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04

Apr 2010

Warrant In Debt – What You Need To Know

Posted by / in Before Bankruptcy, warrant in debt / 272 comments

Warrant In Debt

A warrant in debt is what they call it in Virginia when a creditor is suing you in General District Court.  Warrant makes it sound a little worse than it is, but it is bad enough.  It is not a criminal law problem—you can’t go to jail; but they are trying to make you pay.

A creditor wants to make you pay—and if nothing else works, they want to make you pay with a garnishment.  (A garnishment is a court order to your bank or your payroll office to send part of your money to the court instead.)

warrant in debt judge

When the judge asks, do you owe this money, say “Your honor, I want a trial”

In order to get a garnishment, a creditor first has to take you to court and win. Taking you to court starts with sending you court papers. Those papers are the “warrant in debt.”

(They have to sue you in Virginia if you live in Virginia.  Or where you first signed for the debt.  That’s in the FDCPA, a Federal law.  You should keep that in mind when you get threat letters from lawyers. A lawyer in Atlanta GA probably doesn’t come to Virginia to take people to court. A lawyer in Rockville MD probably does. A lawyer in Richmond VA does almost for sure.)

The way you get a warrant in debt is for the sheriff to come around and tape it to your door. The creditor will sometimes also mail you a copy. The warrant in debt will have a return date which is your first court date.  You can find that return date in the upper right hand corner.  (Where it says Hearing Date and Time.)

YOUR FIRST WARRANT IN DEBT COURT DATE

If you admit you owe the money or don’t show up on your first court date, they get a judgment. Ten days after the judgment, then they can get the garnishment.

(You have ten days to note your appeal; but to appeal you have to pay into court the amount of the judgment—that’s probably impossible for you to do.)

Around here, most people don’t show up, so they automatically plead guilty to owing the debt. Ignoring court papers is usually not a good idea.  Especially not in Virginia, where the judges don’t lose sleep over whether you understood what was happening.

(A lot of people call the lawyer for the creditor and ask, do I have to come to court.  And usually the answer to that is no—you don’t have to come to court.  And it’s true—you don’t have to come to court. It’s just if you don’t come to court you plead guilty and they can start garnishing you in ten days.)

Most people who do show up, just plead guilty.

The judge says, “do you owe this money?”

“Yes, but I can’t pay it right now.” Judge, “OK, you can discuss it with that lawyer after court.”

Do that, and you just pled guilty! The ONLY judge who cares about whether you can pay is a bankruptcy judge. Bankruptcy judges worry full time about whether you can pay, so the other judges don’t have to worry about it at all. And they don’t.

If you go on a warrant in debt, you should tell the judge you are not admitting you owe the money and you need time to talk about it with a lawyer. Some judges will really crowd you to just plead guilty, but if you stand your ground they can’t make you. “Your honor, I want a trial.”

“YOUR HONOR, I WANT A TRIAL. AND I WANT A BILL OF PARTICULARS.”

When the judge calls your name, you need to step up behind one of the podiums (the one the collection lawyer isn’t using) and claim your rights under Virginia law (and also the Constitution.) “Your Honor, I want and trial.  And I want a Bill of Particulars.” Your right to a trial is right there, on the Warrant in Debt form. See where it says,  To dispute this claim, you must appear on the return date for the judge to set another date for trial. That’s what you are doing. You are disputing the claim and asking the judge to set another date for trial.

Right under that is place on the form for the Judge to order a Bill of Particulars. The Bill of Particulars is their proof that you owe the money, you owe it to them, and how much you owe. Sometimes they include a lot of that with the warrant in debt. Sometimes they don’t. But either way, it’s worth asking again.

YOUR WARRANT IN DEBT TRIAL

If you show up for your first court date, don’t plead guilty and do ask for a trial, you’ll get a trial date a month or two later. At the trial you need to stop the creditor from proving that you owe the money.  So you should use that month or two to talk to a lawyer, get ready to fight them yourself, or maybe try to work out a payment schedule.

(If you want to work out a payment schedule, you want to show up for court and ask for a trial.  That gives the lawyer for the creditor the idea that you know a little about your rights—and so the lawyer has some reason to be fair to you.)

If you plan to fight them at the trial—with or without a lawyer—you need to first file your grounds of defense.  Your grounds of defense are the reasons you think you don’t owe the money.  At your first court date, the judge will give you a date for your grounds of defense.  Miss that, and, you just pled guilty.

(Virginia’s system makes it easy to plead guilty to owing the money.  Ignoring the first court date—you just pled guilty.  Showing up and admitting you owe the money—you just pled guilty.  Missing your grounds of defense deadline—oops, you just pled guilty.)

So, if you send in your grounds of defense, then you have the right to show up for trial and defend yourself.

The creditor’s lawyer probably appears in that court on hundreds or thousands of cases each year. You’re there for the first time. That gives you an idea your chances of winning without a lawyer are not all that good.

Still you have a better chance if you are being sued by a debt collector—somebody you never heard of like Asset Acceptance, NCO, CG Services, Cavalry Portfolio—rather than being sued by the company you dealt with, like Ford Motor Credit, Bank of America or Fairfax Hospital.  If you know how to object to their evidence and make them prove that they really own the debt, you have a chance of winning.  (Here’s my blog on how Leslie beat a warrant in debt.)

If this debt has bounced around from debt collector to debt collector, you might also win on the statute of limitations.  The statute of limitations means if they left you alone for too long, they are too late.  But they are only too late if you say so.  Statute of limitations is an affirmative defense—meaning you have to show up and argue it; the judge won’t raise it for you.  (And you’d have to put it in your grounds of defense.)

How long is the statute of limitations?  It depends.  The original creditor, especially a credit card company, probably will produce a notice they claim they sent you where you agree that the law of some state you’ve never been to controls the statute of limitations; and they picked that state because it has a long one.

A debt collector, however, may not have any kind of notice, so then you are protected by Virginia’s statute of limitations.  How long is that?  Maybe three years, maybe five.  (Sorry I can’t be more specific than that.)  It depends.

GETTING SUED IN THE WRONG COUNTY

One way to get some leverage on your creditor is if they sue you in the wrong county.  A debt collector—those guys like Asset Acceptance, NCO, CG Services, Cavalry Portfolio—they are required to sue you in the judicial district where you live.  (Or where you signed the contract; meaning where you financed the car, for example.)  In Northern Virginia, each county and Alexandria City is a judicial district.  (Except Loudoun and Fauquier share a district.)

An original creditor who uses a lawyer is bound by the same rules.  The have to sue you in your home county.

If you get sued in the wrong county, that’s a violation of the Federal Fair Debt Collection Practices Act. And you can sue them for violating your rights!

GETTING SUED BY CAPITAL ONE IN RICHMOND

Capital One sues nearly everybody in Richmond.  (Or sometimes Henrico.) They can get away with that, because they don’t use a lawyer.  However, you don’t have to just give up.  And you don’t have to leave Northern Virginia at 5:00 AM driving down I-95 to get to Richmond at 8:30, either.  On the back of the warrant in debt, lower left, it explains that you have the right to object to venue.  If you follow those instructions and say you can’t get to Richmond and ask the judge to please move it to your home county, the judge will nearly always do it.

Then they will show up several weeks later in your home county, with a lawyer.  And so you start from there.

WHAT TO DO WHEN YOU GET A WARRANT IN DEBT

You have some tough decisions.  If the debt is something that you owe—and that you can afford to pay—you should pay it off.  (No, they do not have to accept payment arrangements; by warrant-in-debt time you are way too late for that.)

If you don’t owe it—or are not sure—you should go to court, ask for a trial, and try to find a lawyer who will help with that kind of thing.  (If you Google “Virginia debt defense lawyer,” one Manassas law firm comes up.  Many lawyers who do this kind of work are members of the National Association of Consumer Advocates, and you can check their website here.)

When you go on your first court day, and you tell the judge you want a trial, you should also ask for a “bill of particulars.”  The bill of particulars is their writing proving that you do owe the money.  That will give you some idea about how strong or weak their evidence is.  If you then get a lawyer to help you, he will really want to study their bill of particulars.

If you owe the money but can’t pay, then it’s probably time to talk to a bankruptcy lawyer.  You can find out more about bankruptcy law in Virginia at this website.  I’m Virginia bankruptcy lawyer Robert Weed.

IF I LOSE IN COURT CAN I STILL FILE BANKRUPTCY?

You can still file bankruptcy on most debts even after your trial on the warrant in debt.  (You can’t file bankruptcy and discharge a debt for fraud–for example if they say proved you lied on your credit report, or stole the money.)

There are a couple reasons why its better to file the bankruptcy before.   One is, after bankruptcy your credit report will still show that you had a judgment against you.   That will make it a little harder to get back to good credit.

Second, the judgment may become a lien on your real estate.   (Less likely if you own the real estate as husband and wife.)  The bankruptcy may not be able to get the judgment off.  It depends.

Third, if you wait until after your warrant in debt court date and you get garnished, you may not be able to get that money back.  You sometimes can if you see a bankruptcy lawyer and file your bankruptcy fast enough.

So, if you are thinking about bankruptcy when you get a warrant in debt, its better to talk to a lawyer quickly.

Hope this is helpful.  Good luck.

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25

Mar 2010

After bankruptcy what if I don’t pay my second mortgage?

Posted by / in Chapter 7 Bankruptcy / 608 comments

After chapter 7 bankruptcy, I often advise my clients, just don’t pay the second mortgage.

Now, if you don’t file bankruptcy and stop paying the second mortgage, two things would happen.  They will call you day and night; and eventually they would sue you and garnish you.  Bankruptcy keeps them from doing either of those.

Will they foreclose you?  That’s the big question.    The second mortgage can sell your house to a new homeowner only if they pay off the first mortgage.  If the value of your house has dropped below what you owe on the first, that’s just a way for them to lose more money.  They are not going to do that.

Virginia Bankruptcy Lawyer Robert Weed

I often advise my clients, just don’t pay the second mortgage. This is a strategy that takes nerves of steel.

To put it another way, the second mortgage won’t kick you out of your house just to be mean.  They will only do it to make money.  If they can’t make money, they won’t do it.

So, what are they going to do?  They will wait patiently for you to keep paying the first, and hope the value comes back up (and the balance on the first drops) that at some point you have equity that they can grab.

So, if you follow this just-don’t-pay-the-second strategy, you know you will never have any equity in your house.  If you go to sell five years or twenty years down the road, the second will still be sitting there.   (With five or twenty years of interest and late fees.)

So when does this just-don’t-pay make sense?  Suppose you have five more years before your youngest is out of high school.  Once that’s done, you might want to move to a smaller place anyway.  Then you can stop paying the first mortgage too, and move out.  The bankruptcy still protects you from both of the mortgages.  (You’d have to keep paying the HOA until the first mortgage forecloses.)

Does this strategy hurt your credit?  It does and it doesn’t.  It doesn’t hurt your credit score, because that second mortgage will  just show bankruptcy and can’t show any late payments after that.  (For my clients, we check to be sure.)  But it does hurt your being able to buy again.

For loans like car loans–or interest rates on your credit cards–your credit score pretty much controls, so you’ll be able to get a care loan at a good rate.  Your score will be good, if you’ve built up new, good credit.

But to get a mortgage, a different rule applies.  The March 2, 2010 manual released by Fannie Mae, (link here https://www.efanniemae.com/sf/guides/ssg/sgpdf.jsp) says what you have to do to get an insured mortgage. You have to be two years after the bankruptcy (with extenuating circumstances), but you have to be three years after a foreclosure.   Even though there will not be a foreclosure on your credit report, there will be one on the land records, and a mortgage lender will check there, too.

So if you follow this just-don’t-pay-the-second strategy, you keep the house for three or five or seven years; then you have to plan to rent for three years or so.  Then you’d be able to buy again.

If real estate goes up a lot over the next ten years, you’d be better financially to move out of the house right after the bankruptcy, rent for three years right away, and then buy again.  (If real estate stays flat, then not being able to buy for ten years doesn’t lose you anything.)

But if you want to keep your children in the same school and the same house, just-don’t-pay-the-second is a good plan.

What if you want to keep this house long term?  One way to do that would be with a second mortgage relief Chapter 13.  See my website on that.  http://virginiasecondmortgagerelief.com/

Or, you can not pay the second for a couple years, save some money, and then offer them a cash settlement.  Say you owe $75,000 on the second mortgage, file chapter 7 bankruptcy, and pay them nothing for three years.   If the value of your house is still less than you owe on the first, and you offer them $7000 to call it even, they might agree.   If you move out, they get nothing.

That strategy takes nerves of steel.  And it works best if you go for several years of not paying them–you want them to get used to getting nothing, so your offer of 10 cents on the dollar looks good.  I’ve seen it work.

Here’s an example where Chase, after getting nothing for four years, offers to settle at $20,000 second mortgage for $2000.  And here’s an example of HSBC offering to settle as $126,000 second mortgage for $12,600.

Here’s an offer to settle at $28,500 for $4250.  My client filed bankruptcy in 2010–this offer came in 2014.

 

PS  In January 2015, Bank of America forgives the whole amount.

Ahmad filed bankruptcy with me in 2011.  He got the best possible deal–Bank of America offered to forgive the whole amount of his seocnd mortgage.

 We had a BOA home equity line of credit for around $33K that was included in our BK back in 2011. I received a letter today from BOA that they have agreed to forgive this amount and we don’t owe them a penny on that. I had a question will that show up in our credit and will it hurt our credit in any way? It took us few years to build our credit and get back up and we don’t want this to damage our credit but we are grateful that is being forgiven…..

Don’t worry, Ahmad, this will nto hit your credit.  and not have any tax consequences either.  And I’ll straighten it out if it does.

This nerves of steel strategy does not always work; but it works a lot.

 

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09

Mar 2010

After bankruptcy, what's this from Weltman, Weinberg & Reis? Or Bass and Associates

Posted by / in After Bankruptcy / 1 comment

If you buy furniture, appliances or jewelry on store credit, they have a right to get it back after your bankruptcy is over.  (Unless you keep paying, of course.)

In Virginia, and most states, that right is found in the Uniform Commercial Code. http://www.law.cornell.edu/ucc/9/overview.html.  That law–lawyers call it the UCC–also gives the bank the right to repossess your car if you stop making car payments.  http://www.law.cornell.edu/ucc/9/9-503.html.

The fact is, they are more likely to come after your car, if you stop paying, than to come after your big screen TV.  Two reasons for that.

First, the car is parked out on the street, where they can get to it.  Second, the market for used cars is a lot better than the market for used TV’s.

Still, if they want to, after bankruptcy they can file a legal paper, called a detinue in Virginia law, and ask you to turn over the TV, jewelry or whatever.   I’ve done twelve thousand bankruptcies, and I haven’t seen two dozen detinue.  I’ve seen two or three for jewelry worth more than five thousand dollars.  And the rest were filed mainly by USA Discounters, a furniture and appliance outfit located mainly near military bases.

OK, so who are Weltman, Weinberg & Reis?  This is a law firm that after bankruptcy, will write to you about something you bought at Best Buy or Kay Jewelry and a few other places.   They say they want you to call 800-837-6008 to arrange to turn back in their “collateral.”

You’ll notice they don’t even tell you what the “collateral”–the stuff–is.  That tells you the “collateral” isn’t really what they want.  They want you to call and offer them a payment.

Don’t do it.

My rule is this.  If they contact my clients with a list of what you bought and when you bought it, send that to me.  (Assuming I’m your bankruptcy lawyer.)  I’ll contact them and work something out.  That hardly ever happens.

As for their typical letter.  “We want our stuff back”–without telling you what it is.  Just toss those out.

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27

Feb 2010

I quit paying–how long after bankruptcy can I keep my house?

Posted by / in After Bankruptcy / 4 comments

Some people file bankruptcy just before the foreclosure .    They have given up trying to keep the house–just can’t afford it.  They want to get some time to save some money before they have to move.  They ask, how long do I have?

In Virginia, the short answer is at least three months.

When you file Chapter 7 bankruptcy, you are protected by the automatic stay.  A stay is a court order.  And the automatic stay is, automatic.  Everybody who is trying to take your money or property is automatically told to stop.    That includes the foreclosure.  http://en.wikipedia.org/wiki/Automatic_stay.

The foreclosure lawyers need to get permission from the bankruptcy judge to start the foreclosure again.  (This is called relief from the automatic stay–they will send you a copy of that court paper.)  Getting that permission from the judge will take them about six weeks.

Once they get permission it should take them five or six more weeks to put through the foreclosure sale. (Should is an important word in that sentence and we’ll come back to it.  Sometimes they take a lot longer.)

In Virginia the foreclosure  take effect on the date of foreclosure sale.   All your rights are gone.  (Some states give you months afterward to buy the house back.  Not here.)

Now you are a tenant without a lease in your own house.  (Somewhat better than a trespasser, but not much.)  Most people want to be out by that point.  That will be about three months after the  Chapter 7 bankruptcy was filed.

What about cash for keys?  If you are still in the house after the foreclosure sale, what happens next?  It partly depends on the new owner.  Sometimes the new owner will decide to buy your cooperation–to pay you cash for keys, to get you to move out promptly and leave the place clean.

You don’t have any legal right to cash for keys, but if the new owner thinks that’s the easiest way to go, you can sometimes get several thousand dollars.  Click here https://robertweed.com/resources/CashforKeys.pdf for s sample cash for keys letter.

What if I get a mean owner? If you get a mean new owner, they will evict you.  That’s a two step legal process.  First, they will file an unlawful detainer–a court paper saying you have to be out.  In Virginia they can do that in less than three weeks.   A couple weeks after that, if you are not gone, the sheriff will put you out.  Here’s how the Fairfax County sheriff’s office describes eviction.  http://www.fairfaxcounty.gov/sheriff/eviction.htm.

What if they don’t foreclose? I said earlier that they should foreclose you about six weeks after they get permission from the judge.  Fairly often it takes them longer; sometimes a whole lot longer.     

The main reason for that, I think, is that the foreclosure lawyers are overwhelmed. There are way more foreclosures today than there have ever been, and they are having trouble keeping up with the work.  So sometimes they don’t get to you for a while; and some people get lost in the shuffle.

A second reason can be the condo fees. Even after the bankruptcy you are still the owner until the foreclosure sale.   The condo fees are an after bankruptcy debt and you have to pay them.   If the bank thinks they’ll have a hard time selling your unit, they might rather let you pay the condo fees for the next six months, and then foreclose you when they think they could sell your condo quickly.

(Make no mistake, your condo association will sue you–fast–for those after bankruptcy condo fees.  The foreclosure crisis is really hurting the condo associations and they have no room in their budgets for being reasonable.)

With those two factors, I am sometimes seeing five or six months go by after the bankruptcy before the foreclosure sale.

How can I plan? Obviously planning is easier if you have a smaller family.  If you can get everything pretty much packed up, ready to move, you can keep living for free (except for the condo or HOA) for as long as they will let you.  Be ready to go when they actually set up a sale date; and wait to see if they offer you cash for keys.

With a bigger family, that’s harder.  Finding a place to move to will be harder and you have to pay more attention to things like school districts.  Of course, you don’t need me to tell you everything is harder when you have to take care of your kids;  you know that.

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23

Feb 2010

Your credit report after bankruptcy

Posted by / in After Bankruptcy / 16 comments

<h2>Your credit report after bankruptcy</h2>

Getting back to good credit is one of the three big reasons to file Chapter 7 bankruptcy.   (The other two are so your creditors can’t call you and so they can’t garnish you.)  Unfortunately,  probably half the people who go through bankruptcy don’t get their credit report fixed.

How should your credit report look?  In 1990, the Federal Trade Commission issued a staff commentary explaining what the credit bureaus had to do to meet the requirement that people’s credit reports be complete and accurate.  (UPDATE:  When the Consumer Finance Protection Bureau took over this area from the FTC, the FTC deleted their commentary.)

The Federal Trade Commission staff  said three things.

First, that a debt discharged in bankruptcy should show a zero balance.  ( “A consumer report may include an account that was discharged in bankruptcy (as well as the bankruptcy itself), as long as it reports a zero balance due to reflect the fact that the consumer is no longer liable for the discharged debt.” )

Second, that a debt discharged in bankruptcy should show a discharged in bankruptcy status.   (“Similarly, a consumer reporting agency may include delinquencies on debts discharged in bankruptcy in consumer reports, but must accurately note the status of the debt (e.g., discharged …”)

Third, that the credit bureaus need to stay on top the the creditors to make sure they send in the required updates–specifically to update past due accounts that are then included in bankruptcy.  (“A consumer reporting agency must employ reasonable procedures to keep its file current on past due accounts (e.g., by requiring its creditors to notify the credit bureau when a previously past due account has been paid or discharged in bankruptcy…”)

In spite of these three requirements, spelled out by the Federal Trade Commission, probably half the people who are discharged in a chapter 7 bankruptcy still have errors on their credit report.  It’s better than it was ten years ago, when probably seven out of ten people came out of bankruptcy with these kinds of errors.  But it still stinks.

The problem now is largely practices that were legalized by a class action lawsuit in California that was supposed to fix the problem.  This is the Terri White class action and it didn’t help much.  To settle the law suit, the credit bureaus agreed to stop things that had already been stopped.  And they were allowed to ignore smaller problems that are getting more and more common, now that they have an official ok.

The big problem, that had mostly stopped, was putting after bankruptcy “charge offs”–meaning you owe the money but aren’t paying–instead of “discharge,” meaning you don’t owe it any more.

Ten years ago, several major credit card issuers always reported charge off instead of discharge.  First USA, Bank One and Fleet were the worst, and the credit bureaus did nothing about it.

A handful of law firms around the country started suing them.   James L Manchee in Texas,  http://www.mancheelawfirm.com/, Kathy Cruz in Arkansas, http://cruzlaw.com/ and Charles Juntikka, in New York City http://www.cjalaw.com/ .  Jason Krumbein, http://www.krumbeinlaw.com/, and myself here in Virginia.

All three of those brands were taken over in big mergers.  First USA and Bank One became part of Chase.  Fleet was gobbled up by Bank of America.  The new owners of those credit card lines didn’t want the hassle.  By the time of judge in the Terri White case told the credit bureaus they needed to fix that problem, it had pretty much been fixed.

New problems were created.    The credit bureaus are not required to update accounts that have been sold.  HSBC, when they get notice of a bankruptcy, always “sells” their accounts.   (Who is buying bankruptcy accounts?)   Then they say–both HSBC and the credit bureaus–that they don’t have to show the account was discharged in the bankruptcy.  It just stays as a zombie account on your credit report.  You’ll notice this is the opposite of what the FTC said (although never enforced)–the the credit bureaus were supposed be sure the creditors told them when a past due account had been discharged in the bankruptcy.

The same rule applied to “minor” derogatories.   If the credit card is only 90 days past due, they can leave it as past due and never show the bankruptcy.

Even worse.  They can leave the bad credit sitting on your credit report if your account is closed.  More and more we are seeing bank and credit card companies just “close” your account when they get notice of the bankruptcy–and just park it on your credit, ignoring the fact that it was discharged by the bankruptcy.

What’s the lesson of all this.  When your bankruptcy is over, your credit report will probably not be right.  Unless you or your lawyers, check it, disputes it, and sues to protect your rights, it will look like some of your debts were missed by the bankruptcy.

That will drag down your credit score; and cause problems with future lenders, possible employers, and security clearance agents, who will want to know why this or that debt was not taken care of.

The bankruptcy is not really over until the credit report is right.

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18

Feb 2010

Can bankruptcy help with my student loans?

Posted by / in Chapter 7 Bankruptcy / 17 comments

If you read the law, it says we can get rid of the student loans in bankruptcy if we can show “undue hardship.”

“Undue hardship” doesn’t sound so bad. It is. What most bankruptcy judges take that to mean is there is absolutely no hope that you will ever make enough money to pay anything toward the student loans.  “Certainty of hopelessness” is what they want to see.

As long as you are young and in good health, you can’t prove undue hardship. Meaning you can’t get rid of student loans.

Can bankruptcy help with my student loans?  Only if you have certainty of hopelessness

In most bankruptcy courts, you can only get rid of student loans, if there is “certainty of hopelessness.” No chance that you will ever work again.

My recommendation, which I don’t like, is to put people into a Chapter 13 payment plan where you make a small to the bankruptcy court for five years.   The court sends that payment to the student loans. At the end of the five years the student loans are still there–bigger than ever–and you do it again.  

Maybe do that three or four or five times until we can get to the point where we can tell the judge there’s no hope of you making enough to pay much of anything and you have been paying under court supervision for fifteen or twenty years.  

At that point you should win, although plan B is another five year Chapter 13. Have I said I don’t like this? I don’t like it.   But especially for people with large “private” student loans, it can be your only hope of having a normal life.  (I like this a lot better for a married couple where only one has the student loan, so the other can do things like finance a car.)

(Michelle Singletary, consumer finance advisor, had a good article about this problem in the April 20, 2010 Washington Post.  She didn’t have any solution though.)

Before October 2005, the only government guaranteed and charitable student loans survived a bankruptcy.  Private student loans were like any other debt. I can see no good reason why Congress changed the law, but I do see a political reason: Rep. John Boehner, Republican Leader in the House of Representatives, always raises a lot of money from the student loan lenders–and passes it around to other Republicans.

These private student loans have a much higher interest rate than the government guaranteed student loans; and they do not offer the income sensitive payment plans that the government guaranteed loans do. If you get behind with them, they can wreck your life.  Thanks, Congressman Boehner.

PS A few bankruptcy judges have lightened up on the undue hardship requirement. That requirement goes back to a Ms Brunner, who tried to get rid of her student loans just one year after she finished grad school.  You can imagine the courts were not real sympathetic to her.

Especially because back in 1985, bankruptcy could get rid of your student loans like any other debt, if you had been in payment status for five years.  So you only needed to show that “certainty of hopelessness” is you wanted to use bankruptcy to get out of student loans in the first five years.

The five year rule is long gone, student loans are NEVER like a regular debt. But for most judges the “certainty of hopelessness” is still what you have to show.

Some judges are looking at that again, and saying an easier rule should apply now. The New York Times wrote about those judges, here. 

PPS  President Obama tried to change the Department of Education policy on student loans.  The Department to Education uses “loan servicers” to collect the student loans.  (Navient and Fedloan Servicing are the one I see the most.) Those servicers are the people who come to the bankruptcy court and argue, when people try to prove “undue hardship” to the Judge.  If nobody’s there arguing, then undue hardship should be easier to prove.  

The Obama White House asked The Department of Education to come up with a new policy.  Didn’t work.  

Department of Education came back with new instructions.  Same as the old instructions. They told the loan servicers to keep fighting the undue hardship cases.  The exact opposite of what the White House–and the bankruptcy lawyers–and you, probably–wanted.  

 

UPDATE  The Washington Post had a good article in August 2015, on the government’s income-driven repayment plans.  

MORE  If bankruptcy can’t get you out of student loans, can the student loans at least get you approved for bankruptcy on your other debts?  This case shows the few courts that have decided that, either way.  IRM 5.15.1.10 lists student loans as a necessary expense–if Federal and being paid.  (Before 11/17/2014 it referred to student loans “secured” by the Federal government.  Now it says, guaranteed by the federal government.  Since the bankrutpcy law is supposed to follow the IRS, that change should means something, but it’s not clear what.  The problem is in 707(b)(2)(A)(ii) “Notwithstanding any other provision of this clause, the monthly expenses of the debtor shall not include any payments for debts.”

UPDATE  The Washington Post has a good article about how the student loans collection agencies are allowed to garnish you, without first going to court.  

UPDATE  The Consumer Finance Protection Bureau has a lot of good info on student loans.  Their page on the Obama Public Service student loan forgiveness program is the best I’ve seen anywhere.  You can see it here.  They estimate that 25% of Americans work in occupations eligible for that program; and they think most don’t know it.  I’ve talked to a lot of people who don’t know they are eligible.  

UPDATE: This morning, heard a talk by Hon. Stephen St John, Chief Judge of the Bankruptcy Court here. He said, until the Supreme Court does something about it, the door to getting your student loans discharged in bankruptcy is “nailed shut.” You might consider moving to another part of the country, but here in the 4th Circuit it is impossible to win on a student loan case.

UPDATE: The College Republican Federation of Virginia (I was state chairman of that group, more than 40 years ago) posted this “Valentine.” Apparently it was first published February 2016 by the College Republican National Committee.

Can bankruptcy help with my student loans?

This “Valentine” was first published by the College Republican National Committee, in February 2016.

UPDATE:  Eugene Wedoff, a retired bankruptcy judge, took over the appeal, pro bono, of a Ms Conniff on a student loan in bankruptcy.  Ms Conniff is a school teacher in a poor county in Alabama; she has advanced degrees but has not been able to move into a position where the advanced degrees would mean more money; she has two children at home, and gets $500 a month in child support.

The bankruptcy court allowed her to get rid of the student loans in her bankruptcy, saying it was obvious she couldn’t pay them.  EMC appealed and the US District Court applied the “certainty of hopelessness” rule, and overruled the bankruptcy court.  Judge Wedoff, who is now Ms Conniff’s lawyer, was one of the best known bankruptcy judges in the country.  He has taken it to the 11th Circuit Court of Appeals. We’re hoping the Court of Appeals listens to him, and other judges start to lighten up on this, a little.  

You can read what Judge Wedoff said, hereappellants-brief-alexandra-elizabeth-conniff-wedoff

UPDATE:  May 2017, Congressman John Delaney (D-MD) and Congressman John Katco (R-NY) introduced a bill to allow student loans to be eliminated in bankruptcy, just like any other debts.  Their bill is H.R. 2366.  This is an important first step.

UPDATE:  June 2017. Bankruptcy Judge in Pennsylvania opens the door a little. He says it’s not necessary to show you can NEVER afford to pay the student loans—forever is a long time. Just that you can’t afford to pay for a “significant portion” of the repayment period on the loan. The student borrower in this case, Ms Price, was divorced with three small children.  The judge said it didn’t matter that maybe when the kids were grown she’d make enough money to start to pay.  Can’t pay now, can’t pay any time soon, and that’s all she needed to prove.  Bad News:  January 2018, the US District Court overturned this bankruptcy court decision.  Ms Price still has to pay her student loans.  What does this mean?  Even if you can persuade the bankruptcy judge, who has to listen to what you say and look you in the eye, the next judge, on appeal, just reads the papers and decides you lose. 

UPDATE: After November 2018, Can Bankruptcy Help with my Student Loans?

The results of the recent election give us some hope that Congress may change the law on student loans in the next couple years.  The top two Democrats on the key committee in the House of Representatives should be friendly.   I remember hearing each of them speak at past national meetings of the National Association of Consumer Bankruptcy Attorneys.  

UPDATE: For people in public service–meaning government or a hospital, mainly–the Consumer Finance Protection Bureau has published improved instructions on the Public Service Student Debt Relief.  Here.   Several December 2018 news articles talked about how poorly understood and badly run this program is.  Over 40,000 people have tried to qualify, and only 206 have been approved.  Here’s a great article from USA Today.

 I see four or five people a month I think are qualified who have never heard of it.

UPDATE: Can bankruptcy help with my student loans? February 2019.  I went to Capitol Hill with about two dozen bankruptcy lawyers from around the country, to support H.R. 770, by Congressman John Katco (R-NY) to allow student loans to be eliminated in bankruptcy, just like any other debts.  There’s some chance it passes the House of Representatives this year, although action in the Senate is doubtful.  Now that the Democrats control the House, our chances in committee are much better. And Rep. Katco is one of only five Republicans who got re-elected in a district Donald Trump lost in 2016.  I hope that means other Republicans will pay some attention to what he has to say.  Long term success likley depends on election a Democratic President in 2020.

UPDATE: American Bankruptcy Institute Calls for a Change.

Consumers picked up a key ally in the battle to restore the bankrutpcy discharge for student loans. A commission of the American Bankruptcy Institute issued strong recommendations on the side of people struggling with student loans they can’t pay. This is big news, because the ABI is dominated by “tall building lawyers” and bankruptcy judges, and is not usually friendly to consumers. You can read more here. 

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