Can Student Loans Be Discharged in Bankruptcy?

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Legal Standard for California

Government guaranteed student loans cannot be discharged in bankruptcy unless, “excepting such debt from discharge … will impose an undue hardship on the debtor and the debtor’s dependents.” 11 U.S.C. § 523 (West) (emphasis added). Undue hardship is determined using the Brunner three-part test. In re Pena, 155 F.3d 1108, 1114 (9th Cir. 1998); Brunner v. New York State Higher Educ. Services Corp., 831 F.2d 395 (2d Cir. 1987). The debtor must establish (1) that they cannot maintain, based on current income and expenses, a minimal standard of living for himself or herself and dependents if forced to repay the loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that the debtor has made good-faith efforts to repay the loans, which may involve an inquiry into the debtor’s efforts to maximize income and to minimize expenses. Id. at 1111.

Element 1: You have to show that if you had to pay your student loans you could not maintain a minimal standard of living.

The first element of the Brunner requires the debtor to show that “based on current income and expenses, a minimal standard of living for himself or herself and dependents if forced to repay the loans.” Pena 155 F.3d at 1111. “Debtors are not required to live at or below the poverty level to be entitled to a fresh start.” In re Cota, 298 B.R. 408, 415 (Bankr. D. Ariz. 2003). “Minimal” is “a flexible and subjective term that can only have objective meaning in light of the particular facts of each case.” Id. at 415 (quoting In re Afflitto, 273 B.R. 162, 170 (Bankr.W.D.Tenn.2001)). The court’s task is to determine if the debtor can afford to support herself and her dependents if made to repay all or part of her student loans. Id at 413.

Will the purchase of a new car disqualify me?

Courts have concluded that the purchase of a new vehicle is not extravagant or excessive. See In re Hampton, 147 B.R. 130, 132 (Bankr.E.D.Ky.1992) (Holding that the purchase of a new car and a $422 monthly payment was reasonable); In re Wallace, 259 B.R. 170, 181 (C.D. Cal. 2000) (Concluding that the purchase of a $26,000 truck was reasonable); In re Pratt, 375 B.R. 753 (S.D. Tex. 2007) (Holding that the debtor did not fail to minimize her expenses by electing to purchase a new, more reliable motor vehicle at a cost of $558.39 per month). So, the purchase of a new car will not automatically preclude a debtor from meeting the undue burden standard for discharge of student loans. The McMillan Law Group has experience with these motions, and can advise you if the facts of your case hint at a possibility of meeting this element.

Element 2: You have to show that your inability to pay your student loans is unlikely to change.

The second prong in the Brunner Test requires that the court determine if the state of affairs the debtor is currently enduring is likely to persist for a significant portion of the “repayment period.” Brunner, 46 B.R. at 756. The test does not require “that additional circumstances be ‘exceptional’ in the sense that the debtor must prove a ‘serious illness, psychiatric problems, disability of a dependent, or something which makes the debtor’s circumstances more compelling than that of an ordinary person in debt.’ ” In re Mandighomi, 242 F. App’x 401, 403 (9th Cir. 2007) (quoting Nys v. Educ. Credit Mgmt. Corp. 308 B.R. 436, 444 (9th Cir. BAP 2004)). A bankruptcy court has the discretion to grant a partial discharge of student loan debt even when the debtor’s earning capacity is expected to improve, if that improvement will be insufficient for the debtor to pay the full balance due without an undue hardship. In re Carnduff, 367 B.R. 120, 131 (B.A.P. 9th Cir. 2007). Usually, debtors need to show that they are disabled or hindered in some way that will prevent them from increasing their income for the duration of the loan payment time.


Element 3: You have to show that you’ve made good efforts to repay your student loans.

The third prong of the Brunner test requires that the debtor show that she has made “good faith efforts to repay the loans.” Brunner, 831 F.2d at 396. Two common factors to be considered in evaluating good faith are the debtor’s efforts (1) to obtain employment, maximize income, and minimize expenses, and (2) to negotiate a repayment plan. In re Mason, 315 B.R. 554, 563 (B.A.P. 9th Cir. 2004). “[T]he mere failure to make minimal payments on a student loan does not prevent a finding of good faith where the debtor never had the resources to make payments.” In re Brown, 239 B.R. at 209 (Quoting Clevenger v. Nebraska Student Loan Program, 212 B.R. 139, 146 (Bankr.W.D.Mo.1997)). In Brown the Court found good faith even where the debtor did not make a single payment, because the debtor lived frugally. Id. at 209. The more efforts you have made to pay your loan, the more inclined a court will be to hold that you had good faith.

If you or anyone you know is having extreme difficulty paying their student loans, contact The McMillan Law Group at (619) 609-7437.

© Alan Shepard, licensed to The McMillan Law Group

Quiet Title and Wrongful Foreclosure in California

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ISSUE:

Many Californians in default on their mortgage and facing foreclosure have filed quiet title and wrongful foreclosure actions. What is a quiet title action against a lender, and are plaintiffs successful in California?

BRIEF ANSWER:                                                                                                         

            A quiet title action in California to determine the owner of property does not generally allow a mortgage borrower in default on their payments to claim title to the land free of liens. However, the action when combined with a wrongful foreclosure claim is often successful in extending the amount of time a defaulted borrower can remain in the house. While in essence, this is simply prolonging the inevitable, it can give a borrower a temporary feeling of control over their own destiny.

DISCUSSION:

Quiet Title Actions as a Defense to Foreclosure

A cause of action to quiet title seeks to determine adverse claims to real or personal property. (Cal. Code Civ. § 760.020.) The action is commonly commenced by homeowners when a lender wrongfully forecloses on their property. My research has not found a favorable California decision quieting title in a mortgage borrower challenging foreclosure. The filing of quiet title actions only prolongs the amount of time a borrower can remain in a house after defaulting.

Theory behind the current suits

The UCC governs negotiable instruments such as mortgages, and it defines a loan as a transferable, signed document that promises to pay the bearer a sum of money at a future date or on demand. Most mortgages are made by investment banks, who then package many similar loans into a mortgage backed security and sell the securities. To convert the mortgages into stocks, each mortgage note must be destroyed. A mortgage and a stock certificate cannot exist at the same time. This creates a gap in the chain of title, and theoretically making the loan invalid. As a result, homeowners can fight foreclosure through a quiet title action and receive clear title. The current trend to argue a break in chain of title is weak, because a “plaintiff may recover only upon the strength of his or her own title, however, and not upon the weakness of the defendant’s title.” (Ernie v. Trinity Lutheran Church (1959) 51 Cal.2d 702, 706.)

A promissory note is usually secured by a deed of trust in the real property. The trust names the security owner as the beneficiary and a loan servicer as the trustee. A trust is a form of ownership in which the legal title of a property is vested in a trustee, who has equitable duties to hold and manage it for the benefit of the beneficiaries. (Restatement of Trusts, Second, §2 (1959).) The trustee under a valid trust deed has exclusive control over the trust property. Usually, the lender records a deed of trust with the county to secure the loan to the debtor. The deeds identify the trustee, and most often identify Mortgage Electronic Registration Systems (MERS) as the nominal beneficiary.

Challenges to MERS

MERS is a company created by the banking industry to bypass recording statutes and filing fees. MERS records who currently owns the notes on a mortgage. A foreclosure may be brought in the name of MERS, and the trustee may act on behalf of MERS to effectuate a non-judicial foreclosure. MERS may also directly initiate a foreclosure proceeding, and California’s “statutory scheme (§§ 2924–2924k) does not provide for a preemptive suit challenging standing.” (Robinson v. Countrywide Home Loans, Inc., (2011) 199 Cal. App. 4th 42, 46.)

The MERS system of foreclosure has been upheld in California based upon two rationales. First, courts have held that MERS, acting as the agent of the beneficial owner, does not need to prove authorization by the beneficiary to foreclose. (Gomes v. Countrywide Home Loans, Inc. (2011) 192 Cal.App.4th 1149, 55-56.) Second, contract law legitimizes the system, because recent deeds of trust require that the borrower agree that MERS can proceed with foreclosure in the event of default. (Id. at 1157.)

Procedural Requirements for Plaintiffs

California mortgagors must file in the Superior Court, which has the authority to grant the equitable relief of quieting title in an individual. (Cal. Code Civ. §760.040.) Once a party has filed the action, they must file a notice of pendency with the office of the county recorder. (Id. §762.010(b).) This notice puts all other parties who are claiming the party on notice that the plaintiff is claiming the land as his, and stops any transfers of the property during the lawsuit.

To survive a demurer, A plaintiff must file a verified complaint that includes: (1) A legal description and street address of the subject real property; (2) The title of plaintiff as to which determination is sought and the basis of the title; (3) The adverse claims to the title of the plaintiff against which a determination is sought; (4) The date as of which the determination is sought; and (5) A prayer for the determination of the title of the plaintiff against the adverse claims. It is highly likely that a claim merely alleging that the plaintiff has an interest in the land will not make it past a demurer. (See Mangindin v. Washington Mut. Bank, 637 F. Supp. 2d 700, 712 (N.D. Cal. 2009) (Dismissing claim merely alleging plaintiff had an interest in land foreclosed upon by bank).)

Tender Rule

A plaintiff seeking to quiet title in the face of a foreclosure must allege tender, which is “an unconditional offeror an offer of performance of their obligations under the Note, made in good faith, with the ability and willingness to perform.” The “Tender Rule” is derived from several cases involving disputes between junior and senior lienholders. (See Arnolds Mgmt. Corp. v. Eishen (1984) 158 Cal. App. 3d 575, 580; FPCI RE-HAB 01 v. E & G Investments, Ltd. (1989) 207 Cal.App.3d 1018, 1022.)

The policy behind the rule is that it would be a useless act to set aside a foreclosure sale based upon a procedural defect when a mortgage borrower cannot redeem the property in absence of that defect. (Karlsen v. American Sav. & Loan Assn. (1971) 15 Cal.App.3d 112, 118.) Some courts interpret the Tender Rule to only require that the mortgage borrower tender delinquent pre-foreclosure payments prior to any claim of quiet title. (Id. at 117; Ghervescu v. Wells Fargo Home Mortg., Inc., 2005 WL 6559918.)

Recently, defendants have successfully demurred to plaintiff’s complaints for quiet title for failure to allege valid tender. (Vasquez v. OneWest Bank, FSB (Cal. Ct. App., Nov. 4, 2011, B225624) 2011 WL 5248294; Dupree v. Merrill Lynch Mortg. Lending, Inc. (Cal. Ct. App., Oct. 24, 2011, B225150) 2011 WL 5142051 (Affirming demurrer and denial of leave to amend complaint).)

Successful cases

Success is dependent on the goals of the plaintiff. The objective of gaining title to land free of any liens is rarely achieved, and has not been achieved in California. However, California debtors have used the action to remain in their homes for years after defaulting. (Ghervescu v. Wells Fargo Home Mortg., Inc., 2005 WL 6559918 (Dissolving preliminary injunction restraining trustee from delivering deed to winning purchaser at trustee’s sale).)

Wrongful Foreclosure, AKA Free rent cases

A wrongful foreclosure action alleges an “illegal, fraudulent or willfully oppressive sale of property under a power of sale contained in a mortgage or deed of trust.” (Munger v. Moore (1970) 11 Cal.App.3d. 1.) These actions work best when brought prior to the non-judicial foreclosure sale. To prevent the sale, the plaintiff must apply for an injunction and convince a judge that they are entitled to the injunction and that without it they will suffer irreparable harm. (Cal Code Civ. Pro § 526.) If the injunction is successful, the debtor can stay in the home for the duration of the lawsuit.

In Ghervescu v. Wells Fargo Home Mortg., Inc. (Cal. Ct. App., Nov. 16, 2010, E048925) 2010 WL 4621734, a borrower used the above procedural strategy to keep his house for over eight years after his default on the loan. After default, Ghervescu arranged a forbearance agreement with his lender, and some time shortly thereafter applied for a loan modification causing confusion with the lender. The lender failed to put the foreclosure proceedings on hold, and Ghervescu failed to make his payments on time.. The bank did not follow up on the pending application, and held a trustee’s sale prior to promised date of sale. Ghervescu quickly filed for a preliminary injunction to restrain the trustee from delivering the deed to the winning purchaser of the house at the trustee’s sale. The granted injunction prevented the foreclosure sale from constituting the final adjudication of the borrower’s rights. (See Smith v. Allen (1968) 68 Cal.2d 93, 96.)  He lost at trial, and his motion to amend complaint and denied. The case bounced around through three trials and two appeals, finally ending in judgment for the bank.

Other Jurisdictions

Contrary to California’s ruling in Gomes, a MERS has come under fire in Utah. In Harvey v. Garbett Mortgage, Utah 3rd Dist. Case No. 100907587 (2010) (unpublished) (Herinafter Harvey),  quiet title action resulted in a deed clear of any liens because the trustee, the legal title holder, did not have any idea who the beneficiary was, did not have physical possession of the mortgage note, and did not know whether a split of the note and trust deed occurred. The plaintiff quickly sold the property after the ruling, and thus has no interest in the land. The loan is now unsecured, and the plaintiff is still liable to the lender to pay the debt. An interesting procedural note about the Harvey case is that the plaintiff did not name MERS as a defendant in this case, even though MERS was the nominal beneficiary, because MERS did not have any actual interest in the property. However, this strategy would not be successful in California, because MERS has standing to foreclose, has a statutory created interest in the land, and a quiet title proceeding is final and binding only upon named defendants.

CONCLUSION:

In California, a quiet title action brought by a mortgage borrower in default against a lender will not result in free property. Courts quickly dismiss quiet title actions without any allegation of wrongful practice by the lender. However, a quiet title action in conjunction with a claim of wrongful foreclosure can allow a homeowner stay in their house for an extended period. A debtor in receipt of a notice of default must act quickly if they want to stay in their home. The first steps of filing a complaint and applying for an injunction require technical legal knowledge and sharpened persuasive ability; two characteristics that cannot be learned by the homeowner fast enough to prevent eviction. The homeowner should seek counsel from an experienced attorney regarding the possible benefits and costs of offensive legal action.

If you or someone you know is considering this sort of action, please contact our firm at 858 499 8954 to schedule a free consultation and case evaluation.

http://www.mcmillanlawgroup.com/uncategorized/wrongful-foreclosure-cases-in-california

http://thebankruptcyguysandiego.com/?p=275

Drafted by Alan Shepard for the McMillan Law Group

Civil Procedure Flow Chart and Outline

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This is what I used to prepare for the Civil Procedure final exam. You may use this to study, but may not republish it or sell it to anyone.

Click on the images to enlarge.






In addition to the above outline, I underlined and highlighted the major Federal Rules of Civ Pro and Title 28 Statutes. I read these over and over again, and applied them to many hypotheticals.

Here’s an example of my mark ups to 28 USC 1367

Finally, I took really good notes in class. My method entails a two column system where I have my case briefs in the left column and the class notes corresponding to the case in the right hand column. Before the exams, I re-read my briefs and notes.

Hopes this helps some 1L’s get prepared for civil procedure.

Epic Thread Necromancy – “Help me become the most legendary gunner ever”

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Every law student must read this thread. For 1L’s it may not be as funny until you have at least a month under your belt. For 2L’s and 3L’s, if you’re like me, you’ll be laughing hysterically (tears, snot, sore ribs).

The thread is located at www.autoadmit.com. Click the link below
Help me become the most legendary gunner ever.

3 Credits Down, 86 more to go.

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Congratulations to all of the CWSL Summer Enrichment students who just took their first law school final. It’s going to be hard waiting for your grade, but as soon as the fall trimester starts you won’t have any time to worry. Everyone I who I met with showed dedication and hard work, and I know you learned a lot. It was a pleasure, and now that it’s all over, feel free to hit me up throughout the next couple years.

Alan Shepard

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