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 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).
