Blogs

Failure to Apply for Income Based Repayment Does Not Bar Discharge of Student Loans

By: Gabriella Formosa

St. John’s Law Student

American Bankruptcy Institute Law Review Staff
 
In In re Krieger,[1] the Bankruptcy Court for the Southern District of Illinois permitted a discharge of federal student loans despite the debtor’s failure to apply for an Income Contingent Repayment Plan (“ICRP”).[2] Under an ICRP, a borrower’s annual loan payments can be reduced after applying a formula that takes into account poverty guidelines and the borrower’s adjusted gross income.[3] However, if the borrower has no discretionary income, the monthly payment due will be zero.[4] Here, the debtor, a twice divorced, fifty-two year old woman had been unemployed for over ten years despite countless attempts to secure employment.[5] She lives with her elderly mother and her sole income is a monthly government assistance check for $200.[6] She is unable to afford health or dental care, a cellular phone, or her car payments.[7] The court held that application for an ICRP would be nothing more than a formality because the debtor was currently destitute, and was likely to remain that way for rest of her life.[8] As such, application was not dispositive of a good faith attempt to repay her loans.[9]

Developing Consensus Among Delaware Bankruptcy Courts to Narrowly Construe Stern v. Marshall Concerning Avoidance Claims

By: Joseph P. Donnelly IV

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 
Adopting a narrow interpretation of the holding of Stern v. Marshall,[1] the Bankruptcy Court for the District of Delaware, in In re DBSI,[2] held that Stern does not preclude a bankruptcy court from adjudicating avoidance claims.[3] In November 2008, DBSI Inc. and several of its affiliates (the “Debtors”) filed for Chapter 11 bankruptcy protection.[4] Following confirmation of the Debtors’ liquidating plan, a litigation trustee commenced several adversary proceedings relating to, inter alia, preferential or fraudulent transfer claims.[5] Certain defendants (the “Movants”) sought to have these adversary proceedings dismissed, arguing that the bankruptcy court lacked jurisdiction under 28 U.S.C. § 157 and the United States Supreme Court’s decisions in Stern v. Marshall and Granfinanciera, S.A. v. Nordberg,[6]to adjudicate causes of action sounding in preference or fraudulent conveyance.[7]

Definition of Reasonably Equivalent Value Narrowed as Pool of Potential Litigants is Expanded in Fraudulent Transfer Context

By: Steve Traditi

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

In In re TOUSA, Inc.,[1] the Eleventh Circuit held that subsidiaries of a parent company did not receive “reasonably equivalent value” in exchange for liens granted to secure the obligations of the parent company in an attempt by the group to avoid bankruptcy.[2] The court also held that third party beneficiaries could be liable as parties “for whose benefit” the transfer was made.[3] In 2005, TOUSA, Inc., a large homebuilding company, entered into a joint venture in order to acquire homebuilding assets from Transeastern Properties, Inc., using monies borrowed from the so-called “Transeastern Lenders” to fund the acquisition.[4] When the housing market took a downturn in 2006, TOUSA defaulted and the Transeastern Lenders sued for more than $2 billion.[5] TOUSA agreed to settle the case for $421 million with money borrowed from a collection of lenders (the “New Lenders”). The New Lenders secured their loans by taking liens on the assets of certain of TOUSA’s subsidiaries (the “Conveying Subsidiaries”).[6]  After TOUSA and its subsidiaries, including the Conveying Subsidiaries, went into bankruptcy, TOUSA sought to avoid the New Lenders’ liens as fraudulent transfers arguing that the Conveying Subsidiaries did not receive reasonably equivalent value.[7] In addition, TOUSA sought to recover from the Transeastern Lenders by claiming that the Transeastern Lenders were the entities for whose benefit the transfer was made.[8]  The bankruptcy court agreed with TOUSA, but the district court reversed.[9] TOUSA then appealed to the Eleventh Circuit.

Mortgagees Misapplication of Plan Payments Not Tortious

By: Benjamin Yeamans

St. John’s Law Student

American Bankruptcy Institute Law Review Staff
 
 
In In re Oliver, the Bankruptcy Court for the District of Kansas held that a debtor did not meet the threshold requirements to proceed on a claim of outrage (i.e., intentional infliction of emotional distress)[1] by alleging that a creditor had misapplied payments received from the debtor and the trustee in violation of the debtor’s chapter 13 plan.[2] Mr. and Mrs. Oliver (the “Debtors”) entered into a loan agreement with CitiCorp Trust Bank FSB (the “Creditor”) to finance the purchase of their home.[3] Roughly three years later, the Debtors filed a chapter 13 bankruptcy petition.[4] The Debtors’ confirmed chapter 13 plan stipulated that the Creditor must apply any mortgage payments to the mortgage balance immediately upon receipt as opposed to holding the payments in a suspense account.[5] The plan also required the Creditor to apply payments made by the chapter 13 trustee and the Debtors to pre-petition arrearages and post-petition claims respectively.[6] The Debtors alleged that the creditor violated the terms of its chapter 13 plan by holding partial mortgage payments in suspense accounts, which resulted in improper interest calculations.[7] Additionally, the Debtors alleged that the Creditor had also violated the plan by failing to provide complete and accurate accountings of payment received from the Debtor and the chapter 13 trustee.[8] Finally, the Debtors also claimed that the Creditor’s misapplication of payments caused the Debtors to file incorrect tax returns, and that as a result, they were denied credit or offered credit at a higher rate.[9]

Questions of Fact and Faith Tithing Undue Hardship and Student Loan Discharge

By: Jessica Wright

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

In In re Lovell,[1] the Bankruptcy Court for the Northern District of Iowa, held that a debtor who tithed approximately 11% of her gross income was nevertheless entitled to a hearing on whether she qualified for a hardship discharge of her student loan debt.[2] The debtor received a Chapter 7 discharge and then filed an adversary complaint for a discharge of her student loans, arguing that the loans would impose an undue hardship based on her current income and monthly expenses.[3] The debtor was gainfully employed and earned $44,255.04 per year,[4] and in her self-reported monthly expenses[5], she included charitable donations and tithes to her church amounting to nearly 11% of her gross income.[6] In assessing her expenditures, the court held that making charitable contributions and tithing is not per se unreasonable when requesting discharge of student loan debt. Instead, a fact-intensive inquiry into the appropriateness of such expenditures is required. For this reason, the court held that it was precluded from granting summary judgment to the creditor.[7]

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