Student Loan Relief Proposals Under a Trump Presidency

With a new President being sworn-in in January, the question for many student loan debtors is, "What will happen with my student loan debt?"  The best answer I can give thus far is, not much.  President Obama signed the College Cost Reduction and Access Act into law in September 2007.  This allowed student loan debtors to enter an income-based repayment program, with the hopes that the payments would be manageable.  Some debtors could receive loan forgiveness by working in public service for ten years, or by making 20-25 years of payments (payments 10% of debtors' income) at which time the rest of the debt would be forgiven.  President-Elect Trump's proposal bears some striking similarities to this already passed law.  His proposal would maintain income-based repayment but instead of payments being based on 10% of debtor's income it would rise to 12.5%.  At the same time, the number of years of repayment would be reduced to 15.  Because the repayment programs already exists under the Department of Education, the new president could sign an executive order to make these changes rather than make a new proposal to Congress.

All of this is hypothetical.  This information is based on campaign promises and any action the President-Elect takes will happen after he is sworn in.  His proposal isn't a huge change for people with existing debt.  Some will find the increase to 12.5% unbearable, while others may be very happy to see loan forgiveness in 15 years.  For now we will have to wait and see.

Chin Up!...At Least the Elections Over.

I am writing this before all of the votes have been tallied. Regardless, who you voted for, don't expect big changes with regard to bankruptcy law. Bankruptcy laws only go through big changes every 25 years or so. For the most part it's a matter of tweaking and fine-tuning existing laws. BAPCPA went into effect in 2005 and has had some pretty serious drawbacks and unintended consequences.  The purpose of BAPCPA, at least as it was sold to Congress, was to drive up the use of Chapter 13 reorganization (repayment) because many more people who could pay back their debt, were utilizing Chapter 7 instead.  Well, Chapter 13 filings didn't go up, and in many states actually went down.  The problem with Chapter 13 is it doesn't leave a lot of room for uncertainty.  It assumes that the conditions in someone's life will sit stagnant throughout the life of the plan.  That's why the failure rate is so high. 67%.  That's right for every 3 people who file a Chapter 13 case, 2 will fail.  While, Congress may have spent time trying to figure out a way to push people into Chapter 13, it spent no time trying to make the option more palatable.

I definitely believe that Chapter 13 is a viable option for many debtors, and that it has a really important place in bankruptcy law.  But Chapter 13 isn't Chapter 7.  If you need to reorganize you have to approach an attorney as soon as the debt slide starts, not at the end.  By then, you may be setting yourself up for failure.  We often look at Chapter 7 as what you do when you are on your last leg.  Well, Chapter 13 is what you do when you have both your legs but one has been persistently aching.  

 

Christmas is Coming !!! (And so are the bills...)

I love the holiday season.  The lights, the trees the presents.  But.  I have learned how to budget Christmas like crazy.  I take advantage of every coupon, rebate and sale imaginable. I stalk every Black Friday Sale and I am prepared for Cyber Monday.  Why, you might ask?  Well, I see a pretty heavy uptick in bankruptcy cases right after New Years' Day.    I am not implying Christmas is the cause of bankruptcies, but it can be a tipping point.  So here are my top 5 money savings tips for the holidays:

1) Layaway.  Before credit cards became widely available in the late 80's, layaway was boon for middle class families.  Mom or Dad could snatch up that popular toy and make payments directly to the retailer until Christmas.  Well, Layaway has made a comeback.  Popular stores like Walmart, KMart, Sears and Toys R' Us, offer layaway.  Typically, you put down 10% of the purchase price and make periodic payments for 6-8 weeks until paid off.  This means a family can break that cost up over 3 to 4 paychecks rather than making a draining one time payment and, unlike credit, there is no debt following you around after the holidays

2) Christmas Club.  Yes, these still exist.  A number of local banks and credit unions maintain Christmas Club to allow you to save throughout the year.  My bank didn't offer one so I set up an account with Capital One 360 online banking.  You designate a certain amount of money to go from your primary account to your Christmas Club account periodically.  I have a $50 every two weeks.  By the end of the year, I have $1300 to spend for Christmas.  The interest rate isn't great but that money is socked away for its intended purpose.

3) Shopping Black Friday.  Yes, I am crazy for Black Friday, but I don't spend carelessly.  You can typically find the sale advertisements up to two weeks prior to the actual sale.  And Black Friday doesn't start on Friday, it now starts on the Wednesday before and lasts through Saturday.

4) Shopping Cyber Monday.  To compete with Black Friday, online retailers like Amazon have their own sale the following Monday.  you can find great deals on electronics, toys and other items.  If you want to buy an Amazon product in particular, like an Echo or a Kindle,  you will likely not find a better deal for the rest of the year.  Subscription services like Prime and Kindle unlimited may also be reduced in price.  Walmart also has its own Cyber Monday deals to compete with Amazon.

5) Shopping throughout the year.  Of course holding on to your gift buying list and keeping the recipients in mind throughout the year.  Doing this will allow you to catch some great deals on items that go on sale typically in the Spring or Summer but not during the period approaching Christmas.

Some of my favorite websites to track deals include:

Black Friday.comhttps://blackfriday.com/

The Krazy Coupon Ladyhttp://thekrazycouponlady.com/

Bankruptcy Tip of the Day: Time is NOT on your side.

The people who get the best benefit from a bankruptcy filing are those who file early.  In other words, those that don't wait until their entire financial world crumbles.  Filing early allows debtors to make the most of their exemptions and preserve as much of their property as possible.  Many potential debtors don't understand that bankruptcy court allows you to keep most (in many cases all) of your property.  I had a wonderful client that came in when her contract job was coming to an end.  Because she came in when she did, she learned that her retirement would be exempt if she filed for bankruptcy.  She had been prepared to cash it in.  Her unemployment would cover her living expenses but not her additional credit card bills, medical bills, etc.  By filing for bankruptcy she was able to preserve her retirement while looking for another job, pay all of her necessary expenses and make it through 6 months of unemployment without liquidating all of her assets.

Debt, Divorce and Bankruptcy

Many couples find themselves hopelessly underwater with their bills following a separation.  There are many reasons couple file for divorce and all are legitimate.  However, very few couples contemplate the financial repercussions of their divorce.  Yes, people think about their retirement, alimony and child support but very few talk about their budget moving forward. 

Once the parties separate and move into different homes, they move from one household budget to two.  Each moves from two incomes to one.  Financial troubles is one of the primary reasons couples divorce, but those financial are exacerbated by the process of divorce.  Sometimes debts, particularly unsecured debt, can fall through the cracks, as parties may have hard time figuring out who pays what.  Then, the parties have costs associated with a divorce.  Those can skyrocket when parties get into a mindset that they must "win" the divorce.  Oftentimes, we see parties deplete all of their resources in an effort to "win" the divorce.  An attorney friend likes to tell clients that they can approach the divorce in one of two ways, "You can put your kids through college, or you can put mine through college."

Bankruptcy can often put the parties back on track and eliminate one of the most contentious facets of divorce.  if the parties file together they can often eliminate the debt that keeps them from being able to support two new households.  For a spouse who has been "stay at home," this may allow them a fresh start as they look to start a new career without a cloud of debt looming over their head.  other times, we have had parties reconcile after recognizing that it was the tremendous debt driving the divorce not a lack of love. 

If parties find their resources stretched when they separate, bankruptcy is an option to explore even if it's a step they ultimately choose not to take.

Top 5 Reasons People File Bankruptcy

Consumer bankruptcy filings are down across the country.  This could be a sign of a continually recovering economy.  However, the reasons for those filings have not changed.  Many people unfamiliar with bankruptcy think that it's simply an issue of bad budgeting.  Sometimes, it is, but that issue doesn't even make the top 5.  Here are the top 5 reasons:

 

5. Less Income

I differentiate this from the actual loss of a job.  Many companies, to offset expenses, have reduced hours, benefits, and bonuses to employees.  Remember the 90's film Christmas Vacation starring Chevy Chase?  His character, Clark Griswold, wants to surprise his family with a pool in the backyard. He's already put a down payment on the installation and he's counting on his Christmas bonus to pay the rest.  Instead of the monetary bonus, he has received every other year, he gets a membership to the Jelly of the Month Club.  Now, a pool is a luxury but what if Clark was counting on that to pay for his daughter's college tuition or to pay in advance for a year's worth of daycare?  Suddenly, not receiving that money may have terrible consequences.

4. Divorce

Divorce can be heartbreaking but it is almost always expensive.  Very few couples live on one income.  Typically, there are two incomes and they live like they have two incomes. Most couples don't live on one income and save the other income for retirement or savings.  They live on both incomes, pooling those resources to afford better stuff.  When that couple divorces, they now have to set up two separate households.  Think of all the bill doubling overnight.  Two homes.  Two water bills.  Two gas bills, etc.  This doesn't even count the cost of the divorce itself in terms of attorney's fees.  I once did a bankruptcy for an individual whose divorce cost so much ($100K+) that there was literally nothing left to fight over.

3. Job Loss

This needs no further explanation.  All of us, having made it through the Great Recession of 2008, no someone, probably many someones, who lost jobs and spent an extended time unemployed.  The prevailing thought is that you should have about 6 months of income in savings just in case you lose your job.  Let's say you gross $3,000 amonth and your spouse grosses another $2,000.  Do you have $30,000 in savings right now?  Not in retirement.  Just in savings.  What happens if you are out of work 7 months not 6?  Or you are unemployed for a year or more? 

2. Unexpected Catastrophe

Many Americans each year havean event occur that no one can for see that completely changes the course of their lives.  This could be the death of a spouse, a house burning down or natural disaster.  I grew up in New Orleans but was living in New Mexico at the time of Hurricane Katrina.  Many of my friends were unable to return to their homes, even if they weren't in a part of the city that was hard hit, for more than six weeks.  The businesses they worked at were shut down. When they returned home, there were extended fights with insurance companies over coverage.  This was the first time many found out that they were under insured. 

1. Medical Expenses

A Harvard study found that 62% of bankruptcies were due to medical expenses.  Many people believe thatbecause of the ACA (otherwise known as Obamacare) this can't happen but refer back to number 2.  People still get to choose their insurer and what benefits they will actually receive.  While there is now a cap on out of pocket expenses, that cap is still more than $10,000 for a family bringing us back to the savings reference in number 3.  Do you have another $12,500in saving for uncovered medical expenses?

These examples may paint a bleak picture, but I hope it makes you think about how easily you could find yourself seeking bankruptcy protection and you may not want to be too quick to judge others for seeking it themselves.

From the Paralegal's Desk: When will I get my discharge?

Shortly, after the client attends the 341(a) meeting they begin asking when they will get their discharge. When you file a bankruptcy chapter 7 it generates two dates the first is the 341(a) meeting the second is the due date for the client to have finished a financial management course and provide a certificate to the court. However, this second date is also the due date for any creditor to file a proof of claim or adversarial claim.  What I tell all our clients is that you cannot get a discharge until after that second date. It does not mean that you will get it right after that date it just means you cannot get one before that date.  Those dates are set in stone and there is no way to hurry it along or move it up.  This can be frustrating for clients who have completed everything asked of them, but creditors have rights in bankruptcy court too.  The court takes both the debtor's rights and the creditor's rights, seriously. 

BAPCPA Part 2: Credit Counseling/Debt Management Counseling

The Bankruptcy Code requires that potential consumer bankruptcy filers take a credit counseling course before filing.  The counseling must be taken with a counselor or counseling agency from an approved list that can be found at the Department of Justice website.  I always suggest checking the DOJ website as the approved counseling agencies vary by state  and the list of approved agencies changes.  The counseling can take place in person, over the phone or online.  The cost can vary from as low as $10 to $50 or more (unless you qualify for a few waiver), and that can largely depend on the method used to complete the counseling.  In person or phone counseling is typically more costly than internet counseling.   Once you have completed counseling, you will receive a certificate which will be valid for 180 days.  This means that you must file bankruptcy within that 180 days or that certification will lapse and you will have to take the counseling course again.  The purpose of credit counseling is to help you assess your financial situation and provide alternatives to a bankruptcy filing.  Debt/Financial management is taken after you file your case and requires that you have case number to provide to the counseling agency.  You can often take the course with the same provider who did your credit counseling and the provider may offer a discount for the debt management course.  Debt management must be completed within sixty days of your first scheduled 341 meeting, but can be taken as soon as your case has been filed and you have a case number.  Financial management counseling can help you create a budget, give you tips about how to use credit responsibly and help you manage your money.

Right after the implementation of BAPCPA in 2005, a number of credit and debt counseling agencies cropped up offering services.  Because this was was a completely unknown and new element of bankruptcy there were a lot of hits and misses.  Some courses were to long.  Others not accessible to folks in rural locations.  Some quickly went out of business.  The number of in-person providers shrunk each year.  More and more clients were being encouraged to use services online.

I am not a fan of credit counseling.  I don't believe it's effective.  I have yet to have a casual consultation about bankruptcy.  By casual, I mean a person ho comes in curious about bankruptcy who has explored no other options first.  Typically, I don't see someone until they have explored every option.  Even thought I'm not a fan, I do suggest that potential clients take credit counseling before retaining an attorney or giving an attorney any money. Credit counselors are there to give alternatives, and I take the position that they should be allowed to do their job.  If they have a workable solution for a client, the client should explore that before filing.  However, I have yet to get a call that a client has decided not to file because credit counseling provided a solution.

While I dislike the credit counseling provision in BAPCPA, I quite like debt management.  In part, because it comes after filing, my clients don't find it to be another stressful thing they have to tick off their list of things to do.  I get mostly positive reviews about debt management.  Clients are provided with tools that will help them moving forward, and information that they didn't know when they first started accumulating debt. 

Regardless of my opinions, both of these courses are requirements to successfully receiving a discharge in Chapter 7 or 13 bankruptcy. It's a few hours total of your time and given the benefits of a bankruptcy discharge it's well worth the time.

 

BAPCPA PART 1: MANADATORY DISCLOSURES IN BANKRUPTCY

AS PART OF THE BANKRUPTCY ABUSE PREVENTION AND CONSUMER PROTECTION ACT OF 2005, attorneys have to provide information to clients at the beginning of representation.  These disclosures are parts of the bankruptcy code.  The first Notice in the disclosures, explains the different types of bankruptcy, Chapters 7, 11, 12 and 13.  It also explains a new requirement of the BAPCPA, credit counseling.  Credit counseling is mandatory on BAPCPA and did not exist as a requirement prior to 2005.  Arguably, the most important information provided in the first notice, is what bankruptcy can and cannot do for the person filing. 

The second notice informs potential filers that the information they provide must be truthful and that that they will be subject to means testing.  Means testing at its simplest, is an income qualification for chapter 7 bankruptcy.  If a person does not qualify for chapter 7 because of the means test, he/she must file a chapter 13 reorganization.

Notice number three  provides that an individual or business providing bankruptcy services, must provide you with a contract outlining the services provided and the cost for such services.

The final notice explains the consequences of providing fraudulent information or concealing information from the bankruptcy court. 

My biggest issue with the disclosures, is that my clients, for the most part, don't read them.  We provide the disclosures in every case.  However, we can't force our client to actually read them.  They expect me to provide this information and I do, making these disclosure wholly unnecessary. 

 

Bankruptcy Tip of the Day: Don't Try to Do Means Testing Yourself

The bankruptcy Means Test was implemented to determine if a debtor filing bankruptcy has income low enough to file chapter 7 bankruptcy.  It's simple.  You take the median income of the state and you are either above or below.  Wrong.  The means test is pretty nuanced.  It is not a simple formula and a lot more goes into it than a high-low calculation.  We often see clients with significant incomes qualify for chapter 7 after carefully completing the means test with all available information.  Most of the information on the internet discourages clients from seeking the help of a bankruptcy attorney to make this determination.  For a fee, most bankruptcy attorneys will do a complete means test and talk to you about your options before committing to a bankruptcy filing.  If you decide to file, our office will credit the amount you've paid to your overall fees.

Bankruptcy Tip of The Day: Don't Leave Out Any Debt

When preparing bankruptcy cases, I want to make sure my clients have listed all of their debt.  The first reason I want to make sure this happens is, it's perjury for them to purposefully not list it.  It doesn't matter what the nature of the debt is or why they feel it should be left out.  You have to list ALL of your debt to the best of your knowledge.  You don't get to pick and choose.  The second reason is, that listing that debt usually benefits the client.  After 2005 an income qualification was put in place to file a chapter 7 bankruptcy case.  In calculating clients' ability to file every debt is important, as a debt may help them qualify. 

Bankruptcy and Your Home: The Question Isn't "Can I Keep My Home?", It's "Should I Keep My Home?"

I have touched on the subject of homes in bankruptcy in a previous post.  It is a major concern of my clients when they are contemplating bankruptcy but, oftentimes, they may be asking the wrong question.  It is not unusual for distressed homeowners to seek bankruptcy protection, particularly, if they have been served with a complaint for foreclosure.  A bankruptcy filing will stop a foreclosure, but it's like sticking a finger into a hole in a dam. It's temporary, and eventually the flood waters will break the dam.  So, instead of asking, "Can they keep their home?", I may be asking the following:

-What brought the clients to the point of foreclosure?  (Illness, job loss, divorce, etc.)

-What is their current income, and do they have enough money to make the month-to-month payment, and pay for all other necessary expenses post-bankruptcy?

-How far behind are they on payments?

-Is the situation that brought them to foreclosure resolved?

-Is there any equity in the home?

I may have a number of other questions bu this is the starting point.  I recently encountered a lovely woman whose home was in foreclosure.  She was divorced but able to maintain her mortgage until she became ill.  Her disability is permanent and she is now on a limited income.  There is little chance that she will earn more in the future (barring a lottery win).  Her monthly mortgage payment represents more than half of her current income.  Technically, she can make the payment, but it leaves her with very little money to pay utilities, food, etc. The home has no equity.  So, what is the benefit of trying to "save" the home?  Even if she is able to make the month-to-month payment, what happens when there is a necessary repair to the property?  There is nowhere in her budget to pay for repairs.  She can't make the repairs without sacrificing some other necessity.  In my estimation the house is not worth saving.  It would continue to be a source of distress and deplete most of her resources and, eventually, it would end in foreclosure. 

This is not information clients want to hear, and I have often had consultations with clients who consulted with another attorney and then come to see me hoping to get a different answer.  I am not going to tell them that they have to give up their home.  However, I have to give both the benefits and pitfalls of trying to keep a distressed home.  Unfortunately, in these situations the scale is tipping heavily towards the pitfalls.

Dear Erika: I Think I Need to File Bankruptcy but I Don't Want to Lose My House.

This is a pretty common question and one that I want to answer using a little math.  Every debtor who files for bankruptcy is allowed to use a certain number of exemptions to safeguard their property.  These exemptions come in two forms, federal or state.  In New Mexico you can use either the federal or state exemptions.  Let's look at both scenarios.

Bob and Sue live in a single family home out on Albuquerque's Westside valued at $225,000.00.  They have a first mortgage of $175,000.00.  The federal exemption for equity in a home is $22,975.00 for an individual and $45,950.00 for a couple.  The NM state exemption is $60,000.00 for an individual and $120,000.00 for a couple.  Because of their loan, equity in their home is $50,000.00.  That equity is protected since it is well within the limits of either the state or federal exemptions.  The trustee has no interest because there is no value outside of the mortgage and the protected equity.  The mortgage lender has no interest because it wants Bob and Sue to continue to pay their mortgage each month (not to mention the Bankruptcy Rules that would block it from taking any action.)

Jane and John live in  a newly-built condo in a new development in Santa Fe.  They paid $500,000.00 for the condo but due to a landfill being developed a mile away, their home value has dropped like a stone and the condo is now worth $375,000.00 Jane and John have a first mortgage of $425,000.00 and a home equity line of credit of $35,000.00.  They owe more on this home than its valued at (-$85,000.00).  We call this negative equity or its sometimes referred to as an upside-down home.  There is no equity to protect.  The trustee doesn't want this house, the lenders don't want this house and, frankly, Jane and John should think long an hard about whether or not they want this house.  It may have started off as their dream home but it's now a money pit.  If they are already contemplating bankruptcy, it is a good time to assess whether they want to surrender the home and start fresh.

Utility Services and Bankruptcy

Utilities such as your electric company and gas company cannot turn off your service because you file for bankruptcy.  They can require you to pay a deposit for future services.  This is why I encourage clients to stay up-to-date with those services that they know they will continue to use such as gas, electric, water, phone, etc.  Because of a recent ruling we can now add internet service  to that list.

This doesn't mean that other non-utility services such as cable will be shut off.  Businesses want good customers.  If you pay your cable bill each month, why would the cable company want to turn off your service?  They're losing enough customers to satellite and "cord-cutting."  At the end of the day, a business wants a good, paying customer, bankruptcy or not.

From the Paralegal's Desk: Trying the Do-It-Yourself Bankruptcy

Would you perform your own open-heart surgery? Then why would you try to navigate bankruptcy and do-it-yourself.  Like open-heart surgery bankruptcy is all about the detail.  I've seen clients come in with a bankruptcy that they tried to do themselves.  I feel bad because the money they have invested, whether it's a bankruptcy do-it-yourself or the filing fee, run hundreds of dollars.  When their case gets dismissed, that money is gone and they have to start over.  It can't feel good to pay a $335 filing fee twice. 

From the Paralegal's Desk: Asking Legal Questions

Being a paralegal is an interesting job. It is funny that many times people just hear the word "legal"  and start asking all types of questions about the law and become highly disappointed when I will not answer and explain that I cannot because I am not a lawyer and cannot give legal advice.  What I will explain is that I am more than happy to set an appointment, so they can get those questions answered.  Those limits on what I can and cannot answer are for the protection of the client.  I am not trying to frustrate or annoy.  I want to get them an answer to the question but that answer needs to come from the right person, namely, the lawyer.

Bankruptcy: Do I Have to Go to Court?

In every bankruptcy case you will have to attend a "meeting of the creditors," also called the "341 creditors' meeting."  I discourage my clients from thinking of it as "court."  The meeting takes in front of a trustee in a conference room in most cases and is quickly over.  The meeting is recorded and you will be placed under oath.  However, this is courtroom-type setting with the client up on the stand getting grilled.  It's a meeting in an informal setting in which the trustee asks questions about the bankruptcy forms submitted and your overall financial situation.  The trustee is neither for or against you, and it is quickly finished.