Qualifying for Student Loans After Bankruptcy
Many students are unable to attend college without federal financial aid. Fortunately, a bankruptcy filing does not affect a student’s ability to obtain need-based financial aid. For most students that means Pell Grants and Stafford Loans, both subsidized and unsubsidized. Your credit is not considered in determining your financial need to receive Pell Grants and Stafford Loans and your bankruptcy filing does not disqualify you from receiving need-based financial aid. Pell Grants and Stafford Loans are the two most common forms of financial aid to undergraduate college students.
Stafford Loans during a Chapter 13 bankruptcy presents a problem for the student. You will need permission from the bankruptcy trustee and bankruptcy court to incur additional debt. These requests are handled on a case-by-case basis, so consult with your bankruptcy attorney if you want to take loans to attend school during a Chapter 13 bankruptcy.
Credit-based financial aid is a different story. This type of financial aid includes student loans from private lenders such as Sallie Mae. Applying for credit-based loans is the same as applying for an unsecured personal loan. Your credit history is considered and your bankruptcy will play a part in the decision to give you the loan.
Your credit is also considered if you are a parent applying for a parent loan like the PLUS (Parental Loan for Undergraduate Students) Loan and the Graduate PLUS (a loan for Graduate students) Loan. These federally guaranteed parent loans are credit based and federal regulations state that a parent with a bankruptcy within the past five years is automatically disqualified from obtaining a PLUS Loan for his or her child, unless there were extenuating circumstances or the borrower obtains a creditworthy endorser. However, if you are denied a PLUS Loan, your child qualifies for increased unsubsidized Stafford loan limits. Stafford loans remain in forbearance while the student attends school, while a PLUS Loan is subject to immediate repayment.
If you are a student or parent who needs money for school after a bankruptcy, speak with your student financial aid advisor and your bankruptcy attorney. Bankruptcy can help eliminate your personal debt and free money for college, or college loan repayment.
Keeping Household Items During Bankruptcy
Many people mistakenly believe that the bankruptcy court will take everything they own and sell it to pay creditors. Some of their descriptions of bankruptcy conjure up images of a poor unfortunate walking the streets wearing a wooden barrel with no property or money to his name.
Well, you can stop worrying about barrel chafing because there are many legal protections that allow you to keep household property during bankruptcy. These protections are generally limited to “common sense” amounts and typically apply to clothing, household furniture, musical instruments, books, electronics, appliances, etc.
One stated goal of bankruptcy is to give the debtor a “fresh start,” so Congress and state legislators attempt to balance the requirement of the debtor to have basic necessities against your creditors’ interests in receiving payment for your debts. The idea is to permit the debtor the things he needs for day-to-day living while prohibiting the debtor from living a lavish lifestyle at the expense of his creditors. For instance, if you have a Steinway grand piano worth $50,000 in your living room, it will likely be taken and sold to pay creditors. If you have a family piano worth $2,000, you can likely keep it.
The truth is that only around four percent of Chapter 7 bankruptcy cases are “asset cases,” meaning the bankruptcy trustee receives money or an asset from the debtor. In the vast majority of these “asset cases” the debtor loses a car or real estate in which he has too much equity. It is very rare to see a debtor lose any household item during a Chapter 7 bankruptcy. Debtors in Chapter 13 keep their property.
Determining whether a household item is at risk is a simple arithmetic calculation. First, start with the liquidation value of the item. Often this value can be determined by looking at yard sales or internet auction sites like Ebay. Next subtract the applicable state or federal exemption amount for that item. Any remaining sum is unprotected equity. Your bankruptcy attorney can discuss your options for protecting and keeping items with unprotected equity.
It is important to correctly describe, value and apply the proper exemptions to household items in your bankruptcy schedules. Once you have provided an adequate description and value of your household items, your attorney can apply the proper exemptions and protect your property from turn-over to the bankruptcy trustee. Discuss any high-dollar household item with your attorney to ensure that you obtain full legal protection for your property.
Can I Have Money in a Bank Account When I File Bankruptcy?
The two most common types of consumer bankruptcies are Chapter 7 and Chapter 13. In a Chapter 7 all of the debtor’s property is placed into an estate which is controlled by the bankruptcy trustee. While no property physically changes hands (at least not at the beginning of the case), the trustee and bankruptcy court have broad legal power over your property. If you have money in a bank account on the day you file, your bank account and money are assets of the bankruptcy estate. You are no longer free to transfer funds or assets as they now belong to the bankruptcy estate.
Take for example that you have $5,000 sitting in your checking account on the day you file bankruptcy. That money is property of the Chapter 7 bankruptcy estate and is no longer yours to control or use. If you take the $5,000 out of the bank the day after filing to pay your mortgage payment and other bills, the Chapter 7 trustee can seek to recover those funds, either from you or from the payee.
During a Chapter 13 bankruptcy the debtor retains possession and control over his or her property, and is free to use any funds in the debtor’s bank account. An accounting is performed and the debtor’s property is classified as either exempt or non-exempt. Non-exempt property is not taken from the debtor (as is often the case in a Chapter 7), but the Chapter 13 debtor is required to pay unsecured creditors a sum equal to the amount of non-exempt equity. For instance, if there is $5,000 in the debtor’s bank account, the debtor may only be able to exempt a portion of the entire sum. The non-exempt portion must be paid to the creditors through the debtor’s Chapter 13 plan (over three to five years).
Cash in a bank account can be a problematic issue for a debtor. Avoiding these problems is the joint responsibility of the debtor and the debtor’s bankruptcy attorney. Timing is critical to minimizing your financial exposure. An experienced bankruptcy attorney can help you maximize the benefits of the bankruptcy laws and navigate around any pitfalls.
Motion/Order to Raise Plan Percentage filed by your Trustee
Our office receives calls from clients in a panic from time to time when they receive one of these Motions and Orders. And understandably so. Your initial reaction is “I can’t raise my plan payment. I am already stretched to the limit.” Relax, your plan payment is not being raised. What is being raised is the percentage of debt being repaid to your creditors who filed a claim to be paid in your Chapter 13 Plan.
This is purely an administrative matter by the Trustee. Your creditors have a deadline to file a claim to be paid in your bankruptcy. After the deadline, the Trustee reviews your case and pays only those creditors who actually filed a claim. The plan as originally filed may have stated that the intention was to pay the unsecured creditors approximately 10% of the balance owed at the time of filing of the case. However, after all the creditors that filed claims are determined, it appears that your regular payment will end up paying these creditors 25% of what is owed by the end of your plan. For bookkeeping reasons, the Trustee will file a Motion and Proposed Order which raises the percentage paid to unsecured creditors to 25%. It is a simple matter and does not affect the amount of your payment.
Creditors who do not file a claim and were notified of the bankruptcy are not paid within the bankruptcy and will be discharged at the end of the plan even though they received no money. They have given up their right to collect the debt and cannot later make you pay them because they did not get paid in the bankruptcy.
Discharging Post-Petition Debt in Chapter 13
A lot can happen during a Chapter 13 repayment plan which generally lasts three to five years. Sometimes large debts are incurred that the debtor is unable to pay. Fortunately, a Chapter 13 debtor is able to discharge a post-petition debt, but only after certain prerequisites are met.
First, the debtor must amend the repayment plan to provide for a post-petition debt. Second, the debtor must usually obtain the approval of the bankruptcy trustee prior to incurring the debt. This is not always obtainable, especially in the case of a large medical bill. Third, the creditor must voluntarily choose to file a proof of claim. And finally, the claim must either be a tax claim, or a claim for a consumer debt necessary for the completion of the debtor’s plan.
A common situation in which post-petition debts arise in a Chapter 13 case is where the debtor needs to purchase a different automobile. Repaying a post-petition car loan through a Chapter 13 plan is easily accomplished through coordination and cooperation from the trustee, the lender, and the court. The lender agrees to be paid by the trustee, the trustee agrees to sanction the debt, and the court approves the amended plan allowing the lender to be paid through the bankruptcy plan.
In some cases it may not be practical to include a post-petition debt in the debtor’s Chapter 13 plan. In that case, the debtor may elect to convert the Chapter 13 case to one under Chapter 7. The Bankruptcy Code states that a debt that arises after the Chapter 13 filing date, but before the debtor’s conversion to Chapter 7, is to be treated as a pre-petition debt. The Chapter 13 restrictions and requirements listed in the preceding paragraph do not apply to debts in a conversion case.
The Bankruptcy Code contains many flexible options for reorganizing your finances and dealing with your creditors. Even when there is an unexpected event that results in a debt, your bankruptcy attorney can provide you with choices for dealing with a post-petition debt.
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.
Is An Inheritance Part Of A Chapter 13 Bankruptcy Estate?
Facts: Client is in the final few years of a 15% Chapter 13. He inherits ½ interest in a home worth about $85,000 and $50,000 in stocks. He only has about $20,000 of total unsecured debt left in his bankruptcy. His Chapter 13 payments are only $200 per month. The Trustee filed a motion to increase his plan to 100%. Result: Debtor sells stock and pays off his Chapter 13 at 100%.
At first glance, the bankruptcy statues would lead you to believe that any inheritance acquired by the debtor at least 180 days after the filing is the debtor’s property. Section §541 describes property of the estate and mentions only those inheritances acquired within 180 days after filing a petition – 11USC §541(a)(5)(A).
However, Section §1306(a)(1) states that property of the estate includes everything listed in §541, and all property acquired by the debtor after the filing of the petition but before the case is closed. Compare that to Section 1327(b) which states “confirmation of a plan vests all of the property of the estate in the debtor”. Further, §1327(c) says that property vesting in the debtor is “free and clear of any claim or interest of any creditor provided for in the plan” (11USC §1327(c)).
Basically, in order to reconcile §1306(a)(1) and §1327(b) and (c), and to capture newly acquired property for the purposes of the bankruptcy estate, Courts rely on §1325(b) –the plan must provide that all of debtor’s “disposable income” be applied to make payments, and then §1329 is used as authority for the Trustee to modify a debtor’s plan after confirmation. The basic argument is that although property vests within the Debtor pursuant to §1327(b), a windfall will be captured for the creditors on a motion to modify under §1329. Is an inheritance this late into a Chapter 13 “disposable income” under §1325(b)? I would think that property excluded by §541, or property otherwise exempted from the estate would not be, but case law seems to result in the opposite analysis.
A few debtor friendly cases indicate use of the ‘best interest of the creditors’ analysis under 11 USC §1325(a)(4) – basically are the creditors better off than they would be under Chapter 7? And in Chapter 7, creditors would most likely not be entitled to an inheritance received over 180 days past the filing date. However, in spite of the Code, Courts have increasingly held that the Chapter 13 estate includes gifts, inheritances, and windfalls that are acquired after the filing. There are several cases where acquiring property (like lottery winnings – see In re Koonce, 54 BR 643 (Bankr DSC 1985), law suit settlements, insurance settlements, inheritances– see In re Nott, 269 BR 250, 257, 258 (Bankr. MD Fla 2000) and In re Euerle, 70 BR 72 (Bankr DNH 1987), large gifts or loans – see Doane v Appalachian Power Co, 19BR 1007 (Bankr WD Va 1982)) has forced Debtors to pay more to their creditors than originally planned for in the Chapter 13. In a recent case in the Western District of Kentucky, a Motion by filed the Trustee resulted in a debtor turning over $205,431.43 to complete his plan at 100% because he won the lottery.
I imagine basic public policy concerns might be behind most of these Court rulings, but isn’t a Chapter 13 supposed to give the debtor a fresh start? It seems like under the Code, any property acquired after the filing should be property of the debtor giving him complete right to control the property. And if so, why is it considered disposable income? Are real property and stocks considered “disposable income”? Why is a debtor penalized for falling into good fortune after filing a Chapter 13? After all, this is not property that was committed to funding the plan. Shouldn’t post-petition acquisitions be used for post-petition obligations? What if Debtor’s case was converted to Chapter 7? Then the property would not be part of the estate – he could keep the inheritance and the creditors wouldn’t even get their promised 15%. Would the conversion be considered in “bad faith” after the Trustee’s motion has already been filed? Hmmm.