Private Student Loans may be dischargeable in Chapter 7

[KeithDoxen]

Sallie Mae could put in the promissory note that it gets your first-born if you default, but that doesn't mean the court will enforce that provision.

We'll have to wait for the litigation on these issues if HR 5043 passes, but it's pretty clear from his statements that the congressman who wrote the bill is specifically targeting for-profit student loans, regardless of who is guaranteeing them or how they're being organized or categorized. Courts will often look to legislative intent when interpreting the law. If the student loan companies try to slip through this law on a technicality, the courts may cry foul.

[el222]

blackdog,

The Project On Student Debt has templates for theses things quite often. I am unable to post a link as I have not made enough posts, but on this site there is a template to urge your congressional representatives to vote for these 2 bills. projectonstudentdebt.org/letter_view.php?idx=21

Here is what I have found after thousands of hours trying to translate the language in the bills and how they would apply to my own loans. My background is: I have $100,000 of student loan debt, $35,000 of it is private. I only have about $22,000 of credit card debt. Obviously it would be in my best interest to wait until something happens with this bill before I file for chapter 7. I have little to no income currently.

Here is what the bill is supposed to say with the changes inserted and / or removed:

"523(a) Exceptions to discharge
…
(8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for —
(A) (i) 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 any program for which substantially all of the funds are provided by a nonprofit institution;

or (B) (ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; "

I'm hopeful after reading what blackdog wrote, that maybe my private loans apply. But what concerns me about the text of this bill (HR 5043) is the part where it states "made under any program". I read an old case where someone tried to discharge their private student loan but failed because even though the loan was provided by a for-profit lender, it was made under a program that lumped in funding by non-profits.

This new proposed legislation would allow the loan from that case to now be discharged, however, I found a link online to a PDF with a promissory note from Sallie Mae for what is a very private student (credit score driven) loan- Grad Excel Preferred. In it, it states that the loan is not dischargeable because it was "made under a program that includes Stafford Loans and other loans and which is funded in part by non-profit organizations, including governmental units". This was a note from 2006-2007. Other Promissory notes I have found on this loan or loan program from other years, do not specify all that, they just say this loan is not dischargeable in bankruptcy. The notes I'm referring to that I found, were written since the 2005 bankruptcy amendment. What is truly frightening is that they have lumped together federal loans in a program with loans that have absolutely no government guarantee nor funding. Sallie Mae even states in their private loan prospectuses that these loans have no federal or governmental guarantee.

My loan is a Grad Excel loan (not preferred), taken out between 2001-2003. Lender was State Street Bank & Trust, Guarantor was Nellie Mae. I asked Sallie Mae a year ago for my Promissory Notes on my private loans, but all they sent me were the applications for them and the Promissory Notes for my federal loans. I find it interesting that they omitted the notes for my private loans. I have re-requested the notes, but it will take 2-4 weeks for me to receive them. I'm curious to see how they have worded the bankruptcy part.

In various documents I have found (mainly their SLM Private Credit Student Loan Trust prospectuses), Sallie Mae has lumped all of their private credit loans together (Excel, MBA, Law and Signature). I'm guessing that most people who have a private loan with Sallie Mae from 2000-2007 have these loans, which makes me wonder if they will not be dischargeable even if HR 5043 gets passed. I don't want anyone to read this and panic, because it may be different for every type of loan depending on the year.

On the plus side, there is a SLM Corporation Q1 2010 Earnings Call Transcript where Sallie Mae's CEO describes how the bill allowing the discharge of private student loans would hurt them. He told the investors that it would damage them. He did not make any exception for the loans by saying well, don't worry about that, most of our loans aren't dischargeable because we have thrown them into a pool with federal loans.

You can read it at seekingalpha.com it is in the Q & A section on page 2. Feel free to email me and I will give you direct links.

Keith,

Maybe you have some thoughts on this? Or anyone else have some insight?


Thanks!

[blackdog]

Thanks for doing the leg work for us, blackdog. Can you tell us more about what the Congressman's office told you about this bill?

My pleasure to do the leg work.

Also, just to clarify, how certain was the Congressman's office that this bill, if enacted, would allow debtors to seek bankruptcy protection for private student loans that were lent by for-profit institutions that use non-profit guarantors? Did the staffer you spoke with make it clear that the bill would allow those of us with these types of loans to once again have bankruptcy protection available to us?

The office was firm that the bill is intended to allow debtors to discharge in BK loans made by for-profit lenders and guaranteed by nonprofits. I got the impression that Cohen's office is terribly worried about the lending lobby and its impact on the bill. I think we all are, which is why it's so important to keep the pressure on. Does anyone know if there's a letter-writing link on the site that provides a template urging passage of this bill and S 3219? If not, is that type of thing allowed here?

I was aware of the typo in the transcript actually. Did Rep. Cohen's office indicate that the typo would be fixed so that the official House records would demonstrate Cohen's true intent with regard to this bill?

His office stated that it had been fixed already but that they had overlooked uploading an amended copy to the Judiciary Committee’s web page. I just checked and the incorrect transcript is still posted. Apparently Cohen's prepared written "script" of the testimony is correct, but the published account of the testimony had typo(s).

I may be receiving additional printed info from the September subcommittee meeting. If it's anything new, I'll post it here.

[KeithDoxen]

At the root of KeithDoxen’s and my different interpretations of the bill were audio problems on Cohen's testimony video and a typo in the published record. I just spoke to Cohen’s office and the original written testimony patently excluded from bankruptcy protections the for-profit (commercial) lender who used a nonprofit guarantor. Excellent, since this is the type of loan so many of us have. Less excellent is that this bill faces deep partisan hostility, not to mention blue dog opposition. The reason it’s gotten this far, in my opinion, is because the republicans haven’t yet shown up to fight it.

Thanks for doing the leg work for us, blackdog. Can you tell us more about what the Congressman's office told you about this bill?

Also, just to clarify, how certain was the Congressman's office that this bill, if enacted, would allow debtors to seek bankruptcy protection for private student loans that were lent by for-profit institutions that use non-profit guarantors? Did the staffer you spoke with make it clear that the bill would allow those of us with these types of loans to once again have bankruptcy protection available to us?

I was aware of the typo in the transcript actually. Did Rep. Cohen's office indicate that the typo would be fixed so that the official House records would demonstrate Cohen's true intent with regard to this bill?

[blackdog]

Correct Interpretation of HR 5043 & Contact Your Representatives ASAP!

At the root of KeithDoxen’s and my different interpretations of the bill were audio problems on Cohen's testimony video and a typo in the published record. I just spoke to Cohen’s office and the original written testimony patently excluded from bankruptcy protections the for-profit (commercial) lender who used a nonprofit guarantor. Excellent, since this is the type of loan so many of us have. Less excellent is that this bill faces deep partisan hostility, not to mention blue dog opposition. The reason it’s gotten this far, in my opinion, is because the republicans haven’t yet shown up to fight it.

We don't have long before our one chance in hell of passage turns into a zero chance. Please contact your representative to share why you believe we need this bill to pass. I know you all have unique stories, and if you’re reading here, you probably have nothing left to lose by sharing that story. I conveyed to Cohen’s office, among other things, my opinion that:

1. It’s unjust that debtors without student loans have superior access to BK relief than those with them. Insolvent debtors, by definition, don't have $10-15K to access the pay-to-play scheme that is student loan BK. And if they did, the nearly insurmountable “undue hardship” standard has caused an attorney exodus from student loan BK cases.
2. Current law has contributed to student loan debtors fleeing the country, committing suicide, and being forced to live off the grid like criminals because the biased BK code condemns student loan holders to a lifetime of harassment and anxiety. This is a mass evacuation of untapped potential, a waste of American resources, not to mention a public policy whose effect is to reward NOT pursuing an education.
3. Many student loan lenders received federal bailout money, while untold numbers of their customers are prevented, under the BK code, from access to relief.

Thanks for reading,
blackdog

[blackdog]

I hope you're right, Keith. I saw the testimony, too, but am nervous because the bill itself is still vague and malleable. Lets hope our elected officials do the right thing with this one!

[KeithDoxen]

I assume this update refers to HR 5043, which does not actually allow discharge of ALL private student loans. It excludes from discharge (without a showing of undue hardship) “any program for which substantially all of the funds were provided by a nonprofit institution."

You might be surprised to learn that your loans are not only private but nonprofit. I hope I'm reading the bill wrong, but I don't think so :-(. S 3219 is the better bill b/c it doesn't contain this ridiculous exclusion for nonprofit loans.

If you read the testimony regarding the bill, you'll see that Rep. Cohen, who introduced it, says that the point of the bill is to make sure that for-profit institutions can't hide behind non-profit guarantors. For example, I have Access Group student loans. The funds for those loans were provided by National City Bank. Access Group is the guarantor. This bill would allow those funds to be dischargeable, because the funds were provided by a bank, not the non-profit.

Will there be litigation on this issue if the bill passes? Yes. But they hire lawyers to draft these bills and let's hope the lawyers know what they're doing.

[blackdog]

On Wednesday, a panel of the House of Representatives Judiciary Committee approved a bill that would allow borrowers to discharge private student loans in bankruptcy..

I assume this update refers to HR 5043, which does not actually allow discharge of ALL private student loans. It excludes from discharge (without a showing of undue hardship) “any program for which substantially all of the funds were provided by a nonprofit institution."

You might be surprised to learn that your loans are not only private but nonprofit. I hope I'm reading the bill wrong, but I don't think so :-(. S 3219 is the better bill b/c it doesn't contain this ridiculous exclusion for nonprofit loans.

[backtoschool]

I do not think it will pass. There is too much money to be made in student loan collection. Never underestimate the power of the banking lobby.

[nc73]

I think it's got a good chance to pass. If my situation were different I would have waited but my current balance is only around 10k. If I waited I have a better chance of getting sued by one of the creditors. I also wanted to get the bk over with so I can purchase a house in a few years.

[KeithDoxen]

You have to remember the Democrats still need at least one or two Republicans to cross over to stop the debate in the Senate. That will not happen. It may have a chance of getting through the House but it will not get through the Senate.

You also have to remember that the bk changes to make student loans non-dischargeable were not just Republican additions, there were plenty of Democrats in on the changes.

I am aware of all that but I am holding out hope for the following reasons. First, there are at least two Republican senators who are de facto Democrats, Snowe and Collins of Maine. They are basically liberals who are nominally Republican. They stick with the party on the big votes but again this is a small bill. It won't even be on anyone's radar screen. This is the kind of vote where they might flip when no one's looking.

Also, the 2005 bankruptcy bill had bipartisan support, but this particular provision governing student loans was snuck in, and everyone seems to agree that they weren't really focusing on this aspect of bankruptcy. I remember seeing an interview with someone, it might have even been a Republican, who said that he wasn't sure how the heck this provision got in the bill! Based on the subcommittee vote, where every Democrat supported putting the student loans back into bankruptcy protection, I would expect at least the Dems to be united and like I said maybe a couple of Republicans as well.

Also, the only reason we'd even need Republicans is if there were a filibuster in the Senate. Small bill usually equals no filibuster. No filibuster means we can lose 9 Democrats in the Senate and still get it through.

[biotechsolution]

You have to remember the Democrats still need at least one or two Republicans to cross over to stop the debate in the Senate. That will not happen. It may have a chance of getting through the House but it will not get through the Senate.

You also have to remember that the bk changes to make student loans non-dischargeable were not just Republican additions, there were plenty of Democrats in on the changes.

[KeithDoxen]

Given that the chance of this bill passing both the House and Senate before the midterms is about the same as a meteor hitting your house or apartment today, making *ANY* decisions related to this proposed bill for your bk planning is a gigantic risk, and frankly, just plain wishful thinking. DON'T DO IT.

I agree that one shouldn't make decisions regarding their bankruptcy on the basis of something that Congress MIGHT do. But I disagree with those who say this bill has no chance. I've analyzed before why I think it does have a very good chance of sneaking through. The Democrats have wanted to pass this for years but they've never wanted to face the attack ads that would come from Republicans if they went through with it. Now that they're going to lose Congress in the fall, they're going to go for broke on a lot of legislation, and this might be among the bills that they pass. Also, a lot of legislation is rushed through the legislative process after sitting dormant for months if not years. I worked for a congressman for a little while in the past. I remember monitoring bills in the House or Senate that were just sitting there collecting dust for months, and then within a two week time span, they would be approved by this committee and that committee and sent over to the other house and approved there too and signed into law. A lot of the smaller bills are handled this way. The big bills that we all hear about, like health care, are the ones that are harder to pass because there is so much public scrutiny given to them. Bottom line is if Democrats really want to pass this, they will ram it through before they are booted.

[lrprn]

Given that the chance of this bill passing both the House and Senate before the midterms is about the same as a meteor hitting your house or apartment today, making *ANY* decisions related to this proposed bill for your bk planning is a gigantic risk, and frankly, just plain wishful thinking. DON'T DO IT.

[KeithDoxen]

Well, yeah, you are correct - I forgot about the fed loans. Perhaps an argument that the new law compels the court to apply a different standard in APs heard after the passage so that all plaintiffs can avail themselves of the right without having to wait and file a second bankruptcy JUST to do so? And that it is contrary to public policy to force people to file BK a second time just to avail themselves of this single relief? I don't know. I'll have to noodle some more.

I think the public policy argument is probably the way to go. Maybe draw out your argument some more, but yeah, you're on the right track I think.

Incidentally, when would I be able to file again if this passes? My Ch 7 was successfully discharged last December. If this bill passes, I would not be eligible for a 7 based on my monthly expenses and all but could easily file a 13 and in so doing would end up paying down only a fraction of my private student loan debt. Maybe as little as 10 percent. And of course I could use that as a negotiation to convince them to settle with me. But what's the minimum amount of time between a 7 and a 13? I seem to remember reading that at least four years must have passed, but I could be wrong.