Topics of Current Interest

Topics of Current Interest

ATTENTION: There are current issues that should be considered by anyone feeling the pinch of Covid-19 and the results of the pandemic upon their finances.

If your economic survival during trying year has relied upon the furloughs in payment of residential mortgages and school loan payments, then there are some issues you should consider, and actions you should take.

Residential Loans: We have experienced executive orders which forbid lenders (particularly those which are subject to Federal law such as FHA, FNMA, GNMA and those rendered by Federally Insured Banks and Savings and Loans) from instituting foreclosures and action to otherwise enforce their obligations. Beware that with the vaccine and increased immunity, these executive orders may cease and the loans and accumulated defaults may become due. If you find yourself facing these circumstances, remember that the Bankruptcy Code does provide relief in such instances. Chapter 13 will allow you to spread those defaults equally over a 60 month period in addition to making your regular payments. Also, if your payments are still too onerous, there is an opportunity to seek a modification of those loans within the bankruptcy process along with regular bankruptcy relief. Call to discuss these issues.

Also, there has been an alarming change in the law applicable to judgments after they have been entered by Court and recorded with the County Recorder. They become a lien upon real property of the judgment debtor in that county, and before the property can be sold and deeds recorded to the new owners, or refinanced, the person or entity owning the recorded judgment must be paid what is owed upon the judgment.

For years such judgments have been excluded from attachment against a homestead (a mobile home or permanent residence where you reside which has equity of up to $150,000) as a lien. Any creditor had to follow the procedure under the homestead law to enforce any recovery if the debtor’s equity exceeded $150,000.00. This year the Arizona State Legislature has amended the laws to give debtors in this State an increased homestead protection of $250,000.00 effective December 31, 2021. Note that this is exactly the amount that the U.S. Senate was proposing as a part of the student loan debt act introduced on February 2, 2021 (“The Medical Bankruptcy Fairness Act”) for adoption in all states to protect homesteads. Therefore, regardless of the adoption of the Fairness Act by Congress, we, in Arizona, will already have the increased homestead value to protect an equity in a residence up to $250,000.00.

The creditors’ lobbyists however were successful in adding measures to the Arizona Act, before it was signed into law, which give creditors substantial benefits applicable to homesteads and judgments. This new Act now provides that judgments (commonly sought in actions in court seeking recovery of even unsecured debts owed but not paid) when recorded will now attach to real estate including any homestead whether the property is then owned or later acquired. The creditor will also first receive any funds which are generated by a refinancing of the real estate, including the Arizona Homestead, should the judgment debtor seek refinancing which withdraws cash in excess of paying the primary creditor who financed the purchase price primary mortgage. This is commonly what takes place when a debtor seeks to improve or repair his residence using his equity to permit such improvements. Debtors may be shocked to learn that such funds are going to be directly paid to the judgment creditor up to the sum reflected in any unpaid balance of the recorded judgment. Only when the judgment with interest is paid in full can the debtor use his equity to pay for additions or improvements. (Question: Was this advisable where these improvements could have been used to improve the property and preserve neighborhoods, and would have increased the equity in any event, bringing the property closer to the maximum protected homestead value?)

The new “after acquired” clause also introduces an issue as to whether such judgment lien becomes a risk upon recording as to any future real estate acquisition, notwithstanding the lack of any real estate owned at the time of recording. Does any attempt to remove a recorded Judgment lien by action in bankruptcy, where the personal debt was discharged, but where there was no exempt real estate upon which to claim an “endangerment”, become a futile effort leaving the recorded judgment to await any later acquisition of real estate to “infect” it? Is there a statutory intent to create a kind of “super lien action” upon later acquired property by simply recording a judgment even when there is no real estate at the time of recording upon which it can act, creating a secured interest in the judgment creditor in that after acquired property?

Rather than await any judgment either by intentional delay or error, and then seek its removal because there is no longer a debt, and there never was any real estate upon which to base a lien interest before or during bankruptcy, it would be prudent to treat any action in a court of competent jurisdiction as a threat to future property rights regardless of the validity and existence of a common law lien. Why permit this “after-acquired” language to endanger the future acquisition of real estate? It would be preferable to file the bankruptcy before the judgment can be granted, and before it can be recorded, thereby staying any creation of a judgment and discharging the debt before it can be used as a justification for recording. Avoid the creation of a judgment even where there is no current property at risk. Take action to avoid any judgment by seeking bankruptcy relief as soon as possible.

Student Loans: Similarly, student loan payments have been furloughed since last April 2020. While we await a return to normalcy, there have been several interesting developments in dealing with the enormous debt many students have accumulated. As you may know, there has been a provision in the Bankruptcy Code for over twenty years which limited a discharge of the student loan debt to only those debtors who suffered “undue hardship” in making the payments. Consequently, in some cases, the debt totaled tens of thousands or even hundreds of thousands of dollars which may never be repaid, yet their burden did not justify a discharge.

There have been some encouraging developments in August 2021, which have a direct impact upon the earlier Senate Bill introduced by Senator Warren and others on February 2, 2021. This previous Bill was entitled, “The Medical Bankruptcy Fairness Act of 2021” and it was supposed to have been referred to the Senate Judiciary Committee for action. That Act was extremely beneficial because it defined “medical” victims of the Covid Virus as anyone who suffered financial loss, lost employment, or furlough, by reason of the pandemic, and qualified them for the discharge of a student loan in bankruptcy. This language entitled almost everyone to a discharge of student loans in bankruptcy. Unfortunately, that Act never appears to have been given serious consideration by even the Judiciary Committee.

There was never a public hearing upon the issue of student loan debt until August 3, 2021, when the Judiciary Committee took up the issue. On August 2, 2021, Senators Durbin and Cornyn jointly proposed an entirely new Bill entitled, “Fresh Start Through Bankruptcy Act” making this the first bipartisan effort to resolve the student debt problems since before 2005. If you listen to the entire hearing, you will be surprised at the Republican and Democrat support for this new Bill. Senators Cruz and many other Republicans joined with Democrats in concluding that it was time to fix this crisis. They agreed that the students were largely misled into believing that their loans would be manageable upon graduation and employment, even though the students were often majoring in a curriculum never likely to give them the income to support this degree of debt. The Senators were further shocked at the billions of dollars many of the Universities have in endowments, and yet they took no responsibility for the huge accumulated debt.

This new Act retains the current “undue hardship” test for eligibility for discharge of student loan debt, but this test would only be applied for the first ten years after the first payment upon the student’s loans was due. This was to prevent students from incurring debt in the belief that upon graduation they could simply file bankruptcy as had been possible before 2005, and rid themselves of the debt. After the ten year period has elapsed, the student loans could be discharged along with all of the other unsecured debt.

Clearly, this Bill is better than anything previously supported by all parties though it does not approach the benefits of the February 2021 Bill. It would appear that that earlier Bill was abandoned because all knew it would not get bipartisan support. The Democrats will likely urge that a time limit should be reduced to no more than 5 years instead of 10, while the Republicans might compromise upon a 7 ½ year period. They are at least talking, and have apparently agreed that some period would be appropriate to assure that immediate bankruptcy would not be filed to relieve indebted students following graduation.

There is also bipartisan agreement that colleges with a high failure rate should share in the cost of discharge. In fact, most of the objections to date, to the August 2, 2021 Act have been from colleges that fear the cost of their share of losses generated by Federal guarantees of loan repayment.
The American Bar Association House of Delegates also voiced its support for the Bill referring to the tremendous amount of debt experienced by so many students. It encouraged the ABA, in general, to support relief from student loan debt and to resolve the crisis.

This matter will be subject to Committee agreement on passage of the Bill. When the majority of the Committee can agree on any changes, it will be recommended to the Senate, and be subjected to discussions by the entire Senate. Hopefully there will be quick approval of whatever the Committee recommends with bipartisan support. There is some hope for some of you but not all.

More good news has been released just days ago. The Dept. of Education has indicated that those of you who have been found to be totally and permanently disabled, as documented in the records of the Social Security Administration, shall be released forever from the balance of your Federally insured student loans without the need to undergo a three year monitory period as previously required, if you claimed a release due to disability. If your loan was reinstated because you did not document your three year monitoring, your loan will also be released.
If you don’t receive notice of a release, but you are filing a bankruptcy, be sure to advise your attorney so that the discharge will include those loans.

Most of you may have known that in 2019 the Trump Administration had already granted loan cancellations to military veterans with a disability. This recent action taken places all that are disabled on the same level for dispensation.

"During the last week of October 2021, the Biden Administration has announced an overhaul of the government's public-service student loan forgiveness program which would allow tens of thousands who work for government or nonprofit employees to discharge their school loans ahead of schedule. Borrowers denied for having the wrong type loans or because of late payments, or other technicalities will now qualify for discharge. Also, members of the military who suspend their student loans while on active duty will be able to count those months toward credits in full payment. Starting next year, service members and federal employees will be automatically enrolled in the program without applying. Because the program applies to most nonprofit organizations these benefits apply not only to just teachers, firefighters, and members of the military, but also the employees of universities, foundations, think tanks, and even advocacy groups.

Also, in late October 2021, the Department of Education told Congress that it is working with the Justice Department to revise its bankruptcy policy for federal student loans. They agree that discharge in bankruptcy needs to be reformed. This would be helpful because an easing of its interpretation could lead to fewer contested cases in bankruptcy when borrowers seek a discharge in bankruptcy, even if Congress does not pass the legislation previously described. The Court will ordinarily grant the discharge if the Department of Education does not oppose it. We will keep you posted.

The Means Test: We are told that many of you are being told that your incomes are too great without completion of all phases of the Means Test. If you have been told that your income or your joint incomes are too great and that you must face the expense and five-year duration of Chapter 13, let us review your records to determine whether we can, through the proper application of the second and third stages of the Means Test, file a Chapter 7. Call us at 602-363-0732 and we can discuss the issues.

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