National Consumer Bankruptcy Rights Center

Protecting The Rights Of Consumer Debtors In Bankruptcy

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PLUS Loan Proceeds Are Not Debtor’s Property and Transfer Cannot Be Avoided

The chapter 7 trustee could not avoid transfers of PLUS Loan funds to the University where the debtors’ daughter was enrolled because the debtors, who applied for and obtained the loans, had no property interest in the funds. Roumeliotis v. Johnson & Wales University (In re DeMauro), No. 14-32312, Adv. Proc. No. 15-3011 (Bankr. D. Conn. June 19, 2018).

The chapter 7 trustee, George Roumeliotis, sought to avoid eight payments totalling $46,909.00 made to Johnson & Wales University for debtors, Robert and Jean DeMauro’s, adult daughter’s tuition and education expenses. All of the payments consisted of Federal Direct Parent PLUS Loan proceeds under the program established by the Higher Education Act and administered by the U.S. Department of Education. Pursuant to regulations, once the DeMauro’s were approved for the loan, the PLUS loan funds were deposited in a “G5 Portal” and the University withdrew the funds as they became due. The DeMauros had no access to the funds at any time and, in fact, swore to use the funds only for their daughter’s education expenses as a condition of receipt of the loan. Any unauthorized use of the funds would subject the DeMauros to criminal prosecution. [Read more…] about PLUS Loan Proceeds Are Not Debtor’s Property and Transfer Cannot Be Avoided

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Scotus Resolves Circuit Disagreement over Non-Dischargeability Based on Fraud

A falsehood concerning a single asset may be a “statement respecting the debtor’s financial condition,” and therefore, the misrepresentation must be in writing to render non-dischargeable a debt arising out of the creditor’s reliance on it. Lamar, Archer & Cofrin, LLP, v. Appling, 584 U.S. ___, No. 16-1215 (S. Ct. June 4, 2018).

Scott Appling put off paying his attorneys fees in a business litigation case by assuring his attorneys at Lamar, Archer & Cofrin, LLP, (Lamar) that he expected a tax refund that would more than cover the bill. When the actual refund was smaller than he represented, he used the money to pay business expenses and told Lamar he had not yet received the refund. In reliance on Mr. Appling’s false statements, Lamar continued to represent him. When the final litigation bill remained unpaid for five years, however, Lamar sued in state court and obtained a judgment against Mr. Appling and his wife. The Applings then filed for chapter 7 bankruptcy relief. [Read more…] about Scotus Resolves Circuit Disagreement over Non-Dischargeability Based on Fraud

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Government Penalty Not Dischargeable

A penalty owed to a governmental agency based on fraud falls under section 523(a)(2) and is therefore nondischargeable under section 1328(a) even though the debt also falls under section 523(a)(7) which is not listed in the debts excepted from discharge. Andrews v. Mich. Unemployment Ins. Agency, No. 16-2383, Kozlowski v. Mich. Unemployment Ins. Agency, No. 16-2680 (6th Cir. May 29, 2018).

In two separate cases, chapter 13 debtors, Priscilla Andrews and Richard Kozlowski, sought to discharge penalties imposed upon them for fraudulent collection of unemployment insurance benefits. The bankruptcy courts denied discharge under section 1328(a). The district courts affirmed in both cases. [Read more…] about Government Penalty Not Dischargeable

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Local Rule for Dismissal without Hearing Is Inconsistent with Code

The Code requires notice and a hearing before a bankruptcy court dismisses a debtor’s chapter 13 case and a contrary Local Rule is invalid. No v. Gorman (In re No), No. 17-1679 (4th Cir. May 24, 2018).

Sarah Hyunsoon No filed for chapter 13 bankruptcy and filed a proposed plan but failed to attend the meeting of creditors or make the first payment under the plan as required under section 1326 and Local Rule 3070-1(C). The trustee, Thomas Gorman, certified to the court that by failing to commence payments under the plan, Ms. No had failed to comply with the Local Rule and that her case was therefore subject to dismissal. Although the bankruptcy court scheduled a hearing on the motion, it dismissed Ms. No’s case prior to the hearing. The district court affirmed. [Read more…] about Local Rule for Dismissal without Hearing Is Inconsistent with Code

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What Is a Loan?

Money need not change hands for a deferred tuition payment plan to be a “loan,” for purposes of nondischargeability under section 523(a)(8). In re Hazelton, No.16-12372 (Bankr. W.D. Wisc. Feb. 23, 2018).

Ms. Hazelton enrolled at the University of Wisconsin, Stout, and entered into a Payment Plan which deferred her tuition payments until the end of the first week of classes. She completed her degree requirements but did not pay the tuition according to the Payment Plan. Stout withheld her degree pending payment of her tuition and intercepted her state tax return. Ms. Hazelton and her husband obtained a chapter 7 discharge and sought sanctions against Stout for its collection efforts, arguing that the tuition deferment did not constitute a student loan and that the debt was therefore discharged in chapter 7 along with her other debts. [Read more…] about What Is a Loan?

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Nationstar Cannot Wriggle Out of Discharge Injunction Violation

Nationstar waived its right to argue that the court could not address the merits of the debtor’s discharge injunction case before ruling on class certification, and several of Nationstar’s post-discharge communications violated the injunction. Forson v. Nationstar Mortgage, LLC., No. 08-61001, Adv. Proc. No. 15-2137 (Bankr. S.D. Ohio March 21, 2018).

Terry Lee Forson reopened his chapter 13 bankruptcy and filed an adversary complaint against Nationstar Mortgage LLC, alleging violation of the discharge injunction, section 524(a)(2), based on Nationstar’s continued collection activities post-discharge. Contending that Nationstar’s conduct was part of an ongoing business practice, Mr. Forson sought class certification. He filed a motion for summary judgment to which Nationstar objected, arguing that, under the one-way rule, the court could not address the merits of the case until it had made a finding with respect to class certification. [Read more…] about Nationstar Cannot Wriggle Out of Discharge Injunction Violation

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Student Loans Discharged under Totality-of-Circumstances Test

In two recent student loan cases out of the First Circuit, the bankruptcy courts rejected Brunner and, instead, applied a totality-of-circumstances test to grant discharge under section 523(a)(8). Smith v. U.S. Dept. of Ed., No. 16-10998, Adv. Proc. No. 16-1079 (Bankr. D. Mass. April 4, 2018); Erkson v. U.S. Dept. of Ed., No. 16-20169, Adv. Proc. No. 16-2018 (Bankr. D. Me. April 3, 2018). [Read more…] about Student Loans Discharged under Totality-of-Circumstances Test

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Petition Date Controls Property-Use Determination

An addition to the debtor’s residential property, which he constructed post-mortgage and pre-bankruptcy petition and which he used as a rental unit, made the property multi-use and rendered the anti-modification provision inapplicable. In re Berkland, No. 17-10821 (Bankr. D. Mass. April 6, 2018).

Kenneth Berkland took out a mortgage to purchase his residential property. He later built an addition to the property to be used rent-free by his in-laws. His brother-in-law later moved in and paid $300 per month in rent. At the time he filed for chapter 11 bankruptcy, the value of his property was less than the amount owed on his mortgage and he sought to strip down the debt into secured and unsecured portions under section 1123(b)(5), a provision that mirrors section 1322(b)(2). The servicer for the mortgagee, Specialized Loan Servicing, LLC,  objected on the basis that the property was subject to the anti-modification provision applicable to debt secured “only by” the debtor’s residence. [Read more…] about Petition Date Controls Property-Use Determination

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Court Takes Self-Enriching Chapter 7 Trustee to Task

The district court went beyond the issue of whether the bankruptcy court properly denied the debtor’s motion for reconsideration, and addressed the unappealed substantive issue of whether the chapter 7 trustee, Kevin McCarthy, properly discharged his duties when he generated substantial fees and costs in pursuit of certain creditor claims. Skubal v. McCarthy, No. 1:17-cv-936 (E.D. Va. May 16, 2018).

Chapter 7 debtor, Megan Skubal, co-owned two real estate parcels as joint tenants with her father, Thomas Skubal. When she filed for bankruptcy, two unsecured creditors filed proofs of claim for a total of approximately $600. The trustee then contacted two additional unsecured creditors to urge them to file proofs of claim. Those creditors were Ms. Skubal’s student loan lender, ASC Education Services, to whom Ms. Skubal owed $46,171.47, and Midland Credit Management, for a credit card debt of $25,818.06. As both creditors declined to file proofs of claim, and despite the U.S. Trustee’s opposition, Mr. McCarthy filed the proofs of claim on their behalf. Mr. McCarthy then sought to sell Ms. Skubal’s real property to pay the $600 claims, the student loan claim, the credit card claim, and his fees and administrative expenses. [Read more…] about Court Takes Self-Enriching Chapter 7 Trustee to Task

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Fourth Circuit Applies Choice of Law Approach to Exemptions

The “state-specific” approach to application of exemption laws applies when determining whether the debtor may use the exemptions from his former domicile state with respect to property located in the bankruptcy state. Sheehan v. Ash, No. 17-1867 (4th Cir. May 4, 2018).

In their chapter 7 bankruptcy filed in West Virginia, Keith and Phyllis Ash sought to apply the exemption laws of their prior domicile state, Louisiana, to exempt approximately $3,500 in various items of personal property located in West Virginia. The trustee objected to application of Louisiana exemption law. The bankruptcy court overruled the objection and the district court affirmed. Sheehan v. Ash, No. 1:16-cv-109 (N.D. W. Va. June 27, 2017). [Read more…] about Fourth Circuit Applies Choice of Law Approach to Exemptions