Blogs

The amount you are required to pay back to your general unsecured creditors in a Chapter 13 Bankruptcy Case depends on various factors.  It can range from only a few pennies on the dollar to a 100% of the debt. The amount required to be paid must be the higher of the "Means Test" (projected disposable income) and the amount of the chapter 7 liquidation test.Means TestThe amount you are required to pay back must be at least the amount of you "projected disposable income" as calculated by the "means test" used in Chapter 13.  Basically, your monthly income is calculated and your expenses are deducted, leaving the "projected disposable income."
For purpose of this test, your income is based on the income for the six months period prior to the filing of the bankruptcy case. If the income changes, higher or lower, the new figure may be required to be used. The expenses used in these test are not your actual living expenses, but they are amounts based on the IRS collection standards for certain items and actual mortgage and car loan debts.The amount of  expenses is deducted from the income leaving the monthly "projected disposable income." Debtor with income less than median income will only be required to pay for three years, but over-median income debtors are required to pay for five years.Chapter 7 Liquidation TestThe amount required to be paid back in a Chapter 13 case must be at least as much as the "chapter 7 liquidation test" which is the amount that could be received on a hypothetical chapter 7 liquidation of your property.Jordan E. Bublick - Miami Bankruptcy Lawyer - North Miami & Kendall Offices - (305) 891-4055 - www.bublicklaw.com

By Zack Friedman

It's one of the most intensely-debated student loan questions: Can you discharge your student loans in bankruptcy?
The short answer: normally, student loans are not dischargeable. However, that may change.

Here's what you need to know - and why.

Student Loans & Bankruptcy: Overview

First, a quick overview. As many borrowers struggle to repay ballooning student loan debt, bankruptcy is one option that gets floated.

According to Make Lemonade, there are more than 44 million borrowers who collectively owe $1.5 trillion in student loan debt in the U.S. The average student in the Class of 2016 has $37,172 in student loan debt.

Student loans are now the second highest consumer debt category - behind mortgages, but ahead of credit card debt.

Unlike other consumer debt such as credit card and mortgage debt, however, student loans traditionally cannot be discharged in bankruptcy.

Why? Some can't explain the rationale for the student loan "no bankruptcy" exception, but others say it grew from a concern that student loan borrowers could take advantage of bankruptcy laws, borrow a bunch of debt, earn a degree and then file for bankruptcy.

There are exceptions, however, namely if certain conditions regarding financial hardship are met.

The Brunner Test: Financial Hardship
Those conditions are reflected in the Brunner test, which is the legal test in all circuit courts, except the 8th circuit and 1st circuit. The 8th circuit uses a totality of circumstances, which is similar to Brunner, while the 1st circuit has yet to declare a standard.

In plain English, the Brunner standard says:

1. the borrower has extenuating circumstances creating a hardship;
2. those circumstances are likely to continue for a term of the loan; and
3. the borrower has made good faith attempts to repay the loan. (The borrower does not actually have to make payments, but merely attempt to make payments - such as try to find a workable payment plan.)

There are variances across federal districts, but that’s the basic framework.

How Do You Discharge Student Loans In Bankruptcy?

In order to have a student loan discharged through bankruptcy, an Adversary Proceeding (a lawsuit within bankruptcy court) must be filed, where a debtor claims that paying the student loan would create an undue hardship for the debtor.

Were Student Loans Ever Dischargeable In Bankruptcy?

Yes. Prior to 1976, you could discharge your student loans in bankruptcy.

Congress then changed the law: student loans were dischargeable if they had been in repayment for five years. Subsequently, that period was extended to seven years.

In 1998, Congress removed dischargeablility except if a debtor could show that paying back the student loans would create an undue hardship. In 2005, Congress extended this protection to private student loans.

So, What's Changed Now?

According to the Wall Street Journal, which spoke to more than 50 current and past bankruptcy judges appointed during both Democratic and Republican administrations, some judges may be more open to helping debtors.

Does that mean the floodgates are now open and student loans can be discharged in bankruptcy?

No.

That said, some judges are looking at ways to help alleviate the burden. Examples, per the Wall Street Journal, may include:

• encouraging bankruptcy attorneys to represent debtors at no cost
• potentially eliminating future tax bills that be linked to student loan debt relief or debt cancellation after 25 years through federal student loan repayment programs
• cancelling private student loan debt from unaccredited schools
• allowing student loan borrowers to make full payments during the Chapter 13 debt repayment period (which can last five years)

While these tactics may be welcomed by some student loan borrowers, critics may question whether judges should actively try to circumvent the existing law (suggesting that Congress, and not judges, should make the law).

Since the vast majority of student loan debt outstanding is comprised of federal student loans, any cancellation of federal student loan debt would be at the federal government's (and taxpayer) expense.

What Else Can You Do If Your Struggling To Make Student Loan Payments?

Here are two strategies:

1. Income-Driven Repayment: For federal student loans, consider an income-driven repayment plan such as IBR, PAYE or REPAYE. Your payment is based on your income, family size and other factors, and is typically lower than the standard repayment plan.

After a certain period of time (such as 20 or 25 years, for example), your federal student loans (not private student loans) can be forgiven. However, you likely will owe income taxes on the amount of your student loans that are forgiven.

2. Pay Off Other Consumer Debt: If you have other high interest debt such as credit card debt, consider paying off this debt first (particularly if the interest rate is higher than your student loan interest rate). This can free up cash that can be applied to student loan debt reduction.

You can also consider a personal loan to pay off your credit card debt. Credit card consolidation is the process of paying off your existing credit card debt with a single personal loan at a lower interest rate.

If you can borrow a personal loan at a lower interest rate than your credit card debt, you can save in interest costs and also potentially improve your credit score.

© 2018 Forbes Media LLC. All Rights Reserved.

In interviews with the Wall Street Journal, more than 50 current and former bankruptcy judges, frustrated at seeing borrowers leave federal courtrooms with six-figure debts, say they or their colleagues are more open to chipping away at the decades-old guidelines that determine how such debt is treated.
 
“If the law’s not going to be improved by Congress, we have to help these young people who are drowning in student loan debt,” said U.S. Bankruptcy Court Judge John Waites in South Carolina.
Outright cancellations remain rare, but judges said they have other tools at their disposal, including encouraging lawyers to represent borrowers for nothing. The lawsuits can cost $3,000 to $10,000 and take years.
 
Other judges are embracing debt-relief techniques that don’t fully erase student loans but make repayment more affordable by, for instance, canceling future related tax bills. The popularity of these relief strategies could get a boost from a panel of professors, judges and advocates who are studying failures in consumer bankruptcy law and plan to release a report next year.

Nearly 45 million people carry student debt in the U.S.—the total amount has more than doubled over the past decade to $1.4 trillion—most backed by the federal government. It has eclipsed credit cards as the largest source of consumer debt after mortgages. Almost every other type can be extinguished in bankruptcy, but legal standards made college debt largely untouchable. Borrowers typically must repay student loans over their lifetime, even those facing extreme financial hardship.In March, Federal Reserve chairman Jerome Powell said he would be “at a loss to explain” why student loans can’t be cancelled like other debt. The Trump administration is considering whether to fight cancellation requests less aggressively.

Consumer bankruptcy lawyers are starting to notice that judges are being more flexible. One Las Vegas law firm recently filed the first cancellation request in its 14-year history after hearing a judge at a conference voice concern over student loans. Other lawyers said growing sympathy among judges is making lenders more willing to reach resolutions out of court.

“I’m getting really good results with settlements these days,” said Chicago lawyer David Leibowitz. “I’m not the only one.”

Rules governing how student debt is handled in bankruptcy are made by Congress and by judges who issue influential rulings. Several bills in Congress that would erase student-loan debt in bankruptcy have stalled in recent years.

Last year in Philadelphia, U.S. Bankruptcy Court Judge Eric Frank cancelled a single mother’s $30,000 in student loans. Opposing lawyers from the U.S. Department of Education said the borrower needed to prove her hardship would persist 25 years, the length of some repayment plans. Judge Frank ruled that the relevant window was five years.

An appeals court overturned his ruling, but his decision inspired Judge Mary Jo Heston in Tacoma, Wash., in December to cancel a portion of another borrower’s loans.

Such rulings are rare because few troubled borrowers attempt to cancel their student loans, because of the historically slim chances of victory. Last year, only 473 people of the millions repaying student loans sought relief using bankruptcy, according to a Wall Street Journal analysis.

No one tracks outcomes of student-loan cancellation cases, and only a handful advance to the point where a judge rules. In one examination of cases in 2017, judges ruled on student-loan debt 16 times, according to lawyer Austin Smith who analyzed WestLaw’s database of key decisions.

In those decisions, judges preserved student-loan debt in 12 cases, and canceled it in three. One borrower got partial relief.

Some bankruptcy judges criticize their colleagues for re-interpreting well-settled law on student loans. “My view is, if the law is clear, follow it,” said retired California judge Peter Bowie.

The push to rethink the legal standard on student-loan debt is bipartisan. Judges interviewed by the Wall Street Journal were appointed during both Republican and Democratic administrations, though bankruptcy judges are appointed by appeals court judges, not the president.

Disagreements among judges on student-loan debt expose philosophical differences, said Cornell Law School professor Jeffrey Rachlinski. Some judges want to maintain predictability by sticking to past law. Others see their roles as fixing flaws in the legal system, he said. “There are people who like to change the institution in which they work.”

Before 1976, laws allowed borrowers to do away with student-loan debt in bankruptcy. Congress, out of concern that new graduates would take too much advantage of that option, made a new rule: Borrowers could cancel student loan debt after only five years of payments. Judges could grant exceptions if borrowers showed that repaying would cause “undue hardship.”

Congress didn’t define “undue hardship” so the task of doing so fell to federal judges. When Marie Brunner, a 1982 graduate of a master’s program in social work, tried to cancel her loans in bankruptcy, a New York judge in 1985 said she had to show three things: she struggled financially, her struggles would continue and that she had made a good faith effort to repay. She lost.

That list still serves as a baseline for hardship in circuit courts that control the rules in most states.

Some appeals courts set even higher benchmarks, with one, for instance, saying borrowers must face a “certainty of hopelessness.”

In 1998 Congress said any borrower trying to cancel any federal student loans must prove “undue hardship,” like Ms. Brunner. Congress gave private student loans the same protection in 2005.

Some of the country’s bankruptcy judges are starting to argue that the prevailing legal standard is unintentionally harsh and wasn’t meant for adults still on the hook for student-loan debt years after college.

Judge Frank Bailey in Boston made that argument in an April ruling wiping out $50,000 in student loans for a 39-year-old man whose health ailments prevent him from working.

Frustrated judges are more likely to “look for wiggle room and try to find solutions that will allow them to sleep at night, ”said Terry Maroney, a Vanderbilt Law School professor who studies judicial decision-making.

Some judges, including U.S. Bankruptcy Court Judge Michael Kaplan in Trenton, N.J., said they are looking for ways to be more forgiving after seeing their own adult children borrow heavily for their education. Other judges grew concerned after talking to their law clerks. The typical law-school student takes out $119,000 in loans, according to the legal-education watchdog group Law School Transparency.

Two judges said they regret their rulings against borrowers more than a decade ago. One Florida judge said that if the case was filed today, the borrower would win.

Kansas judge Dale Somers said he worked particularly hard to justify the reasoning in a December 2016 ruling that cancelled more than $230,000 in interest that built up on a couple’s student loans from the 1980s. They left bankruptcy owing the original amount: $78,000.

Alabama judge William Sawyer declared that student loans had become “a life sentence” in a 2015 decision cancelling a $112,000 student loan debt for high school science teacher Alexandra Conniff, a single mother of two teen boys whose yearly income is $59,400.

She took out loans for several degrees, including a Ph.D. in special education, a discipline she also taught. Repaying them over 15 years would cost $843 a month.

Ms. Conniff testified she has been unable to land higher-paying jobs and keeps costs down. Federally contracted lawyers argued she could cut retirement savings, life insurance payments and $100 in monthly landline-phone costs. The case is under appeal and was sent back to Judge Sawyer to re-rule.

Copyright ©2018 Dow Jones & Company, Inc. All Rights Reserved.

All of my clients want to know how quickly they can recover their credit score and so here is the answer. If you are proactive you can have a six eighty or six 90 credit score. Two years after we file the bankruptcy petition the way that you do that is you obtain a credit card immediately after we file. You start using the card responsibly and you only charge 50 percent of the limit on the card and you pay that off every single month. If you do that for two years you're going to have a 680 credit score in two years.
The post Am I Eligible to File Bankruptcy? appeared first on Tucson Bankruptcy Attorney.