| Brooks Cotten | 0 Comments | Student Debt

Reorganizing Student Loans

There is more outstanding student loan debt in the United States today than there is credit card debt. Today, excessive credit card debt is being made worse by exploding student loan debt. The situation is likely to continue, because acquiring a higher education is increasingly important to landing a good job in a competitive environment. The cost of that education is skyrocketing, and it is easy to borrow student loan money before you are sure that you will have the ability to repay those loans.

A common misperception is that you can’t do anything about student loans in bankruptcy. For one thing, the bankruptcy code does provide for the possibility of a “hardship discharge” in Chapter 7. However, a hardship discharge is available only under extremely limited circumstances, and even then, it requires expensive litigation. Thus, as a practical matter, unless you are old or in terrible shape, you probably won’t qualify, and should not waste time thinking about discharging your student loans without payment.

Even so, you may be able to substantially reduce your student loan payments during the five- year term of a Chapter 13. In the Chapter 13, you can make lower payments to get around the short term pinch. At the conclusion of the plan, your other debt will be wiped out. Then, you will only owe the unpaid portion of the student loan. In this way, you can get out of danger from an immediate disaster, and give yourself several years to develop a long-term solution, usually by making more money in a higher paying job as the result of acquiring your education.

Attorneys Brooks Cotten and Gina Karrh have over 30 years experience in helping people with their financial situations. Call us today at 678-519-4143. 

| Brooks Cotten | 0 Comments | Student Debt

Hardship Discharge of Student Loans

The amount of student loan debt now exceeds outstanding credit card debt in the United States. This is not surprising because acquiring a higher education is perceived to be necessary to landing a job in a competitive environment. Further, it is easier to borrow for a student loan than it is to borrow for other purposes, since unlike other types of loans, neither a job nor a co-signer may be needed. Moreover, the government often guarantees repayment of student loans, and it is not easy to obtain a hardship discharge of student loans in bankruptcy.

Even so, it is not strictly true that you can never do anything about student loans in bankruptcy. For example, you can certainly pay, or partially pay, a student loan in Chapter 13 under the protection of the Bankruptcy Court. However, any unpaid portion will not be discharged in the Chapter 13. Otherwise, the Bankruptcy Code provides for the possibility of wiping these debts out without payment only by obtaining a “hardship discharge”.

A hardship discharge is available only under extremely limited circumstances. Thus, you should not expect to file for a hardship discharge casually. A responsible lawyer would only recommend that route in circumstances where you have a reasonable chance for success. Furthermore, you should expect it to be expensive litigation, and for it to involve substantial time and effort on your part to comply with discovery demands and other trial preparation.

In order to obtain a hardship discharge, the Debtor has the burden of proving three things under the governing Brunner standards. First, you have to prove that you cannot maintain a minimal standard of living for yourself and your dependents if you are forced to repay these loans. Second, you also have to prove that this state of affairs is likely to continue for a significant portion of the repayment period. Third, you also have to prove that you have made a good faith effort to repay the loan.

This is a very high burden, and even homeless veterans have a hard time winning on this type of action. The easier and more cost effective way to deal with the problem is usually to call the student loan lender to explore forbearance or other available programs. If your loan is a federal loan, you may be able to explore options such as income based repayment. That option holds out the possibility of loan forgiveness if you make all required payments for many years, and if you comply with ongoing income verification requirements. State and private lenders would need to be contacted directly for any similar options that they might have.

Bankruptcy attorneys Brooks Cotten and Gina Karrh have over 30 years combined experience in helping people with their financial problems. Call us today at 678-519-4143 to discuss your particular situation. 

| Brooks Cotten | 0 Comments | Bankruptcy Law

Will I Lose My House If I File Bankruptcy?

In Chapter 7, the Court is not interested in taking and selling property except to the extent that it has equity in it… that is, to the extent that it is worth more than what you owe on it. Thus, the value of your property is very important. You are allowed to protect (“exempt”) equity in your residence up to $21,500.00 per spouse. You may also be able to exempt equity in real estate that you do not live in, but the amount of your allowable exemptions is less in that case.

There is not one definitive way to measure “value”, but an excellent starting point is the “fair market value” listed on your property tax bill. You can telephone the county tax assessor for that information, or you can look it up online. “Equity” does not include the amount of any liens on the property, including first or second mortgages, tax liens, or reverse mortgages. In addition, the general rule of thumb is that about 10% of the fair market value of property is excluded from what counts as your “equity” because it would cost about 10% of the value of property to sell it though a realtor.

Even though many debtors own real estate, the vast majority of Chapter 7’s are “no asset” cases where nothing is lost or surrendered. If you think you might have substantial equity in any property, you need to bring that up to the lawyer before you file. That is the way to avoid surprises. If you might lose property in Chapter 7 that you don’t want to lose, then Chapter 13 may be your best option. We can help you evaluate that with a high degree of confidence. 

CAN’T I JUST LEAVE THE HOUSE OUT OF THE CASE?

No. But that does not mean that you will lose the property. For example, even though mortgages are listed (made known) in both Chapters 7 and 13, unless you choose to surrender the property, you continue to pay the mortgage directly on your own as those payments come due in the future.

In Chapter 7, you list the mortgage (and all other secured debt), regardless of your “intentions” with regard to what you want to keep. If you are “reaffirming” a secured debt, that is, keeping the property and continuing to pay the debt on it, then you list it, and indicate that it is your intention to keep it. In Chapter 7 you can’t force creditors to accept your intentions if you are behind on the payments, and as noted above, the Trustee has real power over property if there is equity in it beyond what you are allowed to “exempt”. Safety in Chapter 7 requires that you make your questions or concerns clear to the lawyer.

HOW ARE MORTGAGES TREATED IN CHAPTER 13?

Chapter 13 is often filed to stop foreclosures where you are behind on the mortgage, and it is also used where you might lose the property in Chapter 7 if you have a lot of equity in it. In Chapter 13, most mortgages are paid directly, and not through the plan. In the usual case, the debtor makes mortgage payments after filing in the regular amount on the regular due date. Thus, only the “arrearage” (amount behind as of the date of bankruptcy) is paid by the Trustee (not by you directly) “through the plan”. The Chapter 13 Trustee will catch up the “arrearage” by paying the mortgage holder over time with your “plan payments”.

WHAT HAPPENS IF I FALL BEHIND ON MORTGAGE PAYMENTS AFTER I FILE CHAPTER 13?

If your regular mortgage payments fall behind after you file your case, your mortgage lender may file a motion requesting “relief from the automatic stay”. “Relief from the Automatic Stay” only affects the collateral (the house), but the rest of the Chapter 13 continues, and is not subject to dismissal on this type of motion. In a “Motion for Relief from the Automatic Stay”, the creditor is asking the court to remove the protection that it initially provides… usually to permit foreclosure. A hearing is assigned. It is usually resolved in your favor (without foreclosure) if you catch up, or if you pay in part of the default and come to a mutual agreement with the lender (negotiated by your lawyer) to allow you to catch up the rest of the default over a period of months. It is important to assist the lawyer to reach the best result in these situations.

WHAT HAPPENS TO MY HOUSE IF MY CHAPTER 13 IS DISMISSED?

If a Chapter 13 is dismissed, you lose the protection of the bankruptcy court, but you do not lose any property to the court. Your relationships with your creditors simply become governed by state law as they were before you filed. To the extent that any of your debts have been paid through the plan, your creditors must give you credit for those payments having been made.

CAN I REDUCE MY MORTGAGE PAYMENTS BY FILING BANKRUPTCY?

The bankruptcy court can’t reduce payments on your first mortgage under present law.
However, sometimes you can “strip” a second mortgage (remove the lien and treat the debt as unsecured) where the value of the property is less than the amount owed on the first mortgage.
In Chapter 13, you have to complete your plan successfully before a second mortgage is permanently “stripped”. In both chapter 7 and in chapter 13, this is a changing area of the law. While “lien-stripping” can dramatically help your situation, but it is not automatic, and should be dealt with cautiously.

Of course, even a first mortgage can be reduced by “modification”. This is basically a mutual agreement between you and the mortgage holder to change your note. Modifications during a Chapter 13 are not rare. They do require court approval however, because how much you pay one creditor usually affects how other creditors will be paid.

This information is intended to be general. Please call us at 678-519-4143 to discuss your particular situation with one of our lawyers.