Limitations on the Codebtor Stay

A common concern among people considering filing for bankruptcy is the effect said bankruptcy will have on a cosigner – particularly when the cosigner is a close friend or relative.
First of all, let’s understand what a cosigner is.  When a bank or other lending institution evaluates your application for credit, they perform a risk assessment to determine the likelihood with which they will be paid back for their investment – mostly through your consumer credit report.  Applicants who are deemed a high risk for defaulting on their loan are either denied or approved for the loan, but with conditions that reduce the lender’s risk.  Such conditions can include high interest rates, liens against collateral, or cosigners.  Cosigners are insurance for the lender that if the primary borrower defaults on repayment of a debt, that there is still someone else they can collect after.
So what happens to your cosigner if you file for bankruptcy?  First and foremost – your bankruptcy does not appear on their credit report.  The only time a bankruptcy should appear on someone’s credit report is if that person filed for bankruptcy.
In Chapter 7, there is no such thing as a codebtor stay, which I will discuss shortly.  Fortunately, a Chapter 7 Bankruptcy typically only lasts a few months (from filing, to the meeting of creditors, to the issuance of a discharge), which reduces the impact your bankruptcy will have on a cosigner, if there is any effect at all.
If the cosigned debt is for something like a car loan, then there may be no impact to the cosigner at all, presuming the car is one you own and operate and presuming you intend to reaffirm the debt.  Your reaffirmation of the loan means that the lender can collect from you, and doesn’t have to bother your cosigner.  Additionally, you will be able to continue making payments on that loan in the months prior to filing bankruptcy and while your bankruptcy case is pending.
If the cosigned debt is for an unsecured debt, then problems might arise.  Generally, you must stop making payments on unsecured debts in advance of filing for bankruptcy to avoid a preference issue.  And you wouldn’t be permitted to resume voluntary payments on the debt until after the discharge.  If done by the book, this means that there is (conservatively) at least a 6 month period during which you shouldn’t be making payments on the loan.  In this scenario, if your cosigner did not step in and make payments on the loan, the default would adversely affect his or her credit rating.
During my career, I’ve encountered a few other odd scenarios – people paying on loans taken out by relatives, or secured by collateral owned by someone else.  Rather than analyze every possible scenario here, let me just say that not only might these situations cause the preference problem described above, but you might also have issues along the line of what was seen in Osberg v. Halling.
Chapter 13 Bankruptcy does have a codebtor stay, which means that so long as your bankruptcy is filed and pending (for 3-5 years), creditors may not pursue your codebtors for payment of the loan.  Now, at the end of a Chapter 13, if a debt is discharged / not paid in full, the lender can then pursue your cosigner for the balance.  However, since your case will be over then, you can resume payments on behalf of your cosigner if you choose.
There are a few exceptions to the codebtor stay, however.  It does not / may not apply:

  • if the cosigner became liable for the debt in the ordinary course of business
  • if the case is dismissed or converted to Chapter 7
  • to future notices of intent to dishonor negotiable instruments
  • if the proposed plan does not provide for payment of the cosigned debt
  • if the cosigner is the one who received benefit for the cosigned debt (e.g. the cosigner was primary and you – the debtor – were the backup creditor)
  • if the creditor can demonstrate that its interest would be irreparably harmed by the stay

Student Loans in Bankruptcy

Recently, Anton Nikolai gave an informative presentation regarding student loans to bankruptcy attorneys at the Lou Jones Breakfast Club.  You can read the full text of the presentation, but I wanted to share some bullet points.
Most people are aware that student loans are non-dischargeable in bankruptcy under 11 U.S.C. § 523(a)(8), which can be broadly interpreted to any sort of debt incurred for an educational purpose or benefit.  I’ve even seen arguments in the past that credit card debt incurred to pay off a student loan could be held non-dischargeable – similar to the reasoning for making credit card debt for payment of taxes non-dischargeable (which is expressly provided for by statute at § 523(a)(14) and (14A).  The non-dischargeability of educational benefits applies to both governmental and private student loans.
There is an exception carved out by statute – undue hardship.  But this is more than your ordinary hardship standard.  In fact, the 7th Circuit has adopted one of the most stringent tests for undue hardship in these circumstances, called the Brunner test (from Brunner v. New York State Higher Educ. Serv. Corp., 831 F.2d 395 (2d Cir. 1987)).  The test requires:
  1. Debtor cannot afford to maintain a minimal standard of living if forced to repay student loans.  (This is a tough burden, but not impossible to prove.)
  2. Circumstances exist indicating that this inability is likely to persist for the majority of the repayment period – a certainty of hopelessness.  (This is almost impossible to prove.)
  3. Debtor has made good faith efforts to repay the loan.

The automatic stay does stop student loan collection practices, but those collection practices may resume after discharge once the case is terminated and the automatic stay is lifted.
Federal student loans have powers that private student loans do not.  They do not need a state court judgment to garnish wages.  They may do so automatically through an “administrative garnishment”.  But this garnishment, too, would terminate while a bankruptcy case is pending.
In Chapter 13 Bankruptcy, student loans are considered general, non-priority, unsecured debt.  Meaning they get paid at the same rate as your other general unsecured debts (e.g. credit cards and medical bills).
Unless your Chapter 13 plan proposes to pay such creditors in full, you will have an unpaid balance on your student loans.  Upon exiting bankruptcy, your student loan account may be in default, and subject to default interest rates.
There have been some instances of debtors in bankruptcy proposing to pay their student loan creditors separately, outside of their Chapter 13 repayment plan.  To do so requires that the student loans be treated as a special class of creditor.  This can only happen if the last contractual due date of the loan is after your last scheduled Chapter 13 plan payment.  While the bankruptcy code does permit for special classes of creditors to be created, it also prohibits debtors from creating special classes that discriminate unfairly.  At this time, there is no judicial consensus that student loans can be a special class.  Some judges allow it.  Others do not.
If your plan does not provide for payment in full of your student loans, you will want to make sure that your student loan creditors file proofs of claim in your Chapter 13 bankruptcy.  Although they are stayed from collecting while you are in bankruptcy – whether they file a claim or not – if they don’t file a claim, it means that they will not get paid and your other creditors who do get paid will be paid more money.  Since student loans are non-dischargeable, it is in your interest that they get paid during your bankruptcy plan.Don’t rely on your attorney to determine if your student loan creditors filed claims.  First of all, your attorney is probably handling dozens or hundreds of cases at a time, each with dozens or hundreds of creditors.  It’s tough to verify a negative under these conditions.  Also – particularly with private student loans – it’s not always simple for your attorney to distinguish a student loan creditor amongst your list of other creditors.  Creditors have 90 days from the date of your first meeting of creditors to file a proof of claim.  If they don’t, your attorney has another 30 days to file claims on their behalf under Rule 3004 of the Federal Rules of Bankruptcy Procedure.  If there is anyone you want to get paid, you’ll want to make sure your attorney is aware.There are four types of federal student loans: Stafford, Parent Plus, Graduate Plus, and Perkins.  To determine which of your student loans are federal, check out http://www.nslds.ed.gov/.
There are a few ways to have a student loan administratively discharged (outside of bankruptcy), but these are rare: school closure, disability, unpaid tuition refund, and false certification.Student loans are in one of five repayment statuses: in-school deferment, repayment, other deferment, delinquency, and default.In a default, a federal student loan can intercept tax refunds, wages without a court order, and social security benefits.In a loan is in default, you can rehabilitate the loan to exit default status – but this is a once in a lifetime event.  You must make 9 out of 10 payments to do this.There are various repayment plans you can explore to pay your student loans in a manner that is more affordable.
  1. Standard Repayment (fixed payments for 10 years)
  2. Graduated Repayment (10 years, starts out small, then increases every 2 years)
  3. Extended Repayment (25 year term, fixed or graduated, must have more than $60k in student loan debt)
  4. Income Contingent Repayment (25 year term, based on income AND student loan balance, balance at end is forgiven)
  5. Income Based Repayment (25 year term, based solely on income, $0 payments are possible, unpaid balance is forgiven, pay 15% of calculated discretionary income (income beyond 150% of poverty guidelines), payments adjust each year based on prior year’s taxes)

Note: any forgiven balances in ICR or IBR are taxable income.

Confidences, Duties, and Conflicts in Joint Representation

Occasionally (more often than I like), I will get a client who wants me to keep a secret from their spouse.  You would think that such a request wouldn’t be a problem, since people enjoy attorney-client privilege and confidentiality with their lawyers.
So long as I don’t represent the spouse, this is true.
Most people understand the concept of confidentiality pretty well.  But not nearly as many of them understand how all of that changes in joint representation – meaning, when a husband and wife collectively retain an attorney.  In situations like this, an attorney cannot be used as an instrument for keeping secrets between the two individuals that comprise the attorney’s client.
Let’s take a married couple – John and Jane Doe.  Jane tells her attorney a secret, and asks that it not be repeated to John.  More than likely, a conflict of interest now exists, certainly if the secret is material and significant to the subject of representation.  The attorney may have an affirmative duty to inform John the secret insofar as the secret would affect John’s case, or John’s decision-making ability.
It’s important to realize that attorney-client privilege does not extend to the other person in the room.  There can be no secrets in joint representation.  If a client is insistent on keeping secrets, then the joint representation ought to be severed and the client needs to retain separate counsel.

Reflections on the MMMP

About a month ago, the Bankruptcy Court implemented the mandatory use of the DMM Portal into its Mortgage Modification Mediation Program.  The portal (in theory) allows real-time access to all documents provided by the debtor to the mortgage servicer, with timestamps, accessible by the debtors and their attorney, the mortgage servicer and their attorney, and the mediator.  I was hopeful that the implementation of the portal would finally put an end to the servicer claiming to lose documents or claiming to not get them on-time.  I believed, rather foolishly, that the DMM Portal made the process idiot-proof.
Regrettably, yesterday afternoon, one of the four major lenders proved that despite real-time access to documents, they were still capable of playing dumb.

Them: “We need updated documents [meaning pay-stubs, bank statements, etc.] for the past two months.”
Me: “We uploaded those documents.  They’re on the portal.  The very same portal you used to send me this e-mail request.”
Them: “We need updated documents from the past two months.”
Me: “The documents we uploaded are a week old.”
Them: “We need updated documents from the past two months.”

It was then that I fully understood that no amount of idiot-proofing the process will ever make up for the fact that the lenders cannot be sanctioned for mediating in bad faith.  They have no shame.  They have no conscience.  They have no sense of reputation.  What do they need any of it for?  They don’t even have to be stupid anymore.  They can literally cover their ears and close their eyes, and absolutely nothing can be done.
I so badly want to lay all of the blame on these mortgage servicers.  But truth be told, it’s not their fault.  They wanted the industry to be unregulated and that’s exactly what they got.  They can make bad loans.  They can sit atop billions of dollars in bailout money.  They can obliterate the economy, and do so without consequence.  Telling the lenders that they have to play fair is like giving a six year old boy a real ray gun for Christmas and telling him he can’t vaporize the neighborhood.  The only way this mortgage crisis will be resolved is if we take away the ray gun.
It’s not the bankruptcy court’s fault, either.  They created the Mortgage Modification Mediation Program with the best of intentions.  Trouble is, under federal law, their hands are tied.  They can’t force a modification of a home mortgage.  The best they are empowered to do is to offer this voluntary program.
No, I blame Congress.  They’re the ones who wrote BAPCPA.  They’re the ones who don’t see a need to amend the bankruptcy code to allow bankruptcy judges to do to home loans what they are empowered to do to every other type of debt in existence.  Instead, they waste time in partisan bickering rather than helping real Americans with real problems.

Wisconsin Vehicle Titles

On July 30, 2012, Wisconsin is set to become a “title-holding” state.  What this means is – if you finance a vehicle (rather than purchase it outright), the DMV won’t be sending the car title to you, they will send it to the lienholder, instead.
You still own the car, of course.

There is a common misconception that people don’t own things that have liens on them.  E.g., some of my clients tell me “I don’t own my house, the bank owns it.”  Not quite.  Lienholders have exactly what their name implies – a lien.  A lien is the right a lender has to take possession of certain property you own in the event you default on their note.  However, until such foreclosure or repossession occurs, you are – in fact – the owner.

So why am I posting this information on a blog about bankruptcy?  In all bankruptcy proceeding (both Chapter 7 Bankruptcy and Chapter 13 Bankruptcy), trustees require copies of titles for all vehicles with a lien on them, in order to verify the existence of the lien and to verify that the lien is properly perfected.

Why do trustees require proof of liens (such as copies of car titles and mortgages)?  A lien reduces the available equity in property, thereby impairing the trustee’s ability to liquidate assets for the benefit of unsecured creditors.  This is almost always what you want, if you are a debtor in bankruptcy.  For example, let’s say you have a house that is worth $200,000, and there is a mortgage of $180,000 on it.  There is only $20,000 in equity, that can [usually] be taken as exempt and you get to keep your house, so long as you keep current on mortgage payments.  But, what if the mortgage doesn’t exist or wasn’t properly perfected?  Then, the mortgage can be avoided by the trustee, making the full $200,000 value of the house available to the trustee.  In Wisconsin, that much equity cannot be fully exempt, in which case you’re looking at either losing the house in Chapter 7, or filing a Chapter 13 and paying back at least some of your unsecured debt back.

Accordingly, people who purchase a vehicle after July 30, 2012 will not be able to provide a copy of the title to their bankruptcy attorney unless the car is owned clear of liens (in which case, the attorney doesn’t need the title).
The new “Confirmation of Ownership” is form T056 from the Wisconsin Department of Transportation.
What do you do?  There are still 3 options:
  1. The DMV will still be issuing a document to the car owner.  But it’s not the title of the vehicle.  Instead, it’s called a “Confirmation of Ownership”.  Luckily, that document will have all of the pertinent information that the actual title has, and will be sufficient for what the trustee needs to examine.
  2. Contact your lienholder (i.e. the bank, credit union, or other lender that financed your vehicle).  Since they will have the title, they should be able to provide you with a copy of it.  Short of that, two other documents are acceptable: Confirmation of Security Interest or a UCC Filing Statement.
  3. Contact the DMV for a certified vehicle record.  DO NOT request a replacement title or a replacement Confirmation of Ownership, unless you don’t plan on filing for bankruptcy for at least 3 months, because the issue date will be the current date, not the date you actually purchased the vehicle.  The certified vehicle record can be requested for $10 per vehicle via Form MV-2896.  Clients of Holbus Law Office, LLC can request that the MV2896 service be rolled into their Document Retrieval Service package at no additional charge beyond the DMV’s charges.