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Borrowers are beginning to win battles to erase some student loans in bankruptcy court, overcoming stiff obstacles that have generally blocked that path except in extreme cases of financial hardship, the Wall Street Journal reported today. Since March, several bankruptcy courts have allowed borrowers to cancel private student loans with a new legal argument that relies on vague wording about the legal definition of a student loan. Without proving extreme hardship, the Bankruptcy Code says that a borrower can’t discharge a loan made for an “educational benefit.” This language has opened a window to cancel loans for students who argue that their loans falls outside this category of debt. Such reasoning has been applied to loans obtained to attend schools without accreditation or to study for a bar exam. The argument only applies to a slice of the private student-loan market, which makes up less than 10 percent of the more than $1.3 trillion in outstanding student debt. The federal government dominates the student-loan market and isn’t as vulnerable in bankruptcy proceedings. Read more. (Subscription required.) 

Now available in the ABI Bookstore: Pick up your copy of the updated and revised Graduating with Debt: Student Loans under the Bankruptcy Code, Second Edition! 

The legal malpractice suit that "Real Housewives of New Jersey" star Teresa Giudice claims will vindicate her of bankruptcy fraud allegations — if only in the court of public opinion — is back on after being put on hold for much of this year, NJ.com reported yesterday. Giudice's lawyers Anthony Rainone and Carlos Cuevas filed papers in Morris County Superior Court on Wednesday to reinstate the malpractice lawsuit, which had been dismissed without prejudice earlier this year after her bankruptcy proceedings were unexpectedly reopened. Rainone said that the malpractice case is not likely to go to trial until late 2017 at the earliest.

The Consumer Financial Protection Bureau's plan to restrict the use of mandatory arbitration clauses is likely to be scuttled by Congress, the incoming Trump administration or an industry lawsuit, according to a National Mortgage News commentary today. While the future of the agency and its director are both up in the air, many are now focused on its efforts to finalize the arbitration plan, which the industry fiercely opposes. There are multiple ways that GOP policymakers and the industry could target the rule, leaving many observers to conclude that at least one will work, according to the commentary. For starters, President-elect Donald Trump could attempt to fire CFPB Director Richard Cordray, likely igniting a protracted legal fight that may ultimately kill the arbitration plan. "A new CFPB director will be installed and one of the first decisions will be to rescind regulation banning mandatory arbitration clauses in consumer financial contracts," said Jason Johnston, a law professor at the University of Virginia School of Law.

The Consumer Financial Protection Bureau estimates that the median debit card purchase triggering an overdraft is $24,  essentially a loan with an interest rate that, in annual terms, measures in the thousands of percentage points, according to a Bloomberg commentary yesterday. While banks could simply decline a transaction if there isn’t enough money to pay it,  four out of five large American banks continue to charge overdraft fees on debit or ATM transactions, according to a report issued yesterday from the Pew Charitable Trusts. Most charge at least $35 for each overdraft. Citigroup Inc. is among the minority that don’t let customers incur overdrafts on debit transactions or ATM withdrawals. JPMorgan Chase & Co. bans ATM overdrafts but does charge a fee on debit overdrafts. Bank of America Corp. does the opposite, banning debit overdrafts but allowing ATM overdrafts.

The Consumer Financial Protection Bureau (CFPB) yesterday sued Military Credit Services, LLC (MCS) for making loans with improper disclosures, according to a press release. This is the CFPB’s second enforcement action against MCS. In 2014, the CFPB, along with the states of North Carolina and Virginia, sued the company for similar violations, and the company was ordered to revise its contract disclosures in 2015. In yesterday’s action, the CFPB ordered the company to ensure that its contracts comply with the law. It also required the company to hire an independent consultant to review its practices and to pay a $200,000 civil penalty.

The U.S. Department of Education has two quite different roles in the lives of indebted former students: The same bureaucracy that must safeguard taxpayer dollars by collecting $1.1 trillion in loans also oversees the nation's largest-ever effort to forgive student debt, Bloomberg News reported yesterday. These dual roles have culminated in a strange situation. The Obama administration has repeatedly promised that borrowers eligible to have their student loans cancelled would be reimbursed for "every penny." But for months, the Education Department has been actively working to collect on federal student debt owed by tens of thousands of former students at Corinthian Colleges Inc., which filed for bankruptcy in 2015 under a cloud of fraud investigations. It is clear that government officials, working under their own guidelines, have reason to believe at least some of these same debts should be forgiven. The government stands to gain from muscular collection tactics. Not all former Corinthian students are eligible to have their debt cancelled. But eliminating the debt of those who are could cost the federal government nearly $4 billion, according to Education Department estimates. Read more.

Now available in the ABI Bookstore: Pick up your copy of the updated and revised Graduating with Debt: Student Loans under the Bankruptcy Code, Second Edition!