November 20, 2017

Bankruptcy Often the Least Desireable Option to Eliminate Student Loan Debt

elimination of debtI 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. [Read more…]

  1. assuming that the previous Chapter 7 resulted in a discharge

Co-Signed Loans: An Old Problem that is Making a Comeback

avoid co-signing a debtWhen I first began working in the consumer bankruptcy field, co-signed loans were a common problem that I saw often.  Then credit standards loosened and I rarely saw clients who were co-signers or who had co-signed loans.

Now the personally guaranteed co-signed loan is making a comeback.   I can state without reservation that in both a personal and a business context, agreeing to co-sign a loan for someone with poor credit is never a good idea.

In the current market, standards for consumer credit are tight and securing credit approval can be a challenging feat for someone with mediocre or poor credit.   Because of the tightening credit market and increased regulation by the federal government on lenders, people who may have been approved in years past are now needing others to co-sign in order to take out a loan. [Read more…]

Social Security Disability Payees Now Eligible for Discharge of Student Loans

student loans and SSA disabilityIn an about face from former policy the U.S. Department of Education has released new regulations, effective on July 1, 2013, which state that a student loan borrower’s repayment obligations may be discharged if that borrower has been found totally and permanently disabled by the Social Security Administration.   In an absorbing 61 page restatement of Sections 674, 682 and 685 of Title 34 of the Code of Federal Regulations, the U.S. Department of Education has announced its new, streamlined procedures.

This new policy changes the procedure used by a student loan borrower can petition the Department of Education for loan forgiveness based on the borrower’s total and permanent disability. Under current procedure borrowers with student loans issued under the Perkins loan program, the FFEL loan program or the Ford Federal Direct Loan program could apply for forgiveness on the grounds of disability but the forgiveness rules did not recognize a Social Security Disability Award as proof of total and permanent disability.

In an effort to streamline the total and permanent disability process, the Department of Education will now use a common disability forgiveness procedure for all of its student loan programs rather than a different procedure for each. More importantly, a disabled borrower can now include a copy of his Notice of Award from Social Security as proof of disability. Under current rules, the Department of Education would make its own, independent decision about a borrower’s medical or mental health disability.

[Read more…]

How Chapter 7 Can Help You Pay Your Non-dischargeable Student Loans

Bankruptcy Code 523(a)(8)In my last post, I argued that the current Bankruptcy Code standard for discharging student loans is unduly harsh and burdensome.   Currently student loan debt – and this includes private student loans, government backed student loans, parent incurred loans, and loans paid to schools that have closed down before the student received training or a degree – may not be discharged in bankruptcy unless the debtor can show “undue hardship.”

The courts have read undue hardship to mean some reason beyond the debtor’s control that would preclude repayment.   This usually means that there must be some medical reason that the debtor will not ever be able to return to work.  Underemployment is specifically not a reason to allow undue hardship.  As far as the courts are concerned, debtors who are healthy always have opportunities to increase their income so that they can pay their student loan debt, whether payment comes next year or in 20 years.

It seems oddly inconsistent for the Bankruptcy Code to allow debtors to discharge income tax debt solely based on its age ( income tax debt that is 3 or more years old may be discharged) but for all intents and purposes will not allow for the discharge of student loans despite the fact that:

  • student loans are typically incurred by 17 year olds with little understanding of what real world debt means
  • colleges and student loan lenders have less disclosure requirements than credit card lenders
  • loans remain non-dischargeable even if the school goes out of business and does not provide the education
  • parents who sign for loans have no recourse even though they did not get the benefit of the education
  • colleges have used the wide availability of government guaranteed loans to boost tuition costs at many times the rate of inflation
  • colleges bear no responsibility for offering courses of education that are unlikely to result in salaries sufficient to pay the loans

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Should Student Loan Debt Once Again Be Dischargeable in Bankruptcy?

student loans and bankruptcyLast week, an editor at the Atlanta Journal Constitution contacted me to ask if I would write a guest editorial about student loans and bankruptcy.  Here is a slightly enhanced version of my editorial.  Click on the link to view the original online version of the article

Imagine graduating from college with a tassel and $80,000 of student loan debt.  Now imagine that life happens over the next 15 years – periods of unemployment, no raises, a sick child, and home repairs.  Perhaps you are one of the 50,000 metro Atlanta area families each year who make the difficult decision to file personal bankruptcy.  How does it feel to discover that your student loan debt will survive bankruptcy, never to go away.  Tax refunds?  Seized.  Wages, bank accounts, even Social Security?  Garnished. [Read more…]

Student Loan Debt may be a Bigger Problem than Credit Card Debt

how to pay student loan debtUSA Today recently reported that student loan debt in the United States, which totals $850 billion, now exceeds outstanding credit card debt in the U.S., which totals $828 billion.

USA Today gets its numbers from a web site publisher named Mark Kantrowitz, who publishes two scholarship matching services called FinAid.org and FastWeb.com.  I was unable to independently verify Mr. Kantrowitz’ numbers but if you Google “total credit card debt in U.S.” and “total student loan debt in the U.S.” you will get numbers in the range quoted in the USA Today article.

I actually thought that a more interesting element of this issue has to do with the monthly repayment numbers facing borrowers.  The USA Today article suggests that $30,000 of student loans, payable at 6.8% interest over ten years would amount to $350 per month.  At this level of debt, the average person would need to earn at least $42,000 per year.

In my practice I have frequently seen student loan debt far in excess of $100,000, with monthly payments over $1,000.

In a bankruptcy context, student loan debt is not dischargeable except in cases of “undue hardship.”  In the Northern District of Georgia, “extreme hardship” has essentially been limited to student loan debtors who have a medical issue that prevents them from working.   At this point in time, debtors in the Northern District have not been successful in arguing for hardship discharge on the grounds that they cannot find a job that pays enough to support their student loan obligations.  There was a recent Supreme Court decision involving student loans and bankruptcy, but that case did not address the substantive issue of what constitutes “undue hardship.” [Read more…]

Failure to Disclose Assets Lands Chapter 7 Debtor in Prison

Because the bankruptcy system operates efficiently and quickly and it serves hundreds of people every day, I sense that many bankruptcy debtors forget that everything they submit to the bankruptcy court is done so under penalty of perjury. I recently ran across an article from a Texas newspaper about a Chapter 7 debtor who ended up in federal prison, convicted of bankruptcy fraud, because he failed to disclose an $84,000 insurance payment, proceeds from the sale of a vehicle and several bank accounts.  This particular debtor used Chapter 7 to discharge over $1 million in liabilities.

I bring this case to your attention for several reasons.  First, you should recognize that Chapter 7 trustees are very conscious of the likelihood that a certain percentage of debtors will fail to disclose assets.  While it may seem that your Chapter 7 trustee is not paying much attention to any particular case, I suspect that trustee training programs provide trustees with profiles of the types of debtors likely to omit important information as well as resources to search for evidence of hidden assets.

In the Texas debtor’s case I wonder how he thought that a vehicle sale would be missed by the trustee, given that vehicle liens are public record, as are vehicle registrations.

These days almost any sale of real estate or motor vehicles will generate a paper trail of tax forms, insurance records and title documents.  Further I have personally seen situations where an unhappy ex-wife or a former friend will draft a “poison pen” letter to the trustee will allegations about improper activities by a bankruptcy debtor. [Read more…]

Student Loan Discharge Case Heard by U.S. Supreme Court

student loanEarlier this month the U.S.  Supreme Court heard arguments in a case involving the question of discharge of student loans in a Chapter 13 case.   The case arose from a Chapter 13 petition filed in 1992 by Francisco Espinoza, an American Airlines baggage handler.

Mr. Espinoza’s story began in 1988.  Sensing that airline baggage handling was not a great long term career, Mr. Espinoza enrolled  in a technical school to learn computer drafting and design, and he financined his education with a student loan.  Unfortunately, he was not able to find a job using his new education and he found himself in a financial bind when American Airlines froze wages and reduced his hours.

By 1992, Mr. Espinoza found himself living paycheck to paycheck and unable to pay down his $13,000 student loan.  At that point, he contacted a lawyer and filed a Chapter 13 bankruptcy.   The Chapter 13 plan prepared by Mr. Espinoza’s lawyer provided for full payment of the balance due on the student loan over the term of the plan but it did not provide for payment of $4,000 in accrued interest or for future interest.

[Read more…]

Student Loan Debts – Bankruptcy Won’t Help Much

I have been getting a lot of calls and emails lately about student loan debt.  Perhaps with the economy in recession, student loan creditors are becoming more hard line about collecting, and student loan debtors have good reason to be worried.

Federal government involvement in the student loan business means that collection resources not available to regular creditors come into play.   There is one statute that permits student loan creditors to garnish wages without the need to first go to court.   Student loan claims can also offset tax refunds.

Blog reader Janet describes an all too common scenario as follows:

I am unemployed and have defaulted student loans.  I was married last April and my husband’s tax return was offset as a lovely wedding gift.  I am researching how to file for bankruptcy for my other debts and [Read more…]

Debtor Audits to Start Again – What Does This Mean?

One of the least discussed changes brought about by the October, 2005 changes to the bankruptcy law was a provision that provides for “audits” of random cases.  When a case is audited, it is selected at random by the  United States trustee and the debtor and debtor’s attorney are required to submit extensive documentary proof of information set out in the petition.

In January, 2008, these audits were halted because the U.S. Trustee ran out of money for this program.  Now, according to Jill Michaux of the Bankruptcy Law Network blog, debtor audits are back.  You can read Jill’s post and the links therein to learn more about this audit program.

What actually happens during an audit?

If you are selected for an audit, the U.S. Trustee sends you a notification that you and your attorney will be contacted by an outside accounting firm.  The firm will send you a notice asking for things like:

  • Pay stubs for you and your spouse for the six months prior to the month you filed your bankruptcy petition
  • Bank account statements for six months, with explanations for all deposits over $500
  • Income tax returns including all schedules and forms for the previous two years
  • Divorce documents, including property settlement and child support orders
  • Self employment documents
  • Proof of school expenses
  • Proof of child care expenses
  • Proof of food expenses
  • Proof of transportation expenses

Once you get this information to the auditor, he will analyze this information and compare it to the information set out in your petition.

In the first eight months of the audit program, 1631 audits were completed.  Of those, 29% of the cases audited were found to have at least one material misstatement.  12% of the audits resulted in a Report of No Audit.  The U.S. Trustee statistics do not tell us how significant any of these misstatements are. (Thanks to Peter Orville of the Bankruptcy Law Network for his series of posts about Audits).

When the program was active, only a few of my cases were selected for audits.  After providing a lot of paper, the audit was concluded with no problem.  On the other hand, these audits required me to spend a lot of unexpected time gathering and reviewing documents.  As such, I have changed my fee contract to provide for an additional fee for any case selected for an audit.  It continues to puzzle me whether members of Congress truly understand that people who are filing bankruptcy most likely don’t have a lot of money available for attorney’s fees, yet every change to the law increases this burden.

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