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FDCPA and Bankruptcy

There was an issue regarding whether the FDCPA would apply to bankruptcy proceedings. In particular, this was fueled by the fact that the debt buyers are flooding the bankruptcy proceedings with debts beyond the statute of limitations. They are uncollectible (if objected to) in bankruptcy, but is making such a frivolous claim a violation of the FDCPA?

I thought so and argued so in various materials. The Supreme Court found otherwise, signaling the current court’s hostility to real people and tendency to bootlick the powerful.

Case Study on Student Loans – Hixson

The Choices Facing Hixson

Sometimes people wonder how their payments get out of control so quickly. And many people have a wrong idea about how interest rates on big loans work. This article is designed to help explain the choice one person made, as revealed in a bankruptcy case. This case is In re Hixson, 450 B.R. 9 (S.D.N.Y. 2011), Hixson tried to get rid of just some of his debt – the part represented by his ex-wife, who wasn’t paying, and never had paid, a cent on their joint debt.

Hixson graduated from the Julliard School of Music with a Ph.D. in clarinet in 1998. His student loans at the time were 91 thousand dollars and change. He was married to a woman about whom not much is said – but she had loans totalling about $47,500. That’s all we really know, so what follows is a mixture of guess-work and hypotheticals. But it is intended to be realistic and to show the situation the couple faced.

Let’s suppose that Hixson had several loans with an average interest rate of 7%. This is the way they’re done – every year is a different loan in most programs, and they can have different interest rates. Applying the loan calculator, this is what he faced, more or less. We’re going to guess that he had agreed to a ten-year payment plan. Using our favorite loan calculator (click here for an explanation of how to use it, if you need one), we plug in $91,000, interest at 7% and “120 payments” and we get…

He was on the hook for $1,056.59 per month. That’s pretty much, but if you have a pretty good job it would at least be possible. But who would want to? Hixson, whose degree was in clarinet, was probably counting on getting a university position. This apparently did not happen.

Now let’s consider his then-wife, who had about $47,500 in loans. We’ll just say they averaged 8% interest, and that she, too, was going to pay them over the course of ten years. Here’s what she was looking at:

She was on the hook for $576.31, so together the couple was looking at ten years of payments at a little over $1,600 per month. Again – possible if one or both were in teaching positions. We don’t know what her degree was in, or what it was. What we do know is that the couple didn’t like what they were facing, because they agreed to consolidate their loans. Let’s figure they got a slightly better rate by doing so. We’ll say that the rate on the consolidated loan was 6%, although again we emphasize we do not know what it really was. If that was so, and they kept their payment schedule to a “new” schedule of ten years, here’s what they faced:

Not much savings there, so it is possible we have got some of the numbers wrong. No matter, because what happened afterwards is really more important. In the seventeen months following this loan consolidation, Hixson made 12 payments of approximately $440 each. It isn’t clear why the payments were that size, and Hixson’s wife made no payments – then, or ever.

About 18 months after consolidating their debts, Hixson and his wife divorced. This means that they were both on the hook for the total amount due, but they were no longer married. It would appear from the case, though vaguely, that the ex-wife agreed to pay her loans, but that she never did. In any event, Hixson stopped paying, too, in December 2000. No payments were made until the Department of Education caught up with Hixson and began garnishing wages in October of 2004. They garnished him for between two hundred and six hundred dollars for a year before he declared bankruptcy. The DOE never made any attempt to collect from Hixson’s ex-wife. Hixson was not a clarinet professor – he was apparently a computer internet sales person.

After declaring bankruptcy, Hixson apparently stopped paying on the debt for another four years (although this isn’t clear). What is clear is that in December 2006, Hixson was facing a debt now totalling approximately $195,000. He tried to get it discharged.

At the time relevant to the case, Hixson was making about $40,000 take-home pay per year and living in NYC. His ex-wife had never paid a cent, and the DOE was after Hixson for it all. He faced two options: ten years of payments about $2100 per month (more than all of the money he had, after necessaries) or 21 years of $808/month payments. The bankruptcy court found that Hixson’s situation was not “undue hardship” that would allow any of the debt to be reduced. It also found that, because Hixson had not been making payments, he had not satisfied the “good-faith” test that the courts require for there to be any right to relief at all.

The Point of this Article

We do not know what Hixson did, or “how it all turned out.” We seriously doubt it turned out well for anybody other than the university which sold Hixson a nearly useless degree that took him at least six years to earn, cost whatever out of pocket (or in work) that Hixson had already paid before the case began, plus the $100,000 in loans Hixson got stuck with. Hixson’s total projected payments (not counting anything paid before the bankruptcy court’s ruling): about $350,000.  And these are after-tax dollars – so they likely imply a real cost more like $500,000.

After paying enough to buy a mansion, Hixson will, if he manages, be left with nothing but his degree. We simply wish to point out what a disaster this probably was for Hixson. Be very careful before taking on a student loan!

Link to a Loan Calculator

We have no connection to this calculator, but it will allow you to put in payment terms (number and interest rate) and determine how much money you could borrow; or it can help you take the loan principle and figure out how much you will have to pay – over a length of time you can set – to pay it off. In other words, this program lets you get a realistic handle on the amount of blood, sweat and tears your educational loan will cost. We hope it makes you take a hard look at the universities and their tuition rates.

 For Help with Student Loans

If you are either considering signing or co-signing for a student loan, or if you are at any stage in student loan repayment, you may be interested in our report on student loans.

For More on student loans and the probable political consequences, read Occupy Wall Street and Debt Jubilee.

Repaying Student Loans

The only sure way to avoid trouble with student loans is not to get into it. Be careful and know what you’re doing.

A Simplified Explanation of Student Loan Repayment

 Why they get out of control so quickly

Sometimes people wonder how their payments get out of control so quickly. And many people have a wrong idea about how interest rates on big loans work. This article is designed to help with that, and it comes in large part from our Report on Student Loans and our discussion of a case everyone considering signing up for a student loan, and especially considering loan consolidation with another person, should read carefully. This case is In re Hixson, 450 B.R. 9 (S.D.N.Y. 2011),

A Simplified Student Loan Scenario

Suppose you borrow $100 at 10% interest and you agree to make one payment per year. At the end of year one, you will owe $110. To make any progress, you must pay more than ten dollars (the interest); since it’s a student loan with a 100-year maturity, your payment is $11. It isn’t magic or fancy book-keeping. To make progress you must pay more than the interest, otherwise it gets added to the principle. Your $11 payment will reduce the total owed by only one dollar.

Times are rough, though, so you seek and get a deferment of that first payment. At the end of year 2, you now owe $121. Your $11 payment will not make any headway on the principle, but it will hold things steady. If you need a second deferment, you are now on a downward spiral – even if you make all your scheduled payments till doomsday, you will still get further and further behind.

This won’t happen. Instead, your payments will rise. After a few deferments your payments will be significantly higher and will stretch out just as far into the future as ever. In other words, deferments in which the interest continues to run are extremely dangerous and are to be avoided if possible. If you renegotiate the deal (consolidating your loans, for example), you can possibly change the payments back, but you will do this at the price of increasing the number of payments unless you can get a lower rate of interest, which is not likely for student loans.

Leverage and the Idea behind Student Loans

The idea behind student loans is simple: you pay one price for an asset that should help you in many ways over a long term. Inflation should help, too, because although your income should go up over time simply because of inflation (as well as your increasing experience), your payments will remain constant. Thus your payments should, in theory, go down relative to your income.

That’s the theory. It’s easier to see in something tangible, like a house. Suppose you buy a house for $100,000 with an interest rate of 5%. You pay $10,000 down and agree to pay $100/month for as long as it takes. If the price of the house goes up 10% in the first year, you have made a great bargain: the house is now worth $110,000. The amount you spent to get that house was only $11,200, so you have made $8,800. If your income has kept up with inflation, your hundred dollar payment will be easier to pay than it was at the start, too.

Student loans theoretically work the same way. You pay something down and take out loans for tuition, and you get a sort of two-faced asset: your education and a job using that education. The job, hopefully, is better than you would have gotten without the education, and it should also appreciate over time, so the value of your assets will rise, while inflation will reduce the real impact of your loan payments.

Not So Fast

The theory behind taking loans is easy, so why did so many homeowners go broke in the early 2000s? Because the home-buying spree, like student loans, were based on a premise that isn’t always right. The asset you buy isn’t always worth it – and prices don’t always go up. If prices go down, or if the educational asset does not result in financial gain, and if inflation is low, the leverage can cut the other way. The payments remain constant (or go up if payments are missed), while the ability to pay goes down.

And this is what has happened to so many people in the 2000s. Our Report on Student Loans discusses the way bankruptcy law has affected the equation and makes some suggestions about what to do if you are struggling with student loan payments. For help with the math of your loan, we suggest that you use a loan calculator, and you will find the link to that in the side panel. For a case study of the choices and issues facing one real person who took out student loans, please read A Case Study: The Choices Facing Hixson.

Bankruptcy – what it is and how it works

When people are being sued for debts, they often panic and look for the quickest, easiest, or least scary way out. Bankruptcy sometimes seems to be that way. What is bankruptcy? and how does it work? How does it affect some of your other rights?

What Bankruptcy is

Most people have an intuitive idea of what bankruptcy is – legal protection for people who are broke, right?

Sort of.

Bankruptcy is at least equally a protection for creditors. You see, when people are financially troubled, this doesn’t mean that they literally have NOTHING. Rather, they will spend or distribute an inadequate number of resourses in a way to relieve them of the most pressure, or to favor people they want to favor. Bankruptcy exists to help prioritize and organize the ways debtors distribute their money so as to protect the creditors from favoritism or sneaky behavior. It does protect the debtor (person declaring bankruptcy) from all lawsuits or judgments, and this in turn spares the creditors from having to “race to the courthouse” to file suits against the financially weakened.

That makes good sense, right? So shouldn’t anybody with debt troubles dive into bankruptcy?

Price of Bankruptcy

Bankruptcy is not a “free lunch” to debtors. It can be expensive to do, and over the past decade or two has been made much trickier to get in and finish. It is also extremely intrusive and occasionally time-consuming. It also does not protect you from all claims, notably those associated with “secured” debts – debts like home and auto loans.

In my opinion, bankruptcy is RARELY a good first option for people being sued for debts, especially if they’re being sued by debt collectors. On the other hand, if you expect to negotiate with a debt collector or creditor in any way, our position is that you should consult a bankruptcy lawyer. You should know what it costs and requires, and letting a debt collector know you’ve actually talked to a bankruptcy lawyer can have a wonderful effect on their willingness to accept lower amounts of money.

Issues in Bankruptcy

Perhaps surprisingly, bankruptcy and debt law are not closely related, and lawyers who practice one kind of law rarely know much about the other. Unless your lawyer (if you have one) actually practices both types of law, he or she is probably not qualified to give you advice about the area in which he does NOT regularly practice.

Bankruptcy and FDCPA

Another issue comes from the interaction of bankruptcy and debt laws. This isn’t uniform, consistent, or particularly fair. In some jurisdictions, for example, if you declare bankruptcy, creditors will come out of the woodwork to file “claims” against the bankruptcy estate. It would be illegal for them to sue you, but in SOME courts it’s fine for them to litigate against you in bankruptcy. This is plan stupid and bad, but some federal appeals courts allow it while others make it a violation of the Fair Debt Collection Practices Act (FDCPA). The Supreme Court has not addressed the issue yet.

Bankruptcy and Student Debt

The courts are even less consistent or fair when it comes to student debt. If most of your debt problem comes from heavy student loans, bankruptcy may not offer you much help. They are treated differently from almost all other debts, and in many courts they are almost impossible to shake off. Strangely, perhaps, this issue has not been organized or even considered very much by bankruptcy or debt lawyers. I have addressed the issue in Getting Out of the Trap of Student Loans. That book discusses the way bankruptcy law and student loans collide and, on a federal circuit by circuit basis, what your chances of escaping the trap might be.

Against Debt Collectors

Our view on suits brought by debt collectors is that bankruptcy is rarely a good first option – and only sometimes a good last option. However, you should know that, if bankruptcy will work for you at all, it will work for you just about as well even if the debt collector has obtained a judgment. That is, bankruptcy protection applies to state court judgments as much as any other kind of debt, alleged or proven. Thus you could defend yourself pro se and, if you lost (as very few of our members do), you would still be able to declare bankruptcy if it would help.

Bankrupts Beware – FDCPA No Longer Applies to Claims

Bankruptcy has been one refuge debtors have from debt collectors, but the Supreme Court has recently made things much worse. In Midland Funding, LLC v. Johnson, No. 16-348 (Slip Op. 5-15-17), the Court held that filing claims in bankruptcy court on debts that are beyond the statute of limitations does not violate the Fair Debt Collection Practices Act (FDCPA). If you are in bankruptcy or considering it, this is huge.

Opening the Floodgates to Bad Claims

What Bankruptcy Does

In general, if your debts get too bad, you can file bankruptcy and force all your creditors to stop contacting you. They have to file claims in your bankruptcy action, and the court will either grant those claims or deny them. The court then determines the amount of payments you must make, over what period of time, and you do your best to do that.

It isn’t an easy path, and in fact most bankruptcies are dissolved without “discharge.” That is, most bankruptcies end without accomplishing their purpose. Obviously, the less money you have to pay, and the shorter the period you have to make payments, the better your chances of getting what you wanted out of bankruptcy in the first place: a “fresh start.”

The dirty little secret of bankruptcy, though, is that if claims are not disputed, they are generally granted. In bankruptcy cases brought by poor people (you can bet Donald Trump never had this problem), the lawyers representing the bankrupts have little (personal) incentive to dispute wrongful claims because they’re being paid out of the scanty resources of their clients. There’s a U.S. trustee who is supposed to oversee the process and protect the bankrupt and legitimate creditors from bad claims, but guess what?

They often don’t. Likewise, the court should attempt to winnow out bad claims, but given the number of bankruptcies and their complexity, this often does not happen.

In most bankruptcies, allowing a bad claim means that it’s going to get paid (eventually) by the person filing for bankruptcy. Under current realities, that means a lot of bad claims get paid by poor people.

Enter the junk debt buyers to make things much worse. They buy vast amounts of LONG overdue debt – debt far beyond the statute of limitations – and file claims in bankruptcy cases. This bogs the bankruptcy courts, the trustees, and bankruptcy lawyers down. The more bad claims they file, the more get through because of carelessness. They should NEVER get through, because an unenforceable claim should ALWAYS be denied under bankruptcy rules.

Bad claims hurt the chances of the bankrupts to get their fresh start, hurt the chances of the legitimate creditors to get paid, and incidentally makes the whole process stink to high heaven of injustice. Concern about this obvious corruption of the entire process, incidentally, is not just liberal “blather.” The courts jealously guard their claims to legitimacy – legitimacy is essential to their ability to work at all. Allowing a bunch of hoodlums in fancy suits to steal wholesale from the poor damages the legal system at its very core.

The FDCPA used to offer some protection against that, but the Supreme Court negated that protection with its holding in Midland Funding, LLC v. Johnson, No. 16-348 (Slip Op. 5-15-17). In that case, the Court ruled that debt collectors could file claims in bankruptcy that would be illegal if filed in other courts.

Midland Funding, LLC v. Johnson

The relevant facts in Midland Funding are very simple. Midland, a junk debt buyer, was buying extremely old debts for very small amounts of money. They were using these debts, which were far beyond the statutes of limitations, as the basis for many claims in bankruptcy. Johnson opposed and had the claim in that case disallowed, and then filed suit in district court under the FDCPA, alleging that the claim had been unfair or unconscionable. The essence of Johnson’s claim was that filing obviously time-barred claims in a bankruptcy proceeding was an unfair debt collection practice.

The Supreme Court ruled that it was not.

There is no need to review (here) the tortured logic that effectively immunizes from consequences the intentional doing of something that never, under any circumstances, should be allowed. The state of the law simply is this: debt collectors can file obviously unenforceable claims in bankruptcy without worrying about the FDCPA.

There is perhaps one glimmer of light in this very bad decision. The Supreme Court was addressing “obviously outdated” claims. What Midland was doing was buying obviously unenforceable claims and hoping they would be overlooked and erroneously allowed. While this obviousness is one main way a debt collector’s intention to file outdated claims would be known, the obviousness was also a reason the Court found that the claims were not “deceptive.” What if the claims were known to be outdated by the debt collector but were not obviously so? Facts like that, or similar facts tending to show some actual intent to deceive would present difficult evidentiary issues, but the case could arise and might tip the balance in the other direction.

Conclusion

What the Midland Funding case means, in practical effect, however, is that even if you’re in bankruptcy you’re going to have to know and protect your own rights. Your lawyer has VERY LITTLE incentive to challenge bad claims, and the U.S. Trustee has VERY LITTLE time (or incentive) to do it. If the claims are allowed, you will be stuck paying them in all likelihood. That means that even if you file for bankruptcy you must be prepared to defend yourself against the debt collectors. You will AT LEAST need to know your rights, and you will very probably have to defend them pro se. You’re probably not going to get much help from your lawyer on this one.