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What Does The Constitution Say About Bankruptcy?

by Ben Sheehan

September 13, 2020

This interview with Ben Sheehan, author of the new book “OMG WTF Does the Constitution Actually Say?” was conducted and condensed by franknews.

What does the Constitution say about bankruptcy?

The Constitution mentions bankruptcy in Article One, Section Eight. It says that Congress has the power to establish uniform bankruptcy laws throughout the U.S., including bankruptcy courts.

This is why bankruptcy courts are referred to as ‘Article One’ courts. This is different from ‘Article Three’ courts -- which are mainly district courts and circuit courts -- and both of which can appeal to the Supreme Court. However, Article Three courts mainly handle cases around treaties, federal laws, and the Constitution. There are currently 90 bankruptcy courts, about one per federal district, and each court has its own judge.

The point is that Congress has the exclusive power to handle bankruptcies. State law doesn't have the right to handle bankruptcies -- it's purely under federal discretion, per the Constitution.

There is a bit of dispute around whether you have a constitutional right to bankruptcy as an individual because the Constitution specifically references Congress. However, Congress makes the bankruptcy laws, and their laws say you have a right to declare bankruptcy. So, you have a legal right, but not necessarily a constitutional right.

What is the process for something like student debt cancellation or forgiveness?

The decision to cancel student debt would be through Congress. They can make any laws around bankruptcy they want. There's been a number of federal bankruptcy laws, but the big one was 1978. That's the bankruptcy code that gave us Chapter 11.

It's weird because bankruptcy is just mentioned in passing in the Constitution, as one of Congress's powers, not unlike how Congress has the power to establish post offices and post roads, per a fleeting constitutional mention.

But when you have a Congress that's so divided and inactive, you're screwed when it comes to making policy changes especially if the power to shape that policy is exclusive to Congress. These days, it feels like Congress is mostly partisan gamesmanship, with representatives and senators trying to get viral gotcha videos on committee.

I just don’t think we’re getting anywhere, and I think the founders would be appalled by the performative nature of our modern-day Congress.

In Conversation with Chief Justice Bridget Mary McCormack

by Chief Justice Bridget Mary McCormack

September 27, 2020

This interview with Chief Justice Bridget Mary McCormack , Chief Justice of the Michigan Supreme Court, was conducted and condensed by franknews.

I am the chief justice of the Michigan Supreme Court. I was elected to the Court in 2012. And in 2019, I was selected by my colleagues to be the chief justice.

How is the CDC eviction ban being implemented throughout Michigan?

Michigan has 242 trial courts, including 103 district courts where eviction proceedings are heard. And different judges are interpreting and handling the CDC guidance differently.

One of the things my colleagues and I are going to be talking about over the next few days is whether there is a reason for the Supreme Court to issue any administrative order so that we have uniformity.

It concerns me that different people are having different outcomes in different parts of one state.

That doesn't mean that issuing an order that governs everybody is the right thing to do, but it is something that we have done throughout this pandemic. In fact, we've issued 19 emergency administrative orders to help the courts figure out how to do business in this new world, including one to address the eviction backlog when Michigan's eviction ban was lifted. So it might also make sense for us to figure out if there's a uniform way we should give trial courts instructions on what to do.

What has been the overlap of the CDC guideline and Michigan’s efforts?

The governor issued an executive order back at the end of March and it expired sometime in July. District courts started to process eviction cases then. The Michigan Supreme court issued an order for how to process that backlog and the process for addressing pandemic evictions that included a diversion program.

The Legislature has allocated a significant amount of funding for addressing that backlog — $60 million was allocated to our diversion program. That money goes towards direct payments to satisfy outstanding rent due as well as to fund additional legal aid lawyers across the state to help people connect with available resources.

We had a statewide process for both addressing the backlog and helping folks find their way to funding when the CDC guidance came out. So now, there is Cares Act funding on the table that the Legislature needs to have spent by the end of the calendar year, but the CDC guidance makes it really hard to figure out whether you can still help the tenant and the landlord access the funding or not.

What steps has the Court taken to ensure that tenants do have counsel?

I should say that normally they're not entitled to government-funded counsel.

Eviction cases are civil cases, and nobody is entitled to government-funded counsel in civil cases.

In criminal cases, if you can't afford a lawyer, you are entitled to counsel at the government's expense. That's not true in civil cases.

In this emergency diversion program, a chunk of the funding was directed to legal aid lawyers. The diversion program requires courts to connect a tenant who is facing eviction with a legal aid lawyer so they can figure out if they can access funding to satisfy the outstanding judgment. But, again, that is not a process that is required and it only happens in places where a judge has set up their own eviction diversion program, and they have a legal aid office that works with them on it. It's not something that happens in nonemergency COVID times.

Are there parts of this that you hope extends to the future?

Hopefully, it helps both tenants and landlords. Not every landlord is some big corporation. Some of them are people who are just renting one apartment to try to cover their own rent. What we are seeing is an economic crisis of people who can't afford rent because they've lost their jobs or been impacted by the COVID-19 crisis in ways that they can't pay their bills. If they get evicted, and there is no market for someone to fill that place, that is only going to extend the problem.

We also know it is disruptive to public health to have people without homes. We know that people are better off at home. A diversion program makes a lot of sense in figuring out how we solve this economic crisis and public health crisis. Whether it continues beyond is above my paygrade.

And why do you feel like it's so important that tenants do have access to legal aid?

So they can fully understand what they might be legally entitled to ask a court for, or more acutely in this case, so they can find their way to funding that might actually help them. What they need more than anything is money. The legal aid lawyers throughout the state know exactly how to get them help if they're entitled to it.

Frankly, if we had a little bit less regulation of the bar, we could have non-lawyer navigators helping people to get funding.

This is one of the areas where we should be thinking long term — if we're not going to be able to afford lawyers for every person facing eviction, are there other ways we can help them get the information they need?

When you have a health care issue, you don't see a specialist every single time. Sometimes the nurse practitioner can help you, sometimes a physician's assistant can help you. In law we have only one professional that is public-facing — a lawyer. It might be that this is the opportunity to think about how we can diversify the kinds of professionals who can help people with legal problems.

When you say, "if we can change the regulation to the bar," what does that mean exactly?

It just means that right now we only license lawyers and it doesn't have to be that way. There are a couple of states, Utah and Arizona, who have pilot projects where they are experimenting with licensing professionals to help people with legal problems who are not lawyers.

We're never going to get to a point where we have enough lawyers to assist everybody with every civil legal problem. Eight out of ten people in Michigan can't afford lawyers for their civil legal problems.

Maybe there are other ways we can make sure that they are connected to resources, understand their rights, and understand what's available to them, short of having a fully licensed lawyer to represent them.

Is there anything else that you think is important for people to know about their own rights in this situation?

In Michigan, I'd say to take advantage of our statewide diversion program and get connected with your local legal aid office. Make sure you access the funding that the Legislature has put aside for you. This is what it's there for. Let's make sure we take advantage of it.

Who Profits from Your Student Loans?

by Cody Hounanian

September 27, 2020

This interview with Cody Hounanian, the Program Director of Student Debt Crisis, was conducted and condensed by franknews.

frank | What does the student debt crisis look like today?

Cody | I think statistics can tell part of the story. For example, in the seventies, you could use a Pell Grant to cover most of your college expenses, now you can’t. Anecdotes tell another part of the story. In the past, a part-time job over summer could be used to cover the cost of college. That is not enough anymore. We hear from borrowers every day who work many, many hours while going to school, and that still doesn't cover even a fraction of what higher education costs today.

As a society, we used to be much more willing to invest in covering the cost of education. Over the years, and particularly since the Great Recession, investment at the state, local and federal levels has decreased. As a society, we pulled back from investing in students and left families and individuals to pick up that burden. It's an investment issue. It's also a cost issue.

Can you speak more to the cost issue — why is college so expensive?

There are expenses to operate a major modern higher education institution — especially at the level that we have in the United States. But our political leaders have decided to not invest money into our higher education system, and, as a result, families and students have to pick up the slack and borrow to pay for college.

It is a vicious cycle — the more that colleges increase the cost of college, the more student loans will be taken out to fund those educations. The more that we open up the opportunity for borrowers to finance their education, the more room there is for institutions to increase their costs.

That is why at Student Debt Crisis we support a two-pronged solution. One, we need to cancel a broad amount of the student debt that exists. Two, we need to make many colleges, certainly public institutions, free for students. That is critical to creating a future where the student debt crisis that we see today can’t be recreated.

Do you think that canceling student debt is politically and fiscally possible?

If you accept the premise that our higher education and student loan system are broken, then you have to accept the fact that much of the $1.7 trillion in student loan debt is unethical, immoral, and, frankly, shouldn't exist.

Since the COVID crisis, canceling student debt has gone from a rallying cry of borrowers and advocates to something that is growing in its legitimacy. It has the support of many people in Congress, including Senator Elizabeth Warren, and even presidential candidate, Joe Biden.

But there are other common-sense solutions we should look to, as well. For example, there needs to be a federal refinancing option.

Because of predatory interest rates, many people have loans where they have paid back more than they originally borrowed.

Refinancing is not a new idea — people can refinance their mortgage or auto loans.

Let’s back up — what does refinancing look like for student loans?

Anyone that takes out a traditional lending product for their home or their car, can take advantage of a lower interest rate in the future. That helps them to lower their monthly payments and the total amount of debt that they have to pay back during the lifetime of the loan.

People who have federal student loans are not given that option. Importantly, federal student loan interest rates have fluctuated wildly over the years. There are millions of people that have very high interest rates, very high monthly payments, and no option to lower their interest rates.

With the support of folks like Senator Elizabeth Warren, there have been several attempts to pass common-sense refinancing. It came within two votes of passing in Congress several years ago but did not pass.

How many people are defaulting on their student loans?

A million people each year that default on their student loans. And that does not include a large portion of borrowers who are seriously delinquent on their student loans — these are borrowers who are between 90 and 270 days past due on their payments.

Unfortunately, we see that student loan defaults follow the inequity lines that we see in our society. Black student loan borrowers default at a much higher rate than their white peers.

We also know those who attend predatory for-profit colleges, often single parents, disabled veterans, and other vulnerable communities default at a much higher rate as well.

What happens when you default on your loans?

The consequences of default can be really catastrophic. It can mean huge fees. In many states, you can have your driver's license or your professional license revoked. It can mean that you can't complete your program or access financial aid. It can even mean you can't serve in the military, law enforcement positions, or other jobs that require credit checks. It can disrupt people's lives significantly.

As with other forms of debt, defaulting on your student loans also means that you're likely going to face relentless harassment from debt collectors. These are people that call at all hours of the day, they contact your friends and family, and sometimes they reach out to you on social media accounts. Defaulting can lead to a serious encroachment of your privacy.

Right. And there are repayment options to pay off student loans in an effective way — but no one seems to know?

Nobody with a federal student loan should default. There are affordable repayment options that are available to student loan borrowers through the federal government. The problem is, no one knows that these programs exist.

For example, if you are a low-income borrower or if you are unemployed, you can qualify for a monthly payment that's as low as $0 per month, and still be considered current on your loans. But your loan servicer has to tell you about that option and they have to help you enroll properly. For years, they have failed to do that. There's been a myriad of lawsuits against these companies, but that doesn't fix the problem.

California just passed a student loan borrower “bill of rights” to create enforceable standards. These companies have to give you your options, and they have to educate you on the best options for your situation, not the options best for their bottom line.

The federal student loan system is so complex that it makes it hard for students to navigate — you essentially have to be an expert. What's really important to know is that student loan borrowers are constantly hounded by what we call debt relief companies. These are people that prey on your inability to find any information. Any company offering to enroll you in a federal program with a fee is unnecessary - you can enroll in any federal program at the Department of Education's website at no cost.

But it's not just the private companies or organizations making a profit, right? In 2013, the Department of Education made over $41.3 billion on student loans. How are they making that money?

Yeah, you're right. Hundreds of millions of dollars every year go to the Department of Education through our student loan system.

Most of that comes from the interest on student loans. I think it is important to circle back to the conversation around the lack of refinancing here — we know that the longer that student loan borrowers are stuck with high interest rates, the more the Department of Education reaps in return. That is a perverse incentive.

Those funds go towards funding other government programs. To that extent, I think this is a question about balancing our books as a country and reprioritizing what we want to spend our money on. We need to think about different means of funding that doesn't happen off of the backs of student loan borrowers.

There's literally money on the table to be used to reinvest in education that instead is just being given as a fund generator for the Department of Education.

Can you talk more about the spread between what banks are borrowing and what the interest rates are there and how that differs from private loans?

Yeah. When you think of what a bank can lend money for, you're talking about single digits a — 1% to 0.5% of an interest rate. When a student loan is written by the federal government, it can be anywhere from about 3.5%, today's rate, to 6.5%, which was the rate that it was for me when I attended college in 2013. In the private market, student loan interest rates can be in the double digits — they can be as high as 15% or more.

Federal student loan borrowers, and those with private student loans from banks, are paying much more to finance their own education than what institutions pay to buy financial products. There is a huge spread. Again, I think that is a societal ill.

What does our society prioritize? Is it more important to keep banks afloat or to help young people afford education and make the future better and more bright for our entire country?

Why is the federal system profiting off of this system and these high interest rates rather than acting as a protector against predatory private institutions?

That's a great question. About a decade ago, when a student loan borrower went to the Department of Education for a student loan, the Department of Education would help facilitate that process, but the funds came from a private bank.

During the Great Recession, the banks unloaded this portfolio, they no longer wanted these loans. A lot of the loans were sold back to the Department of Education. From then on, throughout and after the Obama administration, all new federal student loans were not only facilitated by the Department of Education, but the funds themselves came from the government through the Department of Education.

The Department of Education shifted from being a regulatory agency, to essentially acting as one of the largest banking operations within the government.

They have a portfolio of trillions of dollars in student loans. Instead of acting as an institution meant to look out for the interests of student loan borrowers, they are now incentivized to look out for their large portfolio of student loans.

Was the transition of the government towards acting as a bank a partisan led movement?

The Obama administration felt strongly that borrowers needed an easy way to finance their education, or we would have a future where the future economy was void of high skilled labor and job opportunities.

We were also coming out of the recession, and there were deficit issues. So another motivating factor was also the idea of funding — the Department of Education could process these loans and create a revenue stream that could fund other programming in the government.

Do you think the move was well-intentioned?

I would say up until recently, these programs were well-intentioned. I think there were obstacles in making substantive change. But, since Betsy DeVos has become the Secretary of Education, we've seen more of what looks like overt attempts to make sure the system is as broken as possible.

I'll give you an example, there is something called the Public Service Loan Forgiveness Program. It started under the Bush administration, and the goal of the program was to motivate college graduates to work in public service by forgiving their student loan debt after 10 years of service. The current administration has proactively created roadblocks that have denied 99% of applicants to the program. There has been much more of an explicit attempt to prevent borrowers from accessing relief from the federal government — the likes of which we have never seen before.

Does the failure of the Department of Education lend itself to the idea that the government can't be in charge of things?

To those that look at the broken student loan system and say that is a great example of government failure, I would say, look to the other side of the coin — the exploitative private student loan system.

The federal government and the federal student loan system is not perfect by any means. It has created a lot of problems for student loan borrowers. However, the private student loan system that has no consumer protections when it comes to affordable payment plans. They have higher interest rates, they engage in profiteering, and a whole host of other issues that you don't see at the governmental level.

We look at the student loan system within the federal government and think that this is a bloated, broken system that can be corrected. It should be limited in size — meaning we should lower the cost of college and cancel a ton of the student debt to make this program more manageable. But we don't want borrowers to go to the private student loan industry where they lack the affordable options and consumer protections that are afforded to federal student loan borrowers. So the grass ain't greener in the private industry for student loan borrowers by any means.

Why do you think there's so much political resistance to embrace education as a public good?

This is where things are more insidious and, frankly, shameful. It comes down to the fact that there are partisan politics at play. There are some on one side of the aisle that treat a college education as something that should be reserved for the elites rather than as a public good and something that really benefits our society. At the Student Debt Crisis, we believe that America needs highly educated and highly skilled citizens who can compete globally for modern jobs.

frank news is dedicated to storytelling across all mediums. A space for debate, discussion, and connection between experts and a curious readership. Topics are presented monthly with content delivered daily.

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What Does The Constitution Say About Bankruptcy?

by Ben Sheehan

September 13, 2020

In Conversation with Chief Justice Bridget Mary McCormack

by Chief Justice Bridget Mary McCormack

September 27, 2020

Who Profits from Your Student Loans?

by Cody Hounanian

September 27, 2020