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.