Dear NACBA Member,

Yesterday, the House Judiciary Subcommittee on Commercial and Administrative Law took the first steps in reversing language in the 2005 bankruptcy law related to private student loan debt by approving on a 6-3 party line vote H.R. 5043, the Private Student Loan Bankruptcy Fairness Act. NACBA has been actively involved in helping to draft and supporting the legislation which will restore fairness in student lending by treating privately issued student loans in bankruptcy the same as other types of private debt. Under the bill, privately issued student loans will once again be dischargeable in bankruptcy. To view a text of the legislation, go to http://thomas.loc.gov and insert the bill number.

The bill now goes before the full Judiciary Committee. Though time is short in this legislative session, we are hopeful that the bill will see full Committee action before the end of the year. Similar legislation has been introduced in the Senate (S. 3219) by Senators Durbin (D, IL), Whitehouse (D, RI) and Franken (D, MN).

We know that many NACBA members are confronted by clients with substantial student loan debt, both private and government-issued. Yesterday’s action was the first step in restoring fairness to the bankruptcy process.

Student loans are a growing concern for many families. For those with Federal Student Loans they can opt for deferral or Income-Based Repayment. There is very little that can be done to help those struggling with private student loan debt. I’ll keep you posted on the bill’s progress.

The Health Care and Education Reconciliation Act 2010 (aptly known by some as “the new health care law”) has made tremendous waves throughout the news media, twitter, facebook and for talking heads on TV.  However, some folks may overlook the “Making College More Affordable” program contained within the new legislation.

Many of our clients are burdened with student loan debt, so I was curious if the new law provided relief for existing borrowers.

The good news is that new borrowers will have an easier time repaying their loans:

“New borrowers who assume loans after July 1, 2014, will be able to cap their student loan repayments at 10 percent of their discretionary income and, if they keep up with their payments over time, will have the balance forgiven after 20 years. Public service workers – such as teachers, nurses, and those in military service – will see any remaining debt forgiven after just 10 years. More than 1.2 million new borrowers are projected to qualify and take part in the expanded IBR program.”

The bad news is that there isn’t additional relief for existing borrowers.

Existing Borrowers Should Explore Income Based Relief

Income Based Relief may allow qualified borrowers with federal student loans (except PLUS) to drastically reduce their monthly student loan payments. In some cases, a borrower pays what they can for 10 or 25 years and the balance is then eliminated provided they made qualifying payments for the applicable term.  IBR has been around since 2009, and the website I encourage you to visit is:    ibrinfo.org.

Unfortunately, private student loans are not covered using IBR. If you are unsure if your student loans are federal, call your student loan lender and ask.

Once you’re certain your loans are federal (except PLUS loans) your next step should be to contact your lender and get the paperwork started.

Student Loans and Bankruptcy

Eliminating or modifying student loans through bankruptcy is difficult, if not impossible for some clients. However, you should consider all your options. A chapter 13 bankruptcy provides even more flexibility in handling student loan debt, even though you can’t discharge it. Filing a chapter 7 or chapter 13 bankruptcy operates as an automatic stay, and prevents collection efforts against you for the duration of your case.

The first step when considering any student loan for discharge is to see what type of student loan you have. A student loan cannot be discharged if it was “made, insured or guaranteed by any governmental unit, or made under any program funded in whole or in part by a government or a nonprofit institution.” If your loan cannot be discharged, the next analysis is to determine if you are eligible for an “undue hardship” exception. A successful motion may eliminate or reduce your student loan if the right factors are present in your case.

Our office handles student loans through bankruptcy and we would be happy to analyze your situation during a free initial consultation.

The biggest surprise is clearly the increase of the homestead exemption, especially for married couples, who were limited under the old law to preserve $40,000 in their homestead. A married couple can now exempt up to $150,000 in their residence, provided the household qualifies for the exemption.

2009 Senate Bill 259 is set to publish on December 15, 2009, which will become effective on December 16, 2009. The exemptions are set to change as follows:

Consumer Goods

Increased from $5,000 to $12,000

Motor Vehicles

Increased from $1,200 to $4,000

Personal Injury Awards

Increased from $25,000 to $50,000.

Depository Accounts

Increased from $1,000 to $5,000

Qualified Homestead

Increased from $40,000 per household to $75,000 per spouse.

For business debtors and consumer debtors who have businesses:

Equipment, Inventory, Farm Products, Professional Business Books

Increased from $7,500 to $15,000

*What is an exemption, anyway?”

An exemption describes what a bankruptcy filer can keep when filing a liquidation case, such as a Chapter 7 bankruptcy. For example, if a Wisconsin bankruptcy filer owns an automobile worth less than $4,000, the new exemption law allows you to keep the vehicle. Under the old law, you could only keep vehicles that did not exceed a value of of $1,200.

My assessment after reading the entirety of H.R. 627: a step in the right direction to placate the growing ranks of consumers who desperately need relief from the outrageous usury practices of the credit card industry, but nowhere near as effective as advertised.

The term “Little People” is a term of art, and used affectionately. I have no idea how tall credit card users are these days, but I count anybody outside the immediate payouts of TARP funds to be ‘little’ in comparison. They’re my people: the people I work for, and grew up with.

The Good

1. Increased disclosures to consumers concerning credit card terms
2. Elimination of double-cycle billing
3. Measures to counter over-the-limit fees
4. Credit card bills would be paid on the same day each month
5. Restrictions on increasing charges and rates for newly issued cards
6. Requiring AnnualCreditReport.com to be advertised through credit report providers*
7. Restrictions on ‘ninja fees’ for gift cards
8. FTC will oversee efficiency of how credit cards are closed for estates

The Eh

1. Companies can lower interest rates for consumers using review process established by credit card companies

Concern: Effective 15 months from Obama’s signature, and we haven’t seen details of review process that will be established by credit card companies and approved by Board

2. Those under 21 need a cosigner or must assert eligibility through application

Concern: no measures proposed to double check accuracy of application

3. Colleges should restrict access to credit cards on campuses

Concern: no teeth. They should get rid of the bowl system, too.

4. Studies authorized to assess PIN security, cross-marketing of credit cards and security for small business accounts

Concern: Fluff. So glad we need Congress to pass laws to look into things.

5. Congress will look into shifting credit card fees at point of sale (interchange fees)

Concern: Congress effectively tabled the issue. Learn about it here.

6. The ability of the consumer to afford a credit card will be considered

Concern: This could mean less cards issued – and more depsperate measures taken by consumers to qualify for them.

The Ugly

1. Penalties for credit card companies aren’t severe enough if they violate the Act ($500-$5,000 per violation in some cases)
2. Effective date of Bill on most measures won’t occur for another 9 months
3. The practice of usury at the high interest rates consumers suffer from for rates and penalties, will continue

And The Interesting

1. Stored Values of credit cards and purchasing information will be regulated, in part to help us fight terrorism (allegedly)
2. I can conceal a loaded weapon in national parks like GW said I could when he left office

*I like this one. I’ll ask my clients if they know where to get a free credit report and a good percentage respond “FreeCreditReport.com” (which isn’t free.)

The Consumerist has put together some bullet points highlighting the key provisions of the proposed legislation.

Creditcardreform.org has invested in a toll free number where you can call your senator to urge the passing of the bill.