Bankruptcy Litigation Trends NCHELP EFC Student Loan Legal Meeting

2 The changing climate….. Last major revisions to the Bankruptcy Code in BAPCPA. March 23, 2010 – United Student Aid Funds, Inc. v Espinosa. Student loan “debt bomb.”

3 Student Loans in Bankruptcy NACBA survey During January 2012, the National Association of Consumer Bankruptcy Attorneys (NACBA) invited more than 4500 of its members to participate in an online survey. With 860 completed responses tallied, the online survey attracted a high percentage (19 percent) of potential respondents. HIGHLIGHTS OF SURVEY FINDINGS More than four out of five (81 percent) bankruptcy attorneys say that potential clients with student loan debt have increased “significantly” or “somewhat” in the last three-four years. Overall, about half (48 percent) of bankruptcy attorneys reported significant increases in such potential clients. Nearly two out of five (39 percent) of bankruptcy attorneys have seen potential student loan client cases jump percent in the last three-four years. About a quarter (23 percent) of bankruptcy attorneys have seen such cases jump by 50 percent to more than 100 percent.

4 NACBA Survey…..cont. Most bankruptcy attorneys (95 percent) report that few student loan debtors are seen as having any chance of obtaining a discharge as a result of undue hardship. More than four out of five (82 percent) bankruptcy attorneys see the limited availability of student loan discharge in bankruptcy as “a big problem” barring a fresh start for clients. Seven out of 10 bankruptcy attorneys see the lack of ability to separately classify student loans debts for debtors using chapter 13 as a “big problem.” More than three out of five (61 percent) of bankruptcy attorneys dealing with potential student loan debtor clients have seen cases of debts more than 15 years old still being pursued.

5 United Student Aid Funds, Inc. v. Espinosa, 130 S.Ct (2010) End result: Student loans were discharged without a separate adversary proceeding based on plan language. Overruled a decade of case law holding that student loans could not be discharged in bankruptcy absent a finding of undue hardship (“discharge by declaration”). Bankruptcy judges tasked with ensuring plans do not contain offending language. Threat of sanctions.

6 Post-Espinosa reality Espinosa has a very limited fact pattern A Chapter 13 plan that proposes to discharge a student loan debt without a determination of undue hardship violates 11 U.S.C. §§ 1328(a)(2) and 523(a)(8). Espinosa does not extend to Chapter 7 cases. See In re Smyth, 470 B.R. 459 (B.A.P. 6 th Cir. 2012). Actual notice trumps procedural notice requirements. Based on the current bankruptcy code, proving undue hardship is the only way to discharge student loan debt in bankruptcy.

7 The Undue Hardship tests 9 of 11 circuits adopted Brunner 8 th Circuit adopted the “totality of the circumstances” test 1 st Circuit has refused to adopt a test In re Bronsdon, (1 st Cir. 2011)

8 Brunner backlash Brunner was decided in 1987 – when student loans could be discharged under a statutory “time in repayment” provision. Jurisdictions that use “totality” criticize “good faith” component of Brunner. Courts have imported requirements into Brunner that were not part of the original decision (e.g. “certainty of hopelessness”)

9 Is a uniform test for undue hardship necessary? The same set of facts should NOT yield different results based solely on where the bankruptcy is filed. The U.S. Supreme Court may decide the question next term. Roger Traversa – the Supreme Court docket says the cert petition will be considered at the Sept. 24 th conference.

10 Alternative Repayment Plans Most jurisdictions require that a debtor explore alternative repayment options prior to seeking a discharge in bankruptcy. Can a debtor have an undue hardship if the required IBR/ICRP payment is $0? Judges see IBR/ICRP as a challenge to judicial discretion. See Terrence Michael, “JUDGES?!--WE DON'T NEED NO STINKING JUDGES!!!”: THE DISCHARGE OF STUDENT LOANS IN BANKRUPTCY CASES AND THE INCOME CONTINGENT REPAYMENT PLAN. 38 Tex. Tech L. Rev. 73 (2005). Congress could have amended §523(a)(8) in 2005 but chose not to.

11 Bankruptcy Litigation Trends: Outlook Push to remove nondischargeability presumption for private loans Challenges to Brunner test for undue hardship Role of IBR/ICRP in undue hardship litigation Return to “time in repayment” requirement?

12 Bankruptcy Litigation Trends: Questions? Kelly Prettner Associate Attorney, Manager of Legal Operations ECMC (651)