Private Student
Loans and
Bankruptcy
{
November 2012
Prepared for MASFAP
Presented by Steve Winnie, COO and General Counsel, Campus Door Holdings Inc.
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Nothing within the physical or verbal content
of this presentation is intended to be legal
advice or a professional opinion regarding the
likelihood of success or failure of any pending
legislation. Please consult with your own
counsel for legal advice.
Disclaimer
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I. What is Bankruptcy – Chapter 7 vs. Chapter 13
II. Current Bankruptcy Law – 11 USC 523 (a)(8)
III. Current Application of Law – “Undue
Hardship” Test
IV. Proposed Legislation
V. Other Alternatives
VI. Lender Perspectives on Changes to Existing Law
VII. Future Thoughts
VIII. Questions
XI. Presenter Bio
X. References
Table of Contents
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Chapter 7 Bankruptcy
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Commenced by filing a petition with schedules
of assets, liabilities, income and expenses
Often referred to as “liquidation” with
immediate discharge of debts
Trustee is appointed to secure and sell nonexempt assets and use proceeds to pay claims
from unsecured creditors
Remaining unsecured debt is discharged
Most debtors retain property rights
Certain debts not discharged: domestic support
orders, taxes, student loans
I. What is Bankruptcy – Ch 7
vs Ch 13
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Chapter 13 Bankruptcy
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Commenced by filing a petition with schedules
of assets, liabilities, income and expenses
Debtor submits a “plan of reorganization” under
which he devotes his monthly “projected
disposable income” to repay a percentage of
unsecured debt over a period of 3 to 5 years
Each month the debtor makes a single payment
to the trustee who then pays creditors according
to the plan
Ch 7 vs Ch 13 (continued)
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Which to file 7 or 13:
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Bankruptcy Abuse Prevention and Consumer
Protection Act (BAPCPA)
Imposes a “means Test” to determine if a debtor
can file under Chapter 7
If gross income is above the forum state’s median
income, cannot use Chapter 7
Recent strong enforcement against Chapter 7
filers
Ch 7 vs Ch 13 (continued)
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In 2005, the exception to discharge was extended to
include all education loans (private and federally
backed)
A debtor in Chapter 7 OR Chapter 13 cannot
discharge:
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an educational 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 nonprofit institution; or
an obligation to repay finds received as an
educational benefit; or
any other educational loan that is a “qualified
education loan”
II. Current Law – 11 USC 523
(a)(8)
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UNLESS excepting such debt from discharge under
this paragraph would impose an undue hardship on
the debtor and the debtor’s dependents
Process –
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Debtor files a bankruptcy petition (Chapter 7 or 13)
Creditor has the initial burden to establish the
existence of the debt and that it falls into one of the
nondischargeable categories (made by govt.; made
by nonprofit; educational benefits; any qualified
educational loan) [note the low bar to show that the
substance of the transaction was educational even if
ultimate use of the funds was not educational]
Debtor files an adversary proceeding and has to
show an “undue hardship”
Current Law (continued)
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The “Undue Hardship” Test – within the adversary
proceeding, the bankruptcy court must find that
forcing the debtor to pay for the debt would impose an
undue hardship upon the debtor and/or dependants
Most courts have adopted the 3-part Brunner Test.
Debtor must prove all 3 of the following:
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1) That the debtor cannot maintain, based on current
income and expenses, a minimal standard of living for
himself and his dependents if forced to repay;
2) That additional circumstances exist indicating that the
current state is likely to persist for a significant portion of
the repayment period of the student loans; and
3) That the debtor has made good faith efforts to repay the
loan
III. Current Application of
the Law
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First prong of Brunner – with current income and
expense, debtor cannot maintain a minimal standard
of living if forced to repay
What is a minimal standard of living?
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Examples – it is excessive to pay for “amenities”
like a boat, cable and cigarettes although some
courts allow expenditures for reasonable expenses
for cable, phone and Internet
Is debtor maximizing income and minimizing
expenses?
 Examples – rent out extra rooms/cut grocery budget
($550 per month is too much for 2 people)
Current Application
(continued)
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Second prong of Brunner – present “additional
circumstances” that show that the current
circumstances will likely continue for a significant
portion of the repayment period
Most important factor is that the additional
circumstances are beyond the debtor’s control, not
borne by free choice (e.g. switching to a lower
paying career by choice will not suffice)
Debtors have tried a variety of causes here, most
commonly medical conditions
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Asperger’s syndrome and osteoporosis (enough)
Hodgkin’s lymphoma (enough)
Diabetes and resulting blindness (enough)
Depression caused by debt (not enough)
Current Application
(continued)
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Third prong of Brunner – whether the debtor
has made good faith efforts to repay the loan
Good faith is measured by efforts to obtain
employment, maximize income and minimize
expenses – in addition to payment history
Participating in alternative payment plans often
shows good faith
Current Application
(continued)
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H.R. 2028 – Private Student Loan Bankruptcy
Fairness Act
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Introduced by Rep. Cohen May 26, 2011
Would eliminate private student loans from nondischargeability
Stalled in committee by Rep. Smith
Internet petition on change.org to schedule a
hearing for 2028
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Has 500 signatures – still needs 9627 more
IV. Proposed Legislation
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S. 1102 – Fairness for Struggling Students Act of
2011
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Introduced by Senator Durbin on May 26, 2011
Would limit the nondischargeability protection
to loans made, insured, or guaranteed in whole
or in part by a governmental unit
Also stuck in committee
Proposed Legislation
(continued)
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CFPB continues to advocate for dischagreability of
private student loans
Bring back the time-lapse discharge (debtors had to
wait five (5) years after a loan first became due
before discharging the debt until 1990 / from 19901998 debtors had to wait seven (7) years)
Sell an interest in the debtor’s future earnings to the
school or to private equity investors
Allow discharge after five(5) – seven(7) years of
good faith payments
Parse out the fair market value of the debt and the
amount of the claim equal to the fair market value
would be nondischargeable
V. Other Alternatives
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It’s no surprise that Lenders favor the current
framework which only allows discharge of
private student loans if undue hardship can be
demonstrated
From the CBA – “We made a contract with
students to repay their loans, and that’s how
the banking system operates.”
Lenders made credit and pricing decisions in
reliance upon the current legal framework, so
any changes could only be forward-looking
VI. Lender Perspectives
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If private student loans could be more easily
discharged, Lenders will likely:
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Restrict the availability of credit to some degree
(but still attempt to meet demand)
Consider the risk of discharge in pricing the asset
(both at the point of origination and in the
secondary market) = pricing to the borrower will
increase
Insurance and guarantee premiums would also
increase
Wrestle with how to handle cosigners or add
even more to combat bankruptcy
Lender Perspectives
(continued)
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First, remember my disclaimer: Nothing within
the physical or verbal content of this
presentation is intended to be legal advice or a
professional opinion regarding the likelihood
of success or failure of any pending legislation.
Please consult with your own counsel for legal
advice.
Second, it is highly unlikely that any changes to
the bankruptcy code will occur anytime soon
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Politically, the Congress is focused on other
issues right now
VII. Future Thoughts
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Third, there are other more pressing issues
within higher education
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Admissions policies and practices
Rising college costs
Proprietary schools and gainful employment
rates
- Even with the advocacy of the CFPB for a change,
this topic has been raised and dismissed several
times in the past. The current structure will likely
remain in place for the foreseeable future.
Future Thoughts
(continued)
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Feel free to ask them now
Or, e-mail them to me at
steve.winnie@campusdoor.com
VIII. Questions
Steve Winnie is the Chief Operating Officer and Chief Counsel of CampusDoor. He also serves as the
Corporate Secretary and Security Officer and heads the company’s business development efforts. In his
various roles, Mr. Winnie oversees all operational, legal and regulatory matters and manages intake and
implementation of new clients and loan programs. Mr. Winnie has established a robust Regulatory
Compliance and Internal Audit Program at CampusDoor which includes a Quality Control Review and
Reporting Process which serves to mitigate regulatory risk across all loan programs.
After graduating from Cornell Law School, Mr. Winnie worked in private practice in the Commercial
Litigation Department of Philadelphia-based Pepper Hamilton, LLP. He then served as General Counsel
to Campus Door, Inc. from 2006-2008. Mr. Winnie then worked as Associate General Counsel at Sallie
Mae where his practice focused on private student loan originations, specifically marketing and
advertising, new product development and regulatory compliance. Mr. Winnie rejoined CampusDoor
in late 2009.
Mr. Winnie earned his Bachelor of Arts degree in Political Science from Mansfield University of
Pennsylvania and his J.D. from Cornell Law School. He is also a graduate of the ABA National
Compliance School held in Atlanta, Georgia. Mr. Winnie is admitted to practice law before the state and
federal courts of the Commonwealth of Pennsylvania. Mr. Winnie is a frequent speaker at industry
conferences and events and his recent presentations have included Operational Impacts of the revised
Truth-in-Lending student loan provisions and oversight of the private student loan industry by the
Consumer Financial Protection Bureau.
Steve serves as a member of the Board of Directors for the local chapters of the YMCA and United Way
and his interests include spending time with his family, basketball and obstacle course racing.
IX. Presenter Bio
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The Indentured Generation: Bankruptcy and Student Loan
Debt by Daniel A. Austin, Northeastern School of Law;
Santa Clara Law Review vol. 53 (forthcoming).
11 U.S.C. 523(a)(8).
Senate Bill 1102.
House Bill 2028.
Campton v. U.S. Dept. of Educ., 405 B.R. 887, Bankr.
N.D. Ohio 2009).
Mandala v. ECMC, 310 B.R. 213, (Bankr. D. Kan. 2004).
In re Todd, 2012 WL 1862341 (Bankr. Md. 2012).
Let Student Loans be discharged in bankruptcy by Eileen
Ambrose, The Baltimore Sun; July 29, 2012.
References Used