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PARKER, Colo. (CBS4) – The Federal Reserve estimates that student loan debt is a $1.5 trillion problem in America. This debt is sinking many families into bankruptcy, but a new interpretation of the law may be offering some relief.

Paige McDaniel decided to go back to school to get a bachelors and masters degrees in business administration. She chose the online program at Lakeland University.

“I didn’t want a publicly traded school. I wanted a school that was an actual university, and had a focus on academics,” McDaniel told CBS4.

She took out federal student loans to cover the cost of her bachelors and masters degrees in business administration.

“You’re always raised, the more education you have the better off you’re going to be,” she explained.

In addition to the federal student loans, McDaniel signed up for about $120,000 in private student loans.

“Started getting direct mail from Sallie Mae, who had my federal loans at the time, offering additional loans to help with additional expenses, so I did take out some of those loans as well,” McDaniel said.

She didn’t realize the loans were different. Federal student loans have a fixed interest rate, and manageable repayment options. Private education loans have a variable interest rate, and no repayment help.

“That one mistake is…is the biggest regret of my life, and has hurt my family, to the point where it would have been better for me not to get the degrees,” McDaniel said.

She soon found herself in over her head. The loan servicing company was billing her $1500-a-month just on the private loans. She ended up declaring Chapter 13 bankruptcy, but even that didn’t help. She paid on the loans through the proceeding, but still came out owing more than she borrowed.

“We knew the federal loans could not be dismissed, but the private loans were supposed to be,” she explained.

Traditionally, in bankruptcy court, any loan with the word “student” associated with it has not been dismissed. New York lawyer, Austin Smith, has a different take on the law.

“These loans that we’re litigating, these are just like credit card debt. It’s the exact same thing as if a bank gave a student as credit card,” Smith explained.

He argues that private loans that are not used for education expenses, should be treated like any other personal debt, and be dismissed in bankruptcy.

“We have not lost on this issue yet,” Smith told CBS4.

Navient Solutions holds McDaniel’s loans, and is one of the largest student loan servicers in the country. It’s facing several lawsuits about it’s lending practices including those filed by Attorneys General in Illinois, Washington, Pennsylvania, and California. It’s called the allegations in those cases unfounded, and in a statement to CBS4 about McDaniel’s proceeding, it said:

“It went from this is the solution, not one we wanted, but this is the solution, to we’re in worse shape than we were before,” McDaniel said.

Her payments are on hold pending a court decision, but the balance keeps ticking up. It’s at more than $260-thousand now.

“I can’t breathe when I look at it. It’s a panic. There’s no way out of this,” she said.

Colorado Congressman Jared Polis has introduced a bill designed to keep student from getting into this situation. The Know Before You Owe bill would require Universities to counsel students on the difference between federal and private loans before they sign up for them.

©2018 CBS Broadcasting Inc. All Rights Reserved.

Since February 5, 2018  debtors filing bankruptcy in Nebraska have been allowed to sign their petitions and other court documents using digital signatures pursuant to  General Order 18-01.  So what have we learned about the use of  digital signatures in bankruptcy since then?
I recently had the pleasure of speaking to an official at the Administrative Office of the U.S. Courts who was seeking some feedback on how digital signatures were affecting the bankruptcy practice. (Nebraska is the only bankruptcy court the nation that allows debtors to sign documents digitally.)  Here are some of my observations:

• Clients absolutely love the convenience of signing documents digitally.  They no longer have to take time off work or drive through sometimes hazardous weather to sign documents.
• Debtors are able to review documents in a less hurried fashion.  Instead of feeling rushed to sign documents in front of an attorney without much chance to review the paperwork, debtors are now able to read the information at their leisure and they frequently point out errors and omissions.  Although some critics of using digital signatures worried that debtors would just click on “Sign Here” buttons without reading the content, my experience is that clients tend to read the paperwork more thoroughly when they don’t feel rushed and they tend to ask questions or demand corrections when the information is not accurate.
• Debtors receive a full copy of what they sign immediately.  I think the courts would be shocked to learn how many debtors NEVER receive a copy of what they signed (even though bankruptcy rules say they must receive a copy).
• The temptation to alter signed documents is gone.  A dirty little secret of bankruptcy attorneys is that they alter the content of bankruptcy schedules after they are signed.  Why do they do this?  Because they are fixing errors and adding missing creditors and, generally, improving the accuracy and quality of the petition.  The problem is, they don’t get updated signatures after the changes are made to signed documents.  And since they often fail to provide clients with a copy of the documents they signed, who is the wiser? Digital signatures prevent such changes because clients get a copy of what they signed immediately and it is easy to spot unauthorized changes.  Also, since digital signatures allow attorneys to get updated signatures so quickly the temptation to make unauthorized changes goes away.
• Postage and copy expenses decrease for attorneys.  Once we started using digital signatures (we use DocuSign) we began to question why we could not send most general correspondence to clients digitally.  Why is this better than email?  Because you can have your client sign off that they received whatever you sent them. We discovered that the cost of the digital signature service is more than offset by the savings in postage.
• We make debtors sign more documents.  For example, debtors must attend a court meeting about 30 days after their case is filed to meet the Trustee assigned to their case and to provide the trustee with identification, bank statements, etc. Frequently clients would show up in court without ID or bank statements and the Trustee would not conduct the meeting. Clients would be frustrated and say they never got our letter advising them of what to bring to court. Digital signatures changed that. When a client signs something the excuses stop.  They become more accountable.  And since it is so easy to get a client to sign off on warnings you give them and disclosures they need to know, we seem to solicit more signatures on a daily basis.  Digital signatures literally allow us to “get on the same page” with our clients.

Digital signature technology is allowing us to make debtors annotate bank statements with explanations and then we require them to sign the document.

• Bank Statement explanations.  Part of a bankruptcy attorney’s job is to verify the income of a debtor, and we must collect 6 months of bank statements and scrutinize large deposits and expenses.  It is not uncommon to collect statements totaling a hundred pages, especially if clients have multiple bank accounts.  With digital signature services we are able to highlight large deposits and expenses in these bank statements and make a client fill in a text box to explain the source of the deposit or the purpose of the expense. So digital signature technology is allowing us to make debtors annotate bank statements with explanations and then we require them to sign the document.  Talk about accountability! These documents really come alive when debtors must write explanations and sign the document as opposed to just calling the debtor for an explanation only to have the debtor change their story when it turns out the “gift from grandma” deposit was really a paycheck from a source of income they were concealing.

What digital signatures allow us to do is to send a client home with a rough draft of their case and then when they send us the missing documents we can instantly send them an updated petition to sign electronically.

• Digital Signatures take the pressure out of signings.  Signing a bankruptcy petition is like shooting a moving target. We have to perfectly capture a client’s financial situation on one day of their life, and that is hard since bank account balances change daily and six-month income averages that we must calculate change with every paycheck. Ask any bankruptcy attorney and they will tell you the most frustrating part of their job is getting their client to provide all the necessary documents–tax returns, paycheck stubs, bank statements, etc.  There is always a missing document, but cases must be signed and frequently these signings are made in haste to stop paycheck garnishments and home foreclosures.  So, a bankruptcy attorney is charged with the duty of perfectly stating a person’s financial condition on one day in their life while all the underlying data is constantly changing.  That’s hard to do well.  What digital signatures allow us to do is to send a client home with a rough draft of their case and then when they send us the missing documents we can instantly send them an updated petition to sign electronically. Even when a client lives a few blocks away from my office, I frequently sign the case digitally so they can review a draft of the petition at home when their two-year-old they dragged to the signing appointment goes to bed and then they can send me the missing bank account balances or paycheck stubs the next day. Digital signatures bring sanity to the process.
• Small town clients get better service.  Nebraska is a big state and 11 of our 93 counties have no attorneys at all, let alone a bankruptcy attorney.  But they do have smart phones and internet services and we can prepare their case as well as any client who lives locally. By the time we used to mail out a paper petition to a client living 450 miles from Omaha and then get a signed copy back, the information was 10 days old.

I have a great concern to live up to my duty to protect the integrity of the bankruptcy process and the integrity of bankruptcy documents in general. And I realize that many folks out there worry that allowing debtors to sign court documents digitally may undermine the trustworthiness of those documents. However, my experience is just the opposite. Digital signatures improve attorney-client communication and increase client accountability. Clients get a full copy of what they sign immediately and that improves transparency. Attorneys are able to get updated signatures quickly when helpful changes are made to petitions. Really, I can’t think of a single negative consequence of using digital signatures in bankruptcy cases, and I suspect we are going to see bankruptcy courts nationwide begin to adopt this technology in the next two years.
 
Image courtesy of Flickr and sbethany09

The Fair Credit Reporting Act “FCRA” and the Bankruptcy Code
The Automatic Stay v. the Bankruptcy Discharge
The Fair Credit Reporting Act “FCRA” and the Bankruptcy Code deal with debt differently and this difference can become confusing for everyone, including experienced bankruptcy attorneys.  For instance, the legal status of a debt changes as a bankruptcy moves to conclusion.  At the beginning of a bankruptcy the automatic stay stops most creditors seizing assets from the bankruptcy estate’s assets without an order from the Bankruptcy Court.   But the debt is still the same as before the bankruptcy was filed.  If the case is dismissed the creditor has all the same rights as before the bankruptcy was filed.  Reporting the debt to the credit bureaus has raised lots of issues in bankruptcy.  Many courts have found there is no liability under the FCRA to report a debt as being in default, at least until the case is discharged.
An order discharging the debt alters the legal nature of the debt and prohibits collection efforts.
Once the order of discharge is entered it “operates as an injunction against the commencement or continuation of an action … to collect, recover or offset any such debt as a personal liability of the debtor.”  Therefore, a discharge order (unlike the automatic stay) alters the legal nature of the debt. Many courts have interpreted the FCRA to require credit reporting agencies “CRA” and furnishers to adjust credit reports after an order of discharge, otherwise be liable under the FCRA (not all courts follow this line of thought).
Reorganizations
Plans of reorganization are a key component of Chapter 11 and 13 cases.  In order for a reorganization to be successful a plan must be confirmed and completed.  The challenge for the courts is to determine how the debts should be reported on a credit report before completion of the plan.  The order confirming the plan binds the debtor and creditors to the plan’s provisions, and controls any contracts that existed before the bankruptcy was filed, including the amount to be paid and lien priority. Once the plan is confirmed the United States Supreme Court determined that creditors may not relitigate their treatment under the plan (basically they already had their shot at the apple).  Although confirmation binds the parties to the plan’s terms, it does so only as long as the case is active and is subsequently discharged.
If a case is dismissed the debts return to the same position as before the bankruptcy was filed, offset by any monies the creditors received during the case.
Given that the bankruptcy is not completed until discharge this raises the issue of whether a credit report can be determined to be inaccurate or misleading if it discloses the pre-petition debt after the bankruptcy court confirms a plan reducing the amount to be paid on the claim, or if it must report the amount established by the confirmed plan (not yet discharged).  You can see the quandary.

• What is a Discharge and What are the Issues Related to a Discharge?
• Discharge in Bankruptcy
• Too Poor to File Bankruptcy – a New Class of Americans
• 35% of All Americans are Faced With Claims From Debt Collectors

The post Discharge vs Automatic Stay and Credit Reporting appeared first on Diane L. Drain - Phoenix Bankruptcy & Foreclosure Attorney.

Arizona Supreme Court Decides Statute of Limitations ON CREDIT CARD DEBT / ON INSTALLMENT DEBTS runs from the date of the first uncured missed payment.

Mertola LLC v Alberto J Santos/Arlene Santos CV-17-0109-PR (AZ Supreme Court, 7-27-18)  Statute of limitation for debt collection in Arizona – cause of action to collect the entire debt accrued as of the date of Santos’s first uncured missed payment.
Decision:
Mertola, LLC, sued Alberto Santos and his wife Arlene Santos to collect an outstanding credit-card debt. Although the credit-card agreement gave the creditor the option of declaring the debt immediately due and payable upon default, we hold that even if that option was not exercised, the cause of action to collect the entire debt accrued as of the date of Santos’s first uncured missed payment. Mertola’s claim was barred by the statute of limitations six years after that date pursuant to A.R.S. § 12-548(A)(2).  We vacate the court of appeals’ opinion and affirm the trial court’s summary judgment in favor of Santos. We award Santos reasonable attorney fees pursuant to the Account Agreement and costs pursuant to A.R.S. § 12-341.
History:
Santos moved for summary judgment, arguing that the claim was barred by the six-year statute of limitations applicable to credit-card debt under § 12-548(A)(2). Santos maintained that the Bank’s cause of action to recover the entire debt accrued after the first missed payment in February 2008. Mertola countered that a missed payment gives the creditor the right to sue only for that payment. According to Mertola, the cause of action for the entire debt could not accrue until the creditor accelerated the debt. The superior court granted Santos’s motion, finding that “all of the breaches” alleged by Mertola “occurred more than six years prior” to it filing this action.
The Arizona Supreme Court reversed a very bad court of appeals decision.
The court of appeals reversed, agreeing with Mertola that Santos’s missed payments, by themselves, gave the creditor the right to sue only for those payments. Mertola, LLC v. Santos, 241 Ariz. 572, 574 ¶8, 575¶ 13 (App. 2017).   The Arizona Supreme Court reversed this very bad decision (yea for them).
What if borrower cures the missing payments?
Consistent with our decision in Gust, Rosenfeld, we hold that when a credit-card contract contains an optional acceleration clause, a cause of action to collect the entire outstanding debt accrues upon default: that is, when the debtor first fails to make a full, agreed-to minimum monthly payment. Accord Taylor v. First Resolution Inv. Corp., 72 N.E.3d 573, 588 (Ohio 2016). This rule will encourage creditors to promptly begin their collection efforts and protects debtors from stale claims. See Navy Fed., 187 Ariz. at 495 (acknowledging the incentive to begin collection efforts when a cause of action accrues at default). But, as we held in Browne, a debtor may cure a default if the creditor accepts a payment of arrearages that brings the account current consistent with the parties’ contract. 117 Ariz. at 75. By allowing the debtor to cure the default, the creditor relinquishes its pending cause of action to collect the debt, and the statute of limitations commences only upon a new default. Partial repayment, however, does not cure the default or reset the limitations period.
Click here to read full decision….

What may still be in question for the future is whether amortized loans with stated payment schedule, each missed payment carries with it a separate statute of limitations timeline as held in Navy Federal v Susan Jones, 187 Ariz. 493, 930 P.2d 1007 (Court of Appeals of Arizona, Division 2 12/26/96)  Decision: We hold that the six-year period commences on the due date of each matured but unpaid installment and, as to unmatured future installments, the period commences on the date the creditor exercises the optional acceleration clause. 

• Statute of Limitations in Bankruptcy
• Collection Fraud – You cannot be arrested for not paying credit cards
• Too Poor to File Bankruptcy – a New Class of Americans
• 35% of All Americans are Faced With Claims From Debt Collectors

The post Arizona Supreme Court Gets It Right – Collection on Credit Card Debt appeared first on Diane L. Drain - Phoenix Bankruptcy & Foreclosure Attorney.