Student Loan Management Program in the United States Bankruptcy Court for the Middle District of Florida

 Tammy Branson and Christie D. Arkovich, Esq.

 Bankruptcy Law Committee // The Briefs, January 2020, Vol. 88 No. 1

In an effort for debtors to receive a “fresh start” and not a “false start,” the Bankruptcy Court for the Middle District of Florida (“MDFL”) has implemented a Student Loan Management Program (“SLMP”) that utilizes a transparent portal for an individual to obtain relief from federal and private student loans. The program started on October 1, 2019, and is the first in the nation. The SLMP attempts to tackle the $1.5 trillion student loan debt currently owed by forty-six million Americans. The goals of SLMP are threefold: (1) increase communication presently lacking between both federal and private student loan borrowers and their servicers by using a portal; (2) raise awareness among borrowers and their counsel of available options; and (3) end unnecessary and costly forbearance during bankruptcy.

Forbearance is a commonly available option used to delay making student loan payments when a borrower is temporarily unable to make the monthly payments. However, forbearance can have long-term financial implications that often are not understood by borrowers. Although the payment button has been effectively paused, while the student loan is in forbearance, the loan continues to accrue interest. This interest is capitalized and is added to the principal balance of the loan. As a result, without making payments to cover the interest while in forbearance, the borrower’s balance will be higher when the loans reenter repayment.

Historically student loans have been treated like debts owed to other “unsecured” creditors, such as credit card balances, medical bills, and other unsecured debts. The regular monthly payment on student loans was not paid during the bankruptcy; rather, student loans were paid “pro-rata” along with other general, unsecured creditors.

However, the SLMP provides other options. Rather than simply leaving student loans to accrue capitalizing interest in a Chapter 13 case for three to five years, the SLMP encourages debtors to explore the various income-based repayment plans offered by the federal government and to see what options might be available for private student loans.

The program enhances communication, provides additional options, and ends needless forbearance that causes larger loan balances. For instance, a debtor who owes $100,000 in student loans with an interest rate of eight percent would owe more than $148,000 after a five-year bankruptcy repayment plan if the loan were simply put on hold.

In a similar vein, in 2010, the MDFL implemented a Mortgage Modification Mediation (“MMM”) program to assist debtors in seeking mortgage modification. The MMM program uses a portal to exchange documentation and communicate with mortgage servicers. The MMM program has been a great success, has reduced litigation, and is recommended by mortgage creditors as a model for bankruptcy loss mitigation programs. It has been duplicated in many bankruptcy courts across the country and has saved thousands of borrowers from homelessness. The secure portal provided by DMM Portal at https://www.dclmwp.com has added a dropdown menu for SLMP options now available in the Middle District of Florida. The debtor files a notice of participation and uploads the appropriate documents using the portal and the process is underway.

Neither the MMM program nor the SLMP require servicers to modify these loans. They merely encourage the parties to communicate effectively using the portal for transparency. Frequently, when a debtor files bankruptcy, they cannot submit the applications through the student loan servicer’s website, and only the debtor receives notifications of the progress of the process. Without an advocate on their side, loan balances continue to rise, as debtors fail to take advantage of various forgiveness programs or inadvertently default, which adds an additional 25 percent of the total debt in collection costs to the often already high balance.

Why is there a need for such a program?

In 2017, the Consumer Financial Protection Bureau (“CFPB”) and five state attorneys general sued the largest of the Department of Education’s (“DOE”) servicers, Navient, in which they alleged that Navient misallocated payments, steered borrowers away from income-driven repayment program plans (“IDR”), and failed to provide clear information on how to reenroll in IDR plans.

According to an inspector general’s audit of federal student loan servicers, it was found that 61 percent of the time, student loan servicers are non-compliant with federal loan servicing requirements regarding forbearances, deferments, and IDR plans. (February 12, 2019 ED-OIG/A05Q0008). It is beneficial for the debtors to have their own advocate to review their options with them and then apply for the appropriate programs.

The audit report states that one of Federal Student Aid’s (“FSA”) objectives is to include the implementation of processes, tools, and methods that protect the interests of students, and to support FSA in making service providers accountable. The objective further states that FSA would ensure that its processes for resolving student issues are simple for customers to use and sophisticated enough to capture insights that can be used to refine student aid operations. The SLMP has all of these ideas wrapped into one program.

To the SLMP committee, this is a replay of the mortgage crisis; though affordable student loan repayment plans are available from the government, student loan servicers have not been able to properly assist borrowers, just as the mortgage servicers could not do so during the mortgage crisis. Also, there are multiple student loan repayment plans that often are confusing to borrowers. These difficulties were the catalyst to applying the same MMM process to those debtors who have student loan debt.

The SLMP is needed to effectuate Congress’ intent that debtors in bankruptcy receive a “fresh start.” Since most student loans are non-dischargeable, a “fresh start” is not the result when debtors have student loan debt. Under the current bankruptcy case law, a debtor must show the student loans are an undue hardship and that he or she tried to pay the student loans, cannot afford to pay the student loans now, and won’t be able to pay the student loans in the future. This is a very hard threshold that most debtors cannot overcome. A process is needed that works for all parties to assist debtors to enroll in an available IDR plan. This would ultimately provide a greater income stream for the government than when student loans are abated during bankruptcy and receive little pro-rata distribution from the bankruptcy trustee. This program will encourage debtors to sign repayment plans, which will cause increased distribution from the trustee, and such repayment will match the lender’s requirements in the DOE’s process.

We have found when assisting clients that there are significant problems that debtors face when they are in a bankruptcy case that has federally guaranteed student loans. In our opinion, leaving this to the debtors to figure out on their own, by using the government’s website, is not working. Leaving it to the servicers, who do not represent the borrowers, is not working. Leaving Chapter 13 borrowers in forbearance, for five years, is not working. These loans should not be abated; instead, debtors should be able to make progress towards a “fresh start” and not a “false start” with student loans. As acknowledged, the DOE and its loan servicers place these loans on a “hold” while in bankruptcy. This needs to change. As mentioned above, a debtor who owes $100,000 in student loans with an interest rate of eight percent owes more than $148,000 after a five-year plan. This is a sad state of affairs. It is especially important as some borrowers qualify for a forgiveness at the end of their repayment plan. If a borrower works in public service, such as a teacher, police officer, or even court employee, the borrower would earn a forgiveness at the end of ten years. In a five-year Chapter 13 plan, he or she would be half way there! For borrowers who do not work in public service, the forgiveness is earned at the end of twenty years for undergraduate studies and twenty-five years for graduate studies.

Just lifting the bankruptcy automatic stay alone to allow borrowers to work directly with the student loan servicers will not work. The court and the trustee must supervise the debtor’s Chapter 13 plan payments, considering many factors, such as disposable income, unfair class treatment, and feasibility to name a few. The government and the debtor cannot resolve these issues by themselves; it should be within the confines of the bankruptcy process. The SLMP pioneered in the Middle District of Florida is the best way to achieve this goal. Bankruptcy courts around the country are very interested in replicating this process. Hopefully, this program is a success and can be replicated around the country. Stay tuned.

For more information, contact Tammy Branson at Tammy@bransonlaw.com, or Christie Arkovich at Christie@christiearkovich.com

 Tammy Branson, senior paralegal and certified bankruptcy assistant at Branson Law, PLLC, has been a member of the OCBA since 2014.

 Christie D. Arkovich, Esq., is the president of Christie D. Arkovich, P.A., based in Tampa, Florida.

Ms. Branson and Ms. Arkovich are members of the Student Loan Committee for the U.S. Middle District of Florida.