Blogs
Student loans continue to be a heavy burden on many people. Student loan payments are often as much as mortgage payments and can severely limit your ability to have any kind of financial future. Unfortunately many people just assume that they cannot discharge their student loans in bankruptcy. While it is true that it is difficult to discharge student loans in bankruptcy, it is not impossible. Some recent decisions from courts in the Ninth Circuit give us some indication how to discharge student loans in bankruptcy.
The clear indication from the most recent run of cases is that discharging student debt requires preparation. Unless you are living on the verge of homelessness, you cannot simply file a bankruptcy petition, file an adversary proceeding, and expect to get a student loan discharge.
The Evolving Law of Student Loan Discharge
The three elements of student loan discharge are called the Brunner Test and can be boiled down to: 1) how much do you earn, 2) could you earn more, and 3) have you tried to do something about your student loans.
The first part of the test and the third part of the test go together, because they are related to earning earnings and attempts at repayment. Basically, the court will look at how much you make and how you spend your money. If too much money is left over, then you are not entitled to a student loan discharge. One court said that you have to “show more than tight finances” but you can stop short of “utter hopelessness,” however, you are not entitled to a “middle class standard of living” if you want to discharge student debt.” ECMC v. Beattie, 490 B.R. 581, 586 (W.D.WA 2013).
The question, therefore, is whether your expenses are excessive in light of your obligation to repay your student loans. Fortunately, the Ninth Circuit’s recent decision in Hedlund v. Educational Resources Institute, Inc. will help many more people qualify for a student loan discharge.
First, and most importantly, they separated the conduct of the husband – who was seeking a student loan discharge – from the conduct of his wife. The court ruled that the wife’s decision not to work could not count against the husband’s good faith in proposing a budget and attempting to repay the student loans. This provides some relief for borrowers, because it prevents the lender from pointing at the spouse’s conduct. This doesn’t mean that if your spouse is a plastic surgeon, you can simply ignore their income and discharge your student loans. It does, however, mean that the court must focus on the borrower. In the past, lenders would ask why the borrower’s spouse couldn’t earn more.
The idea that the inquiry is narrowed may not seem significant to non-lawyers, but to lawyers it is huge. The Brunner Test is a “totality of the circumstances test.” The court examines each of the three prongs of the Brunner Test independently, but it must look at every fact and circumstance that arises under each prong. If you fail to meet one prong, then the court will rule in favor of the student lender. Narrowing the inquiry means that there are fewer facts and circumstances that go into the test. This means that there is less opportunity for a student lender to use something against you. The facts and circumstances no longer include the question “why can’t your spouse earn more.”
The interesting thing about this is that your spouse’s lack of work cannot hurt you anymore, but it can still help you. For example, if your spouse decides to stay at home and take care of the kids or an elderly relative that does not mean you are acting in bad faith and cannot discharge your student loans. However, if your spouse is unable to work or unable to increase their income, that can still help you. You can still argue that your ability to repay your student loans is limited by your spouse’s inability to increase their income.
Second, the Ninth Circuit recognized that even though certain expenses might be “excessive” they could also be “marginal.” In other words, a budget does not have to be perfect and it does not have to be cut down to the barest minimum in order for you to discharge your student loans. In Hedlund, the Ninth Circuit noted that the cell phones and the car lease were probably excessive expenses, but they were also marginal.
The court reached this conclusion in part because the expenses were also necessary. This highlights an area of struggle in student loan litigation. Student lenders will argue that any expense beyond basic housing, food, clothing, and medical expenses is excessive. This means that student lenders will object to things like car payments, cable, and internet. It is absolutely absurd to argue that the internet is not part of a basic existence in 2013, but that’s their argument. The Hedlund decision will hopefully limit their ability to make such absurd arguments by allowing a court to note that an expense may be excessive, but that the excess is marginal.
The middle prong of the Brunner Test – could you earn more – is usually the simplest prong to prove. You have to prove that you have tried to get a better paying job; and that, a better paying job is unavailable. A trickier question is whether you could get a second job; however, courts appear to be wary of forcing people to work more than fulltime. If you are only working part time, then the court will expect you to either work a second job or explain why you cannot work a second job. Given the state of the economy, this remains the easiest part of the test to satisfy.
Why Preparation Is Essential
The recent cases on student loan discharge have all focused on the borrower’s attempts to repay the loan before they filed bankruptcy. There are two reasons for this. First, the law treats bankruptcy as an absolute last resort for student loan borrowers. Second, in the last few years student lenders have created many new forbearance and alternative repayment options.
Since bankruptcy is the absolute last resort for discharging student debt, it is important to show that it is your last resort. This means that before you file bankruptcy, you should work with a bankruptcy attorney to put your case in the best possible light. This means reviewing your employment history, reviewing your spending, and documenting your efforts to maximize income and reduce expenses. Documentation is your best friend when you file an adversary proceeding to discharge a student loan. If you can actually show what you spent your money on for the last six months to a year, and it was only spent on necessities, then you have a much stronger case. Additionally if you can show that you have actively tried to seek higher paying work and been unsuccessful, then you have a much stronger case.
At the same time that you are documenting your income and expenses, you should apply for all consolidation, forbearance, and alternative repayment plans that are available to you. You will quickly realize that your federally backed student loans are much quicker to help you out than your private student loans. That’s fine. Although there is no definitive ruling on the subject, it appears that courts are willing to give debtor’s credit for acting in good faith if they work out alternative repayment plans on federal loans; and then, attempt to discharge private loans that are either unwilling to reach alternative payment plans or their alternative payments plans are unreasonable.
One note of caution about applying for forbearance or alternative repayment plans, beware of lenders who “lose” your application. Avoid online applications, because they are often impossible to trace. Whenever possible, mail in your application using registered mail and keep the mailing receipt. If it is impossible to submit the application through the mail, then make sure that you print out any confirmation of filing and make sure to contact customer service for confirmation that they have received your application materials. You should keep all correspondence.
Conclusion
It is possible to discharge student loans in bankruptcy, but you should not expect to do it overnight. You should work with a bankruptcy attorney who can help you setup your case to get the best possible result. You may be able to resolve your student loan problems without resorting to bankruptcy. A bankruptcy attorney, who is experienced in student loan issues, can help you find non-bankruptcy options for your student loans. If you cannot find non-bankruptcy options for your student loans, then your bankruptcy attorney can help you create the paper trail necessary to make a good case for student loan discharge.
The post Student Loan Discharge 2013 Updates appeared first on Bankruptcy Attorney Seattle and Kent.
Many clients “surrender” their house as part of their Chapter 7 bankruptcy and assume that said act will allow them to put their homeowner's “experience” totally in their rear view mirror. Unfortunately, in the context of dealing with secured debt (such as mortgages or car loans) in bankruptcy, the term “surrender”does not mean what many... Read More »
If you file for bankruptcy without a lawyer, you can usually get most of the way to the finish line. Unfortunately, “almost” is good enough only in horseshoes and hand grenades – not in bankruptcy.
For a layman filing a Chapter 13 case without a lawyer, he didn’t do too badly.
He got credit counseling and filed the certificate.
He completed the schedules fairly well.
He even filed a pro se adversary proceeding to enforce the automatic stay when the foreclosure on a multi million dollar property went forward despite the bankruptcy.
But the one thing he didn’t know and didn’t provide for was an extension of the automatic stay.
Turns out, he’d filed another bankruptcy case within the 12 months prior to the present case. That case had been dismissed.
So, the automatic stay, one of the defining features of bankruptcy relief, expired 30 days after his case was filed.
The bank is now free to foreclose on his house without seeking the consent of the bankruptcy court.
The Vanishing Bankruptcy Stay
He came so close to getting it right and saving the money a bankruptcy lawyer would have cost.
But an overdeveloped sense of confidence and bankruptcy “reform” bit him instead.
Stopping repeat bankruptcy filings was a goal of the 2005 bankruptcy amendments. Section 362 was altered to provide that in cases where the debtor had a prior case pending within a year of the present case, the stay only lasted 30 days unless the debtor moved the court to extend it.
If there were two cases, pending and dismissed, in the prior twelve months, a bankruptcy filing brought with it no stay at all. The debtor had to proactively petition the court for a stay. And essentially argue why they should get a third bite at this apple.
Beware The Simplicity Of The Bankruptcy Forms
One take-away from this man’s experience is that success in other professional fields, and the fact a bankruptcy case is filed using preprinted forms, does not mean that you can fill out the forms and become an effective bankruptcy lawyer.
While the forms in this man’s case asked about prior bankruptcy filings, nothing in the forms told him what the consequences were of having a prior case that was dismissed.
Official bankruptcy forms are just the beginning of a case.
Traps Abound
A second lesson here is that the Bankruptcy Code since 2005 is strewn with man-traps and quick sand that was deliberately added to the code by Congress to force the automatic dismissal of bankruptcy cases. The vanishing automatic stay is just one of them. Just like the old pitch that you can’t tell the players without a program, you can’t count on navigating a bankruptcy case on your own just because you found a set of forms.
The third point recalls another old saw: penny wise and pound foolish. This case included two multi million dollar properties. The fee for a bankruptcy lawyer to handle the case probably amounted to $2000. By filing without a lawyer and saving that $2000 attorney fee, both properties are in jeopardy.
Just because the law lets you serve as your own lawyer doesn’t make it a good idea. The more that is at stake in your financial life, the more important it is to get experienced bankruptcy counsel.
Cathy Moran helps individuals and small businesses in Silicon Valley with their bankruptcy issues. She can often be found on Google+ and on Consumer Ledger, where she shares information about consumer protection issues and personal finance.
Image courtesy of Flickr and cdedbdme
Official Bankruptcy Forms – A Trap For The Unwary was originally published on Consumer Help Central. If you're seeing this message on another site, it has been stolen and is being used without permission. That's illegal, a violation of copyright, and just plain awful.
Many clients “surrender” their house as part of their Chapter 7 bankruptcy and assume that said act will allow them to put their homeowner’s “experience” totally in their rear view mirror. Unfortunately, in the context of dealing with secured debt (such as mortgages or car loans) in bankruptcy, the term “surrender”does not mean what many people think it does. The act of “surrendering” someone’s collateral in bankruptcy only means that you no longer intend to make the mortgage or car loan payments associated with the collateral. Although receiving your bankruptcy discharge does eliminate your personal obligation to repay the note and mortgage, you still own the collateral (the house or car) until something happens which divests you of such ownership interest, such as a foreclosure sale, short sale or deed in lieu of foreclosure.
The perception that a Chapter 7 Trustee will take control of all property surrendered by a debtor is simply not true in most instances. The Trustee’s goal is to liquidate assets (ie., sell property) in order to generate funds for a distribution to the creditors. However, if the property in question has no non-exempt equity, the Trustee will abandon the estate’s interest in the property and no liquidation will occur. Further, discharging your personal obligation to repay the mortgage does not somehow make the bank the new owner of the property. The bank will only become the owner of the property (1) if their foreclosure process is completed and the bank is the successful bidder at the auction sale, or (2) if they accept from you a deed in lieu of foreclosure.
There are “pros” and “cons” to remaining the owner of your “surrendered” house after bankruptcy. The “up side” is that, if you choose to do so, you should be able to live there for quite a while without making any mortgage or rent payments, which should help in your efforts to get back on your feet financially (although we do recommend that you continue to keep liability insurance on the property). The “down sides” are numerous, especially if you have vacated the property and moved on with your life:
- First, as the property owner you will remain liable for any injuries sustained on the property, such as if a neighborhood kid wanders on to the property and gets hurt. This is effectively dealt with by maintaining (and paying for) your own liability insurance policy on the property. The bank will maintain its own policy insuring the building’s structure against things such as fire, but said policy normally will not protect you from persons getting injured on the property.
- Second, you must still comply with all municipal ordinances regarding property ownership. If someone creates an eyesore on the property by storing old tires or junk cars on it, etc., it is the property owner who will (1) receive a citation from the municipality to remedy the problem and (2) be fined if such remediation does not occur in a timely fashion (as determined by the municipality). This can be difficult to deal with, especially if you have moved far away, hopefully to greener pastures. A caveat to this is that in certain circumstances where the mortgage holder has taken an egregiously long period of time between the entry of a Judgment of Foreclosure and Sale and the conducting of the auction sale (ie., 29 months in one reported case), the mortgage holder can be fined by the municipality if tenants in the property become endangered due to conditions on the premises that are allowed to develop and not remedied by anyone. There is a paucity of reported law on this issue, and we do not suggest that it provides a “safe harbor” for property owners whose abandoned property remains titled in their names.
- Third, if the property in question is a condo or townhouse or part of any community having a homeowner’s association, you will remain liable for all post-bankruptcy HOA dues and assessments. We recommend that you continue to pay the HOA fees after the bankruptcy filing, since homeowner’s associations tend to be very quick about suing those property owners who are in default.
- Fourth, unless you have a tax escrow with the bank, you will continue to receive your property and school tax bills from the taxing authorities. You should immediately forward all such bills to the bank holding the mortgage, as they should pay the taxes in order to protect their interest. You will stop receiving these tax bills once there is a new owner.
You cannot force a bank to accept from you a deed in lieu of foreclosure, and in many instances they will simply refuse to do so, especially if there is a second mortgage or other liens on the property. Further, a recent First Circuit Court of Appeals case made it clear that as long as the bank is not trying to squeeze payments out of you, a lender’s failure to commence and prosecute a foreclosure proceeding does not violate the Discharge Injunction. In short, you cannot force the lender to foreclose, so you might be “stuck” for a while with the burdens of property ownership. Bankruptcy can be a very effective tool for discharging debt, including mortgage obligations, but it is less effective when it comes to undoing all of the incidents of property ownership. Like most things, you take the good with the bad.
According to affidavits signed by former Bank of America employees in a class action lawsuit filed in a Boston federal court, the bank regularly lied to customers seeking home loan modifications to deny their application. The affidavits were filed last week in a multi-state class action lawsuit filed on behalf of homeowners who claim they were wrongfully denied a loan modification under the Home Affordable Modification Program (HAMP). www.MakingHomeAffordable.gov
We were told to lie to customers and claim that Bank of America had not received documents it had requested, and that it had not received trial payments (when in fact it had). We were told that admitting that the Bank received documents would ‘open a can of worms’ since the Bank was required to underwrite the loan modification within 30 days of receiving those documents, and it did not have sufficient underwriting staff to complete the underwriting in that time.” Affidavit of Simon Gordon, Senior Collector of Loss Mitigation for of Bank of America from 2007 to 2012.
According to William Wilson Jr., a former Case Management Team manager for Bank of America, twice a month the bank would deny 600 to 1,500 modification applications at time in a procedure called a “blitz.” Wilson states that Bank of America told its managers to “clean out” the backlog of HAMP applications even though all financial documents were received and Trial Payments had been made by the homeowners. In addition, Wilson claims that homeowners were coerced to accept “in-house” modifications with 5% interest rates instead of the 2% rate provided under HAMP.
I personally reviewed hundreds of files in which the computer system showed that the homeowner had fulfilled a Trial Period Plan and was entitled to a permanent loan modification, but was nevertheless declined for a permanent modification during a blitz. . . . Employees who challenged or questioned the ethics of Bank of America’s practice of declining modifications for false and fraudulent reasons were often fired.” Affidavit of William Wilson Jr.
Theresa Terrelonge, a “collector” for Bank of America, provides more details on how the bank denied applications.
One tactic Bank of America used to delay the modification process involved telling homeowners who applied for a HAMP modification or who were in a Trial Period Plan to resubmit financial information each time they called to inquire about a pending modification. Bank of America then treated any change in financial information as a justification for considering the home owner to have restarted the HAMP process. Even a small change to financial information or correcting an error that Bank of America made will cause Bank of America to restart the application process under the pretext of changed financial information." Affidavit of Theresa Terrelonge.
It gets worse. Terrelonge declares that managers received bonuses based on how many applications they denied.
The production goals of Bank of America placed on its managers were based on how many accounts they could ‘close’—meaning how many homeowners they could reject for the loan modifications rather than how many modifications they could successfully complete. Managers received bonuses if their teams met or exceeded production goals. . . . Employees were awarded incentives such as $25 in cash, or as a restaurant gift card based on the number of accounts they could close in a given day or week—meaning how many applications for modifications they could decline.
It gets even worse than that. Terrelonge states she witnessed employees and managers change, falsify and delete information from Bank of America’s computer system to make it appear that the homeowner was ineligible for a loan modification.
Steven Cupples was employed by Bank America as an underwriter and Team Leader in Bank of America’s HAMP department. He observed that due to poor training, Bank of America employees did not know how to find all the documents submitted to the bank.
Most underwriters did not know that they needed to look for documents in multiple systems and often assumed documents had not been sent. As a result, many borrowers were declined loan modifications that should have been received." Affidavit of Steven Cupples.
The statements made by these Bank of America employees match the complaints I have heard from my clients over the past four years. Banks losing documents. Banks requesting that documents be submitted over and over again. Banks denying the application for no apparent reason.
Studies have shown, however, that loan modifications filed while a bankruptcy case is ongoing have a significantly higher success rate. In states like Florida where the bankruptcy courts have established mediation programs to help homeowners in the modification process, the success rate is nearly 90%.
It is clear that the modification process requires a third party to watch over the banks to ensure that the applications are properly administered. We have helped many of our clients successfully apply for the HAMP program, and I believe bankruptcy court oversight is essential to making this program work.
Bringing you the most up-to-date news, tips and blogs throughout the web. Here’s your Bankruptcy Update for June 18, 2013 Orchard Files for Bankruptcy, but Lowe’s Buying Assets Mexico’s Maxcom negotiates prepackaged bankruptcy Texas Construction Firm Caught in Rare Spider’s Web
Here at Shenwick & Associates, many of our clients have complex bankruptcy cases involving factors that often lead to increased scrutiny by the Chapter 7 Bankruptcy Trustees assigned to the cases, as well as by the United States Trustee Program (USTP), a component of the U.S. Department of Justice that oversees the administration of bankruptcy cases and Bankruptcy Trustees. Some of these factors include:
• High levels of income, expenses and/or assets
• Tax debts
• Business debts
As part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), the USTP established procedures for independent accounting firms to audit petitions, schedules, and other information in consumer bankruptcy cases.
However, due to the federal budget sequestration that began on March 1, 2013, the USTP has indefinitely suspended its designation of cases subject to audit and notified the independent accounting firms performing the audits. At the conclusion of fiscal year 2013 (Sept. 30th), the USTP will make public information concerning the aggregate results of the debtor audits performed during fiscal year 2013.
To find out how you can minimize the chances of an audit of your bankruptcy case through pre–bankruptcy planning, please contact Jim Shenwick.
Warning – this article is fairly technical. It’s an important issue if you’re thinking about filing for bankruptcy and have student loan debt, so skim it to get some ideas.
At least once a week, a client comes in to me with a lot of credit card debt and student loans they can’t pay.
We crunch the numbers and realize that they can pay down their student loans if only they could get rid of the credit card debts.
For those people who are over median income and fail the means test, this may mean they can’t file for Chapter 7 bankruptcy and get rid of the credit card debt.
In some situations, however, we may be able to look to the student loan debt as a way to qualify you for Chapter 7 bankruptcy.
Means Testing Applies Only To Primarily Consumer Debt
Under the U.S. Bankruptcy Code, you’re required to go through means testing only if your debts are primarily consumer in nature. That means we total all of your debt, then divide it into consumer and non-consumer debt.
If the non-consumer debt comes out to 50% + $1 of your total consumer debt, then you do not need to go through means testing.
What Is A Consumer Debt?
Under the U.S. Bankruptcy Code, a “consumer debt” is defined as “debt incurred by an individual primarily for a personal, family, or household purpose.”
So how do you know if a debt was incurred primarily for a personal, family, or household purpose?
In the 1998 case of In re Kelly, the court determined that if a debt isn’t incurred for business ventures or other profit-seeking activities then it is considered to be consumer debt. The bankruptcy court in Los Angeles went along with this reasoning in a related 1994 case, as have other courts covering California through the years.
In New York, too, the question of a consumer debt has come down to profit motives.
So long as the debt is considered to have been incurred with an eye towards profit, you can consider is as non-consumer in nature.
If you’ve got enough non-consumer debt to tip the scales, you’re in a far better position for Chapter 7 bankruptcy.
Is A Student Loan Considered Non-Consumer Debt?
If student loan debt can be considered non-consumer, then someone with a large amount of student loan debt may be able to file for Chapter 7 bankruptcy without worrying about the means test.
The question of whether student loan debt is consumer or non-consumer is an open question in many bankruptcy courts, with judges looking at a variety of factors to decide on a case-by-case basis.
After all, every student can claim that he or she decided to pursue an education because of a long-term profit motive. But the reality is that some people get an education for reasons other than capitalism.
Some folks go back to school to be smarter than they were before (I’m not saying it’s the end result, just that this is the intent). Others do so because they’re looking to avoid a tough job market.
Student Loan Payments As Means Test Deduction
In Los Angeles bankruptcy cases, we may be able to use student loan payments as a deduction on your means test for Chapter 7 bankruptcy purposes. This can help you qualify for Chapter 7 bankruptcy even if you’re above median income.
In New York bankruptcy cases, we cannot deduct those payments from the means test.
If you live in another place and are thinking about filing for bankruptcy, your lawyer can tell you about your local practice.
The Devil is In The Details
The upshot is that when you’ve got student loan debt, you really want to sit down with a lawyer who will take the time to work through every single angle.
For example, if you went back to school because your employer told you to do so in order to get a promotion then I’d look more closely into getting that student loan debt classified as being non-consumer debt.
If, on the other hand, you took a few classes for personal improvement and pleasure then I’d lean the other way.
There are lots of grey areas but, as you can see, for the right situation there may be a way to make a better outcome.
Image credit: Roberto Trm
Student Loans As Non-Consumer Debt In Chapter 7 Bankruptcy was originally published on Consumer Help Central. If you're seeing this message on another site, it has been stolen and is being used without permission. That's illegal, a violation of copyright, and just plain awful.
Many people may not realize that planning ahead for bankruptcy may help you save money, aside from protecting your assets. Planning ahead includes taking a number of important steps to ensure you complete the process faithfully to the best of your knowledge. Taking time to get advice from informed professionals can help you obtain a [...]
Never got one of these on a report card so I am extremely pleased to report that our law firm has obtained an ‘A+’ rating from the Better Business Bureau for our Bankruptcy and Fair Debt Collection Practices Act work.
var bbbprotocol = ( ("https:" == document.location.protocol) ? "https://" : "http://" ); document.write(unescape("%3Cscript src='" + bbbprotocol + 'seal-alaskaoregonwesternwashington.bbb.org' + unescape('%2Flogo%2Fnorthwest-debt-relief-law-firm-22070301.js') + "' type='text/javascript'%3E%3C/script%3E"));
The original post is titled New Better Business Bureau A+ Rating for Our Bankruptcy and FDCPA Law Firm! , and it came from Oregon Bankruptcy Lawyer | Portland, Salem, and Vancouver, Wa .
Updated daily, this blog will keep you informed on the latest bankruptcy news! 
Learn more about how Bankruptcy works and what you need to know.