How Much Debt Do You Need To File Bankruptcy?

There is no set amount of debt needed to file bankruptcy. In deciding whether to file bankruptcy, we examine the amount of debt you have, the type of debt you have, and whether you qualify for Chapter 7 or Chapter 13 from an income perspective. This article seeks to address concerns surrounding “How much debt do you need to file bankruptcy?”.

Unsecured Debt

Unsecured debt is a debt that is not tied to any property. Common examples include credit card debt and credit “lines”. Unsecured debt is discharged in bankruptcy. When deciding if you have enough debt to file bankruptcy, you might consider the cost of filing bankruptcy as compared to what it would cost you to settle the debts with each creditor. Our office routinely assists clients with debt settlement when it makes more sense to settle the debt instead of file bankruptcy. Generally speaking, if you have more than $15,000.00 of unsecured debt and you do not have the ability to settle that debt or keep current on payments, you should consider a bankruptcy filing.

Secured Debt

Secured debt is a debt that is “secured” by a property—a car or home, typically. In a bankruptcy filing, you have the choice to either keep the secured debt (See: Keep Your Car In Bankruptcy) or discharge the debt. Keep in mind, the property travels with the debt. If you choose to keep the property, you keep the debt. If you surrender the property, the debt goes with it.

Upside Down Vehicles

Many clients are faced with a vehicle that is upside down. In other words, prior to bankruptcy, the value of the car is worth less than the loan balance. Trading the car in for a new car simply means carrying that negative equity into the new vehicle purchase. Bankruptcy offers a different solution. You can purchase a new car just prior to filing bankruptcy. Then, when you file the bankruptcy, you surrender the old car (and the old debt), and you are left with only the new car and the new car debt.

Creative Bankruptcy Solutions

You will find that much like the vehicle solution above; bankruptcy offers an opportunity to deal with your debt creatively. Chapter 13, which we discuss in greater detail in prior blog posts, also offers vehicle and home solutions ranging from stopping foreclosure to lowering your vehicle interest rate. Often, these solutions more than make up for the cost of filing bankruptcy.

Speak With A Bankruptcy Lawyer Today

If you have questions about “How much debt do you need to file bankruptcy?”, we are here to help. Call us at 704.749.7747 or click HERE to request a free consultation. You deserve to understand your options and we would love to speak with you.

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 15^th, 2017. That tax debt turns three years old on April 15^th, 2020. If you file your bankruptcy prior to April 15^th, 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 15^th, 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 15^th of 2017 and owe $5,000.00. That tax debt turns three years old April 15^th 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.

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.

What To Expect After Filing Bankruptcy

When you file bankruptcy, you should feel an instant sense of relief. Your bankruptcy attorney has filed the paperwork, and the court has sent out notices of the filing to your creditors. The Automatic Stay immediately goes into effect, which means your creditors are no longer allowed to contact you. You are on your way toward a brighter financial future. Below, we address some common concerns clients have shortly after filing.

The Post-Bankruptcy Timeline

If you file a Chapter 7 or a Chapter 13 bankruptcy, you will receive notice within a week, of your 341 meeting date. The 341 meeting date is typically 45 days after the bankruptcy is filed. The meeting only takes about 10 minutes and your attorney will attend with you. The advance notice is provided so you can make sure to clear your schedule. You can read further in our blog about what happens at a 341 meeting if you like.

Note also that the trustee may request additional documents at the 341 meeting. These may be bank statements, or other information related to assets or debts. The trustee will typically continue the meeting for a few weeks. So long as you provide the requested documentation within 14 days, you do not have to attend a continued 341 meeting.

Chapter 13 Payments

If you have filed Chapter 13, you will need to make your first Chapter 13 payment within 30 days of the bankruptcy filing. Because it takes seven days for your payment to post, you should make sure to mail your payment no later than 21 days after the bankruptcy was filed. Making on time payments in Chapter 13 is a key part of not having your Chapter 13 case dismissed. You will be provided guidance as to how to make a payment.

Taking The Financial Management Course

Once you file, you will need to take a second online course called the Financial Management course, or the Post Bankruptcy course. This is true of Chapter 7 or Chapter 13. The course is for education purposes only, but it is a requirement that it is completed prior to the entry of your discharge. A failure to take the course in the required time will result in you not receiving your discharge. Taking the Financial Management course should be done prior to your 341 meeting. Our firm pays for both the Credit Counseling course you take before filing, and the Financial Management course you take after filing.

Reaffirming Vehicle Loans

In Chapter 13, there is nothing to do regarding your vehicle except to make your monthly Chapter 13 payment. If you have decided to keep your vehicle in Chapter 7 bankruptcy, you may need to complete a Reaffirmation agreement with the lender. Essentially, if you want to keep your car, and if the car has a loan, you must complete and submit the Reaffirmation agreement as quickly as possible after filing. In any case, it must be completed prior to the entry of discharge. In a Chapter 7, this means you have roughly 60 days to complete the Reaffirmation agreement and return it to the lender with enough time for them to review it and file it.

While we will assist with completing the Reaffirmation agreement, you will need to request it from your lender. Steps should be taken toward this as quickly after you file your bankruptcy as possible—certainly no later than two weeks after filing. It will take time for the lender to draft the agreement and send it to our office.

When you reaffirm a vehicle loan, you are re-obligating yourself to the debt. This is done under the same interest rate, terms and repayment period. Additionally, once you reaffirm, any payments you make on the loan will be reported by the lender to the credit bureaus and will help to rebuild your credit.

Surrendering A Vehicle

If you are surrendering a vehicle in bankruptcy, you will simply need to reach out to the lender and make arrangements for them to pick up the vehicle. In the alternative, you can deliver the vehicle to them. This process is quite painless, but you should take steps shortly after filing, to complete the process.

Making Car Payments

In Chapter 13, your car payments are built into your Chapter 13 payment. In Chapter 7, if you plan to keep your car in bankruptcy, you will find that until your bankruptcy case closes, you will most likely need to make your monthly car payments to the bankruptcy division of your car lender’s office. This is a procedural matter for the car lender, and is a temporary payment situation until your cases closes. Once your case closes, you can resume auto-draft or any other type of payment method available prior to your bankruptcy filing.

Redeeming A Vehicle Loan

You may also choose to Redeem a vehicle loan in Chapter 7. This is a process by which you take out a new loan with a redemption company such as 722 Redemption. They will pay off your current vehicle loan, and going forward you will pay the new loan and keep the car. This is usually done to avoid reaffirming a vehicle loan with a very high interest rate, lower the loan balance to the blue book value, and may even offer a longer repayment period than a Reaffirmation. If you wish to start this process, you must reach out to a redemption company as soon as possible after the filing of your bankruptcy.

Home Mortgage Concerns

In Chapter 13, you simply make your Chapter 13 payment. In Chapter 7, as opposed to Reaffirmations on vehicles, you can generally keep your home so long as you continue to pay your mortgage. There is a public policy against reaffirming a home loan. The theory behind this is that your bankruptcy filing relieved you of the obligation to repay the home loan. To enter into a large debt immediately after filing bankruptcy may not be advisable. Supposing the housing market crashed after your bankruptcy. If you never entered into a home Reaffirmation, you could simply turn the home over to the mortgage lender and you would not be responsible for any remainder on the loan if the home is upside down.

For this reason, most individuals choose to “Retain and Pay” the mortgage. This means that as long as you continue to make mortgage payments, you are allowed to keep your home. You do not need to sign a home reaffirmation agreement. Additionally, your lender can not foreclose on the property if you are current. Lastly, your mortgage balance will reflect any payments you make, over time.

The only downside to not reaffirming a home loan is that the lender will typically NOT report the payments to the credit bureaus. This means you won’t get credit for your mortgage payments, and your credit score will not reflect them. You can address this yourself at the end of each year by submitting a list of payments you made on the mortgage, to each credit bureau. If the mortgage lender does not dispute them, you will be given credit for the payments on your credit report.

Your Credit Score After Bankruptcy

Everyone is concerned about their credit score after bankruptcy. You will be surprised how quickly your credit score recovers after bankruptcy. Additionally, you will receive offers for credit cards and vehicle financing shortly after your discharge. In most cases, our clients are able to purchase new homes two years after filing bankruptcy. You can read more about Your Credit Score After Bankruptcy on our blog.

The Discharge

In Chapter 7, after replying to any trustee requests for documents, filing Reaffirmation agreements, and taking your Financial Management course, your discharge will be entered. This means your case is officially closed and you have no further obligations in bankruptcy.

In Chapter 13, your discharge will be entered after you make your final Chapter 13 payment.

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