What are non-qualified student loans?

Student loans are generally excepted from the bankruptcy discharge in 11 U.S.C. 523(a)(8). That section of the Bankruptcy Code prevents discharge of four distinct categories of educational loans:

1. Loans made, insured, or guaranteed by a governmental unit;
2. Loans fully or partially funded by a governmental unit or nonprofit institution;
3. Obligations to repay funds as an educational benefit, scholarship, or stipend; and
4. Any “qualified educational loan” as defined by Section 221(d)(1) of the Internal Revenue Code (“IRC”) of 1986.

The final category is the one we’re examining here. A “qualified educational loan” as defined by IRC 221(d)(1) is “any indebtedness incurred . . . solely to pay qualified higher education expenses.”

So in order to be a “qualified education loan,” the debt must be solely made for qualified higher education expenses. Thus, if a private student loan is partially outside the cost of attendance to a particular educational institution, then the entire loan is non-qualified and can be discharged. The IRC defines “cost of attendance” as “tuition, books and a reasonable allowance for room and board.” Loans made in excess of certified federal limits can be discharged in bankruptcy.

Make your case

Non-qualified private student loans made in excess of the “cost of attendance” are dischargeable. But you must file an adversary proceeding in your Chapter 7 bankruptcy to request that the court find those loans dischargeable.

Courts narrowly construe exceptions to discharge against creditors. So the student lender must (and will) fight your adversary proceeding and prove its case or your loan will be discharged in your Chapter 7.

You will need to meticulously document and calculate your loan amounts and for what purposes you used the funds. You will also need to research the cost of attendance figures for the institution(s) you attended. Student lenders do not just roll over in these cases, so you must be prepared to make your case.

In the last quarter of 2018, U.S. student loan delinquencies reached a record of $166 billion, an all time high. For many borrowers, even income-based repayment presents significant challenges to maintaining sustainable payment amounts on their student loans. Student loan forgiveness would provide relief to these distressed borrowers.

Student loans are generally nondischargeable in bankruptcy

Only in rare cases are student loans allowed to be discharged in bankruptcy. That’s because, since 1976, Congress has steadily chipped away at the bankruptcy discharge for student loans. Now, student loans can be discharged in bankruptcy only if the debtor can demonstrate undue hardship, which is a very difficult standard to prove.

There exists no compelling rationale to treat student loans differently than other types of student loan debt.

Unemployment, underemployment, disability, divorce, or the death of a spouse can all lead to a persistent or even permanent inability to repay student loans. Millions of Americans struggle to make the minimum payments on these loans, often without ever making a dent in their debt.

Student loan forgiveness

The political establishment appears finally to be taking notice.

On June 2019, Senator Elizabeth Warren (D-MA) and Representative James E. Clyburn (D-SC) announced bicameral legislation to provide student loan forgiveness to 95 percent of borrowers, or more than 42 million Americans. The law would completely cancel student loan debt for more than 75 percent of Americans with student loan debt.

Also in June 2019, Senator Bernie Sanders (D-VT) has proposed legislation to completely eliminate the student loan debt of every American. Under Sanders’ plan, all student debt of any kind would be canceled if the legislation is passed into law.

In addition, currently under consideration in Congress are H.R. 770 Discharge Student Loans in Bankruptcy Act of 2019, which would allow the discharge of both federal and private student loans in bankruptcy.

Student loan delinquency rates

This chart, produced by the Federal Reserve Bank of New York’s Center for Microeconomic Data as part of their Q4 2018 report on household debt and credit, spells big trouble for America’s economy. The chart shows the net increase in the aggregate of seriously delinquent balances for all credit types, expressed as a percent of the previous quarter’s balance that was not seriously delinquent.

As you can see, student loan delinquency rates far eclipse those for other credit categories. No less than 11.4 percent of student loans are either in default or 90+ days delinquent. And repayment cycle delinquency rates are probably about two times higher if you factor in student loans currently in deferment, grace periods, or forbearance.

The damage being done to our economy by student loans

Consumer spending drives the U.S. economy. Money spent toward repayment of student loans is money not being contributed to the economy overall. Student loans also suppress new business formation. And student loan debt prevents homeownership because student borrowers must delay homeownership while attempting to repay these steep loans. Finally, those with student loan delinquencies (and thus poor credit) could rejoin the economy with more productive types of credit.

The solution: Bankruptcy discharge of student loans

Bringing back the bankruptcy discharge of student loans would change all that and provide a big boost to the U.S. economy. Even Federal Reserve Chairman Jerome Powell believes that we should bring back the bankruptcy discharge for student loans. In fact, student loans are the only type of risk-free lending in the United States. Legislation amending the Bankruptcy Code to provide for the discharge of student loans could correct that imbalance.

Student lenders religiously report unpaid student loans to credit bureaus

Most student lenders report monthly — every month — to credit bureaus. Your personal payment history accounts for 35 percent of your credit score. Federal student lenders report payment history to credit bureaus monthly and without fail. Most private lenders also report to credit bureaus monthly, while others report every three or four months.

While on-time monthly payments to your student loans will improve your credit, missed or late payments will ding your credit. Student loan default invariably results in a lower credit score. In the eyes of the credit bureaus, unpaid student loans negatively reflect on your creditworthiness.

What if I can’t pay my student loans?

If you make income insufficient to pay your scheduled monthly student loan payments, you likely have options. Contact your lender and see what possible programs you may be qualified for, including deferment or forbearance.

Federal loans also have income-driven repayment programs available, including income-based repayment, PAYE, REPAYE, and income-contingent repayment.

Chapter 13 bankruptcy can help you get your student loans back on track

If no lender repayment program works for you, consider Chapter 13 bankruptcy to get your student loans back on track. You generally cannot discharge student loans in bankruptcy. You can, however, repay your student loans in Chapter 13 bankruptcy, often at a greater percentage than what other unsecured creditors receive.

Once you have a repayment plan in place, your creditors will be paid monthly and your balances will begin to decrease. Consequently, your credit score will improve. Addressing your debts, instead of ignoring them, will always have a more positive effect on your credit score.

Why student loan debt prevents homeownership

A recent analysis of New York Fed and Equifax data demonstrated that “for any given level of educational attainment, those with student debt are less likely to own a home in their early thirties than those who completed their education without taking on as much — or any — debt.”

Zillow recently looked at home purchase affordability across all U.S. metro areas. As of September 2018, the median home value in the country was $220,100. Home purchasers with student debt could purchase a home with a maximum value of $269,400, versus $361,800 for purchasers with no student debt.

In the Washington, D.C. metro area, the median home value is $401,000. According to Zillow, just 62 percent of homes in the D.C. metro area are available to student loan borrowers. And the maximum home value they can afford is $507,600. That amount doesn’t go very far in the District.

As noted by Zillow, the average monthly student loan payment is $388, making it much harder to set aside money for a down payment. Moreover, a home buyer today needs an average of 7.2 years to save a 20 percent down payment for a home.

An emerging systemic delinquency problem

The price of a college education has increased 213 percent over the past 30 years. Today, 11.5 percent of student debt is more than 90 days delinquent. Yet this delinquency rate is likely to be understated because half of all student loans are in deferment, grace periods, or forbearance.

Student loan expert John Hupalo notes that delinquency rates of non-graduates are far worse than that of graduates. To end what he calls “the delinquent student loan merry-go-round,” Hupalo suggests “some sort of amnesty program.” Such an amnesty program actually already exists in American law: bankruptcy.

Bring back the bankruptcy discharge for student loans

Unfortunately, discharging student loans in bankruptcy is nearly impossible. Federal Reserve Chairman Jerome Powell understands that the astonishing growth in student loan debt will suppress economic growth over time. Powell believes that we should bring back the bankruptcy discharge for student loans. Lee Legal also advocates the bankruptcy discharge for student loans.

Each man’s life
touches so many other lives.
When he isn’t around,
he leaves an awful hole, doesn’t he?

It’s A Wonderful Life

What Happens to My Debts When I Die?

Here are some common types of debt and how each can affect your loved ones:

Mortgages. If a home is jointly owned or inherited by a loved one, they are responsible to continue paying the mortgage. Federal law prohibits lenders from requiring that the mortgage be paid off immediately in the event of death. If there is money in your remaining estate, it can be used to take over these payments until a decision is made about whether to keep or sell your home.

Auto loans. If your car payments stop, the lender can repossess the vehicle. However, whoever inherits the car can continue to making payments if they choose to keep it. Remember to officially transfer title of the vehicle, also, to avoid any potential penalties.

Student loans. Federal student loans are forgiven upon death. Private school loans, however, can take money from your estate. But if there are no remaining funds, private loans will also be forgiven. In the event of a co-signer or if you received the loans while married, he/she will be responsible for the remaining debt.

Credit cards and medical bills. These types of debts are considered “unsecured.” So if your estate runs out of money after paying mortgage and car loans these creditors will not get their money back. But if you have a credit card with a joint account, that person remains on the hook to pay off the debt. This general rule does not apply to authorized users, but it is advised for them to no longer use that card.

Taxes. If a deceased spouse owes back taxes and the couple filed jointly, both spouses are liable for the entire amount of the taxes. The IRS may attempt to collect back taxes from the deceased spouse’s estate, however, even if the couple files separately. The IRS allows for an exemption from spousal tax liability called Innocent Spouse Relief. This exemption can provide relief if your spouse failed to report income, reported income improperly, or claimed improper deductions or credits.

How can you avoid leaving a legacy of debt?

Get help now. Seek counsel from a bankruptcy lawyer or financial adviser to discuss your debt. Eliminating your debt through bankruptcy before you die may be the right option for you.

Prepare your estate so there are no surprises. Establish your will with an attorney in advance to avoid leaving loved ones in a lurch.

Alert your loved ones to the status of your debt. Debt collectors are permitted to contact your heirs to collect on debts. However the Fair Debt Collection Practices Act prohibits creditors from misleading your family about what they’re responsible for paying. Be sure to discuss what is and is not part of your debt with a trusted family member or friend.

Job loss

Unemployment benefits simply do not cover living expenses. Losing a job can leave you unable to meet your ongoing monthly obligations, which can lead to bankruptcy. You may expect to find new employment quickly. But you should not deplete your savings paying off unsecured creditors if you will eventually discharge those debts in bankruptcy.

Foreclosure

Bankruptcy stops any scheduled foreclosure auction. If you have fallen behind on your mortgage but have regained the means to make your monthly payment, Chapter 13 allows you to propose a plan to repay the missed payments over five years. If you cannot afford the monthly payment, Chapter 7 allows you discharge the mortgage and move on with your life.

Drop in income

Perhaps your employer has reduced your hours, or reduced your hourly rate, or cut your annual salary. Maybe you have taken on a job that pays less. Or your income may decrease if you lose a tenant renting your property, or if a tenant decides to stop paying rent. A drop in income can lead to bankruptcy if your income does not allow you to pay your monthly bills. Living paycheck to paycheck doesn’t leave enough room for investment, savings, paying down debt — or for real emergencies.

Divorce

Divorce, too, can lead to a decrease in household income. The process of legally divorcing can itself also be very costly. And assets are not always equitably divided. Divorced couples may not produce income sufficient to support separate households. And child support and alimony (domestic support obligations) can further squeeze monthly budgets. While bankruptcy does not discharge child support or alimony, bankruptcy can reduce the debt burdens of divorcees by eliminating unsecured debts.

Medical emergency

More so than in any other developed nation, healthcare in the United States is very expensive. Suddenly facing a medical emergency for yourself or a family member can leave you strapped for cash. And facing health issues while attempting to make ends meet can be overwhelming. Insurance costs are steep, and insurance doesn’t cover every condition and circumstance. Cancer patients are twice as likely as non-cancer patients to declare bankruptcy. But bankruptcy tends to be multi-causal. And the decrease in income following an illness is much more likely to cause bankruptcy than the resulting medical bills.

Student loans

Many young people today are saddled with student loans. And in most cases, student loans cannot be discharged in Chapter 7 bankruptcy. But a Chapter 7 can make paying your student loans much easier if you have other kinds of debts crunching your budget. And you can propose a Chapter 13 repayment plan that pays more on your student loans than on other unsecured debts.

Credit cards

Credit card debt is one of the main reasons people declare bankruptcy. Making the minimum payments on credit cards just won’t cut it. If you’re carrying balances that you cannot pay off in a reasonable amount of time, then consider discharging those debts in bankruptcy. Chapter 7 allows you to quickly eliminate your liability on credit cards. And Chapter 13 repayment allows you to cut the interest rate down to zero and possibly even reduce the principal balances.

Bankruptcy isn’t for everyone

Even if you experience one or more of the circumstances above, you may be able to recover without declaring bankruptcy. In this article we’ve listed the major reasons people declare bankruptcy. But just because you’re experiencing one or more of these doesn’t automatically mean that you should file bankruptcy.

At Lee Legal, we try to keep our clients out of bankruptcy. Schedule a free personal financial analysis and we can help you determine whether bankruptcy is the best choice for you.

Those sticky, sticky student loans

Just look at the graph below, which shows how “sticky” student loans are. The graph represents debt held by different age groups, and the orange bar represents student loans. On average, as you can see, student loans stay with us for much of our lives.

According to the National Association of Chapter 13 Trustees, between 1980 and 2010, the costs for college increased at a rate approximately five times the rate of inflation, and outstanding student loan debt now tops $1.5 trillion. Meanwhile, the default rates on student loans in the U.S. have nearly doubled since 2006. Many young people are filing Chapter 13 bankruptcy to escape the crushing burden of student loans.

Student loans are not dischargeable in Chapter 13

A Chapter 13 bankruptcy will not discharge your student loans. In many cases, you can repay only a percentage of your unsecured debts and discharge the rest of the balances. Unfortunately, however, you will still owe any unpaid student loan balances after you receive a Chapter 13 bankruptcy discharge. The Bankruptcy Code treats student loans differently than it does any other type of unsecured debt.

Call is growing for bringing back the discharge for student loans in bankruptcy. On June 21, 2018, the non-profit, non-partisan National Bankruptcy Conference (NBC) released a position paper recommending reinstatement of the discharge of student loans. The paper notes that many student loans are for ineffective educational programs or programs that the debtor never completes. Astonishingly, almost half of all students who enter college do not graduate and receive a degree.

The editorial board at Bloomberg recently put it best: Let Student Borrowers Declare Bankruptcy, Already.

Repay your student loans in Chapter 13 bankruptcy

While student loans may not be discharged, you can repay your student loans in Chapter 13 bankruptcy. In bankruptcy, the “classification” of claims means grouping together creditors for similar repayment through the Chapter 13 Plan. Most courts have held that student loans are inherently different from other unsecured creditors due to their nondischargeability and are thus are subject to separate classification.

The usual purpose of separately classifying student loan debts is to pay the student loan creditor more than what is being paid to other unsecured creditors. Classifying student loans separately can be accomplished through 11 U.S.C. 523(a)(8), 1122 and 1322 of the Bankruptcy Code.

[I]t is often in the debtor’s interest to pay off
as much of the student loan debt
in the Chapter 13 plan as is permissible.
One way to pay more on the student loan
than on other unsecured debts
is to provide in the Plan that the debtor
will maintain direct ongoing monthly payments
to a student loan creditor . . .

National Bankruptcy Conference,
Student Loan Dischargeability (2018)

You may be able to reduce your payout to unsecured creditors by maintaining your monthly payments to student loans. At the confirmation stage, courts look to balance the financial needs of bankruptcy debtors with those of their creditors. For example, a Chapter 13 Plan may not provide for 100 percent repayment of student loans while the remaining unsecured creditors receive 0 percent. Such a Plan would not be fair to the non-student-loan unsecured creditors.

Talk to a bankruptcy attorney

Claim classification and Plan calculation are as much an art as a science. The bankruptcy trustee, United States Trustee, and bankruptcy judge will closely examine your income and expenses, calculation of disposable income, and claims register to determine whether your Chapter 13 Plan should be confirmed. If you want to repay your student loans in Chapter 13 bankruptcy, talk it over with an experienced bankruptcy attorney.

Before 1976, federal student loans could be discharged just like any other unsecured debts. And up until 2005, private student loans could be discharged, too. The new Fed chief doesn’t understand why student loans cannot be discharged in bankruptcy.

“I’d be at a loss to explain why that should be the case,” Powell said.

Powell also noted that the astonishing growth in student loan debt will suppress economic growth over time. Objective data bear out that observation.

Student loan debt: necessary evil

Education debt swelled to nearly $1.38 trillion by the end of 2017. The cost of education has skyrocketed over the past several decades. In fact, over just 15 years, between 1990 and 2005, college costs rose 50 percent. We need to address the impending student loan debt crisis.

Society places enormous pressure on young adults to incur huge debt for education. And for good reason. A recent Georgetown University study found that college graduates earn $1 million more in earnings over their lifetimes. But with learning comes crushing debt.

The young student population is the most hobbled by debt
than any other segment in our society.

Richard D. Wolff,
UMass Professor of Economics Emeritus

The average student loan debt for a 2017 graduate was $39,400. Americans owe over $1.48 trillion in student loan debt, spread out among about 44 million borrowers.

The impending student loan debt crisis

Student loans aren’t just a drag on student borrowers. They’re a drag on the entire economy.

Student loans hinder homeownership rates and delay marriage. Student loan borrowers in repayment struggle to save for retirement or build savings at all, for that matter. And one in five graduates in 2016 said that their student loans held them back from starting a business. 

According to the Brookings Institution, students will default at a rate of 40 percent by 2024.

Four out of every 10 student borrowers will default.
This long-term data upends any notion
that higher education degrees guarantee financial stability.

Robert Gebelhoff,
Washington Post

Americans now owe about $620 billion more in student loans than in credit card debt. And 45 percent of recent graduates said that college was not worth the price they paid in the form of student loan debt. That’s depressing.

Bring back the bankruptcy discharge for student loans

As Powell notes, “You do stand to see longer-term negative effects on people who can’t pay off their student loans. It hurts their credit rating, it impacts the entire half of their economic life.” But Powell also knows that the task is up to Congress, and in its current makeup, there’s no just chance.

It’s time to bring back the bankruptcy discharge for student loans.

You owe taxes from previous years

If you owe taxes for previous years, the IRS will automatically apply your refund against the taxes you owe. You will receive a notice of intent to levy in the mail. If your refund is larger than your total tax liability, then you will receive a refund for the amount of the difference.

You haven’t filed all of your returns

If you haven’t filed returns for a previous year, the IRS may keep your tax refund until you file those returns. You may not owe anything once you file any missing returns, in which case you will get your refund once the returns are processed. But if you do owe taxes for the unfiled years, see above: the IRS will automatically apply your refund against your outstanding liability.

You are delinquent on student loans

The U.S. student loan situation is a big hot mess. The current student loan delinquency rate is 11.2 percent. The Treasury Offset Program will seize your tax refund to pay down your student loans if you are in serious default. If you want to keep your tax refund, consider entering into an income-based repayment program prior to filing your return.

You owe back child support

The Treasury Offset Program can also seize your tax refund to pay off back child support. If you are seriously delinquent, the IRS may keep your tax refund to offset the delinquency. If your refund is larger than the back child support, then you are entitled to the difference. But you may need to contact child support services to obtain the balance of your refund. Do this as soon as you receive the notice of intent to offset.

You missed the filing deadline

If you don’t file a tax return for a year in which you’re due a refund, you can file the return within three years and still receive the refund. After that, you’re out of luck, because there’e a statute of limitations on tax refunds. In short, if you wait too long (three years) to file your return then you permanently lose your ability to claim a refund from that return year.

Your refund is going to the bankruptcy trustee

In a Chapter 7 bankruptcy, your attorney will in most cases be able to fully protect your tax refund. If you are in a Chapter 13 percentage repayment plan, however, you will likely have to cough up your refunds to the Chapter 13 trustee. That’s why it’s important to reduce your exemptions so that you’re not overpaying your taxes each year.

Student loans are not dischargeable in bankruptcy

Lots of different types of debts are not dischargeable in bankruptcy. You cannot discharge domestic support obligations — child support, property division, or alimony. Likewise, you cannot discharge fines, forfeitures, and criminal restitution obligations; debts arising from fraud or theft; or certain debts that you fail to schedule in your bankruptcy. But of course none of these types of debts are loans.

Most tax debts cannot be discharged in Chapter 7, but some can. Again, however, tax debts are not loans.

Student loans are unique in that public and private lenders are completely protected from the bankruptcy discharge. In the U.S. the only type of risk-free lending is student loans.

All lenders face risk — except student loan lenders

Unsecured creditors, including credit card issuers and personal loan lenders, invariably face the risk of default. Hospitals and clinics face the risk of nonpayment when they treat a patient without payment up-front. The debt collection process is expensive. Creditors often charge off debts that they deem too difficult to collect. Unsecured creditors face immense risk that their loans will be discharged in bankruptcy, or that they simply will never be able to collect.

Secured creditors like auto lenders and mortgage companies face lesser risk, but they face risk nonetheless. Most secured debt is, in fact, undersecured. That is, the collateral is more valuable to the borrower than it is to the creditor. Few creditors would choose to repossess, seize, or foreclosure rather than be paid per the terms of the security agreement. Even if the secured creditor does liquidate the property, the odds of recovering its loan in full are, in most cases, very low.

Student loans do not face such risk. If you take out a student loan, you will owe that loan until you pay it off or until you die. And even if you die, your student loan may still need to be paid from your estate. While federal student loans are cancelled upon the death of the borrower, private student loans are not.

Bring back the bankruptcy discharge for student loans

Betsy DeVos, Secretary of the Department of Education, is sending mixed messages. On the one hand, there are indications that Education is considering clarifying the meaning of undue hardship for the discharge of student loans. That is welcome news. Lee Legal has long advocated for the return of the student loan bankruptcy discharge. On the other hand, however, the DOE is arguing that the nation’s student loan servicers should be protected from state rules that may be far tougher than federal law.

No for-profit institution should be able to engage in risk-free lending. And the federal government shouldn’t make a profit by lending to student taxpayers. Student lenders should face the same risk of lending as all other creditors.

On October 20, 2017, as the D.C. Chair of the National Association of Consumer Bankruptcy Attorneys, I met with District of Columbia Congresswoman Eleanor Holmes Norton to advocate for the bill. After our meeting, the Congresswoman plans to co-sponsor the bill. But, to be honest, the bill has little chance of passing with the current makeup of the Congress.

Historically, student loans were dischargeable in bankruptcy

Congress has been steadily eroding bankruptcy protection for student borrowers since 1976. Historically, bankruptcy treated student loans the same as any other unsecured consumer loans and were thus dischargeable. In 1976, however, Congress changed the Bankruptcy Code and federal student loans were no longer dischargeable. In 2005, the Code was changed again: this time, bankruptcy debtors could no longer discharge private student loans.

Today, student loans can only be discharged in bankruptcy upon a judicial finding of undue hardship, a nearly impossible legal standard to meet. Yet today the discharge is needed more than ever.

H.R. 2366: Discharge Student Loans in Bankruptcy Act of 2017

The Discharge Student Loans in Bankruptcy Act of 2017 is the first ever bipartisan legislation to discharge both federal and private student loans in bankruptcy. H.R. 2366 was introduced on May 4, 2017 by Congressmen John Delaney (D-MD) and John Katko (R-NY). Previous bills attempting to reinstate the bankruptcy discharge for student loans have come and gone.

Obviously, not all student loan borrowers will need bankruptcy protection. Several refinancing and repayment programs offer viable solutions for many of borrowers. There are other student loan borrowers, however, for whom those programs simply won’t work. Hundreds of thousands of borrowers have no conceivable prospects for ever repaying their loans.

Discharging student loans in bankruptcy has never been more necessary

Americans now owe a staggering $1.45 trillion in student loan debt, spread out among about 44 million borrowers. Higher education is a source of research, innovation, and inspiration. Our nation’s colleges and universities are the training grounds for America’s future workforce. But it is also a very big business.

On just the loans made between 2007 and 2012, the federal government stands to bring in $66 billion in pure profit. Private lenders and universities will make many times more than that.

For many student borrowers, the cumulative effect of fees, interest, and penalties pushes loan balances to several times the amount they originally borrowed. And according to a report released by the Government Accountability office in December 2016, the number of borrowers age 65 and over facing this problem jumped 540% between 2002 and 2015. Many are now losing out on their Social Security checks to pay back student loans.

Student loan debt now eclipses both credit card debt (dischargeable in bankruptcy) and auto loan debt (also dischargeable in bankruptcy). It’s time to bring back the student loan discharge in bankruptcy.

Debt Collection. If you have a debt in collection, you have rights. You’re likely going to want to hire a lawyer to enforce those rights. If you have many debts in collection, consider bankruptcy. If you have just a few debts, however, consider hiring an attorney to settle the debt.

Foreclosure. If you are in preforeclosure, act quickly to preserve your options. If you have a foreclosure auction scheduled, you only have two options: reinstate the loan or file bankruptcy. Timing is incredibly important in foreclosure cases. Contact an attorney immediately if you default on your mortgage.

Repossession. If you are facing repossession, you have options before the vehicle is repossessed. Afterwards, not so much. If you have a debt resulting from a former repossession, you can eliminate that debt in a Chapter 7 bankruptcy. If you want to stop a repo before it happens, a Chapter 13 bankruptcy may do the trick.

Garnishment. Garnishment can often severely impact your monthly finances, and garnishment reflects very negatively on your credit score and credit report. Often, the only way to terminate a garnishment wage order is by filing bankruptcy.

Taxes. If you withhold too little from your paycheck, you will get more money with which to pay your bills. But artificially increasing your deductions creates a tax liability for you at the end of the year. We can help you identify which deductions are appropriate for you. And we can help you determine which taxes may or may not be forgiven.

Lawsuits. You could spend thousands of dollars defending a lawsuit that you’re sure you will win. And then you might lose. In many cases, it makes sense instead to moot the suit in bankruptcy. On the other hand, it could make sense to fight the suit and attempt to settle. Talk to an attorney. Don’t try to handle a lawsuit on your own.

Student Loans. You may be in deferment or forbearance right now. But when your monthly student loan payment comes due, will you be able to pay it? Student loans are not dischargeable in a Chapter 7 bankruptcy. But paying your student loans in a Chapter 13 bankruptcy allows you some breathing room to pay your other debts.

Lee Legal Can Diagnose Your Financial Condition

Financial problems don’t solve themselves. Many financial problems aren’t even obvious problems at first. Don’t try to self-diagnose your condition. Seek out an objective analysis and generate a plan unique to your circumstances and goals. Call Lee Legal to schedule your financial diagnosis.

If You Can Afford to Pay Your Debt

Chapter 7 Bankruptcy. Your credit will show a Chapter 7 filing for ten (10) years. If you make enough money to afford repaying your debts, then you should do that. You may forego some money in the short-term, but avoiding bankruptcy when you can afford to repay may pay off for you big time in the long-term.

Chapter 13 Bankruptcy. If you can afford to repay your debt, but not in less than five years, then consider a Chapter 13 bankruptcy. Your attorney will propose a repayment plan suitable to your budget. And a Chapter 13 bankruptcy will remain on your credit report for only seven (7) years.

If You Are Uncollectible

You may make very little income or have no income at all. Social Security may be your only source of income. Your credit score may already be very low. If you have only enough money to pay for your most basic expenses, as well as those of your dependents, then you may be an “uncollectible” debtor.

If a creditor deems you to be uncollectible, then bankruptcy might not be the best choice for you. Questions of whether or not a person should file bankruptcy due to uncollectible status usually occur near end of life.

If You Have Mostly Student Loan Debt

Chapter 7 bankruptcy eliminates student loan debt only in the rarest of circumstances. If you decide to file a Chapter 7, it will not be to discharge your student loans. Chapter 7 won’t help you at all. Student loans are nondischargeable.

Still, Chapter 13 bankruptcy may help if your student loan payments exceed your living expenses. You can use Chapter 13 to reduce or delay altogether your monthly student loan payments obligations during the term of your Chapter 13 plan. Any balances remaining on your loans after the Chapter 13 bankruptcy is over, however, must be repaid.

If You Cannot Exempt All of Your Assets

Most people do not have to worry about unexempt assets. Most Chapter 7 bankruptcy debtors have “no-asset, no-distribution” cases. Even if you own some valuable property, in many cases it will not be financially feasible to liquidate it. The amount of your debt in relation to the value of your assets is a helpful but not entirely reliable indicator.

If you own many valuable assets, however, like real estate or cars or financial instruments of any type, then you must carefully weigh whether bankruptcy is the right choice for you. Likewise, if you are expecting an inheritance or have a valuable legal claim, disclose these assets to your bankruptcy lawyer right from the outset. Your bankruptcy lawyer will analyze how they fit into your larger financial picture.

When You Should NOT File for Bankruptcy

Bankruptcy might not help with child support. In some case, bankruptcy doesn’t help with eviction. Bankruptcy is not one-size-fits-all, and bankruptcy doesn’t fix every problem. A good bankruptcy lawyer will tell you when you should file for bankruptcy. But a great bankruptcy lawyer will tell you when you should NOT file for bankruptcy.

Qualifying for Chapter 7 with Student Loans

If your household income exceeds the median income of your jurisdiction, then you fail the initial means test. In that case, the Bankruptcy Code gives rise to a presumption that you are are abusing the bankruptcy process. The presumption is that you should file a Chapter 13 instead of a Chapter 7. While Chapter 7 entails the quick and simple elimination of debts, Chapter 13 requires an extended repayment plan.

Unfortunately, the Chapter 7 means test does not allow deductions for student loan payments. Because student loans can also be paid through a Chapter 13, monthly student loan payments may not be used to reduce disposable income in the Chapter 7 means test. Student loan payments, no matter how massive, do not affect your eligibility for Chapter 7 on the means test.

On the other hand, if your student loans dwarf the rest of your debts, then you may not have to complete the Chapter 7 means test at all. If you incur your student loans for a professional degree, for instance, then those loans are considered “business” debts. Debtors with primarily business debt (as opposed to consumer debt) need not complete the means test. See 11 U.S.C. 707(b).

Finally, student loans may not be listed as “special circumstances” on the means test as provided for by 11 U.S.C. 707(b)(2)(B). Most courts interpret the “special” circumstances section of the means test to require a debtor to prove “extraordinary” expenses. Student loans are not considered extraordinary expenses for means test purposes. Thus, neither the nondischargeability of the student loans nor the long-term obligation to pay them renders student loan special enough for the Chapter 7 means test.

Student Loans and the Means Test in Chapter 7 Bankruptcy

If you experience difficulty attempting to balance your budget with large student loan payments, consider consulting an experienced bankruptcy attorney. The issues are complex, and still evolving, but there are solutions. Talk it over and assess your options before you make any big decisions or just give up altogether.

Tax Problems in Bankruptcy: Chapter 7

Nondischargeability. Chapter 7 bankruptcy will not discharge recent taxes. Likewise, Chapter 7 does not discharge late-filed taxes. Only taxes over three years old with returns filed on time can be discharged in Chapter 7 bankruptcy. Older taxes may be discharged in bankruptcy. Otherwise, taxes pass through the bankruptcy discharge for many Chapter 7 filers.

Security Bifurcation. If the IRS has liened against your real property, then they may possess a bifurcated claim against you. In other words, part of your tax liability may be treated as priority; some treated as secured; and still another part may be considered unsecured nonpriority and therefore eligible for discharge. Assess your liability carefully. Do not expect either the state or federal taxing authorities to correct their own oversights or mistakes.

Tax Problems in Bankruptcy: Chapter 13 

Repayment in Full. Taxes are priority debts and therefore must be repaid in full during the course of the Chapter 13 plan. In some cases, that may simply reduce the payout to unsecured creditors. But in many other cases taxes may dramatically increase your monthly repayment amount. If you have assets to protect in a Chapter 13, your attorney should conduct a careful review of your total tax liability prior to filing your case.

Mandatory Filing Date. You must file your taxes on time to remain in a Chapter 13 bankruptcy. This year, that date is Tuesday, April 18, 2017. You may not file an extension to file your taxes in Chapter 13. You must file your taxes on or by Tax Day. In addition, you must also provide a copy of your federal and state tax returns to the Chapter 13 trustee. If you fail to do so, the trustee will file a motion to dismiss your case. Nobody enjoys filing taxes. But that will not suffice as an excuse to the court for not filing and submitting your returns.

Tax Problems in Bankruptcy

Tax problems frequently resolve themselves more easily once you are under bankruptcy protection. Take steps before you even file for bankruptcy. By filing your returns on time, many debtors are able to avoid the most common bankruptcy problems in bankruptcy. Sort out your tax situation with a qualified bankruptcy attorney.

What Is Chapter 13?

Chapter 13 bankruptcy is sometimes called the “wage-earner’s bankruptcy.” Many people who do not qualify for Chapter 7 instead file for Chapter 13. Others want to repay arrearage on missed mortgage payments or other secured debts. Chapter 13 of the bankruptcy code allows you to spread payments out over five years at fixed interest rates.

Certain unpaid, nondischargeable debts, however, “survive” the Chapter 13 discharge. Unfortunately, student loans pass through the Chapter 13 discharge intact. Yet Chapter 13 bankruptcy remains a good option when your student loan payments are so high that you cannot pay your other debts and expenses.

Chapter 13 Bankruptcy Does Not Discharge Unpaid Student Loans

Chapter 13 bankruptcy will not discharge either your public or private student loans. The bankruptcy code defines student loans as nonpriority unsecured debts. You will still owe any unpaid student loan balances after you receive your bankruptcy discharge.

The only way to legally discharge student loans in bankruptcy is to prove that paying them back would be an “undue hardship.” As I have previously written, the undue hardship test is a virtually impossible standard to prove. Undue hardship (otherwise known as the Brunner test) requires that, despite good faith efforts to repay your loans, you cannot maintain a minimal standard of living, and this condition is unlikely to change in the future.

Private student lenders are much more aggressive in debt collection than either state or federal lenders. At the same time, private student lenders sometimes settle for less than what is owed rather than face Chapter 13 payments. In some cases, with student lenders, you can even employ the bankruptcy threat. Federally-backed loans cannot settle for less than what is owed.

Reduce Your Payments on Student Loans in Chapter 13 Bankruptcy

You might still want to consider repaying your student loans in Chapter 13 bankruptcy alongside other nonpriority unsecured debts. During the repayment period of three to five years, Chapter 13 bankruptcy allows you to pay your student loans with reduced monthly payments.

While you are repaying through the bankruptcy court, student lenders are prohibited from taking any collection actions against you. Student loans continue to accrue interest during that time.

And while your student loans will pass through the bankruptcy, Chapter 13 discharges any unpaid amounts on other unsecured debts. So when your case is complete, you should have much more disposable income. You can use those extra resources to pay off your remaining student loan balances more aggressively.

Student Loans After Chapter 13 Bankruptcy

Once you receive your Chapter 13 discharge, you will want to start proactively rebuilding your credit. That also means taking care of any nondischargeable debts, including taxes and student loans.

Contact the student loan servicer and make arrangements to pay them. Once you exit bankruptcy, your creditors may resume collection efforts and can also report any defaults on your credit report. So be sure to have a plan in place to get these loans back on track after bankruptcy.

Over half (53%) of potential home buyers with student loan debt said the debt was somewhat or very much an obstacle to buying a home. And 71% of student loan borrowers who don’t own a home cite their college loans as the main prohibitive factor.

In its 2016 Student Loan Debt and Housing Report, the National Association of Realtors addresses the growing impact of student loans on home ownership. The report contains some interesting findings.

Student Loans are Holding Back Home Ownership

Debt delaying potential home buyers is highest among those with more than $50,000 in student loan debt about eight in ten believe it is delaying their ability to purchase a home.

Making a student loan payment every month reduces income and diminishes borrowers’ ability to save for a down payment. Student loans also make it more difficult to qualify for a mortgage, because the loans increase borrowers’ debt-to-asset ratios.

Now more than 40% of the nearly 22 million borrowers with federal student loans have defaulted on their payments. Default on student loans makes obtaining a mortgage much more difficult.

The home ownership rate for borrowers 35 and younger has slumped from 44% at the height of the housing boom to 34% today. Rising interest rates and increasing home values will likely slow this rate even further.

Dischargeability of Student Loans in Bankruptcy

While there have been some recent wins, discharging student loans in bankruptcy is extremely difficult.

College graduates are 27% more likely to own a home than those with just a high school diploma. But for those saddled with enormous student loan burdens, home ownership remains out of reach.

Student loan debt directly impacts on consumer spending on housing, including mortgages. There exists no legal or logical reason to treat private student loans differently in bankruptcy than other types of unsecured credit. Allowing the discharge of student loan debt in bankruptcy would clear the way for millions of potential homeowners.

11 U.S.C. 523(a)(8) provides that, absent undue hardship, a debtor cannot discharge student loans. The bankruptcy discharge does not discharge any debt for “funds received as an educational benefit, scholarship, or stipend.” The Bankruptcy Code also broadly excepts from discharge “any other educational loan that is a qualified education loan.”

Student loans are clearly “funds received”and are therefore nondischargeable. Unpaid tuition, which often includes room and board, does not involve “funds received” by the student. In many cases, therefore, a qualified bankruptcy attorney can discharge unpaid tuition.

When (and When Not) Tuition is Dischargeable in Bankruptcy

How the tuition was incurred determines whether the tuition is dischargeable in bankruptcy. If you did not sign any kind of loan or agreement prior to starting classes, your tuition will likely be deemed dischargeable. On the other hand, if you sign a promissory note to the college or university prior to attending classes, that tuition could be deemed nondischargeable.

In other words, courts are more likely to discharge tuition where a student attends classes without signing any document. Courts are less likely, on the other end, to discharge tuition incurred after a student signs a detailed loan document prior to class attendance. If the bankruptcy court determines that tuition is dischargeable, then the school must release the student’s transcripts.

The law on whether tuition is dischargeable varies from jurisdiction to jurisdiction. When a student does not pay tuition, the student is indebted to the school. But that indebtedness does not make the transaction a loan. See, for example, Cazenovia College v. Renshaw (In re Renshaw), 222 F.3d 82 (2d Cir. 2000).  But see McKay v. Ingleson, 558 F.3d 888, 889 (9th Cir. 2009), in which the court found that the “promise to remit the cost of tuition to the College in exchange for the opportunity to attend classes created a debtor/creditor relationship” and was therefore a nondischargeable student loan.

In the very well-reasoned Institute of Imaginal Studies v. Christoff (In re Christoff), 9th Cir. BAP No. NC-14-1336-PaJuTa (3/27/15), the court looked to whether the debtor actually received funds. Section 523(a)(8)(A)(ii) excepts from discharge only those debts that arise from an obligation to repay funds received as an educational benefit. Under this analysis, if a debtor incurs tuition but did not actually receive any funds, then the tuition is fully dischargeable.

Learn Whether Your Tuition is Dischargeable in Bankruptcy

Neither primary school nor high school tuition are loans for “higher education,” as defined by the Bankruptcy Code. So tuition incurred for K through 12th grades will always be fully dischargeable in bankruptcy.

If you have unpaid tuition and are considering bankruptcy, contact Lee Legal for a free financial analysis. We can help you to determine whether your tuition is dischargeable in bankruptcy.

Education levels directly influence both economic opportunity and wealth creation. Earnings disparities between college and high school graduates accounted for at least 60% of the rise in wage inequality between 1980 and 2005. Not going to college is simply not an option for any young person aspiring to the middle class. Consequently, 43 million Americans across the racial and socioeconomic spectrum have taken out nearly $1.3 trillion in college loans.

The Consumer Financial Protection Bureau has also examined “the disproportionate impact of student debt on communities of color.” The CFPB specifically found that “student loan debt can trigger a financial domino effect that may prevent economic mobility.”

According to a Brandeis study cited in the Washington Post article, the median household wealth is $3,600 for young African American households. Compared that the median household wealth of just under $36,000 for young whites. Addressing the income gap will require increasing minority education quality at all levels, from primary to post-secondary.

Black Students Have a Lot More College Debt

While college education for African Americans is increasing, black households are also far more likely to have student debt. About 54% of young African Americans between the ages of 25 and 40 have student loans, compared to 39% of their white counterparts.

Student Loan Forgiveness: Pros and Cons

There are many, many critics of plans to lessen the enormous wealth gap that exists in America today. (“Putting the blame on the 1 percent is an easy excuse for those who have failed due to poor decision-making, poor planning, lack of skills, lack of drive, lack of sacrifice.”) Yet it is difficult to discern why a racial income gap exists for college graduates.

Even less understandable is why the gap should be allowed to exist if it can be ameliorated or eliminated altogether. A recent report found that if average black family wealth continues to grow at the same pace it has over the past three decades, it would take black families 228 years to amass the same amount of wealth white families have today. That is not acceptable. The feds should direct student loan forgiveness policies toward minorities to lessen the wealth gap.

The Solution: Increase Student Loan Forgiveness for Minorities

The Department of Education needs to do a better job targeting and promoting debt forgiveness programs toward minorities. The Department of Education offers several different types of income-based repayment programs. Generally, these programs allow for forgiveness after at least two decades of payments. The plans may be skewed toward graduate students, but legally these programs are available to all.

In addition to targeted programs, allowing student loans to be discharged in bankruptcy could dramatically narrow the racial wealth gap.