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My Student Loan Debt is unmanageable. Can I discharge it through bankruptcy?

May 12, 2011 by

Prior to October 7, 1998, student loan debt that had been in repayment for more than seven years from the date of bankruptcy filing was dischargeable. That seven year provision was eliminated with the bankruptcy law change in 1998. Student loans are now non-dischargeable under Title 11 U.S.C. Section 523 (a)(8) of the U.S. Bankruptcy Code unless a case of undue hardship exists.

It is very hard to qualify for the undue hardship provision. Most courts only grant a petition for undue hardship if the debtor is elderly, has high medical costs, and supports at least one dependent.

For those debtors who do not qualify for the undue hardship provision, there is one other option for discharging student loan debts. A new option for repaying student loan debt was established alongside the College Cost Reduction and Access Act of 2007. The Act created the Public Service Loan Forgiveness Program, in which public service workers can make student loan payments for ten years, at which point the remaining principle and interest will be fully discharged. Better yet, the amount of payment for ten years will be income-contingent or income-based. The program extends to a broad number of public service jobs including, government, military, police, fire, non-profit employees, public school teachers, and social workers, just to name a few.

Not all student loans qualify for this program. However, if the debtor’s loans do not qualify, they may be able to consolidate into a qualifying loan.

Another issue with this program is that it may create forgiveness of indebtedness income which may be taxed by the IRS. It is still unclear whether or not the IRS will exempt this program from income tax by 2017, when the first loans under this program will be forgiven.

To find out more information about the Public Service Loan Forgiveness Program, you should visit http://www.finaid.org/loans/publicservice.phtml or http://loanconsolidation.ed.gov/ or contact the Department of Education at 1-800-557-7372.

 

[UPDATE:  New student loan forgiveness programs have been added since this article was written.  Do some internet searching on “student loan forgiveness” to find out what is available.]

Filed Under: Costs Of Bankruptcy, Most Popular

What does a “discharge” in bankruptcy mean?

May 12, 2011 by

One of the reasons people file bankruptcy is to get a “discharge” of their debt. A discharge is a court order which states that you do not have to pay the debts. Some debts cannot be discharged. For example, you cannot discharge debts for:

most taxes (however, income taxes for which a return has been on file for a long time can, in some circumstances, be discharged);
child support or alimony;
student loans;
court fines and criminal restitution; and
personal injury caused by driving drunk or under the influence of drugs.

The discharge only applies to debts that arose before the date you filed. Anything that you incur after filing becomes your personal responsibility and is not discharged.

It is important to list all your property and debts in your bankruptcy schedules. If a debt is not listed, there is a possibility that it may not be considered for discharge.

You can only receive a chapter 7 discharge once every eight years.

Some creditors hold a secured claim (for example, the bank that holds the mortgage on your house or the loan company that has a lien on your car). You do not have to pay a secured claim if the debt is discharged, but if you wish to keep the property (the house or the car), you will need to keep making the payments.

Filed Under: Most Popular, Overview

I owe money to the IRS, can I discharge that when I file bankruptcy?

May 12, 2011 by

There answer to that question is that it depends.  There are two tests that have to be met.

1.  Has the return been on file long enough?

Were all of the related returns (i.e. all your tax returns for the tax years for which these taxes are owed) filed on a timely basis, and has it been 3 years since the last date such returns were due including all extensions? [Note: This means that for tax year 2006, the return with extension would be due Oct. 15th, 2007, and you’d have to wait three years from that date.  But if Oct 15th fell on a weekend, then the return would actually be due Oct 16th or 17th, and you’d have to wait three years from that date.  It’s very tricky. ]

2.  Has the amount owed to the IRS been settled/assessed for at least two years?

If your return was ever challenged or if the amount you owed to the IRS was ever unclear for any reason, then you must also wait at least two years from the time the amount owed to the IRS was finally assessed.

 

If the answer to both questions above is yes, then you can file bankruptcy and discharge the IRS debt. If the answer is no, you can either (a) wait until it has been a long enough period of time and then file bankruptcy, or (b) try an “Offer in Compromise” now and see what happens.

You can find info on Offers in Compromise on www.irs.gov. Or you can hire a tax dispute attorney, to help you try to negotiate a settlement with the IRS. If you decide to go this route, be sure you hire a reputable attorney or CPA and not one of the Fly-By-Night organizations that claim to be able to handle tax problems.

Something to keep in mind – If some of this tax debt is for monies withheld from employees’ paychecks that you failed to forward to the IRS, then the debt may not be dischargeable, and such debt may pierce through a corporation or LLC entity and attach personally to the business owner.

Filed Under: Advanced Topics, Most Popular

What is exempt property?

May 12, 2011 by

Exempt property is property that can not be taken from you by your creditors. In other words, it is property that is exempt from levy by creditors. Even hundreds of years ago in England, where our legal system was developed, debtors were able to keep the shirts on their backs. Today the law is more generous. The idea behind exemptions is that debtors get to keep the minimal property necessary to sustain themselves and their livelihoods. So, in most states, the list of exempt property includes things like clothing and personal effects, tools of the trade, one vehicle per driver (up to a limited dollar amount of value), your home (up to a limited dollar amount of value in most states), retirement accounts, and life insurance policies.

After hearing that list, most people say, “That covers everything I own. What kinds of things are not exempt?” Common examples of non-exempt property which CAN be taken by creditors include boats, RV’s additional real estate (i.e. real estate other than your homestead), stocks/bonds, ownership of a business, expensive jewelry and cash in a checking or savings account.

Each state has its own list of which types of property are on the list and what is on the list can vary greatly from state to state. And there are several exceptional types of debts, such as child support and taxes, that can allow creditors to reach even otherwise exempt property.

Also, if a debtor voluntarily places himself into bankruptcy, additional federal laws come into play which can vary what is exempt and what is not.

Filed Under: Most Popular, Will They Take My Stuff
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