Bankruptcy and Student Loans
Understanding the relationship between bankruptcy and student loans.
Student Loan Interest Rates May Increase Soon.
Congress is currently at war over student loan interest rates. Interest rates on Stafford loans will double soon if congress doesn’t act. But although no one seems to want this to happen, the parties can’t agree on what to do about it. This is an important issue for people considering bankruptcy because student loan debt is more difficult to avoid than other debts.
Even if You File Bankruptcy, You May Still Have to Repay Your Student Loans.
Bankruptcy discharges many of an individual’s outstanding debts. When a debt is discharged, the debtor does not have to repay it. However, bankruptcy law makes an exception for student loan debt. Student loan debt will only be discharged under special circumstances.
Section 523(a)(8) of the US Bankruptcy Code provides:
(8) unless excepting such debt from discharge under this paragraph would
impose an undue hardship on the debtor and the debtor’s dependents,
for–(A)(i)
an educational benefit overpayment or loan made, insured, or guaranteed
by a governmental unit, or made under any program funded in whole or in
part by a governmental unit or nonprofit institution; or(ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or
(B) any other educational loan that is a qualified education loan, as
defined in section 221(d)(1) of the Internal Revenue Code of 1986,
incurred by a debtor who is an individual;
This section means that student loans will only be discharged when requiring the individual to repay them would impose an undue hardship on the debtor or the debtor’s dependents. The question then is – what counts as an “undue hardship”?
There is no statutory definition for “undue hardship.” Courts have had to define the term themselves, and different jurisdictions have developed different hardship standards. Generally, courts look at factors such as the finances available to the debtor as they are filing bankruptcy, the debtors’ likely future earnings, and the financial needs of the debtor’s family, among other things. In New York, courts follow the test set out in Brunner v. New York State Higher Education Services Corp., 831 F.2d 395 (2d Cir. 1987). In this case the court asked three questions. First, would requiring the debtor to repay the student loan debts put the debtor, or the debtor’s dependents, below a minimal standard of living? Second, is this financial situation likely to persist for the rest of the loan repayment period? Third, has the debtor made good faith efforts to repay the loans? A New York court is only likely to discharge a student loan debt if these questions are answered in the affirmative.
While the factors to be considered may vary from one jurisdiction to another, courts generally agree that the hardship must be “undue” – that is, beyond “ordinary” or “garden variety” hardship. The point is that student loans will only be discharged under extraordinary circumstances.
If you have questions about student loans, bankruptcy, or other legal issues, the Law Firm of Vaughn, Weber & Prakope, PLLC is here to help. Call us at (516) 858-2620 to set up a free consultation.
Bankruptcy Exemptions
INTRODUCTION TO BANKRUPTCY EXEMPTIONS: FILING BANKRUPTCY DOES NOT MEAN YOU WILL LOSE EVERYTHING.
People are not required to forfeit all of their property when they file bankruptcy. Bankruptcy laws are intended to use individuals’ property to satisfy as many debts as is reasonably possible. The process is not intended to pauperize people. In order to avoid this result, bankruptcy law exempts certain property, up to a maximum value, from the bankruptcy estate. Property that is exempt from the estate is not forfeited in the bankruptcy. That means individuals may keep the exempt property even after they file bankruptcy, as long as the value of that property does not exceed the statutory limit. Federal law allows states to replace the federal exemption scheme with their own. New York allows individuals to choose between federal and state exemptions. Both federal and New York law essentially exempts the same types of property, but the two laws place different limits on each type. This means that people may be able to keep more of their property under one law rather than the other, depending on the types of property they own at the time they file bankruptcy.
Exempt property generally falls under five categories:
1. Basic Necessities and intimate personal items: This category includes personal items such as wedding rings, religious texts, domestic animals, a certain amount of cash, and a home (up to a maximum value).
2. Insurance policies and annuities: Payments individuals receive from insurance claims or annuities may be exempt. This means that after individuals file bankruptcy, they may still receive, for example, payments received under a life insurance plan taken out on a deceased spouse.
3. Motor Vehicles: Individuals may keep an automobile, as long as its value does not exceed a certain limit.
4. Benefits: Benefits such as social security, unemployment, veterans and disability payments may be exempt.
5. Property due under a money judgement: Individuals that receive payments following some lawsuits – such as personal injury, wrongful death, or others – may keep this income, up to a certain value limit.
Again, property exempted under these categories may not exceed certain values, though there may be exceptions and extensions in certain situations. The topic of bankruptcy exemptions is very complicated, and some issues are disputed even among experts. For more information on exemptions, see our earlier posts Changes to NY Bankruptcy Exemptions and Federal Bankruptcy Exemptions & NY .
If you have any questions about bankruptcy and would like to speak to an attorney, please call the Law Firm of Vaughn, Weber & Prakope, PLLC at (516) 858-2620 today to schedule a free consultation.
Bank of America Reduces Mortgages by Forgiving a Portion of the Principal.
For those of you who have not heard the breaking news, Bank of America has begun to forgive a portion of the principal on certain people’s mortgages. The NYT is reporting that “Bank of America has started sending letters to thousands of homeowners in the United States, offering to forgive a portion of the principal balance on their mortgages by an average of $150,000 each.” In a press release announcing the new practice, Bank of America claims to have developed this program under the terms of a settlement involving five major banks, the Federal Government, and 49 state attorneys general. This may mean that other banks will begin taking similar actions in the near future, but that remains to be seen.
In some instances, the reduced principal could end up lowering mortgage payments by approximately 30%. By forgiving a portion of the principle and lowering monthly payments, Bank of America is able to turn mortgages that would otherwise default into long-term performing mortgages. At the same time, this will allow many individuals to remain in their homes. Bank of America will be contacting about 200,000 potential candidates.
If you have any questions about mortgages, feel free to contact The Law Firm of Vaughn and Weber at (516) 858-2620 to speak with a foreclosure attorney. We would be happy to speak with you about this or other mortgage issues.
The May 7, 2012 New York Times article by Natasha Singer can be accessed by clicking here.
Foreclosure Settlement Conferences
What you should know about Foreclosure Settlement Conferences!
Residential foreclosure defendants in New York are entitled to a preliminary foreclosure settlement conference that may enable a speedier and less expensive way of resolving their foreclosure issue than would otherwise be possible. The law requiring the conference – New York Civil Practice Law and Rules section 3408 – is beneficial for foreclosure defendants in a number of ways.
- First, foreclosure settlement conferences are typically less expensive than trial. Thus a foreclosure settlement conference requirement alone is beneficial. But section 3408 does not simply require a conference – it also requires that parties engage in good-faith negotiation for the purpose of “determining whether the parties can reach a mutually agreeable resolution to help the defendant avoid losing his or her home.” Further, the law requires that parties periodically update the court about the negotiation, allowing courts to evaluate whether negotiations are made in good faith. It is rare that legislation requires parties to make good-faith efforts to reach a resolution that is favorable to the defendant, and foreclosure defendants should take advantage of this requirement.
- Additionally, the law requires that the settlement conference occur within sixty days of the day proof of service is filed with the court, unless the parties agree to conference on another date. This allows foreclosure defendants to enter negotiations quickly, avoiding long periods of uncertainty that would certainly add stress to an already stressful situation.
- The law also requires parties to bring certain documents to the conference, gives the court an opportunity to require additional documents, and forbids either party from charging the other for legal expenses associated with the conference. Foreclosure defendants may be able to use the conference period to find out information about their case that may otherwise only be obtained through a potentially expensive discovery process.
Foreclosure Attorneys in Nassau County
Of course, foreclosure defendants may appear at the conference with counsel, which may help them take full advantage of the procedure. The Law Firm of Vaughn, Weber & Prakope, PLLC routinely represents clients through all phases of a foreclosure action. If you are facing a foreclosure, and would like to speak with an attorney about a settlement conference, or any other step in the foreclosure process, feel free to call (516) 858-2620 today.
*Contributions to the research and preparation of this blog were made by Jason Mays, J.D. (awaiting admission in NYS).
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