Discharging Student Loans In Bankruptcy

Recently the House of Representatives Judiciary Subcommittee on Commercial and Administrative Law held a hearing to initiate legislation to change provisions of the federal bankruptcy law that give student loan lenders an advantage over other consumer loans.  Current bankruptcy law provides that student loans are generally not dischargeable under any chapter of the bankruptcy code unless the debtor can show that repayment of the loan creates an “undue hardship.”  Unfortunately, Congress did not define “undue hardship” in the bankruptcy code, so this interpretation has been left to the individual bankruptcy court judges. 

During the Committee hearing Rafael I. Pardo, an associate professor at the Seattle University School of Law who has studied the discharge of student loans in bankruptcy, challenged Congress “to clarify the undue hardship standard.”  Many courts view “undue hardship” as a high bar that is only met by a showing of exceptional circumstances (like physical or mental disabilities, or poor or no future earning potential) that result in an inability to both repay the student loans and provide a minimum standard of living for the debtor and the debtor’s family.  This is a very difficult burden for most debtors to meet, and consequently bars the discharge of student loans in most cases – even while other consumer debts like auto loans, credit cards, medical debts, mortgages, and even taxes are discharged in the debtor’s bankruptcy. 

Consumer bankruptcy attorney Brett Weiss, who testified on behalf of the National Association of Consumer Bankruptcy Attorneys and the National Consumer Law Center, called the situation “unfair” when other consumer loans are forgiven in bankruptcy proceedings while student loans are not.  As a result of these hearings, Rep. Steve Cohen (D-Tenn.) announced his plans to file legislation to “give private student loan borrowers more equitable treatment during the bankruptcy process.” 

For the time being it remains extremely difficult to discharge student loans.  However, there are other non-bankruptcy programs for debtors unable to repay their loans.  In some cases debtors may qualify for reduced payments, deferment, forgiveness or cancellation.  Chapter 13 bankruptcy can also provide a way to cure defaulted student loans, or pay them off during the bankruptcy.  If you have student loan debt, discuss your situation and options with a qualified bankruptcy attorney.

Happy Holidays From Mortgage Lenders

The Associate Press is reporting that Citigroup Inc. will suspend foreclosures and evictions for 30 days.  This moratorium will provide temporary relief for about 4,000 borrowers during the holiday season.  Other lenders are expected to follow suit continuing a tradition that began last year for suspending foreclosures during the holiday season. 

Thanks a lot. 

A report release earlier this month by the U.S. Department of the Treasury indicates that many of the nation’s largest mortgage lenders are not doing enough to lower the numbers of home foreclosures.  In one case the report found that after eight months of participating in the Home Affordable Modification Program (HAMP) Bank of America had registered a dismal 15 percent of the more than 1 million delinquent borrowers who are potentially eligible. 

The HAMP, introduced in March 2009, provided guidelines for lenders to modify a home mortgage, such as capitalizing arrearages, extending a mortgage to 40 years and reducing the interest rate, until the payments get down to 31 percent of a borrower’s income. 

One reason for the low numbers of loan modifications is that it is labor-intensive, according to John Rao, an attorney with the National Consumer Law Center.  Mr. Rao testified to Congress earlier this year that lenders are not compensated for the labor-intensive process of a modification, whereas they are compensated for the extra work in foreclosing on a home.  In other words, there is no real incentive to help the homeowner.  Some lenders have delayed the loan modification process until the homeowner is forced to file bankruptcy and then add thousands of dollars in interest and costs to their home loans. 

For homeowners that would benefit from a loan modification and a chapter 7 bankruptcy, lenders are especially reluctant to give permanent loan modifications, often offering interim loan modifications that last only two to three months.  If the homeowner files for bankruptcy, the lender will often withdraw any workout plan leaving the homeowners further in debt. 

The road to saving your home and easing your monthly debt obligation can be a perilous journey.  It is best to use an experienced bankruptcy attorney to guide you through this difficult path.  Until Congress decides to offer an effective program that offers real relief, bankruptcy can be a powerful option for saving your family’s home.

Surrendering A Home In Bankruptcy: What Is Your Responsibility Until The House Sells?

Our office often gets questions from clients about what responsibilities they have, if any, when they are surrendering their home in a bankruptcy.  The simple answer is this: until the house is sold at a foreclosure sale, you own it and are responsible for the upkeep of the home.

These days, most mortgage companies and banks are in no hurry to have you move out of the home you are surrendering. There are always exceptions.  However, the majority of mortgage companies would rather the house be occupied and taken care of than for it to sit empty and deteriorate or be vandalized. Many of our clients opt to stay in the home up until a week or so before the sale date in order to save money on rent. However, whether your intent is to stay until the sale or move out sooner, you need to continue to take care of the home as its owner.  That means you continue to cut the grass, pay the utilities, pay your homeowner’s insurance, etc.  In other words, you treat the real estate like you did before you filed bankruptcy and decided to give up the property.  The difference is that you will no longer make mortgage payments.  

There are exceptions where clients make arrangements with a mortgage company to turn over the keys and the mortgage company agrees to take possession of the property before the sale.  If you can work out such an agreement, get it in writing!!! You want to make sure that the mortgage company will be paying the insurance and taking care of maintenance before you cancel your insurance policy, turn off utilities or stop cutting the grass.

DO NOT take light fixtures, appliances that came with the home, plumbing fixtures or any other item that is attached to the real estate.  Also, avoid causing damage to the house when moving.  You want to walk away as cleanly as possible to avoid issues that may be non-dischargable in the bankruptcy.  If you have questions, you can always call us for advice!

The Perils of a “Do It Yourself” Bankruptcy

Federal law guarantees open access to the courts and permits self representation in lawsuits, including bankruptcy proceedings.  However, the most important question is not “can you,” but “should you” represent yourself in a bankruptcy case. 

Proceeding pro se (Latin meaning “for himself”) in a bankruptcy case is like navigating a mine field while blindfolded.  Is it possible to be successful?  Sure!  Will your bankruptcy case blow up?  Probably.  Books and internet resources simply cannot substitute for competent legal advice.  Below are a few reasons why a pro se bankruptcy is a bad idea: 

Reason 1:  The Federal Bankruptcy Code is complex. 

Reason 2:  The Federal Rules of Bankruptcy Procedure are complex (and changing as of December 1, 2009). 

Reason 3:  The bankruptcy court’s local rules are complex. 

Reason 4:  The applicability of state law to federal bankruptcy law is complex, including state exemption laws, state criminal laws, and state collection laws.

Reason 5:  The bankruptcy trustee will examine your case more closely since you are not represented by counsel.  The trustee will likely put you at the end of the 341 meeting docket to have extra time to review your bankruptcy case and ask questions. 

Reason 6:  Most skilled bankruptcy attorneys will not step into the middle of a pro se case when things go wrong. 

Reason 7:  Are you really qualified to answer important questions, like: “When should you file?” “What chapter should you file?” 

Reason 8:  Most courts will not allow a pro se bankruptcy debtor to file documents electronically through the court’s internet ECF system. 

Reason 9:  You can be audited by a CPA firm selected by the Department of Justice. 

Reason 10:  Occasionally the pro se case is such a chaotic mess that the debtor is forced to dismiss the bankruptcy and later re-file with the assistance of an attorney.  That’s two bankruptcies on your credit report for the price of one! 

Reason 11:  If you are reaffirming a debt, you must appear in open court and answer the bankruptcy judge’s questions. 

The upside of representing yourself is saving a few dollars.  The downside is a considerable risk to your property, your future finances, and, in extreme cases, your liberty.  Don’t risk your families’ well-being!  Let an experienced bankruptcy attorney guide you through your bankruptcy case.

Is There Any Way You Can Get Rid Of A Second Mortgage By Filing Bankruptcy?

The short answer is NO if you file a Chapter 7 bankruptcy unless you are surrendering your house. However, if you want to keep your house, you might be able to strip off the second mortgage if you file a Chapter 13 bankruptcy. It works like this. Under current bankruptcy law there is no mechanism to modify a first mortgage secured by a debtor’s home. However, many homeowners have found relief for their home mortgage woes by filing a Chapter 13 bankruptcy case, which allows a bankruptcy judge to strip away an entirely unsecured second mortgage lien.

For example, let’s say you purchased your home for $400,000, and obtained two mortgage loans. Today your home is worth $300,000 and you owe $305,000 on the first mortgage and $70,000 on the second. During a Chapter 13 bankruptcy case a bankruptcy court can strip away the second mortgage lien on your home because it is entirely unsecured by your home (i.e. the value of your home is not more than the first mortgage debt). The above example is only possible when the second mortgage is not secured at all by the value of the home. If the home is merely under-secured, lien stripping is not authorized. For instance, if the value of the home in our example is $305,001, then the loan is partially secured (by one dollar) and its second mortgage lien cannot be stripped.

By stripping the lien from your home, the second mortgage loan becomes an unsecured, non-mortgage debt. Unsecured debts receive the lowest payment priority during a Chapter 13 bankruptcy and typically receive pennies on the dollar, if anything. If you believe that Chapter 13 bankruptcy lien stripping could benefit you and your family, call me at 339-0222 so that I can advise as to whether you can strip off your second mortgage.

What Is A 341 Meeting And What Really Happens When I Go To Court?

I get this question constantly from clients. So here is a quick overview of what it is and how it works.

Whether you file a Chapter 7 or Chapter 13, you will be required to attend a 341 Meeting.  A 341 Meeting is also called a Meeting of Creditors.  The meeting is typically set 30 days after your case is filed. The Meetings are not held in an actual court room and the Judge is not present.

At this meeting you will meet the Trustee who has been assigned to your case.  Typically the trustee sits at the head of the table and has a tape recorder to preserve the hearing for the court’s records. And you will not be alone–an attorney from O’Bryan Law Offices will be right by your side at the table.  The trustee will have you raise your right hand and have you swear to tell the truth (put you under oath) just like in any court case where you will be testifying.  Then the questioning begins by the Trustee.

Let me stop you right here because this is where your palms start to sweat and your heart is beating 100mph.  I have never witnessed a client pass out, throw up, suffering a stroke or heart attack or any other ailment while under questioning.  In fact, the response I usually get from clients after it is over is “Was that it?”  That is because you are simply asked questions about the information you have provided about your financial information.  Who knows the answers better than you! And the trustee is not there to shame you because you have filed bankruptcy.  While they are looking at your assets to see if you have anything that could be used to pay your creditors, they are there to help you and do not pass judgment other than if you have assets, no assets, if your plan will pay out, etc.

And it wouldn’t be called a Meeting of Creditors if your creditors were not invited.  All creditors have notice of the meeting but most do not appear.  The majority of the cases I cover in Chapter 7 do not have any creditors appear.  It is more likely in a Chapter 13 but is still a low number that actually come to the meeting.  If a creditor appears, that does not mean your stomach should sink.  Usually, it is a creditor on a home or vehicle which appears and will ask you information regarding insurance and your intentions as to keeping or surrendering the secured item.  

The typical meeting lasts about 5 minutes or less.  You spend a lot more time waiting your turn than you do actually in the meeting itself.

It is normal to be nervous of the unknown but I hope this information puts your mind at ease.  Literally, if you need someone to hold your hand, we will be happy to do that too.

What To Do When A Creditor Is Left Out Of The Bankruptcy Petition.

It is extremely important to list all of your creditors in bankruptcy.  Only the debts listed will be discharged.  This is why we run a credit report and ask our clients to give us a list of every creditor.  Usually we find all of the creditors this way, but sometimes a forgotten (or unknown) creditor that does not appear on the credit report will be inadvertently left off of the schedules, meaning their debt is not subject to discharge, and the Client can still be held liable for that debt regardless of the bankruptcy UNLESS action is taken. 

The most common occurrence of this involves debts associated with hospital visits.   When you receive services through a hospital, you will generally receive invoices from not only the hospital, but also the doctor who treated you.  So, if you only list the hospital, the debt to the physician who bills you separately from his office is not going to be covered.  It is very important to list both.  If your trip to the hospital was so close to your filing date that you have not yet received bills, you must make a phone call to the hospital to find out who you should expect to receive bills from.

This also happens when a Debtor has no recollection of a creditor’s details and the debt does not appear on the credit report.  In these situations I encourage the Debtor to try their hardest to remember as much as possible.  Even if we do not know an account number or the amount owed, as long as we get the creditor’s name and address, we can include it in the bankruptcy.

If a creditor has been left off of the schedules and you realize it while your case is active, we are required to file amended schedules and identify the creditors.  There is a small fee to the Court for filing amended schedules, but it is necessary to complete your bankruptcy petition.  If you do not realize it until after your case has been closed out, we may have to petition the court to re-open the case in order to amend the schedules and discharge that debt.  There is a more substantial fee for that, but again, it is usually necessary. 

Obviously, debtors are expected to be open and honest in describing assets and debts, so if a debt was unintentionally left off of the Petition, you must bring that to your attorney’s attention RIGHT AWAY.  It can be fixed.  An intentional failure to list a creditor, on the other hand, can cause that debt to be declared non-discharged and survive the bankruptcy. In extreme cases courts have denied a bankruptcy discharge because of the debtor’s intentional failure to list all debts.

Bankruptcy Versus Debt Consolidation Services

Like you, I constantly see ads for companies that claim they can negotiate down your balances with your creditors, get your interest rate lowered, and consolidate your bills into one low monthly payment.  These ads run on TV, radio and the internet all times of the day and night.  Some of these companies are legitimate and do truly want to help you get out of debt while others are fly-by-night operations who take your money and run.  Whether they are legitimate or not, they all have one thing in common—they cannot stop your creditors from coming after you for payment. How do I know? Because I represented creditors in the past and creditors have certain rules for those people trying to collect the debts on their behalf.  If the offer from your credit counseling agency does not meet the requirements a collection agency is given by the creditor, the collection agency can accept the proposed payments but does not give up their right to sue you on the entire remaining balance of the debt.

One of the many advantages of filing bankruptcy is that, when your case is filed, you are afforded the protection of the Federal Laws regarding bankruptcy.  The best and most well known provision is the “automatic stay”.  When your case is filed, your creditors are not allowed to contact you or try to collect the debt—they are automatically stopped from these acts.  I like to think of it as they have their arms tied behind their backs.  This gives you a time to breathe, regroup, and get your ducks in a row while your attorney, the trustee and the Judge look at your financial situation and find a solution with your help.

When Your Back Is Against The Wall Because Of Debt, What Can Filing Bankruptcy Do For You?

Have you ever gotten behind on paying a monthly debt and then stopped paying altogether? Did you begin to avoid phone calls from your creditors or the monthly billing statement you get in the mail? Did you ever begin to ignore the debt and pretend it didn’t exist? Have you ever cashed out all or part of a retirement account to catch up on your bills?

Many people who owe money to their creditors can answer “yes” to one or more of these questions. Owing debts that you can’t pay can become overwhelming, stressful, and add unnecessary pressure to your life.  But ignoring the debt can cost you more in the long run.  Pretending that it doesn’t exist or ignoring it doesn’t make it go away. Filing bankruptcy can stop creditors from collecting debts that they are owed.  Below are a few instances of how filing bankruptcy can help.

IRS Tax Levy/Garnishment of wages or bank accounts – Filing bankruptcy can stop money from being involuntarily taken from your paycheck or bank account.  If a creditor sues you for a debt and gets a judgment against you, then they can execute on that judgment and garnishment may occur.  It is better to file bankruptcy once you are sued rather than waiting until you are being garnished simply because you have full access to your money without restrictions.  

Suspended driver’s license – If you are involved in a motor vehicle accident and are determined to be the responsible party who must pay for damages, then you could be sued by a plaintiff insurance company to pay the debt arising from the accident.  You risk your license being suspended if you don’t pay.  If you bankrupt such debt, you can prevent or have the suspension of your license lifted.

Past due utility accounts – If you are on the verge of having your utilities shut off due to non-payment, chances are you may have other debts that you haven’t paid as well.  Filing bankruptcy can prevent a shut off of your utilities.  You may then have continued utility service and start fresh with a zero balance account. 

Does any of this apply to you? It is always best to seek counsel before things get too far out of control.

My Credit Card Company Is Offering A Credit Monitoring Service: Is This Service Worth It?

Several companies have sprung up that promise to help protect you against identity theft. How do they do this? By monitoring your credit. An alert is sent to you when changes to your credit occur such as when a new account is opened or a new address associated with you is logged with a credit reporting company. Some credit monitoring services are independent companies and some are operated by credit reporting agencies such as Trans Union and Experian.

While there are advantages to using these services, there are some problems with them such as:

1)      If you receive a Notification from a monitoring company, your information may have already been used illegally by someone who has opened up a new credit account with your stolen identity. 

2)      The monitoring services cannot catch certain forms of identity theft that don’t access your credit report such as a person using a stolen identity to a) obtain a Payday advance loan, b) apply for a job; or c) apply for a driver’s license. 

3)      Most of what these services offer, you can do yourself.   You can file fraud reports and place fraud alerts and credit freezes on your credit files with credit reporting companies.

Many people believe that credit monitoring activities will make them completely secure against identity theft. That simply isn’t true. However, credit monitoring can be an important piece of your protection package. Some other things you can do include:

• Leave important documents in a safe place at home.
• Only carry the credit cards or other cards you plan on using that day (do not carry your Social Security Card).
• Properly destroy old credit cards, checks and unneeded receipts
• Shop only on secure Web site with companies you trust. 
• Check your bank and credit card statements monthly for any suspicious activity.
• Personally check your credit report at least once a year. 

Since the cost of a monitoring service usually runs $10 to $15 a month, it may be worth it for the peace of mind in knowing that you are purchasing a little added insurance to avoid being the next victim of identity theft.

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