Consequences of Defaulting on Your Federal Student Loans

If you took out a federal student loan to pay for your education and like many young Americans find yourself currently unemployed and unable to repay your loans you could be facing some serious consequences.

What recourse does the government have to collect on defaulted student loans?

Seizing Tax Refunds

One action the government can take to collect on unpaid student loans is to use your tax refund to offset the amount due on your defaulted loans and they can continue to take your tax returns until the defaulted loans are paid in full. You can challenge a tax refund. To find out more information on valid reasons to challenge a tax refund visit www.studentloanborrowerassistance.org.

Garnishment

The government can also garnish up to 15% of your disposable income when you default on your student loans. Like in the instance of a seizure of your tax refund, you can also challenge a wage garnishment and you can find assistance on how to do so at www.studentloanborrowerassistance.org. You can also contact the holder of the loan and try to negotiate a repayment schedule.

Seizure of your Federal Benefits

Another action the government can take to collect on defaulted loans is to seize some of your federal benefits like Social Security retirement benefits and disability benefits. However, they can not take more than 15% of your total benefit. 

Lawsuits

Like any other creditor the federal government can file a lawsuit to collect on your unpaid student loans and there is no statute of limitations on filing. If you have been sued for nonpayment of student loans you should contact a lawyer immediately.

What can you do?

Besides the steps outlined above, you can also contact the Department of Education’s Ombudsman at 877-557-2575 or visit its website at www.fsahelp.ed.gov. You may also consider Bankruptcy. There are certain circumstances where federal student loans can be discharged in a Chapter 7 and you should contact Dailey Law Offices for a free consultation to determine whether or not your federal student loans may be qualified for discharge.

When you should reopen a bankruptcy case

Reasons a Debtor Might Want to Reopen a Bankruptcy Case

The three most common reasons that a debtor desires to reopen a bankruptcy case are as follows:

1)  Failure to file a pre-discharge credit counseling certificate;

2) Failure to list a creditor or an asset;

3)  Failure to take necessary steps to remove a judgment lien from real estate.

It is important to note that if the only reason a debtor is considering reopening a bankruptcy case is because a creditor wasn’t listed, it shouldn’t be reopened to add a creditor where the debt would have been eligible for discharge. Courts have consistently held that if a debt would have been eligible for discharge had it been listed there is no need to reopen the case to add the debt at a later date. The debtor’s attorney need only send a letter to the creditor with the case number for the bankruptcy.

How to Reopen a Bankruptcy Case

The debtor’s attorney will  file a motion to reopen the case without giving notice to the creditors or scheduling a hearing. In the motion the debtor’s attorney will specifically request whatever action caused them to file the motion to reopen the case be taken. For example, if the case needs to be reopened to avoid a judgment lien the motion should so state and a copy of the letter to avoid the judgment lien should be attached. The judge will then sign the order allowing the case to be reopened to act on the specific request and then enter a discharge. 

If you think you may need to reopen your bankruptcy case contact Dailey Law Offices today to speak with a Bankruptcy Lawyer.

Chapter 13 Cramdowns

What is a Chapter 13 Cramdown?

A Chapter 13 Cramdown allows you to reduce the balance of a secured loan and pay a lower interest rate on that loan. Most often debtors use the cramdown on vehicles, but if all of the conditions apply it can be used on other secured loans.

How does a Chapter 13 Cramdown on vehicles work?

For a cramdown to be applicable the vehicle has to have been purchased 2 1/2 years prior to your bankruptcy filing. If you meet this prerequisite then a cramdown can save you money on your payments. Usually at some point your car note is no longer fully secured because of the rate of depreciation on a vehicle.  In a cramdown your note is only 100% secured by the value of the vehicle at the time you file the petition. So if you owe $10,000 on your car note and your car is only valued at $7,000 then you can reduce your loan balance to $7,000. You will most likely be paying a lower interest rate on the new loan balance also. The remainder of the loan, which in this example would be $3,000, would be paid back in the plan as an unsecured debt, which means you will only be paying a percentage of that amount back-whatever rate you are paying your other unsecured creditors. The new loan balance must be payed by the end of the repayment plan.

Call Dailey Law Offices today to find out if your vehicle is eligible for a cramdown.

Reasonable and Necessary Expenses in a Bankruptcy

Why a court looks at a debtor’s expenses.

Two things that a bankruptcy court looks for in a bankruptcy petition are a debtor’s income and expenses. This is important because in order to file a Chapter 7 the debtor must make less than a determined amount for his/or her family size or be unable to pay a minimum amount of money into a Chapter 13 plan. When filing a Chapter 13 all of your disposable income must be applied towards the plan payment. Whether or not a debtor can afford that minimum payment depends on its expenses and whether or not those expenses are reasonable or necessary. 

What constitutes a reasonable and necessary expense?

The consensus of most courts has been that the debtor should be able to maintain a reasonable lifestyle but not that type of lifestyle which drove them to file bankruptcy in the first place. Courts often scrutinize such expenses as gifts, recreation and charitable contributions. Some specific items that have been scrutinized are boat payments, private school tuition, and health and country club dues. In re Butler, 277 B.R. 917, 921 (Bkrtcy.N.D. Iowa 2002). If the Court finds that an expense or expenses you have listed are not reasonable and necessary then you will likely fail the disposable income test, which means that you have failed to apply all of your disposable income to your plan payment. 

What happens if I fail the disposable income test?

If one or more expenses that you list are deemed to be unreasonable and unnecessary by the court one of two things will likely happen. You will be required to stop spending money on the questionable expense, whether that means terminating a gym membership or relinquishing a camper and then committing the money used towards that expense to the plan payment or have your case dismissed for bad faith pursuant to Section 707(a) of the bankruptcy code for failure to make lifestyle changes.

Your attorney will review your expenses when you file and discuss any potential red flags. But the best rule of thumb to follow is, if you have listed an expense that isn’t necessary for your well-being and the maintenance of a frugal lifestyle the court will likely find it unreasonable.

Preparing to File Bankruptcy

Once you have decided to file bankruptcy there is what may seem like a lot of information that your attorney will need from you, both in questionnaire form and in document form. Even if you have not decided to file for bankruptcy yet, but you want to expedite the process if and when you do decide to file, start thinking about the following matters.

What sort of questions will I be asked by my attorney?

Dailey Law Offices asks questions about the following information when preparing a client’s bankruptcy petition:

Real Estate

  • Address
  •  Mortgage payment
  •  Mortgage balance
  •  Whether or not you wish to retain the property and approximate value

 Personal Property

  •  What sort of personal property do you own? i.e., checking accounts, savings accounts, automobiles, clothing, household goods and furnishings, safety deposit accounts, retirement accounts, stocks, bonds, etc.
  • What is the value of the aforementioned personal property?
  • Are there any co-owners to the aformentioned personal property?
  • Do you wish to retain your vehicles or surrender them?

Income and Expenses

  • List employer’s name, address, length of employment and employment title
  • Gross household income for the past 6 months
  • Monthly household expenses

Debt

  •  Complete list of all creditors
  • Last four digits of account numbers
  • Account balances and minimum monthly payments

Miscellaneous Information

  • List of your dependents and their ages
  • Names and addressess of any co-debtors you may have
  • Social security number
  • All of spouses pertinent information if you are filing jointly

Documents to Gather

In addition to answering a rather lengthy questionnaire with respect to the aforementioned topics, you will also be asked to gather the following documents before your bankruptcy petition can be completely prepared.

  • Last six months worth of paystubs
  • Last six months of bank statements for all of your bank accounts
  • Last three years of tax returns
  • Vehicle Registrations
  • Deed
  • Mortgages

The information discussed above is not by any means all inclusive, but if you are considering filing bankruptcy and would like to make the process a speedy one start thinking of the issues discussed in this post.

Bankruptcy and Divorce

Divorce or Bankruptcy-which comes first?

Unfortunately, in many circumstances divorce and bankruptcy fall hand in hand. Couples often decide to end their marriage due to financial difficulty and the question becomes should you file bankruptcy before you file for divorce or petition for dissolution or vice versa. The answer really depends on your response to the following questions:

Do you and your spouse both need to file?

If both you and your spouse are in significant debt and need to file for bankruptcy and specifically if you qualify for a Chapter 7 bankruptcy you should consider filing jointly before you file for divorce or petition for dissolution. You will save money filing for bankruptcy because you will be filing a joint petition rather than two single petitions later on. You will also have all of your unsecured debt discharged which will eliminate the need to allocate debt liability in a separation agreement later on making the divorce or dissolution much simpler. If you must file a Chapter 13 because your income disqualifies you from filing a Chapter 7 or because you wish to keep property for which you are in arrearages on, it is probably best to wait until your marriage has been terminated.

How badly do you want to be divorced?

Filing bankruptcy puts an automatic stay on all civil cases-including pending divorces. A motion for relief from stay can be filed with the bankruptcy court that would allow the divorce case to proceed while the bankruptcy is pending, but that would cost more money and still result in a delay. If you wish to quickly terminate your marriage the best option is to dissolve the marriage and then file bankruptcy.

Issues to consider when filing for bankruptcy after a divorce

If you file for bankruptcy after you file for divorce you will need to disclose all property disbursements in your separation agreement and if you attempt to discharge a debt that you agreed to be liable for in your separation agreement, you could meed with resistance from your former spouse. They could file an adversarial proceeding in bankruptcy court contesting the dischargeability of a specific debt based on your obligations in your separation agreement. Adversarial proceedings are basically civil lawsuits within the bankruptcy court and cost additional money to defend.

The bottom line is that whether or not to file bankruptcy before you file for divorce depends on your individual circumstances. Call Dailey Law Offices today for a free consultation to discuss your personal situation and decide on a course of action that is best for you.

Who should file Bankruptcy?

Five Reasons You Should File Bankruptcy

Not everyone needs to file bankruptcy when they run into financial trouble, but there are five main instances in which bankruptcy is really your only viable option.

Garnishment

If you have received a notice that wages will be garnished from your paycheck or they have already been garnished from your paycheck, you will  need to file bankruptcy to avoid continued wage garnishment. As soon as you file your bankruptcy petition the wage garnishment must cease and any wages garnished after the date of the filing must be returned to the debtor. 

Attachment

Like garnishment, attachments can only  be stopped with the filing of a bankruptcy or payment of the debt owed. Presumably if you were able to pay the debt owed your wages wouldn’t be garnished or your bank account wouldn’t be attached. And like the instance of a garnishment, once you file your bankruptcy the attachment must stop. Any funds withdrawn from your account subsequent to the filing of your bankruptcy must be returned.

Repossession

If your vehicle is about to be repossessed and you are unable to pay the amount due to bring your vehicle current, filing bankruptcy is your only real option to keep your vehicle. You will need to file a Chapter 13 and all of your arrearages must be cured over the life of the plan payment.

Foreclosure

Most individuals wish to keep their home whenever possible. If you have attempted a loan modification that has failed or the foreclosure process has already begun on your home, filing a Chapter 13 bankruptcy will allow you to keep your home and pay the arrearages over the life of the payment plan. Once your plan is complete and your case is closed you will just continue paying your mortgage until it is paid or you sell your home.

Creditor Harassment

Some individuals own no personal or real property but have suffered so much creditor harassment that the only way to stop that harassment is to file bankruptcy. I advise my clients to attempt to negotiate a payment plan or settlement either directly or through a credit counseling service, but you can’t force a creditor to accept lesser payments or a settlement. If you are unable to reach an agreement, filing bankruptcy prevents creditors from sending letters and making phone calls in an attempt to settle a debt.

In sum, bankruptcy isn’t for everyone. If you have some disposable income and you are current on your house and car payments, it may well be worth a try to negotiate a settlement with your creditors. But if you do not have the means to pay a settlement and you are ready to lose your home, your car, wages or the money in your bank account, bankruptcy is often the only way to avoid a loss.

Surrendering Your Real Property in a Chapter 7

Are you immediately off the hook for damages?

Probably not. Until the deed to the property is transferred from your name to the bank you could be liable for potential damages that arise on the property that you are surrendering in a Chapter 7. If at all possible it is advisable to stay in your home to deter those who may feel compelled to trespass and do damage to a property that would otherwise be vacant. At the minimum it is in your best interest to retain home owner’s insurance on the property in the event that a claim for damages does arise. Homeowner’s insurance may be costly to maintain if you aren’t living in the house, but it is available at a higher premium. And the cost of the alternative may be much higher.