Michigan Bankruptcy Lawyer

Entries from February 2009

Can My Student Loans Be Discharged in Bankruptcy?

February 26, 2009 · Leave a Comment

collingebook2This is an issue near and dear to my heart, as, having gone to law school somewhat later in life after a lengthy career as a graphic designer, I myself will most likely die of old age long before my own student-loans are paid off. Some of the problems and causes of students’ wildly increasing student loan bills were discussed yesterday on NPR’s On Point show with author Alan Michael Collinge, whose new book, The Student Loan Scam, discusses the unholy relationship between student loan lenders, university financial aid administrators, and the US Congress in a most enlightening and, sadly, disheartening, manner. In his radio interview, Collinge explicitly addressed one of the most egregious problems with student loans as a rising component of Americans’ escalating debt-loads: namely, that, for all intents and purposes, they are not dischargeable in bankruptcy, either in Chapter 7 or Chapter 13.

If you’re interested in hearing more about why this is so and how this situation came about, I highly recommend listening to Collinge’s interview and reading his book, particularly if you are a parent with children approaching college-age or if you, as I was, are looking to make a mid-career transition and are considering returning to school full-time in order to do it. What I will discuss in the remainder of this post is the actual impact of student-loan debt within the bankruptcy process.

Student loans are specifically excepted from the discharge of debts resulting from a successful bankruptcy petition by section 523(a)(8) of the US Bankruptcy Code.  This section contains several important components to those considering bankruptcy.  It covers:

  • Any educational benefit overpayment or loan that is …
  • Made, insured, or guaranteed by the government or a governmental unit …
  • Or also any obligation to repay funds received as an educational benefit, scholarship, or stipend …
  • Or any other educational loan defined as a “qualified education loan” by section 221(d)(1) of the Internal Revenue Code of 1986.

Thus, any debt which falls into part or all of this provision is unable to be discharged by bankruptcy—unless, as section 523(a)(8) states at its outset, the debt causes an “undue hardship” on the debtor or the debtor’s dependents. Additionally, section 221(d)(1) of the Internal Revenue Code also defines a “qualified education loan” as any debt incurred solely to pay for higher education expenses. The two primary arguments that a student loan should be discharged in any given circumstance, therefore, are that (1) the debt causes an undue hardship and (2) the debt is not the result of a “qualified education loan.” There are other associated and included conditions as well, but these are the general arguments available.

Both, however, offer extremely high bars to discharge.

As to the undue hardship argument, the courts have rendered multiple decisions on the subject that make it very difficult to establish that an “undue hardship” has indeed been imposed by the debt. The basic test (known as the Brunner Test) for undue hardship is:

  • If the debtor is unable to maintain a “minimal” standard of living for the debtor and his or her dependents based on current income and expenses;
  • If the debtor’s general circumstances indicate that this state of affairs isn’t likely to change throughout the life of the loans;
  • And if the debtor has made good faith efforts to repay the loans.

It doesn’t sound that difficult, but, time and again, courts have ruled against debtors seeking discharge on this basis. Very low-income debtors have the best chance of success.

The argument that the loan is not a “qualified education loan” is a possibility when a loan has been used for living expenses in addition to “higher education expenses,” but the possibility that an argument based on this statutory wording will result in a complete discharge is uncertain at best.

There are, however, many additional arguments to be made on a case-by-case basis, and a knowledgeable bankruptcy attorney should be able to determine whether your student loans are, as most unfortunately indeed are, truly non-dischargeable. Under some circumstances, particularly when a debtor is attempting to provide for dependents on a very low annual income, discharge may remain a possibility, albeit, as Alan Michael Collinge argues, a very slim one.

If you have any questions about your student loan or any other debt, please contact me to schedule a free, initial consultation.

Categories: Bankruptcy · Chapter 13 · Chapter 7 · Judicial Decisions · Student Loans
Tagged: , , , , , , , , ,

Am I Responsible for My Fiancee’s Debt After Marriage?

February 23, 2009 · Leave a Comment

It may seem cold to suggest that couples considering marriage examine what their mutual debt-load will be after they marry as part of the process, but it is a fact that the debt belonging to one partner will affect the other throughout and, if it comes to it, after marriage. While I am not a family law attorney and do not handle divorce cases, I do encounter the issues created by pre-marital debt quite often in my work as a bankruptcy attorney. Both married couples and couples considering both marriage and divorce have many questions about the debt accrued by each partner individually, before and during the marriage, and by the couple as a unit during the marriage. For those in the not-yet-married category, by far the most common question I am asked is whether a partner, through marriage, will become legally liable for his or her partner’s pre-marital debt after marriage.

Michigan, unlike common property states like California, is an  equitable distribution state, which, in terms of assets belonging to marital partners, means, for divorce purposes, that a judge will decide what assets belong to each divorcing partner equitably. Typically, under this system, property belonging to a marital property prior to the marriage is held to belong wholly to that partner after the marriage, even if the partners cohabitated before marrying. There are many caveats and special circumstances altering this rule, but, in Michigan, this is the case generally.

Likewise, with regard to pre-marital debt, debts incurred wholly by one partner prior to the marriage will belong to that partner after divorce. Debts which are incurred during the course of the marriage, however, are joint debts, generally, regardless of whose name is attached to it. In Michigan, these debts will, like joint-assets, be divided equitably by the court according on the basis of such considerations as the length of marriage, child support requirements, and the level of financial contribution to the marriage by each partner, among many others.

Generally, then, a partner considering marriage needn’t worry about shouldering his or her fiancee’s pre-marital debt (unless they contribute to it or work to detract from it during the course of the marriage). However, that does not mean that there are no further implications of that debt upon the health of the marriage. Struggling with an overabundance of debt is the reason that many marriages fail. If one partner, prior to marriage, is overwhelmed by debt, it is possible that filing for bankruptcy prior to marrying will allow not only that partner to move forward and reconstruct his or her financial health but will also allow the marriage to get started out on solid footing.

A new marriage is by definition a shaky, uncertain thing. If you are considering marrying but are concerned about the effect your debt-load may have on your future spouse or your marriage in general, please contact me to schedule a free, initial consultation. Together, we can examine whether filing for bankruptcy prior to marrying will be beneficial to you both.

Categories: Bankruptcy Basics · Bankruptcy Planning · Marriage and Bankruptcy · Michigan
Tagged: , , , , , , , , , , ,

What Happens to my Unemployment Benefits if I File Bankruptcy?

February 20, 2009 · Leave a Comment

Unemployment benefits are many people’s only source of income in truly difficult times. However, they are often insufficient for providing the standard of living recipients had before becoming unemployed, and they are, therefore, also often insufficient for keeping people from losing further financial ground and arriving at the possibility of needing to file for bankruptcy simply to keep food on the table.

Fortunately, in Michigan, unemployment benefits are protected when recipients file for bankruptcy. Michigan law provides that unemployment benefits are not included in the “bankruptcy estate” that is created when you file a bankruptcy petition and that the bankruptcy trustee, who oversees that estate, may not, therefore, transfer that money to any of your creditors. Unemployment benefits must, however, be listed as part of your current income in Schedule I, which is one of the several “schedules” attached to each bankruptcy petition. This same amount is then also listed as “exempted” on another of the attached schedules, but it is important to disclose your unemployment benefits as income to your bankruptcy attorney.

Prior to filing for bankruptcy, creditors may endanger your unemployment benefits indirectly by threatening to sue you for money owed to them, and a successful suit would allow them to place a judgment lien on your personal property or even garnish your bank accounts—which might contain unemployment benefit funds. If a creditor is threatening such actions against you, or if you have any concern over your ability to continue receiving unemployment benefits during or after a bankruptcy filing, please contact me to schedule a free, initial consultation. I’ll be glad to look at your entire financial picture, including unemployment benefits, and help you determine the best way to protect the income you have, regardless of its source.

Categories: Bankruptcy · Bankruptcy Planning · Chapter 13 · Chapter 7 · Michigan · Unemployment
Tagged: , , , , , , , , , , ,

What Happens to My Tax-Return if I File Bankruptcy?

February 2, 2009 · Leave a Comment

It’s that time of the year again, and one of the most often overlooked aspects of a prospective bankruptcy filer’s financial picture is the tax return that is expected but not yet received. It is a common misperception that, when you file for bankruptcy, the bankruptcy trustee and court are concerned only the past and the present state of your financial affairs. In fact, in many ways, they are just as concerned with future alterations to your finances.

An annual tax-return is often the largest unscheduled influx of cash that a consumer receives all year long, so it is of particular interest to trustees. From the end of a year, around late November to December, through March or April of the subsequent year, the possibility that a debtor filing for bankruptcy may receive a large check from the government is something that all parties need to keep in mind. For those of you considering filing for bankruptcy, especially now, as we have just passed employers’ deadline to issue W2 forms, it is important to include the amount of money you expect to receive in your tax-return in the disclosures you make to the bankruptcy attorney preparing your petition.

Remember to include your expected tax refund in your discussions with your attorney is especially important because, often, there may be steps the attorney can take to prevent the inclusion of the full refund in the bankruptcy estate which is overseen by the bankruptcy trustee. For example, if the refund is produced by excessive tax withholding throughout the tax year, the refund may be prorated over the course of the year with only the pre-petition portion being included in the estate. Issues also arise with regard to the tax refund in joint bankruptcy petitions (petitions for bankruptcy from a married couple). Certain tax credits may also be treated differently than others in the petition. The timing of the petition’s filing may also determine whether the refund is included in the estate at all, furthermore.

In short, as with all aspects of bankruptcy, the treatment of an expected tax refund is a complicated matter and should be discussed with a bankruptcy attorney. Many people rely on that tax return to get a jump on the new year, and losing it to a bankruptcy trustee due to an ill-time petition filing or other misstep is a major blow. The possibility is, however, a needless risk. Good planning with a bankruptcy attorney and, most importantly, full disclosure of your entire financial picture, including your future financial picture, will easily mitigate such risks.

If you are considering filing for bankruptcy and are concerned about the impact it may have on your ability to retain your tax refund or about the impact your tax refund may have on your ability to file bankruptcy in the first place, contact me to schedule a free consultation.

Categories: Bankruptcy · Bankruptcy Planning · Chapter 13 · Chapter 7 · Joint-Filing · Michigan · Tax Returns and Bankruptcy
Tagged: , , , , , , ,