How Austin Smith invented a way of discharging private student loans that’s game-changing for bankruptcy lawyers
In this episode of Bankruptcy Law Success, I interview Austin Smith, a bankruptcy lawyer in New York City who is devoted to discharging student loans in bankruptcy. Austin is a legal genius who has blazed a trail for discharging student loans that other bankruptcy lawyers can follow.
Some of the highlights in this interview include:
- How Austin invented a novel legal theory that allows him to discharge many private student loans in bankruptcy.
- Why student loans to attend “unqualified” institutions can be reliably discharged via bankruptcy (and how to determine which institutions are which).
- Exactly how some former students can also discharge their student loans (Hint: part-timers and foreigners may be in luck).
- And most important, how to calculate a student’s annual “cost of attendance” to identify which private student loans can be discharged entirely.
- And a whole lot more, including how to settle with student lenders to reduce loan balances to pennies on the dollar, without ever stepping foot in court.
To help other bankruptcy attorneys learn how to discharge certain private student loans, Austin has also agreed to share his standard complaint, a motion for summary judgment on the discharge issue, a motion for summary judgment on the FDCPA and discharge violations issue, and a number of cases that he’s won or found important.
You can get all these files for free sent to your email inbox by going here right now.
You can listen to the episode by clicking the “play” button in the audio player above, or read a full transcript below.
You can also subscribe to get an email when we release new episodes of the Bankruptcy Law Success podcast.
Bob: Hi, this is Bob Hiler of the Bankruptcy Law Success Podcast, where we introduce you to successful bankruptcy lawyers, as well as powerful ideas that can transform your bankruptcy practice. Today, I’m very excited to be speaking with Austin Smith, an attorney who founded Smith Law Group, which is devoted to discharging student loans in bankruptcy. He’s here in New York City along with me. Austin, welcome to the podcast.
Austin: Thank you, Bob. I’m happy to be here.
Bob: So I’m very excited to have you on the podcast. I know that you have worked with Michael Jaafar, who we just interviewed about private student loans, and you worked with him on that.
Austin: Yes sir.
Bob: So normally, I like to go through the history of the lawyers that I interview, but Austin, for you, I was wondering if you could start by explaining in 30 seconds what the big issue is that you’re dealing with in terms of student loans and why everyone should drop what they’re doing and pay attention to the rest of this podcast.
Austin: Absolutely. So I think the headline here for me has always been: not all student loans are non-dischargeable in bankruptcy. So to the extent that everyone thinks student loans are completely immune from discharge, that’s just fundamentally not true. It does require a certain amount of analysis but I think that bankruptcy practitioners not only can help their clients, but they can actually make money by doing a thorough analysis of a client’s student debt, determining what’s dischargeable and what’s not, and getting their client out of a very bad situation that a lot of these people fall into.
Bob: And if you are a bankruptcy lawyer, we’re dealing with filings being down 50-60% since the peak. And everyone wants to crack the student loan market. You know, you’re talking about the holy grail of discharging student loans through bankruptcy and really giving people a fresh start. But this is an issue really that affects the private student loan market. How big of an issue are private student loans versus the total student loan market?
Austin: Yeah, that’s a very important point. That’s right. There’s not much, unfortunately, that has changed in the federal student loan market, which constitutes about 85 percent of the total student loan market, which is partly why no one ever really talks about private student loans. Because it’s only 15 percent–maybe a little higher than that–of $1.3 trillion, but I think there really should be.
And the reason is this: federal student loans–for all of their problems–do have pretty equitable payment plans. You can get into one of these income-based repayments where you’re paying nothing more than 15 percent of your discretionary income. And I understand that that can be a lot of money for people but it is capped. You can get easier deferments. You know, after 20 years, the entire debt is forgiven if you’re in one of these income-based repayment plans. So the federal government–for all their faults–has done a lot to work with student debtors. And so in my practice, people who have federal loans are never really in that much trouble. There are places they can go. The Department of Education will work with them.
That is not true for private student loans. Private student loans are nothing more than credit-based consumer transactions. They have very high interest rates. I have clients with interest rates as high as 14, 15 percent.
Bob: Oh wow.
Austin: There are no payment plans. You are paying based on the principal and the interest, and they do not care how much money you’re making. It is not unusual for my clients to have bills every month or $2,000 to $3,000 a month in private student debt, while their federal loans are $200 or $300 a month. So in my experience, the private loans–although it’s a smaller segment–it is where people are getting into real trouble, and there’s no way out of it. The federal government is going to work with you, in my experience. The private lenders will not.
And so that’s why I find it so important to clients with private student debts about their options in bankruptcy because very often, there is a lot that can be done. You know, it’s not going to solve the whole problem. This is not going to fix the student loan problem. It is going to, I hope, provide a little bit of relief from all the pressure, clean up the worst segment of the market, and then at some point, Congress is probably going to have to do something about the federal student loan problem. And that’s a problem for sort of better minds and bigger people.
But I think that this is an area of law where bankruptcy lawyers can really be the driving force behind correcting a system that really went off the rails in between ’05 and ’08 when they were just originating billions and billions and billions of dollars of this stuff and securitizing it into asset backed securities, just like the mortgage crisis. And that needs to be cleaned up and fixed and then we can move on and tackle the federal problem, hopefully, through congressional action.
Bob: Are you also kind of seeing that discharging student loans through bankruptcy is a real growth industry? And by the way, I’m tossing this ball up for you to spike it here, because that’s my strong sense…
Austin: Yeah, so when I first started doing what I’m doing, there were very very few published opinions on discharging private student loans in bankruptcy. Every couple of months, a court will deny an undue hardship challenge. But that was sort of the only avenue people thought was available. What we started doing was saying, “Hey, let’s step back a second. The Bankruptcy Code does not say all student loans are non-dischargeable. It has very specific requirements.”
Then, although the federal government is totally immune, private lenders are not. Private lenders were given very limited and qualified protection in the Bankruptcy Code. And so before you’re asking my client to prove undue hardship, why don’t you prove to me that this is a genuine qualified education loan? And once we flip the tables on them, their first reaction was, “This is ridiculous. This isn’t how the world works, kid.” But we started getting judges to agree. And now… There was really no opinions on it.
We’ve now–I’d been a part of several but not all of them–we’ve won nine out of 10 of the last cases over the last 18 months where courts have sort of adopted this view that, “Wait a second. You can’t just walk into this bankruptcy court and say, “Oh, it’s a student loan. You can’t get rid of it.” You need to show me why this is non-dischargeable.”
And that, I think, was a real sort of revolution in a sort of, in a sense, that we sort of flipped the tables on them and said, “You know what? We’re done trying to prove undue hardship for these things. First, you prove to me this is entitled to a presumption of non-dischargeability.” And we have found that judges are receptive to it and that the banks very often can’t prove it, because it doesn’t meet the statutory requirements.
Bob: I love it. You’re flipping the script.
Austin: That’s what we’re trying to do.
Bob: So can you give us an example, a general example, hypothetical example… Well, not hypothetical, maybe a real example where you’re not bound by confidentiality agreements. But give us an example of someone came in struggling under a mountain of debt and you saved them.
Austin: Sure. So I think the client… This one is still a little bit ongoing so I can’t give you the fairy tale ending yet but I think it’s the most important case. And it was actually the guy I first met… When I first started doing this, I was just sort of looking around chat forums and people were talking about student loan problems. And then I started talking to a guy who had–and I’m not joking–$1,000,000 in student debt.
Austin: He had $400,000 in federal and $600,000 in private. And we started talking–and this is after I’d first published my article that no one was really paying attention to–and he said, “Well, everyone’s telling me I can’t get rid of it.” And I said, “Well, I don’t want to get your hopes up because I’d have no way to prove this to you yet but frankly, I just don’t think that’s true.” And he’d actually been to law school, which is partly how he borrowed this much money. And so he said, “Alright, well, let’s try it.”
But he was out in California, so I had to get him another lawyer to do it. And I’ve just been sort of helped doing the briefing for them. But the result was exactly what my article had sort of spoke on. And prior to the court ruling on that, we’d won two other cases so we had a little bit of precedent and it was just… The bank said he had…
I think there were five or six different lenders, all the major sort of names of Wall Street had lent this kid $100,000 each. And he’d been borrowing money, these so-called “direct to consumer loans” that aren’t really around anymore. But from ’05 to ’08, banks were bypassing the financial aid office to originate more and more of this debt. And they were just sending $30,000 or $40,000 checks to people every couple months. And I’m really not exaggerating about that. This guy was getting $30,000 or $40,000 every couple of months during college.
Bob: OK, so he borrowed to attend both undergraduate and then immediately after, he did law school?
Bob: So even if that’s seven years of schooling, that’s $1,000,000?
Austin: Yes, so he’s borrowed about $100,000 on top of his federal loans every year.
Bob: Oh wow.
Austin: In any of that… Yes, so we went into court and the judge wrote an excellent opinion absolutely agreeing with us. He said, “Absolutely not. Just because these things are called student loans, doesn’t mean they’re non-dischargeable.” I mean, he noted the size of the debt, which just has a sort of shock value, like, “What is this, a joke? How do you have $1,000,000 of student debt?”
And so we won the motion to dismiss and are now come to doing discovery and sort of working our way towards trial. And in that case, I’m very confident we will win in the end. But it was sort of a major watershed moment of just breaking through that initial misconception that everyone had, which is, “Well, you borrowed $1,000,000, it’s all non-dischargeable, nothing you can do.” And that’s just not the case.
Bob: Awesome. So I want to take a step back and ask you how you discovered all this.
But before I do that, I want to stop and speak to the audience. And I want to say that if you’re a bankruptcy lawyer and you’re struggling to sign up retainers and just do regular bankruptcy filings, there is this whole world, this blue ocean of discharging student loans through the bankruptcy process. And I really want you to pay attention to the rest of this podcast because this could be the most important next 30 minutes of your law career. I don’t normally say things like that. I’m just going to go out there and say that.
OK. So, Austin, you’re describing cases that you’re working on now. This kind of all stems back to the article that you published, The Misinterpretation of 11 U.S.C. 523(a)(8), in July 2014. I believe you were still in law school when you published that.
Can you tell us a little bit about how this novel interpretation of 523(a)(8) came about?
Austin: Yeah, and so you’re going to have to bear with me. This is going to get a little nerdy but I’ll try to explain it in as plain English as possible.
So that’s right, I was in law school. That was sort of originally just my law review note. I had been… I was a third year student and I had to write an article to meet my requirements for the review. And I was looking around for a topic. It was frankly at this point that I’m kind of mailing it in, just finding an easy thing, writing some kind of public policy puff piece and being done with it.
And for whatever reason, I’d had some sort of lawyer friends and one of them–I was talking to him one day–and he said, “Oh, you should write about student loans.” And I said… I humored him but I think that didn’t really sound all that interesting. And he, for whatever reason–I thanked him for doing this–said, “No, no, no. Seriously, let me send you a case. This is a really sort of peculiar area of the law.”
And so he sent me a case that was about undue hardship. And I don’t know… Undue hardship proceedings are a very strange sort of judicial proceeding. It’s essentially a suffering contest. The debtor comes in and they’re being asked to prove in a court of law that their life is so horrible that they should be relieved of their obligation to pay their debt. It really… You read them and they don’t… They try to dress it up in legal language but it’s not very successful because at the end of the day, you read these opinions of the judges saying, “Well, yeah, you lost a job and you were hit by a car, but hope springs eternal, guy, and you may be running Microsoft one day, so I’m not going to say it’s all over for you. You know, let’s see what the world has to offer.” And so they’ve sort of misused this American optimism against the debtor to say, “You know, we can never know what tomorrow holds.” So it’s not, “As a matter of law, I can’t say that forcing you to repay this is an undue hardship.”
And so I was reading that and I said, “You know, that is odd.” And then I started looking around and there are a lot of people had written about this. This was not a new observation. And so I sort of, I don’t know, I might as well going to copy one of these guys and say the same thing they’ve already said. But in any event, I kept reading them and I started to notice something. And that’s sort of where this article came from.
You know, in some of these cases, the debtor would come in and the judge would say rightly, “All right. Well, the first thing we need to decide is whether this is an educational loan that’s except from discharge.” So right there, the judge sort of was on the right track. OK, first, let’s do first things first. And the judge would say, “You know, I’ve got this statute here, 523(a)(8). It’s got three parts. The first part says, essentially it’s got to be a federal student loan.” And the judge looked at the loan documents and said, “Well, this isn’t a federal student loan so that doesn’t apply.”
And then he went down to the next section. He said, “All right. Otherwise, it’s got to be a qualified education loan.” And this is for the private lenders. And he said, “Well, what’s a qualified education loan?” And he sort of read through the statute and he said, “Well, it’s got to be for an eligible student and an eligible school, blah, blah.” And he looked at the loan and he said, “Well, this isn’t that. This guy was attending an unaccredited career training program.” He’s like, “This isn’t an accredited program. It’s not a qualified education loan.”
And then he came to this third part, which is this very strange language that says, “Or an obligation to repay funds received as an educational benefit, scholarship or stipend.” There wasn’t a lot of law on what that meant. And the judge said, “Well, it seems to me that this debt provided an educational benefit so therefore, it’s non-dischargeable under number three. So let’s move on to the undue hardship challenge.”
And it just struck me that that was insane–or maybe not insane–but just wrong. Why would Congress accept two very specific types of debt and then the third one say, “And any other loan that provides educational benefit.” That’s like sort of–the way I’ve always thought of it–is like walking into a mini mart and you say, “Hi, do you guys sell alcohol?” And he says, “No, we don’t sell Budweiser in cans and we don’t sell Jack Daniels in bottles, and we don’t sell any alcohol.” Why would you need to go through those first two if number three covers all of them?
And so I started to do a lot of research. And I knew that was wrong but I didn’t know why. And then I couldn’t figure out how to prove it. But I started playing around and when you look at that statute again, OK, so it says, “An obligation to repay funds received as an educational benefit, scholarship or stipend.” Well, those three words taken together (benefit, scholarship and stipend). Surely, each of those is sort of referring to a species of one genus such that, OK, a benefit should be interpreted in accordance with scholarship and stipend.
Well, what does benefit actually mean? Oh, benefit has two meanings: one is a payment made by a governmental unit or an employer–you know, like as an insurance benefit, an employee benefit–and number two is, or anything advantageous. And so it just sort of dawned on me, “Wait a second, they’re not using benefit in the second sense. They’re using benefit in the first sense such that a scholarship and a stipend are also payments made by the state or the employer.” And so that dawned on me and I was absolutely convinced I was right but I had no way to prove it.
And so what I just started doing for the next three months was reading every legislative history transcript for the last 30 years amending the Bankruptcy Code. There must have been hundreds and hundreds of thousands of pages, most of it completely worthless. But finally, I was able to start sort of… Some of them were word-searchable as you could just Control-F it and started looking for keywords and lo and behold, from 1990, I found when they had amended the statute for this particular provision, the lawmakers said, “All right guys, we need to amend the law because some of these scholarship kids are gaming the system and this is what they’re doing.”
If you get a scholarship… Let’s say you go to West Point, right? The government will actually pay for West Point but it’s a conditional scholarship. So what the government is going to do is, “All right, we’ll pay for West Point but then you got to join the Army for 10 years.” Now if you go to West Point and then you don’t join the Army–let’s say you just don’t show up to boot camp and you’re like, “You know what, I’m going into private equity. Screw this.”–the government then sends you a bill. And they’d say, “OK, well, you didn’t honor your contract so now you owe us $300,000.” Now, what that is is that’s an obligation to repay funds received as an educational scholarship.
And so what Congress said was: under the current version of the law, guys, that’s not technically a federal loan. And so kids can default on their contractual obligations to the federal government, then go into bankruptcy court and get it discharged because technically, it’s not a student loan, it’s a defaulted contractual obligation. So we need to fix this and the way we’re going to fix it is by calling this an obligation to repay funds received as an educational benefit, scholarship or stipend. And so when I found that, I was like, “OK, good. I was right. That is the right way to read this.”
Bob: Actually, I might have to disagree with you because I’m pretty sure you were a little bit more excited and you weren’t that rational.
Austin: Yeah, I was. I’d say, yeah, it was sort of that aha moment. Aha, I was spending three months in my apartment reading legislative history and I found it. So it was kind of a cool moment for me. And so I wrote the article and I got the American Bankruptcy Institute to publish it. And honestly, at the time, I thought “OK, good, I solved that problem.” And I thought everyone’s going to read it, people are going to be like “this guy is so great,” and all of the judges are gonna say, “Oh my god, we’re so wrong,” everyone’s going to fix this, everything’s going to be fine.
And as I learned, absolutely nobody read it and nobody cared. So that was a good lesson in sort of how the world works. And so I’d gotten a job at a consumer defense–oh no, I’m sorry–a defense firm in New York. And it was a great firm and really nice people doing very good work. And I just started doing typical corporate defense work and that I was always hounding the partners to sort of let me do this. So they said “What do you mean, let me do this?” I said, “Well, let me go find a client. I’ll do it pro bono and I’ll test this theory.” And they said, “Yeah, yeah, yeah. Get back to your doc review. We’ll talk about that later.”
And so that went on for a while and eventually, the e-mails and the phone calls finally got the better of them. They said, “All right. You know, just to get you off my back. Do it. Fine, go find a client and go do this.”
Austin: And so I started working with the pro bono clinic in Brooklyn and sort of talked to them a little bit about what I wanted to do and they have a lot of people coming through there who need help. And so we eventually found a client who had a bar exam loan. And this was perfect because it was one of these types of non-qualified loans. It’s not a qualified loan.
And so we filed a lawsuit and the bank said, “What on earth are you talking about? We’ve got all these cases that say any loan for an educational benefit is non-dischargeable.” And they said, “What case do you have?” And I said, “Well, I don’t have any cases, but it’s just wrong.” And they sort of smirked and threatened sanctions at one point. But we filed the case, we got a motion to dismiss, and we won.
And the judge wrote an incredible opinion called In re Campbell where she essentially adopted this interpretation. And she was sort of a better researcher than I was and found some cases that kind of hinted at this from years ago but hadn’t had the legislative history and hadn’t sort of done a thorough analysis about why this was the proper interpretation of the law. And she wrote this great opinion.
And The Wall Street Journal covered them and we got some really good press. It was on ABC News and so at that point I said, “OK, now, we fixed the problem.” And it turned out, no, one day of media attention and one win doesn’t sort of make you a hero. So I then started saying, “All right. Well, it looks like we’re going to have to sort of really do this and we can do some class actions, we gotta do some individual cases, we gotta win more opinions, we got to go to the circuits. You know, this is going to be a big operation.”
And so I put in my two weeks in my firm, took out a small business loan, set up a shop and just started filing cases. And we’ve been winning pretty much all of them. And a lot of other lawyers have started to get into the mix and the opinions have been growing. I’ve been getting some pretty good attention. And we started filing these class actions because not only is this a problem going forward but all the people who’ve been through bankruptcy over the last 12 years have been affected by this. And we think they’re entitled to restitution.
And so that’s sort of a long answer to your question and probably a little bit more self-involved than it should have been, but that’s sort of how I got to where I am today.
Bob: No, that’s exactly what I was looking for. That’s great, thank you. So I want to take a moment here and–at least on a high level– explain the specific kinds of private student loans that are subject to discharge in the bankruptcy process.
Bob: Well, the first one is unqualified institutions. And you just hinted at that with the BARBRI loan or the bar loan or whatever.
Bob: But unqualified institutions, can you give us a 30-second spiel on that?
Austin: Yes, so in order to be an accredited institution or a qualified institution, you have to be contracted with the Department of Education. And you have to be qualified to receive what’s called Title IV Funding. And what this means is essentially the government lends a lot of taxpayer-subsidized money to schools. And you can’t just set up a college in your basement and say, “Oh, I’m Bob’s Barber College, and I want my students to be able to borrow federal loans.” It’s not going to work.
So the federal government has a very rigorous and very thorough and very bureaucratic process to get Title IV eligibility. And once you get that, then you get the spigot for federal money. But if you don’t have that, you’re not Title IV, and your loan isn’t a qualified education loan.
And actually, let me just step back one second if I could because there’s an important sort of parity here between bankruptcy and tax. The original definition of a qualified education loan actually isn’t from the Bankruptcy Code, it’s from the Tax Code. And the reason is this: Congress granted tax benefits for people who are paying interest on qualified education loans such that you can deduct the interest payments made on a qualified education loan from your taxes. But that’s the reason there’s this very detailed formulas because this is the IRS after all. And they are not just going to let you say, “Well, I spent some money on some books and I took a cooking class so I wanted to deduct that from my taxes.” No, this is only for those loans that meet this criteria. So one of those criteria is it’s got to be a recognized school to participate in the Title IV program.
Another requirement is that the student be an eligible student.
Bob: Yes, I want to go into that, but…
Bob: I want to really… For the bankruptcy lawyers out there that are listening, I really want to… This is a loophole that you can drive a truck through.
Bob: So I would like you to list, just quickly, list a bunch of… Caribbean medical institutes would be an example of an unqualified institution. Can you just, off the top of your head, list some more?
Austin: Yeah. So I mean, the one qualification I’ll make is it’s hard to speak in generalities here because there’s going to be an exception to everything I say. There are some cosmetology schools that, for some reason, are Title IV eligible. But understanding there will be exceptions to this, the general list is, yeah, Caribbean medical schools, most foreign schools–there are some foreign schools that are accredited but most of them are not–cosmetology schools, truck driving schools, flight schools, generally, what we called “trade schools”, generally–I don’t know if we call them that anymore but that’s what they used to be called–hairstyling schools, a lot of chiropractic schools.
And then there are just a lot of online for-profit colleges that are just not accredited.
Bob: Oh, is that right?
Austin: Yeah. Now, not always. There are a lot of for-profit schools like the University of Phoenix that is totally legitimate. I mean, in the sense that it’s Title IV. But a lot of for-profit online schools are not Title IV.
Then you get into the ridiculous examples. There are dog walking schools where you learn how to be a dog babysitter. There are schools where you can learn how to put horse shoes on horses. This is a legitimate school. It’s not Title IV accredited but you can borrow money from a private bank to attend it.
So my general rule is if you haven’t heard of it, check it out. Another interesting thing to note, the further west you move, the more of these there are. It’s very hard to operate an unaccredited school in the east. But once you get to California, California has thousands of unaccredited schools operating because the state regulations are very loose. You can literally set up a college in your basement. And if you can get a contract with a private bank to make student loans, you’re off and running.
Bob: All right.
Austin: So, yeah, Caribbean medical schools, any kind of trade school, online for-profit colleges, these are the areas you want to be looking at or if your client says they went to a school like that, that’s when you should really perk up.
Bob: And that’s, you know… This is a loophole that’s so easy that you kind of cherry picked it for your first case.
Austin: Right. That’s right. Yeah, that’s what we want. There are a number of requirements, some of them are tougher than others but, yeah, exactly. A bar exam loan, BARBRI, is not a Title IV program. And so we were fortunate that that was one of the ones that came to us early because it was the easiest one to win for sure.
Bob: Awesome. OK, so then the second issue is one that you’ve already brought up, but it’s the unqualified persons.
Bob: So can you go into that, please?
Austin: Yeah, so the eligible student is you got to be a U.S. citizen and you’ve got to be attending more than part-time–oh, I’m sorry–part time or more. So if you are only attending–generally, I think it’s six credits is half time–so anything six credits or above, you’re an eligible student. But if you’re taking five credits or less, which I have seen reports say that’s 12 percent of the student population, you are not an eligible student. You’re not eligible for Title IV funding. Any money you got must have come from a private bank, and it’s not a qualified loan even if you were at a real school because you were only a part-time student.
So US citizen and half time or more, those are the two things to look for.
Bob: Now I saw the PowerPoint presentation that you and Michael Jaafar presented, I think, at NACBA.
Bob: And this is a recollection, but I thought it mentioned something about eligible foreign students.
Austin: Yeah. I mean, that’s the… I think there are some eligible foreign student exceptions. I can’t think of what they are off the top of my head.
Bob: OK, that’s fine.
Austin: But yeah that… This is where you sort of need to look at the code or use the Best Case tool because–and this is why so many people have ignored it–because when you start to take apart IRS regulations, there is an exception to every exception to every rule.
Austin: And it becomes very cumbersome and burdensome to work through. But what I’ll remind people of: the burden is on the creditor. I don’t have to prove my client was an eligible student or an ineligible student. The bank has to prove they were an eligible student. And a lot of people miss that. No, no, no, this is not my burden. You got to prove this is a qualified loan.
And they say, “So how am I going to do that?” I say, “I have no idea how you’re going to do that. And frankly, I don’t think you’re going to. But don’t try to tell me this is my problem.”
Bob: So the third… I think there is a third major category, which you call the Cost of Attendance issue in your seminal article, is that the last major category?
Austin: Yeah. I mean, I think there’s a couple of minor categories that really haven’t been fleshed out too much in the case law. But, yeah, I mean, Cost of Attendance is certainly–and I think Cost of Attendance is also the biggest, this is the biggest area–and what Cost of Attendance is is for people attending accredited schools.
You could be attending Harvard, you could be attending the University of Illinois. But again, getting back to this tax distinction, every penny you spend when you’re in college is not a qualified expense. The only penny that we’re going to allow you to deduct the interest from are those that are made within the Cost of Attendance.
And what’s the Cost of Attendance? That is the addition of tuition, room, board, books, sometimes a computer, sometimes health insurance. It’s up to the school, but the school has to publish that and it has to be reasonable, right? In order to maintain Title IV eligibility, you’ve got to be proving that you’re not ripping your students off. So if you are running… You know, at the University of Oklahoma, room and board better be a lot less than it is at NYU because you’re living in Tulsa, Oklahoma not the West Village. And so the Cost of Attendance is school-specific, but it is a strict number.
And what happens is you start your year and you’ve got–let’s just say for the sake of argument–$30,000 in qualified education expenses. That’s what the Cost of Attendance is. Federal government’s probably going to lend you $8,000 or $9,000. Maybe your parents are going to chip in a little bit, maybe you’re going to work over the summer and you’re going to start paying into that. Once you hit $30,000, every dollar you get above that is not a qualified education expense. If you want to live in a nicer apartment, you want to buy a car, you want to go on spring break… Or you just love reading and you want to buy a first edition set of Shakespeare’s complete works, that’s fine, but that’s not a qualified education expense.
So, you know, people get often tripped up about, both ways. “Well, what if I use the money for legitimate educational expenses?” Or “What if I used federal money for alcohol and drugs?” Well, no. The question is not how you use the money. The question is: was it within the Cost of Attendance?
Bob: OK, so let’s break this down.
Bob: So by the way, I looked this up. I looked at some of the data sources and in this spreadsheet that you can download from this data thingy that Mike Jaafar actually…
Austin: Yeah, IPEd. Yeah, the Department of Education is required by that higher education act to keep a database on all of this and make it public.
Bob: OK, so we’ll link that data source in the transcript.
Bob: Man, these tuitions are crazy.
Austin: Well, they are. I mean, and that is a problem in itself. But I think I said before, we need to make sure the schools aren’t ripping you off. But I guess that’s a little bit subjective. I mean, the tuition rates… I think the figure I saw was they’ve been increasing eight times faster than the consumer price index or something like that. I think…
Not to sound like a sort of nostalgic conservative but I do meet people who say when they went into college, you could pay for college by working at a bar over the summer. That was the general consensus, you can make $5,000 or $6,000 over the summer or whatever it was, and that will pay for your college. And that is so far beyond where we are now. And I don’t know how we bring it back to some sanity. I know a lot of people have different ideas about how we got to where we are. But you’re right, it is outrageous in a lot of ways.
Bob: So I just pulled up the numbers for Harvard just for the heck of it.
Bob: And the tuition alone is $43,000.
Austin: Yeah, right.
Bob: So the Cost of Attendance would then have to kind of… Or the loan would have to be in excess of $43,000 in order to be eligible for discharge through the…
Austin: That’s right. And I will make one important distinction here: the code actually says the loan must be made solely for qualified higher education expenses. And that means it’s $10 of… So let’s say you go to Harvard, it’s $44,000. You borrow $43,000 from the federal government, right? And then you borrowed $20,000 from the bank…
OK, so $43,000 from the federal government, all qualified. $1,000 from the bank is qualified, but the other $19,000 is not. The whole thing is dischargeable because, unless the entirety of the loan was within the Cost of Attendance, it’s what’s called a mixed use loan and the interest is not tax deductible and it’s dischargeable in bankruptcy.
Bob: What about something where like the interest and penalties make the balance on the loan $7 trillion.
Austin: So, yeah. No. Nice try, but no, it is at the moment of origination.
Austin: So, yeah, I mean, it will balloon after that but what we’re looking at is how much was originated.
Bob: So the trick there is that you listen to the prospective client explaining the situation. Then you go into the database, you calculate their tuition plus room and board plus whatever, all the things that you mentioned, and then you compare them to the amount of loans that they originated in the year. And then, I believe, I think I read this in an article that you wrote where the first thing that you do is you eat up some of the Cost of Attendance kind of the… The federal student loans get the first bite at the apple.
Austin: Well, that’s my argument. My argument is that the federal government has priority. There’s no consensus on that yet. You know, I’ve been through some judges who say,”No, no, no, we’re just going to do this on a ‘first in, first out’ accounting system.” And then I’d say, “Well, what do you count as first in?” I mean, if… You know, the federal government sometimes will disperse the money throughout the year, so how are you going to do the timeline on that? And that is… But that’s certainly the argument I make, federal government is priority.
But there is going to be some sort of timeline. Generally, in my experience, the private loans come afterwards. You’re generally going to get your federal money in August and then you’re going to get the private loans in September or November. So most often, I don’t have a problem with this.
But, yeah, there are going to be some times, I think, where if it’s really close–and I don’t mean to diverge here but let me bring up one other point– there is a major difference in private student loans between what are called school certified loans and direct to consumer loans. And I think I mentioned this earlier but school certified loans, the money isn’t given to you. The money is given to the school. And sometimes a client will come to me and he’ll sort of show me all of his loans and it’s not only loans but it was also scholarships and grants.
So I’ll look at his statement and let’s say he’s got $20,000 in eligibility. So he’ll get $6,000 from the federal government and he got $1,500 state scholarship, a couple other things. And then he’s got some private loans and it adds up to $20,085. Now based on what I just told you previously, well it doesn’t matter. The private loan’s $85 over. It’s dischargeable, and that may be true.
But I have to say that when it’s a school certified loan, I’m less confident that we’re going to be able to get it discharged because it has this sort of more fundamental student loan quality to it. And most of the people with those kinds of loans frankly aren’t above the Cost of Attendance.
The people that you’re going to run into that have the real problems are the ones who got into these direct to consumer loans, and the banks did $50 billion or $60 billion dollars in these. So there’s a lot of it out there. I mean, with interest and fees, I’m sure it’s well over $100 billion, $150 billion by now. And it’s not even close for most of these people. Their college was $15,000. They borrowed $12,000 from the federal government and then they got $60,000 in direct to consumer loans.
So very often, I find that the people that are really in trouble that need my help, it’s not… You don’t have to do this painfully careful analysis. I mean, you should do it in order to be thorough. But if you’re getting into a situation where you’re having to count pennies and which penny came first which penny came second, that’s a tougher argument to make, I think, in court. And there are… The direct to consumer program was so broad and so massive. That’s where you’re really going to find these problems.
Bob: Are these institutions still making these sort of direct…
Austin: They’re not really making them anymore. You know, the New York Attorney General really cracked down on a number of the banks. Congress got involved. The CFPB started getting involved. And they didn’t outlaw them but they said, “Guys, these are super dangerous. And they’re not really student loans.” And so most of the banks 2008-2009, you read their annual reports and they say, “We have voluntarily ceased our direct to consumer lending and now all of our loans are school certified.” Well, it wasn’t really all that voluntary.
But also it is partly because credits dried up in ’08 after the crash. So between that and the congressional investigations and a default rate on these things–I mean, the default rate was 40%, 45%–so they just stopped.
Bob: And if you are a lawyer and you’re kind of just scanning for a name of institution names that gave out these kind of direct to consumer loans, what are the names that jump out?
Austin: Yeah, so the biggest ones you’re going to look for are Navient or Sallie Mae, they’re sort of the same entity. A really big one is the National Collegiate Trust. Oftentimes, those are serviced by American Education Services, AES. But Navient, Sallie Mae, National Collegiate Trust, American Education Services, those are sort of the biggest ones. I would say eight out of ten of the clients who walk into your door with student loan problems, if they’ve got private student loan problems, are going to be with one of those two.
And then Wells Fargo, Citibank and JP Morgan were all involved in this but to a much lesser degree.
Bob: This is all very exciting. One of the very exciting elements of this is that you’re able to discharge private student loans. But there’s another element that–as someone that helps bankruptcy attorneys–has got me really excited, which is that there’s deep pockets and there can pay off for attorneys fees, FCRA violations, FDCPA, TCPA, all that stuff.
But I want you to explain this in your own words, what are some of the things that can happen and how can a lawyer get paid on these cases?
Austin: Yeah. I guess, let’s talk about the two ways to get paid. The first way, obviously, is that your client has to pay. This can be complicated work and bankruptcy lawyers need to earn a living. And so what I generally do sometimes… I will tell you this, more and more often, a lot of these kids’ loans were co-signed by their parents and their parents will pay me to do it. And so that’s one way. You know, the millennial generation, 25 to 35, if the parents are involved in any way, sometimes they can pay you hourly to do it.
I do charge hourly or sometimes I’ll do kind of a reverse contingency fee where I’ll say, “All right, you pay me 10 percent of whatever the value of the debt is I discharge for you.”
Austin: And a lot of times… And that’s sort of how I do payment plans. So you can pay me over a year, over two years.
Austin: So one is we try to work with the parents. Two is try to do some sort of payment plan or reverse contingency fee. In my experience, these things, first of all, they don’t really go to trial. And so you can do one of these in 20 hours, 25 hours really at most. So it’s really not as much work as you might be afraid of. You know, you file the complaint, do some discovery. And the more and more of these cases we win, I think, the less work they’re going to become because the banks, they are fighting us very hard on this “all student loans are still non-dischargeable” idea and they keep losing.
And we recently won at the Ninth Circuit BAP. So you really can’t make that argument in the Ninth Circuit anymore. And so that, I think, over the next year as we win more of these and we hopefully get some circuit opinions, the banks will stop making that argument and these things will become even more quick
So think about it, a 20 hours, 25 hours of work–however you’re going to value that–for your client, I think they’ll try to work out if there’s a family member who can help pay, if they have a job and you can work out a payment plan. Those are my two suggestions for how to get paid if you need to be paid by the debtor.
The more lucrative way is to make the bank pay. And the way you do that is pretty simple actually. But the problem is it has to be an old bankruptcy case. So what you need is go through your old file and try to think about, “Oh, I remember the lawyer that came to my office. He probably had a bar exam loan.”
All of those loans–so many people also miss this–when you get your discharge, it’s not like it sends certain loans into this kind of debt purgatory. It’s a final determination. Either the debt was discharged or it wasn’t. And there’s important case law that says… And the parties may not even know. The bank may say it wasn’t discharged. You may say it was or you may not know. You may agree with the bank but it doesn’t matter. It either was or it wasn’t.
And what you can do is you reopen your bankruptcy case and you file an adversary proceeding and you say, “Look, not only was his debt discharged but they’ve been hounding me to pay it. And these are discharge violations.” And bankruptcy lawyers–I think they’re pretty familiar with those–it’s a claim under Section 524 of the Bankruptcy Code, which is a permanent injunction that if the creditor’s trying to collect on a discharged debt, they’re in contempt of court. And the court can order not only them to pay your attorney’s fees but punitive damages. And a lot of courts will award up to $500 per collection attempt.
You know, there was just a case in the Ninth Circuit the other day where the bank entered $119,000 in punitive sanctions. And they said, “Look, every single phone call you made after the discharge is a discharge violation and it’s $1,000 apiece.” And the Ninth Circuit BAP upheld that.
And not only that, sometimes we go into state court or into federal court and assert FDCPA claims. Trying to collect on a discharged debt is a misrepresentation of the legal status of that debt. And so there’s a number… There are people…
You can probably think of other kinds of tort claims or statutory claims to bring. You know, when the fundamental issue is you are… Essentially it’s fraud, right? You are trying to collect on a debt that–and we’ll get to this later–you know is not owed and you’re making a misrepresentation to the person who owes money, the person who is relying on, and they’re paying you. That’s fraud.
Bob: Well, there’s… I mean, you get into the issue of intent, like did Navient–let’s not say Navient–but did institution X knowingly try to collect on a student loan knowing that it was discharged in the bankruptcy?
Austin: Well, I’ll tell you why I think you’re going to have some success with that. It’s because they tell their investors that these things are dischargeable. So they are telling the consumers they’re non-dischargeable but they know they’re not going to get away with that to sophisticated parties on Wall Street.
So you read the prospectuses for these student loan trusts and they say, “Hey, guys, watch out. A lot of these loans are not qualified education loans and they may be dischargeable in bankruptcy.” So you’re right. I have not successfully sued someone for fraud but one day, I hope to.
Bob: OK. So in terms of collecting from the debtor, where you’ve outlined these statutory penalties for violations of Section 524, are there other penalties as well? Or other deep pockets?
Austin: There’s sort of three people you can go after in one of these situations. You can go after the bank that owns the loan. You can go after the third party servicer who is trying to collect on the loan. And I generally sue both of them.
And the third person is the credit reporting bureau. You can complain to the credit bureau that this loan was discharged in bankruptcy and they have to remove it. And if they don’t remove it, you can sue the credit bureau. And so that’s sort of the three people–you know, you may be able to think of other people–that you can sue who have some liability for violating your statutory rights.
Bob: When I was speaking with Michael Jaafar on the podcast earlier, he also mentioned that if you have a student loan or private student loan that was discharged in bankruptcy maybe 5, 10 years ago or that should have been discharged, the student loan servicer claimed that it wasn’t discharged, made you pay for 10 years. And so you have that kind of cumulative pot of gold.
Austin: Oh, yeah.
Bob: So you can get that back.
Austin: Oh, yeah absolutely. Yeah. I mean, that happens I’d say about half the time. That’s right, yeah. That’s not only punitive damages but right of restitution. Any penny they pay with interest gets refunded.
Bob: Oh, wow. With the interest, I didn’t know that. How did they calculate the interest rate?
Austin: I think, generally, states have statutory rates. I think it’s like 7% or 8%.
Bob: Oh, OK.
Austin: Yeah. It’s not going to add up to a ton. I mean, that’s you know… I mean, it may add up to something but you only pay back $600, $700, which is generally what I see. But I’m sure there are people out there who’ve repaid thousands and thousands. And in that situation, yeah, the interest would be very important.
Bob: So I’d also like to mention that if you are able to discharge a student loan in the bankruptcy process, it’s my belief–and correct me if I’m wrong–but it’s my belief that that’s not a taxable event because it’s being discharged through the bankruptcy process.
Austin: That’s very important. And, yeah, I think that’s exactly right. And when you’re doing one of these, you need to make sure… And a lot of times, you will come to a settlement. And part of the settlement needs to be: no 1099 will be issued on this because you do not get a 1099 for debts that are discharged in bankruptcy. That’s right. That’s very important.
Bob: So you’re saying that… I’m talking about going to trial and getting something verified as dischargeable student loans. But obviously, there is a settlement [process]. Does a loan servicer kind of have the ability to say, “We won’t issue a 1099.”
Austin: The loan servicers, no. You’re going to need the bank for that.
Austin: So as I said, I generally sued both. And because, yeah, I think that’s probably right. I think that the third party servicer thinks that you’re only suing them. I mean, the problem with this is you can’t…
Actually, I don’t know that you could get away with just suing the third party servicer because they don’t own the debt. So I mean, they couldn’t settle it, for instance, because they don’t own it. So you’re going to have to bring in the guy who owns the loan.
Bob: And what about the entity of the student loan trust, which I believe is the agent that securitizes this student loan?
Austin: Yeah, that’s exactly right. So that’ll happen… It gets a little tricky there. National Collegiate Trust, what’s going to happen is your client’s going to say, “I make all these payments to American Education Services every month.” And you say, “OK. Well, that’s probably National Collegiate Trust.” And so you’re going to sue National Collegiate Trust and they’re going to come back and say, “Well, National Collegiate Trust isn’t legally a thing. You need to sue the specific trust that owns the loan.”
So then you have to generally amend your pleadings and sort of put in the proper name. Because in my experience, you can never find out who the trust is because you’re not paying that trust. You pay AES and then they give it to the trust who owns the loan. So when it comes to National Collegiate Trust, that’s sort of an additional hassle. Navient or the other banks, although a lot of their loans are securitized, there’s some kind of beneficiary ownership that you can just sue Wells Fargo or sue Citibank or sue Navient, Sallie Mae. And that’s going to be the proper party.
Bob: So, Austin, how can people start filing these cases? Well… OK, so let’s say that I’m a lawyer–which I’m not, I’ll plug myself and say that I’m a marketing consultant for bankruptcy lawyers specializing in Google AdWords–but if I were a lawyer and I came to you and I said, “Please, sensei, I want you to teach me how to do these cases.” What would you advise?
Austin: I guess there’s two things. One, how do you do these cases? And two, how do I find these people? And I’ll put in a plug for the Best Case software right now. I spent the last year working with them to create this platform that will essentially automate everything we’ve just talked about. You just put in your students’, your customers’, your clients’, rather, student loan information. It will aggregate all of it. It’ll run it across the Department of Education and it’ll spit out a nice clean form that answers all your questions.
Austin: So that’s… It can also provide you pleadings, a complaint, a motion for summary judgment, and all the things you need, discovery requests, to get this done. So I would… If they say you’re a Best Case customer, that’s a very useful product. If you’re not…
Bob: Wait, let’s stop there because I believe the product is called the Student Loan Analyzer. Is that right?
Austin: That’s correct, yes.
Bob: So it’s my understanding that you were involved in creating this product. Is that true?
Austin: Yeah, that’s right. Best Case really is… My hat’s off to them because they’re not only a very competitive organization, but they really, and I mean this, they want to help their clients, who are bankruptcy lawyers, help their clients. And so when I first started doing this, I got introduced to Dave Danielson, who’s the CEO and this was… It was really kind of a crackpot idea but he really saw some value to it and said, “Look, we hear this problem. This is an emerging problem. It’s going to be getting bigger and bigger and how do we help these people? How do we help the lawyers help their clients?”
And so we started to workshop on ideas to the extent you could create a computer program that will tell you whether your loan is a qualified education loan or not. I mean, that’s really the biggest hurdle because actually when I first started doing this, it’s really hard to figure out sometimes. It is kind of a formula but until you develop that sixth sense about it and you can spot these things, it’s very complicated.
And so we were hoping that that was going to be a tool that people could use that would assist them with this, get them comfortable with it. You know, we did some blogs and some videos to try to just make this as simple as possible. There are some complicated issues but it’s very doable. And to the extent that there’s also a feature on the product that will search through your old customers that you can help, people who came to you years ago with big student loan problems before we had any of this good case law, and you can reach back after them and say, “Hey, I remember we did your bankruptcy four years ago and I remember you went to an unaccredited medical school. Well, turns out, that loan may have been discharged. Why don’t we get you down here and figure out if we can get that money back and we can get this off your credit report, we can get you that fresh start that’s the whole reason you came to me.”
Bob: Yeah. So let’s drill down to this a little bit. With Student Loan Analyzer, I would imagine that the first time that you go through… you’re building a Best Case file for a client, you’re not going to ask them questions like, how many credits did you do every year in college?
Bob: So I imagine that there’s some kind of holes that you need to fill in. Can you talk about that a little bit?
Austin: Yeah. I mean, it’s got a lot of functionality but it’s not… For instance, there’s something we didn’t talk about yet, the idea that unless you are a qualified taxpayer, there may be some discharge-ability issues. So there are… Because it’s such a complicated statute, the tool itself isn’t gonna answer every question you have.
What it’s going to do is, your client’s sitting there: “where’d you go to school?” Type in the school’s name and it’s going to pop up. Yes, that’s accredited or no, it’s not. OK. So it’s not accredited, well, you’re done. Now you know that the student loan’s dischargeable. All right, let’s say it is accredited. All right. Well, can we look at your credit report? We’re gonna have to find out how much money did you borrow. To the extent that they remember and say, “Oh, no. I was only attending school at night on the weekend.” And we say, “Oh, OK. Well, then it’s not accredited. I’m sorry, then you’re an eligible student.”
So there is a certain amount of information that you’re going to need to get out of your client to make the tool work. And I think it starts with the most basic and the easiest: was the school accredited? How much did you borrow? Were you a full-time student? And as you work through these, sometimes your client’s not going to know and you’re going to need to get them to get more information. And so this is where it does become a little bit of a process.
But if the client’s sitting there with $200,000 in debt, it’s worth them tracking down some documents to get to the bottom of this.
Austin: But yeah, the tool doesn’t do all the work for you. You’ve got to do some real input for it.
Bob: No, I get it. I mean, this isn’t Hogwarts.
Austin: Right. Exactly.
Bob: But if you’re a lawyer like a lot of my clients, they file 500 cases a year and so over the last ten years, they have 5,000 cases. Are you saying that if you do use Best Case, you can kind of go in there and… So how would you use Best Case to analyze a corpus of 5,000 cases?
Austin: Oh I see what you’re saying… All right. Yeah, I should clarify that. Looking back, all you’re going to able to do that with looking back is to find out to the extent it was a student debt and who the bank was or the owner or the lender was. Yeah, you’re not going to have any of this information about that in your file. So when I talk to people, I would say, “Well, pull up everyone with a Sallie Mae loan.” Or “Pull up everyone with a National Collegiate loan.” And sometimes people pull up to 2-300 people and you say, “All right. Well, you can send them a letter. These are your clients.”
And that’s sort of where the bankruptcy lawyer’s gonna have to make his own marketing determinations about what do I want to do, how do I want to contact these people, how can I help them? And that’s when they’re going to, at some point, come back in. And then you can use the Analyzer. But they’re going to need to then to do that input. So that sort of looking back feature isn’t going to have the data you need at that moment.
Bob: Yeah, but the cool thing is that you can use Student Loan Analyzer to find the needles that are worth contacting in your haystack.
Austin: You got it.
Bob: And then once you find the needles, not everyone is going to be a true.. Let’s call them.. Not everyone’s going to be a “gold needle” but…
Austin: Right. Yes. Yeah, that’s exactly right. You can at least find the needles or, I guess another way to say it is, you can sort of make your pile of hay a lot smaller and you can say, “All right, well here’s my defined universe of people with student loans. How exactly can I find out which ones are eligible for some relief?” And that is… You know, different lawyers have different ideas about how to do that and whatever is most efficient and whatever makes more sense for you once you’ve got that list of people.
Bob: Awesome. And then when it comes to answering these questions, are you suggesting that the way Student Loan Analyzer works is that it’s kind of like I use TurboTax and so I just fill out a little wizard and then it tells me how much tax I owe? It’s a similar kind of wizard?
Austin: Yeah, it’s very similar. And actually, it’s got some other great features because this is not as we talked about… Of the $1.3 trillion, $1 trillion of it is federal debt. So a lot of these students can have federal loans.
But it will also do an undue hardship analysis for you. If you put in the data it’ll say, “You are in the Central District of California. There have been 37 undue hardship proceedings in Central District of California in the last 10 years, and 26 of them have been successful. And in fact, they will go down to the judge and see this judge has heard 3 undue hardship challenges and he’s granted all three of them or he’s denied all three of them.” So it’ll sort of give you an idea about, “All right. Here’s my client’s income level. Here’s their expenses.”
The other thing we did want to sort of point out to people was to the extent that the loans are excepted from discharge, don’t stop there.” The federal government can be a beast in litigation.
But if you’ve got a qualified private lenders, file an undue hardship challenge. And if your client’s making minimum wage and they’ve got a serious burden, you may not be able to win an undue hardship challenge but you can certainly work something out in settlement. It’s gonna be a lot better for your client. So it’ll sort of give you some guidance on how to do that because as I think I probably said, 99 percent of cases are settled. So do not imagine that when you file this case, you’ve got to be ready to go to trial. I mean, you’ve got to file it in good faith and you’ve got to believe your client has a right to relief.
But if you’re a bankrupt student, I think you have a legitimate reason to file an undue hardship challenge if you are not making enough money to service your debt. And so file them, get those on file. And I think you’ll find you’re going to have some very happy clients. And as we talked about, you can build out a sub-practice here and start generating more revenue for your practice.
Bob: OK. Well, the last thing I want to just ask quickly about is income-based repayment plans for federal student loans. Does the Student Loan Analyzer do anything on that front? I know we’re asking it to do a lot but…
Austin: Yeah. What it will do is to the extent that you’ve got a federal loan problem, it will refer you to a third party that is contracted with Best Case to help people work through their income-based repayment. Because although some of the paperwork can be a little bit troublesome and working with the federal government is always a bit of a nightmare. So they have a…
It won’t do it itself but it does have a resource that can assist your client in getting into one of those programs because that’s the first thing I tell people. If they’ve got a federal loan, get into an income-based repayment. That’s what I’m in. $200,000 student debt myself and I pay a significant amount each month but it’s doable. It’s 15 percent of my income. And it’s fine. It is far better than the alternative, I think, which is paying those market rate, based on principal and interest.
Bob: Austin, have you thought about leading a workshop on some of these topics? I’m putting you on the spot. If you don’t answer the question, that’s okay but…
Austin: Yeah. I would… Yeah. And I’ve talked to Dave Danielson, the Best Case about it, and we’re very interested in doing that and how we can get… We presented in NACBA and I think it’s… Some of the stuff that’s hard to understand. At first, it seems complicated but like anything, once you start working it, it sort of becomes second nature. But yeah, now that’s something we do need to do because education is a big part of this in sort of breaking through the gridlock and so that’s something we’re certainly exploring and wanting to do.
Bob: Let me ask a nitty-gritty question. You said earlier that it’s the obligation of the bank to prove that they are not subject to discharge.
Austin: Yes, that’s right.
Bob: Does that mean that, in terms of calculating the Cost of Attendance, though, they’re not going to know all that information. Do they have to use the Cost of Attendance? Do they need to generate that or do you need to put that the Cost of Attendance information in your brief?
Austin: That gets into discovery issues. In discovery, you have an obligation to provide any documents that they’ve requested that’s under your control or like readily accessible. And this is such a new area of law, I don’t know some of the answers to those questions. To the extent that they’re going to try to find… In my experience, they go directly to the source. They go to the school and they subpoena the school and they oftentimes have to get the school to testify.
And I think this is partly where–and I don’t mean this to sound like a gimmick or anyone should be acting in bad faith–but this is a real advantage that you have in litigation. This is not easy to prove. They’re going to have to call witnesses. They’re going to have to subpoena records from the Department of Education, probably from the IRS. And so when your opponent is sitting in their law office trying to figure out how to prove this is a qualified education loan, that is, I think, real leverage that you have to the extent your client is interested in some kind of equitable settlement.
And lawyers, that’s such an important point. Keep the legal burden where it is. Your burden is to prove undue hardship. Their burden is to prove it’s excepted from discharge. And that is not easy to do. And you don’t need to… You have to abide by your obligations as a party to a lawsuit to produce relevant documents that are in your possession. You do not have to go out to the Department of Education and get this information. That’s for them to do.
Bob: On the flip side, on the Department of Education website that has all this data which I’ll link to the transcript. But, man, it’s hard to follow. Does that information get sucked into Student Loan Analyzer? Or…
Austin: It does. Yeah, so that’s where the Student Loan Analyzer has pulled all of that data and it aggregates it for your clients specifically based on the year, and the school, and where they were.
Bob: Oh wow.
Austin: Yeah. Yeah, which is nice because, I mean, the website is… It is not all that user-friendly, unfortunately.
Bob: It’s terrible.
Austin: You know, it took me about six months to figure out what I was doing on it and how I could find the information, which is a part of the genesis for the Student Loan Analyzer was… This is… I mean, that used to take me two or three hours for a client. And now with the Analyzer, here’s a nice little plug, that’s two or three hours saved. You just type in the info and you got it.
Bob: And it’s like any of the other bankruptcy softwares out there. It will prepare all the filings you just kind of print and then review.
Austin: That’s right. You got it.
Bob: That’s awesome.
Bob: OK. Is there anything that I haven’t asked you that should have asked you in terms of understanding the private student loan issues out there?
Austin: I don’t think so. I think you were pretty comprehensive and I think we covered everything.
Bob: I mean, correct me if I’m wrong, but, well, you were telling me earlier that you’re getting all these phone calls every day from people.
Bob: I mean, you’re getting essentially free leads which is something that most people out there would love…
Austin: Yeah. I know. And I’m a one-man band. And so I can’t even keep up with all of it. And we are… To the extent that other lawyers get involved in this. I mean, there’s a wonderful lawyer in Florida and there’s some lawyers in California, there’s a great lawyer in Missouri who I’ve sort of developed relationships with and when I get a call from someone in California, I refer them.
And we would love to grow that more, that kind of network of student loan attorneys because there are so few of us. So some will be quoted in an article and they’ll get a bunch of calls from people all over the country. I’m not a Missouri lawyer so I can’t help them.
So to the extent, we can build a 50-state network for people who do this or interested in doing this. I mean, there’s so much work to do. By my estimates, there are 250,000 people right now who have been through bankruptcy who have non-qualified private loans who are being harassed into repaying them. And that’s a lot of people. You know, when you think that to do some numbers with you, if you file an FDCPA suit and you gave some refunds or whatever, value one of those cases at $10,000. That’s $2.5 billion in attorney’s fees. Not to mention restitution. That is money that currently is possessed by the bank that should be in the pockets of the debtors and the attorneys for doing the work. And so that is something like…
So that is just gold in the streets waiting to be picked up. And as we talked about before, there’s this wonderful confluence of self-interest and altruism. This is a problem that not only helps people. I mean, these people’s lives have really been hurt by this. And you can both help them and make some money doing it, which is sort of the American dream, I guess, in a lot of ways.
And so I really… People say, “Oh, don’t you want to keep this to yourself?” No, I don’t because there is so much of this. I could never conceivably do all this myself. And there are people all over the country and we’ve got a big active bankruptcy bar that has all the tools right now to resolve this problem, not only for the 250,000 people who are currently operating under this disability but think about all the people over the next 20 years that will be coming to your offices. I think it’s a real opportunity to get involved in this space of litigation and do some really good work and make some money doing it.
Bob: Yeah. Do you think that beyond it being an opportunity, that it’s also an obligation, that it’s almost legal malpractice or legal malfeasance to not…
Austin: Yeah. I mean, I’ll say this just candidly. Sometimes I talk to lawyers who are very worried about this: “Was I committing a malpractice for the last 10 years?” And you absolutely were not. There were no cases that said this. The case law was pretty clear: no student loan could be discharged. So that was a completely reasonable thing to think and tell people. I think that now, as you know, this is getting more attention and more cases are going this way, yeah, I would say you probably have an ethical obligation to look at this. Or at least be very clear with your clients that this is just not something you do.
But I’m sort of on the side of, that may be right… You may be doing a big volume bankruptcy practice and this isn’t something you’re interested in. That’s fine. But I think that one thing I would say is, tell your clients there’s nothing they can do about this, that’s the statement that needs to stop. You know, the statement can be, “I can’t help you but go find someone who can.” But so many people come to me and they say, “Well, my lawyer told me I couldn’t get rid of this.” And that was probably… It wasn’t a true statement when the bankruptcy lawyer said it but it was a reasonable statement. I don’t know how much of a reasonable statement that is anymore.
And so I’m hoping over the next year… These things don’t happen overnight but over the next couple of years, that narrative starts to change. And that’s when the power really is going to shift, from the creditors bar to the bankruptcy bar, when these consumers and the bankruptcy lawyers stop sort of rolling over for the creditors and start saying, “Screw you guys. You prove to me this is a non-dischargeable debt.”
Bob: Do you think that bankruptcy lawyers are… Do you think it’s fair for them to charge additional amounts of money for the service? Because they have to do a lot more work.
Austin: Absolutely. No. Yeah, I always tell them that: “Look, this is a professional service you’re offering. No one expects you to do this for free.” And clients don’t expect me to do it for free. I mean, I work out with different clients, different payment arrangements. But no, I mean, we’ve got to eat. We’ve got lives to lead.
This is a very valuable professional service and to the extent that there isn’t a deep pocket to sue, no, this is extra work, this is extra labor. You know, bankruptcy lawyers are working under very tight margins sometimes and it is absolutely right that they get paid for this work.
Bob: So do you think a fair thing would be whatever they earn for, say, a Chapter 7 but in addition to that, a 10 percent reverse contingency fee?
Austin: Yeah, I think that might be great if you want to do it hourly. I mean, a lot of this can be done. Once you start doing it, you’ll have all the documents and you get used to it. It’s not very hard. Yeah, but I think 10 percent reverse contingency because a lot of times you’re going to settle. So you’re not going to get the whole thing erased. I think that’s a good way to do it.
Or you know, when I do hourly, I frankly try to work with the client. I try to work out a payment, an hourly rate, that they can afford. I don’t like to sell myself too short just because then you get into a problem of “what is my hourly rate?” That’s some marketing and financial thing that each lawyer needs to decide for themselves. But no, I don’t think this… Given what the Chapter 7 fee is for, this is a lot more work and you need to get paid for it.
Bob: Well, how do you handle the fact that you’re essentially having the client incur a loan… I mean, you’re providing this work on spec but then they go through the [Chapter] 7 discharge process. Why won’t your legal fees be discharged along with all the other debts?
Austin: Well, that’s a question that I don’t know… I am not a bankruptcy lawyer who handles people’s actual Chapter 7s, so that’s not a problem I’ve had to deal with yet. People don’t usually find me until after their discharge. So that is a question I’m not qualified to answer. I don’t know exactly how that works but I assume there is some contractual way to do that. But you got me there.
Bob: Yeah. I mean, my answer–and again I’m not a lawyer–but based off of my conversations with other lawyers that you can split up your fees between pre-filing and post-filing.
Austin: Yeah, that could be right. Yeah. Yeah, I assume this is not the first time this problem has arisen. There must be an ethical workaround. Not that you’re working around the ethics, but that is ethically a workaround.
Bob: Yeah. And so the way that they handle that is that after the filing–I don’t know if it’s at the 341 meeting or wherever it is or when it is–but after the filing, then you have them sign a new contract where they…
Austin: Yeah, I think that’s right. I think that’s right. I think that… Another way I like to think about it is even beyond the qualified student loan problem, when we talk about undue hardships, we’re talking about several billion dollars in private student debt that’s going to be going through the bankruptcy courts over the next few years. I think it’s absolutely reasonable to think that based on not only unqualified loans but even qualified loans with an undue hardship challenge, you can cut that in half. So we’re talking about…
Lawyers are going to essentially erase several billion dollars in debt and they have to get paid for that, right? That’s not free. But when you think about it with sort of the macro numbers like that, I think people get a little bit more excited and think, “Oh my gosh, you’re right. So we’re going to take $5 billion and we’re gonna turn it into two and half.” Well, there is some value in cutting $5 billion in half. One of the tricks that I think is–I have not entirely figured out and I hope other smarter, better marketing guys are going to do it–is how do you how do you monetize that? Right? What’s the best way to monetize that? That is a really important service you’re providing to your clients. It’s not cheap, it’s not free. It needs to be fair.
But when we just sort of step back for a second and think about what power you have in front of you to erase this debt and then it’s just a matter of how do you monetize it.
Bob: Awesome. Well, that’s a great note to end on. Austin, thank you so much for coming on the podcast.
Austin: Thank you so much for having me. It’s been great.
Bob: And I’ll just end it with another call to action. If you’re a bankruptcy lawyer and you have listened to this podcast, hopefully, you’re as excited as I am. This is a huge opportunity for you. Just really get involved. Read some briefs of… Austin, would you be willing to send me some briefs that I can upload so that people can…
Bob: So read those briefs. Learn about the case law and see the precedents that Austin and other bankruptcy attorneys are setting out there because this is a huge opportunity for us all to–how did you say it, Austin?–be self-interested and altruistic at the same time.
Austin: That’s right. That’s what we’re trying to do.
Bob: OK. Awesome. All right. Thank you so much.
Austin: Thank you so much.
Bob: OK. Bye bye.