How Michael Hoverson profits by slaying “zombie debts” that bankruptcy ignores (like student loans and tax debt)

In this episode of Bankruptcy Law Success, I interview Michael Hoverson, a bankruptcy lawyer in Minneapolis who has filed bankruptcies for 31 years. Over the years, he’s also noticed that there are many debts that bankruptcy completely ignores.

So he’s learned legal techniques to slay these “zombie debts,” like student loans and tax debts. That’s one reason he’s been able to spend less on marketing, yet still keep busy in a shrinking bankruptcy market.

Some of the highlights in this interview include:

  • How Michael learned how bankruptcy can help with student loans, by practicing in a world long ago where the Bankruptcy Code didn’t have a huge student loan loophole.
  • How you can turn a single bankruptcy lead into FIVE SEPARATE CASES: (1) a bankruptcy petition, (2) an IRS tax resolution case, (3) a state tax case, (4) private student loan litigation, and (5) a federal student loan rehabilitation case.
  • When Michael uses the “undue hardship” standard to discharge student loans (and when he doesn’t bother trying).
  • Exactly how he gets clients eager to pay large legal bills to make their tax problems go away.
  • And a whole lot more, including how to make money from enrolling federal student loan borrowers into income-based repayment plans.

In this interview, Michael and I refer several times to Austin Smith, who invented an ingenious method of discharging many private student loans. To learn more, you can see my 90-minute interview of Austin. If you’d like to explore this topic even further, 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 speaking with Michael Hoverson, a bankruptcy attorney in Minneapolis.

Michael, welcome to the podcast.

Michael: Oh, good morning, Bob.

Bob: So, you first came to my attention because you identify yourself as a “student loan attorney” on some parts of your website. I know that you’re a bankruptcy lawyer, but maybe we could start by just talking about some of the work that you do with student loans.

Michael: Well, with student loans, I first started… I’ve been practicing for about 31 years now, mainly bankruptcy and consumer protection and some civil litigation. But way back, when I started doing bankruptcies, I was handling student loan cases back then — mainly in the context of bankruptcy, and that was with undue hardships. You may or may not recall… When I started in 1986, Chapter 7s, you could discharge your student loan if it was a “stale” student loan. Back… I don’t know the sequence of the years, but it started out: if this student loan was 10 years old from the day that it became due… Pardon me, instead of ten years, the student loan was… ten years old, you could discharge in a Chapter 7 bankruptcy, then Congress amended the Bankruptcy Code to shorten that to seven years, and then I believe it went to five years. And then they abolished it entirely, as far as a stale student loan. And that left, essentially, you could discharge a student loan under undue hardship, which was very factual intensive.

Likewise, which was just as important, in a Chapter 13 bankruptcy, a “wage earner plan,” you could put… your student loan debt in the plan — and most plans were what we called a “composition plan,” where you aren’t paying your creditors 100 cents on the dollar, it might be 5, 10, 20 cents on the dollar. You could put any student loan (federal or private student loans) in the Chapter 13 plan, and discharge those upon successful completion in a plan which is either three or five years.

And that was a very powerful tool to deal with student loans. That was eliminated in the Chapter 13 context, I believe it was 1989 or 90, if I recall correctly. So, over the years, it’s gotten more and more difficult to deal with student loans in the context of bankruptcy. And so I started finding other ways to help my clients with student loan debt, because a majority of my clients have student loan debt. And one of the things I did was three years ago I attended a workshop put on by Joshua Cohen who is known nationally to deal with student loans, not only in bankruptcy, but mainly alternatives outside of bankruptcy: administrative remedies for federal loans, and other remedies for private student loans such as litigation and other methods.

So, that’s that’s kind of what got me into there. And then, if you want to go into specifics of other areas we can do that too.

Bob: Sure. So, I’ve heard kind of mixed things about that student loan course. Well, I’ll start by saying that I’ve heard that you learn a lot at that course, so I’m not questioning whether you learn a lot at the course. The question is whether you can build a successful practice doing things like income-based repayment plans.

Have you try charging clients directly to put them into an income based repayment plans, has that worked for you?

Michael: Yes. The thing is, with some of those administrative remedies on the federal loans, some of your potential clients have already done quite a bit of research and and can do it themselves. Other people need some handholding and taking them through it, because it’s not as simple as just filling the form out. And sometimes these people that you’re dealing with at the loan servicers are not always looking out for your best interests.

Bob: Yeah.

Michael: There’s a lot of different types of income-based, there’s income contingent repayment, income based repayment, new PAYE, a few different ones. And some of them, it depends on when the loan was taken out, and things of that nature. So, I guess to answer your question, some people could do it themselves, some need help. What I do, essentially, is I offer a free consultation because I have no idea what what the situation is till we sit down or talk on the phone to see what they have. And quite frankly, when I get a call from a person, they don’t know what they have for student loans. I ask them if it’s federal or private: “I got a bunch of loans, it’s over $100,000, I don’t know what’s going on.”.

So you’ve got to start, kind of, to the basics and fundamentals. So I instruct them to go get a report on their federal student loans which is through NSLDS, and that’ll show every federal student loan or grant they’ve ever had, and the status of that loan, and who’s servicing it, if it’s in collections, what have you. So that’s usually 99 percent accurate, so you can at least get your hands on what they have for student loans there. Then for the private loans, that’s tougher. Get letters they have. Pull a credit report. But half the battle is just figuring out what they have. I mean, it can be extremely difficult. And so once you get that kind of laid out, then you figure out: what can we do?

If they’re being garnished, that makes it real tough. Then they typically need an attorney, because you’re not stopping that garnishment. The only thing stop the garnishment is with a…

Bob: A bankruptcy…

Michael: A bankruptcy, or you need to get the loan out a default… To get it out of default, you either consolidate or you can rehabilitate. Typically, you’re rehabilitating. And to rehabilitate… So now they’re getting garnished, they’re getting 15 percent of their wages taken. This is administrative, no legal action, nothing just right off the bat if they’re W-2 and they’re being garnished.

So, now what you’re doing is you’re going to try and get them in rehabilitation. Well, rehabilitation is nine payments out of ten months, and there’s a payment established. So, in addition to 15 percent being garnished, now you have to pay another amount that’s determined by you, the consumer, or your attorney. This is where you really need an attorney, because you can negotiate that payment. There’s a lot of room to negotiate because, quite frankly, they usually don’t have nothing to pay for this other payment. Well, you’ve got five months into the rehabilitation program, then they’ll stop the garnishment.

Then you have to complete your rehabilitation, which is nine months (nine of ten). And then you… it gets.. you take it from the debt collector, you go pick a servicer, and then depend upon the status of the loan, if they haven’t been consolidated whatever, you generally are going to be consolidating for the most part for all of these federal loans, assuming you can do it, if they meet the requirements. And then you’re going to pick your income based repayment program and get them into it.

So it’s a process. But, circling back to your question, if they’re in good standing, if (say) they’re in deferment or forbearance or they’ve just been making payments and you don’t have to go through dealing with the garnishment, or rehabilitation if it’s in default, some of your clients can do that without much difficulty. But I’ve found, for the most part, a lot of people do want help, because after you get it set up… The initial part is where all the work is done. After they’re into the program, then they have to recertify every year.

Bob: Yeah.

Michael: And typically the servicer that you’re dealing with will give you about a one or two month notification so you can recertify. And that part is not all that difficult, because essentially on these income based programs, it comes down to your adjusted gross income on your tax return and the size of your family. But there, again, somebody without legal counsel might not know some things you can do. For instance, if you’re married and your spouse who does not have the student loans has a significant income, that is a detriment to you who in the IBR program or any of these income-based programs because they’re taking… they’re including your spouse’s income in adjusted gross income. So it can be a big big difference, so I’ll have people call me and say “hey, even though you may take a little hit on refunds or what have you, you better start filing separate returns. Wife is making ten grand a year, husband is making 90. File separate returns. Now, we got an adjusted gross income of something under 10 grand, and Wife… Let’s say they have three kids, Wife can still (even if you don’t claim the three kids in a tax return) if she’s paying for half their support, you can claim that as the size of your family. Because again, it’s a function, this number is a function of the size of your family and your adjusted gross income. So that part most of your student loan debtors out there are not going to know that, you know, to sometimes split up the tax return. So, that’s one other element there.

Bob: Well, I can absolutely see how you’re adding value to the lives of your clients. I guess, on the flip side, what I’m wondering is: are you able to make this a viable practice area. So, let me give an example. I recently spoke to an attorney who gives advice for all kinds of loans but when she has advice for federal loans and does an income-based repayment program, she charges a fixed fee of several hundred dollars to get them into the right income-based repayment program, and to give the kind of advice you’ve described. Is that a business model that’s worked for you, like a fixed fee, or do you charge hourly? How do you charge for this kind of work?

Michael: Yeah, on my federal loans, unless there’s litigation, I will establish a fixed flat fee. And again, if they’re not being garnished or if they’re not in default and I just have to do the get them into the right program, the fees are going to be less because they’re my client for a few months. If I’ve got to rehabilitate the loan and then consolidate and get them into an income-based program, they’re my client for over a year. And so there’s going to be more work and more fees involved.

But, yeah, for the most part with my practice dealing with the federal student loans, it’s going to be flat fee. But I do have some other unique cases. For instance, I’ve got a person, not to get off track…

Bob: No, go ahead.

Michael: She was a client five, six years ago. And she had a bankruptcy years and years ago where you discharged your student loans if they were stale. And she had a relative do her bankruptcy and there was some bankruptcy litigation. And, in her eyes, she thought she resolved everything way back 10, 15 years ago in a bankruptcy. 15 years ago. A couple of years ago, she starts getting calls from a collection agency trying to collect on these student loans that she believed was all resolved through the bankruptcy. So then I get involved writing letters, I demand documentation, promissory notes, and accounting. Nobody responds, nobody responds. This goes on for a year and then they finally say the loans get sent back to Department of Education, we’re done with it. So, we thought we were done.

Four years go by, I think, now, and just last fall, she gets contacted by the U.S. Department of Education for the offset program, where we’re going to seize tax refunds now and take your soecial security when you become retired. So she got me involved, and came back to me, I had her file. We responded to that and asked, you know, to dispute the whole thing, had records showing that these were dealt with in her bankruptcy. And we’re still… We asked for a hearing, we have an administrative hearing over the phone coming up. But that’s that’s kind of a nightmarish case where these federal loans, the left hand and right hand do not know what’s going on and these are old, old loans. You know, there’s no statute limitations. Statute of lmitations went away, I believe, in 1990, 91. There used to be a 20 year statute of limitations. So, here she has to still get an attorney involved to deal with this garbage. And in that type of case, I have to charge hourly, because I have no idea how much time I’m dealing with. But back to the administrative remedies, where they’re newer loans and not a lingering issue like that, yeah it’s a flat fee. It’s something that the client can do reasonably, you know.

Bob: Can you give us a range, on like what the fee is? You know, you’re talking to other bankruptcy attorneys and everyone’s wondering: how much should I charge. More than 500 dollars, or less than 500 dollars.

Michael: Yeah, typically it depends on how many loans they have, but if they’re not… if they’re not in default and I don’t have to rehabilitate them, then I think you’re looking at $750 to $1,000.

Bob: OK.

Michael: If I’ve got… If they’re being garnished and I’ve got to take them all the way through the four steps, I’m typically charging $1,500 bucks, sometimes a little more. So that’s kind of how I handle those matters. You realize that a lot of these people don’t have a lot of money, but they still need help to deal with this stuff. I mean, it’s a nightmare.

Bob: Do you have an escape hatch in your contract so that if something like that scenario that you just described — with 20 year statute of limitations and you think that the case is dead and then it comes back four years later — do you have any escape hatches to convert people into hourly?.

Michael: Well, that was an hourly case. Yeah, that was an hourly. See, dealing with these administrative remedies, I mean, it’s not rocket science. You’re going to… I mean, there’s not… Unless somehow litigation would come up, then you’d, yeah, you get something in your retainer agreement that if it turns into litigation, it’s going to be hourly. But, again, if you’ve done a few of these, you know that if they’re being garnished — unless you’re going to contest the garnishment and ask for an appeal and then you’re looking hourly probably — but otherwise, you kind of have an idea how much you’ve done… You know, the first few are going to take a lot more time. But once you’ve got it established, and you go into this, you kind of figure out how much time you’re going to have in it.

Bob: One of the things that I’ve realized interviewing so many bankruptcy attorneys is that they kind of divide into two categories. One is the litigators or former litigators, and one is the non-litigators, the people that are more focused on the process of filling out forms. One of the cool things with you is that you’re a litigator. I’ve noticed that litigators are much more likely to get involved in FCRA cases, FDCPA cases, TCPA cases. What’s the deal for you in terms of those sorts of cases?

Michael: Well, I mainly… If there’s FDCPA, I’ll get into it. I used to refer all that out, quite frankly, years ago. When I was busy with bankruptcy, I really focused on bankruptcy and stuck to bankruptcy filing and bankruptcy litigation, adversary proceedings and what have you. Any FDCPA and other collateral matters like that, I’d farm out. If I have it today, I’m going to look at it and pursue it more than likely, mainly with the private student loans and some of the litigation if it’s there. If we’re trying to do adversary proceedings with private loans, and there’s FDCPA elements there then we’ll pursue that. Otherwise, my other situations with clients with debt that might not be resolved that I can take other approaches to deal with it is… For instance, taxes. Generally a lot of times, taxes are not discharged in bankruptcy. So we’ll do a bankruptcy if they’ve got taxes that don’t go away, I also negotiate payment plans on state taxes, federal taxes, the IRS. And if I think my client has a good case, I’ll do “offer in compromises” with federal taxes. I’ve been successful with those. Other areas… I do get other clients that come back to me with issues. So, maybe subsequently, they incurred more debt and they’re being sued by one credit card. Now I’ll litigate and defend any type of debtor/creditor cases, you know, whether the creditor is coming after them, say, on a credit card or a loan or something like that. So I get other related debtor/creditor matters that kind of come out of other bankruptcy… you know, former bankruptcy clients.

Bob: What is the goal in that kind of debtor/creditor case. Are you just trying to get them prove that your client has a loan, things like that? What’s the goal?

Michael: Well, first of all, in all jurisdictions not just ours, we have essentially two law firms that do a high volume of debtor/creditor where they represent creditors. And their modus operandi is: we’re just going to sue it out, even if it’s been discharged in bankruptcy or if been more mainly… even if there’s a statute of limitations, or if we don’t have paper on it. And so they… Unfortunately, a lot of these debtors just don’t defend it. And, you know, I don’t know what percentage… It’s over 50 percent, they get the default judgment.

Bob: I’ve heard numbers like 90 percent plus.

Michael: It could be. Quite frankly, it could be. Because you get a summon’s complaint, there’s no court date. They don’t realize it doesn’t have to be in court. In Minnesota, it’s hip service, servicer process commences the suit. You get served, they could leave it with mom or someone of suitable age at the house. And they don’t… They throw it in garbage, unfortunately…

But the people that do get a hold of me in a timely manner, it’s not too difficult to answer the complaint and get into it. You’ve got statute of limitations, you’ve got “do they have the paperwork.” And most of these, quite frankly, are purchased debt. It’s not the original creditor. And a multitude of times, they don’t have the paperwork to support it. They don’t have the evidence to go into court. They don’t tell you that. You get into discovery: “Show me the note. Show me the guarantee.” They don’t have it, you know. So you can either get your client off without paying anything, or negotiate something that’s much much reduced from what they’re seeking in the complaint. So it’s always been advantageous. I mean there’s a numerous amount of cases where I get my client completely off, especially on this purchased debt. I mean, it’s just… it’s crazy.

Bob: So you mentioned “tax levies” and “offers in compromise”… Actually, I have a lot of CPA friends, so I’ve actually heard of offers in compromise from the other side of things from the CPAs… The tax levy work, particularly for… what is called… tax… What’s the kind of work where you have a tax issue… You’re calling a tax levy. But it’s also…

Michael: A levy is just a… A levy is when they’re enforcing, trying to collect on it. You know, the IRS is not bound by the exemptions by the state… For instance, Minnesota, you can exempt $390,000 of your homestead. You can exempt 75 percent of your wages. None of that applies to the IRS. When they come and garnish, which is a formula based upon your gross income and your exemptions I believe, it ends up being about 80 to 90 percent. So they’re going to come and take your check. They’re getting a big chunk of it. As opposed to, if the Minnesota Department of Revenue is garnishing, they’re bound by the state exemptions. So the most they can take is 25 percent. So the IRS… If the IRS sinks their teeth in and starts garnishing, you’ve got a big problem.

Now the flip side of it is, they give you a multitude of warnings. It’s not just one letter or two. They give you a bunch of letters, you know: “don’t ignore us, otherwise we’re going to garnish you.” And generally they are going to levy your bank account before they start garnishing wages. So when I get a client coming to me, I… we get on it as quickly as possible and we try — it depends on the amount of the debt — but you know, the biggest hassle dealing with the IRS is when you call in to talk to somebody, you’re getting somebody in a different state, a different person. They generally will not assign it to one agent. And it’s very frustrating. You’re on hold for two hours, and then you start talking to somebody. They’ll have the notes on their computer from the prior conversation you had with them. But the goal when I get involved is I try and get to assigned to somebody local, one person, so you save a ton of time. And if it’s a substantial amount of taxes owed, you can usually do that. But, you know, then then it becomes, you know, there’s a lot of paperwork involved.

I’ll give you a example. The last one I did, it was for business taxes 941 and 940, mainly 941 federal taxes.

Bob: Uh oh…

Michael: And that amount… Pardon?

Bob: That’s not good. Isn’t that unpaid payroll taxes?

Michael: Correct, yeah. Yup. And sometimes, they’ve been already assessed to the individual under the responsible person doctrine and sometimes not. In any event, in this one, they had not yet been personally assessed. And the amount of taxes was over $200,000.

Bob: Oh, wow.

Michael: And my client did have an ongoing business, so he didn’t want to shut the business down and start a new business because goodwill and name and what have you. Long story short, after a lot of tugging and pulling and paperwork on that particular case, we were able to get in and…

In the old days, it used to be a lump sum within 30 or 60 days, all of it at once. Now they have different programs, where you spread it out two years. Depending on how far you go out, but in this particular case, we did a, I believe, a 24 month plan and ended up being about $12-13,000. So my client’s in it right now. So if he completes it, all the rest of the taxes go away at the end. And they have not… And they won’t personally assess him, and then they remove their liens.

But the other side of it is: you have to be compliant for five years. Otherwise, they can resurrect the debt that you discharged in your offer in compromise. But, again, it’s a win-win for both parties. I mean, they’re never going to collect this, when the numbers get that big. They’re never going to collect it.

Bob: Sure.

Michael: So what they can get in hand today is better than nothing. So, the IRS, they are… I’ve had a couple of where you have to go back and forth, but you kind of have an idea if you really chart out your client’s income and future income and assets, because they have a pamphlet. You could come up with a number if you do it properly, that’s probably going to be close to what they’ll accept, in most instances.

Bob: Wow, very cool.

Michael: Now that’s the IRS. The state, Minnesota, we’ve never heard of offers in compromise. It’s just recently, it’s been two or three years, on their website they have forms that they say we do offers in compromise now, but it’s nothing close to what the IRS does. And I haven’t had the opportunity to try and put one through with them yet, I had one that we were going to look at, but they flat out told me my client wasn’t an candidate, so don’t waste your time.

Bob: So I remember what it was called: “tax resolution services,” something like that. Well, that can be very profitable if you can… Because you have, unlike with student loans as an example, in tax resolution, you have clients that have a lot of money and that are facing large damages, and have a real incentive to pay to make those damages go away.

Michael: Correct, correct, yup.

Bob: So how do you get more of that tax resolution business. Is that something that on the marketing side, you’re making a special effort for? Or you just see what falls in your lap?

Michael: Well, most of my clients, they are either former clients or referrals from other clients or other attorneys. Quite frankly, I don’t… My marketing is mainly bankruptcy and student loans and just debtor/creditor. You know, it’s kind of broad.

Bob: Well, let’s about that a little bit, the other kinds of marketing that you’re doing. You know, we can talk about student loans or we can talk about just straight up bankruptcy. What are you doing on the marketing side that’s working, that other bankruptcy lawyers might be interested in?

Michael: Well, probably not as much as most attorneys… I depend upon mainly from referrals. I used to do a half-page, three-quarter page back when Yellow Pages were big, and that’s when there’s a lot more bankruptcies being filed. I’ve done the pay per click Internet stuff, I’ve done all that stuff, but at the end of the day, when I set… Well, things have changed over time, but mainly right now I’m just utilizing my Web site and I have an SEO company to try and keep me up on top as best we can. Beyond that, it’s… That’s really it. I haven’t… I used to spend a lot of money marketing, and I pulled back…

Bob: Yeah, filings are down over 50 percent since the peak, so lots of people are trying different things. Have you tried Internet advertising, Google AdWords, anything like that.

Michael: Oh, I used to do that. But, you know… Speaking with other people, and my SEO people, they say organic results are, you know… Their data actually shows that one of the better avenues… I guess, I probably get three calls a week from these different entities, pay per clicks, leads, all that kind stuff. I mean, maybe one a day. And again I’ve tried some of the stuff before. And if the filings are way up, you can justify it. But with the filings so down, the percentages you going to get from what you’re paying for that, it doesn’t… It doesn’t make sense, in my view at least.

Bob: Absolutely. Where does it start to make sense for you, just in terms of, you know…

Michael: And I’m not a high volume filer, you know. Back when I was with a smaller firm, we did TV ads, we did all that stuff. I mean, I’m not… I’m not doing hundreds of cases a year. You know, I’m… I used to be… I get referrals, you know, a lot of my clients are cases are more difficult. They’re not the everyday garden-variety consumer bankrutcy cases. So a lot of my referrals are coming out of litigation or some other issue, so they got some baggage with them. So somebody may not want to take that particular case, because it’s not just going to be filing the case. There’s going to be an aftermath to it. More than likely, in some instances, some adversary work. So my cases are not just… I mean, I do have the garden variety, but other ones that come from referrals have usually got something tied in them that’s going to be additional work. There are more issues involved.

Bob: Well, just on the bankruptcy… In terms of Internet advertising for bankruptcy lawyers, I’m not really speaking to you, but just to the listeners of the podcast… I’ve said it before, but on a high level, for about $35 in a competitive metropolitan area — and maybe less in a less competitive metropolitan area or a more rural area — you can generate a lead. And if you have your marketing and sales set up right, you can convert… I have one attorney, I was talking to yesterday, one of my clients was telling me that they convert one in four clients have been converting. One in four leads have been converting into a client.

Michael: I would say that’s very good.

Bob: Yeah. No, it’s fantastic.

Michael: I mean, if I could, I would do that in a heartbeat.

Bob: Yeah, well, we should talk after the call that.

Michael: Sure, yeah.

Bob: So that’s on the bankruptcy side. The other interesting thing on the private student loan… On the student loans side — and I do want to talk to you about private student loans in a minute — but on the student loans side, the other really interesting thing is that “student loan attorneys” or “student loan bankruptcy” is a keyword on Google that people have not been able to monetize. So Google’s suggested payment per click for that keyword “student loan bankruptcy” (or something like that), it’s like $2 per click. Instead of on “bankruptcy,” it’s like their suggested bid is somewhere in the $20-30 range. So there’s essentially an infinite amount of clicks that you can get at a very reasonable cost for the student loan side of things. And so if you’ve really set up a machine that can make money using IBR and income based repayment programs and these other things that you’ve described to me, that’s another place where you can get a lot of customers… a lot of clients very cheaply. So that’s something to look into, maybe.

Michael: Yeah, you know, since I’ve been focusing more on student loans, I haven’t gone back. I don’t know, it’s been, oh, 5-6 years ago that I used to do Google AdWords, I mean, quite intensely. Yeah. You’d go on and check daily the bids for the different words, were kind of… It was unique, how these things would bounce around. And in different… You know, it could change overnight. But, yeah, I haven’t looked recently with student loans, but I will tell you a lot of these firms if you see it come up with “student loans” in bankruptcy, they’re getting people to call in, but they don’t do any student loan work. They’re just getting…

Bob: Refinancing…

Michael: They’re getting people to call in, and they might talk about an undue hardship, and that’s about it. Beyond that, they don’t go any further. You follow what I’m saying?

Bob: Wait, no, say that again? Like, I thought you going to talk about sort of loan refinancing…

Michael: No, not refinancing… Some of these law firms that advertise for “bankruptcy,” and then throw in the words “student loans.” A lot of them don’t do any student loan work. The only student loan work they *may* do is an undue hardship. Do you follow me?

Bob: Yeah. No, I get that. So they’re really just dangling this concept of “relief from student loans” just like it’s like the cheese in a mouse trap. And then when you actually get to the bankruptcy, they say “hey, no, actually, we don’t really do that work.” Yeah, absolutely.

Michael: Right, they’re hoping to get clients that have student loans call in and because they have a bunch of other debt: “Hey, bankruptcy will help you out here. Let’s clear out the debt, and go deal with your student loans elsewhere.” That type of thing, I guess.

Bob: I mean, I suppose that it’s a spectrum of egregiousness when it comes to that, but in general what you’re describing is not something that I think is really that respectable.

Michael: Right, right.

Bob: So, one of the exciting things about you with the student loan work that you’re doing is that you’ve done work on private student loans. I know that Austin Smith was co-counsel with you on a couple cases. I interviewed Austin on the podcast earlier and I think he’s awesome. And maybe I could ask you to explain some of the work that you’re doing on private student loans and how that’s worked out for you.

Michael: Sure, yeah. Austin’s a great guy. You know, how we met… I had an adversary proceeding going on, two and a half, three years ago in Minnesota here and it was an undue hardship, plus my client had one of the loans was a bar review course, she’s an attorney. And in that particular loan, I pled that was not a… it didn’t fit within the criteria of 523a8, it was not an educational loan. And as I’m going through that case, I’m in the middle of it… And I had multiple defendants, I had two or three different lenders on there. And quite frankly, I was able to get one dismissed out right away, they voluntarily dismissed out, which is great. And so, anyways, Austin, I believe, caught my name when he was searching the courts docket at Pacer on that, and then he got a hold of me and he shared with me, which was great, his Campbell case, In re Campbell, because he had a bar review course and he won, he got a great decision.

Bob: Yeah, that’s a perfect precedent for you.

Michael: Exactly. Up till then, there were, I believe, two or three reported cases on bar review going the other way. So his case pretty much helped me slam dunk my case on that end of it. And then he contacted me. He had a client here in Minnesota that had some private student loans on a case in St. Paul. So we got together and became co counsel on that particular case, brought a summary judgment motion on the grounds that the student loans were discharged by the bankruptcy way back when discharge was granted, because they were not… They didn’t fit the criteria of 523a8. And we… The judge sided with us on partial summary judgment and ordered that, on one of the provisions, it didn’t fit the criteria as an educational benefit, scholarship or stipend. And for the remaining, there were other portions we had to prove to finish our case. And that was under Section 523a8(b). You have to show it’s not an education loan that’s qualified, as defined under a provision of the Internal Revenue Code, and that ends up…

That’s where you get into the cost of attendance analysis. And that’s… I believe Austin talked about that in your interview quite in-depth. And we didn’t need to get into that on that particular case, because we ended up settling the case. And I’m not aware of any reported cases where they’ve got into the cost of attendance where they determine how you actually go about that, because there’s some factual issues on that and that’s where the judge quite frankly didn’t rule in on that particular matter. He said we need more discovery and we’d go to trial on that. And part of it is: how do you determine the cost of attendance, even though it’s established by the school and it’s published on IPEDS. You know, when you’re looking at the school transcript, do you look at it chronologically as you’re counting up the federal loans and the scholarships and the grants. Or do you take the direct to consumer loans last, which a lot of these loans that we’re litigating now are student loans that don’t come to the financial aid office. You know, they’re direct to the students, so they don’t even show up on the school transcript. So we didn’t have to get to that. And again, I’m not aware and I believe there is, because Austin and I talk about this a lot, and he would know about it because he’d be the one probably making the law. That we haven’t got to that stage. These cases either settle or we’re still litigating the cases. So that’s been, you know, real good.

The trend that we’re seeing across the country are: most of the courts now are saying that as far as the provision of 523a8A2 is that these private student loans don’t fit the criteria, and they’re not “educational benefits.” So if you can get over that part of the statute, then you’re to the last part which is more factual. But we have another case that’s going on right now in Minneapolis. We have a different judge and that’s set for trial in April, so we’ll see what happens with that particular case.

But, yeah, it’s interesting, it’s… And I think that Austin did say that he spent many many months studying this and the legislative history, and what have you, and came up with this argument and analysis, so… And if you really look at it, and look at the case law, I think the trend now is, like I said, they’re ruling in favor of the consumer, the student loan debtor on these. And eventually, someday, we’ll have some decisions that actually get into the cost of attendance argument.

Bob: One of the cool things that I’ve discovered in my conversations with Austin, even after the podcast, is that there’s really been a shifting of the burden. If you look at a Brunner test for undue hardship, there the burden is on you — on behalf of the debtor — to prove that there is an undue hardship. But the cool thing about these cost of attendance cases and you can, if you’re listening out there and you want to learn more about the cost of attendance issue than you can just search for “Bankruptcy Law Success Austin Smith” and you can see a whole 90-minute discussion on this topic. But the cool thing about that is that it’s a shifting burden, so the burden has been shifted to the creditors’ attorney to prove that. So all that stuff that you were talking about, in terms of how difficult it is to prove what the cost of attendance is, and who do you subpoena, and all that stuff. Yes, that is difficult, but I just want to assure people out there that: you don’t actually have to prove that. That becomes a burden of the creditors attorney. Well, I mean the first thing I’ll say is: that’s my belief, Michael, is that your belief as well?

Michael: Yes, that’s correct. Yeah, and the whole thing is: they may not even know how they want to approach that. You know, one case you could win on the cost of attendance if you are to go chronologically, or in another case, if you say we’re going to take the private loans that are direct to consumer, if we look at those lastly, the analysis could come out different ways. Are you following me?

Bob: I am following you, but… Because I’ve read now a bunch of these cases, and I’ve also talked to Austin about this specific issue. My sense is that the direct to consumer… What is it called when the school… The school certified loans.

Michael: Yeah, yeah.

Bob: The school certified loans tend to happen earlier. They tend to be issued in August and paid out maybe at least by September, whereas the the private student loans — particularly the direct to consumer loans — tend to be later in the process anyways. So there’s tends to be a down alignment of those issues, from what I understand.

Michael: That’s correct, yeah. Yeah, the certified ones on the promissory note, they’re actually certified by the school. How much money has already been issued? What’s the cost of attendance, and how much has been issued and other federal… So they’re looking, actually, to try and keep within the cost of attendance. Yeah, the direct to consumer, they’re not doing any checking. And, quite frankly, these are usually coming at the tail end. The students typically are going to get the federal money, and it’s capped depending upon if they’re undergrad or grad, it’s capped on these different types of loans. And then when they need more money, they go to the private lenders, and they’re going to be typically the loans that go through the finance… that are certified and go through the financial aid office.

Then you get the direct to consumer. These checks are written right out to “debtor” and it goes right to their house. They can… There’s no control over how the money is going to be used, they can do what they want with it, quite frankly. But yeah, going back to the burden of proof, yeah with the undue hardship, the burden is on the debtor to show the undue hardship that’s going to be there if you’re going to make me pay these loans back for the rest of my life. As opposed to the private loans under the cost of attendance, the burden shifts right away to the creditor. Exactly. You know, so that burden is on them and it’s a big burden.

Bob: It’s a beautiful thing, and I think one of the things that… the sea change that’s going to happen is, not only are the precedents going to improve (led by people like you and Austin), but the understanding of the creditors’ bar is going to… It’s going to dawn on them that, unlike with the Brunner test, they actually have the burden of proof on them to prove that the cost of attendance and all these things, and then they’re going to they’re going to start settling these cases very very quickly.

Michael: Right, right. Back to the undue hardship, even though the burden is on the debtor, in the 8th Circuit, we don’t have the Brunner test. We have the “totality of circumstances test,” which is a little better for the debtor. But it is still a difficult task. I mean, you know, the undue hardship case I’ve done, the first one ever did a year out after practicing. I mean, I had a single parent with four kids and my client was legally blind. I won, hands down, and I go: “Great, this is great.” After that, every single case, they fight you, they go to trial. There is absolutely no middle ground on these federal loans. They’ll fly somebody in from Washington, D.C. with the U.S. Attorney General’s office and fight these things tooth and nail. And then, if you happen to win, they appeal it. They appeal it! So now you’ve got a client that can barely afford to go through the level of the trial at the bankruptcy court level, then they’re appealing the thing. OK, so they made it real, real difficult.

Now, then, years back, this… the income with the federal loans… the income-based repayment programs and what have you came out. And they were arguing: well, judge, if she can pay five dollars a month for 20 years, we’re great with that. And so some of the courts are buying into that. There’s been published decisions in the past few years that it’s not determinitive. Even though you can pay five bucks a month or whenever under their program, it doesn’t mean… They forget to say, yeah, but at the end of that program, that’s taxable income. If he got $100,000 forgiven, and you can’t show you’re insolvent, you’re going to be taxed on that hundred grand. So all you’re doing is putting another problem on the plate later down the road. Now, granted, once those taxes get three years, you can just discharge them in bankruptcy. But, still. But going back to… From what I can see, at least, in the… In coming up here, what I see with clients is even though the federal loans are going to be more difficult to discharge in undue hardship (unless you get a super super good factual case), when you’ve got them coupled with these private loans, you have a very good chance of discharging the private loans, because under the criteria, right before you sue this out in adversary: “They want two grand a month, Judge. Their interest rates are 8, 9, 10 percent and they want… the minimum payment plan is two grand a month, they won’t work with me at all.”

So even… So you flip it back. The federal loans, sure, they’ll work with me. So, in some cases, I’m not even going to (on an undue hardship) go after and try to take the federal loans out, because they typically are not going to negotiate. But the… you get to the private ones then, and they get $50,000 to $60,000 of private ones. You got a good argument for an undue hardship, because of the fact that they’re not willing to work out anything and there’s no requirements (like the federal loans where they’re mandated by federal law on these payment programs).

So there’s a better argument today with these private loans and undue hardships, quite frankly. And on top of that, if you’ve seen in the last week, there’s some discussions through the president’s office that they’re talking about making it easier to discharge student loans without undue hardship. I haven’t seen any fine details, but there’s talk of that.

Bob: You know, I was going to say that I just read about yesterday, but you know what it is? We’re friends now on LinkedIn, and you posted about it and I read the article that you posted about the administration lessening the standard.

Michael: Yeah, we’ll see where it goes. It might just be lip service. We’ll see where it goes. But, to what extent. I mean there’s got to be other other ways to deal with this.

Bob: Well, it’s exciting. One of the business models that Austin talks about in terms of discharging private student loans through this interpretation… Through what he would say is a proper interpretation of 523a8…

Michael: Correct.

Bob: Is that you can do a reverse contingency fee where if you dismiss or if you get $100,000 loans discharged, or vanished through whatever mechanism, you can you can ask for a reverse contingency fee of 10 to 15 percent. In that case, it would be $10,000 to $15,000. So that’s one way that you can make money from this. Have you tried a reverse contingency fee, or are you more in the fixed fee or hourly model right now.

Michael: I haven’t got into that yet with the cases I’ve got pending now, but it’s something I will explore with other clients going, as more cases come to the door on these private student loans in bankruptcy contexts. Now, outside of bankruptcy, though, I’ve got a dozen cases going on right now in state court. And those cases can be… Well, for instance, you’ve heard of National Collegiate Trust. They’ve been suing people for the last three or four years. Well, we have one firm in Minnesota that mainly does… handles all the litigation. And I’ve got six or seven cases pending right now.

There was a consent order that came out last fall that dealt with Trans World System who was their agent who essentially handles all the underlying litigation, discovery, what have you, and the ones that submit affidavits for summary judgment and they’re the ones that show up in court to testify. Well, essentially the Consumer Financial Protection Bureau didn’t shut them down, but they scrutinized their practices and they’re in the process of auditing all these cases, most of the cases, if their student loan trust fit within their criteria. So my cases that are pending right now are all still waiting the outcome of that audit. And absent, or depending upon what comes out of the audit, we’ll see if we continue on.

But I’ve had cases… Well, my very first one that I’ve had with them, I answered it right away and served discovery. And they kept asking for more time to answer discovery, more time, more time, more time. And finally came back with: “would you would you take 50 cents in the dollar?” No, we want the paper. Answer the discovery. Our clients decided we’ll dismiss it with prejudice. Completely done. Client didn’t have to pay a penny.

Bob: Wow.

Michael: But the ongoing cases now, they’re all in litigation. And, quite frankly, I have a hearing next week on one of them in St. Paul. I don’t know how they’re going to get a competent witness, what they’re going to change to come in and prove their case. Because these things are layered in the trusts and they don’t have personal knowledge of what they’re testifying to. So it’ll be interesting to see what happens.

Bob: I think I read about this in the New York Times where they were saying that… I think the article was about National Collegiate Trust and how they just don’t even have remotely any paper trail for most of their loans.

Michael: No, some of them, they do. Now also, so there was an actual order entered back last fall with Trans World. On the same day they were supposed to be a consent judgment entered against National Collegiate Trust in court. And I think it was in Delaware. Well, that got put on hold, because we’re arguing who owns the trust and stuff. That still hasn’t been done. So that’s still up in the air. But there’s enough there. That’s just one of the private student loan creditors I deal with. There’s other ones, couple other ones out there that are buying up debt. And I litigate those too, and those are not National Collegiate Trust. For instance, the underlying debt might be Navient, I’m trying to think… Citibank… And on those, they may or may not have their paperwork, but even if they have their paperwork and have a fairly solid case, you can negotiate those down significantly and get something that your client can handle.

So, again, it comes back to: if the person getting sued, if they are on the ball and don’t let it go by default, you’re going to do much better with an attorney than getting a default judgment against you.

Bob: So what kind of settlements are you seeing seeing these creditors make for these student loans.

Michael: Yeah, 20-30 cents in the dollar at no interest. And a payment they can afford. That’s the thing, a payment they can afford. I’ve got one guy, it was over $118,000… $120,000. I think it was like four or five loans. And it took a lot of going back and forth with the opposing counsel. But I got the debt reduced significantly. I mean his payments are like… We have to do a… like 50 bucks a month to start with and they go up a little over time because of his situation. But something he can afford and they realize it too.

Because the flip side is, you guys want to play hardball, I’ll put my guy in a Chapter 13 for five years. A perpetual Chapter 13. You’re going to get a few dollars a month and that’s it. And then when he gets done and if they’re not discharged, I’ll put him in another Chapter 13. Good luck trying to collect. That’s survival mode. So they get it, they get it. And this is purchased debt, what they buy for, 10-15 cents on the dollar?

Bob: If that, yeah.

Michael: Yeah.

Bob: Well, that’s pretty cool, because I know that a lot of bankruptcy lawyers get into this to help clients, to help them get the fresh start that the Bankruptcy Code promises. And student loans has been such as large exemption, such a big loophole, that’s been preventing people from getting that fresh start. So can you talk about that just for a minute? Like how satisfying is it to help someone who’s almost suicidal because of their student loan problems, and then you solve that for them?

Michael: Yeah, I mean, it’s… Some think taxes are the worst debt and the more and more you get into and you read through this, I mean, student loans are by far the worst kind of debt you can have. And to try and find out some type of resolution to help your client, I mean, it’s just, it’s great. I have clients who say, “I’ll just quit my job. I’ll become self-employed.” I’ve got attorneys call me and they’re close to retirement and “should I try and cut a deal with these student loans? These are federal loans or should I just let it go?” They’re self-employed so they’re essentially they can’t be garnished. And they have an LLC or a corporation that doesn’t owe the debt, it’s a separate entity, so they can continue to work and make money. And so they’re just trying to get through life, and they can’t because the loan amount is so high.

Bob: These are attorneys that are making presumably six figures a year.

Michael: Not everybody. No, this particular one I’m talking about is not making that kind of money. I mean, if they were making the money they’d be paying on it. They just have… they’re making a decent living but, no, they’re not… It’s just that with penalties and interest and collection fees, the amount has gotten so high… I mean, all my clients…. You look at the principal amount of the debt and then you look at what the debts today are if 10 or 15 years have gone by. It’s astronomical, it’s crazy. $20,000 could turn into $100,000.

Bob: Wow. Well, I feel lucky because I spent five years of my career, the first five years of my career, I spent on Wall Street which I’m not super happy about because I didn’t continue in finance, but it did let me pay off my loans. And so, you know, after hearing so many student loan horror stories, I’m glad at least I did that.

Yeah, oh yeah. Likewise with me, my student loans were not that much back when I attended school and I was able to take care of them in a short period of time. But in today’s education… and the amount of the student loan that students are coming out with… I mean, I’ve got a person called me the other day. I mean, they combined husband and wife: $600,000 in federal loans. I think that’s one of the higher ones I’ve seen. We’re going to get them into an IBR, but I’ve had some people with…

Bob: Did you say $600,000 in federal, only? So there is presumably more private loans?

Michael: Yes. No I don’t think they had any private… These are old old loans. And the husband/wife consolidated at some point, which you don’t see too often, where they consolidate two person’s loans. But I’m talking about just a number, that’s %600,000, but I’ve had other clients, $300, $400,000 and some without even getting their degree, up to $200,000 without a degree! I mean, so yeah, it’s…

Bob: Did Austin ever tell you that story about the million dollar student loan, the guy who had a million dollars in private student loans.

Michael: No, was that discussed on your podcast with him.

Bob: I can’t remember if it was on the podcast or after. It was a case I believe in California, where someone… It was one of his earlier cases where someone had a million dollars in private student loans.

Michael: Oh, wow. Crazy.

Bob: Well, I want to wind things down, but before we go I want to give you an opportunity… I want to ask you about the Volunteer Lawyers Network, where I believe you volunteer to do… to help people with bankruptcy. Is that right?

Michael: Yeah, probably every other month I do what we call “bankruptcy screening.” Way back when I started it years ago, you would actually go down to their offices and sit down with them. They give me a lunch and you’d be on the phone for two hours. They have people that are prescreened and qualified for their services where you’re determining if they’re in need of a bankruptcy and also just answering questions. A lot of times, it will just be giving them advice and might be — they offer at Volunteer Lawyers Network attorneys to write letters to creditors because a lot of them are judgment proof. And I’ve been doing that a year out of practice, I still continue to do it. I used to take some cases too, but I don’t actually do the cases anymore, but I’ll mentor other attorneys and do the bankruptcy screening.

Bob: Awesome. Well, I want to thank you so much for being on the podcast. I learned a lot, and I had a lot of fun, so thank you so much for talking with us.

Michael: Yes, and I appreciate you having me on, Bob.

Bob: Thanks, Michael.

Michael: Thank you.

Bob: Bye bye.

Michael: Bye.