Posted by Kevin on April 21, 2014 under Bankruptcy Blog | 
From various sources, I have been reading about the results of a study done by PayScale concerning the financial return (or lack thereof) of various types of college degrees. Given that student loan debt now exceeds one trillion dollars, this study (and others like it) should be considered by both prospective college students and their parents.
A little aside. My father was of the WWII generation. He did not go to college. However, he pounded into me from an early age that if I wanted a good job, I had to get grades and go to college. Did a good job follow from a college degree? Or was it that there was roughly a one to one ratio between good jobs and the number of people going to US colleges in the 1950″s?
I started college in 1969 and finished my JD-MBA in 1978. By that time, there had been an explosion in the number of college students. And while good jobs increased because the economy grew, there no longer seemed to be a one to one relationship between college grads and good jobs. That was the bad news. The good news was that college and law school were far less expensive than they are today. With the help of my father’s union scholarship and my parents’ financial support, I was able to finish college and two grad schools with less than $7,000 of debt- a manageable sum. Nowadays, however, young people are finishing college with over $30,000 of debt. Forget about graduate school. Some students who attend professional schools (medicine, law, business) are coming out with over 100K of debt. Unbelievable.
The PayScale study indicates that certain degrees, such a engineering, pretty much insure that the graduate will earn at least 500K more over a 20 year period than someone who did not attend college. At the same time, an arts or humanities degree from a lower tiered college may translate into a six figure deficit vis-a-vis high school graduates. OUCH!
Predicatably, graduates of elite schools including the Ivies fare better than graduates of lower tiered schools. Moreover, a study by McKinsey, highlighted in a recent article in The Economist, points out that in this less than stellar job market, 42% of recent graduates are in jobs that do not require a 4 year degree.
What to do? In the long run, study hard (or run 4.4 in the forty yard dash for a football scholarship) so your chances of getting into a top tier school are better. In the short term, however, students and parents have to be smart about the type of financial commitment that college is. Explore financial aid opportunities especially through local clubs or civic organizations. For example, our local Rotary awards scholarships to about 10 students per year. Second, look into community colleges for the first two years. You can test your abilities for two years at a pretty reasonable price. If you do well, you can transfer into a 4 year degree program in your third year. As a transfer with a high GPA, not only will you be in a better position to get into a school that may have been out of reach out of high school, you may be able to negotiate a better financial aid package.
Finally, you have to be on top of your student loans once you graduate. The last thing you want to do is fall into default. More than that, you would want to be pro-active in finding the right repayment plan which will allow you to pay your student loans and not live in poverty. Do not shy away from seeking expert help in this area. It may be money well spent.
Posted by Kevin on April 16, 2014 under Bankruptcy Blog |
An income tax debt that you owe for the 2013 tax year presents both some challenges and opportunities if you file bankruptcy in early 2013. The challenges are practical ones. You have a debt that you wish you didn’t have, it can’t be written off (discharged) in bankruptcy, and you may well not know how much it is because you haven’t prepared the tax return yet. So it can be a frustrating and scary uncertainty.
The interplay between taxes and bankruptcy can be complicated, however, under the right circumstances your 2013 income tax debt can be—believe it or not–paid in full essentially without costing you anything. That’s because under bankruptcy law in many circumstances recent tax debts are paid in place of your other creditors, leaving less or nothing for those other creditors. This can happen in both Chapter 7 and Chapter 13, much more likely under that latter. This blog shows how your taxes can be paid in an “asset” Chapter 7 case, and the next blog shows the more common Chapter 13 situation.
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Payment of 2013 Income Taxes in an “Asset” Chapter 7 Case
Most Chapter 7 cases are “no asset” ones. This means that the bankruptcy trustee takes nothing from you because everything you have is exempt or else not worth the trustee’s effort to collect. So none of your creditors—including the IRS—are paid anything through your Chapter 7 case itself. In that situation, you would have to make arrangements to pay any 2013 income tax with the IRS (and/or any state tax agency, if applicable).
On the other hand, an “asset” Chapter 7 case is one in which you own something that is NOT exempt and IS worth for the trustee to collect, sell, and distribute its proceeds to the creditors.
The Example
Consider this. You own a boat that has become more expensive and more work to own than you’d expected. In a Chapter 7 case, if you do not claim an exemption on the boat and your bankruptcy trustee believes the boat is worth collecting from you and selling, then the 2013 taxes are among the first debts that the trustee will pay out of the proceeds. Why? Because the taxes are what is called “priority debts”. Although most of your creditors are paid pro rata—equally, based solely on the relative amount of their debts— “priority debts” are paid ahead of your other creditors. So, assuming you do not have any debts that are even higher on the priority list (see Section 507 of the Bankruptcy Code), your 2013 IRS/state income tax will be paid in full before the trustee pays anything to any of your other creditors. As a result you would no longer have this tax to pay after your Chapter 7 case is completed.
Caution
For this to work as described takes just the right conditions, with more twists and turns than can be fully explained here. So definitely discuss all this thoroughly with your bankruptcy attorney.
Posted by Kevin on April 11, 2014 under Bankruptcy Blog |
Chapter 7 sometimes doesn’t help you enough with certain debts. Included are some income taxes, child and spouse support you’re behind on, home mortgage arrearage, and vehicle loans, among others.
There are times when filing a straight Chapter 7 case will help you enough by writing off your other debts so that you have the practical means to take care of the remaining special debt(s). It frees up money. But other times you need the extra protection that a Chapter 13 payment plan gives you.
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Here are the ways Chapter 7 could help with the first three of the special kinds of debts mentioned above, and ways that Chapter 13 can help more if necessary. The fourth kind—vehicle loans—are in some respects more complicated, so they’ll be addressed separately in an upcoming blog.
Income Taxes
Some income taxes can be discharged (written off) in bankruptcy, including under Chapter 7, but some can’t, generally more recent ones. If you have a tax debt that will not be discharged, but is the only debt that will not be and is small enough, you can file a Chapter 7 case and make payment arrangements directly with the IRS (or applicable state tax agency). If the monthly payment amount is manageable, this could well be the sensible way to go.
But if the tax amount is too large for what you can afford to pay, or you have a number of debts that would not be discharged under Chapter 7, then Chapter 13 would help in the following ways:
- You would likely get more time to pay off the tax.
- The IRS or state agency would be prevented from taking collection action without permission of the bankruptcy court.
- Generally you would not need to pay interest and penalties from the time your case is filed, allowing you to pay off the tax debt with less money.
Child and Spousal Support Arrearage
State laws allow ex-spouses and support enforcement agencies to be extremely aggressive in their collection methods. Sometimes you can work out a deal with these enforcement agencies, sometimes not. If you can make a deal, then Chapter 7 may make sense for you.
But otherwise you need the extraordinary power of Chapter 13. It gives you three to five years to pay the support current, as long as you rigorously keep up with your ongoing monthly payments in the meantime. And throughout this time all of the very tough collection tools usually available to your ex-spouse or support agency are put on hold for your benefit.
Home Mortgage Arrearage
If you are behind on your home mortgage but want to keep the home, and you file a Chapter 7 case, you are at the mercy of your mortgage company about how much time you will have to catch up on the mortgage.
In contrast, similarly to what is stated above, Chapter 13 will give you three to five years to cure that arrearage. So, if you are too far behind to be able to catch up within the time you would be given under Chapter 7, then you need to file under Chapter 13.
Posted by Kevin on April 7, 2014 under Bankruptcy Blog |
The risk that creditors will not allow you to discharge some of their debts can be minimized through smart timing of your bankruptcy.
One of the most basic principles of bankruptcy is that honest debtors get relief from their debts, dishonest ones don’t. One way you can be “dishonest” in the eyes of the bankruptcy law is to use credit when, at that point in time, you don’t intend to pay it back. That makes sense. Each time you sign a promissory note or use a credit card you are directly stating in writing, or else strongly implying, that you promise to pay the debt you are then creating. That makes moral common sense. And it’s the law: a creditor can challenge your ability to write off a debt that you did not intend to pay when you incurred it.
Creditors Have the Burden of Showing Dishonest Intent
But most of the time when a person takes out a loan or uses a credit card, they DO intend to pay the debt. The law respects that reality by holding that most debts are discharged (legally written off) unless the creditor can prove to the court that the debtor had bad intentions when incurring the debt. So, for example, if a person completes a credit application with inaccurate information, for the creditor to successfully challenge the discharge of that debt it would not only have to show this inaccuracy was “materially false,” but also that the person provided that information “with intent to deceive” the creditor. See Section 523(a)(2)(B) of the Bankruptcy Code.
Dishonest Intent Inferred from When You Incurred the Debt
However, in the delicate balancing act between the rights of debtors and creditors, the law also recognizes that it’s quite hard to prove an “intent to deceive.” So the Bankruptcy Code gives creditors a significant, although limited, advantage when consumer purchases or cash advances are made within a short period of time before the bankruptcy filing. A debtor’s use of consumer credit during that period is presumed to have been done with the intent not to pay the debt, on the theory that the person likely was considering filing bankruptcy at the time, and likely wasn’t planning on paying back that new bit of debt. So the statute says that this new portion of the debt is “presumed to be nondischargeable.”
Limitations on the “Presumption of Fraud”
This presumption is limited in lots of ways:
- Applies only to consumer debt, not debts incurred for business purposes.
- Covers only two narrow situations:
- 1) cash advances totaling more than $750 from a single creditor made within 70 days before filing bankruptcy;
- 2) purchases totaling more than $500 from a single creditor made within 90 days before filing bankruptcy, IF those purchases were for “luxury goods or services,” defined rather broadly as anything not “reasonably necessary for the support or maintenance of the debtor or a dependent.”
- The debtor can override the presumption by convincing the court—by personal testimony and/or other facts—that he or she DID, at the time, intend to pay the debt.
So there is no presumption of fraud, and no presumption of nondischargeability of the debt, if cash advances from any one creditor add up to $750 or less within the 70-day period, or if credit purchases for non-necessities from any one creditor add up to $500 or less within the 90 days. See Section 523(a)(2)(C). This means that one simple way to avoid the presumption is to wait until enough time has passed before filing bankruptcy so that you get beyond these 70- and 90-day periods. That is, this is easy unless you have some urgent need to file the case. Either way, your attorney will help determine when you should file your case.
Possible Creditor Challenge Even Outside the Presumption
With all this focus on the presumption, be sure to understand that even if your use of credit doesn’t fit within the narrow conditions for the “presumption of nondischargeability,” a creditor could still believe that the facts show that you did not intend to repay a debt, or that you incurred the debt dishonestly in some way. However, these kinds of challenges are relatively rare because:
- As stated above, the creditor has the burden of proof, and it’s not easy for it to prove your bad intention;
- The creditor can spend a lot of money on its attorney fees to make the challenge, with a big risk that the debts will just be discharged anyway; and
- The creditor may also be required to pay YOUR attorney fees in defending the challenge if it loses. See Section 523(d).
Posted by Kevin on April 4, 2014 under Bankruptcy Blog |
To qualify for Chapter 13, you must be an “individual with regular income, meaning that your income is sufficiently stable and regular to enable you to make payments under a Chapter 13 plan. That requirement of a “stable and regular” income means not only at the time of filing, but for the entire duration of the plan (36 to 60 months). In a way, every Chapter 13 is a leap in faith that the debtor’s financial situation will be stable (or better) through the duration of the plan. Of course, life throws you curve balls. You lose a job, or your hours are cut. You or a member of your family gets sick and insurance does not cover the whole bill. The car breaks down-more than once. Your wife has to quit her job to take care of her sick mother. Whatever. The Code takes this into account. How? One way is by allowing you to convert your Chapter 13 to a Chapter 7.
Here’s an example to illustrate this. You own a home and have two mortgages. You are $5,000 behind in payments on your first mortgage (balance $250,000) and cannot remember when you last paid the second (balance of $75,000). You owe $25,000 in credit card bills, and another $10,000 in medical expenses that the insurance did not cover. The home is worth a less than the first mortgage. You had been laid off, but got a new job, and are starting to get significant overtime. But now, almost miraculously the debt collectors are calling again. You are making enough to take care of that first mortgage, your current expenses, and if everyone tightens belts, a little more, say $250 per month.
Chapter 13 may be the answer. How, you say. Even if everything goes right, what am I going to do about that second mortgage? Chapter 13 gives you the power to “strip” the second mortgage; that is, convert the second mortgage secured debt into unsecured debt. Then, the second mortgage gets paid pro rata with the credit cards and medical bills. How much? What ever is left over after paying your current monthly bills, your first mortgage arrearages, and the fee to your lawyer and the trustee. Could be very little. Plus the “second mortgage strip” also lowers the debt against the home by the amount of that second mortgage, bringing the debt down closer to the home’s market value. Seems to satisfy both your short term and long term goals. Chapter 13 looks good, so you file under that chapter. You know it is going to be a bit of a stretch, but if the stars line up right, you get to keep your home and discharge your debts.
15 months into the plan, your boss cuts back on most of your overtime. You can’t even pay the first mortgage much less the trustee. If the case is dismissed, there is no more automatic stay so your creditors will come after you because you now have wages that can be garnished. What to do?
The Bankruptcy Code explicitly states in that a Chapter 13 debtor may convert a case under this chapter to a case under chapter 7 at any time. Any waiver of the right to convert under this subsection is unenforceable.
Not a perfect solution, by any means. However, better than being thrown to the wolves. Let’s look at the scenario under the converted Chapter 7. First, you do not have to make any more payments to the trustee. That comes out to $3000 per year. Second, your Chapter 7 case is over in about 3 months and you most probably get a discharge. That means that you have knocked out all your debts (mortgage, credit card and medical).
BUT, the Code differentiates between the debt and the security for the debt. The debt is discharged but the security (mortgage) remains on the property. Unless you can make a deal with the mortgagees, you will probably lose your home. But you will not owe any deficiency on the first mortgage or anything on the second. Moreover, you will knock out the credit card and medical debt.
Now, if you work with experienced bankruptcy counsel, he or she will lay out this scenario in a way that you know or should know that you are taking a “shot” to save your home. If it works, God bless. If not, you switch into a 7, get your discharge and move on with your life.
So conversion to Chapter 7 can be a decent result when the goals of Chapter 13 cannot be met, either because of unexpected circumstances or because the debtors took some calculated risks which did not go their way.
