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The Student Loan Crisis and Bankruptcy

in Bankruptcy

The United States is unique in the world in the way we handle bankruptcies.  We go to great lengths to keep both borrowers and lenders honest.  One of the flaws in our bankruptcy system is that bankruptcy can only discharge student loan debt in very extreme situations.  Generally speaking, if a lender knows that they have someone on the hook, they’ll often use that leverage to lend too much money, often at varying levels of interest.  This can cause problems in people’s finances because they often see easy, cheap money and get themselves overleveraged.  This is one of the reasons our student loan crisis has occurred. 

The reason bankruptcy is a good way to sort out the student loan debt crisis is that bankruptcy is a good way to determine those who can pay and those who can’t.  Our bankruptcy system has been functioning in its current state for more than a century and knows how to make sure that lenders and borrowers are treated fairly.  Bankruptcy is one of the most transparent systems in our entire legal process.  Cases are open, transparent and decided quickly, allowing both the debtor and the creditor access to a fair and swift process.  

The bankruptcy code already does a good job of determining who and can’t afford to pay something back and it certainly has a better grasp on the needs of the community than our elected leaders in congress. 

BANKRUPTCY KEEPS BORROWERS HONEST

Bankruptcy will always keep a borrower honest.  The hallmark of bankruptcy protection is truth.  If you seek the protection of the courts, you must tell the truth, the whole truth and nothing but the truth about your financial situation.  You must disclose ALL your income, assets and liabilities.  The court’s job is to ensure fairness.  You will always be left with enough to live a normal middle class existence in bankruptcy.  The trustee and the courts all but guarantee it. If you can afford it you can keep your car, home, household goods and even your retirement accounts.  What you can’t keep are luxuries like vacation homes, extravagant jewelry or collector cars. 

If a borrower makes more money than the typical household in their area, that borrower must file a Chapter 13 and pay back at least a portion, if not all of their debts. If they make less than the median income, they have a choice between a Chapter 7 or a Chapter 13 bankruptcy. 

BANKRUPTCY KEEPS LENDERS HONEST

This is harder for some people to understand, but indulge me.  Lenders are in the business to make money.  After all, that’s why you pay interest in a loan.  If there is a chance that a lender won’t get paid back, that lender is less likely to throw money around like a drunk sailor. If lenders know that they COULD lose their investment, lenders could ultimately be more selective about what loans they fund and the amounts that they’re willing to shell out.  

If student loans are more selective and offer less money, schools will have to lower tuition to meet the market.  Schools that don’t will dry up and die.  One of the reasons that college tuition has risen so sharply is the easy access to student loan money that has created a feeding frenzy amongst colleges looking to outdo one another and compete for your ever fatter loan check. Tuition has outpaced inflation for decades and where that money ultimately goes is lost on me. I have however seen extravagant marketing and insane amounts of construction on college campuses. It leads me to believe that there are ways to control costs at schools and if the money isn’t there to fill the coffers of colleges and universities they’ll be forced to cut back. 

Let’s be very honest.  I love my alma mater, The University of Georgia, and I want it to succeed but if students weren’t able to get their hands on so much money to begin with, tuition would cost less. Yes, some stadiums and arenas may not get built or renovated and perhaps the cafeterias would have to cut back on the gourmet meals, but students would still get a good education.  After all, doesn’t a Toyota get you to the same destination as a Lexus does, just for less money?

THE SOLUTION

If student loans were dischargeable in bankruptcy, lenders would only approve students who were going to schools that provided them good, sound education that would provide them with the opportunity to earn a solid living.  As someone who has practiced bankruptcy law for over a decade and filed thousands of cases, I often meet with people who owe tens of thousands of dollars in student loans that were taken out to attend a for profit college that didn’t lead them to any kind of gainful employment or employment advancement.

Prior to the 1990s, student loans were dischargeable in bankruptcy if a borrower had made 5 years worth of payments and met the qualifications.  I believe we need to find a common sense solution to the student loan crisis.  Americans want to pay for their education and many of them do. Having a way for those who can’t to eliminate their debts, legally, just makes good sense.  

What’s on your credit report after bankruptcy?

in Bankruptcy, Credit and Credit Cards

Your credit report is just what it says.  It’s basically a report card for your finances that lenders use to make decisions regarding your credit worthiness and ability to repay. 

Bankruptcy makes many of these debts go away all together and forbids collection efforts on any debt that isn’t included in the bankruptcy.  We often get the question, “what will my credit report look like after bankruptcy?”  While we can’t answer all your questions, especially about your credit score, what we can say is that your score is likely to go up, starting the very month you file and it should clean up a number of issues on your report. 

Every listed debt on your credit report has something called a trade line.  The trade line notates the following things:

  1. When your account was opened
  2. The balance on the account
  3. The type of loan (ie. mortgage, auto, revolving, etc.)
  4. The payment history on the loan
  5. It’s current status

 

WHAT SHOULD MY CREDIT REPORTS SAY AFTER I RECEIVE MY DISCHARGE?

  • First and foremost you will see the bankruptcy.  It will likely appear in a section called public records.  It may list who your attorney was and whether you completed your bankruptcy (ie. got a discharge or successfully completed your case) or whether it was dismissed for some reason (this means your debts have all come back).  
  • The trade lines for all revolving (credit cards) and other unsecured loans should have the payment history stopped and the balance should read $0.  If your completed your case, it will also say, “discharged in bankruptcy.”  It will likely remain like that for 6 years following the date it was discharged.  It signals that this debt used to exist but doesn’t anymore.  There should be no more mention of late payments or non payments.
  • If you have student loans,  you’ll see a line on the report for that as well.  Because student loans are not frequently discharged in bankruptcy your credit report will continue to show their status.  If you were current, it will show current and if you were not current, it will reflect that as well.  While many people find that student loan debt causes them many problems, one bright side is, if you start making your payments again after your bankruptcy discharge, you can use that payment history to rebuild your credit moving forward. 
  • The final list you often find are secure loans.  Secured loans are loans that involve collateral like an auto loan or mortgage.  These loans will often only show on your credit report if you sign what’s known as a reaffirmation agreement with the lender and the lender files it with the court.  While reaffirmation agreements are not required in most cases and are sometimes discouraged, they can help rebuild your credit if they are filed with the court and the creditor updates your credit report.  If you do not sign a reaffirmation agreement with the lender and you wish to retain the secured property you’re often allowed to just continue payments to the lender, but be aware.  Lenders often put up roadblocks to monitoring your payment progress by denying you access to your online account access.  You’ll need to contact your lender and see how they wish to proceed with your payments going forward.  You’ll also need to keep meticulous records of your payments to the lender.  

 

If all of this seems complicated, well, it is.  The attorneys at Harmon and Gorove are here to help you through all of this and we work tirelessly to get your finances back on track.  If you’re in need of bankruptcy assistance, contact us today for a free consultation to see how bankruptcy can help you achieve your financial goals. 

Escrow: The Forbearance Gotcha

in Bankruptcy, Credit and Credit Cards

Millions of people have applied for and received mortgage forbearances during the pandemic. It’s been a huge lifeline that has saved hundreds of thousands of homes from foreclosure.  There’s only one problem.  Once you stop making your mortgage payment, money stops going into your escrow account.  That leaves deficiencies in the account that pays your property taxes and your homeowners insurance.  

What’s an escrow

Most mortgage lenders require that you pay a portion of your monthly payment into what’s known as an escrow account.  Escrow accounts usually pay out for things like homeowners insurance premiums and property taxes.  Because those are things that have to be paid, the lender takes the money and sets it aside to make sure that it actually gets paid each year.  

Escrowed taxes after forbearance

At the end of your forbearance, whenever that may be, you will still be responsible for the payments you missed.  Some lenders are asking that the payments be made up in a lump sum while others are allowing the amount to be divided up over a period of months.  There’s simply no single way that says how something has to be handled.  There is no firm and solid rule yet. 

While the principal may not be due in one lump sum and could ultimately be spread out over years, one thing is certain. Skipped escrow payments will be due long before anything else is.  This could potentially add hundreds of dollars to payments each month when they do resume because lenders are allowed to recoup the escrow shortage over 12 months.  

Example: Your escrow is short $4,500 for the year.  If you make that up over the course of a year, that’s an extra $375 a month on top of your normal payment, not including any principal payments that must be added in.

Keep escrow in mind

The Covid emergency, coupled with numerous different terms laid out in mortgages, make the answer about what’s going to happen very complicated.  What makes it even worse is that the goal posts keep moving.  We don’t know what kind of legislative remedies are going to pop up in the future.  

The long and short of it is, be mindful of what’s happening to the escrow balance of your mortgage and ask questions now so you aren’t blindsided later.  

Finally, if uncertainty still exists and you’re financially able, set aside the escrow portion of your mortgage just in case you need to make up the balance quickly and if for some reason you don’t, at least you have a little bit of savings on hand for another emergency.  If you’re in trouble with your mortgage and need help, contact the attorneys at Harmon and Gorove.

Crushing Tax Penalties In Bankruptcy

in Bankruptcy

I often tell people that in the grand scheme of government bureaucracies, the scariest one isn’t the usual suspects.  Sure, some people think they need to worry about the FBI or the NSA…maybe even the DEA or the CIA, but they’re wrong.  

The scariest and most dangerous organization within the federal government isn’t one of those aforementioned groups (unless you’re a drug dealer or mafioso).  It’s the IRS.

The IRS has the ability to garnish your wages, put liens on your home and other property.  Seize your bank accounts and pile on tons of interest and penalties to unpaid taxes. Let’s be honest.  When you’re already having trouble paying the taxes, the penalties are just adding insult to injury.  

There seems to be a penalty for everything.  Failure to file in a timely manner, failure to prepay your taxes,  failure to be completely accurate.  All of these penalties add up quickly, oftentimes dwarfing the actual amount of the unpaid taxes themselves.  

The good news is, bankruptcy can not only eliminate your liability for certain taxes, it can wipe out the tax penalties as well.

Too good to be true…think again.

The rules for discharging tax penalties

Penalties for dischargeable taxes are dischargeable

A tax penalty is always tied to a particular filing year.  If the tax for that year is able to be discharged in bankruptcy, the penalties are dischargeable as well. 

The way this work is as follows:

  1. The return for that  year was due more than three years before the bankruptcy was filed. 
  2. The return was preferably filed on time but if it wasn’t, it’s been on file for at least two years.
  3. The tax for that year was assessed at least 240 days before the bankruptcy.

If you meet his formula, the tax is dischargeable and so is the penalty. 

A Penalty related to events more than three years old is dischargeable.

If the penalty is triggered by a failure that was more than three years old, the penalty is dischargeable.  It’s even dischargeable in cases where the tax for that year is not dischargable…even if you didn’t file the tax return on time.

Don’t believe me, see 11 U.S.C. 523(a)(7).

All tax penalties can be wiped out in a Chapter 13

Yep, that’s true.  All tax penalties are discharged by a Chapter 13. 

That’s a deal that’s almost too good to be true.  

While a Chapter 13 bankruptcy does require that you pay all priority taxes in full along with all the interest that accrued before you filed your case, in the end all the penalties are wiped out, even on the priority taxes.  

Lots of rules

Discharging tax debt is complicated.  That’s why so many bankruptcy attorneys are reluctant to do it, they just don’t know their way around the rules.  

We do. 

We get the tax transcripts and verify all the important dates and transactions. We follow up with your accountants and we work directly with the IRS and state department of revenue. 

When it comes to tax problems, get experienced legal help. Otherwise you may not be able to successfully discharge taxes and tax penalties.  This isn’t the time to go with the TV lawyers or the “$0 down” kooks.  Bring in the big guns and set yourself up for success.  Call us today if you find yourself in major trouble with taxes. 

Life…after bankruptcy

in Bankruptcy

Are you tied up in debt? Should you file bankruptcy? 

Is it better to live with this debt and keep making the minimums?

What’s going to happen to me if I file bankruptcy?

WHAT’S LIFE LIKE…AFTER BANKRUPTCY?

Every one of these are Good questions.  I applaud people who realize that debt and debt relief have consequences for the future. We’ve written about it before. People are scared of what they don’t know and we all know that you’ve heard all the horrible myths about bankruptcy.  

Now that we have looked at this we have to turn the question around:  what will life be like if you continue on as you’re doing now?

Spending your life in debt

Servicing debt cuts your options for the future.  Think about it.  A large portion of your paycheck is already spent before you even see the check. It doesn’t matter if it’s a credit card bill, a doctor bill, the light bill or a payday loan, you’re locked in.  

Not long ago, the government published a study that stated most Americans couldn’t even handle a $500 emergency without borrowing money.  Even more than that, you’re also likely not making provisions for your retirement because you’re spending all your money paying for the now.  

Lots of people tell me they don’t think they’ll ever retire. Some say it because they like what they do…but most can’t make ends meet without a job. What you don’t consider now is 1. You will get old (unless you drop dead) and the job choices you have will diminish the older you get.  The older you get, the less able you are to handle the rigor of a full time career. 

Beyond that, we all know that stress kills.  Study after study show the negative side effects of stress.  Jobs are stressful. Do you really want to spend your golden years scratching and clawing at a job just to get by? 

After bankruptcy

So, you pulled the trigger and made it out of debt.  

What now?

Here’s a list of the negative aspects of filing for bankruptcy.

  • Credit (at least in the short term) is more expensive
  • Bankruptcy will show on your credit report
  • If you rent some landlords may be uncomfortable
  • Some new employers will have issues. 

Time heals all wounds and that is true even of bankruptcy.  This needs to be weighed against the negatives of continuing in debt. 

Everyone always worries about their credit score but let’s be honest,  if you’re this deep in debt, it’s probably not great anyways.  The biggest thing is to look at your debt to income ratio. That gets better immediately.   Don’t believe me, just ask the CFPB. 

The Benefits of Bankruptcy

Bankruptcy might be the first step to improved financial health.  You can start with more financial alternatives and the chance to do things differently.

Bankruptcy may even be a step in better physical health. Stress takes an enormous physical toll on your body, not to mention the mental health implications.  Bankruptcy, ultimately wipes out that stress so people can go on living their lives.  Bankruptcy also enables you to save for the future.  It wipes clean all the things that were nickel and diming your paycheck to death and allows you to finally start building that nest egg to help you with the unexpected or to save for retirement. 

Cash for Keys

in Bankruptcy

Losing your home is never easy. No one thinks that one day, the home they’ve spent so much time and money trying to build, literally and figuratively, will have to be turned over due to often unforeseen and occasionally unfair reasons.  Millions of Americans experienced this during the 2008 financial crisis and now with Covid, the issue arises again.  The good news is, once you’ve dealt with the reality that your home will likely have to be turned over to the bank, you can look at options.  One of the best ones is called…cash for keys.  

When you’ve decided to walk away from a house you can no longer afford, don’t overlook the opportunity to be paid to move out.

Cash for keys started during the foreclosure crisis in 2008.  Banks that were often forced to foreclose were finding that the occupants of the house would often strip the house bare of anything of value.  We saw a house where even the kitchen cabinets and toilets had been taken out.  The banks who were foreclosing were having to take huge losses because of the amount of work prospective buyers were looking at having to do to get the house habitable again.  So…banks figured out a solution.  

The banks determined that it was advantageous to both them and the occupants to pay the former owners money to help them move and voluntarily surrender the house.  The former owner gets cash to help move and start over again and the bank gets the house on a schedule, with the property in good order.

Time = $$$

Typically, you see the banks are willing to give you more money the faster you get out.  Move out in two weeks and we’ll give you more than if you take two months.  

Why pay

All this said, why does the bank pay for quick possession?  That’s easy:  It costs less than having to get the former owner of the home tossed out by the authorities, it’s faster AND the money comes with strings.

Until the foreclosure actually goes through, you’re still the owner of the house and you have every right to live there.  You also have every right to take from the home you own whatever you want and sell it.  You could literally strip the toilets, cabinets, appliances, etc. out of the house and sell them to your neighbor (that happened). I actually encourage anyone who is thinking about walking away from their homes to to live there until the jig is up. When the banks actually do get ownership of the house, they often have to get a court order to get you out of the house.  

All of this takes time and time, as we well know, is money.  

More $$$ leads to better feelings

Better feelings leads to less damage to the property.  It’s faster, it’s cheaper and it usually leaves the house in much better condition for the bank to resell. In order to get the cash, the former owner will have to leave the house in good condition with all of the fixtures and agreed upon appliances in place.  

It also solves the problem that the former owner has…no cash.  It allows them to fund their move and it keeps the house in livable condition so the bank can make more money reselling the house.  

Let’s make a deal

If you’re facing foreclosure, don’t panic.  If you want to try to save your house, call us immediately.  Don’t wait until the day before the foreclosure to talk to a good bankruptcy lawyer.  It’s too late then.  

If you’re ready to walk away, still call us, you don’t want the bank to try to sue you for any arrearages or slap a massive tax debt on you after they get the house, sell it for nothing and “forgive” the rest of the loan (that can technically be considered income). 

If you want to save your house, we’ve got you covered. If you want to walk away, we have negotiated several cash for keys deals for our clients.  It may even be enough to pay off your bankruptcy, fund your move and leave some money in the pot for you.  

Either way, it’s a good idea to give us a call if you’re in a pickle.  We can help you settle the foreclosure issue once and for all and get you back on your feet.