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Is now the time to challenge defaulted Federal student loan debt?

Educational Credit Management Corporation, the main private entity hired by the U.S. Department of Education to pursue and collect defaulted student loans, is under fire for overly aggressive litigation tactics against debtors who seek to discharge student loans through bankruptcy proceedings, reported Natalie Kitroeff of the New York Times on Thursday, January 2, 2013.

The United States First Circuit Court of Appeals, The Honorable Norman H. Stahl presiding, sanctioned ECMC for abusive and aggressive collection tactics in 2012, stemming from a bankruptcy case filed in 2004 and completed in 2010.

Ms. Kitroeff also referenced the 2012 case of Karen Lynn Schaffer, age 54, who could no longer continue paying on student loans taken out to help her son through school when her Hepatitis C flared up and disabled her from working. ECMC claimed in court filings opposing her request to discharge the student loan obligation that she had overspent dining at restaurants. She had spent $12 at McDonalds to purchase a meal for both she and her husband.

ECMC came into being in 1994 after the main collector and backer of student loans at the time collapsed from too many defaulted student loans. ECMC was armed with new and powerful collection tools including the ability to easily garnish wages, social security income and intercept Federal tax refunds.

Default rates dropped from some 22% in 1990 to just 10% in 2011. However, bulldog tactics and endless litigation are part of the game.

Emory University’s Professor Rafael Pardo called the agency’s tactics a “war of attrition, death by a thousand cuts.”

ECMC has worked to try to “change the rules” on bankruptcy discharge of student loans. ECMC has pushed courts to adopt a standard that is stricter than the normal “undue hardship” test which utilized by many courts.

ECMC has adopted even new tactics to make it tough on borrowers. ECMC claims that if defaulted borrowers can qualify for an “income contingent repayment plan” acceptable to the standards of ECMC, then any bankruptcy student loan discharge requests should be denied. The problem is that such repayment plans stretch on forever with no light at the end of the tunnel and little hope of credit score recovery. The company goes to great lengths to ensure that almost everyone “qualifies” for so-called “income contingent repayment plans”. The result is almost life-time indebtedness for the borrower.

There’s another aspect to any student loan debt that might be forgiven. An “income contingent repayment plan” that forgives part of the debt may create taxable income for the debtor who receives the benefit. The larger the forgiven amount, the larger the problem for the debtor. While arguments supporting a request that the IRS not view the forgiven portion of the debt as taxable income could be made in some cases, even making these arguments through a costly professional could be expensive, difficult and have no guarantee of success. Points like these were raised by Ms. Schaeffer’s lawyer, according to the New York Times story.

While the Federal Court of Appeals for the 8th Circuit has signed off on the approach argued by ECMC, other circuit courts have not. The State of Washington is located in the 9th Circuit.

Want to get rid of some student loans? Having significant health and family problems? The spotlight on the ECMC could be the signal that today is your day to file a Chapter 7, and to seek a discharge of your student loans.

If you have any questions about student loans and how you might go about discharging them through bankruptcy, please contact me at your earliest convenience.

Student Loans: Should I borrow the money? What is a Parent Plus Loan?

As I approach my 19th year in the practice of law, I often ponder the risks of assuming large student loans. I took the risk, and I successfully repaid my student debt. Others have not been so lucky.

I signed my first student loan promissory note on September 6, 1985. I finished undergraduate studies with a loan debt of $11,000. My total borrowings topped out at just short of $60,000.00 in 1993 following law school. It was a surreal number to me. I found it depressing. If I recall correctly, the payments were over $750 monthly, and started in January,1994. I struggled at first as my first job as a lawyer did not pay very much. I bumped along, scraping, scrimping, and saving (and keeping my old car running) for just about two years, until 1995 when I was able to “consolidate” to a payment of some $450 monthly plus an “unconsolidatable” loan that I paid $60 monthly on the side of for a total of about $510 monthly. This was a princely sum for a 27-year-old with an old, dying car and no outside family help.

Essentially, I paid my last student loan payment in July 2010. Some sixteen and one-half years later.

I have always been a bit entrepreneurial, In 1996, I was able to start my own law practice. From its inception, it has always done pretty well. Others have not been so lucky. Many of my friends have struggled with student loan payments.

How would my road be different today if I was a graduating high school student?

I don’t know if I would have even gotten so far today as tuition is higher and some of the student loans I was able to take out are not as available. Many of the loans offered today are Parent Plus loans, in which the student loan lenders try to get the parents of a student to sign up for the student loan. I don’t know if my parents would have been so willing to sign student loan notes for me in the amount required to get through four years of private undergraduate education. Also, with tuition hikes, the $10,000 I borrowed to get through my undergraduate program may be equivalent to borrowing $30,000 today. Would my parents (both hardworking people with high-school educations ) have been willing to sign up for $30,000 (in today’s dollars) of parent-obligated “plus loans”?

I likely would have had to attend a less expensive school under today’s situation, other than the Whitworth College (a private Presbyterian affiliated college in Spokane, WA) that I attended. I greatly benefited from my time at Whitworth. I believe that my educational experience at some other school would not have had the same qualities that Whitworth provided me. I can safely say that under today’s situation, my trajectory would have be different now than the one I was able to take.

If you are a parent, and your child is extremely motivated and a high achiever, I would probably step up and sign up for an appropriate amount of Parent Plus student loans as a last resort. However, if your child is a bit unsure of his/her direction, I suggest that you avoid the Parent Plus loan option. In the case where your child is less focused or not a high achiever, you are better off taking out a home equity loan (if you have any home equity) to pay for their education rather than taking out Parent Plus loans. The reason I recommend this approach is because even if you end up in financial trouble, the home equity line of credit can potentially be discharged through bankruptcy should you lose your home, whereas the Parent Plus loan is less dischargeable in bankruptcy.

If you are a child and are considering asking your parents to sign up for a Parent Plus loan for your benefit, all I can say is that you better be “on target” with your education. If you’re reading this blog, there’s a very good chance that you are aiming pretty well.

Seriously, for a young person to make good on their promise to their parents in return for their financial support through a Parent Plus loan, you need to get in, get great grades, graduate, and get to work. Do not screw your parents financially by changing your major five times, and by partying while you bring home a string of C’s, D’s and the occasional F. You need to decide on your major (or at least your department) before you show up for the first day of college as a freshman, and you need to stick with it even if you decide you might “want to go in a different direction”. You do not have the right to ask your parents to obligate themselves unless you are giving 110%. If you are not achieving top honors (baring some sort of learning disability) while asking your parents to sign up for Parent Plus loans, you are insulting your parents. Parent Plus loans did not exist when I was in college, but during my first couple of years at school, my parents did pay for some of the tuition. My way of honoring their commitment was to graduate summa cum laude which means “highest honors”. I was 5th in GPA in my college graduating class and finished with a 3.91 Grade Point Average. I received one “B” grade in my freshman year and two in my senior year. Every other grade was an “A”.

For what it is worth, that is my story. If you are a parent and your child does not have a commensurate level of committment to educational and study dedication, then you have the right to say “no” to a Parent Plus loan when asked by your child.

If you are a child and you do not intend to excel and be at the top of your class and department, you have no right to ask your parents to so obligate themselves to a Parent Plus loan, unless of course your parents are so wealthy that the Plus Loan is of no financial consequence to their long-term economic position.

Thank about it. Student loans are only for people ready to give a 110% effort towards being a student. There is a reason they are called student loans, and not called “play time, find myself loans.” Student loans are serious. If you take one out, you need to be serious about your career based on the education that you are buying with your student loan.

Bankruptcy and Litigation

Judge Shaking Finger

After a decade of litigation and related bankruptcy, Jacqueline Palank of the Wall Street Journal wrote on the question of who owns the song, “Whoomp! (There It Is)”.

This song is familiar to anyone who attended a sporting event in the ’90s. Released in 1993, “Whoomp! (There It Is)” was one of those ubiquitous pump-up-the-crowd songs played during sporting events, a status cemented by its inclusion on the first volume of “Jock Jams.” It was later declared the 65th worst-song-ever, surrounded by such other ’90s gems as “How Bizarre” by OMC, “Breakfast at Tiffany’s” by Deep Blue Something and “Supermodel (You Better Work)” by RuPaul.

To decide this matter, Judge Richard A. Schell of the U.S. District Court in Sherman, Texas, scheduled a hearing for Aug. 27. This is when a jury will be selected for a trial over which of two music companies is the true owner.

In 1993, Alvertis Isbell’s Bellmark Records released “Whoomp! (There It Is),” by one-hit wonder Tag Team. According to Isbell, the record label owned the sound recording of the song, while its affiliated publishing company, Alvert Music, owned the composition rights to the song’s written form.

However, DM Records licensed “Whoomp! (There It Is)” in 1997. Bellmark filed for bankruptcy protection the same year. In 1999, Bellmark sold most of its assets, including its sound recording rights, to DM Records. According to Isbell, the composition rights weren’t included in that sale because they are an asset of Alvert, which wasn’t in bankruptcy.

According to Isbell, DM has been wrongly claiming ownership of both the song’s sound and composition rights. Isbell is seeking a ruling that Alvert Music still owns the composition rights, and also wants damages for DM’s alleged infringement on his ownership rights.

DM Records, however, says written agreements do not mention him or Alvert Music by name, and therefore don’t distinguish between the two types of song rights. As a result, both were assets of Bellmark and therefore included among the assets DM Records bought from Bellmark’s bankruptcy.

After a decade of litigation, the parties asked Schell to rule on the dispute without a trial. The judge denied the request Friday stating, “Because there are genuine issues of material fact surrounding ownership of the subject composition copyrights, the court denies both DM and Isbell’s motions for summary judgment.”

Many experts believe that we may be headed for another recession. Don’t enter a second recession with mountains of debt. I can help you to understand the options available to you for dealing with your debts. I am sure that I can be of assistance to you, to a family member, or to a friend as we all know people experiencing trouble these days even if we are not experiencing our own financial troubles. Please do not hesitate to make contact with me. I emphasize courteous and discrete consultations that fill your time with useful information. The impact to your life after an in-person consultation with me may be substantial, and life-long. You will enjoy a new peace of mind and a fresh hope for the future with a new roadmap for financial success that we develop together. You can contact my scheduler through our website for your free 30 minute consultation. If you wish, you may schedule your free 30 minute consultation by phone by calling us at 253-383-1001 Monday through Thursday from 9:00 AM until 5:45 PM, and on Friday from 9:00 AM until 12 noon.

Is there anything I can do about a student loan that has defaulted?

College Graduates are Shackled to Student Loan Debt
Typically once your loan enters default status, the lender requires you to pay off the remaining loan balance in its entirety in one lump sum. 

However, the U.S. Department of Education has a loan rehabilitation program to bring defaulted student loans current. There are several reasons as to why you should take advantage of this program. When you enter into the program, risk of wage garnishment ends, and the IRS will no longer be able to withhold your income tax refunds.

Additional advantages take place after you have completed the loan rehabilitation program. The loan will no longer be in default status and will be considered current. Furthermore, the negative credit reports to the three national credit bureaus associated with the loan will be deleted. You will now also regain eligibility for the benefits that were originally available on your loans before the loan defaulted. These benefits may include deferment, forbearance, and Title IV eligibility.

There are some differences to the program depending on the type of loan that you are trying to rehabilitate. In all cases, you are required to make nine full, on-time payments of an agreed amount within twenty days of their monthly due dates to the Department of Education.

The aforementioned differences have to do with the lender who services your loan after you complete the program. A Direct Loan will be returned to the Direct Loan Servicing Center, a FFEL Loan may be purchased by an eligible lending institution, and a Perkins Loan will be serviced by the Department of Education until the loan balance is paid off.

Some things to keep in mind:

  • Payments secured through involuntary means, such as wage garnishment or litigation, cannot be counted towards your nine payments.
  • You are only allowed to perform loan rehabilitation once per loan. That means if your loan falls back into default, you will have few if any options, and you will more than likely be responsible for the remaining balance in full.

Many experts believe that we may be headed for another recession. Don’t enter a second recession with mountains of debt. I can help you to understand the options available to you for dealing with your debts. I am sure that I can be of assistance to you, to a family member, or to a friend as we all know people experiencing trouble these days even if we are not experiencing our own financial troubles. Please do not hesitate to make contact with me. I emphasize courteous and discrete consultations that fill your time with useful information. The impact to your life after an in-person consultation with me may be substantial, and life-long. You will enjoy a new peace of mind and a fresh hope for the future with a new roadmap for financial success that we develop together. You can contact my scheduler through our website for your free 30 minute consultation. If you wish, you may schedule your free 30 minute consultation by phone by calling us at 253-383-1001 Monday through Thursday from 9:00 AM until 5:45 PM, and on Friday from 9:00 AM until 12 noon.