By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She is currently writing a book about textile artisans.
The New York Times published a two-part series on Monday on predatory lending to taxi drivers to purchase taxi medallions.
Part one, ‘They Were Conned’: How Reckless Loans Devastated a Generation of Taxi Drivers examined the impact on taxi drivers. Part two, As Thousands of Taxi Drivers Were Trapped in Loans, Top Officials Counted the Money, discussed the lack of regulation that allowed the problem to arise, and continue.
The medallion lending bubble burst when prices for taxi medallions collapsed after Uber, Lyft, and other ride-sharing apps appeared on the scene.
The series has sparked inquiries by both the New York State attorney general Letitia James, and Mayor Bill de Blasio, according to the New York Times in Inquiries Into Reckless Loans to Taxi Drivers Ordered by State Attorney General and Mayor.
I recommend readers make time to look at the series. The sad and sorry tale that it recounts will be familiar to those with some knowledge of the foreclosure crisis. What it says: predatory lending persists, and regulators have failed to stop it. I note that this crisis has continued under Trump’s watch – but began well before he assumed office. And another point: New York city and state regulators are responsible for creating and maintaining this crisis.
Other than that cursory mention, I don’t wish to do a deep dive into the plethora of regulatory failings that occurred here. What I want to discuss is a possible solution to the problems some drivers continue to face – sparked by an alert reader’s notice of a titbit of misleading information in part one of the series. In discussing the options that a driver/borrower faced, the Grey Lady notes:
Bankruptcy would cost money, ruin his credit and remove his only income source. And it would mean a shameful end to years of hard work.
Part of the problem of the with the New York Times piece is its clear class bias – and its assumption that there is some overarching stigma attached to declaring bankruptcy. But in fact, the purpose of bankruptcy isn’t to shame the filer, but rather, to allow him or her to reorganize his or her financial life, so as to be able to return to leading a productive, dignified economic life – rather than being perpetually doomed to trying to pay debts that can never realistically be repaid.
As no less than Elizabeth Warren documented – in her work as a legal academic that first brought her to public attention – medical expenses, a divorce, or a job loss, can quickly bowl over individuals, and place them in positions of extreme economic hardship.
I also can’t resist mentioning that Senator Joseph Biden, is in part responsible for narrowing the scope of the remedies that bankruptcy provides. He joined Republicans in 2005 in promoting the Bankruptcy Abuse Prevention and Consumer Protection Act, legislation that made it more difficult to file for bankruptcy, and also expanded the previous exclusion of student loans from bankruptcy protection to include private as well as federal loans, unless the borrower can prove “undue hardship” (which has been defined as “certainty of hopelessness”). (For more on the Warren/Biden disagreement on this issue, see this Vox primer, The 20-year argument between Joe Biden and Elizabeth Warren over bankruptcy, explained).
What Does This Mean for Debt-Burdened Taxi Drivers?
In the case of taxi drivers burdened with medallion loans, bankruptcy would not, in fact, remove a driver’s only income source but only his medallion (and possibly not even that). Whether a driver files for bankruptcy under Chapter 7 or Chapter 13 of the Bankruptcy Code, the medallion holder may be able to retain that medallion – by satisfying certain specific, technical requirements (I’ll discuss some of these issues a bit further below).
But first I must make very clear: I know very little about bankruptcy. This is a highly specialized area of the law, one I have no first-hand experience with – I didn’t even take a basic bankruptcy class in law school. I know what I do not know – and bankruptcy certainly falls in that category.
So why should you read further? I consulted with a specialist before I wrote this post, to ensure that the information I present here is accurate.
I also point out the basic intuitions many people hold about this area turn out to be flat out wrong. For example: retirement accounts are generally completely exempt when a person files bankruptcy, as long as they qualify under the Internal Revenue Code (and almost all do). Most people don’t know this. So, bankruptcy lawyers despair when they learn that a potential client paid off debt, using a retirement account, before filing for bankruptcy. If that order had been reversed – filing first – those assets would have been protected.
There is a lesson to be learned from how someone like Donald Trump – whose companies filed for bankruptcy multiple times – can somehow retain significant assets, certainly worth far more than a New York City taxi medallion. And more than that, he survived and thrived – even managing to be elected President of the United States, rather than succumbing to a death from despair. (Yes, I am aware that these were corporate rather than personal bankruptcies. Nonetheless, I believe the point still stands – and is even emphasized, as Trump’s personal assets weren’t affected at all).
I stress: Anyone considering filing for bankruptcy MUST first get competent legal advice.
So here we go. I discuss the two possible options: filing under Chapter 7 of the Bankruptcy Code, or filing under Chapter 13. The difference is that under Chapter 7, a borrower’s debts are discharged in one step, whereas under Chapter 13, a borrower makes income-based payments for 3 or 5 years under a plan and receives a discharge after completion.
Okay, a taxi driver/medallion holder/borrower burdened with a medallion loan has a valuable asset: the medallion. But the lender holds a security interest in the medallion – meaning if the borrower fails to pay, the lender can foreclose on the medallion (as if it were a house or a car). When the holder files for bankruptcy, s/he can take steps to redeem that asset from the lender and eliminate the loan. How that is done depends on whether it’s a Chapter 7 or Chapter 13 proceeding.
In a Chapter 7 proceeding, the taxi driver/medallion holder/borrower filing for bankruptcy can redeem the medallion for its current value, but normally s/he would then have to pay the entire amount at once. Some holders paid more than a million dollars for their medallions — financing most of that purchase price – but the current value of medallions looks to be about $200,000. That’s still a formidable amount to pay for an asset that may not have reached bottom yet (despite their apparent purchase by some hedge funds, according to the New York Times). But if the driver can raise the money, the medallion is his or hers.
In a Chapter 13 proceeding, the taxi driver/medallion holder/borrower filing for bankruptcy can cramdown the principal to the current value and the interest to something called the Till rate (prime plus 1-3%), which would almost certainly be less (maybe even far less) than the monthly payments on the original loan, then pay this reduced amount over the 3- or 5-year term of the Chapter 13 bankruptcy plan.
Under either approach, if the bankruptcy is successful, the driver would then own the medallion free and clear, and his/her personal liability for the difference between the original loan amount and what he/she paid is discharged in the bankruptcy. This is the fresh start that bankruptcy is all about.
Another option would be to offer to surrender the medallion. If the lender is sloppy or out of business or just doesn’t want to recognize the loss, they may never respond. Then the medallion holder could just keep the medallion – and keep driving. The downside to this approach is that the lender’s security interest in the medallion would survive the bankruptcy discharge, so that lender could still foreclose on the medallion even after the driver’s personal liability was eliminated by the discharge.
Again, though, bankruptcy can be a very complicated process requiring diligence and a lot of hard, tedious work and meeting many conditions – some easy, some not. Whether it will help a particular medallion holder depends on his/her situation and the terms of his/her particular loan. So, before anyone reading this gets his or her hopes up, it’s necessary to talk to a competent bankruptcy lawyer or two.
What it offers is the possibility of a fresh start for many people who are now hopeless. It shouldn’t be ignored, stigmatized, or dismissed, as the New York Times does.
Free Help From Bankruptcy Lawyers
I include some information on sources that may be able either to assist, or point those considering bankruptcy in the right direction.
I also encourage readers to chime in with suggestions as well.
NYC Bankruptcy Assistance Project 646‐442‐3630
Mobilization for Justice, 212-417-3799, Wednesdays between 2:00 p.m. and 4:00 p.m.
NYC Bar Association Consumer Bankruptcy Project, 212-626-7383
National Consumer Law Center, “For Consumers” tab. Especially: How to Get Legal Assistance, (which includes a link to the National Association of Consumer Bankruptcy Attorneys, which in turn has a directory of members under the “Find a Lawyer” tab). And: Brochures for Consumers (a list of brochures, including a few on bankruptcy)
Now, I am aware that there are legal publishers who publish guides on how to file for Chapter 7 or Chapter 13 bankruptcy if you cannot afford an attorney. After thinking long and hard about the issue, I’ve decided not to include those details here.
My reason: This is highly specialized area of the law. One in which you can do yourself more harm than good if you don’t file properly. So, at the risk of repeating myself too often, I encourage those considering this option to try and consult an attorney before proceeding.
Isn’t the irony that people who could benefit from bankruptcy can’t afford a bankruptcy lawyer to navigate the legal labyrinth Uncle Joe Biden created?
If it’s not complicated, you’d need around $1500 for a Ch. 7 BK lawyer and filing fees before seeing any relief. Under Ch. 13, the attorney is often paid out of the 3-5 year payment plan and some don’t require an upfront payment. At least half of Ch. 13’s end up defaulting on the payment plans and lose their BK asset protection. This risk might be underestimated by debtors considering Ch. 13. After a default on the Ch. 13 payment plan occurs, creditors would be free to “repo” the medallion. Those unable to afford the attorney’s fees for Ch. 7 might be incentivized to use Ch. 13 even if it’s not in their long-term interests.
Thank you for that clarification. Doesn’t the scenario JL lays out here sound complicated? More than a basic $1500 quickie bankruptcy?
In most simple Ch. 7 BKs, debtors lose secured assets and unsecured assets exceeding minimum state-established thresholds. Borrowing 200K to “redeem” the medallion as JL suggests would depend on a creditor’s willingness to take on the risks of lending to a bankrupt debtor on an asset of questionable long-term value. It might not be a viable option for everyone.
Ch. 13 was established for those who want to keep their secured assets and are able to make adequate payments over a 3-5 year period. Ch. 13 attorney fees are set by local judges and will take at least $4K out of the payments. Trustee fees may take another 5-10% of the payments. It’s expensive and risky for debtors without substantial and steady income. The Ch. 7 “redemption” strategy seems to be less risky for debtor’s who are able to borrow the market value of the medallion.
In either case, I’d question the long-term value of the medallion before agreeing to keep it in a BK. If the medallion can’t generate an extra 30-40K in annual income over other career options, giving it up in a Ch. 7 might be best.
Driving a Taxi is one of the very rare jobs that a recent immigrant with a little English can do immediately upon arrival.
This reality makes the value of the medallions rather hard to describe without considering the situation of the prospective owner. It also explains more completely the tragedy of a bunch of billionaires ‘disrupting’ the business of people at the bottom of the economic ladder.
Most drivers I know would rather drive for a person who owns a license rather that be encumbered by the various difficulties, and expenses associated with ownership, License fees,(cost of medallion), insurance, company dues, maintainence, risk related to the drivers who use your taxi when you’re not driving yourself…
Owners tend to have more need for income/cash flow, so they deal with the hassles of ownership in order to make a little more money each week, and it is just a little.
While BK may erase the debt, it still leaves Taxi drivers suffering what amounts to a man made plague.
The Taxi ‘industry’ is, for the most part, just a whole lot of small-time operators who are close to the edge a lot of the time, and so the ‘disruption’ caused by Uber and Lyft is squeezing people who have few options, and considering how municipalities have failed to enforce the regulations that govern who can operate in their cities, it’s clear they have no one but themselves to look out for their interests.
Also, I’d never understood why people who were eligible for Ch. 7 would take Ch. 13 until you explained it so clearly. Thanks again.
I read the first article the other day and if I remember right, the loans for medallion were not considered to be consumer loans, they were considered business loans. Consequently, the regulatory oversight seemed to convince itself that the taxi drivers as businesses (not consumers) had the intellectual capital to properly appraise the risk of the loans to their businesses. Therefore they didn’t need consumer protection.
I haven’t read the 2nd article, but from the 1st I did have to wonder why these drivers seemed to be trapped in their loans. Especially if they truly were business loans they should be able to protect their personal assets.
Small business loans are usually personally secured. Who would lend money to a small business otherwise, unless it was very long-standing and had very good credit? (I don’t know if this applies to SBA loans but I also don’t know if cabbies would be eligible.)
I am a small business owner and all of my business’s credit is secured both to my corporation and to me personally.
DrRichard – These are probably small business loans and are personally guaranteed by the individuals and the recourse is back to the individual. Additionally, if the Banks in underwriting sought SBA 7a or other additional assistance to back their collateral the Borrowers and Guarantors could be sent to the treasury for collection (think garnishment of wages and all treasury rights and powers for the govern’t to get their money back)
Very helpful, thanks!
While I do empathize with owner-operators, this is misleading – do all owners of medallions drive? Evgeny “Gene” Freidman – the cab king of New York (associated with Michael Cohen nonetheless) or Symon Garber the taxi king of Chicago (a friend of old Mayor Daley’s son Patrick). Again this is an example of regulatory failure.
In regards to this comment: “this crisis has continued under Trump’s watch”, how exactly does Trump have anything to do with this? As I read the two articles, it seems to me that this crisis was created, festered and made very profitable by the NYC regulatory system. And somehow Trump is supposed to go into NYC, the proverbial “liberal utopia” and fix it? Trump may deserve many “pokes in the eye”, but this is not one of them. Or did you have to poke Trump because you are supposed to lay everything at Trump’s feet? Sort of like getting a hangnail during Trump’s presidency and somehow Trump is responsible? This sad example of corruption should be investigated, prosecuted, and those responsible to include NYC officials sent away to the clink. And all ill gotten wealth separated from those who prey upon our poor.
Basic reading comprehension and elementary school civics can answer these questions.
According the sentence which precedes the one you quoted, the “crisis” relates to predatory lending which regulators failed to stop. The writer explains that this crisis continues under Trump’s presidency. If the author hadn’t stated this, readers might mistakenly think the problem magically stopped at some point.
How is it “poking Trump in the eye” to mention that he’s taken no action? It’s merely a fact.
Trump hasn’t done a damn thing about predatory lending. Nor has he done a damn thing about gouging borrowers during bankruptcy. AFAICT he has no intention of doing anything about it ever. Can NYC officials remedy this on their own? No. They have no control over bankruptcy law. Trump, however, does.
Trump is the President. As such he has the ability to suggest, request, or shape legislation that would remedy the problem. According to Wikipedia:
> The president can be involved in crafting legislation by suggesting, requesting or even insisting that Congress enact laws he believes are needed. Additionally, he can attempt to shape legislation during the legislative process by exerting influence on individual members of Congress.
In fairness, I should note the President has no duty under the Constitution to remedy hangnails.
I don’t think NYC could be called a liberal utopia, or even a neoliberal utopia, since at least the debt crisis of the 1970s. It’s been a bare-bones operation all around ever since then.
Rep. Katie Porter had a great line that bankruptcy law covers what happens when capitalism doesn’t work out, but is therefore understudied.
To add to the list of misconceptions, I find that many peeps–including lawyers!– don’t realize that within constraints INCOME TAXES can be discharged in BK.
The hitch here is that Returns must be timely filed–one can’t waltz into BK and file e.g., 5 years–which you will be forced to do anyways before you file–and get relief from tax liability.
Timing us important also: besides the shame factor I find occasionally that small businesses hang on because they feel a duty of loyalty to their employees.