Possible Relief For Student Loan Debts? Don't Count On It... Yet

The Wall Street Journal recently published an article claiming the Trump Administration is considering relaxing the "undue hardship" standard for discharging student loan debt in bankruptcy. This would be a major change in long-term bankruptcy law, as Congress has shown little willingness to provide this relief. But, it does provide a glimmer of hope for millions who sink deeper into student loan debt.

READ THE ARTICLE HERE: Trump Administration Looking At Bankruptcy Options For Student Loan Debt.

The "undue hardship" standard makes it extremely difficult to discharge student loan debts through bankruptcy. The Debtor must face a severe hardship which prohibits them from paying the debt while also maintaining minimal living standards, the hardship must be long-term, and the debtor must have made a good-faith effort to repay the debt. As discussed in the article, proving this is difficult and costly, so much so that only 500 debtors even attempted it last year. In practice, it is not an option for the neediest consumers.

Congress must approve any permanent change, but the president can set enforcement policy to a more lax standard. Major bankruptcy reform last occurred in Congress in 2006, and even then it was mostly favorable to creditors. However, a strong push from the president could lead to popular support, especially among Congressional members in close electoral races.

This development is probably not reason to get too excited if you are facing large student loan debts, at least not yet. First, the president has been prone to bold declarations during his first year in office that are quickly forgotten, or there has been a lack of policy follow through. Second, as mentioned above, Congress would need to approve any sweeping or significant change beyond enforcement, and the creditor lobby has so far been stronger than the consumer lobby. Recent efforts have stalled, and there is no indication there is any momentum for change.

Finally, if the focus of relief is truly on the undue hardship standard, as opposed to broader change directed at different student loan situations, many consumers may still be beyond help. For instance, what will the new standard require? Will under-employment qualify, or must you be disabled or unemployed? What will constitute a "good-faith effort" to repay? Or will you even be required to make one? Not everyone who is overwhelmed by student loan debt is in the midst of severe hardship, but millions find the debt inflexible and oppressive. 

While this may be a negative view of the situation, it is realistic for any bankruptcy attorney. Congress just has not shown the willingness to do anything in this area. However, this may be an opportunity for rare bipartisan action, as this effort has so far been taken up by more liberal members. As student loan debts balloon to astronomical levels, effecting more and more voters, Congress may finally be forced to act, even if it is just to curry favor at the polls. Democrats and Republicans both hear the cries of student loan debtors.

Student loan reform in bankruptcy is inevitable in the long run, but cold cynicism tells me, "not yet".

Contact us if you are facing student loan debt, or any type of debt. I would be happy to discuss your options during a free consultation. 

The Bankruptcy "Liquidation Test"

The value of your personal property is always important in bankruptcy. Your property can be protected and exempted from your creditors in bankruptcy, but the exemptions are limited. For instance, if you own a $100,000 house, but owe $90,000 on the mortgage, your $10,000 in equity can be adequately protected from your creditors. However, if you own the same home outright, without a mortgage, your $100,000 in equity is too great to fully protect, depending on the exemptions being used (different exemptions can be used in different circumstances, but that is the subject of another post).

So, what happens when your property is not fully protected? You do NOT have to surrender the property. Instead, you may file a Chapter 13 bankruptcy and submit to the so-called "liquidation test". This test is enumerated in the bankruptcy code under section 1325(a)(4). The liquidation test requires that unsecured creditors (such as credit cards and medical bills) must be paid at least as much in a Chapter 13 bankruptcy plan as they would be paid in a Chapter 7 liquidation, minus any administrative or sales costs.

In practice, this means you must repay your unsecured creditors, dollar-for-dollar, the amount your property would be worth were it to be sold to pay off your creditors, minus whatever is exempted, whatever it is secured by, and whatever costs would be involved in the sale. For instance, if your home is worth $100,000, but you owe $50,000 on the mortgage, and the homestead exemption is $26,000, you must pay your unsecured creditors $24,000, minus estimated sales costs. If you owe your unsecured creditors $24,000 or less, they will be paid in full. If you owe them more, they will be paid a portion of what they are all owed, out of the $24,000 pool.

It should be noted, the exemptions for personal property, such as furniture, clothes, jewelry, tools and household goods, etc. are normally more than sufficient. Also, retirement accounts are usually completely exempt. It is homes, rental properties and cars owned outright that cause the greatest problems with exemptions. It will be important to disclose all property you own to your attorney to guarantee that it all accounted for and protected.

The liquidation test sometimes makes it important to get an appraisal of your home. Appraisals can cost several hundred dollars, but it may be worth it if the results save your thousands (or tens-of-thousands) under the liquidation test. If you only roughly estimate the value of your home, you take the risk of the trustee challenging your case. Precise numbers and amounts will reduce uncertainty.

Contact us if you believe the value of your property could cause a problem with the liquidation test. I will be happy to sit down and review your situation during a free consultation. We can determine if your property will be fully, or partially, exempt. We can plan a Chapter 13 bankruptcy to protect your property if it cannot be protected. We may even determine that your property is not worth liquidating, which will allow you to file a Chapter 7 bankruptcy.

New Year, Fresh Start

As a bankruptcy attorney, this is my busiest time of the year. I file more cases at the beginning of the year than any other time. Having passed the holidays, many people turn their minds to more practical matters, including their finances. Also, with tax refunds becoming available, many clients will have some money available to complete the process. It all adds up to a busy time.

New Year's is a time for fresh starts. Many people use New Years resolutions as a way to set change in motion. It is not a bad idea. Starting at the beginning of the year sets an easy frame of reference for determining how that change is progressing throughout the year. The same goes for fixing your financial situation. Taking stock of your situation in January allows you to track your progress as the year goes on.

If you are facing tight finances, it is worth sitting down and determining what you can fix on your own, and what will require help from an outside party. Start by making out a realistic budget. Calculate your monthly income after taxes, and deduct all of your normal necessary payments, such as rent/mortgage, car payments, utilities, food, household expenses, etc. Next list all of your discretionary spending (things you can live without) such as cable, travel, entertaining, and the like. Finally, try to determine how much you would need to pay down your outstanding debt and not just make minimum payments.

Is there enough money left over to do so? If you can cut back discretionary spending, or if your necessary spending is set to drop, and the extra money allows you to pay down your debts (and not just minimum payments) with tighter budgeting, you don't need to file bankruptcy. If your income is set to increase, you may also be able to avoid filing. Try to set goals for every month for how much you want to save and pay down your debt, and track your process through the year.

However, if you cannot meet your debt payments even with strict budgeting, you may want to consider the fresh start of bankruptcy. This may not initially be what you imagine yourself wanting to do. But, it is a process written directly into the original US Constitution intended by the Founding Fathers to offer relief to people facing burdens they cannot fix on their own. It is not a personal failure (even Abraham Lincoln filed on business debts), but a form of relief when the circumstances of life make it impossible to meet every burden. In addition, Chapter 13 may allow you to repay some or all of your debts. Either way, you will keep your property and finally be able to move on with your life anew.

Contact us to set up a free consultation. It is my job, and specialty, to review the private finances of my clients and determine the best path forward. Sometimes that involves bankruptcy, sometimes it does not. This post is a simplified version of what I do. I will look at the whole picture, your income, expenses, debts, and assets. With over a decade's worth of experience, I have a pretty good sense if there is a way around bankruptcy, or if it makes the most sense.

You don't need to let the stress and strain of your financial difficulties extend into the new year. New Year's is a time for fresh starts... don't deny yourself the relief!

Managing Holiday Spending

The holiday season can be very stressful in the best of times, and this can be especially true when you are facing debt issues. The holidays are expensive. Between gifts, traveling, and parties, the bills can add up quickly. It's not a time of year that you want to think about debt, and you should enjoy time with your friends and families. However, it doesn't hurt to keep a few things in mind if your money is tight this time of year.

Gifts are a part of the holiday season, for better or worse. It's always nice to give a gift that someone appreciates, especially to a child. However, this isn't easy when your credit cards are nearly maxed out and there is no money in the bank. If your budget is limited, and you need to cut back on gift giving, try giving more modestly to adults in your life. Adults can always buy things for themselves, they're not at the mercy of Christmas to get something they have wanted all year. If you can only buy a limited number of gifts, save them for the children in your life, who will care more and enjoy it more.

You can also limited the scope of who you buy gifts for. Get something for your closest friends and family members, but you don't need to buy something for everyone on the periphery of your life. You don't need to buy your mailman or every co-worker something. This doesn't mean you are not generous. You'll be able to give gifts again when you are back on your feet. But, you may need to cut back this year, or give more modestly. Once again, most adults don't care about receiving gifts, and are more  likely to appreciate your presence.

Travel is another holiday expense. Flying home to be with family can be costly. You should travel to be with your family if possible, but if you can not, you may want to travel closer to home, possibly allowing yourself to drive. You could also consider staying a shorter period of time, as this will reduce expenses such as eating out or hotels. Once again, this may not be ideal, but better days are ahead in the future, and it may be much easier to travel then.

Finally, people love to throw parties around the holidays. It's a great opportunity to see all of the important people in your life at one time. Just like gifting and traveling, it can get expensive. If money is tight, you may consider not hosting a party, but instead attending other parties. It is easier to bring a bottle of wine or a dish than providing for an entire party. And, you'll still be around the people you care about.

The holidays truly are a time of year to spend time with the people you care most about in your life. It is NOT about spending the most money. Holiday traditions and experiences can be expensive. But, reducing those costs and still enjoying the holidays is entirely possible. 

Why Your Bankruptcy Attorney Needs To Know Your Home's Value

One of the first questions your bankruptcy attorney will ask you is, "what is the value of your home?" This often throws people off, because home values are not the first thing they are considering in the face of mounting bills and pressure from creditors. It seems like the first questions should be about your amount and types of debt. These are certainly important questions that will need to be discussed, but knowing the value of your home often determines more when considering whether or not to file bankruptcy.

The value of your home is so important because it is likely your most valuable piece of property, and it will need to be protected from your creditors. "Exemptions" under bankruptcy law protect your property from your creditors. However, these exemptions are not unlimited. If, for instance, your own a million dollar home, you cannot file for Chapter 7 bankruptcy, as you would have too much equity in your home. Now, I am sure you are saying, "...if I had a million dollar home, I would not be filing for bankruptcy." Which is true, but this is just an extreme example. An individual can in fact only exempt about $27,000 in equity in their home, a couple only double that amount. So, there will be many situations where the exemptions will be an issue, as this is often about how much equity someone has in a home.

"Equity" is the value of your home, minus what you owe on it. So, first thing that will be important to know is the value of your home (determining what you owe is simple... get a mortgage statement). The value the bankruptcy court will want to know is what the home would actually sell for, not its tax assessment value (they never use this value, as it is rarely accurate). The best value would be a recent purchase price. If you purchased your home last year for $100,000, it is probably still worth $100,000. If you purchased it five years ago, that purchase price may no longer be relevant, depending of the neighborhood. In general, recent purchase price is not useful if your home was purchased awhile back, but it may be a guide as to what it is worth.

The other fool-proof way to value your home is to get an appraisal from a third-party appraiser. The only downside to this method is that an appraisal usually costs several hundred dollars. This will not be necessary in most cases. If you clearly owe more than what your home is worth, you will not need a full appraisal. If your home can be reasonably valued using online comparable values, or recent sales in your neighborhood, you will not likely need to go through the expense.

However, there will be times when getting an appraisal is advisable. In situations where your home value is unclear, or where the exemptions may fully protect your home, or not, depending on the value, it should be strongly considered. An appraisal may save you thousands of dollars in bankruptcy, so a few hundred dollars would be well spent to get one. This will be something to discuss with your bankruptcy attorney.

If the value of your home is too great for the exemptions, all is not lost. You will still be allowed to file a Chapter 13 bankruptcy which lets you keep your home and repay your creditors over a five year period, with court protection. This is the subject of other posts, but even in these cases, providing the court with an accurate value of your home will be necessary.

So, if you are considering speaking to a bankruptcy attorney about your situation, and you own a home, you should first take a little time to consider what your home is worth. Contact us if you would like to schedule a free consultation to discuss your debt and how it relates to your home. We can discuss your situation in more detail and see if bankruptcy is an option for you.