Hello world! Please change me in Site Preferences -> This Category/Section -> Lower Description Bar

05

Aug 2020

November Elections Might Help Bankruptcy Law and Your Student Loans

Posted by / in General Information About Bankruptcy Law, Weekly Posts / No comments yet

Democratic Platform Promises Good News on Bankruptcy and Student Loans

Are you struggling with student loans you can’t pay? The Democratic Platform promises to help.

The platform of the 2020 Democratic National Convention says this: Democrats will restore the prior standard in bankruptcy law to allow borrowers with student loans to be able to discharge their debts in bankruptcy as a measure of last resort.

What’s that “prior standard?” That probably means a bankruptcy discharge can discharge student loans that have been in payment status for several years. (The required payment status was five years beginning 1976; increased to seven years in 1990.)

And I hope it means that private student loans are just regular debt.  Bankruptcy filed any time should discharge those. (That was the law on private student loans until 2005.)

So, if the Democrats have their way, if you are out of school, with no deferments, for seven years (maybe only five), then you can file bankruptcy to discharge your student loans.

What does this promise of future help mean to you now?

Should I Wait and See Election Results?

Suppose you have a credit card problem right now–and impossible student loans also hanging over you. If you file Chapter 7 bankruptcy today, you can’t file Chapter 7 again for eight years. So if there’s a new law, you’d have a very tough time taking advantage of it.

Can you hold on until after the election? November 3, 2020 is election day this year. That will decide if a Democrat is elected President. It will also decide if Democrats take control of the United States Senate. (It might hinge on a Georgia runoff January 5, 2021.) Democrats likely need control of the Senate to deliver on this student loan promise.

Election day

Election day is November 3, 2020

After the Election, Expect More Delay

The new President and new Congress come into office next January. But I doubt they get started on bankruptcy law and student loans right away. The pandemic and economic crisis will keep them busy. My own guess: I’d expect to see changes in the bankruptcy law affecting student loans taking effect by July 2022. That’s more than a year and a half after the election.

Can’t Wait that Long? Consider Chapter 13

If you can’t handle, or outrun, your debts until summer of 2022, you can protect yourself with a Chapter 13.

A Chapter 13 bankruptcy is a payment plan through the bankruptcy court. You have to pay “all you can afford” for three years–or sometimes five years. “All you can afford” puts you on a tight budget; but not as tight as a garnishment for 25% of your after-tax pay. (If you have a security clearance, filing Chapter 13 can protect your clearance. Going late on your debts can put your clearance in jeopardy.)

Here’s a big advantage of Chapter 13: You can drop out of Chapter 13 at any time. You’d plan to drop out when a new law allows you to discharge your student loans in a Chapter 7. If the law doesn’t change, you’d likely want to see the Chapter 13 through to the end.

Conclusion

Are your credit cards out of control? Are you in danger of getting garnished now? Do you also have a student loan problem?

Maybe filing Chapter 13 now is a good plan. You can set up small payments on the debts now. And be able to take advantage of a new law on student loans when it’s available.

Student loans can keep you in poverty

Now, bankruptcy is almost no help with impossible student loans.

Bankruptcy Law and Student Loans:  When Student Loans Became Special

Student loans now are in a special category that bankruptcy law can hardly touch.

Under the old, 1898 Bankruptcy Act, student loan debt was just another debt. You could clear in in bankruptcy just like credit cards, loans, medical bills. Starting in 1976, clearing student loans got tougher and tougher.

In 1976, a new law said that student loans had to be in repayment status five five years, before they could be discharged.  (Excerpt for undue hardship.) The current bankruptcy code was passed in 1978, kept that five years.  In 1990, it was stretch out to seven years. In 1998, the seven years was gone.  You could only clear student loans based on “undue hardship.” And undue hardship basically means paralyzed, never work again.

In 2005, private student loans received the same special status of government and charitable student loans. That’s where we are today.

During the presidential primary season, Sen. Elizabeth Warren called for the Federal government to just forgive them all. The Democratic platform doesn’t go nearly that far.  Probably a Democratic majority in the Senate won’t do that either.

Please select the social network you want to share this page with:

23

Nov 2013

Taxes, short sale, and bankruptcy!

Posted by / in General Information About Bankruptcy Law, Weekly Posts / No comments yet

The tax break on short sales is due to expire on December 31, 2013.

Since 2007, Congress has waived the debt forgiveness tax when a homeowner does a short sale. This tax break was put in place at the beginning of the housing crisis and set to expire at the end of 2012.  Congress extended it for one more year, to 2013.  But the Washington Post reports  it looks like it won’t be extended again.

Here’s the background.  The basic tax rule is that debt forgiveness counts as income–and is taxed as income.  If somebody cancels your debt–like in a short sale–you get a debt cancellation 1099-c.  And you have to pay taxes on that “debt cancellation income.”

Short sale can lead to taxes on debt forgiveness income.

Cancellation of debt is “income.” And the income tax is a tax on income. So a short sale can lead to tax on that debt foregiveness income.

You can fight that.  If you show the IRS that the lender never would have gotten the money anyway, then you defeat the tax.  The IRS explains that here.

One way to show that is to file bankruptcy.  Another way is to fill in this form.  A third was is to live in a state where the lender can never come after you for a deficiency after a foreclosure.   That’s the law in California, for example.  But not here in Virginia.

Do you need to get out of a house where you owe way more than it’s worth?  Most people who do would rather do a short sale than a bankruptcy.  And if that’s your only problem, most bankruptcy lawyers would agree.  Until now.

Now you have to worry about being hit for taxes on the amount of money the sale is “short.”  If it’s a little bit, the tax won’t be much.  But if you are short fifty or seventy five thousand dollars–and there are still homes around Northern Virginia that far underwater–the tax could be a big problem.

You should talk to a tax professional (not just listen to a real estate agent) about the tax consequences of doing a short sale.  And if your tax adviser is not real confident you are ok under IRS Form 982, you should consider bankruptcy.

PS  If you have a second mortgage, you also need to worry about whether the second mortgage is forgiving your deficiency–or are they just allowing to short sale to go through, but planning to sue you later.  That happens a lot–I explain why here.

 

Please select the social network you want to share this page with:

NORTHERN VIRGINIA BANKRUPTCY LAW OFFICES