Help Center

Analysis: The Fight over How Student Debt Is Collected in the U.S.

 
 

March 17, 2015

 
home | newsroom | chart of the day | blogs | bankruptcy code and rules | statistics | legislative news | volo
  NEWS AND ANALYSIS

ANALYSIS: THE FIGHT OVER HOW STUDENT DEBT IS COLLECTED IN THE U.S.

Three collection agencies are suing the government for canceling their contracts to collect overdue federal student loans, a move that the companies say was unjustified and came without warning, the Washington Post reported today. The government ended its agreements with these companies after discovering that debt collectors were giving incorrect information to students and families. President Obama has vowed to overhaul the way Americans repay their student loans, and lawmakers and consumer advocates have pressured the Education Department to change the way it compensates debt collectors. Advocates have accused the government of creating a system that encourages the companies to use high-pressure tactics against families. Two weeks ago, the Education Department said that it would end its relationship with five of the 22 private collection agencies it uses after an audit showed that the companies misled consumers about a program that helps people who have defaulted on their federal loans return to good standing. The firms told borrowers that their late payments would be removed from their credit reports, even though that was not true. According to the department, employees also misled borrowers into believing that certain collection fees could be waived if they paid up. The collection agencies say that the department's evaluation was arbitrary and flawed. Coast Professional, Enterprise Recovery Systems and National Recoveries have filed lawsuits against the government over the last few days, while Pioneer Credit Recovery is pleading its case for having the contract decision reversed to the Government Accountability Office. Read more.

For the latest developments on student loans and bankruptcy, be sure to register for tomorrow's ABI Live Webinar, "New Developments in Student Loans: Need to Know."

COMMENTARY: NEW RESEARCH SUGGESTS RULES FOR DEBTORS ARE TOO TOUGH

Far fewer Americans are seeking bankruptcy protection now than before BAPCPA, and evidence is mounting that the law's reforms may have done more harm than good, according to a commentary in The Economist on Sunday. Will Dobbie, of Princeton University, and Jae Song, of the Social Security Administration, look at chapter 13 bankruptcies before the reforms of 2005. They link half a million bankruptcy filings to tax records and use a novel technique to analyze them: Because some bankruptcy judges are more lenient than others, people in similar straits may end up with different bankruptcy decisions. This quirk allows some useful comparisons. Dobbie and Song argue that easier bankruptcy laws have good microeconomic effects: If a creditor may no longer claim large chunks of a bankrupt's salary, that may increase his incentive to work -- and decrease his need to slip out of town, change his job and close down his bank account. On average, those granted bankruptcy earned over $6,000 more in the subsequent year than similarly placed plaintiffs who were rejected. The unlucky ones found it trickier to service their mortgages. Michelle White of the University of California, San Diego and colleagues found that bankruptcy reform caused the default rate on prime mortgages to rise 23 percent. Read the full commentary.

TROOPS LEFT FINANCIALLY EXPOSED BY MANDATORY ARBITRATION CLAUSES

Over the years, Congress has given service members a number of protections from repossessions and foreclosures, but efforts to maintain that special status for service members has run into resistance from the financial industry, including many of the same banks that promote the work they do for veterans, the New York Times reported today. While using mandatory arbitration, some companies repeatedly violate the federal protections, leaving troops and their families vulnerable to predatory lending, military lawyers and government officials say. "Mandatory arbitration threatens to take these laws and basically tear them up," said Col. John S. Odom Jr., a retired Air Force lawyer now in private practice in Shreveport, La. High-ranking Defense Department officials agree, telling Congress that "service members should maintain full legal recourse." Last year, a bipartisan bill that would have allowed service members to opt out of arbitration and file a lawsuit met with opposition from the U.S. Chamber of Commerce and Wall Street's major trade group, the Securities Industry and Financial Markets Association (SIFMA). "While we remain very supportive of the troops, we see no empirical or other evidence that service members are being harmed by or require relief from arbitration clauses," said Kevin Carroll, a managing director and associate general counsel at SIFMA. The trade groups' members include a roster of financial companies that have trumpeted their hiring of veterans and their initiatives for troops returning home from war. They include JPMorgan Chase, the nation's largest bank, and USAA, which caters almost exclusively to service members and their families. Many banks contend -- as do companies in other industries -- that arbitration is a more efficient and less costly way to handle disputes. A spokesman for USAA said that the company supported the bill because it would have been "good public policy for the entire industry." Still, USAA uses mandatory arbitration clauses in many of its financial service contracts with service members. Read more.

For further analysis of financial protections for service members, be sure to pick up a copy of ABI's Bankruptcy and Debt under the Servicemembers Civil Relief Act.

FED "STRESS TESTS" STILL POSE PUZZLE TO BANKS

Six years after the Federal Reserve's "stress tests" began, the biggest Wall Street banks still are straining to decipher them, the Wall Street Journal reported on Friday. Goldman Sachs Group, Inc., JPMorgan Chase & Co. and Morgan Stanley scaled back their plans to return money to shareholders by at least $11 billion in the last week after their own assumptions about future risks turned out to be rosier than predictions made by the central bank. While no big U.S. bank failed the test, some of Wall Street's marquee names were shocked by the disparity between their expectations and the Fed's, such as projections for how banks' assets and net income would fare in a severe economic downturn. The surprises cost some banks billions of dollars out of capital-return plans designed to reward shareholders. J.P. Morgan decided to reduce its proposed capital return by about $6 billion, while Morgan Stanley withdrew a request to redeem $4.9 billion in trust-preferred securities, said people familiar with the banks financial dealings. Goldman's revised plan added back about $3.3 billion in capital from the firm's initial request, according to a Wall Street Journal analysis, though it is unclear how much came from buyback revisions. Read more. (Subscription required.)

DISCOUNTED SUBSCRIPTIONS TO AUDIO ABI JOURNAL AVAILABLE FROM MODIOLEGAL!

Subscribe now to our new streaming audio Journal, offered by ModioLegal. Narrated articles from each issue of the ABI Journal can now be accessed through your web browser -- on your computer, smartphone, or tablet -- for a low monthly fee. For a limited time, subscribe to this new service now for just $9.95 a month (regularly $12.95) with coupon code abi-early. Sign up for any audio Journal plan, and your first month is free! Go to http://www.modiolegal.com/subscribe to learn more. You can also contact Modio Legal for a free demo by e-mailing them at accounts@modiolegal.com.

SHIPPING SOON: ABI'S NEWEST PUBLICATION EXAMINES ISSUES SURROUNDING LITIGATION AND LIQUIDATION TRUSTS IN BANKRUPTCY

ABI's newest publication, A Practitioner's Guide to Liquidation and Litigation Trusts, tackles issues surrounding litigation and liquidation trusts established in an insolvent company's bankruptcy proceedings. Such cases as General Motors, ASARCO, Tronox, Enron and Bernard L. Madoff Investment Securities LLC have established these types of trusts as vehicles that can be separated from the insolvent company's business operations to administer assets that have uncertain recoveries or that may require significant time to handle (such as environmental claims). A Practitioner's Guide to Liquidation and Litigation Trusts is designed to give bankruptcy and other professionals an overview of how and when trusts can be used to handle significant large-scale litigation matters and the liquidation of other assets for the purpose of accumulating recoveries and distributing them across multiple claimants. The book offers guidance on the most common issues faced in establishing, managing, monitoring and ultimately concluding a liquidation trust or litigation trust. Convenient checklists, relevant case citations and references to bankruptcy-related issues, as well as recommended forms of trust agreements and suggested provisions for bankruptcy plans and disclosure statements, are also provided in this 300-page guide (which includes a separate thumbdrive containing more than 1,000 sample pages from liquidation and litigation cases).

A Practitioner's Guide to Liquidation and Litigation Trusts is currently available for pre-order (make sure to log in to receive the ABI member price of $85).

NEW CASE SUMMARY ON VOLO: GERARD V. GERARD (7TH CIR.)

Summarized by Lars Fuller of BakerHostetler

The Seventh Circuit reversed the U.S. District Court (E.D. Wis.), which had affirmed the bankruptcy court's entry of judgment of nondischargeability under Sect. 523(a)(6) (willful and malicious injury) after giving preclusive effect to state court trial verdict in favor of creditors. The Seventh Circuit ruled that the jury verdict, which found the debtor liable for slander of title because the debtor "knew or should have known" that the lien filing was a sham, did not satisfy the requisite intent requirement for willful and malicious injury. Requisite intent required finding that the debtor had "knowledge of its falsity or reckless disregard of whether it was false." The state court jury did not factually determine whether the debtor had acted with knowledge or reckless disregard of lien falsity. The Seventh Circuit remanded to the bankruptcy court to decide whether the debtor knew of the falsity of the lien or had reckless disregard to whether the lien filing was false, such that the debtor's slander of title was "willful and malicious" within the meaning of Sect. 523(a)(6).

There are more than 1,500 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: NINTH CIRCUIT BAP HOLDS LAW V. SIEGEL PRECLUDES BARRING A DEBTOR'S AMENDMENT OF EXEMPTIONS ON GROUNDS OF BAD FAITH OR EQUITY

A recent blog post examined the Ninth Circuit BAP's opinion in Gray v. Warfield (In re Gray), 523 B.R. 170 (9th Cir. B.A.P. 2014), that the U.S. Supreme Court's decision in Law v. Siegel, 134 S. Ct. 1188 (2014), precludes a bankruptcy court from denying a debtor's amendment of his claim of exemption on equitable grounds.

To read more on this blog and all others on the ABI Blog Exchange, please click here.

ORDER YOUR PRINTED COPY OF THE FINAL REPORT OF ABI'S COMMISSION TO STUDY THE REFORM OF CHAPTER 11!

Order your printed copy of the Final Report of ABI's Commission to Study the Reform of Chapter 11! The 402-page Final Report contains more than 200 discrete recommendations of chapter 11 policy reforms. ABI's Commission to Study the Reform of Chapter 11 was established in 2012 with a mission to study and propose reforms to Chapter 11 of the Bankruptcy Code and related statutory provisions. After months of deliberations, the Commission unanimously adopted this report to provide to Congress. For the special price of $40, you will have all the testimony, studies and figures that went into compiling the recommendations at your fingertips! Click here to order.

INSOL INTERNATIONAL

INSOL International is a worldwide federation of national associations for accountants and lawyers who specialize in turnaround and insolvency. There are currently 43 member associations worldwide with more than 9,000 professionals participating as members of INSOL International. As a member association of INSOL, ABI's members receive a discounted subscription rate. See ABI's enrollment page for details.

Have a Twitter, Facebook or LinkedIn Account?

Join our networks to expand yours.

 

 

NEXT WEEK:

BBW15
Register Today!

UPCOMING EVENTS:

ASM15
Register Today!

9th Annual Credit and Bankruptcy Symposium
May 7-8, 2015
Register Today!

17th Annual New York City Bankruptcy Conference
May 14, 2015
Register Today!

ABI/St. John's Forty-Hour Bankruptcy Mediation Training
May 17-21, 2015
Register Today!

14th Annual Litigation Skills Symposium
May 19-22, 2015
Register Today!

5th Annual Memphis Consumer Bankruptcy Conference
June 5, 2015
Register Today!

22nd Annual Central States Bankruptcy Workshop
June 11-14, 2015
Register Today!

22nd Annual Northeast Bankruptcy Conference
July 9-12, 2015
Register Today!

10th Annual Northeast Consumer Forum
July 9-11, 2015
Register Today!

Beijing Insolvency & Restructuring Symposium
July 13-14, 2015
Register Today!

20th Annual Southeast Bankruptcy Workshop
July 23-26, 2015
Register Today!

11th Annual Mid-Atlantic Bankruptcy Workshop
Aug. 6-8, 2015
Register Today!

 
   
  CALENDAR OF EVENTS
 

2014

March
- ABI Live Consumer Webinar: "Student Loan Update"
March 18, 2015
- Bankruptcy Battleground West
March 24, 2015 | Los Angeles, Calif.

April
- Annual Spring Meeting
April 16-19, 2015 | Washington, D.C.

May
- Credit and Bankruptcy Symposium
May 7-8, 2015 | Uncasville, Conn.
- New York City Bankruptcy Conference
May 14, 2015 | New York, N.Y.
- Forty-Hour Bankruptcy Mediation Training
May 17-21, 2015 | New York, N.Y.
- Litigation Skills Symposium
May 19-22, 2015 | Chicago, Ill.
 

 

 


June
- Central States Bankruptcy Workshop
June 11-14, 2015 | Traverse City, Mich.
- Memphis Consumer Bankruptcy Conference
June 5, 2015 | Memphis, Tenn.

July
- Northeast Bankruptcy Conference
July 9-12, 2015 | North Falmouth, Mass.
- Northeast Consumer Bankruptcy Forum
July 9-11, 2015 | North Falmouth, Mass.
- Beijing Insolvency & Restructuring Symposium
July 13-14, 2015 | Beijing, China
- Southeast Bankruptcy Workshop
July 23-26, 2015 | Amelia Island, Fla.

August
- Mid-Atlantic Bankruptcy Workshop
Aug. 6-8, 2015 | Hershey, Pa.

 

 
 
ABI PaskayABI Endowment FundABI Endowment Fund
 


#160;To unsubscribe click here or send a blank email to %%email.unsub%%.

American Bankruptcy Institute
66 Canal Center Plaza, Suite 600
Alexandria, VA 22314
(703) 739-0800