Bankr. M.D.N.C.: In re Calloway- Domestic Support Obligations and Good Faith in Chapter 13

Summary:

Ms. Calloway divorced Mr. Bowles and shortly before a final judgment was entered in their equitable distribution proceeding, she filed Chapter 13. Just prior to Ms. Calloway’s bankruptcy filing, the state court judge circulated a preliminary ruling to the parties via email, stating that he believed an unequal distribution of the marital assets in favor of Mr. Bowles would be equitable and that Ms. Calloway would be required was to pay a total of $50,514 by means of monthly payments of $300, due to the her liquidation of two retirement accounts, which had a total value of roughly $31,000. Additionally, since their separation, Ms. Calloway alone made all payments on the former marital home, with the mortgage against which being reduced by approximately $23,000.

Ms. Calloway’s Chapter 13 plan was proposed for 36 month with priority claims to be paid in full and an estimated 0% dividend to general unsecured creditors, with Mr. Bowles as the only listed such creditor. He, unsurprisingly, objected to confirmation of her plan asserting that the $50,514.52 owed to him was a priority claim as a domestic support obligation pursuant to §507(a)(1)(A) and that Ms. Calloway’s plan must provide for its full payment over the life of the plan pursuant to §1322(a)(2). The court found that Ms. Calloway’s plan appropriately provided for payment in full of priority claims, which, unless and until an objection determined otherwise, included Mr. Bowles claim as filed.

Mr. Bowles additionally objected on good faith grounds to confirmation, asserting that Ms. Calloway filed the case in bad faith to avoid repayment of his debt. The bankruptcy court rejected this characterization both because Ms. Calloway had steadfastly paid the mortgage against the jointly owned real property, without seeking to overstate her interest, and had no other means to repay the $50,514.52 on her fixed income other than over the course of a Chapter 13 plan.

Commentary:

While $1,111/mo. payment would satisfy Mr. Bowles’ priority claim in full in 60 months,  this does look an awful lot like a property settlement and not a domestic support obligation, so there may be an objection to claim pending questioning its priority status.  If successful,  the $1,111 a month plan would, in the 36 month Applicable Commitment Period required  here, only pay  a dividend of approximately 50% to Mr.  Bowles (or even less if there was an substantial and unanticipated  change in circumstance sufficient to justify a modification later.)

For a copy of the opinion, please see:

Calloway- Domestic Support Obligations and Good Faith in Chapter 13

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Bankr.  M.D.N.C.: In re Price- Separate Classification of Student Loans in Chapter 13Bankr.  M.D.N.C.: In re Price- Separate Classification of Student Loans in Chapter 13

Summary:

The Prices, who are above median income debtors, but nonetheless have negative projected disposable monthly and no non-exempt assets, proposed an estimated 15% dividend to the class of dischargeable general unsecured creditors, which totaled $11,728.38.  They also proposed to separately classify the  $10,463.48 claim by Navient for non-dischargeable student loans.  The Chapter 13 Trustee supported confirmation, but the Bankruptcy Administrator filed a limited objection to such treatment.
The bankruptcy court first addressed whether the prohibition in  §1322(b)(1) against “unfair discrimination” in favor of one class of unsecured creditors was applicable as  §1322(b)(5) allows the a plan to cure and maintain payments on “any unsecured claim … on which the last payment is due after the date on which the final payment under the plan is due.”  While recognizing a split in opinions on this question, the court held that since §1322(b)(5) specifically applies despite the limitations in §1322(b)(2), it does not similarly explicitly override the “unfair discrimination” restrictions in §1322(b)(1).  Instead, the two can be read in a consistent manner by applying both.

Turning to whether the separate classification was not unfair, the bankruptcy court held that the burden was on the debtor.   Without direct precedent from the 4th Circuit, the bankruptcy court considered the factors from In re Wolff, 22 B.R. 510, 512 (B.A.P. 9th Cir. 1982) and In re Husted, 142 B.R. 72, 74 (Bankr. W.D.N.Y. 1992), but found such to be inadequate for the specific inquiry required under §1322(b)(1), preferring a consideration of the “totality of the circumstances.”  See In re Crawford, 324 F.3d 539 (7th Cir. 2003).  This would then include:

(1) Whether the discrimination has a reasonable basis;

(2) Whether the debtor can carry out a plan without the discrimination;

(3) Whether the discrimination is proposed in good faith;

(4) Whether the degree of discrimination is directly related to the basis or rationale for the discrimination;

(5) The difference between what the creditors being discriminated against will receive as the plan is proposed, and the amount they would receive if there was no separate classification;

(6) The importance of the “fresh start” to the honest but unfortunate debtor; and

(7) The importance of allowing creditors to equitably share in a distribution of the debtor’s assets.

Even though the Prices proposed to pay Navient not with “disposable income”, as defined by the Bankruptcy Code, but through “discretionary income”, resulting from belt-tightening, they had not provided “any extenuating factors justifying the separate classification of the student loan debt.”  The frugality necessary to pay the student loan actually dissuaded the bankruptcy court as  “ they might otherwise use that income for food and other necessary living expenses”, increasing the feasibility of the plan.

Commentary:  

At the time of writing this, the Chapter 13 Trustee is holding $11,424.49.  If the Prices were to convert their case prior to confirmation to Chapter 7, this amount would be refunded to them and they would, with no disposable income or non-exempt assets, very quickly receive a discharge of all of the other unsecured debts.  The Prices could then immediately pay the student loan in full and file a second Chapter 13 plan to deal with secured and priority claims.  The payment to Navient would not be preferential as it would not have received more than it would had the second case been  a Chapter 7, since there would be no other remaining  unsecured claims with which to share those funds.  This shows some of the absurdity of refusing to allow separate classification of unsecured student loans, as every Chapter 7 case separately classifies non-dischargeable student loans.

For a copy of the opinion, please see:

Price- Separate Classification of Student Loans in Chapter 13

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Law Review: Cohen, Lawless and Shin- Opposite of Correct: Inverted Insider Perceptions of Race and Bankruptcy

Abstract:

Previous data collected during the 2007 meltdown of the subprime mortgage market showed that African Americans were approximately twice as likely to file chapter 13 bankruptcy than persons of other races, a significant policy issue given the generally less generous rules in chapter 13. We first update and replicate these findings with new data collected during 2013 2014 as the housing market recovered. Results of the original study were not specific to the subprime crisis as the new data showed the same 2:1 racial disparity as the older data, suggesting that this disparity may be a relatively enduring part of the U.S. bankruptcy system.

To see if insiders were aware of this disparity, we sent surveys to a national random sample of consumer bankruptcy attorneys. They seemed to believe there was a racial disparity in bankruptcy, but they had the disparity exactly backwards. A majority (about 60%) believed that whites were twice as likely to file chapter 13 when it is actually African Americans who are twice as likely to do so. We also report on a convenience sample of respondents from Amazon Mechanical Turk. These respondents have little or no knowledge of the U.S. bankruptcy system but likely hold common American stereotypes about which groups tend to be responsible or irresponsible. Their responses were largely similar to those of bankruptcy professionals. Overall, Mechanical Turk respondents were slightly more accurate than bankruptcy professionals. The likely reason is that Mechanical Turk respondents stuck more closely to the national base rate.

Across all studies, it seems that those inside the bankruptcy system have little knowledge of the racial disparities that exist within it. Instead, they rely on common American stereotypes about who are responsible or irresponsible citizens.

Commentary:

This is a very hard topic for consumer bankruptcy attorneys, but one which we must all grapple, both in their individual practices and more generally as a legal community. It is towards that end that the National Association of Consumer Bankruptcy Attorneys (NACBA) is including “Implicit Racial Bias and Consumer Bankruptcy” as a centerpiece panel discussion at its upcoming 2018 Conference in Denver, with a focus on both learning to be aware of these often unconscious decisions and how lawyers can work to counter them.

It is interesting that the authors of this paper sent similar surveys to Chapter 13 Trustees, but that the response rate was substantially lower, likely because, as the authors note, “the trustees had communicated among themselves about the survey.” This indicates that the value of these studies may be wearing thin, as this active refusal to participate by Chapter 13 Trustees shows a defensiveness that may leave at least that segment of the consumer bankruptcy community unwilling and uninterested in engaging with this issue.

Perhaps the subjects of this paper would more readily work to come to terms with the troubling findings in these studies if the authors of this paper had expressed even a modicum of respect, let alone admiration, for the hard work and dedication that the vast majority of consumer bankruptcy attorneys provide day in and day out for their otherwise under-served clients.

For a copy of the paper, please see:

Opposite of Correct: Inverted Insider Perceptions of Race and Bankruptcy

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E.D.N.C.: Myrick v.  Equifax- Duty to Investigate Credit Report Dispute and Bankruptcy Discharge

Summary:
Mr.  Myrick brought suit against Equifax under the FCRA for willfully failing to verify the discharge of a debt in his Chapter 7 bankruptcy.   In light of Daughterty v.  Ocwen Loan Servicing, the district court reconsidered its previous grant of summary judgment and instead found that Equifax had in its possession “records that would have enabled it to confirm the status of the … account through an identified source, i.e., PACER.”   Instead, there was a factual issue of “whether Equifax conducted a reasonable investigation by limiting its efforts to confirming the disputed information” with the creditor and not checking PACER or elsewhere.

Commentary:
This is example of  excellent persistence by the lawyer and also  fortuitous timing in the decision from 4th Circuit coming slow closely with the order.

This case also points towards the growing trend, following Houck v.  Lifestore, of bringing matters related to a bankruptcy discharge in the district court rather than bankruptcy court.

For a copy of the opinion, please see:
Myrick v. Equifax- Duty to Investigate Credit Report Dispute and Bankruptcy Discharge

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Law Review: Hermann, Jonathan S.- Restoring Bankruptcy’s Fresh Start

Abstract:

The discharge injunction, which allows former debtors to be free from any efforts to collect former debt, is a primary feature of bankruptcy law in the United States. When creditors have systemically violated debtors’ discharge injunctions, some debtors have attempted to challenge those creditors through a class action lawsuit in bankruptcy court. However, the pervasiveness of class-waiving arbitration clauses likely prevents those debtors from disputing discharge injunction violations outside of binding, individual arbitration. This Note first discusses areas of disagreement regarding how former debtors may enforce their discharge injunctions. Then, it examines the types of disputes that allow debtors to collectivize in bankruptcy court. Without seeking to resolve either disagreement, this Note assumes debtors may collectivize in this context and employs an “inherent conflict” test that looks to whether disputes over discharge injunction violations are arbitrable. Because the “inherent conflict” test likely leads to the conclusion that courts must enforce class-waiving arbitration clauses, this Note argues that Congress should amend the Bankruptcy Code not only to provide debtors an explicit right of action under § 524 and the ability to collectivize, but also to prohibit the arbitration of these claims. Doing so will give full effect to the discharge injunction and fulfill the promise to debtors that they can truly begin anew after bankruptcy.

Commentary:

An option that is not mentioned in this paper for addressing arbitration of consumer bankruptcy issues is that a Chapter 13 debtor could provide in his or her plan that all arbitration provisions are hereafter void. Confirmation orders routinely adjust and redefine the debtor/creditor relationship with such being binding on all parties. (Pursuant to §1322(b)(2), this might not be a permissible modification of the rights in a consumer mortgage secured only by the debtor’s principal residence.)

For a copy of the paper, please see:

Restoring Bankruptcy’s Fresh Start

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Law Review: Sousa, Michael D.- The Persistence of Bankruptcy StigmaLaw Review: Sousa, Michael D.- The Persistence of Bankruptcy Stigma

Abstract: 
The debtor-creditor relationship has always been intertwined with notions of morality. Failing to pay one’s financial obligations has traditionally been met with social opprobrium, internal shame, and external stigma. This dynamic did not change with the advent of American bankruptcy law. Indeed, for much of the twentieth-century, scholars have studied and debated whether the stigma associated with filing for bankruptcy has declined over the years, particularly in the 1980s and 1990s when the number of consumer bankruptcy filings increased dramatically. Existing studies suggest that the stigma regarding personal bankruptcy has declined in the latter portion of the twentieth-century.
Using a data set previously untapped by bankruptcy and social science scholars, this study explores the trend of bankruptcy stigma for approximately four decades, from the advent of the Bankruptcy Code in 1978 to the present day. Contrary to both existing studies on this issue and the arguments set forth by some commentators, the results of the present study suggest that the stigma surrounding personal bankruptcy has actually increased over time, rather than decreased, and this trend paradoxically tracks the number of consumer bankruptcy filings each year.
The results of this study should not only serve to re-invigorate the debate regarding Americans’ views about the bankruptcy process from a social perspective, but it also offers evidence for policymakers and Congress should they choose to re-examine the 2005 amendments to the Bankruptcy Code occasioned by the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”). If, indeed, the results of this study are accurate insofar as bankruptcy stigma has increased from 1977 to 2016, then our nation’s bankruptcy laws currently rest upon an entirely faulty premise.

Commentary:  

The author’s concluding explanation for the increasing stigma in filing bankruptcy is the feeling that as:

Americans adhere to the concept of economic meritocracy, then those who find themselves clinging to the lower economic rungs in society deserve their fate. It is consequently understandable that when financial calamity strikes an individual or family and debt service simply becomes no longer manageable, attribution of the economic plight is associated with personal failings and limitations. Becoming mired in debt and needing to file for bankruptcy as a result offends Americans’ traditional values of hard work, personal responsibility and morality, thus leading society to stigmatize those who break with these social norms.

This perspective could also explain to some degree the differing rates of Chapter 7 and Chapter 13 filings, both regionally and based on race, that has been noted elsewhere.

For a copy of the paper, please see:

The Persistence of Bankruptcy Stigma

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Bankr. E.D.N.C.: In re Hamilton-Conversano- Nonfiling Spouse Income; § 707(b)(3) Smell Test

Summary:

Ms. Hamilton-Conversano filed Chapter 7 without her husband. Other than the couple’s secured debts, Mr. Conversano had no debts of his own and Mrs. Hamilton-Conversano had one American Express card, with a balance of $46,669.52, which they had jointly used to pay for all household expenses.

In completing her Means Test, Ms. Hamilton-Conversant took a “marital adjustment” to her husband’s contribution to her Current Monthly Income including $417.86, for the full monthly cost of their child’s private school. The Bankruptcy Administrator argued in that the private school contribution, even though made by the non-filing spouse, was capped by statute at $160.42. The BA also argued that Mr. Conversano’s additional income in the form of life insurance contributions and cell phone reimbursement that should be included as income.

As to her husband’s income, Mrs. Hamilton-Conversano countered by pointing to the differences in the language in § 101(10A)(B), defines “current monthly income” to include “any amount paid by any entity other than the debtor . . . on a regular basis for the household expenses of the debtor or the debtor’s dependents . . .” and Official Form 122A-1, which starts with the full amount of the non-filing spouse’s income, and is then adjusted in Official Form 122A-2, the Chapter 7 Means Test Calculation, to subtract any part of the non-filing spouse’s income not used to pay for the household expenses of the debtor or the debtor’s dependents, requiring delineation of the purpose for which the income is used. As the statute controls over the form, Mrs. Hamilton-Conversano argued that her husband’s total income was not relevant, only the amount actually contributed to the household. The bankruptcy court acknowledged that this argument was compelling, but that Mrs. Hamilton-Conversant had presented evidence of what the appropriate contribution would have been.

Regarding the private school expense, the bankruptcy court rejected this argument as Mrs. Hamilton-Conversant admitted it had been rejected by all other courts to which it had been presented.

Going further, the bankruptcy court also held in the alternative that pursuant to the “totality of
the circumstances” test for determining abuse under § 707(b)(3) in In re Green, 934 F.2d 568, 572 (4th Cir. 1991), the bankruptcy court ultimately found that this case did not pass the “smell test” as the only debt had been used to pay expenses for the entire household, including her husband, and the household budget, including her husband’s income, was sufficient to pay at least a portion of that debt.

The bankruptcy court admitted that American Express has agreed to offer this card solely to Mrs. Hamilton-Conversant and would likely not be able to collect anything from her under nonbankruptcy law, presumably owing to the ownership of the home as Tenants by the Entireties and the lack of wage garnishment in North Carolina. This notwithstanding, “[i]t is this court’s responsibility to analyze whether a case is an abuse without considering what the debtor might achieve under non-bankruptcy law.”

Accordingly, the case would be dismissed (unless converted) under 11 U.S.C. § 707(b)(2) or alternatively § 707(b)(3)

Commentary:

Unaddressed in this case, however, is that the Equal Credit Opportunity Act (ECOA) , 15 U.S.C. § 1691 et seq., prohibits creditors from denying or limiting credit based on ace, color, religion, national origin, sex, marital status, or age. One of the primary reasons for its enactment was to prevent creditors from requiring women to have their husbands be jointly liable for debts. It is troubling that this opinion denies a discharge because Mrs. Hamilton-Conversano incurred debts exactly as Congress intended them to be allowed.

For a copy of the opinion, please see:

Hamilton-Conversano- Nonfiling Spouse Income; § 707(b)(3) Smell Test

For another summary and commentary, please see:

Wife’s Solo Bankruptcy Filing Doesn’t Pass ‘Smell Test’

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E.D.N.C.: Baum v.  Baum- Date of Separation and New Debts for Nondischargeability under §523(a)(15)

Summary:
On appeal from the bankruptcy court decision in Baum v.  Baum, the district court reviewed whether debts between separated spouse are discharged under 11 U.S.C. §523(a)(15), which  provides, that a debtor shall not be discharged from a debt:

(15) not of the kind described in paragraph (5) [dealing with alimony, maintenance and child support] that is incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record, or a determination made in accordance with State or territorial law by a governmental unit;

First, the district court agreed with the bankruptcy court that while the parties were “informally” separated, sleeping in different rooms, at the time the debts were incurred, under North Carolina law separation requires a “cessation of cohabitation.”  Secondly, the district court also held that §523(a)(15) requires the creation of new debts.  The consent orders eventually entered into by the parties as part of their divorce did not create any new debts at that point.  Accordingly, the debts were discharged.

For a copy of the opinion, please see:

Baum v. Baum- Date of Separation and New Debts for Nondischargeability under §523(a)(15)

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Bankr. E.D.N.C.: In re Hector- Accounting for Income, Expenses and Household Size under 11 U.S.C. § 707(b) with Domestic Partner

Summary:

Ms. Hector, a realtor with income subject to fluctuation dependent on sales, filed Chapter 7, but did not include her Domestic Partner in her household size nor any income contribution, as their finances and expenses were neither commingled nor shared. Ms. Hector did not assist her Domestic Partner with housing expenses, but did pay all for all groceries and cleaning supplies for both. As such, Ms. Hector claimed deductions for housing and utility expenses on the Means Test. The Bankruptcy Administrator sought to dismiss the case, arguing that those were inapplicable and left sufficient disposable income to pay unsecured creditors.

The first issue addressed by the court was whether Ms. Hector may list a household size of one for means test purposes, when she shares a residence with a partner. Following Johnson v. Zimmer, 686 F.3d 224, 237 (4th Cir. 2012) and In re Morrison, 443 B.R. 378 (Bankr. M.D.N.C. 2011), the bankruptcy court applied the “economic unit” approach to determining household size, with factors including:

1) the degree of financial support provided to the individual by the debtor;
2) the degree of financial support provided to the debtor by the individual;
3) the extent to which the individual and the debtor share income and expenses;
4) the extent to which there is joint ownership of property;
5) the extent to which there are joint liabilities;
6) the extent to which assets owned by the debtor or the individual are shared, regardless of title; and
7) any other type of financial intermingling or interdependency between the debtor and the individual.

Finding that, due to their minimal financial commingling, the bankruptcy court held that Ms. Hector’s household size was 1.

Next the court examined whether Ms. Hector should include some or all of her Domestic Partner’s income in the Current Monthly Income calculation. Turning to the statute, the bankruptcy court held that 11 U.S.C. § 101(10A) only required inclusion of “any amount paid . . . on a regular basis for the household expenses of the debtor.” Since her Domestic Partner did not directly pay her or give any money, there was nothing to include.

In determining if the claimed housing and utility deductions were allowable, the bankruptcy court started with Ransom v. FIA Card Services, N..A., 562 U.S. 61, 64, 131 S.Ct. 716 (2011), which allowed only “applicable” expense amounts, which mean those that are mean “appropriate, relevant, suitable, or fit” in light of a debtor’s individual circumstances. Further, as  Lynch v. Jackson, 853 F.3d 116, 119 (4th Cir. 2017) allows deductions which the debtor actually incurs, Ms Hector could not claim housing and utility deductions that she did not actually have. Accordingly, the case was ordered to be dismissed if not converted to Chapter 13.

For a copy of the opinion, please see:

Hector- Accounting for Income, Expenses and Household Size under 11 U.S.C. § 707(b) with Domestic Partner

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Law Review: Taylor, Aaron & Sheffner, Daniel – Oh, What a Relief It (Sometimes) Is: An Analysis of Chapter 7 Bankruptcy Petitions to Discharge Student Loans

Law Review: Taylor, Aaron & Sheffner, Daniel – Oh, What a Relief It (Sometimes) Is: An Analysis of Chapter 7 Bankruptcy Petitions to Discharge Student Loans

Abstract:

Conventional wisdom dictates that it is all-but-impossible to discharge student loans in bankruptcy. This contention, however, misstates the fact that bankruptcy discharge of student loans is possible—and it happens. This Article presents a statistical analysis of what happened when Chapter 7 bankruptcy petitioners in the First and Third federal judicial circuits filed 523(a)(8) adversary proceedings—or proceedings to discharge their student loan debt due to an “undue hardship.” In our analysis, we found undue hardship discharge rates of 54% in the First Circuit and 24% in the Third Circuit. But more significantly, we found that undue hardship determinations were relatively rare. A plurality of cases was dismissed at the debtors’ behest. The next most common resolution was settlements between debtors and creditors. And when all forms of resolution were considered, 51% of First Circuit debtors and 46% of Third Circuit debtors who sought discharge of their student loans obtained some form of relief—either an undue hardship discharge, a settlement, or a default judgment. These rates, while not representing certainty, surely do not reflect the near-impossibility of relief that is often assumed when student loans are discussed in the context of bankruptcy.

Commentary:

While encouraging that there is some sort of favorable resolution for debtors in roughly half the undue hardship cases brought, this number is subject to a self-selection bias. The authors recognize this writing that “it is possible that only the most compelling debtors are pursuing discharge, while others with weaker claims are being counseled out of the endeavor”, p. 298, but then minimize this as a “discouraging effect” due to “exaggerated feelings” of hopelessness.

With approximately 18% of the adult population of the U.S. having some student loans there is no reason to believe that the percentage is not higher for debtors that file bankruptcy. The authors’ finding that only 1 in 1000 Chapter 7 debtors even attempt to have student loans discharged, shows that there is a gaping chasm between the number of debtors with student loans and those that even try to eliminate them.

To ascribe this discrepancy to “exaggerated feelings” is to ignore the real questions of why there are not more attempts at discharge. The findings in this paper that representation by counsel is one of the crucial predictors of a beneficial resolution for debtors, points one answer, specifically how those attorneys were paid for their representation. As attorneys’ fees, both already paid and amounts still owed, as well as the source of those funds, in bankruptcy cases are required to be disclosed to the court, this would seem to be an easily obtainable data point that could be used for analysis.

This is the “dirty secret” of the student loan defense, whether by the government, its servicers or private student lenders- amplifying the “discouraging effect” of unlikely discharge to the cost of full-scale scorched earth litigation with a debtor that (almost by definition and statutory requirement) cannot afford to pay a lawyer. This is perhaps the best explanation for why debtor’s attorneys that are willing to fight tooth and nail with even the biggest mortgage banks shy away from student loan discharges. In the former, there are often fee-shifting statutes, so victory results in the bank paying the debtor’s attorney’s fees or at the very least leave a debtor with monies freed from their housing expenses. Absent the most egregious failure to consent to discharge, success in eliminating student loans through bankruptcy does not require the lender to pay anything to the victors, but often leaves the debtor still without extra money to pay lawyers.

 

For a copy of the paper, please see:

Oh, What a Relief It (Sometimes) Is: An Analysis of Chapter 7 Bankruptcy Petitions to Discharge Student Loans

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