Posted by Kevin on May 31, 2017 under Bankruptcy Blog | 
The Bankruptcy Reform Act of 1978, referred to as the Bankruptcy Code, provided that student loans made by a governmental unit or a non profit institution of higher education was not dischargeable in bankruptcy unless (a) the loan became due before five years before the date of the filing of the petition (in plain English, after 5 years of payments), or (b) if not discharging the loan imposed an undue hardship on the debtor or the debtor’s dependents. Note, private student loans were dischargeable under the 1978 statute. Many students took advantage of the ability to discharge their student loans after five years.
Since in the 1970’s and 1980’s student loans were to be repaid in 10 years, many said that it was unfair to allow students, in effect, to wipe half their debt obligation by filing bankruptcy. So, in the latter part of the 1980’s, the statute was amended to require 7 years of payments or undue hardship. In 1998, Congress amended that statute again to limit the discharge of student loans only to cases where the debtor could demonstrate undue hardship. In the meanwhile, the regulations relating to federal loans started to allow more flexibility in paying back student loans based on the borrower’s income. Those income driven repayment plans morphed into today’s IBR, ICR and REPAY programs.
In 2005, once again, there were major amendments to the Bankruptcy Code under BAPCPA which states for the Bankruptcy Abuse Prevention and Consumer Protection Act (still trying to figure out where the consumer protection comes in). Under BAPCPA, a debtor cannot get a discharge of a student loan unless the debtor can demonstrate an undue hardship on the debtor and the debtor’s dependents. The types of student loans that are not dischargeable included the following:
1. loans made, issued or guaranteed by a governmental unit;
2. made by any program funded in whole or part by a governmental unit or non-profit institution: or
3. any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code, incurred by the debtor who is an individual.
Since many private loans are qualified education loans under the Internal Revenue Codes, private lenders received a windfall under BAPCPA- their loans became non-dischargeable but the private lender was not required to provide income driven repayment plans.
It is difficult to get a undue hardship discharge. You must file an adversary proceeding (lawsuit) in the bankruptcy. The test used by the bankruptcy court in New Jersey to determine undue hardship is called the “Brunner test”, and consists of the following:
1. Based on current income and expenses, the debtor cannot maintain a “minimal” standard of living for the himself and the his dependents if forced to repay the student loans;
2. Circumstances exist which indicate that the debtor’s economic situation is likely to persist for a significant portion of the repayment period of the loan(s); and
3. The debtor has made good faith efforts to repay the loan(s).
The Court has wide latitude in either granting or withholding a discharge to student loans. It also means that if you lose at the trial level, it is very difficult to get the decision overturned on appeal. Obtaining a discharge of a student loan under the Bankruptcy Code is an expensive and not always successful way to deal with student loan debt. However, given the right set of circumstances, it can eliminate your student debt.
Because of the difficulties of proving undue hardship, student loan lawyers have developed various strategies outside of bankruptcy arena to deal with the ever increasing problem of repaying your student loans. I welcome you to visit my student loan website (http://studentdebtnj.com) which provides more options in dealing with your student loan debt.
Posted by Kevin on May 30, 2017 under Bankruptcy Blog |
Most people considering Chapter 7 “straight bankruptcy” have low enough income to qualify. Find out if you do.
The “Means” Part of the “Means Test”
When Congress passed the last major set of changes to the bankruptcy laws in 2005, it explicitly said that wanted to make it harder for some people to file Chapter 7. The idea was that those who have the means to pay a significant amount of their debts should do so. Specifically, those who can pay a certain amount to their creditors within a three-to-five-year Chapter 13 payment plan ought to do so, instead of just being able to write off all their debts in a Chapter 7 case.
How the Law Determines Whether You Have Too Much “Means”
The “means test” measures people’s “means” in a peculiar, two-part way, the first part based on income, the second part based on expenses.
The income part is relatively straightforward; the expense part involves an amazingly complicated formula of allowed expenses.
The good news is that if your income is low enough on the income part of the “means test,” then you’re done: you’ve passed the test and can skip the rest of the test. The other good news is that most people who want to file a Chapter 7 case DO have low enough income so that they do pass the “means test” based simply on their income.
Is YOUR Income Low Enough to Pass the “Means Test”?
Your income is low enough if it is no higher than the published “median income” for a household of your size in your state. You can look at your “median income” on https://www.justice.gov/ust/means-testing.
A Peculiar Definition of “Income”
Here’s what you need to know to compare your “income” (as used for this purpose) to the “median income” applicable to your state and family size:
1. Determine the exact amount of “income” you received during the SIX FULL calendar months before your bankruptcy case is filed. It’s easiest to explain this by example: if your Chapter 7 case is to be filed in July, 2017 , count every dollar you received during the six-month period from January 1,, 2017 through June 30, 2017. After coming up with that six-month total, divide it by six for the monthly average.
2.When adding up your “income” include all that you’ve acquired from all sources during that six-month period of time, including unconventional sources like child and spousal support payments, insurance settlements, unemployment benefits, and bonuses. But EXCLUDE any income from Social Security.
3. Multiply your six-month average monthly income by 12 for your annual income. Compare that amount to the published median income for your state and your size of family in the link provided above. (Make sure you’re using the current table.)
Conclusion
If your “income”—calculated in the precise way detailed here—is no more than the median income for your state and family size, then you have passed the “means test” and can file a Chapter 7 case.
But if your income is higher than that, you may still be able to pass the “means test” and file a Chapter 7 case. That is a little more complicated, however.
Posted by Kevin on May 27, 2017 under Bankruptcy Blog |
If you borrowed money to purchase your motor vehicle, you have signed a promissory note which is an obligation to pay the loan debt. You also gave to the lender a lien of your vehicle. In bankruptcy, your lender is known as a secured creditor. Although the underlying debt may be discharged in bankruptcy, the lien passes through the bankruptcy because it is a property right. That means that the lender can always foreclose on the lien if you do not make payments.
The Bankruptcy Trustee Only Cares about Equity Beyond Any Exemption
In a Chapter 7 case you have two people besides you who could be interested in your vehicle. Clearly, the lender is interested. But also, the bankruptcy trustee will become interested if there is equity in the vehicle that exceeds the amount of the exemption. In New Jersey, the vast majority of debtors use the federal exemption which is $3775. There is seldom too much equity if you owe on a vehicle, but check with your attorney to make sure this is not an issue in your case.
Dealing with the Lender-
Surrender
You may not want to keep your vehicle for a multitude of reasons. Or you may not be in a position to make the vehicle loan current within a short time after the bankruptcy filing. If you just surrendered your vehicle without a bankruptcy, you’ll very likely owe and be sued for the “deficiency balance” (amount of loan plus all repo and sale costs minus the sales price). Especially in auction situations, that deficiency balance is often much higher than you expect. Surrendering the vehicle in your Chapter 7 bankruptcy eliminates the deficiency scenario. Indeed, that is a common purpose for filing bankruptcy.
Reaffirm
If you want to keep your vehicle, generally you must be either current on your loan or able to get current within about 30 to 60 days after filing the Chapter 7 case. In New Jersey, you are required to sign a reaffirmation agreement, which legally excludes the vehicle loan from the discharge (the legal write-off) of the rest of your debts. Then you have to stay current if you want to keep the car. Remember, because the vehicle loan was not discharged in the bankruptcy, if you miss payments, the lender can repossess the car, sell it at auction and come after you for any deficiency. So talk to your attorney and think carefully about the risks before reaffirming your vehicle loan.
Redeem
You can keep your vehicle if you redeem by paying to the secured creditor the vehicle’s current replacement value (what you would pay a retail dealer for a vehicle of comparable age and condition). I mention this in passing because in over 30 years of filing Chapter 7’s, I have never had a client who redeemed a motor vehicle. Why? Given the price of motor vehicles these days, it takes thousands of dollars to redeem and most of my clients would not have filed bankruptcy if they had a spare $5-10,000 of cash laying around. But, in theory, you could do it.
Conclusion
Usually “straight bankruptcy”—Chapter 7—works best way if your vehicle situation is pretty straightforward: you either want to surrender a vehicle, or else you want to hang onto it. Chapter 7 gives you these options.
Posted by Kevin on May 23, 2017 under Bankruptcy Blog |
In a Chapter 7 bankruptcy, the trustee sells non-exempt assets to pay your creditors. The Code provides certain dollar limit exemptions for your home, car, household items and the like. The problem for some debtors is that Chapter 7 may not exempt all their assets. Chapter 13 is often an excellent way to keep possessions that are not “exempt”—which are worth too much or have too much equity so that their value exceeds the allowed exemption, or that simply don’t fit within any available exemption.
Options Other Than Chapter 13
If you want to protect possessions which are not exempt, you may have some choices besides Chapter 13.
You could just go ahead and file a Chapter 7 case and surrender the non-exempt asset to the trustee. This may be a sensible choice if that asset is something you don’t really need, such as equipment or inventory from a business that you’ve closed. Surrendering an asset under Chapter 7 may also make sense if you have “priority” debts that you want and need to be paid—such as recent income taxes or back child support—which the Chapter 7 trustee would pay with the proceeds of sale of your surrendered asset(s), ahead of the other debts.
There are also asset protection techniques—such as selling or encumbering those assets before filing the bankruptcy, or negotiating payment terms with the Chapter 7 trustee —which are delicate procedures beyond the scope of this blog post.
Chapter 13 Non-Exempt Asset Protection
Under Chapter 13 you can keep that asset by paying over time for the privilege of keeping it. Your attorney simply calculates your Chapter 13 plan so that your creditors receive as much as they would have received if you would have surrendered that asset to a Chapter 7 trustee.
For example, if you own a free and clear vehicle worth $3,000 more than the applicable exemption, you would pay that amount into your plan (in addition to amounts being paid to secured creditors such as back payments on your mortgage). You would have 3 to 5 years—the usual span of a Chapter 13 case—throughout which time you’d be protected from your creditors. Your asset-protection payments are spread out over this length of time, making it relatively easy and predictable to pay.
It gets better-in some Chapter 13s you can retain your non-exempt assets without paying anything more to your creditors than if you did not have any assets to protect. If you owe recent income taxes and/or back support payments (or any other special “priority” debts which must be paid in full in a Chapter 13 case), you can use these debts to your advantage. Since in a Chapter 7 case such “priority” debts would be paid in full before other creditors would receive any proceeds of the sale of any surrendered assets, if the amount of such “priority” debts are more than the asset value you are seeking to protect, you may well only need to pay enough into your Chapter 13 case to pay off these “priority” debts.
This is in contrast to negotiating with a Chapter 7 trustee to pay to keep an asset, in which you would usually have less time to pay it and less predictability as to how much you’d have to pay.
Chapter 7 vs. Chapter 13 Asset Protection
Whether the asset(s) that you are protecting is worth the additional time and expense of a Chapter 13 case depends on the importance of that asset, and other factors. Generally, this is not a DIY project. You need to speak with competent bankruptcy counsel to review your options
Posted by Kevin on May 10, 2017 under Bankruptcy Blog |
When you’d like to favor certain important debts over others, often Chapter 13 makes this possible.
Using the Bankruptcy Laws to Your Advantage
One of the basic principles of bankruptcy is that you usually can’t favor one debt over your other debts. However, under the Bankruptcy Code, certain creditors are recognized to be legally different. For example, secured creditors have rights over your property that you’ve given as collateral, rights that unsecured creditors don’t have. Also, bankruptcy does not discharge (write off) certain debts. These include child support, many types of taxes and many student loans, and certain other debts. These can’t be discharged while most debts can.
Chapter 13 requires that you treat certain debts differently- and that can be to your advantage.
Here are two good examples.
Catching up on Your Mortgage Arrearage
The law highly favors residential mortgage debts, especially your primary mortgage. Why? The policy reason is that these lenders should be protected in bankruptcy to lessen their risks. Arguably this encourages more investment in the residential mortgage capital markets which makes mortgages more readily available to homeowners.
So, if you were behind on your home mortgage and wanted to keep the home, you’d have to catch up. That is referred to in the Chapter 13 context as paying the mortgage arrearage. You can’t escape doing so just because the home is worth less than the debt (as you often can with a vehicle loan).
In a Chapter 13, you have up to 60 months to pay your mortgage arrearage. In New Jersey, those payments are made to the trustee while you make your regular mortgage payments going forward directly to the lender or servicer. As long as you make these payments, the automatic stay remains in effect and your mortgage lender cannot file a foreclosure. Moreover, the lender cannot demand payments that exceed 1/60 of the arrearage (assuming a 5 year plan) and cannot add late or other fees.
Child Support Arrearage
Another kind of debt that is highly favored in the law is child support. As a result, if you get behind on support payments, the collection procedures that can be used against you are extremely aggressive. In New Jersey, you can go to jail, have your driver’s license suspended or have a professional license suspended.
Chapter 7 provides no direct help if you owe back support. The “automatic stay” that protects you from other creditors does not even apply to support debt under Chapter 7. This means that the aggressive collections can just continue; the bankruptcy filing has no effect on it.
But a Chapter 13 is very different. The “automatic stay” does protect you and your property from collection of the support arrearage. You ARE protected from support collections, as long as you follow some strict rules. After the Chapter 13 filing, you must pay ongoing regular support payments, and your Chapter 13 plan payments. In addition, you have to pay off the entire support arrearage before completing the case (up to 60 months).
