Supreme Court denies Appeal on dischargeability issue of student loan debt

Last Monday, the Supreme Court decided it wouldn't consider an appeal from our very own Seventh Circuit by a man from Wisconsin who owes $260,000 in student loans from business and law school and was seeking to have the loans discharged in bankruptcy. 

The current test in place that determines whether student loans are dischargeable in bankruptcy is called the Brunner Test.  It basically says that student loans are not dischargeable in bankruptcy unless you can show an undue hardship.  Sounds easy right? Wrong.

Showing that your student loans present an undue hardship is nearly impossible in practice. 

This Brunner test adopted a standard for "undue hardship" requiring a three-part showing: (1) that the debtor cannot maintain, based on current income and expenses, a "minimal" standard of living for herself and her dependents if forced to repay the loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that the debtor has made good faith efforts to repay the loans.   In re Brunner, 46 B.R.752, 756 (S.D.N.Y. 1985).

Mark Tetzlaff, who filed a Chapter 7 Bankruptcy in 2012, was asking the court to use a less strict standard to determine the dischargeability of his student loans.  This test, known as "The Totality of Circumstances Test" and is arguably an easier test than the Brunner test.  

Either way, the Supreme Court refused to hear his appeal, leaving the issue partially unresolved.   For Mr. Tetzlaff, many will argue that he can still enter into a low Income Based Repayment (your IBR payment could be zero in some cases), leaving him with the ability to discharge his student loan debt over time, anyway.

Read more about it here. 

Divorce and Bankruptcy FAQ

It's no secret that divorce and bankruptcy go hand in hand.  Bankruptcy can be a good way to finalize your divorce and get rid of all of your debts that you incurred while married.  There are however some nuances to filing bankruptcy while in the process of getting divorced that you should consider.  I've put together a list of FAQ that I get asked often when discussing divorce and bankruptcy.

1. Am I liable for my spouse's credit card debt? 

Not usually.  Unless you specifically co-signed on the debt.  

2. What if my spouse files for bankruptcy, do I have to file too? 

Not necessarily.  If your debt is truly separate then only the person who has the debt in their name needs to file.  But if you have joint debt, if one person files the other person remains liable for the debt.  This is why it's recommended that you file one joint bankruptcy petition while still married to discharge ALL debt.  

3. Can we file one bankruptcy petition while married? 

Yes.  It's easier and cheaper to file one petition while you are still married.  You can be separated you just have to still be legally married.  Once you divorce you must file 2 separate bankruptcy petitions. 

4. What about child support? Can that be discharged in bankruptcy? 

A big fat NO. 

5. I owe $50,000 to my divorce attorney, can I include this debt in my bankruptcy? 

This is a tricky one.  If the attorney fees are YOUR fees and they are not associated with child support or child custody issues then you can probably discharge them in your case.  If you were assigned to pay your spouse's attorneys fees then you probably cannot discharge them in bankruptcy. 

6. My spouse and I both own our house together and have a mortgage on the home.  I don't want the home but my spouse does.  Can I file bankruptcy and get rid of my house? 

Sort of.  If you file for bankruptcy and list your home as as property to be surrendered, then the mortgage company can never come after you for a deficiency balance if it goes to foreclosure.  But you remain the legal owner of the home until your name is removed from the title in a sale.  Bankruptcy does not remove your name from the title of the home.  Instead, it relieves you of personal liability in paying the mortgage.  Your spouse can remain in the home and if they keep paying the mortgage they can keep the home.  This means that you should try to sell the home or refinance the property to remove your name from the title at a future date. 

7. My spouse and I owe taxes to the IRS.  Can we discharge those in bankruptcy?  

Maybe.  There are very specific rules to discharging IRS debt in bankruptcy.  See your local bankruptcy attorney to discuss them.  If you believe you did not incur the tax liability and your spouse only did you can try to contact the IRS for an innocent spouse form to try and get out of the debt obligation. 

Other issues that can have an impact on your bankruptcy case during a divorce are:

• dividing assets
• dividing retirement accounts
• alimony/child support payments
• assigning debt to the other party in your divorce decree
• who pays the divorce attorney fees

50 cent files for bankruptcy! Wait, what does that mean anyway?

Tip: don't show up to your 341 meeting wearing all your gold chains.

As you all have heard by now, Curtis James Jackson III (aka 50 cent) has filed for bankruptcy protection.  Many of the articles I've read online make it seem like he's broke and living on the streets.  But 50 cent filed for Chapter 11 Bankruptcy, a type of bankruptcy most regular people don't know much about.  Very long story short, he can keep assets and continue making money, he just has to pay back creditors according to a bankruptcy plan and most importantly, creditors have to wait!  This article from complex.com sort of explains it: "50 Cent Filing for Bankruptcy Does Not Mean He's Broke".

For most regular folks your bankruptcy options are usually a Chapter 7 or Chapter 13.  Either you have no assets and low income and you get rid of your unsecured debt in a Chapter 7, or you might have some assets and a big higher income and you repay some of your debt in a Chapter 13.  Read more about your choices here.

And just for fun here is a list of famous people who have filed for bankruptcy:

• Abe Lincoln
• Thomas Jefferson
• Walt Disney
• Henry Ford
• Larry King
• Donald Trump
• Mark Twain
• Burt Reynolds
• M.C. Hammer
• Cindy Lauper
• Mike Tyson
• Toni Braxton

and many more.

For many people bankruptcy is a necessary step to reorganize their lives after a financial set back.

US Department of Education issues advisory letter on student loans and bankruptcy!

If you know anything about bankruptcy and student loans, you know that they do not work well together.  Student loans are not dischargeable in either a Chapter 7 or Chapter 13 Bankruptcy unless you file an adversary proceeding and can show that the loans present an undue hardship on the Debtor.  The test called the "Brunner Test" is very difficult to pass unless a Debtor has a severe illness and no prospect of ever repaying the debts again.

The US Department of Education issued a letter today providing guidance to lenders when dealing with student loan discharge claims.  The letter reiterates how only a Debtor in an extreme situation should be issued a discharge of their student loans in bankruptcy.  Although the letter does direct student loan lenders to follow a two-step analysis to determine whether they should object to an attempt at discharging student loans in a bankruptcy case, the result is essentially the same: Student loans are extremely difficult to discharge in bankruptcy.

The two-step analysis suggested by the US Department of Education is as follows:

1. First a loan holder must evaluate a borrower's undue hardship claim and determine whether the holder believes the repayment would constitute an undue hardship according to the legal standard set by the Federal Courts.  (Essentially the Brunner test).  If the loan holder determines that there would be an undue hardship, they can consent and not oppose the discharge.  (Although they could still object at this point).

If the loan holder believes there is no undue hardship they then move on to step 2.

2. The loan holder should then weigh the cost of objecting to the undue hardship claim in court, with consenting to the discharge.

Long story short, this letter provides an analysis of student loan debt dischargeability and provides some guidance to lenders on how to approach adversary proceedings, but the takeaway is the same: Student loans are VERY difficult to discharge in bankruptcy.

It is also important to note that an adversary proceeding is often times a lengthy and expensive proceeding, and many Debtor can not afford to hire their bankruptcy attorney to litigate these matters.

The entire letter issued by the US Department of Education can be found here.

IS BANKRUPTCY RIGHT FOR YOU?

Deciding if you should file for bankruptcy is a tough decision.  Most people who find themselves in debt qualify for at least one type of consumer bankruptcy.  If you have over $10,000 of debt and are unable to pay your bills or are dealing with a foreclosure, wage garnishment or lawsuit you may want to consider filing for bankruptcy.  

Chapter 7 Bankruptcy

When you file Chapter 7 bankruptcy you eliminate your unsecured debt such as credit cards and medical bills.  Most of the time you can keep your home and car.  In order to qualify for Chapter 7 bankruptcy you cannot have substantial assets or earn over the median income in your county.  

Chapter 7 bankruptcy will stop a wage garnishment and lawsuits against you. 

Some debt is not eliminated in Chapter 7 such as student loans, secured mortgage debt, child support and alimony, parking tickets and tax debt.  

Many people qualify for Chapter 7 bankruptcy and can eliminate most of their debt.   Chapter 7 attorney fees range from $1,000-2,000 depending on your case.  The court filing fee is $335.00.   

Chapter 13 Bankruptcy

When you file Chapter 13 bankruptcy you file a  bankruptcy plan that pays back some of your debt over a 3 to 5 year period.  Many times, people who might not qualify for Chapter 7 due to income or assets, can file a Chapter 13 case and have a manageable payment for the life of the plan. 

Chapter 13 bankruptcy can include parking tickets and lift a license suspension, can void a second mortgage lien, and can include tax debts owed to the IRS or state. 

To qualify for Chapter 13 bankruptcy you must have some form of regular income, such as a regular job, child support, or a pension or social security. 

Chapter 13 fees are set by the court in this jurisdiction and are $4,000.00 plus the court filing fee of $310.00.  However many times you can have your case filed with little or no money down, depending on your situation. 

Call us today for a free consultation and we will help you determine which type of bankruptcy is right for you. 

BANK OF AMERICA, N. A. v. CAULKETT

Let's talk about today's Supreme Court decision in Bank of America, N.A. v. Caulkett.  First of all, it's pretty rare that the US Supreme Court actually talks about a real consumer bankruptcy case that affects consumer bankruptcy attorneys and their clients.  But this one actually discusses important issues that everyone who practices bankruptcy law should know. 

The facts of the case involved two Debtors who filed Chapter 7 and tried to void their second mortgage liens through bankruptcy.  Basically their homes were underwater and they had wholly unsecured second mortgages that they were looking to cancel in a Chapter 7.  In this jurisdiction everyone knows that you can't do that and I would never try.  But in other places like the Eleventh Circuit apparently, it had been allowed.  

This means that you would be allowed to file Chapter 7 bankruptcy and completely eliminate your second mortgage if the house was underwater!  I imagine I would be filing 10 bankruptcy cases a day if I had the power to do this in this jurisdiction!  

In this case, the Supreme Court held once and for all that:

"A debtor in a Chapter 7 bankruptcy proceeding may not void a junior mortgage lien under §506(d) when the debt owed on a senior mortgage lien exceeds the current value of the collateral if the creditor’s claim is both secured by a lien and allowed under §502 of the Bankruptcy Code." 

Most bankruptcy attorneys already knew this and it doesn't really cause much reaction in this jurisdiction. 

However, did you know that you can completely void a second mortgage in a Chapter 13 Bankruptcy? If your home is underwater and you owe more than the house is worth, you can file Chapter 13 and repay some of your unsecured debt for a period of 3-5 years.  If your second mortgage is wholly unsecured you can throw it in with the rest of your unsecured creditors and pay as little as 10% to your second mortgage.  At the end of your Chapter 13 plan the mortgage company is required to remove the lien!

This means that if you owe $50,000 on a second mortgage and your income and assets are low enough, you can potentially repay only $5,000 of that mortgage through your bankruptcy and eliminate the rest!

To qualify generally for a Chapter 13 to lien strip your second mortgage there are some rules: 

• You have to have income of some kind. 
• Your home must be underwater and the second mortgage has to be completely unsecured. 
• You have to have some sort of Comparative Market Analysis or proof of the property's value. 
• You have to qualify under the "means test" as a Debtor with no disposable income or very little disposable income. 
• You cannot have assets that exceed your exemptions. 

Call me today for a free consultation if you want to discuss a Chapter 7 or Chapter 13.  

You can read the entire Supreme Court Case here.