by Scott Schuster

Small cases, that often do not seem to be worth pursuing at all, can have a big impact on your company’s bottom line. I have often heard clients say “I want to pursue this as a matter of principle, but I’m not sure it’s worth the cost.” Some attorneys agree. However, pursuing and winning such a case tells the world that you are serious about collecting your debts and that message is often far more valuable than expected.

I recently defended a case wherein the debtor attempted to discharge certain student loans through bankruptcy. The amount of the debt was small ($20,000) and the monthly payment ($122 per month for 25 years) was insufficient to make any noticeable impact on the client’s monthly financials.

However, the debtor’s case was absolutely frivolous because the Bankruptcy Code makes discharge of student loans subject to very stringent conditions. The Code states that student loans are not discharged unless the debtor can show that it would be an “undue hardship” to force the debtor repay the debt. Typically, to prove an undue hardship, a debtor must provide evidence that the debtor has minimized his or her expenses and maximized his or her income.

The aforementioned case was frivolous because the debtor, who was disabled and only earned $1,300 per month from social security disability, lived in a $285,000, five bedroom, three bathroom home that was paid for by her husband. Debtor’s SSI income was used to support the $1,800 in mortgage payments the family made each month. More egregiously, the Debtor was disabled when she accepted the student loan and agreed to repay the money.

Despite the fact that paying $122 per month would not cause an “undue hardship,” Debtor filed a complaint seeking to discharge the student loan. The client immediately asked whether the case was “worth pursuing.” Clearly, the client would win the case if we fought hard enough, but the debt was small.

My advice to the client was to take a step back and look at the case in the grander scheme of its business operations. The Debtor’s attorney in the case has practiced for many years and files dozens of bankruptcies each year. If the client were to “roll over” and show that it would not fight the smaller cases, the attorney would know what he could get away with in future cases. One thing I pointed out to the client is that debtors’ attorneys tend to be very friendly with one another and tend to share their experiences. As a result, showing weakness in this case could give rise to dozens of frivolous student loan dischargeability actions in the future.

In the end, we litigated the matter. The parties exchanged discovery, conducted depositions, and eventually filed motions with the court seeking summary judgment. Debtor’s counsel was flabbergasted; he repeatedly said ”I cannot believe your client is fighting this case.” In the end, he probably spent ten times more time and effort on the case than he expected. I flew to Philadelphia to argue the case and put our argument - that Debtor’s lavish lifestyle is not an “undue hardship” - on the record. The Judge agreed and entered an order in our favor, excepting the debt from discharge and guaranteeing that the debtor could not take the easy way out.

Yes, the client spent some money to litigate the case and the immediate result ($122 per month for the next 25 years or so) will make no difference to the client’s year-end profit. However, the client took a stand and made it known that, as a matter of principle, frivolous cases will be defended. Debtor’s attorneys will think twice about filing such a claim the next time around.

Many bankruptcy attorneys are concerned about the efficiency of their process. By definition, at least the debtor has limited funds to pay for an engagement. This impacts the creditors who may not see a full recovery on their claim. As a result, many bankruptcy practitioners are leery of spending any resources on electronic discovery. This podcast was created to share the experiences of Bob Bernstein, a bankrupcty practitioner in Pittsburgh, PA with Bernstein Law Firm and Jeffrey Ritter, an electronic discovery consultant from the Waters Edge who has just written a book on electronic discovery and the bankruptcy process called Discovering the Digital Record-The Questions for Examination. 

Click link to listen to Podcast: http://www.esibytes.com/?p=718

Click on this link to see Bob Bernstein talk with Kevin Miller on WPXI’s NightTalk about Bankruptcy and Get P.A.I.D.: A Guide to Getting Paid Faster (and What to do if You Don’t!)

http://www.youtube.com/watch?v=vsgGf2RIig4

Please feel free to share this link with people.

It’s gotten pretty quiet out there about whether businesses can get loans; what was known as the “credit crisis.”  It hasn’t loosened up very much. Maybe there is money to lend.  Maybe there isn’t.  Even if there is, it seems that only those busineses with good credit, good assets and a good business plan will qualify.  These are the best risks.

But there is still another credit crisis out there.  That is the crisis that small- and medium-sized businesses are facing daily.  The question of whether to extend credit to its customers is a daily issue.  Can we afford to use up our limited credit line on extending credit to new customers?  What if we need it for materials or staff?  Or advertising?  Are there was to reduce our risks to enable us to get the business without losing our shirts?  These are questions that are asked more and more frequently as this recession continues.

Credit managers and other treasury people need to worry about these issues and make decisions based on proper policy, proper risk analysis and proper documentation (when they do lend).

Business owners and managers:  make sure you are thinking about this stuff other than when the need is immediate.

Bob Bernstein