The Bankruptcy Lawyers Blog

With students needing a college education and workers seeking retraining both hoping to land a decent job, the amount of student loans taken out last year passed $100 billion for the first time last year and total outstanding loans are to exceed $1 trillion this year according to the Federal Reserve Bank of New York.

Higher education seekers are borrowing twice what they were ten years ago and the total outstanding debt has doubled in the last five years. The trend of Americans reducing what is owed on credit cards and home loans is going in reverse with student loans.

Unlike mortgages and credit cards, however, this debt cannot be shed in bankruptcy. Congress has given lenders (including the government) broad collection powers making these loans less likely to be bailed out from defaults.

The problem ahead lies in the economic impact these loans will make on the rest of the economy. New car sales, home sales and other life-cycle events will be delayed as borrowers work to pay off these non-dischargeable loans.

The number of defaults has risen 2.1% in the past two recorded years with the highest number of defaults (over nine months behind on payments) stemming from the rise in for-profit, online schools like the University of Phoenix, which gets 88% of its revenue from federal student loans.

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The real estate website MortgageOrb is reporting that a Florida provider of default legal services is sounding the alarm on a new bankruptcy practice that he says could delay the foreclosure process in the state.

According to an announcement put out by the Law Offices of Daniel C. Consuegra Monday, Chapter 7 bankruptcy trustees in the state have been filing paperwork to sell homes encumbered by valid mortgage liens. The sales convey the property, by trustee’s deed, to third-party buyers, who are often investors. Consuegra says the sales are often connected to borrowers whose bankruptcy filings show there is no equity in the subject property, nor any provisions to bring loans current.

Oftentimes, the notice of sale provided to lenders is improper - if it is provided at all, Consuegra says. His firm has further discovered instances where the investor-buyers are revealed to be corporate entities affiliated with foreclosure defense firms. According to Consuegra, the investor-buyer then rents out the property on a month-to-month basis, delays the foreclosure and makes a profit from the rentals.

“For the mortgage lender, this means additional parties to the foreclosure action, added service of process costs, as well as difficult and costly litigation,” Consuegra said in the announcement. “Often, the sale takes place in the bankruptcy while the foreclosure case is stayed by the automatic stay. In some cases, the foreclosure case goes to judgment, but must be vacated for failure to serve the new owner.”

Consuegra says the issue is rearing its head in Florida’s Middle and Southern districts and that the Tampa division of the court is examining the matter in specific cases.

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U.S. District Judge Susan C. Bucklew of the Middle District in Florida recently ruled that the “absolute priority” rule no longer applies to individual Chapter 11 debtors since the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

SPCP Group LLC v. Biggins et al., Nos. 10-2381, 10-2384, 10-2386, 11-33 and 11-34, 2011 WL 4389841 (M.D. Fla., Tampa Div. Sept. 21, 2011).

The ruling, codified at 11 U.S.C. § 1129(b)(2)(B)(ii), comes into play when an unsecured creditor objects to a so-called “cramdown” plan. It mandates that unsecured creditors receive payment in full before the debtor may retain property of the bankruptcy estate. It was ruled on appeal from a bankruptcy court decision granting plan confirmation to a group of individual Chapter 11 debtors that the rule no longer applies to them.

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The September 2011 American Bankruptcy Institute report showed fewer individuals filed for bankruptcy protection in September holding back on spending, household debt and other borrowing.

But while U.S. consumers are making their credit card payments on time, delinquencies grew for other categories of debt such as auto and home equity loans according to data released this week by the American Bankers Association.

While total consumer bankruptcy filings are expected to be as much as 10 percent less than in 2010, the economy is not driving those numbers down.

Will a surge of bankruptcy filings come before the end of the year? Or are Americans just weathering the storm? Post your comments here.

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A panel of the 8^th U.S. Circuit Court of Appeals has ruled the homestead exemption applies to proceeds from personal property sold with a debtor’s house unless the money was segregated from the sale or was used to pay off creditors.

Danduran v. Kaler, No. 10-3813, 2011 WL 4104923 (8th Cir. Sept. 16, 2011)

The ruling reverses a decision by a bankruptcy judge who found the proceeds from the personal property were not part of the homestead and agreed with the trustee that the exemption did not apply. The panel concluded that the Chapter 7 trustee, who objected to the exemption being applied to the proceeds, failed to demonstrate either contingency.

In the panel’s opinion, the debtor, Lawrence D. Danduran Jr., sold his New Rockford, North Dakota home in September 2009, combined with personal property, for a combined $225,000. Included in the personal property were a pool table, hot tub and A/V equipment.

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