Posted by Kevin on January 28, 2018 under Bankruptcy Blog | 
A constant theme in consumer bankruptcies is that a fundamental purpose of bankruptcy is to give the honest but unfortunate debtor a fresh financial start.
The fresh start is effectuated, in part, by allowing a debtor to get a discharge of his or her debts. “Discharge” is the permanent legal write-off of debts. The law says that all debts get discharged, except those that fit specific exceptions.
Exceptions to Getting a Discharge
There are two types of exceptions to the discharge of your debts. The first excepts discharge as to specific debts (while the remainder of the debts are discharged). The second excepts discharge as to all of your debts.
1. Specific Debts Not Discharged
Many of my clients have a general understanding that certain debts may not be dischargeable. They are surprised , however, when they find out how many different debts are or may not be dischargeable. The Rules indicate that the debtor or any creditor may file an action relating to the dischargeablilty of a debt. However, in practical terms, these debts fall into 3 groups based on how the debtor and her attorney may decide to deal with with the issue of dischargeability during the course of the bankruptcy.
- debts such as unpaid child support are never dischargeable and, for the most part, no special action need be taken by either the creditor or debtor;
- debts including income taxes and student loans are dischargeable but only under certain conditions. Since the taxing authority and student loan holder will usually begin collection efforts upon the conclusion of the bankruptcy, the onus usually falls on the debtor to apply to the court for a determination relating to dischargeability; or
- debts incurred through misrepresentation or fraud are deemed dischargeable unless a creditor objects AND successfully proves the misrepresentation to the satisfaction of the court.
2. NO Debts Discharged
The second, less familiar set of exceptions is actually more dangerous. That’s because these doesn’t affect just a specific debt or two. Rather this set of exceptions affects your ability to receive a discharge of ANY of your debts whatsoever in a Chapter 7 case.
The following kinds of dishonesty could result in not being able to discharge your debts in a Chapter 7 case:
- Hiding or destroying assets during the year before filing bankruptcy
- Hiding or destroying assets after the bankruptcy case is filed
- Hiding, destroying, falsifying, or failing to keep records about your financial condition
- Failing to satisfactorily explain a loss of assets before the filing of bankruptcy
- Making a false oath.
Actions to deny discharge of all debts can be brought by a creditor, the trustee assigned to the case, or the United States Trustee’s office. A negative result is devastating to a debtor. At a seminar, I recall a judge referring to this type of denial of a general discharge as a death sentence for a debtor.
Conclusion
Most of the time, you’ll be able to discharge all the debts you expect to discharge. Furthermore, your right to an overall discharge of debts will very likely not be challenged. But if you have ANY reason for doubt about these, be sure to tell your bankruptcy lawyer. And do so right away, preferably early in your first meeting.
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 March 27, 2016 under Bankruptcy Blog |
The policy behind bankruptcy is to give an honest debtor a fresh start. The fresh start begins with the filing of the bankruptcy petition. By just filing, almost all attempts at collection of a debt are stopped by the automatic stay. The fresh start is completed when the debtor receives a discharge. A discharge means that the debt is cancelled, wiped out.
Not all debts are discharged, however. And a discharge does not mean, in certain circumstances, that a creditor cannot make some recovery. For example, in the case of a mortgage on your house, the bankruptcy discharge only applies to the debt. Say, you borrower $500,000 from the bank. You sign a note which is a promise to pay back the $500,000 with interest. That is the debt. And you sign a mortgage which is the collateral for the debt. The mortgage says that if you do not pay back the $500,000, the bank can take your house. The bankruptcy discharge knocks out the note, the debt, but not the mortgage. So, the lender can foreclose on the house and get what it is owed from the house. What if the house is only worth $300,000? Then, that is what the bank gets. The bank cannot come after you for the deficiency because the debt is discharged.
What debts are discharged in bankruptcy? Credit card debt, medical bills, personal loans without collateral, as stated above deficiencies on home mortgages but also deficiencies on car loans, most claims for injury based on negligence (car accidents, slip and fall, etc.), most judgments, business debts, guarantees, leases and older taxes for which you have filed a return which is not fraudulent, and the taxing authority has not filed a tax lien.
The Bankruptcy Code, however, does not discharge all debts. Some are dischargeable sometimes. Some are not dischargeable. For example, students loans are not usually dischargeable absent a showing of undue hardship. The burden is on the debtor to prove undue hardship which is not easy in New Jersey. Willful and malicious injury by the debtor to another, some debts incurred by fraud and/or dishonesty, and embezzlement may not be dischargeable, but the creditor must go to court to challenge the discharge. The bankruptcy judge makes the decision whether the debt is dischargeable in these cases.
Payroll and sales taxes are not dischargeable (called trust fund taxes). Other debts not dischargeable include income taxes recently incurred, domestic support obligations, criminal fines or restitution, injuries suffered when the debtor is intoxicated because of alcohol or drugs, post filing condo fees, and debts not put down in your schedules except in a no asset case.
So, if you are thinking about filing bankruptcy, you should speak first with an experienced lawyer so you can determine which of your debts may or may not be dischargeable.
Posted by Kevin on June 8, 2012 under Bankruptcy Blog |
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.
Posted by Kevin on October 5, 2011 under Bankruptcy Blog |
When the Code was changed back in the late 1970’s, a debtor could discharge a student loan if there was a hardship situation or if loan payments were due more than 5 years before the filing. Now, a debtor can only get a hardship discharge. I tell all my clients that you have to be in pretty bad shape with little or no prospects for a decent living to get a hardship discharge . Even then, it was iffy.
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