Administrations Student Debt Plan Would Ease Burden but Critics Say It Could Promote Overborrowing

ABI Bankruptcy Brief | May 14 2013

May 14, 2013

NEWS AND ANALYSIS

ADMINISTRATION’S STUDENT DEBT PLAN WOULD EASE BURDEN, BUT CRITICS SAY IT COULD PROMOTE OVERBORROWING

The White House proposal that the government forgive billions of dollars in student debt over the next decade is supported by student advocates, but critics say that it would expand a program that already encourages students to borrow too much and stick taxpayers with the bill, the Wall Street Journal reported yesterday. The proposal, included in President Barack Obama's budget for next year, would increase the number of borrowers eligible for a program known as income-based repayment (IBR), which aims to help low-income workers stay current on federal student debt. Borrowers in IBR programs make monthly payments equivalent to 10 percent of their income after taxes and basic living expenses, regardless of how much they owe. After 20 years of on-time payments—10 years for those who work in public or nonprofit jobs—the balance is forgiven. Under the program today, most borrowers with loans issued since October 2007 are eligible to participate. The budget proposal—which requires congressional approval—would let all borrowers with pre-2007 loans participate and would make tax exempt any debt forgiven through the program. (Loan forgiveness can be considered taxable income.) Read more. (Subscription required.)

SURVEY: MILLIONS STRUGGLING WITH MEDICAL DEBT

A recent survey found that medical debt continues to weigh on the shoulders of millions of consumers, according to a column in yesterday’s Dallas Morning News. Last year, 41 percent of adults ages 19 to 64 said that they had problems paying medical bills or were paying off medical debt over time, according to a survey by the Commonwealth Fund, a private foundation that promotes improvements in the health care system. Twenty-nine percent of those paying off medical bills said they were carrying more than $4,000 in debt, and 16 percent reported $8,000 or more in medical debt. Gaps in health insurance, inadequate coverage and large medical bills have left millions with medical debt, said Sara Collins, vice president of Affordable Health Insurance at the Commonwealth Fund. The Affordable Care Act, which goes into full effect next year, has improved the situation somewhat, she said. In particular, a provision that allows adult children to remain on their parents’ health insurance policies until they are age 26 has had an impact. Another bill currently being considered in Congress, the "Medical Debt Responsibility Act," would prohibit credit bureaus from using paid-off or settled medical debt collections in determining a consumer’s creditworthiness. The bureaus also would have 45 days from the date the medical debt collection is paid off or settled to expunge the collection from the consumer’s credit report. Read more.

TRANSUNION: CREDIT QUALITY OF MORTGAGE BORROWERS NATIONWIDE HAS IMPROVED

Widely reported mortgage delinquency rates are being weighed down by older mortgages and loans long past due, but more recent mortgages are performing at pre-housing-bubble norms, according to an analysis of national lending data by TransUnion, the Chicago Tribune reported today. In a study of 52 million mortgages, the credit information provider found that mortgages originated before 2009 comprised 50 percent of all outstanding loans and 86 percent of all loans that were 60 days or more past due. That translates to 14.5 percent of loans originated in 2007 falling delinquent within their first three years, compared with only 2.5 percent of mortgages originated in 2010, after the housing bubble burst and lending standards tightened. Read more.

CREDIT-RATING AGENCIES POISED TO AVOID OVERHAUL

Three years after Congress told federal regulators to consider changing the way credit-rating agencies are paid, the industry appears poised to dodge a major overhaul, the Washington Post reported today. The ratings firms have been widely criticized for contributing to the 2008 financial crisis by issuing high ratings to toxic securities backed by residential mortgages. Since then, the way these firms are compensated has come under scrutiny, with critics arguing that the agencies have a conflict of interest because they are paid for their analysis by the very banks and corporations whose products they are rating. One proposal designed to end this “pay to play” dilemma comes from Sen. Al Franken (D-Minn.), who is pushing to have the Securities and Exchange Commission set up an independent board that would assign financial products such as bonds to credit-rating agencies to rate, rather than allow banks and companies to choose which agencies to use. The approach will be debated today when the SEC holds a day-long roundtable to discuss the credit-rating agencies’ business model with industry officials, academics and investor advocates. But several analysts who track the issue say it is unlikely that the SEC will adopt a plan that separates hiring from payment, in part because doing so is not as simple as it appears. Read more.

ANALYSIS: IP TRANSACTIONS NEED SPECIAL CARE WHEN COMPANY IS IN FINANCIAL DISTRESS

In intellectual property licensing deals where one party is in financial distress, practitioners must take particular care as the transaction unfolds, according to experts on the topic, Reuters reported yesterday. IP counsel Daniel Ilan and bankruptcy partner Lisa Schweitzer, both of Cleary Gottlieb Steen & Hamilton, who in 2011 represented Nortel Networks in the $4.5 billion bankruptcy sale of its residual patents, said that caution is especially needed when balancing the fate of intellectual property during bankruptcy. Due to the way that recent transactions are scrutinized by bankruptcy courts for fairness, they may be voided or challenged if they appear to have been made for less than market value, said Schweitzer. If the company seeking to license its IP is financially distressed, including on the verge of bankruptcy, the company that pays for the license must make sure it is paying a fair price for the property, Schweitzer said. U.S. appeals courts have disagreed over whether certain obligations under IP licensing contracts, including the responsibility of the licensor to protect the "quality" of the trademark, constitute obligations that are absolutely necessary in order to complete the contract, Ilan said. Read more.

For more information about intellectual property in bankruptcy or valuation issues in bankruptcy, be sure to pick up a copy of Bankruptcy and Its Impact on Intellectual Property Law, Second Edition and A Practical Guide to Bankruptcy Valuation from ABI's Bookstore.

NEW ABI LIVE WEBINAR ON MAY 29 WILL FOCUS ON CLASS ACTIONS IN BOTH BUSINESS AND CONSUMER CASES

Class action lawsuits in both chapter 11 and 13 cases are becoming more prevalent. Are you wondering whether your clients’ WARN Act claims would be better pursued against a debtor company in a class action adversary proceeding or in a class proof of claim, or both? If your client has been sued in a debtor’s consumer class action adversary proceeding, do you know the best defenses against class certification? ABI's panel of experts will highlight the case law and explore the potential benefits and pitfalls of class actions by creditors against debtor companies in chapter 11 cases and by debtors/trustees against creditors in chapter 13 cases on May 29 from 1-2:15 p.m. ET. Special ABI member rate available! Click here to register.

ASSOCIATES: ABI'S NUTS & BOLTS ONLINE PROGRAMS HELP YOU HONE YOUR SKILLS WHILE SAVING ON CLE!

Associates looking to sharpen their bankruptcy knowledge should take advantage of ABI's special offer of combining general, business or consumer Nuts & Bolts online programs. Each program features an outstanding faculty of judges and practitioners explaining the fundamentals of bankruptcy, offering procedures and strategies tailored for both consumer and business attorneys. Click here to get the CLE you need at a great low price!

ABI GOLF TOUR UNDERWAY; NEXT STOP IS CENTRAL STATES BANKRUPTCY WORKSHOP IN JUNE

Rob Schwartz and Scott Gautier are tied at 34 Stableford Points atop the closely bunched leaderboard after the ABI's Golf Tour's first stop at Lake Presidential Golf Club. Next up for the Tour is the famed Bear course at the Grand Traverse Resort at the Central States Bankruptcy Workshop on June 14. Final scoring to win the Great American Cup—sponsored by Great American Group—is based on your top three scores at seven scheduled ABI events, so play as many as you can before the tour wraps up at the Winter Leadership Conference in December. See the Tour page for details and course descriptions. The ABI Golf Tour combines networking with fun competition, as golfers "play their own ball." Including your handicap means everyone has an equal chance to compete for the glory of being crowned ABI's top golfer of 2013! There's no charge to register or participate in the Tour, and women are most welcome.

ABI MEMBERS WELCOME TO ATTEND INSOL'S LATIN AMERICAN REGIONAL SEMINAR ON JUNE 13 IN SAO PAULO

ABI members are encouraged to attend INSOL’s Latin American regional seminar in São Paulo, Brazil, on June 13. The one-day seminar has been organized by INSOL in association with TMA Brasil to cover current cross-border insolvency and restructuring topics. The seminar is designed to be interactive and to allow the attendees to discuss and debate about practical issues with speakers who are leading players in the insolvency and restructuring field and with experience in insolvency proceedings involving different countries. The seminar will benefit from simultaneous translation in English, Portuguese and Spanish. For more information and to register, please click here.

ABI IN-DEPTH

NEW CASE SUMMARY ON VOLO: BRANIGAN V. DAVIS (IN RE DAVIS; 4TH CIR.)

Summarized by Ann Brogan of Crowley, Liberatore, Ryan & Brogan, P.C.

In two “Chapter 20” cases, the Fourth Circuit affirmed confirmation orders stripping off valueless junior liens against debtors’ property. In a 2-1 ruling, the Court rejected the argument of the chapter 13 bankruptcy trustee that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 created a per se rule that barred lien-stripping in Chapter 20 cases.

There are more than 800 appellate opinions summarized on Volo, and summaries typically appear within 24 hours of the ruling. Click here regularly to view the latest case summaries on ABI’s Volo website.

NEW ON ABI’S BANKRUPTCY BLOG EXCHANGE: FURTHER ANALYSIS OF THE SUPREME COURT'S RULING IN BULLOCK V. BANKCHAMPAIGN

The Bankruptcy Blog Exchange is a free ABI service that tracks 35 bankruptcy-related blogs. A recent post takes a closer look at the Supreme Court's ruling yesterday in Bullock v. BankChampaign NA involving the definition of "defalcation" in 11 U.S.C. § 523(a)(4).

Be sure to check the site several times each day; any time a contributing blog posts a new story, a link to the story will appear on the top. If you have a blog that deals with bankruptcy, or know of a good blog that should be part of the Bankruptcy Exchange, please contact the ABI Web team.

ABI Quick Poll

Bankruptcy courts should implement constructive trusts in any case where applicable state law would recognize them.

Click here to vote on this week's Quick Poll. Click here to view the results of previous Quick Polls.

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