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Citation: 
2016 WL 4437606 (6th Cir. 2016)

Ruling: 

District Court erred in dismissing Trustee's Complaint to recover alleged fraudulent transfers and civil conspiracy charges. Case remanded for further proceedings.

Judge(s): 
Moore, Gibbons and Davis (Senior Circuit Judge from Fourth Circuit Court of Appeals)

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State unemployment benefits are paid pursuant to a system that relies on trust. Benefits are paid based on representations made by claimants that they are out of work and that they continue to seek out full-time work. If a claimant finds part-time work, then benefits are reduced accordingly. A recent opinion from the United States Bankruptcy Court for the Western District of Michigan (the “Court”) addresses a Chapter 7 debtor’s attempt to discharge a debt owed to the State of Michigan for overpaid unemployment benefits, and penalties and interest stemming from the overpayment.  Read More ›
Tags: Chapter 7, Western District of Michigan

There is a lot of chatter going on among Nebraska bankruptcy attorneys about reports of court hearings where debtors are being told they can keep a car even if they choose not to reaffirm the car loan as long as payments are kept current.
That’s news to me and many of my colleagues.  The Bankruptcy Reform Act of 2005 was supposed to end the Ride-Through option.  A “ride-through” is where a lender cannot legally repossess a vehicle even if the debtor does not sign a formal Reaffirmation Agreement as long as the loan was paid current.
A reaffirmation agreement is an agreement to pay a debt (typically a home or auto loan) listed in a bankruptcy case.  Reaffirmations basically pull a debt out of the bankruptcy and makes a debtor liable again for the payment.  Secured debts tend to be reaffirmed in Chapter 7 and unsecured debts almost never.  Clients tend to reaffirm their car loans because if they don’t the banks may repossess a vehicle regardless if the loan is paid current.
In contract to the reaffirmation agreement, a “ride through” gives the debtor the best of both worlds:  they keep the vehicle but are not liable for the debt in the event they can not afford future payments.  Keep the vehicle if you can afford the payments, but surrender it without being responsible for the debt if you cannot.  Everybody loved the ride through, except the banks.
BANKRUPTCY REFORM ACT ENDS THE RIDE-THROUGH?
Along comes the Bankruptcy Reform Act of 2005, and the bankers finally got what they wanted. The automatic bankruptcy stay rule was modified to ban the ride-through option:
11 U.S.C. 352(h)(1):
In a case in which the debtor is an individual, the stay provided by subsection (a) is terminated with respect to personal property of the estate or of the debtor securing in whole or in part a claim, or subject to an unexpired lease, and such personal property shall no longer be property of the estate if the debtor fails within the applicable time set by section 521(a)(2)—
(A) to file timely any statement of intention required under section 521(a)(2) with respect to such personal property or to indicate in such statement that the debtor will either surrender such personal property or retain it and, if retaining such personal property, either redeem such personal property pursuant to section 722, enter into an agreement of the kind specified in section 524(c) applicable to the debt secured by such personal property, or assume such unexpired lease pursuant to section 365(p) if the trustee does not do so, as applicable; and
(B) to take timely the action specified in such statement, as it may be amended before expiration of the period for taking action, unless such statement specifies the debtor’s intention to reaffirm such debt on the original contract terms and the creditor refuses to agree to the reaffirmation on such terms.
And with that 2005 amendment to the Bankruptcy Code, we all waived goodbye to the ride-through.  You want to keep that car?  Sign here please.
But now our court seems to be saying something else.  Several bankruptcy attorneys report of hearings where the court is saying they can keep their vehicle as long as the loan is paid current.  Is the Ride-Through back?
STATE LAW:
It appears that Nebraska Statute 45-1,107 is the key law in question.
Consumer credit transaction; default; consumer’s right to cure.
(1) With respect to a consumer credit transaction, after a default a creditor may neither accelerate maturity of the unpaid balance of the obligation nor take possession of collateral, except voluntarily surrendered collateral, because of such default until twenty days after a notice of the consumer’s right to cure is given. The consumer shall have twenty days after the notice is given to cure any default by tendering the amount of all unpaid sums due at the time of the tender, without acceleration, plus any unpaid charges, or by tendering any other performance necessary to cure the default as specified in the notice of right to cure. Cure shall restore the consumer to his or her rights under the agreement as though the default had not occurred.
(2) With respect to defaults on the same obligation after a creditor has once given notice of the consumer’s right to cure, the consumer shall have no further right to cure and the creditor has no obligation to proceed against the consumer or the collateral.
Okay, so a consumer has 20 days to cure a default.  But how exactly does this law help when a car loan is not reaffirmed in bankruptcy?  There are no cases in Nebraska even mentioning this law. Most auto loan contracts contain a “bankruptcy clause” which states that filing bankruptcy itself constitutes a breach of the agreement.  How does one cure that type of breach?
Based on the complete lack of case law on this statute, it is very unclear that Nebraska state law permits a general ride-through option.
BACKDOOR RIDE-THROUGH
Perhaps the court is referring to something called a “Back Door Ride-Through.”  To qualify for a backdoor ride-through, a reaffirmation agreement must be filed with the court and the court must then disapprove the agreement.  By filing the reaffirmation agreement with the bankruptcy court, the technical requirements of §521(a)(2) and §362(h) are satisfied.  See Coastal Fed. Credit Union v. Hardiman, 398, B.R. 161, 166 (E.D.N.C. 2008); In re Baker, 390 B.R. 524, 532 (Bankr. D. Del. 2008); In re Blakely, 363 B.R. 225, 2230 (Bankr. D. Utah 2007).  See Debtor’s Dilemma: The Economic Case for Ride-Through in the Bankruptcy Code, Amber J. Moren,The Yale Law Journal.
A backdoor ride-through creates a binding nonrecourse loan subject to the automatic bankruptcy stay protection.
Why would a court deny a filed reaffirmation agreement?  Generally, if it appears that a debtor does not have sufficient income to justify the monthly expense or if the the loan balance significantly exceeds the value of the vehicle, a court may decline to approve a reaffirmation agreement.
Is the backdoor open in Nebraska?  Does a reaffirmation agreement filed with the bankruptcy court that is not approved give rise to a ride-through?  There is no written opinion stating this, but it would seem from reported court hearings that such an option may exist.

Image courtesy of Flickr and Anders Ljungberg.

By Ron Lieber
So someone has asked you to co-sign for a student loan.
Chances are, it’s your child or grandchild, or perhaps a niece or nephew. You have unrelenting faith in this teenage freshman, or near certainty that graduate school will lead to a lifetime of gainful employment. And maybe you feel badly that the family has not been able to save enough to pay the bills outright.
Fine. But be very, very careful.
When you co-sign for a loan, you, too, are responsible for it. If the primary borrower can’t pay, you have to. If that borrower pays late, your credit could get nicked as well. And the mere existence of the loan on your credit report may keep you from being able to get other kinds of loans, since lenders don’t always want to do business with people who already have a lot of debt.
In some cases, the lender will try to collect from a co-signer even if the primary borrower is dead, as a recent collaboration between ProPublica and The New York Times revealed. Legislators in New Jersey held hearings on the matter this week.
After a postrecession lull, the so-called private loans — which generally have less favorable rates and terms than federal loans, and tend to require co-signers — are making a comeback of sorts. About one in 10 undergraduates takes one out, according to Sallie Mae, the biggest lender. Undergraduate and graduate students together borrow $10 billion to $12 billion in new private loans each year, according to MeasureOne, a market research and consulting firm, and the trajectory has been upward since the 2010-11 school year.

The $102 billion in outstanding private student loans make up just 7.5 percent of the $1.36 trillion in total student loan debt; the rest is made up of federal student loans. Undergraduates, however, can borrow only so much each year from the federal government before hitting limits.
So for anyone who wants to borrow more, there are the private loans, which usually come from Sallie Mae, banks and credit unions or other entities. The Consumer Financial Protection Bureau has a helpful guide on its site that explains the difference between federal and private loans in some detail.
Most private lenders require borrowers to have a co-signer to get a loan at all or to get a better rate. During the 2015-16 academic year, 94 percent of new undergraduate private loans had a co-signer, while 61 percent of graduate school loans did, according to MeasureOne’s analysis of data from six large lenders that make up about two-thirds of the overall market.
Tempted to help out by lending your signature and good credit history to someone? Your participation could indeed make a difference. Credible, an online loan marketplace, examined about 8,000 loans and found that undergraduates looking for loans who had co-signers qualified for loans with (mostly variable) interest rates averaging 5.37 percent. Students flying solo got a 7.46 percent quote.
For graduate students, the numbers were 4.59 percent for duos and 6.21 percent for people going it alone. For its average undergraduate loan — $19,232, paid off in eight years — the savings over time would be $1,896, which comes to about $20 a month.
But co-signing comes with plenty of risk. The Consumer Financial Protection Bureau outlined a number of them in a report it issued last year. In theory, most lenders provide a process by which the co-signer can be removed from the loan at the primary borrower’s request.
Perhaps the biggest concern for co-signers ought to be the bureau’s assertion last year that lenders turn down 90 percent of the borrowers who apply for these releases. The bureau’s director, Richard Cordray, described the process as “broken.”
But Sallie Mae said that more than half of its borrowers who make this request succeed. For PNC, the figure was 45 percent for the last 12 months. Citizens Bank reported a 64 percent number, while Wells Fargo said so few people had asked for a release that it did not track the number. (It’s possible that many don’t know that it’s possible, as the bureau chided lenders for not making the rules clear.)
What accounts for this gap? The bureau’s sample includes many loans that the original lenders sold to investors. These anonymous loan owners may not have the same incentive to be customer-friendly as big-name banks.
Some co-signers can’t get a release because the primary borrower doesn’t have sufficient income or a good enough credit score — fair and square. But sometimes it’s neither fair nor square. The bureau reports numerous instances where people make several months’ worth of payments in a lump sum but then don’t get credit for the consecutive monthly payments that some lenders use to keep score on people who are aiming to release their co-signers.
Worse still, co-signers who make payments themselves may discover after the fact that the lender requires the primary borrower to make years of on-time monthly payments before it will consider a release. So efforts by the co-signer to help the primary borrower stay on track may foil their very attempt to get themselves off the loan later.
There are rarer horrors, too, where the death or the bankruptcy of the co-signer causes an automatic default, according to the bureau. At that point, a mourning child can receive a bill for the full balance, and debt collectors may chase after the executor of the estate for a dead grandfather who co-signed a loan years ago. The big banks that offer private student loans say they do no such things.
As for more likely events, like credit-sullying late payments, just 4.37 percent of borrowers were at least 30 days late on their loans at the end of the first quarter, according to MeasureOne’s look at the big private lenders. But it’s not necessarily the same 4.37 percent who are overdue at any given moment. Moreover, that number will go higher during the next downturn, and there might be more than one bad economic cycle during any individual’s tenure as a co-signer.
A CreditCards.com survey of people who had co-signed on loans of all sorts found that 38 percent ended up paying at least some money, 28 percent were aware of damage to their credit and 26 percent saw relationships suffer as a result.
So where does this leave someone trying to help and tempted to co-sign? The tough-love reply goes like this: If you need a private loan as an undergraduate especially, then your college of choice is simply not affordable. Federal loans plus savings and current income should be enough to pay all of your costs, and if they aren’t, then it’s community college and living at home for you. And no, we won’t take the debt on in our names only or yank money from home equity, since we need to think about retirement and not be a burden to you later.
But can you really bring yourself, as a parent in particular, to deny a teenager or an ambitious graduate student a shot at the better opportunities that a more prestigious and expensive school might bring, as long as the debt isn’t outsize? Even an aspiring engineer who will earn plenty?
Many people simply will not be able to say no. So a few words for them. First, keep in mind that the teenagers you’re betting on may never graduate. And if they don’t, the odds are higher of the co-signer being liable for the private loan while the college dropout earns a modest hourly wage. So be especially wary if you think there is even a chance that your child or grandchild is not committed to college.
Finally, look the primary borrower in the eye and draw out a commitment of total and utter transparency. “Don’t assume that the primary borrower is making the payments, and make sure you have an open enough dialogue that they will tell you about it before they miss that payment,” said Dan Macklin, co-founder of SoFi, a company that helps many people refinance older student loans. “I’ve seen too many people where it’s an embarrassment and not spoken about, and it’s not very healthy.”
Copyright 2016 The New York Times Company.  All rights reserved.