Student Loan Dischargability in Bankruptcy

 

Clients frequently inquire as to whether their private and government backed student loans can be discharged in bankruptcy. Sadly for them, it is almost impossible to discharge federal student loans in bankruptcy given certain changes in the way they are structured today.  

The so called Brunner Test (named after the seminal case on the topic), which contains the standards used in bankruptcy courts to determine whether a student loan can be discharged, specifies that in order for discharge to occur, all of the following must be true:

  1. based on current income and expenses, the debtor cannot maintain a “minimal” standard of living for herself or her dependents if forced to repay the loans;
  2. additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period for the student loans; and,
  3. the debtor has heretofore made a good faith effort to repay the loans.

Yes, you can try to prove undue hardship, under these tests, but it is now, for all practical purposes, almost impossible to do and this is why. First, under the various special repayment schemes: income based repayment, pay as you go, income sensitive repayment; you can have a zero dollar ($0) monthly payment assuming your income is low enough.  At the end of the term of these programs (20 to 25 years), any remaining student loan balance will be forgiven. So how can anyone successfully argue that a zero (or very low) monthly payment with the prospect of loan forgiveness creates an undue hardship? Secondly, now that the Dept. of Education has a workable administrative process for a disability discharge, if you are declared 100% disabled by the social security admin, you can discharge your federal student loan.  Thus, people who once would have been able to show Brunner hardships because of disability no longer need to do so.  those people don’t need bankruptcy for their student loans.

So, if you have both significant private student loans and federal loans and are a good candidate for a bankruptcy hardship discharge, you include both classes of debts in the case.   (Note:  The bankruptcy must be filed (either a 7 or 13) then an adversary proceeding (2nd lawsuit) against the student loan lenders must be filed.) Assuming you can win on undue hardship, the court is likely to only discharge the private student loans because these do not have the programs discussed above attached to them.

If you are not already on one, you need to get on a specialized repayment program.  I suggest that you visit the following site to find out more information.

            https://studentaid.ed.gov/repay-loans/understand/plans/income-driven

Also, it is recommended that you discuss this issue with a seasoned bankruptcy lawyer.  I am Christopher C. Carr, Esq., a Chester County Bankruptcy Lawyer who can assist you with these and all other matters relating to bankruptcy and debt relief.. Call me at 610-380-7969 today!

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Gamblers & Bankruptcy

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By Christopher C. Carr, Esq. Chester County bankruptcy attorney.

Why do some people already in dire economic shape gamble?  Prudence suggests that they should not do so but gamblers are notoriously imprudent. Well ironically they often do so because they foolishly believe that they can gamble their way out of debt.  Other gamblers think they can win enough money to pay back their gambling debts– debts they may have rung up on their credit cards, money owed to casinos or riverboats, loan debt, and even home equity debt all associated with gambling problems–but quite the opposite happens. You only end up creating more gambling debt to repay. And even if you actually did win enough money to pay off your debt, you would most likely gamble that money away too, thinking if you won once you could win again. GA and other organizations can help to cure the addiction but the debt that persists is a slippery slope tempting the gambler to return to the game of choice and chance.  So oftentimes it is necessary to cure the debt problem to alleviate the addiction. And there is only one way to effectively do so, a Chapter 7 (or 13) bankruptcy, which if successful can wipe the slate clean in one fell swoop.  Thus, Bankruptcy may be the only option for dealing with gambling debt.

If you owe bookies or loan sharks, you may be forced to borrow money from a friend or family member to pay the gambling debt, especially if you’re being threatened with reprisals if you do not pay up . But borrowing money from a loved one, while perhaps better than having your legs broken, may not be such a good idea because all such debts will be discharged in a Chapter 7 bankruptcy leaving them high and dry.

I tell such clients that they should pay some of the money they are gambling away to me instead.  Gambling is risky and the “odds are stacked in favor of the house” but I am a sure thing, or nearly so.  What stands in the way of a fresh start in Bankruptcy for the gambler?

  1. Fraud: Gambling debt, including debt incurred from casinos or charged on credit cards and loans, can be discharged in bankruptcy. It’s important to know that any creditor can object to the bankruptcy filing by claiming you incurred the debt under false pretenses or through fraud. For example, if you took out a credit card cash advance knowing you didn’t have the money to repay the advance when you borrowed it, the creditor can ask the court not to discharge the debt. Creditors owed gambling debts may file “adversary proceedings” to challenge the dischargeability of their debts under Bankruptcy Code section 523(a)(2)(A) provides an exception to discharge for debts obtained by “false pretenses, a false representation, or actual fraud.”  These suits, historically filed by casinos, are rare today. They are expensive, cast the casino and its entire industry in a bad light and with the rise of legalized gambling, are no longer favored by the courts.  The gambler’s creditor has the burden to prove that the gambler actually committed fraud, in other words that you had the intent not to repay the debt when incurred and that is barring some lucky (or more likely stupid) admission, very difficult to do.
  2. Reporting Requirement: All gambling losses within the previous year must be reported on the Statement of Financial Affairs which is part of every bankruptcy filing.  This is required so the bankruptcy trustee and court can determine whether any fraud was involved in the bankruptcy filing.  Bankruptcy trustees have broad powers to avoid transfers which appear fraudulent because they are transfers for which the debtor received “less than reasonably equivalent value,” which is the basic benchmark for determining fraud under the Bankruptcy Code. This requirement may pose obvious difficulty for the gambler who has been dealing with loan sharks who may act aggressively to keep from having their names become a matter of public record.
  3. Luxury Debts: However unlikely it is that the casino will win an adversary action, there is another bar standing in the way of clearing very recent gambling debt. Bankruptcy Code section 523(a)(2)(C) makes a debt non-dischargeable if the debts was for a “luxury good or service” over $1,225 and purchased within 60 days of the filing of the bankruptcy.  That section also precludes discharge of cash advances over $1,225 obtained within 60 days of the filing of the bankruptcy.  In most cases, the exception can be avoided by simply waiting the requisite 60 day period of time
    to file the bankruptcy.  However, this may not be as easy as it sounds for the compulsive gambler. Often the lawyer must demand a turnover of all credit cards, etc. so that the problem is cut off at the source.
  4. Chapter 13: Impossibility of fulfilling the plan because of compulsive gambling:  oftentimes a gambler who is behind in house or car payments because of money diverted to gambling will have no choice but to file a Chapter 13.  This requires a 3-5 year plan wherein the gambler promises to repay some of his debts.  But the plan must be funded by the gambler’s income and little threatens income as effectively as compulsive gambling.  Thus, may trustees and courts (tipped off by the required gambling disclosures…see above) will closely scrutinize such a plan and may demand that the gambler be under the treatment of a psychiatrist and/or regularly attending GA meetings before they will give it the go ahead. A clean recent bank and/or credit card statement(s), not showing large withdrawals, can also be very helpful in showing that the gambler has the self control needed to suceed with a plan in a Chapter 13.

It is clear that the cure of the gambling addiction and its economic fallout go hand in hand.  One cannot easily be repaired without the other. We are experienced in dealing with the problems of and in counseling gamblers and would be happy to discuss the issues facing you or a loved one challenged by this affliction.

Law Offices of Christopher C. Carr, MBA,  P.C., is a quality bankruptcy and debt relief practice, located in  Valley Township, west of Coatesville, Pennsylvania, where Attorney Christopher Carr, a Chester County bankruptcy attorney, who has over 30 years if diversified legal experience, concentrates on serving the residents of and businesses located within Western Chester County and Eastern Lancaster County, Pennsylvania, including the communities in and around Atglen, Bird in Hand, Caln, Christiana, Coatesville, Downingtown, Eagle, Exton, Fallowfield Gap, Honeybrook, Lancaster, Lincoln University, Modena, New Holland, Parkesburg, Paradise, Ronks, Sadsbury, Thorndale, Valley Township, Wagontown & West Chester,  Pennsylvania. If you reside or do business in the area and need assistance with a legal issue, please call Mr. Carr at (610)380-7969 or write him at cccarresq@aol.com today!  


X in Bankruptcy is for (Old) Chapter X

3356289385_aee9478f7d_t[1]  Brings the Series to an End (See Below)

By Christopher C. Carr, Esq. Chester County bankruptcy attorney.

Tel: 610-380-7969 Email: cccarresq@aol.com

Website: westchesterbankruptcyattorney.org

What X Was:

You have heard of Chapter 11 right?  Everybody has.  But how about Chapter 10?  Ever heard of that?  Well, here is a bit of history:

Chapter X was a portion of the bankruptcy code that dictated bankruptcy processes and procedures for corporations. 1978 was the last year corporations were able to file bankruptcy under Chapter X

Chapter X, (or “Chapter Ten”) was originally introduced in the Bankruptcy Act of 1898. Chapter X was used as a blueprint for the reorganization of financially unhealthy corporations under which  a company would have to present full disclosure of current financial conditions to the court for review. Along with working in cooperation with the courts, the company would have to be be willing to develop a debt reorganization plan that would allow for the orderly retirement of its current outstanding debt. If the court found that the company met the qualifications for a Chapter 10 and that the reorganization plan was workable, the court would grant the protection and a appoint a manager for the plan. The court-appointed manager was to serve as an ongoing liaison between the court  and the debtor company.

Chapter X was a notoriously complex procedure, and was seldom used during its time.  Most corporations instead opted to file Chapter XI (the Chapter 11  of that time) because it did not displace the company’s management with a court appointed manager and gave management more control over reorganization. Chapter XI was also more popular because it gave corporations more control over how and to what extent the company would repay creditors and liquidate assets.

Why X Matters Today:

Though Chapter X was removed in 1978 under the Bankruptcy Reform Act, its ideas were revised and combined with Chapter XI and other bankruptcy laws to create today’s Chapter 11.  One of the most important of these concepts which pervades the modern Bankruptcy Code was that of “disinterestedness”, which meant that as a condition of employment, trustees and court-appointed professionals were not allowed to have a personal interest in the outcome of the cases.

Note: This completes the 24th and final letter in the ABC’s of bankruptcy which I commenced with the letter C on November 22, 2011,  Who would have thought it would take me a year to get through the alphabet once?

I dedicate this final blog in the series to my son Ethan Forrest Carr, whose 16th birthday it is today! Congratulations, Ethan!

©Christopher C. Carr, Attorney at Law 2009, 2012. All Rights Reserved

Law Offices of Christopher C. Carr, MBA,  P.C., is a quality bankruptcy and debt relief practice, located in  Valley Township, west of Coatesville, Pennsylvania, where Attorney Christopher Carr, a Chester County bankruptcy attorney, who has over 30 years if diversified ;egal experience, concentrates on serving the residents of and businesses located within Western Chester County and Eastern Lancaster County, Pennsylvania, including the communities in and around Atglen, Bird in Hand, Caln, Christiana, Coatesville, Downingtown, Eagle, Exton, Fallowfield Gap, Honeybrook, Lancaster, Lincoln University, Modena, New Holland, Parkesburg, Paradise, Ronks, Sadsbury, Thorndale, Valley Township, Wagontown & West Chester,  Pennsylvania. If you reside or do business in the area and need assistance with a legal issue, please call Mr. Carr at (610)380-7969 or write him at cccarresq@aol.com today!  


I also provide Mortgage Modification Services.

Other lawyers blogging “X” include:

Photo by takomabiblilot

The “F” in Bankruptcy Alphabet is for “Failure” (and “Fresh Starts” in Bankruptcy)

F 2724770810_f84d80d958_t[1] is for Failure and “Fresh Starts” in Bankruptcy {Perhaps also for “Favorite”  because of all the articles I have written, this is my favorite”}

By Christopher C. Carr, Esq. Chester County bankruptcy attorney.

Tel: 610-380-7969 Email: cccarresq@aol.com Web: westchesterbankruptcyattorney.org

Many people in our culture still believe unfortunately that it is a mortal “sin” to declare bankruptcy; akin to a financial death sentence, to admitting failure as a human being and as a member of the larger economic enterprise. But in fact bankruptcy has been “built into” the US capitalist system since its beginnings with the Bill of Rights because it is essential to the very success of that model, which is in turn based on encouraging individual risk taking.

Being a success is a basic assumption of American life. We are taught almost from birth that at all costs we must be winner! But In fact, it is a harsh irony of life that success is built on trial and error and consequently upon failure. Some companies have even adopted corporate cultures which actually encourage failure so that employees will be willing to take risks and innovate.  See Why I Hire People Who Fail.

Our lawmakers from the very founding of our country have been mindful of the necessity to provide this “escape path for risk takers”:

The United States Constitution provides a method whereby individuals, burdened by excessive debt, can obtain a fresh financial start and pursue newly productive lives unimpaired by past financial problems. It is an important alternative for persons mired deep in financial difficulty.

The federal bankruptcy laws were enacted to provide debtors with a fresh start and to establish a ranking and equity among all the creditors who are clamoring for the debtor’s limited resources. Bankruptcy helps people avoid the kind of permanent discouragement that can prevent them from ever reestablishing themselves as hard-working members of society.

Source: Purposes, Benefits and Costs of Bankruptcy Disclosure pursuant to U.S. Code § 527(a)(1) & § 342(b)(1).

Some disagree with this proposition stating based on empirical findings that bankruptcy only helps about 2/3 of all who apply to get a fresh start and that is only because they find a steady income source.  See “The Failure of Bankruptcy’s Fresh Start”.  But for me, this only proves the point for i.) 2/3 is a pretty high rate of economic “resussitation”, ii) a study design like this just looks at a single point in time, it does not do follow ups to see what percentage ultimately do see improvement in their financial condition and iii.) how do you get people to pull themselves out of the economic mire (see quote above) unless society provides a safety net which is after all what bankruptcy really is? Not everyone will try and of those who do not all will make it but then there are no guarantees in life (or the law).

In my practice I represent many hard working small business people (from screenplay writers to truck stop owners) who are heavily engaged in the capitalist system. And what is capitalism at its core but the willingness of people to take chances in hopes of making money?  Someone–a small business venture–comes up with an idea for a business, obtains the financing and other myriad necessary resources to get that business up and running, strives to generate sufficient revenues to cover expenses over time, all in the hopes of making a profit from engaging in the business. At any point things may not work out as expected, causing the business to founder and ultimately sink.  Failure lurks in waiting at every corner!

Indeed some historians of note have argued that the American Revolution was in large part fought for debt relief:

The idea that debt is necessary for trade, and is to be forgiven liberally when necessary, is a key driver to the rise of our market economy. Americans fought to provide the same debt relief to everyone because we believe in equality and because bankruptcy protection takes the risk out of risk taking. Our historic willingness as a nation to forgive debt lies behind a good part of our prosperity. One good example is John Pintard, a state legislator and stockbroker, who was one of those who fell for William Duer’s financial scheme, which helped trigger the Panic of 1792, the nation’s first stock-market crash. Pintard ultimately landed in debtors’ prison in Newark. He got out of jail in 1798, and he filed for bankruptcy in New York in 1800. Among his many other post bankruptcy accomplismments, Pintard  founded the New-York Historical Society in 1804, and was a founder of the New York Bank for Savings in 1819.

In 1841, Congress passed a sweeping federal bankruptcy law that offered bankruptcy to everyone. Meanwhile, in 1831, the New York State Legislature abolished imprisonment for debt. Other states soon followed. Debtors’ prison was abolished, and bankruptcy law was liberalized, because Americans came to see that most people who fall into debt are victims of the economic cycle or misfortune like Pintard, and not of sloth, greed, or other negative personal attributes.

What would happen if there were no bankruptcy laws, no bankruptcy courts and no chance for people to obtain a fresh start?  Would people be as eager to innovate, to take chances and to possibly fail with no safety net to catch them? It is a fundamental premise of the capitalist system that they would not. That is why people who cannot pay their debts should not feel that they are ethically “challenged”, especially in this difficult economy, if they find they must seek the protection from their creditors for which our bankruptcy laws so prudently provide. For, failure is only the first step on the way to a fresh start!

Law Offices of Christopher C. Carr, MBA,  P.C., is a quality bankruptcy and debt relief practice, located in  Valley Township, west of Coatesville, Pennsylvania, where Attorney Christopher Carr, a Chester County bankruptcy attorney, who has over 30 years if diversified ;egal experience, concentrates on serving the residents of and businesses located within Western Chester County and Eastern Lancaster County, Pennsylvania, including the communities in and around Atglen, Bird in Hand, Caln, Christiana, Coatesville, Downingtown, Eagle, Exton, Fallowfield Gap, Honeybrook, Lancaster, Lincoln University, Modena, New Holland, Parkesburg, Paradise, Ronks, Sadsbury, Thorndale, Valley Township, Wagontown & West Chester,  Pennsylvania. If you reside or do business in the area and need assistance with a legal issue, please call Mr. Carr at (610)380-7969 or write him at cccarresq@aol.com today!  

I also provide Mortgage Modification Services.

©Christopher C. Carr, Attorney at Law, 2011, 2012, All Rights Reserved.

More attorneys playing the bankruptcy alphabet game at letter F (HEY GUYS WE ARE 25% OF THE WAY TO Z!!!):

Omaha and Lincoln, Nebraska Bankruptcy Attorney, Ryan D. Caldwell: F is for Family Farmer/Fisherman.

New York Bankruptcy Lawyer, Jay S. Fleischman: F is for Future Flow Agreement .

Northern California Bankruptcy Lawyer, Cathy Moran: F is for First .

Kauai Bankruptcy Attorney, Stuart Ing: F is for Foreclosure

Jacksonville, Florida Bankruptcy Attorney, J. Dinkins G. Grange: F is for Forms .

Colorado Springs Bankruptcy Attorney Bob Doig: F is for Foreclosure .

Los Angeles Bankruptcy Attorney, Mark J. Markus: F is for Forgiveness of Debt .

Filing Bankruptcy: Pros and Cons

 

Christopher C Carr, Bankruptcy Guest Contributor

By Christopher C. Carr, Esq., Chester County Bankruptcy Lawyer

Tel: 610-380-7969 Email: cccarresq@aol.com Web: carrlaw.org

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Christopher C. Carr , Esq., MBA explains the types of bankruptcy and weighs the pros and cons of filing bankruptcy.

In these troubled economic times many people are having difficulties paying their bills and may be wondering whether a bankruptcy will help them. To examine the various strategies available to avoid bankruptcy, we must first understand what bankruptcy is and what it can and cannot do. The United States Bankruptcy Code offers several types of debt relief. The United States Bankruptcy Code offers two primary paths for consumers:

  • A Chapter 7 Bankruptcy: In a so called “straight” bankruptcy, the Trustee in bankruptcy seeks to liquidate the debtor’s non exempt property and distribute the proceeds to the creditors in order of priority, in exchange for discharge of all of the debtor’s eligible debt. (Exemptions for various property classifications are set out in federal and state law.) However, certain debts such as guaranteed student loans and domestic support obligations are non-dischargeable in bankruptcy. Most 7’s are “no asset” bankruptcies.

Certain higher income debtors who do not meet the new Means Test must instead file a Chapter 13 Bankruptcy.

  • A Chapter 13 “debtor in possession” Bankruptcy: Here, unlike in Chapter 7 proceedings, the debtor retains possession of the assets (hence its nickname). In order to be confirmed by the court, the debtor must prove sufficient income to support a 3-5 year plan wherein payments on secured debt such as mortgages and auto loans (including arrears) and non-dischargeable items continue and unsecured creditors typically get paid a small portion of their debts. For debtors facing mortgage foreclosure, Chapter 13 may be the only choice to halt the process while seeking other remedies within or outside of bankruptcy such as a Home Affordable mortgage modification is obtained. However, recent statistics indicate that only about 35% of all 13 plans are ever completed.

There are overall limits as to how much unsecured and/or secured debt a debtor may have and still utilize Chapter 7 or 13. If either is exceeded then the debtor will have but one alternative if they wish to file for bankruptcy:

  • Chapter 11, a third type of Bankruptcy, is primarily used to help in debt businesses restructure. An example is the bankruptcy from which GM has successfully emerged with the help of a massive US bailout. It is much more complex, time consuming and expensive than Chapter 7 or 13, but is the sole resort for individual debtors with debt which exceeds the limits mentioned above.

Other Advantages to Bankruptcy: The overall goal of every bankruptcy case is to give the debtor a “fresh start.” The “automatic stay” in bankruptcy will apply once your case is filed. This generally halts all collection activities, foreclosures, repossessions, Sherriff’s sales, etc. while in effect.

Disadvantages to Bankruptcy:

  • Many people wish to avoid bankruptcy because of the social stigma perceived to be associated with “going bankrupt” even though it is perfectly legal and in fact is guaranteed by the US Constitution.
  • Bankruptcy remains on the debtor’s credit for up to 7 (Chapter 17) or 10 years (Chapter 13) from filing and may interfere with efforts to obtain credit, purchase or refinance a home or even obtain employment. However, it should be noted that most who seek this relief already have impaired credit and, more importantly, in reality new credit is generally extended to debtors who keep their payments current for a year or two following discharge. So, in effect bankruptcy can work to “repair” credit where nothing else can.

A real life example would be where the debtor has amassed so much debt that they cannot qualify for a mortgage.  Their debt to income ratio is just too high. At tins point there is little reason to hold off from filing as the likelihood of obtaining credit resources at competitive rates are almost nil. However, once the debt is cleared by a discharge in bankruptcy this ratio can return to normal or better and given sufficient time and a good post petition payment profile, the debtor will once again be an attractive loan candidate.

Homeowners, who have racked up large arrears in their mortgage payments which have to be repaid in full over the 3-5 year plan period in a chapter 13 , may find the payments too high to afford causing the bankruptcy ultimately to be discharged or converted, perhaps thus only delaying the ultimate loss of their home in contrast to a Home Affordable (HAMP) mortgage modification where as the name implies ideally a long term affordable solution is reached.

  • Not all types of debt are dischargable in bankruptcy, a good example being guaranteed student loans.
  • While perhaps not strictly speaking a disadvantage,  there is a substantial waiting period once a bankruptcy has been discharged…the debtor has to wait to file if they wish to again obtain a discharge from new debt, the timeframes varying with the type of bankruptcy initially undegone. For this reason, bankruptcy should be considered strategically.  When its gone, its gone, at least for a good long time!

The key point is that each debtor’s situation is unique and deserves special consideration. Further, because the process is hardly ever as smooth as it is supposed to be because of the complexities and pitfalls involved, it is advisable to consult a competent and compassionate attorney who has experience in bankruptcies and/or in negotiating modifications to guide you through the process and help you properly complete the paperwork.


MY AVVO.COM ANSWERS FEED:


©Christopher C. Carr, Attorney at Law 2009, 2016, All Rights Reserved

Christopher C. Carr, Esq. is a  Chester County Bankruptcy Attorney owner of Law Offices of Christopher C. Carr, MBA,  P.C., a quality Bankruptcy & Debt Relief Practice, located in  Valley Township, west of Coatesville, Pennsylvania, where Attorney Carr, who has over 30 years of diversified experience as an attorney, concentrates his practice on serving the residents of and businesses located within Western Chester, Southern Berks and Eastern Lancaster Counties in South Eastern Pennsylvania, including the communities in and around Atglen, Bird in Hand, Caln, Christiana, Coatesville, Downingtown, Eagle, Exton, Fallowfield Gap, Honeybrook, Lancaster, Lincoln University, Modena, New Holland, Parkesburg, Paradise, Ronks, Reading, Sadsbury, Sinking Spring, Thorndale, Valley Township, Wagontown, West Chester, West Lawn, & Wyomissing, Pennsylvania. Carr also has experience in many other areas of the law. If you reside or do business in the area and need assistance with a legal issue, please call Mr. Carr at (610)380-7969 or write him at cccarresq@aol.com today!

I also provide Mortgage Mod  and Debt Settlement Services.

IMPORTANT NOTE: I am not your bankruptcy lawyer, and nothing within this site creates that relationship.  Bankruptcy law requires that for me to be your lawyer, you and I must have a written contract.  So, unless we both agree in writing, you are not my client. Therefore, nothing written herein is to be relied upon as legal advice such as I might give to a client.

I am a debt relief agency. I help people file for bankruptcy relief under the bankruptcy code.