Can Student Loans Be Discharged Through Filing Bankruptcy?

     Most are aware that student loans are not discharged through the bankruptcy process.  Section 523 of the Bankruptcy Code specifically excludes both government and private student loans from being discharged (or eliminated) through bankruptcy unless the student loans would “impose an undue hardship” on the debtor and the debtor’s family.  If I were to ask 10 families if their student loans imposed an undue hardship on their families I would guess 9 out of 10 would say yes.  That being said, the bankruptcy court’s definition of undue hardship is much different than mine and yours.

A Case Story of Student Loans and Bankruptcy

     While I was in law school I served as an extern for the bankruptcy court in the District of Nevada.  This was a great opportunity to witness a bankruptcy judge deal with these types of issues on a daily basis.  One time an attorney who had been severely injured in a car accident filed for bankruptcy and sought to have her student loans from law school discharged.  The court held a hearing where the attorney testified that she was a paraplegic due to the car accident and had suffered additional significant injuries that made continuing on in her law practice very difficult if not impossible.

     After two days worth of testimony the court ruled that while the attorney’s injuries were significant, they did not impose such an undue hardship so that the attorney could not continuing working.  The court cut the lawyer’s student loans in half, leaving approximately $45,000 left to pay.  I recite this story to demonstrate that the “undue hardship” that the student loans must impose will have to be significant to garner any sympathy from the bankruptcy court.  For most, if you can work and earn money you will end up paying your student loans and they will not be discharged through the bankruptcy case.

Options For Dealing With Student Loans During Financial Distress

     With all that being said, student loans are not like most loans in that there are programs and options that may help you if you run into financial difficulties and cannot pay your loans.  I would recommend starting at http://www.studentloanborrowerassistance.org/  to get information that will help you in dealing with your student loans.

     Arizona bankruptcy attorney John Skiba offers a free consultation to discuss your student loan problems or any other financial set back as well as the bankruptcy options that can help you recover.  Mr. Skiba can be reached at (480) 464-1111 or via email at jskiba@jacksonwhitelaw.com.  Mr. Skiba helps clients in the filing of Chapter 7 bankruptcy, Chapter 13 bankruptcy, and Fair Debt Collection lawsuits.

We are a Debt Relief Agency.  We help people file for bankruptcy relief under the Bankruptcy Code (11 U.S.C. 528(b)(2)(B)).  The services, benefits, or assistance we provide in connection with consumer debts may involve bankruptcy relief under the Bankruptcy Code.

If you are not looking for bankruptcy relief, it is important to know your rights as a consumer as well as the regulations that govern creditor contacts with you.  The Fair Debt Collection Practices Act (FDCPA) governs communications between collectors and you.  Below are a few behaviors that are barred by the FDCPA.; collectors CANNOT:

• Contact third parties and reveal that you owe a debt;
• Contact a third party more than once;
• Send you correspondence about the debt on a post card or in a letter that indicates a debt collection business;
• Contact you after they know you are represented by an attorney;
• Call before 8:00 a.m. or after 9:00 p.m.;
• Call your place of employment if they know you cannot accept calls there;
• Harass or abuse you;
• Threaten violence or other criminal means to you or your property.

This list is non-exhaustive, but give you an idea of what types of behaviors are prohibited.  If you are being harassed by a collector and need help enforcing your rights, I offer a free consultation on FDCPA cases.  Further, the FDCPA provides that you can collect statutory damages of $1,000, plus real damages and attorney’s fees.  If we determine that the collectors contacting you have violated the FDCPA I will take your case with no upfront fees.  Contact attorney John Skiba for more information at (480) 464-1111.

The Process of Pre-Filing

Much of the work in your bankruptcy is completed prior to your case actually being filed with the bankruptcy court.  Initially, it is vital that you meet with an attorney to discuss the various Chapters available under the Bankruptcy Code and to further discuss the best way to protect assets throughout the bankruptcy process.  While there are people who file bankruptcy without an attorney, it is not recommended.  The Bankruptcy Code is very large and quite technical, making it very easy for those unacquainted with it to make a misstep that could prove very costly in the long run and even possibly get your case dismissed.

At Jackson White, after you call in we will set up a free consultation with you to discuss your particular financial situation and to help you determine what chapter under the Bankruptcy Code you should file under (or if you should even file bankruptcy).  Once the decision has been made to move forward, you will be given a questionnaire to fill out that covers all of your debts, income, assets, and financial history.  It is vital to the process that you disclose all assets and all debts accurately in the early stages of bankruptcy.  You will also be asked to get documents together such as tax returns, bank statements, and pay stubs.

After this information has been provided, it will be used to prepare the bankruptcy petition and schedules.  The bankruptcy petition is a document that contains information such as your name, address, and any prior bankruptcies.  The schedules contain information on your assets, debts, income, and monthly expenses.  Once complete, you and your attorney will review the documents for any errors.

Prior to filing your bankruptcy case, the Bankruptcy Code mandates that you take a credit counseling class.  At Jackson White we work with credit counseling providers to help you in getting this requirement taken care of and can even be done online or over the telephone.  This is an important step as your case cannot be filed until the credit counseling course has been completed.

Now that the bankruptcy documents and credit counseling course have been completed, your case is ready to be filed.  In bankruptcy court in the District of Arizona all case filings are done electronically over the Internet.

The Post-Filing Process

Upon filing your case, you will receive a case number from the court and pursuant to the Bankruptcy Code the “automatic stay” is in effect.  The automatic stay bars any collection efforts against your or any of your property.  This is a powerful tool and will stop foreclosures, repossession, even telephone calls.

U.S. Trustee

Your case will be assigned a trustee who represents the United States Trustee’s Office, a division of the Department of Justice.  The trustee’s purpose is to review your case and make sure that you are in compliance with relevant sections of the Bankruptcy Code.  In a Chapter 7 bankruptcy case, the trustee will review your assets and if warranted, can seize non-exempt assets for liquidation.  In Chapter 13 cases, you will make your monthly plan payment directly to the trustee.

Shortly after you file you will receive a letter from your assigned trustee that contains a questionnaire and makes requests for items such as bank statements, copies of titles to vehicles, and tax returns.  It is important to gather all requested documents and return them to the trustee in the requested time.  Failure to do so will delay your case and even possibly result in your case being dismissed.

Chapter 13 Plan

If you have filed a Chapter 13 case, you will have a Chapter 13 plan payment that must be paid monthly.  The first plan payment is due 30 days from the date your case was filed.

Meeting of Creditors

Approximately 30 days after your case is filed you will be required to go to the Bankruptcy Court to attend the Meeting of Creditors.  The Bankruptcy Code provides that creditors and the trustee are to have an opportunity to ask questions.  It is rare that a creditor will actually make an appearance at the Meeting of Creditors.  However, the trustee will place you under oath and ask questions about your bankruptcy filing and the documents you provide in response to the trustee’s letter.  Most of these questions are centered on the truthfulness of your documents and information as well as any transfer of assets.   I attend this meeting with all clients and am there to answer any questions a client may have.  This meeting it typically 5-10 minutes long.  While the Meeting of Creditors is an important day and something that must be taken seriously, it is nothing to lose sleep over.

Discharge

The goal of the bankruptcy case is to obtain a discharge.  Upon discharge, you are no longer liable for the debts that are provided for in your bankruptcy schedules.  Prior to receiving your discharge you must complete a second credit counseling class.  This second course is actually a Financial Management course.  Again, at Jackson White we will provide you with a course that can be completed online.

In Chapter 7 bankruptcy cases, you should receive your discharge approximately 90 days after your Meeting of the Creditors.  In Chapter 13 cases, you will not receive your discharge until after you successfully make all payments provided for in your Chapter 13 Plan.  This occurs after the plan is complete.  Most plans are in the 36 month to 60 month range.

Closing of Case

The fact that you have received your discharge does not mean that your case is now closed with the bankruptcy court.  However, once your discharge has been issued, in most cases the bankruptcy court will close your case out within 30 to 60 days.

While not every case is the same, understanding the basic process of filing bankruptcy can reduce a great amount of stress and give you greater insight into how your case is being handled by the court.

Arizona Bankruptcy Attorney John Skiba offers free consultations on all bankruptcy matters.  If you would like to meet with Mr. Skiba call (480) 464-1111.

The Wall Street Journal reports that in anticipation of the new law going into effect major credit card companies have been raising rates, reducing credit lines, and closing accounts.  See http://online.wsj.com/article/SB10001424052970204044204574358612543642536.html.  The majority of the provisions in the new law go into effect in February 2010.  Among the new provisions are new disclosure rules and limits on interest-rate increases on existing balances.

Credit card debt is one of the main reasons people file for bankruptcy.  Regardless of the type of bankruptcy you file (Chapter 7 or Chapter 13), you will be able to eliminate all or nearly all of your credit card debt.  If you are struggling with credit card debt and want to learn how bankruptcy can help you, attorney John Skiba offers a free bankruptcy consultation to discuss your particular situation.

Home foreclosures climbed to a record high for the third time in five months this past July.  July 2009 foreclosure rate was up 32%  when compared to the same time the previous year and up nearly 7% from June 2009.  Arizona is third in the nation behind Nevada and California when it comes to foreclosures.  One in every 135 households in Arizona, including Phoenix, are in foreclosure.

Similarly, bankruptcies are up 36% in the first half of 2009 when compared to the first half of 2008 with total filings for the nation at 711,550 bankruptcy cases so far in 2009.

Attorney John Skiba, in Mesa Arizona, offers a free bankruptcy consultation to help those who are facing foreclosure or are considering bankruptcy.

The bankruptcy code provides that the trustee assigned to your bankruptcy case can undo any payment made to a creditor made within 90 days of filing your bankruptcy.  If the creditor happens to be a family member or business partner, the trustee can look back up to one year before your filing and try and undo those payments.  The process for undoing those transactions will be done through a lawsuit filed against the creditor who received the payment.

The purpose of this post is to provide guidance to potential filers, that if you are planning or even thinking of filing bankruptcy, it is best not to try and pay off any specific debt or worse to pay a family member over your other creditors.  Such transfers/payments are likely preferences and could result in delay for your bankruptcy case and your creditor being forced to defend a law suit in the bankruptcy court.

Arizona Bankruptcy Attorney John Skiba provides a free bankruptcy consulation where your specific financial situation can be discussed.

Admittedly, viewing bankruptcy laws as a financial tool rather than as a financial pit requires an adjustment in our thinking.  David A. Skeel’s book “Debt’s Dominion: A History of Bankruptcy Law in America” changed my view of the bankruptcy process and its purposes.  Specifically, he provided that bankruptcy is necessary in a market-based society, because without out laws that would provide for a fresh start, few would be willing to take the financial risk of starting a business.  Think about it, how many of us would be willing to incur the necessary debt to open a business knowing that if the business happened to fail, that we would be burdened with such debts for a lifetime.

If you would like to learn more about the bankruptcy process and how it can help your situation, Arizona Bankruptcy attorney John Skiba offers a free bankruptcy consultation.

There is an interesting article in the Wall Street Journal by Brett Arends about Rethinking Bankruptcy that I thought worth sharing here in its entirety.

Rethinking Bankruptcy

by Brett Arends

There’s a surge in personal bankruptcy filings at the moment, for obvious reasons. Some 30,000 Americans are filing each week, and the figures could top 1.4 million for the year.

But too many people are talking about bankruptcy as if it’s a sign this country’s social safety net has failed.

It isn’t. Bankruptcy is part of the safety net. Other countries have welfare states, America has bankruptcy. And so long as you plan ahead, it doesn’t have to wipe you out.

If you are smart you could get through a bankruptcy filing and still keep your home, your retirement savings, the childrens’ college funds, your car and your personal effects. Amazingly, according to a recent study by the Federal Reserve Bank of Boston, you may even get your credit cards back pretty soon — whether that is a good thing is another matter.

I don’t want to encourage irresponsible behavior. But I don’t write the laws, and they are there for a reason.

Furthermore, although there is some dispute about the numbers (we’ll get to that in a minute), it is certainly the case that sheer bad luck lands a lot of people in bankruptcy court. Yes, some people spend themselves into oblivion on Jacuzzis and trips to Lake Tahoe. But many others are walloped when their job is eliminated or when a child gets very sick.

Every middle class family should be aware of the risks of bankruptcy, and how to protect their assets if the sky falls.

Bankruptcy laws are complex and vary from state to state – if you want to make substantial plans you should probably talk with a lawyer in your state who specializes in the subject.

Some basics: Money in pension plans, including a 401(k), should be secure from creditors. The same is true for money in an IRA in amounts up to $1 million. If you have children or grandchildren, money in 529 tax-sheltered college savings plans becomes secure two years after deposit. You can contribute $65,000 per child to your 529 plan this year without triggering gift taxes, or $130,000 if you’re a couple. You retain control of the money in the plan, too.

Life insurance products, including retirement annuities, may also be protected, though rules vary by state.

Many states have a homestead exemptions that shield your home from unsecured creditors (though your home’s mortgage isn’t shielded, of course). You usually have to file paperwork to obtain the exemption. Florida and Texas, famously, offer virtually unlimited homestead exemptions. “It’s irresponsible not to have a homestead exemption on your house,” says Frank Morrissey, who teaches bankruptcy law at Boston University.

Little known: In more than 20 states married couples can own their home as “tenants by the entirety,” which affords substantial protection against a creditor of one spouse (though not of both). “In effect, neither party owns the property, it’s owned by the marriage,” explains Richard Nemeth, a bankruptcy lawyer in Cleveland.

There are other exemptions that vary by state, from a car and working tools to some other personal effects. Iowa exempts a family shotgun: An enterprising bankrupt several years ago bought a $10,000 antique gun on the eve of filing for bankruptcy to claim the exemption. He got away with it, too.

Such boldness is usually a bad move, however, as courts frown on naked greed. “When it comes to bankruptcy,” says B.U.’s Mr. Morrissey, “the usual rule is, pigs get fat, but hogs get slaughtered.” The earlier you shelter assets, the safer they should be.

As long the economy stays grim, bankruptcy filings will become increasingly common – which may diminish the stigma that accompanies bankruptcy. It is, in a sense, surprising that so many Americans should still feel ashamed of bankruptcy when those in a far more comfortable situation feel no such chagrin. Corporate bankruptcies are an accepted part of doing business from Wall Street to Silicon Valley. Executives who collect $30 million from a bank in the years before it collapses are not expected to give it back.

Bankruptcy gives people a fresh start, but the long-term effects vary. A study last year by researchers at the Federal Reserve Board in Washington, D.C., found that people who filed for bankruptcy were more likely than others to fall back into debt arrears, even many years later. But there may be complex reasons for that, and every case is different. (Here’s a link to the study: http://www.federalreserve.gov/pubs/feds/2009/200917/200917pap.pdf)

As for the causes of bankruptcy: The widely reported statistic that nearly two-thirds of personal bankruptcies are caused by medical bills deserves a more skeptical eye. The number comes from a study by Dr. David Himmelstein, et. al, to be published next month in the American Journal of Medicine. Yet if you read the report you’ll discover only 29% of those interviewed for the study actually said their medical bills caused their bankruptcy. And while the “medically bankrupt” claimed average medical bills of $17,943, that group’s total net debt averaged $44,622, or more than twice as much.

Claire Ann Resop, a bankruptcy lawyer in Madison, Wisconsin, adds that medical debt may show up more in bankruptcy filings because it’s often the last bill you pay when you get into trouble. Hospitals may be lenient on repayment and charge no interest, while the landlords demand cash and the credit card company charges 30% interest. “Medical facilities may simply be the best creditors to have,” she says.

The Bankruptcy Code provides that if a person incurrs debts on a credit card totaling more than $550.00 within 90 days prior to filing a bankruptcy case, there is a presumption that those debts are non-dischargeable and will likely have to be paid back.  However, this rule only applies to purchases for “luxury goods or services.”  See 11 U.S.C. § 523(a)(2)(C).  This leads to the question, what are considered “luxury goods or services?” The Code specifically states that “luxury goods or services does not include goods or services reasonably necessary for the support or maintenance of the debtor or a dependent of the debtor.”  11 U.S.C. § 523(a)(2)(C)(ii)(II).

What all this means is if you use your credit card within 90 days before  filing bankruptcy, and if what you purchase is not reasonably necessary for the support of you or your family, you may have to pay it back.  The opposite is also true — if you purchase something on a credit card within 90 days of filing that exceeds $500.00 and is necessary for the support of you or your family, you will likely not have to pay it back.  Things like groceries or gas for your car so you can get to work could be examples of items necessary for the support of your family.

Because your credit card statement only provies a total amount of a purchase and the store where the purchase took place, I have actually had creditors raise objections based upon the store where a purchase was made.  For example, you are much more likely to get an objection to a purchase made at Best Buy or some other electronics store than you would for a purchase made at your local grocery store.  I have even had a creditor distinguish between a charge at Target as compared to Super Target (because Super Target carries groceries while Target generally doesn’t).  In sum, you should avoid usuing your credit card if you are planning on filing bankruptcy, but minor use for necessities will likely not raise an objection from your creditors.

Similar to the 90 day rule on credit card purchases, the Code provides that if you take a cash advance from a credit card (or use a credit card check), within 70 days prior to filing your bankruptcy case, there is a presumption that those funds are non-dischargeable.  See 11 U.S.C. § 523(a)(2)(C)(i)(II).  The presumption only arises if the cash advance was more than $825.00.  General rule on cash advances, don’t take them out within 70 days prior to filing your bankruptcy, and if you did take out a cash advance and must file, plan on paying it back.

Arizona Bankruptcy Attorney John Skiba offers a free bankruptcy consultation to discuss how bankruptcy laws can help you obtain debt relief.

Generally speaking there are two options available to individuals seeking bankruptcy protection: a Chapter 7 bankruptcy or a Chapter 13 bankruptcy. The 7 and 13 found in the title of these bankruptcies refers to the chapter of the bankruptcy code which governs that particular type of bankruptcy. A Chapter 7 case is generally considered a liquidation where you will be required to surrender any unencumbered, non-exempt assets for the payment of creditors. On the other hand, a Chapter 13 bankruptcy helps you reorganize your debt while remaining in possession of your assets. Chapter 13 offers many powerful tools in helping you reorganize, one of which is the “cram down.”

The Chapter 13 Cram Down

In a Chapter 13 case, the Bankruptcy Code permits debtors to modify the rights of secured creditors. A debt owed to a secured creditor is one in which there is property or collateral attached to the debt as security – for example, a debt on a car or a mortgage on a house. The cram-down is typically used on cars. In applying this tool, you will only be required to pay what your car is worth, not what you currently owe. For example, if you owned a 2005 Chevy Suburban that was worth $15,000, but you owed $25,000, in a Chapter 13 case, you would only have to pay the value of the car ($15,000) and the remaining balance would be discharged. The only limitation to this rule is that you must have purchased the car at least 2.5 years before you file for bankruptcy. If you purchased your car less than 2.5 years ago, this option is not available.

How the Cram Down Can Help

In addition to cars, the cram down can be used on almost any other secured debt including investment or rental properties. It cannot, however, be used on your personal home. If you would like to discuss the cram down option or to discuss bankruptcy and how it can help you, Arizona Bankruptcy attorney John Skiba offers a free bankruptcy consultation.

Generally speaking there are two options available to individuals seeking bankruptcy protection: a Chapter 7 bankruptcy or a Chapter 13 bankruptcy. The 7 and 13 found in the title of these bankruptcies refers to the chapter of the bankruptcy code which governs that particular type of bankruptcy. A Chapter 7 case is generally considered a liquidation where you will be required to surrender any unencumbered, non-exempt assets for the payment of creditors. On the other hand, a Chapter 13 bankruptcy helps you reorganize your debt while remaining in possession of your assets. Chapter 13 offers many powerful tools in helping you reorganize, one of which is the “cram down.”

The Chapter 13 Cram Down

In a Chapter 13 case, the Bankruptcy Code permits debtors to modify the rights of secured creditors. A debt owed to a secured creditor is one in which there is property or collateral attached to the debt as security – for example, a debt on a car or a mortgage on a house. The cram-down is typically used on cars. In applying this tool, you will only be required to pay what your car is worth, not what you currently owe. For example, if you owned a 2005 Chevy Suburban that was worth $15,000, but you owed $25,000, in a Chapter 13 case, you would only have to pay the value of the car ($15,000) and the remaining balance would be discharged. The only limitation to this rule is that you must have purchased the car at least 2.5 years before you file for bankruptcy. If you purchased your car less than 2.5 years ago, this option is not available.

How the Cram Down Can Help

In addition to cars, the cram down can be used on almost any other secured debt including investment or rental properties. It cannot, however, be used on your personal home. If you would like to discuss the cram down option or to discuss bankruptcy and how it can help you, Arizona Bankruptcy attorney John Skiba offers a free bankruptcy consultation.