Wednesday, December 14, 2016

Student Loans: In and Out of Bankruptcy

The Wall Street Journal recently reported that approximately 40% of student loan borrowers are not making their payments. While student loans can often feel overwhelming and overly burdensome, not making payments can create even worse problems. Not making your student loan payments will adversely affect your credit. When you are late making a payment, creditors will report this behavior to the credit bureaus and it will lower your credit score. A lower credit score can result in difficulties in opening new lines of credit and higher interest rates when purchasing a home or car, etc. 

If you do not make your payments, the student loan companies have other ways of collection from you. Federal student loan companies have the ability to start garnishing your wages and bank accounts without a judgment. Private student loan companies do have to go to court to obtain a judgment, but they can also start garnishing your wages or bank accounts if you are delinquent. A garnishment allows a creditor to seize all the money in your bank account (up to the amount owed) or take a percentage of every paycheck until the debt is satisfied. This often can put even more of a financial strain on an individual than making the normal payments.  

Student loans also usually do not go away with bankruptcy. While bankruptcy can help get rid of your credit cards and medical debt, student loans will not be discharged unless you meet very specific circumstances. A bankruptcy attorney can review whether you might be able to discharge your student loans, but it does require a lot more expense than a traditional bankruptcy and it is often left to the discretion of a judge to determine whether you meet the necessary criteria to discharge. Right now the required criterion for discharging your student loan debt varies depending on where you live and is a very high burden.

If you do find yourself in a difficult situation, and cannot make your normal payments, there are options out there.

1.      Contact your lender and see what options are out there.

If you are in a temporary situation when you cannot make your payments, possibly due to any reason including loss of a job or a health issue, lenders will sometimes work with you. If you contact your lender and explain the situation, they may be able to give you a lower payment for a time period or be able to offer you a deferment or forbearance (where you stop making payments for a certain period of time). Often these options are at the discretion of the lender, but if you need some breathing room, it cannot hurt to ask. The benefit of being in a deferment or forbearance is that even though you are not making payments (or less than a full payment), your lender will still report your loan as current. This ensures your credit will not be negatively impacted by the reporting of a late payment or delinquency. The downside to lower payments or not paying for a time period is that it is usually only for a limited amount of time and your interest will still be accruing. When you get back to making your payments, the payment maybe higher or you might be paying for a longer period of time.

2.      There are various repayment options out there.

When your federal loans come due, your loan payments will automatically be based on a standard ten-year repayment plan. However, there are payment options for federal loans that spread out your payments over more years or base your payments on your income. Depending on what your monthly income is and when your federally guaranteed loans were taken out, you could qualify to have your student loan payments capped at 10%, 15% or 20% of your discretionary income. If your income is low enough, your payment could be $0/month. However, you do have to reapply for the income-driven programs every year and submit documentation of your current income so the payment can be recalculated. After payments for 20-25 years (depending on the plan) on an income-driven plan, the remaining balance is forgiven. The downside to these income based programs is that any remaining debt that is forgiven will be taxed as income. For more information on these options you can visit: or contact your student loan provider. Also note that for most repayment plans, you do have to consolidate your loans and that can take a few months.

While the income-driven plans are only for federal loans, some private lenders do have other options available. Again, if you are having trouble making your payments on your private student loans, your best course of action is contacting your lender and asking about other repayment options.

3.      If you work for a government entity or certain nonprofits, you may qualify for Public Service Loan Forgiveness (PSLF).

Under PSLF, if you work full time for a qualifying employer for ten years AND make 120 on-time monthly payments, the remaining balance of your federal loans will be forgiven. These payments are usually made in conjunction with one of the modified repayment plans offered by the student loan companies because the traditional repayment of student loans occurs over a ten-year period. The benefit for this program is that any remaining balance on your student loans that is forgiven under PSLF is not taxed.

4.      As a last resort, bankruptcy may help buy some time or help with other debt.

While you cannot easily discharge your student loans in bankruptcy, there are options under the bankruptcy code to help find a manageable payment. With income-driven plans, your payment is based on a percentage of your income. These are often the best options available and can really help those with substantial amounts of student loan debt. However, this option is usually not available to those with private student loans. Also, if you have to make substantial payments to other creditors, sometimes even the income-driven payments feel overwhelming. Bankruptcy is an option, but does help everyone.

A Chapter 7 might be an option for those who cannot pay their student loans because of a substantial amount of other debt. A Chapter 7 can help those who qualify wipe away other unsecured debt, such as medical bills and credit cards. A Chapter 7 can also allow you to walk away from a secured debt, such as a car or a house, without having to worry about any deficiency. There are numerous advantages to a Chapter 7, but also some negative affects as well. If you are experiencing substantial hardship due to significant debt and cannot make your student loan payments, then you should consult a bankruptcy attorney. For example, after a major medical procedure, often individuals have trouble handling their payments to the doctors and to the student loan companies. An attorney can help examine your situation and determine whether you could potential benefit from filing. An attorney will also help you determine whether you qualify for this options. 

If you have private student loans, and those lenders will not work with you, then you have an option of a Chapter 13. A Chapter 13 is a repayment plan over the course of three to five years. This options does require steady income during the course of the plan, but all creditors are required to participate in this repayment plan or they receive nothing during the course of the plan. Your plan payments are approved by the court, and the amount is based on your income and expenses that the court determines are reasonable. Your plan may pay unsecured creditors anywhere from 0% to 100%, it just depends on what your payments will be. Certain debts, such as tax debt, past due mortgage payments or arrearages on a car, must be paid during your plan. After your plan is complete, any of your unsecured debt (other than student loans and a few other limited exceptions), such as credit card, medical bills, payday loans, etc., will be discharged in accordance with your plan. Your student loans will remain, but the benefit of a Chapter 13 is that it provided you with time to find a better paying job or handle the rest of your debt without the risk of the student loans coming after you. There are various downsides to a Chapter 13. For example, the court will review your income during the course of the bankruptcy to determine if you could potentially pay more to creditors. Similarly, any increases in income or bonuses may be required to go to creditors if you are not paying them in full. For some people, a bankruptcy means the student loan companies are off their backs for a few years and that is enough reason for them. However, you should review all options available before considering bankruptcy to handle your student loans. Talk to a bankruptcy attorney if you believe bankruptcy might help your situation. The attorney will be able to help breakdown whether a bankruptcy might be beneficial in your situation.

There are many options out there for repayment and a lot of information. If you have any questions about what options apply to your situation, your lender is a great place to start. You also need to be carefully of the scams that try to take advantage of vulnerable and desperate debtors. There are many sites that look like legitimate sites or advertise settlements for student loan accounts or debt forgiveness. Often the offers that appear too good to be true are not real. If you are looking for real information about student loan and the repayment option, be sure you on the U.S. Department of Education’s website.

Is Bankruptcy for Me?

When I tell others outside the office that I am a bankruptcy attorney, they often volunteer that they either should look into bankruptcy or that bankruptcy just isn't for them.  It is always one extreme or another. The truth is that many people could use bankruptcy if they understood bankruptcy.

Many people fear bankruptcy because "someone might find out" that they filed.  Oh well, so they find out.  It is a public court filing, but so is divorce, collection law suits, foreclosure and other "reputation" events that occur.

Bankruptcy can be a tool to rid yourself of debt.  It is less known for the ability to repay some creditors over the course of the next three to five years.  Sometimes, you may need to restructure your payments on your cars, student loans, court ordered payments, IRS debt, personal loans, second mortgages, or investment properties.  Maybe the monthly payments are just too high and you need some relief from the amount being paid each month, even though you still want to keep the property. This can apply to furniture, computers, cars or any other secured debt.  Often, we find that people who did well financially a few years ago can barely hang on to what they have, but they still believe they can't file bankruptcy because they still make too much money.  It doesn't matter -- they can still file.

When someone wants to get rid of debt, we usually try to liquidate their assets and discharge all of their debts through Chapter 7 bankruptcy -- this simply means you want all of your debt to just go away (usually credit cards, charge cards, payday loans, title loans and medical bills).  You have given in to just throw your hands up in the air, give in to whatever needs to be done so that you can just start fresh all over again.  You can get your fresh start with Chapter 7 Bankruptcy.  There may be income limitations on how much you are permitted to earn to file Chapter 7.

If you make too much money to file Chapter 7, perhaps you want to get a new start with Chapter 13 bankruptcy.  There are many ways to reorganize your debt in Chapter 13.  Perhaps you want to repay everyone 100% of what they are owed, but you can't afford to do it the way they want you to do it, so Chapter 13 forces them to accept a court ordered plan over the next few years.  Perhaps you want to repay everyone, but you cannot afford to do so; a Chapter 13 may be in the mix for you.  Chapter 13 will permit you to repay some of your debt to your creditors based upon your income; creditors receive a portion of the debt owed to them, but the balance of it can be discharged if you make all your payments.  

Some of our clients pay 100% back to creditors. Others pay 90%, or 50%, or 10%, and then we even have what we call a 0% payout plan.  0% plans are Chapter 13 cases where you have some debt that is secured (cars and houses) or prioritized (taxes, child support arrears, and other government debt) over other unsecured debt (credit cards, charge cards and personal loans), and your plan pays the secured debt and the priority debt, but nothing to your unsecured creditors.  Yes, if you earn lots of extra money or you get a refund or inheritance over the next few years, you will probably have to pay those funds over to the Court to give to creditors that were otherwise going to be discharged.

Some cases we see are for people that are a few months or years behind on a mortgage, or a few months behind on a car payment.  Perhaps you just overspent and you can't catch up.

Bankruptcy Court cases are FAIR.  They are for those who need financial help -- this does not mean the Court pays you money, but it does give you relief from having to make payments.  They don't give you extra income or change your spending habits, but they do get rid of debt or allow you to stop collections so that you can restructure your payments.  The point is that you can't have your cake and eat it too.

Bankruptcy is for those with resolve and perseverance.  If you will do whatever it takes to start over, perhaps you should consider bankruptcy.  It is not just for the poor and unlucky.  If you cannot pay your bills, whatever they are, and you can't get out of the hole on your own, perhaps bankruptcy can help you.  We often tell prospective clients that they do not need bankruptcy, or that they have a variety of alternatives; it is not for everyone; it does not solve every financial problem.  Consider a free consultation with your soon to be favorite bankruptcy lawyer.  Call my office for a consultation at (703) 880-4881. 

Wednesday, August 4, 2010

Law Offices of Juan E. Milanes, PLLC - HOME

Law Offices of Juan E. Milanes, PLLC - HOME

Get a Fresh Start with Bankruptcy

I met with a prospective client today that had about $10,000.00 in credit card debt, another $10,000.00 in medical bills, $7,500.00 that was still due on a repossessed automobile, and a couple grand in student loans.  "I've had it" she told me.  "I need a fresh start!  I need to file bankruptcy. Please help."  

She was young.  Very young.  In the past, our clients have been quite elderly (70s and 80s), but not so young.  Most clients seem to be in their 30s and 40s, but rarely in their 20s.  Nonetheless, she needed help and she was looking in the right direction.  She knew what she needed and had succumbed to the idea of filing bankruptcy to start over.  Other than age, she is just like so many others that are out there.  We discussed the differences between Chapter 7 and Chapter 13.  She qualifies for Chapter 7 based on her income alone, and she doesn't own any real estate that she is seeking to keep or reaffirm, so there really was reason to discuss too much about a Chapter 13.

We sat and talked about 45 minutes.  I was not in a rush and neither was she.  She was nervous at first, but then became much more relaxed.  I try very hard not to be pushy with prospective clients.  I don't like those bossy lawyers that push you into doing something you aren't prepared to do.  So, we talked about how filing a Chapter 7 Petition for her would get rid of all her debts, except for the student loans, which are non-dischargeable (like debt owed to the IRS).  We walked through documents and information that we would need to begin the process.  I gave her every chance to ask questions and I did my best to be responsive in an educational way.

She seemed very happy that once she retains this office that she could send all the collection calls she gets to this office.  She also seemed very comfortable with the office after a few minutes.  My office is here to help people, not judge them or help them figure out how to beat the system, and we walked through that too.  She was happy.  I gave her some general bankruptcy information and a workbook to complete if she desires to move forward.

I feel good about this lady.  She has a strong head on her shoulders.  She knows what she needs to do and she is resolved to get it done.  Why is this important?!  Because so many people come to our office to learn about bankruptcy, but they really haven't decided it is what they want.  That's ok because at some point in their life, I believe they will return when they finally make that important decision.  We educate prospective clients in an effort to give something back, but also to obtain future business from them.  She was absolute in her opinion that she had to file.

She didn't have a lot of debt that could be discharged -- less than $30,000.00.  Nonetheless, bankruptcy could wipe out that debt and let her start over again.  Oftentimes, we have clients with $100,000.00 to $1 million in debt, so the amounts to get rid of are all over the field.

In any event, I hope this lady returns.  We can certainly help her and give her the fresh start she so badly told me she needed to obtain.  She left an impression on me.