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Can bankruptcy help with my student loans?

Posted by Robert Weed / 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.

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.  

Great News

November 2022, the Biden Administration Turns Policy Upside Down

At least for some people, the government will now support your effort to discharge your student loans

 

 

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.

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, here. appellants-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. 

SummaryofKeyRecommendations_FINAL

UPDATE:  

November 2022, The Biden Administration opens the door to allow millions of people to discharge their student loans in bankruptcy.  

 

Bankruptcy, foreclosure, 1099-A and 1099-C

Posted by Robert Weed / in General Information About Bankruptcy Law / 31 comments

You don’t need to worry about getting a 1099-A.

If the bank took over your house in a foreclosure, either before or after filing a bankruptcy,  you will receive a copy of a 1099-A.  Form 1099-A is a form the mortgage company is required to file to show that they acquired your property.  It’s what the IRS calls an informational return–it just gives information to the IRS.

You should not receive a 1099-C, which is a cancellation of debt return.  You should not, but you might anyway.  You should not, because there are NO tax consequences for debts discharged in bankruptcy.  So you are NOT taxed on what they didn’t get at the foreclosure sale.   The bankruptcy protects you from that tax.  Here’s the link to the IRS website that says that.    http://www.irs.gov/newsroom/article/0,,id=174034,00.html.

If you get a 1099-C anyway , the IRS may later write to you and say, hey, you owe us another $XX,000.00 because of the debt cancellation.    If you get that letter from the IRS, you need to write them back and say this debt was discharged in bankruptcy.  Send them a copy of your papers.  I’ve always seen that work.   I can get you another copy of your bankruptcy discharge, if you lost yours.

(One thing I should add; I’m assuming your property is here in Virginia or another state that has similar mortgage laws.   If your property is in a state like California, where the mortgage company cannot chase you after a foreclosure, in certain circumstances, it would be really important to file your bankruptcy before the foreclosure sale, not after.)

So, here’s the summary.

Get a 1099-A.  Expect to get one; no need to do anything.

Get a 1099-C.  Should not get one, if you do, expect to hear from the IRS.

IRS letter saying, you owe us all this money.  Write back and say, no I don’t, because of the bankruptcy.  There is a deadline for replying, so make sure you do write back and send them the bankruptcy info.   They are easy to deal with if you reply quickly, but get stubborn if you ignore it until they try to collect the money,

(If you want, you can fill in the IRS Form for this.  Check the very first box, 1a.  Title 11 means “bankruptcy.” )

PS If you get a 1099-C after a bankruptcy, there should be an A in box 6.  That’s explained here Letter Codes for Box 6 of the 1099. 1099-C, A in box 6, tells the IRS there’s no tax on the cancellation because the cancellation was a bankruptcy.

After foreclosure, do mortgage companies keep trying to collect?

Posted by Robert Weed / in Weekly Posts / No comments yet

Many people ask me what happens if they walk away from the house and don’t file bankruptcy.  Do the big banks and mortgage companies really keep trying to collect the rest of their money?

Well in some states, about half, they can’t.  For example, they can’t in California and it’s very difficult in Pennsylvania.  But here in Virginia, they can and do.

The Federal Deposit Insurance keeps track of that.  (The FDIC’s job is to be sure the banks have money in the bank when you need your, so they keep track of how much the banks collect on, among other things, charged off loans.)  The FDIC reports the banks collected one billion on charged off mortgages in the first nine months of last year–up from about $750 million the year before.  Another $400 million was collected from charged off home equity loans.  And that’s how much they got–the amount they tried to get from people (who then woke up and filed bankruptcy to stop them) would be much higher.

The FDIC total does not include money collected by debt collectors who bought the foreclosed loans from the banks and then tracked down the former home owners.   What’s the bottom line?  In Virginia you can’t just give back the house and figure they will call it square.  Sooner or later, they will come after you for the rest of their money.

The bankruptcy cram-down and the Massachusetts election

Posted by Robert Weed / in Weekly Posts / No comments yet

Today’s New York Times blames the Democratic defeat in the Massachusetts Senate election, in part on the failure of the Obama administration to help people reduce their mortgages to save their homes.  Copy this link:  http://www.nytimes.com/2010/01/21/opinion/21thur1.html

That’s the bankruptcy cram-down that candidate Barack Obama promised to support, but President Obama orphaned.  Without Presidential support, it passed the House of Representatives, but died in the Senate.  Before the election, based on his promise, I personally told a hundred people that they had a chance to save their homes if Obama was elected.  (That was my advice as their lawyer; personally, I voted for the other guy.)  Well, Obama got elected but he didn’t help and they lost their homes.

(The Washington Post January 9, 2010, had an excellent article by Kevin Huffman explaining why action is still needed, or foreclosures will continue and housing values will continue to fall.   Otherwise,  “this crisis could go on for years, dragging down the chance of real economic recovery.”  http://www.washingtonpost.com/wp-dyn/content/article/2010/01/08/AR2010010803377.html)

Obama’s failure to push the bankruptcy cram-down had at least  small impact in Massachusetts, and maybe a big one.   The small impact was that probably ten thousand homes went to foreclosure there that could have been saved.  Now, that by itself does not reverse a hundred thousand vote defeat.

The big impact would have been evidence that Obama’s recovery plan had something in it for the ordinary family.

Businesses have always been allowed to use bankruptcy to reduce what’s owed on an apartment or warehouse or office building.  Allowing people to do the same to save their homes would show that Obama’s recovery plan included something for the middle class.  Voters might would have been more willing to trust him on health care and the other issues, if he had fought for them on something they could see and understand.

So far, the only thing people can see that Obama has done is to throw money at the banks.  And that wasn’t change;  Republicans would have, and did, do the same thing.    Think it was Harry Truman who said, if there’s a choice between a Republican and a Republican, the Republican will win most every time.   That’s what happened in Massachusetts.

Bankruptcy Outlook for 2010

Posted by Robert Weed / in General Information About Bankruptcy Law / 1 comment

New Years

There were 10,634 bankruptcy cases filed in the Alexandria bankruptcy court in 2009.  That broke the record of 9,769 set in 1997.

About 750 of those cases were my clients, and each had their own series of events that brought them to my office.

Many were directly related to the mortgage crisis.  (In the last half of 2007, it seemed like half the people I saw were either people who worked in real estate or the mortgage business, or people who had gotten into mortgages that never made any sense.)   But the recession itself has now passed the real estate crisis as the biggest economic cause of personal bankruptcies.   Layoffs, reduced hours and reduced pay, people who just can’t get work.

National studies show the biggest cause of filing bankruptcy, year after year, is medical.  Either medical bills, directly, or lost time from work for medical reasons, or medical expenses for other family members that ends up on the credit cards.

Divorce often goes hand in hand with bankruptcy, as the costs of living separately is almost always more than the cost of living together.  (Some of those divorces are causes by the financial stresses, and now and then I think a marriage could have been saved if people had come to see me sooner, instead of fighting with each other about their lack of money.)

Nationally, there were 1.4 million personal bankruptcies in 2009.  The American Bankruptcy institute expects the number to go higher in 2010.   The national record was set in 2005, when Congress passed the new bankruptcy law, which many people feared would make filing bankruptcy far more difficult.

The cities and counties served by the Alexandria VA bankruptcy court have a population of two million people–that’s about 1.5 million adults.  That 10,000 bankruptcies represents about 15,000 adults, since about half are husband and wife cases.  So pretty close to one out of every hundred adults in Northern Virginia filed for bankruptcy last year.  At that rate, about half of all Americans file bankruptcy at some point in their lives.

(Bankruptcyaction.com keeps an update on national statistics.  http://www.bankruptcyaction.com/USbankstats.htm)