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New York attorney Austin C. Smith writes an important article in the American Bankruptcy Institute under the heading The Misinterpretation of 11 U.S.C. 523(a)(8) suggesting that federal courts have been misapplying the student loan exception to discharge since 1990.
Section 523(8) of the Bankruptcy Code provides that bankruptcy does not discharge an individual debtor from any debt for:
(A)(i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or
(ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or
(B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986.
Prior to the Bankruptcy Reform Act of 2005, private student loans were dischargeable in bankruptcy. The change in the bankruptcy law in 2005 was to add subsection (B) above to provide that a Qualified Education Loan as defined by Section 221(d)(1) of the Internal Revenue Code was excepted from discharge. In all other respects, the law remained the same.
The error federal courts are making, according to Smith, is when they deny discharge to private student loans because they are “educational benefits” under section A(ii) when in fact section A(ii) does not address private student loans. Section A(ii) existed prior to the reform act of 2005, so to claim that any loan that confers an educational benefit is excepted from discharge is to argue that private student loans were not dischargeable prior to 2005, and that simply is not the case.

The term “educational benefit” is being interpreted so broadly that it makes the addition of Section (B) unnecessary. Indeed, how could any private student loan not also be an educational benefit? Is not any loan to a student also a benefit to their education?

According to Smith, the courts have lost track of the history of 523(a)(8). In 1990 Congress amended the law to deny discharge to any obligation to repay an educational benefit, scholarship or stipend. The amendment was spurred by an 8th Circuit case of U.S. Dept. of Health and Human Services v. Smith in which the bankruptcy court discharged the debt of a medical student who accepted a scholarship on the condition that he work in a “physician shortage” location for a certain number of years. The law was amended in 1990 to prevent discharge of these conditional scholarships. The 1990 amendment prevented discharge for any debt:
 (a)(8) for an educational benefit overpayment or loan made, insured or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution, or for an obligation to repay funds received as an educational benefit, scholarship or stipend.
Smith argues persuasively that the 1990 amendment was never designed to protect loans. Conditional scholarships were the target of the 1990 amendment.

[A] growing number of courts have realized the difficulty of the resultant logic: Interpreting “educational benefit” to except from discharge any loan that in any way facilitates education renders the remaining provisions of the statute meaningless. If any money lent to any person for any educational purpose is protected, then the remaining provisions of § 523(a)(8) — provisions carefully crafted to protect federally insured loans, nonprofit loans and other loans qualified by the IRC — become superfluous.”

What is a Qualified Educational Loan under Internal Revenue Code 221(d)(1)?
A QEL is “any indebtedness incurred by the taxpayer solely to pay qualified higher education expenses. The term “qualified education expenses” is defined as “the cost of attendance at an eligible educational institution.” Cost of attendance is “tuition, books, and a reasonable allowance of room and board as defined by the institution.” Private loans in excess of this limit are not “qualified” (i.e., they may not be taken as deductions on a tax return) and they are not protected from the bankruptcy discharge.
The problem is, federal bankruptcy courts are, according to Smith, bypassing the required tax analysis demanded by IRC 221(d)(1) and just declaring private loans nondischargeable educational benefit.
The most extreme example of this misapplication of the student loan discharge law in found in the case of Carrow v. Chase Loan Serv., 2011 Bankr. Lexis 823 (Bankr. N.D. 2011). Despite the fact that the debtor received the maximum federal loan amount for which she was eligible and thus all the private loans issued by Chase Bank could not be certified because they were beyond the debtor’s eligibility, the court nevertheless declared the debts to be nondischargeable because they were clearly an “educational benefit.”
Contrast the Carrow opinion with the opinion of the 7th Circuit in case of In re Oliver, 499 B.R. 617 (7th Cir. 2013). In that case the 7th Circuit held that a debtor’s failure to repay tuition did not constitute a qualified educational loan and therefore ruled the tuition debt discharged. The bankruptcy court for the Northern District of California made a similar decision recently. Inst. of Imaginal Studies v. Christoff, 310 B.R. 876, (N.D. Cal. 2014).
The Take Away:
Bankruptcy attorneys need to spend more time determining whether the private loans their clients are facing are Qualified Educational Loans under IRS 221(d)(1) and, if not, bringing Adversary Proceedings to determine whether those debts are excepted from the bankruptcy discharge. Special attention must be paid as to whether the private loans exceed the school’s certified cost of attendance.
Image courtesy Flickr and iwearyourshirt.

This is the bankruptcy case study for E.A. from Montgomery, Kendall County, Illinois. He is here to see whether chapter 13 bankruptcy will provide debt relief for him. Let’s look at the facts of his case: he is currently a homeowner with a market value of $149,000. (www.zillow.com)He has two outstanding loans on the property.+ Read More
The post Bankruptcy Case Study-Chapter 13: Get Current On Mortgage appeared first on David M. Siegel.

“With Great Risk Comes Great Reward” – T. Jefferson
In order to succeed as a business person in this country individuals have to be willing to take a risk.  They put their heart, soles and wallets on the line.  However, not every business can succeed.  Even among those businesses that do succeed, there are often major hiccups in the owners personal finances along the way.  When a business owner files for personal bankruptcy they face special headaches that non-business owners don’t face.
Pay Stubs
When an employee of a company files personal bankruptcy, the trustee requests pay stubs, bank statements, tax returns and other financial documents.  These documents are usually pretty straight forward with the information the trustee is seeking right there for all to see.  However, business owners don’t typically receive pay stubs.  Even if a business owner chooses to receive a regular paycheck, the stubs are not telling the whole story.  They may also receive bonuses, profit sharing or simply draws that may not appear on the owners pay checks.  The owner’s income is often a complicated target that is hard to find and even more difficult to explain to a trustee who may never have run a business of their own.
Valuation
The value of a business is a moving target that is very difficult to nail down.  Assets, debts, income, depreciation all play into the amount that the business could sell for on the open market.  While the target is moving and difficult to determine, it is also potentially very important to the outcome of a business owners personal bankruptcy.  In a Chapter 7 bankruptcy the valuation of the business could determine whether or not the business owner is entitled to keep their business after filing.  In a Chapter 13 bankruptcy the valuation of the business is used to determine how much of the debtor’s unsecured debt must be repaid.  To make matters worse, neither your judge nor your bankruptcy trustee has any special training when it comes to business valuations.  Therefore, it is important to be well prepared so that your business valuation prevails.
Loans
It would be great as a business owner to have a company so steady that each month’s income was equal to or greater than the last.  However, as all business owners know, business is generally a series of ebbs and flows.  One month you are on top of the world and the next you are dead in the water.  Seasonal changes, road construction, economic slow downs and a plethora of other complications cause businesses head aches.  Often times business owners turn to small business loans, credit cards or other lines of credit to get through the slow months.  However, most of these sources of credit require that the business owner personally guarantee the loan.  When a business owner is in bankruptcy they are not allowed to take out most loans without court approval.  This makes pre-bankruptcy planning especially important for business owners.
Personal Guarantee
Most businesses are run by their owners as separate entities.  They may be a corporation, a LLC, a PLLC or one of many other various forms of entities.  However, because they are run as separate entities, these businesses are liable on the debts that they take out.  While the business owner is able to discharge their personal liability in bankruptcy, they cannot discharge the debts owed by the business itself.  This means that despite the bankruptcy, the owner will have to repay most business debts if they wish to continue operating the business.
These are just a few of the many problems that business owners face when they file for personal bankruptcy.  That is why it is imperative that business owners seek help from an attorney that has intimate knowledge of both bankruptcy rules and procedures as well as basic business practices.
Second Chance Legal Services offers free initial consultations.  Please call us at (248) 629-6367 to schedule your consultation today.

Sometimes you’ve got a question you need answered before you make the decision to hire a lawyer.
Questions such as:

• Can I transfer property out of my name to protect it from a bankruptcy filing?
• Can I get a mortgage after filing bankruptcy?
• Can a school withhold my transcripts for not paying a student loan?
• Is it a good idea to have my parents co-sign for my student loans?
• How do I stop a debt collector from calling me?
• How long does negative information remain on my credit report?

It used to be that you had two choices when you needed those questions answered – you could sit on the Internet all day trying to figure out which website had the right answer, or you could drag yourself into a lawyer’s office and waste a few hours of your time.
I’m happy to tell you that you now have a third choice – Money Go Roundtable.
Money Go Roundtable is a podcast that I cohost with my friend and colleague Gene Melchionne. Each work day we choose a question like the ones above (in fact, we answer those exact questions on the show) in ten minutes.
It’s free to subscribe, free to listen, and free to ask your general question. Just click the button to subscribe in iTunes.

If you’ve got a general question just hop onto Twitter and ask it using the hashtag #mgrpod. Don’t ask specific questions about your case, and remember that we’re not giving legal advice – just general information to help you get a better understanding of the world of debt, credit, bankruptcy and student loans.
Gene and I are having a lot of fun doing the shows, and our goal is to give you as much knowledge as possible. I hope to see you there soon.