Wall Street economists had expected a small drop, but according to the Labor Department, initial claims for unemployment insurance actually rose by 36,000. An analyst from the Labor Department said that much of the increase is due to the administrative backlogs left over from the holiday season in the state agencies that process the claims.

Regardless of the ups and downs shown week to week, the economy is not consistently generating net increases in jobs. After adding only 4,000 jobs in November, which was the first increase in nearly two years, in December employers cut 85,000 jobs. Many economists say the four-week average of claims will need to fall to below 425,000 to signal that the economy is close to generating net job gains. Unfortunately, the four-week average rose for the first time since August to 448,250.

The number of people continuing to claim regular benefits dropped slightly to just under 4.6 million. However, this data does not include millions of people who have used up the regular 26 weeks of benefits customarily provided by states and are now receiving extended benefits for up to 73 additional weeks, which is paid for by the federal government. Over 5.9 million are receiving extended benefits in the week ended Jan. 2, which is an increase of more than 600,000 from the previous week.

These numbers demonstrate that even as layoffs are declining, hiring has not picked up, leaving people out of work for extended periods of time.

California has had the largest increase in claims, with 16,160. Texas, Florida, Pennsylvania and Georgia have the next largest increase. Oregon has had the biggest drop in claims, of 5,784, followed by Iowa, Kentucky, Michigan and Massachusetts.

There are positive forecasts out there as well. Because unemployment claims have been on a steady drop since last fall as companies cut fewer jobs, some economists hope that hiring will soon increase. Another report suggests that economic growth could pick up this spring.

Other economists, however, have been worrying that growth in the economy will stagnate this year as government support programs wind down and unemployment remains high.

Unlike other creditors, student loan creditors do no have to sue you and obtain a judgment in order to collect from you.  Blog reader Nancy describes a disheartening scenario:

I am dealing with a student loan that’s 25,000.00 and the Department of Education took my tax return from me. I am a single mother with a special needs child and needed every bit of that money. I have been on unemployment since Jan of 08.  Things are not looking up for me in finding employment in my area. I am roommateing with a friend just to make ends meat here and I was told that maybe filing for a chapter 7 would be good for me. I have no credit card debt but I do have some hospital bills. Not sure what I need to do, I know that I can not afford this 25,000 student loans which by the way started out only 15,000. Interest has taken over and made it an impossible dept to pay off.  Please tell me what I should do. I also cant afford to have my taxes taken away every year from something that will never be paid off due to those interest rates.

Here is my response: As a general rule, bankruptcy is not a good tool to reduce or eliminate student loans.  Many years ago, when I first started my bankruptcy practice, you could discharge student loan debt.  Over the years, Congress has whittled away that option.   Now, not only are student loans protected from bankruptcy discharge – except in very limited situations – but student loan creditors can seize tax returns and garnish wages without first going to court to obtain a judgment.   In some respects, student loan debt has almost as much priority as child support or tax debt.

The only possibility for student loan discharge may be found at Section 523(a)(8), which denies a bankruptcy discharge to

- 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

- an obligation to repay funds received as an educational benefit, scholarship, or stipend; or

- any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual;

unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents

As you can see, therefore, the only mechanism to discharge student loan debt is to claim that not discharging the debt would create an “undue hardship” on the debtor and the debtor’s dependents.

As you might imagine, shortly after Section 523(a)(8) went into effect, a number of debtors filed paperwork in bankruptcy asking judges to discharge their student loans based on this undue hardship language.   The result of these attempts has not been positive for debtors.  For the most part, judges in the Northern District have been extremely reluctant to permit the discharge of student loan debt.   In the few cases where discharge has been granted, the basis for the hardship usually has been medical – i.e., a debtor has a debilitating condition that would preclude any type of substantial work.    There have also been a few cases in which judges have partially discharged student loan debt even when it is very much unlikely that the debtor will ever have the financial capacity to pay back his student loan debt.

In my reading of these cases, judges have not been sympathetic to the “I am unemployed and don’t expect to find a job soon” argument.  Often the judges look at the debtor’s education, health and potential earning capacity and take the position that at some point in that debtor’s life, he will find a decent job – or at least a job that will allow for repayment of the student loan.

Because bankruptcy is a very limited and unlikely option, student loan creditors are rarely willing to work out any kind of repayment deal.  They know that they can garnish wages or seize tax refunds so they have very little incentive to strike a deal.

In Nancy’s case there does seem to be a medical element present – the cost of raising a special needs child, but that argument would need to be developed and reviewed in light of applicable case law.  Again, in my view at least, the unemployment argument will not go very far.

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Jonathan:  I desperately need your advice.  I work in sales at XYZ company and last year I earned more than $200,000.  I am married with 2 kids.  This year I’m on track to earn about $120,000.  My house is worth $425,000, but the first and second mortgage combined equal to about $435,000.  I am also financing a Mercedes – the monthly payment is $725 per month and the payoff is $37,500.  I also have $35,000 in credit card debt.  I am not behind on anything and I have borrowed twice against my 401(k) to keep afloat.  My wife and I have made the decision that we are prepared to give up the house and the car and move into an apartment.  I would like to file Chapter 7 and walk away from everything – when can I schedule an appointment? –Fred

Here is my response: Dear Fred – unfortunately I don’t think you can file a Chapter 7.  Under the bankruptcy law, you cannot qualify to file a Chapter 7 unless your income falls below a certain threshhold called the “median income.”   As part of my analysis, I will compare your household income with the median household income for a family of 4 in Georgia (currently $68,908.00).  As your household income exceeds the median by over $50,000, a median income evaluation in your case would create something called a “presumption of abuse.”  This presumption is rebuttable in theory, but as a practical matter, I think is unlikely that you would be able to squeeze into a Chapter 7.

Instead, the “means test” of personal bankruptcy would dictate that you would have to file a Chapter 13 repayment plan.  Assuming that you did give up your house and your expensive vehicle, the bankruptcy trustee would expect you to downsize your lifestyle substantially in a Chapter 13 – at least to the point where you would have sufficient disposable income to pay back all of your creditors in full in a Chapter 13 case that will last 3 to 5 years.

Given that you are in sales, you also run the risk of committing to a Chapter 13 that provides for a payment based on current income.  Chapter 13 is not a flexible vehicle so you should not go into a Chapter 13 expecting that your plan payment would change if your commission income goes down.

So, for folks like Fred, the alternatives are – maintain your lifestyle and struggle to keep your head above water until you find a way to earn more money, or walk away from the expensive big ticket items, reduce your lifestyle, and commit every penny of disposable income to a 3 to 5 year payment plan.

The business was a media company that was going to stream on-line videos to individuals – kind of a self-help program delivered by video.  The promoter apparently solicited investments from dozens of people, but apparently the money ran out before subscription income could sustain the business.

Originally the promoter filed a Chapter 11, reorganization, but it was converted to Chapter 7 because there were insufficient income streams to reorganize.

This case was set up as an “asset case” as the debtor owned personal assets beyond what he could claim as exempt property that could be liquidated for the benefit of creditors.  The trustee hired an auction company and the auction was scheduled for 9:00 am on June 21 at the debtor’s house.

I found out about this because a good friend of mine lives in the same neighborhood as the debtor and he had heard rumours about what might be inside.  I decided to join him at the auction.

We arrived at the debtor’s house around 8:30 AM and there was a line of about 30 people in front of us.  Some were from the neighborhood, but most were not.  Cars were lining the streets in the subdivision, and security was present.

Right at 9am, the doors opened and people streamed in.   The first thing I noticed upon entering was that all of the items for sale were tagged.  This was not an auction in the traditional sense – basically the auctioneer had priced the various items and if you got there first, you could buy the item.  I suspect that as the week goes on, the liquidator would be open to offers, but I wonder how much stuff will be left at that point.

While there was plenty of stuff left by the time I got in, there were people there who obviously knew what they wanted.

Because the proceeds of the auction go to the bankruptcy estate (to pay creditors and the Chapter 7 trustee), the liquidator was not giving anything away, but I suspect that there were some decent deals if you knew what you wanted.  If I had to guess, I would say that most of the small items were going for 60 to 70 cents on the dollar.

The second thing I noticed – the debtor’s house was pretty much left as it was found when the trustee seized possession.  There was food in the refrigerator, dirty clothes in the hamper, etc.  It was a little creepy, to be honest.

I walked around for about 30 minutes, but did not buy anything.  There were a couple of items that seemed like good deals, but nothing that was worth standing in a 30 minute line to pay.

I would like to stress that this type of situation – an auction of personal belongings at one’s house – is fairly unusual.  Firstly, most Chapter 7 cases are “no-asset” cases, meaning that all of the debtor’s personal property is exempt.  Secondly, this case involved an investment promotion failure (the Chapter 7 trustee refers to it as a Ponzi scheme in his pleadings), and the trustee in this case may have been trying to send a message.