For as long as I've been practicing bankruptcy law, the argument against allowing a debtor to pay student loans through a chapter 13 plan has always been that doing so would unfairly discriminate against other unsecured creditors in violation of section 1322(b)(1) of the Bankruptcy Code. This was even true when a debtor began their case on an income based repayment plan. While I did not agree with that analysis, that was the lay of the land and the cost usually outweighed the benefit of fighting.
Fast forward to August 1, 2019 (the effective date of the Bankruptcy Court's program), and it appears as though that landscape has changed. Beginning on August 1st, the Bankruptcy Court is implementing a procedure for a Student Loan Modification program (SLM Program) (Administrative Order FLMB-2019-1). For those who are unaware the United States Bankruptcy Court for the Middle District of Florida (the "Bankruptcy Court") has a successful history of implementing programs of this type. The Bankruptcy Court's Mortgage Modification Mediation program ("MMM Program") was one of the first in the country. The MMM Program has been adopted by numerous bankruptcy courts across the country.
The SLM Program appears to use the best feature of the MMM Program, i.e. the parties are required to communicate through a portal system in good faith. The portal system used by the Bankruptcy Court eliminates the "we never received the documents" excuse that creditors normally use in these situations. While I do not anticipate that debtor's will suddenly have a lot of options regarding repayment that they did not have prior to filing bankruptcy, the SLM Program is significant.
First Debtor's are able to pay their student loan payments through their chapter 13 plan. Before the SLM Program, debtors normally could not make payments on their student loans causing them to owe more after bankruptcy then they did going in; robbing them of the fresh start they needed. Now with the SLM Program, debtors are able to work-out an agreement to pay down, potentially an appreciable portion, of that debt. This is significant because in a chapter 13 bankruptcy debtors must pay what their creditors would have received in a chapter 7 (liquidation) or their disposable income, whatever is greater. For debtors who are paying disposable income, theoretically, if they work out a payment plan under the SLM Program, more money would go to pay the non-dischargeable student loan debt instead of the dischargeable unsecured debt leaving them in a much better position. I say "theoretically" because only time will tell if the SLM Program survives challenges by creditors or trustees.
The second reason the SLM Program is significant is that it appears to allow debtors to maintain their IBR plans. Prior to the SLM Program, debtors who had an IBR plan went into deferment and were no longer eligible to continue with the program. Since most of the IBR plans have a feature that forgives the remaining debt after a set period of time, the filing of a chapter 13 bankruptcy would extend the time to forgiveness for 3-5 years. With the implementation of the SLM Program, debtors are no longer penalized for the time they spend in bankruptcy.
The final reason the SLM Program is significant is that it is a concrete step is solving the student loan crisis. While structural changes need to be made in Congress (here's to hoping Congress makes student loans generally dischargeable again), programs like the SLM Program show that courts are will to take the steps necessary to address this crisis within the confines of the law as currently situated. Whether the SLM Program works or not, I thank the Bankruptcy Court for taking the initiative to help fight the problem.
The Small Business Reorganization Act of 2018 ("SBRA") was introduced in both chambers of Congress as H.R. 7190 and S.3689 during the 115th Congress. While it did not get signed into law it is a good idea.
The SBRA aims to simplify the bankruptcy process for "small business debtors," the term is defined by the bill, that realistically would be better off in a chapter 13 bankruptcy but because of debt limit issues are forced into a chapter 11. After reading the text, I came up with the 6 most important changes that I believe this bill will institute:
1. A trustee would be appointed in every case.
This is important because in most cases the debtor would be better off having a trustee appointed and handling a lot of the tedious work that becomes burdensome and expensive. Small business debtors typically do not have the same capabilities as the multi-billion-dollar institutions that they are lumped in with.
2. The unsecured creditors’ committee would be eliminated unless cause is shown why it should be convened.
Realistically this is not a huge deal because small business debtors tend to have fewer creditors in general, but it does eliminate a procedural issue and should streamline the process.
3. Only the Debtor can propose a plan and the plan must be filed within 90 days unless the court extends the time.
Currently, a small business debtor has 180 days to file a plan; upon expiration of that time frame, any party in interest, under certain circumstances, has the ability to file a plan. This has the potential to create dueling plans, one proposed by the debtor and another proposed by creditors, which creates problems for confirmation. With the proposed changes the case would function more like a chapter 13 case.
4. The need for disclosure statements and solicitations are eliminated unless cause is shown why the court should require them.
Potentially this could be huge and bring the confirmation process in line with chapter 13 but I could see courts issuing first day orders requiring both. If the court does not, it appears to shift the burden to the creditors to object to the plan if they do not agree with their treatment.
5. Property of the Estate is determined based upon how the plan is confirmed.
If a debtor can avoid having to resort to the “cram down” provisions of confirmation then property of the estate would be limited to prepetition property just like in chapter 7 cases, whereas if a debtor cannot get the creditors to agree to their treatment then property of the estate is expanded to include post-petition earnings and assets. This provides a HUGE incentive for debtors to get creditors to agree to the plan.
6. The Discharge would not be delayed.
This is another major incentive for the debtor to avoid the “cram down” provisions of confirmation. If the debtor can get the creditors to agree to their treatment then they will receive their discharge at confirmation and will not have to wait until completion of payments under the plan.
While the Small Business Reorganization Act of 2018 did not pass, the Small Business Reorganization Act of 2019 has been introduced in the Senate. Unfortunately, a companion bill has not been introduced in the House yet.
Last Friday the 3 month and 10 year treasury yields inverted. Historically, this has been one of the most accurate indicators of a pending recession. Basically, an inverted yield curve means that people believe that in the short term they will have better opportunities to invest their money and therefore require a higher interest rate to tie that money up for a relatively short period of time; whereas, people believe that over the medium term those same investment opportunities will decrease and therefore are willing to swap a lower interest rate for the safety of the "guaranteed" return.
While I personally believe that the next recession could be worst than the last, I will table my thoughts on that for now. Instead, I would just like to say that now is the time to start preparing. If you have a financial advisor it is probably a good idea to get their take on what you should do with your investments. Also, if you have the ability, now would be the time to prioritize building that "rainy day" fund so that you have a cushion were something to happen like an unexpected medical situation or job loss. I believe the "experts" say you should have at least 3 months worth of expenses saved. If you own a business you should at least entertain the possibility of a slow down and have a plan in place should one occur.
Whether a recession comes or not, communication with your advisors and having savings in the bank is good advice. If a recession comes and times get tuff, it is important to remember that the decisions you make during the tuff times are the ones that set-up for financial future. The thing I see most doing bankruptcy work is that people are willing to destroy their financial futures because they have to much pride to seek advice or get help. If the times get tuff and you are struggling to get by, please, please, please put your pride aside and seek help.
Jeffrey Lampley, Esq.
I am attorney in Southwest Florida who practices in the areas of Business Law and Bankruptcy. This Blog is a combination of useful information and my thoughts on life. Enjoy.