It is one of the oddities of life:  a business can file for Chapter 11 and remain respectable, while those who file for Chapter 7 or 13 are ashamed and embarrassed.  Is bankruptcy really something to be embarrassed about, and is there a difference between a corporate bankruptcy and a personal one? The main reason [...]

Raj Sabhlok, ContributorEconomists fear we’re racing towards another trillion dollar bubble of student loan debt. But there is a simple way to stop the madness now, before we blow any more taxpayer dollars — or our kids pay an even bigger price. If financial history has taught us anything, it’s that high levels of debt and, more specifically, bad loans lead to financial crises. We have seen this numerous times including the Asian Debt Crisis in the late 90s, the more recent Greek Debt Crisis and, of course, the U.S. subprime mortgage debacle.Financial crises have often been linked to government monetary policy. Arguably, the U.S. government was at least complicit with “easy money” credit policies that led to the housing boom and bust, which in large part triggered our most recent financial crisis.Unfortunately, we are heading for another government-induced financial crisis — this time it is the $1 trillion in student loan debt. As of 2010, about one in five households in the U.S. have student loan–related debt of over $26,000. What is saddest about this pending crisis is that it will likely impact millions of student borrowers throughout their lives, because unlike credit card debt or mortgage debt, student loans can’t be discharged by bankruptcy.How did we get here?Ironically, as this crisis races toward a financial cliff, there has been no action by the government to curtail student loans, as would be the case in any other debt-related financial crisis. In 2011-12, the federal government issued 93 percent of all student loans.Student loans are unique for a number of reasons, none perhaps more glaring than the fact that virtually nothing can disqualify an applicant from a federally-backed loan, excluding a prior student loan default or a drug conviction. A student loan is quite possibly the only loan that is not tied to credit worthiness or the ability to repay. Even more frustrating is that these easy loans are correlated to the rising cost of college — colleges have every incentive to raise costs knowing that there is an endless money supply.Stop the madnessThis crisis will likely end badly for the millions of student borrowers steeped in debt and with no ability to repay. For some reason, the government believes that everyone should go to college and is willing to give students any amount of money to put them on that righteous path. Inexplicably, this is all happening with no regard to whether students will be employable upon graduation or how they will pay back these monstrous loans. This madness must stop.Like any loan, there needs to be some element of credit worthiness as William Bennett suggested last week in his article, “The looming crisis of student loan debt.” But one might ask, how can an unemployed student be creditworthy?A simple solutionAdmittedly student loans are riskier than most since there is no tangible asset to collateralize (although there certainly is a non-tangible asset — the student’s education). However, all educations are not created equal and should be “appraised” by lenders as part of a student loan determination.College fees and student loan debt have a perverse symbiotic relationship. Rising costs in education beget rising student loan debt. It is puzzling why an art degree costs as much as a computer science degree when the job prospects of each are so vastly unequal.Lenders, in this case the government, should make a fact-based determination of a student’s likelihood to graduate, to get a job and their expected income. Prospective students applying for loans can be evaluated for “credit worthiness” based on a score much like a FICO score. A student loan score would be based on a formula comprising their grade point average, major, and academic institution. Each of these variables is directly related to a student’s ability to get a job upon graduation and repay their loans. For example, a STEM (science, technology, engineering and mathematics) major at MIT would yield a higher score and loan compared to a religious studies major at a lesser ranked school.While the solution I have outlined doesn’t offer relief to those deeply in debt today, it will stop more hot air going into the student loan balloon. And although I agree that everyone should have the right to go to college and study whatever they’d like, our government and colleges shouldn’t be reckless with our youth’s financial future — or taxpayer dollars.Copyright 2012 Forbes.com LLC. All rights reserved.

Many people are confused about the difference between a charge-off and a bankruptcy discharge.  What is the difference, and which one is better? A charge-off occurs when your creditor, usually the bank with which you have your credit card, declares that your debt is unlikely to be collected.  The bank has, after assessing your situation, [...]

When life intervenes during the course of a Chapter 13 case, we can modify the debtor’s Chapter 13 plan. As I laid out the provisions of §1329 on modifications for that post, I saw the hand of the late Senator Ted Kennedy in this section. I talked earlier here about his role in providing a deduction on the means test for health and disability insurance that a debtor ought to have but might not have at filing. Subsection 1329(a)(4) provides that obtaining health insurance not already deducted in the means test justifies a modification of a confirmed plan: (4) reduce amounts to be paid under the plan by the actual amount expended by the debtor to purchase health insurance for the debtor (and for any dependent of the debtor if such dependent does not otherwise have health insurance coverage) if the debtor documents the cost of such insurance and demonstrates that— (A) such expenses are reasonable and necessary; (B) (i) if the debtor previously paid for health insurance, the amount is not materially larger than the cost the debtor previously paid or the cost necessary to maintain the lapsed policy; or (ii) if the debtor did not have health insurance, the amount is not materially larger than the reasonable cost that would be incurred by a debtor who purchases health insurance, who has similar income, expenses, age, and health status, and who lives in the same geographical location with the same number of dependents who do not otherwise have health insurance coverage; and (C) the amount is not otherwise allowed for purposes of determining disposable income under section 1325(b) of this title; and upon request of any party in interest, files proof that a health insurance policy was purchased. One hopes that health insurance will become more widely available and less expensive over the next couple of years. But don’t overlook the opportunities for reducing plan payments in confirmed cases to fund health insurance for your clients who didn’t have insurance at confirmation. Image courtesy of Truthout.org.

This is the case of Joseph Loomis who comes to me from Aurora, Illinois for consultation regarding debt relief.  Mr. Loomis has never filed for bankruptcy before.  He is not a homeowner and he is not renting, either.  He is living with his parents.  He has a 2012 Ford Transit which is financed by Ford+ Read MoreThe post Bankruptcy Case Study By Attorney David M. Siegel appeared first on David M. Siegel.

Many people are confused about the difference between a charge-off and a bankruptcy discharge.  What is the difference, and which one is better? A charge-off occurs when your creditor, usually the bank with which you have your credit card, declares that your debt is unlikely to be collected.  The bank has, after assessing your situation, [...]

As many readers of this blog are aware, defaulted student loans are generally not dischargeable in bankruptcy except in special circumstances. The debtor must show that: (1) he or she cannot maintain, based on current income and expenses, a minimal standard of living for the debtor and dependents if forced to pay off the student loan; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loan; and (3) that the he or she has made good faith efforts to repay the loans. That was the holding in Brunner v. New York State Higher Education Services Corp., 831 F.2d. 395 (2nd Cir. 1987), the leading case on student loans and bankruptcy, and its reasoning has been adopted by most federal appellate courts. However, non-bankruptcy remedies are available under federal and state law for student loan debtors, including loan consolidation, deferment or forbearance: 1. Loan consolidation. Most federal student loans (except private loans) are eligible to be consolidated. However, if your loans are in default, you must meet certain requirements before you can consolidate your loans. Loan consolidation greatly simplify loan repayment by centralizing your loans to one bill and can lower monthly payments by giving you up to 30 years to repay your loans. You might also have access to alternative repayment plans you would not have had before, and you'll be able to switch your variable interest rate loans to a fixed interest rate. 2. Deferment. Deferment is a period during which repayment of the principal balance of your loan is temporarily delayed. Also, depending on the type of loan you have, the federal government may pay the interest on your loan during a period of deferment. The government does not pay the interest on your unsubsidized loans (or on any PLUS loans). You are responsible for paying the interest that accumulates during the deferment period, but your payment is not due during the deferment period. If you don't pay the interest on your loan during deferment, it may be capitalized (added to your principal balance), and the amount you pay in the future will be higher. 3. Forbearance. If you can't make your scheduled loan payments, but don't qualify for a deferment, your loan servicer may be able to grant you a forbearance. With forbearance, you may be able to stop making payments or reduce your monthly payment for up to 12 months. Interest will continue to accrue on your subsidized and unsubsidized loans (including all PLUS loans). There are two types of forbearance: discretionary and mandatory. For discretionary forbearance, your lender decides whether to grant forbearance or not. For mandatory forbearance, if you meet the eligibility criteria for the forbearance, your lender is required to grant the forbearance. For more information about possible solutions to coping with your student loan debts, please contact Jim Shenwick

I’ve spent hunks of the past couple of days working exemption issues in cases we’re filing. California has opted out but has a bankruptcy-only set of exemptions that largely mirror the federal bankruptcy exemptions. My typical client this year has substantially more income and more assets than the people I was seeing two years ago.  Today’s client has more to protect, so I wallow in exemption issues. In no particular order, here are the themes and problems that developed. Allocate grubstake to cash All other things being equal, if you have to choose between exempting cash and/or stock or vehicles, exempt the cash.  If the non exempt asset has associated costs of sale or uncertain value,  you will have an opportunity to negotiate with the trustee on the purchase of the asset by the client, or the timing of turnover. There’s little discussion about the value of money on deposit or stock for which there is a market. Count the transaction costs If it costs the trustee 10% of the value of a car to pick it up and send it to the car auction, you only need to exempt 90% of the vehicle’s value.  The remaining 10% of the value gets spent for costs of sale.  Nothing remains to be distributed to creditors. Don’t forget taxes The sale of stock or investment property may well trigger a capital gains tax to the bankruptcy estate.  The longer the client has held rental property the greater the likelihood that they have depreciated the property on the one hand and borrowed against its value on the other hand. Find out what the basis of the property is and calculate whether there is enough value in the property to pay costs of sale, capital gains taxes, secured debt and have anything remaining for creditors. Watch out for situations where the debtor has tax loss carryforwards that might offset the gains.  Those tax attributes pass to the estate on filing. Pin down the form of title Make sure you know how the debtor holds title.  One of my favorite approaches to difficult cases is a filing by only one spouse.  It becomes important to know how the spouses hold title. We were agonizing about some $25,000 in blue chip stock our married-filing-alone client held.  We determined it was acquired during marriage, making it, we thought, community property.  When we got the account statements, lo and behold, the account was held as husband and wife, as joint tenants.  Under applicable state law, joint tenancy is a form of separate property.  Voila, our lady’s interest in the shares was just halved. Under California law, property acquired by gift is the separate property of the recipient.  That allowed us,  in another case.  to exclude the engagement ring of a non filing spouse. Know your state property law and get the controlling documents so you include only what the debtor really owns. Challenge your client’s values Debtors, in my experience, often over estimate the value of their assets.  They hate to admit their home has fallen in value from a prior peak;  they recall what they paid for items, not what they would sell for today.  If values seem generous to you, prod. Yesterday’s case included an entry for art and antiques, with a $5000 value assigned, and my paralegal’s note that the client didn’t think she could get that amount in today’s market.  Well, then it’s not worth the amount assigned if it wouldn’t sell for that today. And, of course, if you can’t arrange the exemptions to cover the client’s accumulations, and spending down assets isn’t feasible, then consider Chapter 13. Image courtesy of NathanColquhoun. Last call for Saturday’s day long workshop on marketing your bankruptcy practice with imagination and elbow grease.  If you can get to Pasadena, join Jay Fleischman and I for an update on changes in the world of SEO and bunches of ideas for websites that really work for you.

Chapter 13 bankruptcy is a long-term commitment. For those who successfully complete the process of the three-to-five year plan, a discharge of remaining debt awaits, as well as the peace of mind of having paid off a chunk of their secured, non-dischargeable debt while keeping any asset they really wanted to keep. But if something [...]

We get so caught up in putting the right stuff in the right place on the bankruptcy schedules that it’s easy to lose sight of the big picture. Having learned that assets subject to a spendthrift trust provision aren’t property of the estate,  we omit them from the schedules.  Patterson v. Shumate. Forgetting, of course, that Schedule B asks for interests in retirement plans and pensions, which are not property of the estate. And forgetting, I think more importantly, that the schedules should tell the client’s story.  A story that makes sense and is complete. Half the story All this springs from a special appearance I made as the holiday approached.  I’m mindful of the string of cases that say that an attorney making a special appearance becomes the debtor’s attorney just as surely as the attorney hired by the debtor. So, I asked for the schedules in advance of the appearance.  I’d been told the debtor was working age but longtime disabled. The budget shows that the debtor lived alone, with  monthly living expenses of $1700 and disability income of $900.  How’d he do that? The schedules were no help.  No assets that throw off money.  No sign of a room mate.  No history of gifts in the SOFA.  No clue…. So I asked the attorney, before the trustee could ask me. Turns out, the debtor was the beneficiary of a special needs trust managed by a parent.  The trust paid out the difference between disability income and expenses. But there was no way to see that from the schedules prepared. My questions of debtor’s counsel pointed out that there was something essential missing from the schedules.  First, the debtor had an interest in the special needs trust.  It needed to be disclosed. My practice with assets that the debtor owns but aren’t property of the estate is to list them on B, label them in caps “NOT PROPERTY OF THE ESTATE” and put their value in the far right hand column as “0″.  If you put a value in that column, the program will spit out schedules that make it appear that there are significant non exempt assets. By listing it, I’ve met my disclosure requirements.  But just as importantly, I’ve told the whole story, given the trustee the big picture:  this disabled person makes it because  he has another source of income. So, take a look at the schedules you’ve prepared and ask if, taken as a whole, they tell the whole story.  If they don’t, tweak them so they reflect reality. (all but B-22, which is fiction from the start<g>). Image courtesy of Foto Havlin. Like This Article? You'll Love These! A Bankruptcy Exemption Planning Basic Attorney as added-value at 341 meeting Do Your Bankruptcy Schedules Tell the Client’s Story?