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Bankruptcy and Taxes

If you are considering filing bankruptcy, you may be interested in determining how income taxes are addressed in a bankruptcy filing. In order to determine how bankruptcy affects taxes, you must know the original due date the taxes came due. From there, you will need to know when you filed the tax return related to that tax debt. With an understanding of these two factors, you can determine the treatment of the debt in a Chapter 7 filing and a Chapter 13 filing.

The Taxes Must Be Three Years Old

Your tax obligation comes due on the date the taxes are due. For example, the taxes due for calendar year 2016 did not come due until April 15th, 2017. That tax debt turns three years old on April 15th, 2020. If you file your bankruptcy prior to April 15th, 2020, the debt will still have priority status. This means in a Chapter 7 the tax debt will survive the bankruptcy. In a Chapter 13, the debt will be paid  in full through your 60 month Chapter 13 plan.

If you file your bankruptcy after April 15th, 2020, the debt loses its status and is lumped in with other general unsecured debts in a Chapter 7 or Chapter 13 filing. In a Chapter 7, this means the debt is discharged in full. In a Chapter 13, a percentage of the debt will be paid just like the remainder of unsecured creditors receive a percentage of their debt through the Chapter 13 plan. Many Chapter 13 plans are set to pay 5 or 10 percent to unsecured creditors, or even less. This can be a tremendous advantage for individuals with heavy tax burdens who are considering bankruptcy. (If you want to read more about Chapter 13 payments, we wrote about them HERE).

Your Tax Return Must Be Filed

If your tax debt is more than three years old, there is a chance it qualifies to be treated as unsecured debt, as discussed above. However, there are a few additional requirements. One of those is that the tax returns related to that tax debt must have been filed at least two years prior to the bankruptcy filing. If you failed to file your own return and the taxing authority filed a “forced return” on your behalf, unfortunately even if that forced filing is more than two years old, it will not qualify for this requirement.

The 240 Day Rule

One last requirement is that the taxing authority must have assessed the tax debt at least 240 years prior to the filing. For example, consider a scenario where you file taxes April 15th of 2017 and owe $5,000.00. That tax debt turns three years old April 15th of 2020. However, if the IRS audits you for 2017 and assesses an additional $10,000 of debt for the 2017 tax year, you will need to wait at least 240 days from the date of the assessment of new taxes in order to have that debt discharged in bankruptcy.

Confused? Don’t Be!

We are here to help. We assess tax debt on a regular basis in our office and you will have confidence about the treatment of your tax debt prior to your bankruptcy filing. If you would like to schedule a consultation you can call us at 704.749.7747 or click HERE to request one. All consultations are free, and you deserve to understand your options regarding bankruptcy and taxes. When it comes to choosing a law firm, we know you have options. We hope you choose Layton Law.

Bankruptcy Is Not A Four Letter Word

Currently, both bankruptcy and Covid-19 are spreading quickly. As we begin to see Fortune 500 companies file for bankruptcy due to Covid-19, it is a great time to remind ourselves that bankruptcy can be viewed as a business decision. In fact, filing bankruptcy is what saves many companies and enables them to thrive in the market post-bankruptcy. It is too early to tell whether companies filing bankruptcy now will bounce back; however, historically we do know that companies like Apple, General Motors, and Hostess all successfully bounced back with the help of a bankruptcy filing.

There are also famous individuals who filed bankruptcy and went on to great success. This was long before bankruptcy and Covid-19, but among them are Walt Disney, Donald Trump, and Abraham Lincoln. These individuals understood that bankruptcy is not  a four letter word. If anything it is more akin to a seven letter word: F-R-E-E-D-O-M. The day you file bankruptcy is the day you play your ace card against oppressive creditors and accumulating debt.

Bankruptcy Is The First Step To Recovery

One common concern regarding a bankruptcy filing is how long it will take you to bounce back from bankruptcy. Truthfully, it is the bankruptcy filing that is the first step in recovery for a business or individual. The bankruptcy filing brushes back creditors and forces them into a plan the company can manage while they continue to conduct business. The same is true of a personal bankruptcy filing.

From the day you file bankruptcy, you get relief from creditors. They are no longer allowed to pursue you for collection of debts, or legal actions against you related to debt. As a result, you can finally breathe again. Your income is no longer being shoveled to creditors whose balances do not seem to move despite significant payments each month. Instead, you can use those funds to pay for the needs of yourself and your family. If you file a Chapter 7 bankruptcy, you will receive a discharge of your debts. If you file a Chapter 13 bankruptcy, you will enter into a re-payment plan which quite often requires you to pay less than 10% to your creditors spread out over a five year period.

As one of our favorite clients said in a recent review of the firm “Chapter 7 and Chapter 13 are just that: Chapters. They are not the entire book!”

Treat It Like A Business Decision

You can choose to view a bankruptcy filing as a business decision—or at least a financial one—for you and your family. Smart business owners put their emotions aside and do what has to be done for the health of the company. Most of our clients realize that bankruptcy is not an emotional experience; however, they do confess that it was their emotions that kept them from filing sooner. Unfortunately, this means months or years of payments to creditors on debts which are ultimately discharged in bankruptcy. If you act quickly, you can avoid spending any additional money on unsecured debt which will be addressed with one bankruptcy fee and one bankruptcy filing.

The bankruptcy court has remained open despite Covid-19, allowing debtors to move forward with their financial recoveries. Most hearings are done over the telephone at this time, which is a great convenience for all parties and a wonderful solution as the courts are busier each month with bankruptcy filings.

Take The Next Step

The next step is simple. Call us to speak with an attorney. The call is free and you deserve to understand your options. We can be reached at 704.749.7747. We are happy to answer questions about bankruptcy and Covid-19. Or, you can click HERE to request a consultation by filling out a very short form.

Watch A Short Video

If you’d like to know a little more about the firm, watch this short one minute Introductory Video by Chris Layton. We know you have choices. We hope you choose Layton Law.

Small Business Bankruptcy

Filing a small business bankruptcy in North Carolina will relieve you of your personal obligations on business debt. Your business entity will still be liable for the debt. As a result, for most small businesses, a Chapter 7 or Chapter 13 combined with a dissolution of the corporate entity, will accomplish your goal of eliminating both personal liability and business liability. After bankruptcy, most small business bankruptcy clients are able to start a new small business under a different name.

Despite what you’ve read about filing business bankruptcy under Chapter 11, our clients often accomplish the same result through a personal bankruptcy by filing a Chapter 7 or Chapter 13 bankruptcy, and dissolving the small business. This saves you thousands of dollars and you are rewarded with the same result– you are free from your obligation under the small business debt.

Personal Liability In Small Business Bankruptcy

When most small business owners take on business debt, they sign as an officer or member of the small business, and then again personally. This guarantees the lender that either the business or the individual will repay the debt. This is why simply dissolving the business will not eliminate the debt from your life—you’re still on the hook personally. This means creditors for the business can come after your personal assets: home, vehicles, savings, etc.

Business Assets and Liabilities

When you file a personal bankruptcy and include business debt, you’ll also need to provide income and loss statements for the business for the year prior to filing. Your Charlotte bankruptcy attorney can assist you with putting these together, if an accountant has not already done so. You’ll also need to list all assets and debts of the business.

Dissolving The Company

Dissolving an LLC or other small business entity eliminates the potential for creditors to pursue the company for debt—the company no longer exists. If you file a personal bankruptcy in combination with the dissolution, you relieve your personal liability. In essence, you’ve filed a small business bankruptcy by filing personally. If there are assets of the company which need to be addressed, our firm can assist with contacting creditors in compliance with The North Carolina Business Corporation Act.

Starting Another Business

Filing a small business bankruptcy does not prevent you from starting a new business. You’ll be subject to the same approval process if you need to take on debt to get the business started, and your personal bankruptcy may be a hurdle from a credit perspective. But entrepreneurs are creative and often find funding outside of traditional means to get new businesses started.

Call today if you have questions about your small business, small business bankruptcy or personal bankruptcy. The consultation is free, and we’re here to help. We can be reached at 704.479.7747. Or, you can click HERE to request a free consultation.

What Happens To My Car In Bankruptcy?

If you own a car or lease a car, you will need to decide what happens to your car in bankruptcy. You have the choice to keep your car and the debt associated with it, or you can choose to surrender the car in bankruptcy. This means the car goes back to the lender, and the debt goes with it. There are one or two exceptions, which we will address. In summary, you can either keep the car and the debt, or ‘get rid of’ the car and get rid of (discharge) the debt.

How Can I Keep My Car In Bankruptcy?

If you want to keep the car in a Chapter 7, you will need to be current on payments by the date of your 341 meeting. You will sign a Reaffirmation Agreement with the lender, which will contain the same terms you had prior to the bankruptcy. The reason for the agreement is the filing of your bankruptcy technically relieves you of the obligation to repay the loan; however, if you want to keep the car, you will need to renew the agreement. The Reaffirmation Agreement accomplishes that.

If you want to keep your car in Chapter 13, you can do so. Your interest rate may decrease due to the interest rate set by the bankruptcy court. Additionally, if you have had the vehicle for more than 910 days, you may be able to lower the balance on the loan in Chapter 13, which can be a tremendous benefit.

How Do I Surrender My Car In Bankruptcy?

If you want to surrender the car and the debt, it is easy. We file your bankruptcy and reach out to the car lender to make arrangements for them to pick up the car or have you drop off the car in the alternative.

You Have Options

The upside to addressing a car in bankruptcy is that you have options. Most clients are incredibly happy with the results of bankruptcy including the ability to have flexibility regarding vehicles. The rules of bankruptcy heavily favor the debtor—the person filing—and as a result, if you would like to keep a vehicle while discharging all unsecured debt, it is almost always an option.

Speak With A Bankruptcy Lawyer Today

If you would like to speak with us about what happens to your car in bankruptcy, you can request a free consultation. Just call 704.749.7747 or click HERE to request a time to talk. If you would like to watch a short video from Chris Layton, it may help you make a decision regarding working with us. We know you have choices. We hope you choose Layton Law.

Does Bankruptcy Ruin Your Credit?

No, bankruptcy does not ruin your credit. In fact, bankruptcy may ultimately be the reason you are finally able to restore your credit. We understand your credit score is an important factor in deciding whether to file bankruptcy. While the initial filing of a bankruptcy will temporarily lower your credit score, most debtors find that their score recovers within a year from filing bankruptcy.

Your Debt To Income Ratio

One important aspect of your credit score is your debt to income ratio. The filing of a bankruptcy changes your debt to income ratio in your favor. This immediately serves to help you re-build your credit. Additionally, as a result of your bankruptcy, your credit report will show fewer debts. You become an attractive client to creditors when your debt to income ratio is healthy. This means you will be considered for credit cards, automobile loans, and other extensions of credit.

How Quickly After Bankruptcy Will My Credit Score Recover?

Most of our clients tell us that their credit score bounces back at the one year mark from filing bankruptcy. However, this will fluctuate depending upon how high your score was before filing bankruptcy, and depending upon the steps you take to rebuild your credit after bankruptcy. If you are making payments on a secured credit card or a vehicle after bankruptcy, those positive payment reports will serve your credit score well.

Free Yourself From The Chains Of Credit Card Debt

Credit card companies want you to fear bankruptcy. They would rather you give them every extra penny you have, to keep them from taking further action against you for non-payment. This is true regardless of whether your monthly payment to them makes even the slightest dent in the balance owed.

The bigger picture when deciding whether to file bankruptcy involves regaining your financial freedom. The relatively small price to pay for that financial freedom is the time it takes to rebuild your credit. When bankruptcy clients call us two years after their bankruptcy to tell us they have gotten approved for a home mortgage, they usually tell us the same thing: I never should have waited as long as I did to file my bankruptcy.

Speak With A Charlotte Bankruptcy Lawyer Today

If you have questions about how bankruptcy can help your credit, we are here to help. Once a client decides to file bankruptcy, we advise you stop paying on any debt which will be discharged by the bankruptcy. If you would like to speak with a bankruptcy lawyer, call us at 704.749.7747 or click HERE to request a free consultation by phone or in person.

 

Should I File Bankruptcy Or Just Not Pay?

If you are overwhelmed by credit card debt or medical bills, you may be considering Chapter 7 or Chapter 13 bankruptcy. Or, you may be considering simply not paying. Here’s why bankruptcy is the best long-term approach to managing overwhelming debt.

What Can Creditors Do If I Do not Pay?

If your debt is secured by a vehicle, the creditor can repossess the vehicle. In North Carolina, this is a contractual agreement between the creditor and the vehicle owner and does not typically require court approval.

If your debt is mortgage debt or home equity line of credit debt, the lender can use the North Carolina statutory provisions under N.C.G.S. Sec. 45 to begin the foreclosure process. Essentially, if you cannot ‘catch up’ on the mortgage with the lender, your home can be sold to pay the mortgage creditor.

If your debt is unsecured debt like credit card debt or medical debt, the creditor’s primary recourse is to contact you in attempts to collect. Many unsecured creditors will use this method for months before resorting to taking legal action against you. Keep in mind, an unsecured creditor can file a lawsuit against you to prove the amount you owe, and secure a judgment. Once a creditor has a judgement against you, they can pursue your assets with the backing of the judicial system. Additionally, if you own a home, the judgement will attach to the home. This means when you sell the home the judgment will need to be paid in most cases.

Creditors And The Writ Of Execution

Once a creditor obtains a judgment, they can file a writ of execution with the sheriff to pursue your assets. This includes your home, vehicles, cash in bank accounts, etc. For the most part, you can protect the same property you would be able to protect or exempt in a bankruptcy. The remainder of your property is available to the creditor. When a creditor is pursuing your assets, you may receive a Notice of Right To Claim Exemptions. This puts you on notice that you must report your assets to the creditor. It also lets you know the creditor is pursuing your assets.

Bankruptcy Stops All Collection Attempts

By filing a Chapter 7 or Chapter 13 bankruptcy, you put your creditors on notice that they are no longer allowed to attempt to collect on debts. This is a function of The Automatic Stay in bankruptcy. Additionally, you pay a fixed amount of money to your bankruptcy attorney or the bankruptcy court, in exchange for discharging the entire balance of the debt. If you have unsecured debt more than $10,000, it makes sense to consider bankruptcy. If your debt is $20,000 or more it will almost always make sense to file bankruptcy as compared to attempting to pay the debt.

We have written many articles about using bankruptcy to stop a foreclosure and recover if you are behind on mortgage payments. We hope those are helpful.

Speak With A Charlotte Bankruptcy Lawyer Today

If you have questions about whether to stop paying on debt, we are here to help. Once a client decides to file bankruptcy, we advise you stop paying on any debt which will be discharged by the bankruptcy. If you would like to speak with a bankruptcy lawyer, call us at 704.749.7747 or click HERE to request a free consultation by phone or in person.

 

When Is The Right Time To File Bankruptcy?

The short answer is that most people wait too long to file bankruptcy. The right time to file is before you have thrown thousands of dollars away on large debt. The right time to file bankruptcy is before you have eaten through your retirement funds to make good on mounting credit card debt. A consultation with a Charlotte bankruptcy attorney can often put all your fears about bankruptcy to rest, and help you decide if the time to file is right now.

Foreclosure And The Right Time To File Bankruptcy

There are a few matters which can force your hand in a bankruptcy filing. If you are facing a foreclosure and you want to use bankruptcy to save your home, you will need to file bankruptcy within 10 days after the foreclosure sale date. Additionally, you can only use Chapter 13 bankruptcy to save a home from foreclosure. As a result, the right time to file bankruptcy to stop a foreclosure sale is any time before the 10th day after the foreclosure sale. Then, your Chapter 13 plan will schedule the mortgage arrearages to be paid over a 60-month period. In many cases, we are able to file an Emergency Bankruptcy for clients as this deadline approaches.

Retirement Funds And The Right Time To File Bankruptcy

All retirement income is exempt in bankruptcy under 11 USC Sec. 522. This protection includes 401k, IRA, and most pension plans. This means that regardless of when you choose to file bankruptcy, whatever funds you have in a qualified retirement account will be exempt or protected from creditors.

Because of this “super exemption” on retirement funds, it does not make sense to withdraw your exempt retirement funds to pay creditors. Additionally, as soon as you take funds from an exempt retirement account those funds are no longer exempt assets. This means $10,000 in a 401k is exempt while the same $10,000 once withdrawn and placed in your checking account is no longer exempt by 11 USC Sec. 522. Potentially, these funds will need to be turned over to the bankruptcy court if they are in your possession at the time of your bankruptcy filing.

Income And The Right Time To File Bankruptcy

When attempting to qualify for a Chapter 7 bankruptcy filing, you must meet the income requirements. The bankruptcy court looks at your most recent six months of income in determining whether you qualify. This is done through what is known as The Means Test. Your bankruptcy attorney will apply the rules of bankruptcy to determine if you pass The Means Test.

The Means Test starts with a calculation of Current Monthly Income (CMI). Your CMI is your average monthly income from all sources, for the six months prior to filing. The bankruptcy definition of income differs from the definition of income used by the IRS. If you receive a cash gift from a family member, it will be included in your income calculations. As a result, your bankruptcy attorney may advise you to wait to file, if you have income from the past six months in excess of the allowable amount. The good news is that by waiting a few months to file, your six-month average income will change. For example, if you received a bonus at work for $10,000 in February, it would be included in your income calculations if you file in March, April, May, June, July, or August. However, if you wait to file until September, your February income is no longer relevant.

Speak With A Charlotte Bankruptcy Attorney Today

If you would like to have a consultation with a bankruptcy attorney, you can call us at 704.749.7747 or click HERE to request a consultation. Consultations can be done over the phone or in person, and they are free. The goal is to help you understand your options, and answer any questions you may have about the process.

5 Myths Surrounding Bankruptcy

Bankruptcy is surrounded by myths, and they keep eligible individuals from pursuing what can be an amazing way out of crippling debt and financial stress. You deserve freedom from the anxiety caused by the myths surrounding bankruptcy. We hope this article helps. And if you have any questions, we’re here to answer them. Just reach out to us.

#1 All Bankruptcy Filings Are The Same

To understand and debunk some of the myths about Chapter 7 bankruptcy, we must first understand how Chapter 7 bankruptcy differs from Chapter 13 bankruptcy. While both are consumer bankruptcy options, Chapter 7 bankruptcy is typically used in a situation where the client has limited income and assets, and does not have the ability to pay back all or even some of their debt. Chapter 13 bankruptcy is a tool for catching up on a delinquent secured debt like a mortgage or car. It is also a compromise where you pay back some of your debt while completing a court approved repayment plan.

#2 Bankruptcy Will Stay On My Credit Report Forever

While effects of a Bankruptcy on your credit report can vary due to the case, the credit reporting of a Chapter 7 bankruptcy lasts a maximum of ten years. Some credit reporting agencies remove the bankruptcy after seven years. Some of these credit report references to bankruptcy include trade lines that state that your account was included in bankruptcy, and third party collection debts, judgments, and tax liens discharged through bankruptcy. More importantly, your credit score and your ability to get a loan or credit card recovers much faster than this time frame. We see this with clients year after year.

#3 My Credit Score Won’t Improve Until The Bankruptcy Is Gone From My Credit Report

While your post-bankruptcy credit score will show a drop after filing, you will be surprised at how quickly your credit score begins to recover. One reason is that by way of the bankruptcy, your debt to income ratio improves in your favor. Additionally, creditors are more likely to lend you money because they know you have no other debt, and they know you can’t file bankruptcy again. Often, the same creditors you included in your bankruptcy filing will offer you new extensions of credit shortly after you file.

Obtaining a secured line of credit and making payments on it, or taking out a new credit card and making payments on it, will help you to raise your credit score with the goal of hitting the range of 700-749 over time. Making on-time payments for all debt, adding and paying new credit, and keeping your credit card balances under a thirty percent utilization are all examples of ways to boost your post-bankruptcy credit score.

#4 I’ll Never Have Credit Cards Again

While we secretly hope this is true for you, we hope it’s because you choose to never have a credit card again. The truth is, as this article has indicated so far, you’ll be given lots of opportunities to have a credit card after filing bankruptcy. Truthfully, credit cards are actually one of the best ways to build credit, and options for those post-bankruptcy do in fact exist.

Credit cards that require an upfront security deposit, are called secured credit cards and have a lower barrier of entry but allow you to spend and rebuild credit just like any other kind of credit card. After you make consistent payments on a secured credit card, you will see your credit score increase and other credit opportunities arise.

#5 I’ll Never Get A Home Loan After Filing Chapter 7

Similar to credit cards, when paid on time, loans help you to rebuild your credit score and certain loans are easier to receive after having filed bankruptcy. Credit builder loans, CD loans, or Passbook loans, are similarly secured with a deposit or collateral and will all help to rebuild your credit score. These loans are easier to procure due to the simple fact that the lender is protected in the event that you are unable to pay, which makes them a great opportunity to rebuild credit score in the meantime. If you’re repaying a vehicle loan, you’ll also see the benefits by way of an increase in your credit score.

Generally, at the two year mark after filing bankruptcy, our clients who have diligently re-built their credit after bankruptcy, find they are eligible for a mortgage. A more conservative estimate would be two to four years; however, we receive so many phone calls at the two year mark from clients who are excited because they are buying a home, that it’s worth mentioning here.

Speak With A Charlotte Bankruptcy Lawyer Today

If you are considering filing bankruptcy, it’s important that you speak with a Charlotte bankruptcy attorney. The call is free and you will come away with a much better understanding of your options. You can reach us at 704.749.7747 or click to request a FREE CASE EVALUATION, and we will be in touch shortly.

Further Reading

If this article regarding myths surrounding bankruptcy was helpful, you may find other helpful articles on our Bankruptcy Blog. Thank you for visiting the website—we hope it has been helpful.

 

Discharging Student Loans in 2019

I have created a Google Alert for Student Loan Crisis. Every day my inbox tells me about one or another tales of how unpayable student loans are the key stressors for Millenials and Generation Z. One of the best measures for the sense of where our country is going is to analyze trending cases in bankruptcy courts that consider whether to discharge student loans in bankruptcy.

As many of us know, the general rule is that student loans are not dischargeable unless the debtor can show that the loans impose an “undue hardship.” While the Bankruptcy Code does not define this phrase, most courts have adopted a three part approach known as the “Brunner Test” to determine whether a debtor’s repayment of student loans after bankruptcy constitute “undue hardship.” The three parts, all of which must be satisfied, are:

  1. Will repaying the loan force the debtor to live an existence below a minimum standard of living?
  2. Will this condition likely persist into the foreseeable future?
  3. Has the debtor made a good faith effort to repay the student loans?

While the U.S. Supreme Court has not stated that the Brunner Test is the sole applicable standard, it has become the widely acknowledged standard around the country. I’ve taken a look at ten of the most recent student loan opinions to see if we can draw any conclusions about national trends in discharging student loans in bankruptcy.

In re Halatek (Eastern District of North Carolina)

  • Amount of Loan: 114,783
  • Held: Although Chapter 7 debtor suffered from Hypermobile Ethles-Danlos Syndrome and narcolepsy, she was gainfully employed by the State of North Carolina in a tenured, non-legal position, earned $66,192 in salary in 2016, debtor could not meet the first prong of the Brunner test because she had the ability to make payments on her student loan debt, while maintaining a minimal standard of living, if she reduced her discretionary expenses.

Analysis: North Carolina is a low income state, and $66,192 (right around median for a family of three) seemed simply too high for this court to find that this debtor could eliminate her student loans, notwithstanding her debilitating illness.

In re Tinsley (New Jersey)

  • Held: 1) whether or not a debtor is eligible for a zero-dollar-per-month repayment plan is not outcome determinative as to the first prong of the Brunner test. If the court finds that a debtor has reasonable expenses that significantly exceed their income and they would be unable to pay any loan amount, then the first prong is satisfied, even if a zero-dollar-per-month repayment plan is an option. 2) Debtor does not satisfy second prong of Brunner test where debtor medical condition does not prevent her from maintaining full-time employment for a significant portion of the repayment period, debtor’s expenses will decrease dramatically for a significant portion of the repayment period of the student loans, and debtor failed to produce any evidence that showed how her student loans have created a “stigma” in her life and how that stigma will impact her for a significant portion of the repayment period of the student loans.

Analysis: the Court added a “stigma” gloss to the second Brunner prong where none had existed previously. Plus, the likelihood that expenses would decrease caused the court to refuse to discharge the student loans.

In re Quackenbush (Southern District of Mississippi)

  • Amount of loan: $30,809 and $7,760 in accrued interest
  • Held: Debtor could not survive DOE’s motion for summary judgement even though debtor was unemployed and supporting her mother and mentally disabled daughter where debtor did not produce evidence that her situation was likely to persist for a significant portion of the repayment period of her loans, or that she had made a good faith effort to repay.

Analysis: the evidence required to discharge the student loan must be applied to every prong of the Brunner test. Borrowers frequently run afoul of the third prong because they have been simply unable to make any payments at all.

In re Regan (New Mexico)

  • Amount of Loan: $50,000
  • Held: Debtor, a 62 year old with an annual income of $44,444 could not discharge loans under Brunner because under the first prong of the Brunner test, evidence of her financial condition established that she could maintain a minimal standard of living even if forced to repay her student loans under an income-based repayment plan and public service loan forgiveness program; if she made payments under an IBRP, took advantage of the PSLFP, and made 114 consecutive qualifying payments, the remaining balance of her student loan debt would be forgiven in nine years, when she was 72.

Analysis: This opinion demonstrates the bias against discharging student loans in bankruptcy. The income of $44,444 was below the state median income, even for a household of only one person.

In re Lozada (SDNY)

  • Held: debtor fails first prong of Brunner test where his expenditures indicated that he lived a comfortable lifestyle and the record did not reveal any efforts to minimize discretionary expenses. Also, debtor has at least $1,400 of surplus income that he could apply towards paying his student loans. Debtors’ charitable donations totaling more than $100,000 in the five years preceding his bankruptcy also weighed against him.

Analysis: This was a fairly easy decision. Surplus income of any kind is typically enough to defeat a request to discharge student loans in bankruptcy.

In re Kinney (Northern District of Iowa)

  • Held: Debtor’s cosigning of niece’s student loans, where debtor receives no educational benefit from these loans, weighs against prohibiting discharge for debtor, so long as debtor can otherwise satisfy the Brunner test.

Analysis: this decision makes a nuanced distinction between guarantying another’s student loans and obtaining student loans for one’s own benefit.

In re Metz (Kansas)

  • Amount of Loan: $67,277
  • Held: 59 year old single debtor who filed bankruptcy under Chapter 13 was entitled to partial relief under the Brunner test where, although she had an income of $43,000, she could not make minimum monthly payments of $564 while maintaining a minimum standard of living, had few if any prospects of earning a higher salary, and would have been required to pay to work until she was 84 to pay the entire debt.

Analysis: like other cases, the age and low relative income of the debtor entitled her to obtain relief from her student loans.

In re Menefee (Eastern District of VA)

  • Held: debtor failed to satisfy any prong of Brunner test where she failed to provide any evidence as to her current income and expenses or the amount of her student loan payment, and thus did not establish that she could not maintain a minimum standard of living.

Analysis: this case raises the question of debtor’s good faith in attempting to obtain student loan relief. Debtors bear the burden of establishing the right to a discharge in bankruptcy for student loans.

In re Pierson (Northern District of Ohio)

  • Held: 1) debtor could satisfy first prong of Brunner test notwithstanding in the IBR repayment program at a zero monthly payment requirement. 2) Debtor met second prong of Brunner test where debtor struggles with learning disabilities and bi-polar manic-depressive disorder and thus had limited future earning potential. 3) Debtor could satisfy third prong of Brunner test where he utilized administrative assistance such as requesting forbearance and did not seek discharge until 20 years after his education. Discharge granted.

Analysis: this case would provide the greatest hope for those who would seek to discharge student loans in bankruptcy. This debtor overcame two of the greatest hurdles facing such debtors: participating in an income based repayment program and seeking forbearance and deferment instead of outright making payments. This court certainly focused on the debtor’s long term mental health struggles.

 In re Richardson (Southern District of Georgia)

  • Held: debtor fails first prong of Brunner test where creditor shows that debtor could maintain minimal standard of living by limiting his retirement plan payroll deductions.

Analysis: voluntary deduction for retirement plans frequently interfere with a debtor’s efforts to discharge student loans or otherwise obtain bankruptcy relief. Courts frequently view such deductions as a debtor paying themselves before paying creditors. On the other hand, if a debtor can’t possibly save for retirement because he owes exorbitant student loans, then why is that not an undue hardship?

Conclusion: as much as we would like for bankruptcy courts to take up the mantle of addressing the huge social problem imposed by ruinous student loan debt, it appears almost certain that the final word must be made by Congress. However, if an enterprising attorney were to bring this matter to the Supreme Court who would articulate a standard that is less rigid than the Brunner Test, as traditionally applied by bankruptcy courts, that could open doors for huge change in the world of student loans and bankruptcy.

This article was contributed by Ronald J. Drescher. He can be reached at www.drescherlaw.com or 410.484.9000.

Speak With A Charlotte Bankruptcy Lawyer Today

If you are considering filing bankruptcy or have questions about discharging student loans,  it’s important that you speak with a Charlotte bankruptcy attorney. The call is free and you will come away with a much better understanding of your options. You can reach us at 704.749.7747 or click to request a FREE CASE EVALUATION, and we will be in touch shortly.

Further Reading

If this article was helpful, you may find other helpful articles on our Bankruptcy Blog. Thank you for visiting the website—we hope it has been helpful.

Is Bankruptcy Public Knowledge?

Yes, your bankruptcy filing is public knowledge. However, the chance of someone finding out you filed bankruptcy is not as good as you might think. In fact, other law firms routinely call our office to ask us to check to see if an individual or company has filed bankruptcy. The reason it’s difficult for someone to find out you filed bankruptcy is that information is stored on PACER. PACER is an electronic system which stores records. In order to access it, you must register and pay per page for any materials you would like to view. As a result, most PACER users are bankruptcy lawyers, creditors and their attorneys. As a result, the chance your friends, family members and co-workers find out you filed bankruptcy is very small.

Bankruptcy And Your Credit Report

While we have written in the past about bankruptcy and your credit score, it’s important to know that bankruptcy will show on your credit report for up to ten years. This is not cause for alarm, because your credit score is more important than how long bankruptcy shows on your credit report. In fact, unless your credit was perfect before filing bankruptcy, your credit score a year after filing bankruptcy will typically recover to what it was the day before you filed. From there, if you follow a few simple strategies for building your credit score, you will continue building a healthy credit score.

Credit Card Offers

Our clients report to us that they start receiving credit card offers shortly after filing for Chapter 7 bankruptcy. One reason for this is that bankruptcy improves your Debt To Income Ratio. Your debt to income ratio compares your income to the amount of debt you have. When you file bankruptcy, you eliminate a large amount of debt. As a result, your debt to income ratio improves. Creditors see you as a good candidate for credit card offers. First, they know you do not have any other debt to pay. Second, they know you can’t file bankruptcy again for at least 8 years. As a result, you will start to get credit offers, which may surprise you.

Automobile Financing

Most clients are surprised to find out they can keep their car in bankruptcy. However, you may want to obtain a new car just before or just after filing bankruptcy. Even Chapter 13 clients who are in an ongoing bankruptcy, are able to obtain financing for new cars. This surprises many clients. Additionally, the process for getting approved for new vehicle financing in Chapter 13 is quite easy.  Again, another myth of bankruptcy is dispelled by the reality that filing bankruptcy serves to protect you more than it serves to harm you.

Life After Bankruptcy Gives You A Chance To Excel

Yes, bankruptcy is public knowledge. What’s more important is how positively your life will be affected from the day you file your bankruptcy. Without the ongoing debt payments, filing bankruptcy is like giving yourself the raise you deserve. You’ll find you have more money left over each month after paying bills, you can balance your budget and save for special events like birthdays and Christmas, and you’ll even be able to help a relative in need, if you desire. You deserve a second chance, and we’re eager to help you seize the opportunity.

If you are considering filing bankruptcy, it’s important that you speak with a Charlotte bankruptcy attorney. The call is free and you will come away with a much better understanding of your options. You can reach us at 704.749.7747 or click to request a FREE CASE EVALUATION, and we will be in touch shortly.

Further Reading

If this article “Is Bankruptcy Public Knowledge?” was helpful, you may find other helpful articles on our Bankruptcy Blog. Thank you for visiting the website—we hope it has been helpful.