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Bankruptcy Basics

Posted by Kevin on October 3, 2017 under Bankruptcy Blog | Be the First to Comment

Over the last couple of years, this blog has dealt with many Chapter 7 and Chapter 13 issues.  Some simple, some complex.  Every once and awhile, however, it is good to go back to the basics.  So, in the next few blogs, that is what we will do.

We will begin with an overview.  Many people are skittish about filing bankruptcy.  Yes, they are in a bad financial situation.  Not enough money coming in, debts are mounting, creditor calls are becoming more than annoying, and maybe there are lawsuits.  In society, we are brought up to be responsible and honor our obligations.  It is part of being an adult.  For many, the thought of bankruptcy is equated with failure.   But I take a different point of view.  Bankruptcy should be looked as a vehicle for a new start, a fresh start.

Many people do not know this, but the right to file bankruptcy is in the Constitution.  Congress is given the right to establish uniform laws concerning bankruptcy.  The first bankruptcy law was adopted by Congress in 1800.  It was clearly pro-creditor.  There were subsequent bankruptcy acts in 1841, 1867, 1898 and 1938.

The next major revision was the Bankruptcy Reform Act of 1978, commonly referred to as the Bankruptcy Code.  The Bankruptcy Code marked a significant change in the point of view of bankruptcy laws.  It was decidedly more pro-debtor compared to prior law.   It allowed a vast majority of debtors to file Chapter 7  where debtors are not required to make cash payments to creditors and keep most, if not all, of their assets.

Creditor groups complained that the Bankruptcy Code was too pro-debtor and lobbied Congress for changes.  This led to minor revisions in the 1980’s and 1990’s.  The lobbying continued.  In 2005, Congress adopted the Bankruptcy Abuse Protection and Consumer Protection Act (BAPCPA).  Although this was a major overhaul of  many areas of the Bankruptcy Code, from a consumer’s point of view, BAPCPA tries to force more debtors into Chapter 13 where monthly payments must be made by the debtor for periods ranging from 36 months to 60 months.  All in all, BAPCPA has made the bankruptcy process more complex and more costly to a prospective debtor.

If there is anything that you should take from this blog, it is that bankruptcy is a right that you have under the Constitution of the United States.  It gives you an opportunity to deal with your debts and get a fresh start.



Plan for Success

Posted by Kevin on August 5, 2017 under Bankruptcy Blog | Be the First to Comment

Although the Great Recession started in December, 2007 and ended technically in June, 2009, economic growth has been sluggish through the 2016 election and even to this day.  Participation in the work place went from 66.4% in January, 2007 down to 62.5% in October, 2015.  That means that people lost their jobs and withdrew from the work force for extended periods of time for a myriad of reasons.

In July, 2017, the Department of Labor indicated that US employers added 209,000 jobs.  More importantly, wages are going up.  This is bringing many people back into the work force.

It is not surprising that many of the people who had been sitting on the sidelines for extended periods of time have accumulated significant debt over the past few years.  In the past, I would receive a steady stream of calls from people who were outsourced (or otherwise laid off) or downsized concerning lawsuits or threatened lawsuits, and garnishments from their creditors.  In the last few years, however, I get less such calls.  That does not mean that people have not accumulated debt.  It probably reflects certain policy decisions made by creditors about the viability of suing people when they are out of work and, therefore, judgment proof.

Once you get a job, however, you may not be judgment proof.  Granted, if you go from unemployment to a minimum wage job, you may not be subject to creditor harassment.  But, what if you were unemployed for a year or more because your job was outsourced.  You have education and skills that in the right job market, could translate into a sizeable salary.  In that case, if you get back into your field, it is only a matter of time before debt collectors will be in touch with you.

So what do you do?  Wait for the telephone call?  Or the summons and complaint to be delivered by the sheriff?   Probably, it would be better to be proactive.  At the least you should do a personal financial audit.  How much debt do you have?  Is it unsecured like credit cards or medical bills, or secured (collateral involved).  Is it student loan debt that may not be dischargeable in bankruptcy?  How much are you going to have from each paycheck after your monthly expenses to pay those back debts?  Are there areas where you can cut back?

When we deal with prospective clients, we try to tailor our advice to their specific economic situation.  Some may have defenses to creditor action so fighting a collection action in State court may be the way to go.  Others may find negotiation with specific creditors can get a payment plan or settlement at a reduced amount.  Some are better served by engaging a reputable creditor counseling agency.  Others may need the protection afforded by the Bankruptcy Code.

Congratulations.  The economy is getting better and you are back in the job market.  But, if you have accumulated debt over the last few years, have a plan to deal with it.


Student Loans- Bankruptcy Basics

Posted by Kevin on May 31, 2017 under Bankruptcy Blog | Comments are off for this article

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 ( which provides more options in dealing with your student loan debt.

Bankruptcy Filings Continue Down- Better Economy??

Posted by Kevin on March 10, 2013 under Bankruptcy Blog | Be the First to Comment

In May, 2012, I published a blog entitled “Bankruptcy Filings Down- Better Economy?.  My conclusion was that filings were down but the increased cost of filing bankruptcy  may have had more to do with the decrease in filings than the economy getting better.

Well, ten months have passed.  There has been a presidential election.  Certain segments of the economy are doing much better (like the stock market), others not so well (housing).  Filings are down in New Jersey17% from March 1, 2012 to February 28, 2013.   But does that mean that we have a better economy?

Maybe and maybe not.  A few days ago, the Labor Department announced that unemployment was 7.7%, the lowest since the meltdown/recession.  But is that an accurate number?   You see, the unemployment number goes down when employment goes up.  But, it also goes down when  people stop looking for work or take part time work instead of full time. If you consider the number of people who have dropped out the work force or who are working part time, the unemployment number (known as the U-6 unemployment number) is greater than 14%.  So, if you factor in the broader measure of employment (U-6), the economy is still struggling.

How do you apply that to number of bankruptcy filings.  While it is true that if you cannot afford the filing fee, you usually cannot afford bankruptcy, it is also true that if you don’t have any assets or income, creditors have nothing to go after.  So, if you can put up with a few unpleasant telephone calls, people can generally avoid their creditors.  As they say, you cannot get blood out of a stone.  So, why file?

Unless the US slips back into recession, real unemployment should go down eventually.  People will shift from government benefits to wage paying jobs. Rather than writing off your debts like in the old days (1980’s),  credit card companies, hospitals and even doctors are selling your debt for pennies on the dollar to hedge funds or other debt collection agencies.  Those guys do not go away.  First, you will get letters and calls.  Eventually, when they find out where you work, you will get judgments against you (if they do not have them already), and then wage garnishments.  Something to think about.

So, if you have been out of work for a year or more, and get a job- congratulations.  But if you also have judgments or owe lots of money and you get a  job, you may want to give serious thought to speaking with a reputable debt counselor or bankruptcy attorney.  Why?  Because at that time you have options.  However, if you want until your wages are garnished, your only recourse may be bankruptcy.   The automatic stay, which occurs when you file a bankruptcy petition, will stop a garnishment dead in its tracks.

Word to the wise.

Are Paying Debts a Moral Obligation?

Posted by Kevin on July 9, 2012 under Bankruptcy Blog | Be the First to Comment

Most experienced bankruptcy attorneys know that there is a moral consideration in filing bankruptcy.  We know that many clients wrestle with the idea of whether it is morally right for them to file.  Books are written about the bankruptcy filings of famous Americans through the years for the dual reasons of demonstrating that filing bankruptcy does not necessarily make you a bad person, and also to demonstrate the moral ambivalence that confronted these  famous people when they filed bankruptcy.

You could consider the choice whether or not to file bankruptcy to simply be a “business decision.” Merely a weighing of the costs and benefits of filing and not filing.   For many people, that is as far as it goes (and I do not have a problem with that).  After all, corporations of all sizes file “strategic bankruptcies” all the time. Their very smart and well-informed managers decide that bankruptcy is the best way to reduce debt and streamline their operations, so that the business can survive and hopefully thrive into the future.

And who doesn’t want to survive and thrive?

But for you, it may not be that cut and dry.  You consider yourself more than a business. More than a corporation. For you, the human costs and benefits have to be added into the equation.

For many people, the decision to file bankruptcy is more than a business decision.  For many, that’s where morality comes into the decision. We humans are moral creatures. That means that our important choices include the moral assessment of the situation.    If we don’t engage in the moral component of this choice, we may experience something akin to “buyer’s remorse”; that is, after the fact we look back and  say to ourselves, “why did I do that”?

So what do you need to do to make a good moral decision?

First, accept the choices that you made—good and bad, sensible and short-sighted, intentional and forced—and review the circumstances that got you where you are now. Accept that you made a series of legal commitments to pay your debts, consider how much choice you had at the time about them, and in hindsight what you could have done differently, if anything. Analyse honestly why are you now not able to keep those commitments?  Is it because you lost a job or because your spending habits, especially in the area of non-necessities,  are out of control?  By analyzing choices made, you are not only assessing whether to file bankruptcy, but you are putting yourself on the path not to repeat your mistakes.

Second, consider both the financial  costs and benefits of  bankruptcy versus the  moral costs and benefits of continuing to try to meet those financial commitments.  Yes, you can get my debts discharged.  But, how will your family, friends, co-workers view you in the future.?  Am you being an honest debtor or are you gaming the system?  Or will it be viewed that you are gaming the system? Do you have a realistic chance of successfully paying off your debts, and even if so, what would be the likely human costs while doing so?  And if you do not have a realistic chance, how do you weigh the benefit of putting up a good fight against the costs that come from just delaying the inevitable?

Third, recognize that you now have both the opportunity and obligation to make a good decision about whether to continue trying to meet those commitments. To just accept the status quo without facing the situation honestly and bravely is making a decision by default, which is likely neither your morally best nor practically wisest move.  In other words, you should control your destiny rather than destiny controlling  you.

Fourth, get advice so that you know your legal options. You cannot make decisions, whether business or mixed business and moral, without knowing the facts and the law. An experienced bankruptcy attorney not only knows the law, he or she knows what you are going through.  More importantly, an experienced bankruptcy attorney can guide you to bankruptcy alternatives if that makes sense for you.  You may have the best of all intentions, but with your hours at work cut back,  lots of debts, and bill collectors badgering you at work and home, bankruptcy is probably your best and only realistic alternative.  On the other hand, you may be a candidate for debt consolidation through a reputable non-profit debt counselor.  Or you may have enough equity in your home to get a second mortgage and consolidate your debts.  Finally, filing under Chapter 13, where you pay back a portion of your debt, may be economically feasible and fit into your notion of fairness and morality.  One size does not fit all.    An experienced bankruptcy attorney can put you in a position to make the right decision for you and your family.

Is Discharging a Student Loan Possible in Bankruptcy?

Posted by Kevin on June 8, 2012 under Bankruptcy Blog | Be the First to Comment

What does it take to write-off a student loan in bankruptcy? An “undue hardship.” And that is a very tough standard to meet.

When the 1978 Code was enacted, you could discharge a student loan 5 years after the first payment was due or for undue hardship.  By 1990, there was an outcry that the 5 year rule was too lenient.  It was increased to 7 years.  I remember that what would drive the judges crazy when, say, a  medical student, usually during his or her residency, would file a Chapter 7 and wipe out $200,000 of student loan debt, and then afterward pull in the big bucks.  Admittedly, this was egregious.  By the mid-90’s, there was talk that the time period would be increased to 10 years.  But Congress, through the Higher Education Amendments of 1998, decided to do away with the time element for discharge of student loans.  The Bankruptcy Code incorporated this amendment.  So, since 1998, undue hardship to the debtor and the debtor’s dependents is the only way to discharge a student loan.

Undue Hardship is not defined in the Code.  That means that the bankruptcy courts were required to decide, on a case by case basis,  what undue hardship means.  There have been hundreds of decisions relating to what constitutes an undue hardship.  Although there are some differences among regions of the country, the general consensus that to meet this “undue hardship” hurdle, you have to show that you meet three conditions:

1. Under your current income and expenses, if you were required to repay the student loan, you would be unable to maintain even a minimal standard of living.

2. This inability to maintain a minimal standard of living while repaying the student loan would likely stretch out over all or most of the loan repayment period.

3. You had made a meaningful effort at repaying the loan, or to qualify for appropriate forbearances, consolidations, and administrative payment-reduction programs.

The bottomline is that very few debtors will be able to get a student loan discharged. That means that even if you file bankruptcy, you will be required to pay off the student loan- no matter how long it takes.  Moreover, unlike some debts in which the burden is on the creditor to challenge the discharge of the debt, with a student loan the burden is on the borrower to establish “undue hardship” during the bankruptcy case.  Otherwise, no discharge and the debt survives your bankruptcy case.  As we said in the opening- a very tough standard.

How Come My Attorney Cannot Always Tell me Which of My Debts Will be Discharged under Chapter 7?

Posted by Kevin on June 4, 2012 under Bankruptcy Blog | Be the First to Comment

Most of the time your attorney will know which debts will be legally written off in your bankruptcy. But not always, for two reasons.

A couple of blogs ago I made the point that the discharge order entered on your behalf by the bankruptcy judge will write off all of your debts, EXCEPT for those types of debts which are on a list in Section 523 of the Bankruptcy Code. The most common ones on the list include:

a. most but not all taxes

b. debts incurred through fraud or misrepresentation, including recent cash advances and “luxury” purchases

c. debts which were not listed on the bankruptcy schedules on time in a case involving assets to be distributed to creditors

d. money owed because of embezzlement, larceny, or through other kinds of theft or fraud in a fiduciary relationship

e. child and spousal support

f. claims against you for intentional injury to another person or property

g. most but not all student loans

h. claims against you for causing injury or death to someone by driving while intoxicated (also applies to boating and flying)

These different types of debts each deserve a closer look, which I will do in upcoming blogs. But let’s go back to the question in today’s title. Most of the time your attorney can reliably tell you whether a particular debt will be discharged in your bankruptcy case. But sometimes he or she will not know because:

1. With some types of debts—the ones described in items b, d, and f of the list above—the debt is discharged unless that creditor raises an objection by a specific deadline (which is usually 60 days after your meeting with the trustee).  So the best your attorney can do is point out to you that you may have a problem.   He or she sometimes may know that reputation of a given creditor to object under similar facts- a rough risk assessment.  But whether the risk is high or low, with these types of debts neither your attorney nor you will know for sure whether that debt will be discharged until either the creditor objects or the deadline for objection passes without objection.

2. With the other types of debts—the ones described in items a, c, e, g, and h of the list above—at the beginning of the case sometimes either the facts are not sufficiently clear or how the law should be applied to the facts is not clear, or both. You might think that the attorney should get all the necessary facts before filing the case. But sometimes the facts are simply not available, the additional work to get them is not worth the cost, or there is no time to do so because of the need to file the case quickly. Add in the consideration that the bankruptcy statutes often use broad language that can be and is in fact interpreted differently by different judges. As a result, in these situations there is simply no absolute way to know at the start of the case whether a particular debt will be discharged.

Take as an example one of the types of debt listed—a claim against you for fraud or misrepresentation.  Since intent of the debtor and reliance by the creditor are issues that the court must consider, it is not clear cut whether a claim of fraud can stand up.  For example, if you fudge your income on a loan application, but the lender based the loan on the value of the collateral instead of your income, then the lender did not rely on your stated income.  No reliance, no fraud; therefore, the obligation is dischargeable.   But your attorney will not know this until discovery is conducted (and that’s only if the lender rep tells the truth.)  So you can see that in these “gray areas” your attorney may well not be able to tell you in advance whether that particular debt will be discharged.

When you are consulting with an attorney about a bankruptcy filing, it is important to give that attorney all pertinent facts about your debts.  Moreover, you should ask your attorney whether any of your debts may not be discharged.

Just got a Job, Think about Bankruptcy

Posted by Kevin on January 16, 2012 under Bankruptcy Blog | Be the First to Comment

Now, that my seem like a harsh title.  You may have spent an extended period on unemployment because of the prolonged economic downturn.  While you were on unemployment, you used up all your savings and went into debt.  You sent out hundreds of resumes and spent hours on the net looking for a job- even if it was for less than your prior jobs.  Things are now looking up.  You are back to work.  But, now is the time to be wary.

Read more of this article »

Bankruptcy Statistics

Posted by Kevin on January 9, 2012 under Bankruptcy Blog | Be the First to Comment

It appears that the economy is getting better.  On a national level, bankruptcy filings went from 132,173 in October, 2010 to 106,255 in October 2011.  This is a reduction of 19.6%.  In New Jersey, bankruptcy filings went from 3,511 to 2,995 over the same period of time.  That is a reduction of 14.7%.  Not as good as the national numbers, but still pretty good.

Now, does that mean the economy is getting better, or does it mean that people are so bad off that they don’t have enough money to file bankruptcy?

Read more of this article »

Saturday Night’s all right for fightin’- except in bankruptcy

Posted by Kevin on August 13, 2011 under Bankruptcy Blog | Be the First to Comment

The object of a consumer bankruptcy is to get a discharge of your debts.  That means that you do not have to pay them back.  The Code, however, has certain exceptions to discharge.  Among them is a debt for willful and malicious injury by the debtor to another person or the property of another person or entity.

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Car- Means Test

Posted by Kevin on July 16, 2011 under Bankruptcy Blog | Be the First to Comment

The 2005 Act, BAPCPA, requires that a debtor submit to a means test to determine eligibility for Chapter 7.  The means test was based on an IRS test to determine what part of income a taxpayer can pay on back taxes.

The means test has a two part test for motor vehicles.  The first is an ownership allowance.  The second is an operations allowance.  The ownership allowance gives the debtor a $496 deduction per vehicle per month no matter what you owe on it.  If your monthly payment is $200- you get $496.  If your monthly payment is $600- you get $496.  But what happens if you have your vehicle paid off?

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Chapter 13 Dismissal

Posted by Kevin on July 8, 2011 under Bankruptcy Blog | Be the First to Comment

In a Chapter 13, the debtor is limited to  $360,475 of unsecured debt.  Unsecured debt is debt where there is no collateral.  Like credit card debt.

However, in a Chapter 13, a debtor can strip off otherwise secured debt that is completely underwater.  For example, if your house is worth $300,000 and the first mortgage is for $350,000 and the second mortgage is for $100,000, the second mortgage is totally unsecured and could be “stripped off”.  When it is stripped off, it  becomes unsecured debt and must be added to other unsecured debt.

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Bankruptcy & Foreclosure- Related?

Posted by Kevin on February 22, 2011 under Bankruptcy Blog | Be the First to Comment

Of course, they are related.  People who cannot pay their mortgages are likely to be people who are having trouble paying other debt, like credit cards.

But, I am talking about strategy.  Some of the same arguments that are being used by the cutting edge foreclosure defense attorneys were actually used first by bankruptcy attorneys.

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