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Bankruptcy: Personal Redemption and Financial Rehabilitation

By Jonathan on April 18, 2012

I have long counseled my clients that bankruptcy should be viewed as a “strategic retreat” as opposed to a failure or embarrassment. In a capitalist society, people take risks, and innovation and prosperity springs from that risk taking. While you may not own a company, you are in charge of what marketer Harry Beckwith calls “You, Inc.” Every decision you make – whether it is buying a house, using your credit cards, choosing to buy or not buy insurance – has consequences and sometimes you will find yourself with a lot more bills than ready cash or prospects for enough cash.

As a bankruptcy lawyer, I see Chapter 7 and Chapter 13 as financial tools. It is not my role to past judgment on your decisions or make you feel guilty about making a particular decision. My role is to serve as a trusted financial confidante to help you understand the pros and cons of the powerful financial tool called bankruptcy.

In fact, when you do appear in bankruptcy court you will note that lawyers for your creditors, the trustees and even the judges are focused on financial solutions. Guilt and blame are not part of the equation. Like any other financial tool, bankruptcy requires you to follow certain rules, but the underlying meme is financial not emotional.

I am by no means alone in positing that your consideration of the bankruptcy option ought to arise from a reasoned, thoughtful and logical consideration of both bankruptcy and non-bankruptcy options. My colleague Frank Pepitone, a bankruptcy lawyer in Garden City, New York, argues that bankruptcy should be viewed as a type of rehabilitation. Here is his thoughtful analysis:

Bankruptcy as Financial Rehabilitation

In our society, when people face emotional or physical problems, many will seek therapy. Therapy can be as simple as talking things out with a family member or friend. In more extreme cases, people will seek the help of a professional in order to work though their problems. [Read more…] about Bankruptcy: Personal Redemption and Financial Rehabilitation

How Chapter 7 Can Help You Pay Your Non-dischargeable Student Loans

By Jonathan on April 15, 2012

In my last post, I argued that the current Bankruptcy Code standard for discharging student loans is unduly harsh and burdensome. Currently student loan debt – and this includes private student loans, government backed student loans, parent incurred loans, and loans paid to schools that have closed down before the student received training or a degree – may not be discharged in bankruptcy unless the debtor can show “undue hardship.”

The courts have read undue hardship to mean some reason beyond the debtor’s control that would preclude repayment. This usually means that there must be some medical reason that the debtor will not ever be able to return to work. Underemployment is specifically not a reason to allow undue hardship. As far as the courts are concerned, debtors who are healthy always have opportunities to increase their income so that they can pay their student loan debt, whether payment comes next year or in 20 years.

It seems oddly inconsistent for the Bankruptcy Code to allow debtors to discharge income tax debt solely based on its age ( income tax debt that is 3 or more years old may be discharged) but for all intents and purposes will not allow for the discharge of student loans despite the fact that:

student loans are typically incurred by 17 year olds with little understanding of what real world debt means
colleges and student loan lenders have less disclosure requirements than credit card lenders
loans remain non-dischargeable even if the school goes out of business and does not provide the education
parents who sign for loans have no recourse even though they did not get the benefit of the education
colleges have used the wide availability of government guaranteed loans to boost tuition costs at many times the rate of inflation
colleges bear no responsibility for offering courses of education that are unlikely to result in salaries sufficient to pay the loans

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Student Loan Debt Collection Issues

By Jonathan on April 12, 2012

Student loan collection issues have been in the news lately with a number of proposals floating around Congress to allow for less burdensome discharge of student loans in bankruptcy and even a bill to forgive student loan debt outside of bankruptcy under certain circumstances.

This week I wrote a guest editorial for the Atlanta Journal Constitution proposing a return to the pre-1998 Bankruptcy Code provision that allows for student loan discharge 7 years after the loan first comes due.

At this point, however, student loan debt remains non-dischargeable and, as such, private bill collectors working on behalf of lenders who have issued non-dischargeable student loans, are aggressively pursuing delinquent borrowers – both former students as well as parents who co-signed or guaranteed their child’s student loans.

What rights are available to student loan borrowers? I asked attorney Sergei Lemberg, whose firm represents consumers in matters related to fair debt collection, fair credit reporting and lemon law to answer this question. Here are Sergei’s observations: [Read more…] about Student Loan Debt Collection Issues

Should Student Loan Debt Once Again Be Dischargeable in Bankruptcy?

By Jonathan on April 12, 2012

Last week, an editor at the Atlanta Journal Constitution contacted me to ask if I would write a guest editorial about student loans and bankruptcy. Here is a slightly enhanced version of my editorial.

Imagine graduating from college with a tassel and $80,000 of student loan debt. Now imagine that life happens over the next 15 years – periods of unemployment, no raises, a sick child, and home repairs. Perhaps you are one of the 50,000 metro Atlanta area families each year who make the difficult decision to file personal bankruptcy. How does it feel to discover that your student loan debt will survive bankruptcy, never to go away. Tax refunds? Seized. Wages, bank accounts, even Social Security? Garnished. [Read more…] about Should Student Loan Debt Once Again Be Dischargeable in Bankruptcy?

Should I Bother Answering a Lawsuit if I am Planning on Filing Bankruptcy Anyway?

By Jonathan on March 30, 2012

Last week I received a call from a prospective client who was just beginning his research into the bankruptcy process. As I have stated many times I encourage anyone who thinks that bankruptcy may be even a remote possibility to call or come in because pre-bankruptcy planning will always produce a better result (even if you end up deciding not to file) and because you will inevitably learn something from talking to me that will help you deal with your debts.

In any case, this potential client asked a few questions and just as we were about to conclude the call he mentioned that he had been sued 3 weeks prior but “it really doesn’t matter because I am currently unemployed and I can get rid of that debt in a bankruptcy later on.”

Nothing could be further from the truth. [Read more…] about Should I Bother Answering a Lawsuit if I am Planning on Filing Bankruptcy Anyway?

Can I Pay my Taxes with a Credit Card, then File Bankruptcy to Discharge the Debt?

By Jonathan on March 29, 2012

With April 15 just around the corner, many of us will be scrambling to come up with money to pay Uncle Sam. For those who are self employed, estimated tax liability payments are due every quarter. The IRS does allow you to pay your tax debt with a credit card, but you can expect to pay a “convenience fee” of around 2% of the amount charged. for this option.

Further, if you do use your credit cards to pay your tax debt, the Bankruptcy Code specifically disallows that part of your credit card debt to be discharged in a bankruptcy case, unless the tax you are paying is dischargeable as well.

The Bankruptcy Code is silent as to how long the non-dischargeability status remains associated with credit card debt when you continue to use and make payments on that credit card for several months prior to filing for bankruptcy, and that makes for some interesting conjecture. [Read more…] about Can I Pay my Taxes with a Credit Card, then File Bankruptcy to Discharge the Debt?