‘Neither A Borrower Nor A Lender Be’

Five former students want a federal judge to classify them as creditors in the ongoing ITT Tech bankruptcy.

The government began scrutinizing the Indiana-based for-profit school, which had 137 sites in 39 states, in 2014, as the Education Department looked into allegations of fraud regarding program offerings and students’ future job prospects. The hammer fell in 2016, when the government cut off student aid, which was ITT Tech’s primary income source. In January 2017, five students demanded a share of ITT Tech’s $389 million in assets and $94 million in escrowed funds to satisfy student debt obligations. The students hope that changing their status will convince bankruptcy trustee Deborah Caruso to end collections efforts, and they also hope that the judge would make a finding of fraud.

Over 800 former students and employees submitted statements to the court detailing fraudulent practices at the school.

Creditors’ Rights

Polonius’ advice to his son Laertes in Hamlet may have been very solid for a young man trying to make his way in the world, but creditors have many rights in consumer bankruptcy proceedings under the United States Bankruptcy Code.

First and foremost is a security agreement. While the automatic stay essentially eliminates the moneylender’s right to enforce the agreement, at least as long as the bankruptcy is pending, the underlying agreement remains in effect,because bankruptcy judges do not have the legal authority to invalidate such agreements except in rare cases. If the debtor stops making payments, the moneylender will usually file a motion for relief from stay, and if the judge grants this motion, the moneylender can enforce its security interest in the collateral through repossession, foreclosure, or whatever.

This issue often comes up with regard to delinquent mortgage payments, because typically by the time the mortgagor initiates foreclosure proceedings, the homeowner is at least four or six months behind. If the debtors cannot afford to retain the collateral but do not want a foreclosure on their records, a foreclosure alternative may be available, such as:

– Short Sale: The bank lets the homeowner sell the property for less than fair market value, the bank eats the loss, and the parties part ways.
– Deed in Lieu of Foreclosure: A voluntary foreclosure looks better on credit reports than an involuntary foreclosure.
– Cash for Keys: If the bank will not agree to a short sale or DIL, it may pay the departing homeowner to clean the property and get it ready for resale.

In some cases, especially furniture, appliances, and other goods with very low resale values, the moneylender may refuse to enforce the security agreement and allow the debtors to keep the property even if they violate the security agreements.

Second, creditors may be entitled to adequate protection payments. In many districts, several months may pass before the court confirms the repayment plan. If the plans aren’t confirmed, the trustee (person who oversees the bankruptcy on behalf of the judge) normally refunds nearly all the money that the debtors have paid, leaving the creditors with nothing. So, some courts require debtors to make additional payments to secured moneylenders during this period, so the creditors are protected if the plan is rejected.

The amount varies, but it is typically about 1 percent or 1.5 percent of the unpaid principal balance each month.

Contact Experienced Lawyers

Both creditors and debtors have rights in bankruptcy proceedings. For a free consultation with an experienced bankruptcy lawyer in Chicago, contact the Bentz Holguin Law Firm, LLC. Convenient payment plans are available.

Resources:

abi.org/abi-journal/when-is-a-secured-creditor-entitled-to-adequate-protection-an-emerging-trend

makinghomeaffordable.gov/steps/pages/step-2-program-hafa.aspx

shakespeare.mit.edu/hamlet/hamlet.1.3.html

nytimes.com/2017/01/06/business/student-victims-seek-to-become-creditors-in-itt-bankruptcy.html