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I recently received this email from a prospective client (“Jane”) seeking to have her student loans discharged in bankruptcy.  Do you see the problems with this case?

I am permanently disabled due to cognitive decline resulting from a craniotomy to repair one of three aneurysms. I also suffer from back pain, anxiety, depression and panic attacks. In addition to my 2012 brain and gallbladder surgeries, I underwent back surgery in 2011 and two foot surgeries in 2010, and due to complications from my back surgery I have not been able to return to work. . I was very recently approved for disability retirement after 25 years as an employee with the federal government.  I also receive SSI.   I filed a chapter 7 in 2008 and am unsure what my options are in regard to having my student loans forgiven. I am seeking a full discharge.

Let’s start with the most immediate problem – currently, Jane’s eligibility to file bankruptcy.  Under Bankruptcy Code Section 727(a)(8), Jane is not eligible to file Chapter 7 for eight years after previously filing a Chapter 7 1.  Depending on when in 2008 she filed, she would have to wait until at least 2016 before filing a second case.Assuming for sake of argument that Jane was eligible to file Chapter 7, a practical problem she would face using bankruptcy to discharge her student loans would be that of cost.  Bankruptcy Code Section 523(a)(8) says that student loans are not dischargeable in bankruptcy unless the debtor can show that not discharging them would constitute undue hardship.In defining undue hardship, bankruptcy judges have come to rely on an analysis set out in a 2nd Circuit case called Brunner vs. New York State Higher Education Services Corp.  The Brunner test considers three factors to determine whether student loans can be discharged in bankruptcy:

1. has the debtor made a good faith effort to repay his loans
2. based on current income and expenses, can the debtor maintain for himself and his family a minimal standard of living if forced to pay his loans; and
3. are the debtor’s financial circumstances likely to remain during a significant portion of the student loan repayment period

Based on what Jane writes, I think she would have a reasonable argument that she meets all three elements of the Brunner test, although in general bankruptcy judges have been reluctant to discharge student loans.  Regardless, Jane would have the burden of filing a lawsuit in bankruptcy court to put the discharge issue before the judge.  Bankruptcy litigation is not cheap – it is likely that the cost of this type of litigation could reach $5,000.I think that there are better options than bankruptcy for Jane.First, she has the option of doing nothing.  If Jane’s only source of income is SSI and she has no assets, she is essentially judgment proof.  SSI (which is the welfare type of disability) may not be garnished by anyone, even the Department of Education.  Jane may end up with judgments filed against her but those judgments are uncollectible and will remain so unless her life circumstances change dramatically.Second, if Jane’s student loans are federally issued or federally guaranteed, she can apply for loan forgiveness based on disability 2.  The Department of Education has recently changed its rules regarding disability forgiveness and Jane’s SSI disability determination may be enough to convince the government to forgive her loans.Third, if Jane’s loans are federally issued or guaranteed, she could enter an income based repayment plan.  Assuming her income remains low, the income based repayment plan formula would likely call for a zero dollar payment.  At the end of the repayment term (usually 20 years), the loans would be deemed satisfied and Jane’s liability would end.So, Jane has a variety of options and based on the information at hand bankruptcy would be the least desireable.

1. assuming that the previous Chapter 7 resulted in a discharge ↩
2. Disability forgiveness does not generally apply to private student loans. ↩

The post Bankruptcy Often the Least Desireable Option to Eliminate Student Loan Debt appeared first on theBKBlog.

Section 110 of the United States Bankruptcy Code provides that a non-attorney can assist in the preparation of the bankruptcy petition. However, as an Inkster, Michigan man just learned (the hard way), the Bankruptcy Code places numerous requirements on bankruptcy petition preparers and subjects those who do not comply to substantial penalties.
On Tuesday, February 25, Derrick Hills of Inkster was sentenced by U.S. District Court Judge Sean F. Cox to 46 months in prison after being convicted by a jury in September of five counts of criminal contempt. The contempt proceedings stemmed from repeated violations of orders issued by U.S. Bankruptcy Judge Steven Rhodes from 2007 to 2009. According to a press release issued by the U.S. Attorney's Office following Hills' conviction at trial:

The evidence presented at trial showed that Hills had acted as a bankruptcy petition preparer since 2007, assisting people in filing for bankruptcy. Hills continued to act as a bankruptcy petition preparer despite five bankruptcy court orders issued by Bankruptcy Judge Steven Rhodes, permanently enjoining Hills from doing so for various non-compliance with bankruptcy rules and complications caused by his acting in the capacity of a bankruptcy petition preparer. Hills assisted individuals with consumer debts in preparing and filing their Chapter 7 bankruptcy paperwork. However, his actions went well beyond what was allowed by law and clearly violated Judge Rhodes Orders.

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Tags: Chapter 7, Did you Know?, Eastern District of Michigan

You Can Protect Most Property You can file bankruptcy and protect a certain amount of personal property. If you are filing a chapter 7 bankruptcy, then you have certain exemption amounts under Illinois law that allows you to protect a certain amount of property. For example, you can protect up to $15,000 worth of equity+ Read MoreThe post Can I protect My Property And Still File Bankruptcy? appeared first on David M. Siegel.

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