with primarily consumer debts.  The duty is designed to protect vulnerable and unknowledgeable parties.  2) the agreements were signed on the eve of bankruptcy, when debtors are often anxious and desperate to retain houses, vehicles, or other property.  3) Even when a debtor is not vulnerable and unknowledgeable, there is a heightened reliance on fair dealing from a prospective agent in setting the terms of compensation where the implications of the fee structure on the interests of the client can only be known based on information within the control of the prospective agent.  This applies here where the implications of the fees could only be known by reference to the Bankruptcy Code's provisions for payment of fees from the estate and provisions of the chapter 13 plan.  Because in the Carr case the affidavits showed the debtor understood the implication of early payment of fees would result in a practical inability to retain his car if the case were dismissed early, the objection is overruled in that case, and sustained in the Lindsey case where no such understanding has been shown.  Both fee applications were denied for failing to comply with the local rule requiring filing of any agreement pertaining to compensation be signed and filed with the court. The rule encompasses agreements disclosing that the attorneys would be paid ahead of other creditors and the debtors' acknowledgement and acquiescence of that fact.  While counsel filed the locally mandated Court Approved Retention Agreement, under the local rule they are also required to file the required full written agreement regarding their understanding as the precise manner of the attorneys compensation under the chapter 13 plan.  ,

  In In re: Tony Randall & Wendy Randall, Debtors., No. 17-33322-HDH13, 2018 WL 1737620 (Bankr. N.D. Tex. Apr. 10, 2018) the Court found that not only was post-petition interest on prepetition domestic support obligations ('DSO's) permitted to be paid in a chapter 13 plan, but such interest was required to be paid in the plan even when other unsecured creditors were not receiving 100% of their claims.  The debtors initially scheduled the DSO claims to be paid in full plus interest, but the chapter 13 trustee objected.  When the plan was amended to omit interest, the State Attorney General's office objected,  The DSO claims totaled $47,112.26.    The Court recognized a split of authority in the 5th Circuit.  In re Hernandez, found that postpetition interest may not be paid through the Chapter 13 plan. 2007 WL 3998301 (Bankr. E.D. Tex. Nov. 15, 2007).  This case reasoned that even though the BAPCPA amendments moved DSO claims from 7th priority to 1st in §507(a)(1)(A), priority status was only granted to such claims owed as of the filing of the petition.  Since no interest was owed as of filing, it was not entitled to priority status.  Also, §507 only applies to allowed claims, and §502(b)(2) mandates disallowance of claims for unmatured interest.  Contrary conclusions were found in . In re Resendiz, 2013 WL 6152921 (Bankr. S.D. Tex. Nov. 20, 2013) and In re Lightfoot, 2015 WL 3956211 (Bankr. S.D. Tex. June 22, 2015).  These cases rely on §104(14A) which expressly includes interest accruing under nonbankruptcy law in the definition of a DSO.  As Texas Family Code § 157.265 provides for 6% interest per year on DSO claims, such interest must be includes as part of the claim in bankruptcy.  §1322(a)(2) requires that a plan provide for payment in full of all priority claims.  As to §502(b)(2), the Lightfoot case found that the more specific provision of §104(14A) superseded that rule as to DSO's.   The Court follows the reasoning of the 2nd line of cases.  It stressed though that DSO's are only entitled to interest where state law so provides, and even in Texas not all DSO obligations are entitled to interest.    Michael Barnett.  www.hillsboroughbankruptcy.com

As a bankruptcy lawyer, I see many hard working people who fall prey to these internet payday loans. And they are afraid if they stop paying the loans that somehow the consumer had done something illegal.  So I’m happy to have proof of what I tell them. In most cases it’s the internet payday loan […] The post Scott Tucker King of Indian Tribe Payday Loans Fined a Billion and Convicted by Robert Weed appeared first on Robert Weed.

Here at Shenwick & Associates, many of the people we work with have student loan debt.  This should come as no surprise, considering that Americans owe more in student loan debt than credit card debt.  We’ve written about student loan debt and how difficult it is to discharge in bankruptcy previously (mostly recently here).  This month, we wanted to tell you about a pending case that may offer hope for some student loan debtors. Let’s start by looking at the relevant provision of the Bankruptcy Code.  Section 523 governs exceptions to the discharge of debt, and § 523(a)(8) provides that: A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt-unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor's dependents, for-an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or an obligation to repay funds received as an educational benefit, scholarship, or stipend[.] This case (Haas v. Navient Solutions) revolves around the question of what an “educational benefit” is.  One of the co–plaintiffs (Haas) borrowed money to prepare for the Texas bar exam in 2009.  The other co–plaintiff (Shahbazi) borrowed money to attend a unaccredited technical school in Virginia in 2002.  Haas filed for bankruptcy in 2015 and Shahbazi filed for bankruptcy in 2011.  In both cases, the debtors listed the debt to Navient’s predecessors (which we will just refer to Navient, since two Navient entities are the co–defendants) as non–priority general unsecured claims instead of priority unsecured claims.  Navient was notified of the discharge, but instead of filing adversary proceedings (bankruptcy litigation) to contest the dischargeability of these debts, Navient and various collection agencies continued to try to collect on these debts, which the co–plaintiffs allege to be in violation of the discharge injunction in § 524(a)(2) of the Bankruptcy Code. So Haas and Shahbazi filed their own adversary proceeding against Navient, contending that the debts they were incurred were not “Qualified Education Loans” excepted from discharge, but instead “Consumer Education Loans” that targeted students attending unaccredited schools, and seeking class–action status.   Navient moved to dismiss the case, which was denied last month. The case is far from over, and if even if the plaintiffs and their class are successful, this would only affect a small portion of student loan debtors.  In our experience, most clients have qualified educational loans, which are very difficult to discharge in bankruptcy without undue hardship.  However, for student loan debtors who have been on the ropes since the seminal Brunnerdecision and the changes to dischargeability of educational loans in BAPCPA, this is welcome news.  For any questions about your student loan debt, please contact Jim Shenwick.

By Brandon Kochkodin (Bloomberg) -- The FBI raid on the offices of President Donald Trump’s lawyer, Michael Cohen, included one surprising aspect: taxi medallions. Agents were seeking documents on Cohen’s ownership of “numerous” New York City taxi medallions, according to CNN. That might not be as salacious as records showing payments to an adult film star or to a former Playboy Playmate, but taxi permits were once a bonanza for alternative asset investors. Prices for the permits jumped 60 percent from March 2011 to March of 2014 when they sold for $1 million each. The S&P 500’s total return in that period was 53.2 percent. But the entrance of Uber and Lyft has slashed their value. Permit prices dropped almost 80 percent by March 2017 before recovering a bit over the last year. It’s not clear when Cohen made his investment. ©2018 Bloomberg L.P.

The March 2018 New York City Taxi & Limousine Commission (TLC) sales results have been released to the public. And as is our practice, provided below are James Shenwick’s comments about those sales results.1. The volume of sales continues to remain low. In March, there were only 29 taxi medallion sales (excluding stock transfers).2. 14 of the 29 sales (almost half) were foreclosure or estate sales, which means that either: (1) the medallion owner defaulted on the bank loan and the banks were foreclosing to obtain possession of the medallion or; (2) the medallion owner died, and the estate was selling the medallion. We disregard these transfers in our analysis of the data, because we believe that they are outliers and not indicative of the true value of the medallion, which is a sale between a buyer and a seller under no pressure to sell (fair market value).  An additional transfer was from an individual to an LLC for no consideration, which we have also excluded from our analysis.3. The 14 regular sales they ranged from a low of $163,333 (four medallions), to six medallions at $180,000, to two medallions at $225,000, and two medallions at the higher end of the price scale at $300,000 and $350,000.4. The low sales volume seems to indicate that at this stage of the market, not many parties are involved in selling or buying medallions, possibly due to the fear that medallion prices may further decrease.5. The median of March’s sales was $180,000, a $17,500 (9 %) decrease from February’s median sales of $197,500.6. However, politicians have spoken recently about capping the number of ride–share app drivers and/or instituting congestion pricing in Manhattan – either of these measures would stabilize or increase the price of medallions.Please continue to read our blog to see what happens to medallion pricing in the future. Any individuals or businesses with questions about taxi medallion valuations or workouts should contact Jim Shenwick at (212) 541-6224 or via email at jshenwick@gmail.com.

By Danielle D'OnfroNestled among several potential blockbuster cases in the court’s penultimate week of argument this term, there’s a quiet personal bankruptcy case. The case, Lamar, Archer & Cofrin, LLP v. Appling, ostensibly concerns the breadth of the word “respecting” in the Bankruptcy Code. But in simpler terms, the case is about how the Bankruptcy Code treats dishonest debtors. The goal of consumer bankruptcy is giving debtors a “fresh start” so that they can get on with their lives despite past financial missteps. The Bankruptcy Code does this by discharging debtors’ personal responsibility to repay many, but not all, obligations incurred before they filed their bankruptcy petitions. Of course, relieving debtors of their obligations necessitates that their creditors bear losses.And that result, in turn, has its own ripple effects throughout the economy — from increasing the cost of credit for everyone to further bankruptcies when a creditor cannot itself absorb the loss. The Bankruptcy Code thus balances the competing goals of providing individuals the relief they need and minimizing unfairness to creditors. One way the Bankruptcy Code does this is by limiting bankruptcy’s discharge to “honest but unfortunate debtors.” Debtors remain personally liable for any non-dischargeable debt even after the conclusion of their cases, meaning that they can face wage garnishment and any other method of collection authorized under state law. This case arises from a dispute between Lamar, Archer & Cofrin, LLP, an Atlanta law firm, and one of its former clients, R. Scott Appling. Like many bankruptcy disputes, this one involves questionable financial and strategic choices by both parties. In 2004, Appling hired Lamar and another firm to represent him in a dispute against the former owner of his business. By March 2005, Appling’s bill had grown to $60,000, which he could not (or would not) pay at the time. He allegedly induced Lamar to continue working on the case by explaining that he was expecting a tax refund of approximately $100,000 that would enable him to pay the outstanding bill. Appling contends that he never promised that the refund would be that large, but merely represented his accountant’s best estimate. In fact, Appling received a far smaller tax refund in October 2005 and promptly spent the money on business expenses. According to Lamar, in November 2005 Appling claimed to still be waiting for his tax refund; Lamar thus kept working for Appling until June 2006, when the firm learned the truth. The firm sued and won a judgment for $104,179 in Georgia state court in October 2012. Three months later, Appling filed for Chapter 7 bankruptcy and Lamar filed an adversary proceeding in the Middle District of Georgia, seeking a determination that Appling’s $104,000 outstanding bill was non-dischargeable under 11 U.S.C. § 523(a)(2)(A) because it was “obtained by fraud.” That case went to trial in September 2014, in order to resolve the parties’ competing accounts of two conversations that had occurred nearly a decade earlier. The provision at issue is 11 U.S.C. §523(a)(2), which states: “A discharge … does not discharge an individual debtor from any debt … for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition.”  Then, §523(a)(2)(B) says: “(B) use of a statement in writing—(i) that is materially false; (ii) respecting the debtor’s or an insider’s financial condition; (iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and (iv) that the debtor caused to be made or published with intent to deceive.”  Whether one should read an “or” between §523(a)(2)(A) and §523(a)(2)(B) is one of the issues in this case. The provision at issue is 11 U.S.C. §523(a)(2), which states: (a) A discharge … does not discharge an individual debtor from any debt— … (2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by— (A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition; (B) use of a statement in writing— (i) that is materially false;(ii) respecting the debtor’s or an insider’s financial condition;(iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and(iv) that the debtor caused to be made or published with intent to deceive.Whether one should read an “or” between §523(a)(2)(A) and §523(a)(2)(B) is one of the issues in this case. Appling filed a motion to dismiss, arguing that his debt did not fall within the exception under Section 523(a)(2)(A) because the alleged misrepresentation was a “statement respecting [his] financial condition.” The bankruptcy court denied the motion, reasoning that the term “statement respecting the debtor’s . . . financial condition” covers only statements about a debtor’s “overall financial condition or net worth.” Because Appling allegedly lied about a single asset — his tax refund — he did not lie about his overall financial condition. The court did not grapple with Section 523(a)(2)(B). The U.S. Court of Appeals for the 11th Circuit reversed, joining the U.S. Court of Appeals for the 4th Circuit in holding that a statement about a single asset could be a statement respecting the debtor’s financial condition. It went on to find that Lamar could not bring a claim because Section 523(a)(2)(B) provides that misrepresentations about the debtor’s financial condition are only non-dischargeable if made in writing. The Supreme Court granted certiorari on the question of “whether (and, if so, when) a statement concerning a specific asset can be a ‘statement respecting the debtor’s … financial condition’ within Section 523(a)(2).” In their briefing, the parties offer strikingly different interpretations of Section 523(a)(2). Lamar argues that the Supreme Court should follow the U.S. Courts of Appeals for the 8th, 10th and 5th Circuits and hold that statements about a single asset are not statements respecting the debtor’s financial condition. Under this view, only misrepresentations about the debtor’s overall personal balance sheet fall within Section 523(a)(2)(A)’s exception (really, the exception to the exception, because dischargeability is the norm). Appling, for his part, contends that whatever statements he may have made about the tax refund were statements respecting his overall financial condition and therefore fell within the exception. He rests his argument on the ample precedent interpreting terms like “respecting” and “relating to” broadly. A group of law professors, represented by the Institute of Bankruptcy Policy, make a third, and perhaps more appealing, argument in an amicus brief supporting Appling. They maintain that this case need not test the boundaries of “respecting” because Appling actually intended to talk about his financial condition — his ability to pay his bills as they came due — when he spoke about his tax return. Although the current Bankruptcy Code dates only to 1978, Congress built the code on nearly a century of prior bankruptcy practice. Both parties argue that this historical practice militates in favor of their desired reading of the statute, but Appling’s amici have the more sophisticated argument.They argue that Section 523(a)(2)(A) in the 1978 Code merely re-enacted provisions from the Bankruptcy Act of 1898, as amended in 1903, 1926 and 1960. The 1903 and 1926 amendments to the code codified the discharge exception, they argue, but limited it to cases in which the debtor made a written misrepresentation. Consumer lenders, being a creative lot, realized that their debt would be non-dischargeable if the debtor lied in the origination process, and so they began requiring debtors to sign forms misrepresenting their assets in the origination process. Congress attempted to fix this problem in 1960 when it provided that false written financial statements regarding a debtor’s financial condition were not a basis for denying a discharge unless the lender actually relied on the falsehood. Before Congress replaced these provisions with Section 523(a)(2) in 1978, the weight of the case law held that a statement about any one of a debtor’s assets could be a statement about the debtor’s financial condition. If Congress meant to incorporate this case law, then, many statements about a debtor’s assets would qualify under the exception to non-dischargeability. This interpretation is appealing in practical terms: If a homeowner says “my house is in foreclosure,” the listener knows something about that homeowner’s overall financial condition, just as she does if the same homeowner says “my net worth is a million dollars.” Lamar responds, though, that this approach stretches the word “respecting” too far, arguing that it “takes a sledgehammer” to the well-established principle that debt obtained by fraud is non-dischargeable. Depending on how it resolves the main issue in the case, the court may also need to decide how Section 523(a)(2)(B)’s “use of a statement in writing” language fits with Section 523(a)(2)(A)’s exception to non-dischargeability. Appling and the 11th Circuit treat this provision as an exception to the exception to the exception: Written fraudulent statements about the debtor’s financial condition on which the creditor relies render a debt non-dischargeable. In its opinion, the 11th Circuit explained that this rule “may seem harsh after the fact, especially in the case of fraud,” but “it gives creditors an incentive to create writings before the fact, which provide the court with reliable evidence upon which to make a decision.” The 11th Circuit’s reading seems like the most plausible interpretation of the statutory text. At the same time, though, it raises some difficulties. Lamar argues that this reading involves the court substituting its own policy preferences for those of Congress. Indeed, the 11th Circuit’s view is somewhat difficult to square with the very problem that the 1960 amendment sought to fix: shady lenders encouraging borrowers to falsify documents to render their debts non-dischargeable. Moreover, Lamar’s amicus, the National Federation of Independent Business Small Business Legal Center, raises additional states’ rights concerns, calling this reading an encroachment on the states’ prerogative to create their own statutes of frauds. Frankly, it is surprising that the Supreme Court even chose to hear this case. Although the case largely turns on a legal question, the parties still seem to be fighting about factual premises, arguing about who said what to whom 10 years before the trial. That said, it is good to see the court willing to tolerate a slightly messy vehicle to bring much-needed clarity to the Bankruptcy Code, especially because, as I’ve observed before, messy vehicles are the norm in the bankruptcy world.© 2018 SCOTU Sblog 

By Jillian Berman A recent court ruling may offer hope for thousands of struggling borrowers looking to escape education-related debts. A Texas bankruptcy judge denied a request by student loan company, Navient, last month to dismiss a class-action lawsuit accusing the firm of illegally collecting on loans that were discharged in bankruptcy. Navient is appealing. Patricia Christel, a spokeswoman for the Navient, declined to comment on pending litigation, but noted in an email that the company supports reform “that would allow federal and private student loans to be dischargeable in bankruptcy for those who have made a good-faith effort to repay their student loans over a five-to-seven year period and who still experience financial difficulty.” The decision last month means the case can move forward and it also offers the opportunity for an appellate court to weigh in on whether loans historically viewed as exempt from bankruptcy discharge can actually be wiped away in the process. “This is one to watch for potential,” said John Rao, an attorney at the National Consumer Law Center and expert on consumer bankruptcies. The ruling comes as lawyers across the country are increasingly looking to challenge the conventional wisdom that any type of student loan isn’t dischargeable in bankruptcy. It also comes as the Department of Education is reviewing the high standard student loan borrowers must meet in order to have their debts discharged in bankruptcy. This case centers around a very specific type of debt — and a small share of Navient’s private loan portfolio — money loaned to borrowers to pay for unaccredited programs, such as bar exam study courses and K-12 educational expenses. The lawyers representing the class estimate that about 16,000 borrowers fall into this category, according to Austin Smith, one of those attorneys. But if the appellate court rules in favor of the plaintiffs that could indicate that borrowers with similar loans from other companies could also be entitled to relief. “If I were advising other companies who have these loans and have taken similar positions as Navient — I would be worried,” said Dalié Jiménez, a professor of law at the University of California-Irvine’s School of Law.  Reasons for student loans to be exempt from discharge in bankruptcy To discharge a loan in bankruptcy, they must fall into one of four categories: 1. A federal student loan. 2. A student loan made by a qualified nonprofit (say, by a school). 3. A qualified education loan, which could be made by a for-profit company, but would need to be made for qualified educational expenses; in other words, those incurred at an accredited program for the cost of attendance. 4. Funds received as an “educational benefit.” Traditionally, bankruptcy courts have determined that the types of loans in question in this case can’t be discharged because they were received as an “educational benefit.” But recently, lawyers and judges have started to question whether loans to help borrowers study for the bar and other similar debts truly fit into that category. “It does definitely reflect a trend of this kind of decision,” Rao said of the recent ruling. In his order, the judge argues that the phrase “educational benefit,” likely refers to something different from simply a loan used for educational expenses. And, instead, refers to arrangements like money fronted by an employer for a worker to attend college that would need to be repaid if that employee leaves their job. “By its use throughout [the provision], Congress was certainly aware of the term “loan” and is presumed to have made a conscious decision of when to use it and when to choose something different,” the order reads.  The legislative history of funds with ‘educational benefit’  That rationale appears to be in line with the legislative history of the educational benefit term, according to a recent paper by Jason Iuliano, a fellow at the University of Pennsylvania School of Law. The paper argues that — by viewing funds received for educational benefit to mean loans — judges have been interpreting the educational benefit language too broadly. Iuliano notes that during congressional hearings around the time the language was added, an expert explained to members of Congress that it was meant to only exempt conditional grants from being discharged in bankruptcy. “It was an effort to stop this very, very narrow category of exceptions,” Iuliano said. “It just ballooned up to cover pretty much anything you can make a case that advances one’s education.”Judges have been using this broader interpretation in part because it’s been so rarely challenged historically, Iuliano said. Because of the popular narrative that student debt is impossible to discharge in bankruptcy, it’s extremely rare for debtors to actually attempt to do so. What’s more, lawyers have also historically shied away from representing student loan borrowers trying to discharge their debt in bankruptcy, Iuliano said. Now that’s starting to change, said Rao. As more lawyers are beginning to challenge whether these debts are dischargeable in bankruptcy, judges are now hearing and carefully considering both arguments, he said. “Judges are not just going to automatically assume that the loan is entitled to this protection from discharge,” Rao said. Of course, the case is far from over. And Iuliano notes that even if the judge rules in a way that’s the most favorably possible to the debtors, the ruling would still only cover a fraction of borrowers or those with these very specific types of loans from this company. Still, he said there’s reason to believe these borrowers tend to be worse off than others with student loans and so it would help those who are struggling the most. “There’s probably a large swath of people that this applies to that they could get some fairly immediate relief,” Jiménez said. Copyright © 2018 MarketWatch, Inc. All rights reserved.

By Sarah O'Brien For people facing crushing debt, the weight of carrying it can seem unbearable. As bills go unpaid and debt collectors start calling, one nagging question might loom large: Would bankruptcy fix this? Depending on the type of debt you face and the rest of your financial picture, the answer could be yes. "Many people who file for bankruptcy probably never thought they would," said Harvey Bezozi, a certified financial planner and certified public accountant at The Tax Wizard in Boca Raton, Florida."It's freeing, but it definitely can be traumatic to do it." An estimated 733,000 businesses and individuals are expected to wipe out or reduce their debt through bankruptcy in fiscal year 2018, according to the U.S. Trustees Program. That's far below the peak of 1.5 million filings in 2010, yet up from an estimated 685,000 in 2017. Meanwhile, overall household debt stood at more than $13 trillion at the end of 2017, according to the Federal Reserve. That includes $8.8 trillion in mortgages, $1.4 trillion in student loans, $1.2 trillion in car loans and more than $1 trillion in credit card debt. While student loan debt currently is difficult to discharge in bankruptcy — you must prove undue hardship — most other consumer debt is fair game for either eliminating or negotiating a lower payback amount, depending on the specifics of your case. Of course, getting to the point of actually filing the paperwork with the bankruptcy court means overcoming the emotions that accompany the decision. "When people finally get to the point of coming to talk to me, it usually takes another six months for it to sink in that they have to file," said Cara O'Neill, a legal editor with Nolo who also is a bankruptcy and litigation attorney in Roseville, California. She said there often is a triggering event — such as a lawsuit filed by a creditor — that makes people realize how much trouble they're in. "People really don't want to have to go the bankruptcy route," O'Neill said. "They usually do everything they can to avoid it." In fact, some end up tapping their retirement savings to stave off bankruptcy. Experts say this is a big no-no and often just delays the inevitable. For starters, retirement assets — including 401(k) plans and individual retirement accounts that you own and contributed to — generally are protected in bankruptcy. (Inherited IR As do not get the same protection.) An exception to this broad rule applies to IR As, both traditional and Roth: Up to a set amount per person — currently about $1.28 million — is safe from creditors. Any excess could go to pay off creditors. Additionally, if you already receive retirement income, that money is not necessarily protected in bankruptcy. Meanwhile, if you are younger than 59½ and turn to your retirement assets to pare down debt, you will pay an early-withdrawal penalty of 10 percent unless you meet one of a few exceptions. That's on top of paying ordinary income taxes on the distribution. "The most significant thing to avoid is using retirement funds to pay back debt," O'Neill said. "If you can come out of bankruptcy without debt but with your retirement savings still intact, you'll be in a [more] stable financial place." Filing options There are several ways to file for bankruptcy. Most individuals typically choose between Chapter 7 and Chapter 13. Each has filing fees of a few hundred dollars, and enlisting an attorney can add $1,200 to about $3,500, depending on where you live and the complexity of your case. "Most filers will stop paying the debts that are getting discharged and instead use that money to pay the costs of filing," O'Neill said. It's also worth noting that while federal law governs bankruptcy, there are some differences among states regarding what property cannot be sold to pay off creditors. For instance, in some states, wedding rings up to a certain value are protected. Both Chapter 7 and 13 stop collection activity like calls from creditors or debt collectors, wage garnishments and, potentially, lawsuits from creditors. (Court judgments already in place are trickier to get rid of in bankruptcy.) However, there are differences in who qualifies and how debt is treated in each option. Chapter 7 generally is for people who lack enough income to repay their debt and have little in the way of assets. It also is the most common way to file individual bankruptcy. This approach quickly erases certain forms of debt, including from credit cards, medical bills and personal loans. It does not, however, necessarily stop your car from being repossessed or prevent home foreclosure, O'Neill said. Chapter 13 generally gives you three to five years to pay back certain debt and keep the asset (i.e., house or car). It also prevents creditors from garnishing your wages or putting a levy on your bank account. For this filing option, you must have income, and your debt must be below a certain amount (about $1.5 million total). For individuals with debt above that threshold, Chapter 11 — which is largely similar to Chapter 13 — might be the best choice. This is the least commonly used option for individuals. Credit impact The biggest downside of bankruptcy is the hit your credit report takes. "You exchange not having that debt for having a bankruptcy on your report," said Ike Shulman, co-chair of the National Association of Consumer Bankruptcy Attorneys' legislative committee. However, he said, many people who file for bankruptcy already have tarnished credit due to delinquent loans. The filing remains on a credit report for seven to 10 years, although the impact decreases over time and your score will tick upward. In fact, most Chapter 7 filers can qualify for a mortgage loan four years later, O'Neill said. Regardless of which bankruptcy approach you take, you should be prepared to provide detailed information on your financial life to the court. That includes tax returns, bank statements, pay stubs and the like. Keep in mind, too, that having an initial consult with a bankruptcy attorney often is free. They also might have suggestions for handling your debt that does not involve bankruptcy. "No one wants to acknowledge they can't handle their bills," Shulman said. "People don't file bankruptcy because it's an easy decision to come to. It's because they don't have other choices." © 2018 CNBC LLC. All Rights Reserved. A Division of NBC Universal.