ANALYSIS: "UNDUE HARDSHIP" PROVISION PROVES TOUGH BARRIER TO SHEDDING STUDENT DEBT IN BANKRUPTCY
Federal bankruptcy law requires debtors who wish to erase student debt to prove that repaying it will cause an "undue hardship." One component of that test is often convincing a federal judge that there is a "certainty of hopelessness" to their financial lives for much of the repayment period, according to a New York Times analysis on Friday. No reliable statistics are kept to track how many people bring undue-hardship cases each year, but it appears to be under 1,000, far less than the number of people failing to make their student loan payments. In its most recent snapshot of student loan defaults, the Department of Education reported that among the more than 3.6 million borrowers who entered repayment from Oct. 1, 2008, to Sept. 30, 2009, more than 320,000 had fallen behind in their payments by 360 days or more by the end of September 2010. About 10.3 million students and their parents borrowed money under the federal student loan program during the 2010-11 school year. One reason so few people try to discharge their student debt may be that such cases require an expensive, separate legal process from the bankruptcy proceeding. Nor is the process quick, since the lender or the federal government often appeals when it loses. Read more.
SHORT SALES WILL SOON BECOME AN OPTION FOR MANY MORE UNDERWATER BORROWERS
Fannie Mae's and Freddie Mac's new short-sale reform policies could be a big help for homeowners with underwater mortgages who are facing financial distress, the Washington Post reported on Saturday. Starting on Nov. 1, owners whose loans have been purchased or guaranteed by Fannie or Freddie may qualify for a short sale if they fit key hardship criteria, including unemployment; divorce; long-term disability; a change in job location that is more than 50 miles from the current home; a business failure; death of the primary or secondary wage earner; or a natural or man-made disaster. In what could be a far-reaching change, Fannie and Freddie will allow borrowers who are current on their mortgage payments — not seriously delinquent, as traditionally has been required — to qualify for short sales, provided they fit the hardship criteria. Borrowers who are considered "most in need" will be eligible for streamlined processing of short sales, involving reduced documentation and much speedier resolutions than usual. Read more.
CHAPTER 9 SAVES RHODE ISLAND CITY, BUT LEAVES SCARS
Central Falls, R.I., is close to emerging from bankruptcy with a plan that hammers its retired municipal employees but leaves bondholders unscathed, in a contrast with other recent U.S. municipal bankruptcies, Reuters reported yesterday. On Thursday, a state-appointed receiver overseeing the finances of the small city is expected to win court approval for a plan that rescues Central Falls from financial collapse and should balance its budget for at least the next five years. The smallest city in Rhode Island and the only one in the state to file for bankruptcy will emerge with powerless elected officials, property owners facing tax hikes every year and retired public employees irate about having their pensions slashed. In the spring of 2010, Central Falls was facing insolvency due to steep cuts in state aid, revenue shortfalls and an unfunded liability of about $80 million for pension and retiree health benefits. The city had revenue collections of about $16 million, but its expenses topped $21 million. Mayor Charles Moreau started cutting the city's workforce after asking for a judicial receiver in May 2010. City employees now total 116, down from 174. The city's 133 retirees had their pensions cut by up to 55 percent, with pensioners now getting an average of $16,626 a year. The state allocated $2.6 million to soften the blow for the next five years. Read more.
AUTO LENDERS STEP UP LENDING TO SUBPRIME BORROWERS
A new study by Experian's auto finance research unit showed that U.S. lenders are giving as large a portion of new car loans to subprime borrowers as they did just before the start of the financial crisis, Reuters reported today. Subprime, or less-qualified, borrowers received 25.41 percent of all loans on new vehicles in the three months through the end of June, up from 22.29 percent in the same period a year ago and more than the 24.96 percent at the start of the financial crisis in 2007, according to Experian. The report also found lenders more aggressively making loans to subprime borrowers of used cars. Subprime borrowers received 56.46 percent of loans on used cars in the quarter, up from 52.70 percent a year earlier. Read more.
COMMENTARY: BREAKING UP BANKS IS HARD WITH TRADERS HOOKED ON DEPOSITS
Shareholders of Wall Street banks who agree with former Citigroup Inc. Chief Executive Officer Sanford “Sandy” Weill that the companies should be broken up face an obstacle: bondholders, according to a Bloomberg News commentary today. That is because trading on Wall Street relies on borrowed money/leverage, according to the commentary, that can be obtained cheaply as long as the traders belong to a conglomerate, such as Bank of America Corp., JPMorgan Chase & Co. or Citigroup, that gets federally insured deposits. Jefferies Group Inc., a securities firm that is not part of a bank and cannot turn to the Federal Reserve for help, is currently charged more to borrow in the credit markets than banks are. "If you divorce them from the mother ship, you'd also be divorcing them from the government at the same time, and that's where the subsidy is," said Cornelius Hurley, director of the Morin Center for Banking and Financial Law at Boston University. "The funding advantage is the key." With stock prices at or below liquidation value, Wall Street's biggest banks are fending off calls to break up from stockholders, analysts and industry veterans including Weill. The firms are too complex to manage, over-burdened by regulation, and a risk to taxpayers, their critics say. Read the full commentary.
LATEST ABI PODCAST FEATURES EXPERTS DISCUSSING OIL AND GAS BANKRUPTCIES
The latest podcast features ABI Deputy Executive Director Amy Quackenboss speaking with Deborah D. Williamson and Meghan E. Bishop of Cox Smith Matthews Inc. (San Antonio), authors of When Gushers Go Dry: The Essentials of Oil & Gas Bankruptcy, the newest publication in ABI’s Bookstore. Williamson and Bishop discuss how the U.S. oil and gas industry, perhaps more than any other industry, is vulnerable to the effects of myriad internal and external factors, ranging from global credit markets to domestic and foreign geopolitical events, and from technological developments and limitations to population growth and even the weather. There have been 62 oil and gas company bankruptcy filings since 2008, according to BankruptcyData.com, representing a 170 percent increase from the 23 filings between 2002-07. Click here to listen to the podcast.
LATEST CASE SUMMARY ON VOLO: ESTERLING V. COLLECTO, INC. (2D CIR.)
Summarized by Wayne Greenwald of Wayne Greenwald, PC
The Second Circuit reversed the bankruptcy court's decision by saying that the defendant violated the FDCPA's proscription against “false, misleading, or deceptive” debt collection practices by sending the plaintiff, a former debtor, a collection letter incorrectly stating that her student loans were "ineligible for bankruptcy discharge" and therefore her account "must be resolved." Although the plaintiff may face significant hurdles to discharging her student loans, the least-sophisticated consumer would interpret the notice as representing, incorrectly, that discharge of the loans was wholly unavailable.
There are more than 600 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: TAX COURT RULES ON POST-PETITION AND POST-CONFIRMATION INTEREST ON TAX CLAIMS
The Bankruptcy Blog Exchange is a free ABI service that tracks 35 bankruptcy-related blogs. Following up on a previous entry, a new blog post today discusses the case of Everett Associates v. Commissioner and the tax court’s rulings on (i) postconfirmation interest on unsecured priority tax claims, (ii) whether the IRS may assess tax penalties during the pendency of a debtor’s bankruptcy case, and (iii) the dischargeability of tax penalties.
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.
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Client matters left unfinished at a firm when it files for bankruptcy are the property of the defunct firm.
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