Earlier this year, the author of an article in Forbes Magazine noted that the total outstanding student loan balance in America is over $1 trillion. Further, the delinquency rate on student loans is higher than the delinquency rate on credit cards, mortgages and automobile loans. Politico observes that it is dubious whether Congress will pass legislation proposed by Senator Elizabeth Warren which would allow 25 million individuals with student loan debt to refinance at lower interest rates. For some individuals staggering under the weight of a large student loan, a Chapter 7 bankruptcy is tempting.
The difficulty of using bankruptcy to crawl out from under student debt is illustrated by Murphy v. Educational Credit Management Corp., a case recently decided by the federal District Court of Massachusetts. Murphy is not the typical bankruptcy action bought by someone in their 20s, 30s or 40s to discharge a student loan debt. In Murphy, the debtor who brought a Chapter 7 bankruptcy action was a 63-year-old man who had taken on over $240,000 in student loan debt on behalf of his children who were not responsible for repaying the loans.
A bankruptcy court judge concluded that the debt was nondischargeable despite the fact that the debtor was nearing retirement age and had been unemployed for years despite attempts to secure a job. This conclusion was based upon findings that the debtor was: (1) well educated; (2) near but not yet at retirement age; and (3) unburdened from other debt. The debtor appealed.
The Murphy appeal
The district court began by observing that the debtor had a “steep hill to climb” since the purpose of the Bankruptcy Code-which is to give honest debtors a fresh start-does not automatically apply to student loan debtors. Accordingly, discharges of student loans are granted only in truly exceptional circumstances.
The court stated that a student loan debtor cannot discharge an educational loan unless the debt would be an undue hardship on the debtor and the debtor’s dependents. The totality of circumstances test was applied which, according to the court, boiled down to one question with regard to the debtor before it: Can the debtor now and in the foreseeable future maintain a reasonable, minimal standard of living for he and his wife and still afford to make payments on the student loans?
The district court noted that the debtor’s bankruptcy schedule showed that he and his wife operated at a monthly loss of close to $4,000. The debtor’s house was well underwater and his IRA account had been liquidated to cover expenses. At the same time, the debtor was in good health and had not yet reached retirement age. In fact, the court found that he probably had a good many productive years ahead of him in which to repay the loans. The district court agreed with the bankruptcy court that the debtor’s situation did not present truly exceptional circumstances warranting a discharge.
Seeking bankruptcy relief
If you find yourself under a heavy student loan debt, you should contact an experienced Massachusetts bankruptcy attorney for advice. It is true that discharging a student loan debt is a daunting task. However, the “undue hardship” test is not invariably impossible to meet and, in fact, some people have successfully satisfied the test. Assuming that bankruptcy might not be a viable way to discharge your student loan debts, a bankruptcy might eliminate other debt which, in turn, would make it easier for you to repay the student loan.
–On behalf of David Nickless
Chapter 7 bankruptcy is the most familiar type of consumer bankruptcy for many people. Sometimes referred to as “liquidation” bankruptcy, Chapter 7 allows borrowers to eliminate some or all of their debts and start over with a fresh slate.
Faster debt relief brings pros and cons
As with any method of dealing with overwhelming debt, there are benefits and drawbacks to Chapter 7 bankruptcy. For instance, filing for Chapter 7 is a relatively short process, which means that borrowers who choose this route can eliminate their debts quickly – often within just a few months. However, filing for Chapter 7 can also cause a person’s credit score to drop substantially. After a borrower’s debts have been discharged, he or she can begin rebuilding credit immediately, but the process will take some patience and persistence.
Dischargeable vs. non-dischargeable debt
Another thing to consider when weighing the options for getting out of debt is not all debts are eligible for discharge in Chapter 7. This means that some borrowers may have debts remaining even after going through the bankruptcy process.
However, many of the most common types of consumer debts can be eliminated by filing for Chapter 7 bankruptcy. These include most “unsecured” debts, or those that are not backed by property. For example, overdue credit card balances and medical bills can generally be discharged during Chapter 7 bankruptcy.
In contrast, secured debts such as a home mortgage or car loan cannot usually be discharged. Other types of debt that may remain after Chapter 7 include past-due child support payments, certain tax debts and most student loans. People whose debts are largely non-dischargeable should talk with a bankruptcy lawyer to find out about the other debt relief options that may be available, such as Chapter 13 bankruptcy.
Exempt property and liquidation of assets
In theory, people who file for Chapter 7 bankruptcy can be required to “liquidate” certain assets, or give them up in exchange for having their debts forgiven. However, because many types of property are considered “exempt,” it is often possible to go through Chapter 7 bankruptcy without losing any property at all.
Certain exemptions are provided for in the federal bankruptcy code, and others are defined at the state level. Typically, the person filing for bankruptcy gets to choose which set of exemptions to apply, and each has its pros and cons for different situations. Thus, when considering Chapter 7 bankruptcy in Massachusetts, it is a good idea to talk things over with a local bankruptcy lawyer to learn about the different options and get help choosing the best route under the circumstances.
-On behalf of David Nickless
Before you file bankruptcy, it is important to have a general understanding of how it will treat your debt.
You may have already heard that bankruptcy can help relieve you of your burdensome debts, but are less clear about exactly how it would affect your debts specifically. The answer to the question depends on the type of debts that you owe and the type of bankruptcy that you file.
Generally, consumers have two types of debt-secured and unsecured. Secured debt is debt where repayment is secured by the pledging of collateral. If this type of debt becomes delinquent, your creditor may take back the collateral. Common types of secured debt include mortgages and car loans.
Conversely, unsecured debt is not secured by collateral. If you default on this type of debt, there is no threat of repossession. Instead, the debtor may file a lawsuit against you or hire a collection agency to collect the debt. Examples of this type of debt are credit cards, medical bills and utilities.
Bankruptcy‘s affect on each type
The manner in which bankruptcy affects each debt type is dependent on the type of bankruptcy filed. Chapter 7 eliminates virtually all unsecured debt in as little as three months after filing. However, secured debt is treated differently. Chapter 7 can eliminate your personal obligation to repay the secured debt, but it does not affect your creditor’s right to repossess the collateral. In order to keep the collateral, it is necessary to stay current on the payments during the Chapter 7 process. Fortunately, this is easier than it was before bankruptcy, as your unsecured debt is eliminated, allowing you to devote more of your income towards your secured debts.
If you file Chapter 13, all of your debts are consolidated into a payment plan. Under the plan, you make monthly payments towards your debts over a three to five-year period. Although it may seem that you must repay all of your debts in full, this is not the case. Under the plan, unsecured creditors are only entitled to receive as much as they would have received if you filed Chapter 7 instead. Since this is nothing in the majority of cases, most unsecured debt is wiped out at the end of the Chapter 13 process.
For secured debt, Chapter 13 does not wipe away the debt, but gives you three to five years to make it current. As long as the agreed payments towards your arrearages are made under the plan, your creditor is prohibited from taking the collateral pledged. Because of this, Chapter 13 is an excellent choice for those far behind on their secured debt that would like to hold on to their houses, cars or other collateral.
There are many exceptions to these general rules. For example, some types of debt, such as child support, alimony and taxes that cannot be eliminated in bankruptcy. It is therefore important to speak to an experienced bankruptcy attorney before you file. The experienced bankruptcy attorneys at Nickless, Phillips and O’Connor can listen to your debt situation and counsel you further on how bankruptcy would affect you specifically.
-On behalf of David Nickless
If you are having debt problems, it may put you in a position where you feel you have to turn to friends or family members for financial assistance. If you are unable to resolve your debt issues, you may decide to repay the kindness of your family or friends by paying back what you can just before you file bankruptcy. Although paying them back may be on the top of your list of priorities, if you later file bankruptcy, it can cause complications and bankruptcy litigation, as it may be regarded as a preferential transfer.
Under the bankruptcy laws, all debtors must treat their creditors equally. Simply put, this means that you cannot significantly favor one creditor over another. For example, it is prohibited that you repay a friend or family member before paying a credit card debt. If you violate this rule, it is called a preferential transfer. The rules regarding preferential transfers not only apply to transfers made during bankruptcy, but ones made during a certain period before bankruptcy. Under the law, a preferential transfer is technically defined as:
- A transfer you made to a creditor because of a debt;
- Made within 90 days before you filed bankruptcy (or one year if the transfer was to family, friends, business associates or other “insiders” under the law);
- Made during the period you were insolvent (the law presumes that you are insolvent 90 days before you filed bankruptcy); and
- Which allowed the creditor you repaid to receive more than they would have received if you filed Chapter 7 bankruptcy
As a point of reference, most unsecured creditors (like friends and family) do not receive anything in a Chapter 7 bankruptcy. In most cases, unsecured debts are wiped out completely. Because of this, it is highly likely that most repayments to family members and friends made within a year of filing bankruptcy would qualify as preferential.
Recovery of preferential transfers
Once you file bankruptcy, the bankruptcy trustee examines all transactions you made within the one-year look-back period. If the trustee finds a transaction that is preferential, he or she may compel the creditor to repay the transaction. This essentially means that the trustee may bring legal action against the creditor to force repayment. Once the transaction has been recovered, the funds are distributed to all creditors according to the priorities enumerated in the bankruptcy laws.
Fortunately, certain transactions are exempt by law from being regarded as preferential. Most transactions in an aggregate amount of less than $600 are exempt. Also, payments made for child support, domestic support or alimony are similarly not considered preferential.
Speak with an attorney
Although you may feel a personal and moral obligation to repay a friend or family member, it is generally better to wait until after you have completed the bankruptcy process to fulfill this obligation. Since the rules regarding preferential transfers are fairly complicated, it is important to have the advice of an experienced bankruptcy attorney before filing. An attorney can review your situation, identify any issues or complications, and outline the best way to ensure the smoothest journey possible through the bankruptcy process.
-On behalf of David Nickless
The CFPB reviewed the credit card market and reported some positive and negative findings.
The Consumer Financial Protection Bureau (CFPB) recently released a report analyzing the credit card market. The report discusses both positive and negative findings and was conducted as required by the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act).
More on the CARD Act
The CARD Act was passed in response to the 2008 financial crisis in an attempt to protect consumers from an overzealous credit market. It used regulations to curb the ability of credit card companies to raise interest rates and fees. The law included a provision requiring a biennial review of the credit card market by the CFPB.
More on the report
The most recent report, released in December of 2015, is the second report since the CARD Act was passed. The first was released in 2013 and found that the CARD Act had “increased transparency in the consumer credit card market” by capping fees and eliminating certain reprising practices.
The main findings from the most recent report include both positive and negative points. The positive is that the “all-in cost of using credit cards” has remained stable since the last report. Unfortunately, three concerns for consumers remain:
- Deferred interest. These programs generally offer consumers the opportunity to purchase a larger item, like furniture, free of interest for a period of time. After this time passes, the agreed upon interest is applied. The report finds that the lack of transparency in this market results in “avoidable consumer costs.”
- Special credit cards for subprime situations. Credit card offers that target consumers with subprime scores have significantly higher costs compared to their mass market counterparts. These higher costs were reflected in fees and interest rates that resulted in consumers owing 40 percent more than their year-end balances in 2013 and 2014.
- Variable interest rates. These are rates that are scheduled to rise when background interest rates in the economy rise. Most cards now carry these rates. Although the report notes that these rates themselves are not concerning, the fact that they will likely increase in the near future is. There is concern that not all consumers will be aware of this potential increase as well as the fact that the rate applies to both future and existing balances.
These negatives could result in greater debt for consumers in the future.
Options for those struggling with credit card debt
Depending on the details of your situation, those facing unmanageable credit card debts may be eligible for relief through bankruptcy. Credit card debt is often dischargeable, meaning if the application is approved the applicant may no longer be liable for the debt.
There are benefits and risks with filing for bankruptcy. As a result, it is wise for those considering a fresh financial start through a petition for bankruptcy to contact an experienced lawyer. This legal professional will review your situation and discuss the options that can help you meet your future financial goals.
-On behalf of David Nickless
Debt-laden consumers should understand the differences between Chapter 7 and Chapter 13 bankruptcy plans.
The pressure of unmanageable debt can have serious implications for Massachusetts residents. When looking at a mound of bills that are unable to be paid, consumers should evaluate their options. For some people, this may include filing for bankruptcy.
Because there are multiple types of bankruptcy plans, it can be difficult to know which one is right in a given situation. Understanding the basics of the available plans is important when making such a choice. Chapter 7 and Chapter 13 are the two forms of consumer bankruptcy.
A look at Chapter 7 bankruptcy
As explained by the U.S. Courts, Chapter 7 bankruptcies offer people a way to essentially wipe away most if not all of their existing debt. Consumers are not required to repay any debts that are included in their Chapter 7 plans. However, some assets may be seized and sold in order to repay some debts.
Assets subject to loss in Chapter 7 bankruptcies are those that are attached to some form of collateral such as automobiles or homes. Financial liabilities associated with these things are referred to as secured debts. Debts that do not have any form of attached collateral are called unsecured debts. Some examples include medical bills or credit card balances.
Some forms of debts are not able to be included in a Chapter 7 plan. Among these are child support awards and student loans.
The American Bar Association indicates that a Chapter 7 bankruptcy may be reported on a consumer’s credit report for 10 years.
A look at Chapter 13 bankruptcy
In contrast to Chapter 7 plans, Chapter 13 bankruptcies are essentially structured debt repayment options. Trustees monitor cases and outline a stipulated amount of money that debtors must pay each month. These monies are then used to repay creditors at least some of what they are owed. Payment plans will last between 36 and 60 months.
People must have sufficient income levels in order to qualify for Chapter 13 bankruptcy. Because these plans protect assets from being taken, they are often used by homeowners to avoid losing their homes . However, mortgages are not included in these plans and people must continue to make their mortgage payments in addition to their bankruptcy payments.
A Chapter 13 bankruptcy may be seen on a consumer’s credit report for anywhere between seven and 10 years.
Getting help with bankruptcy
Filing for bankruptcy requires close attention to many details. It is always best for Massachusetts residents to work with an experienced attorney at this time. Legal involvement can help people to choose the plans right for them.
A new federal survey has found widespread harassment of consumers by debt collectors.
Federal law lays down a number of rules that debt collectors are supposed to abide by when contacting those who owe debts. However, as USA Today reports, a new survey of consumers by the Consumer Financial Protection Bureau (CFPB) has found that many debt collectors routinely ignore these rules. The survey concluded that even when consumers tried to put an end to the harassment, many debt collectors nonetheless failed to comply with the law. The survey is an important reminder to anybody who may be struggling with debts that creditor harassment is illegal and that steps can be taken – including possibly filing for bankruptcy – to make it stop.
Collectors harassing consumers
The CFPB survey included responses from more than 2,000 consumers. The results found that a quarter of all consumers who have been contacted by a debt collector felt threatened. Furthermore, three quarters of respondents who said they asked a debt collector to stop contacting them nonetheless continued to receive contact. By law, debt collectors must stop trying to contact a consumer if that consumer requests, in writing, that they cease contact.
The law also says that debt collectors can only call consumers between 8am and 9pm unless given permission by the consumer to do otherwise. However, a third of respondents said they received calls outside of these hours. Even more alarmingly, as Money Magazine reports, in more than half of all cases debt collectors called people about an unpaid debt that either did not belong to that individual or was in the wrong amount.
Struggling with debt
The problem of creditor harassment is one that more and more Americans are experiencing given that debt problems are so widespread. For example, 35 percent of American adults who have a credit file have at least one debt that is in collections, according to a 2014 study. That’s equivalent to about 77 million Americans having a debt that is currently in collections.
Furthermore, the CFPB study found that the way debt collectors and lenders handle consumers’ privacy is troubling. For example, the report noted that lists of supposed debtors are often put up for sale on online marketplaces. Alarmingly, many of those lists include sensitive unencrypted information, including debtors’ Social Security numbers, birth dates, and other information that can be used to steal their identities.
Creditor harassment is a widespread and frustrating issue, but there is one way to make the unwanted phone calls stop. While not right for everybody, bankruptcy does provide a way for consumers to end creditor harassment and to get back on their feet. By talking to a bankruptcy attorney today, those struggling with debts will have somebody who can deal with the creditors on their behalf and ensure that their rights and best interests are respected.
-On behalf of David Nickless
U.S. credit card debt has reached an all-time high in what experts say could be an early warning sign.
The new year started off with some worrying news for economists and consumers. According to USA Today, the Federal Reserve recently released data showing that U.S. credit card debt had reached its highest levels on record – and had exceeded the previous peak seen in April of 2008 just before the financial crisis struck. While incomes are also higher now than they were in 2008, rising default rates and evidence of growing financial insecurity for many Americans, suggests that the rising debt load could be an early warning signal for consumers and the economy.
Credit card top tops $1 trillion
Federal Reserve data shows that revolving debt – which is mostly credit card debt – increased by $11.2 billion to reach $1.023 trillion in November 2017. Given that those figures don’t include all of the holiday shopping purchases consumers were charging to their cards in December, it is likely that credit card debt is even higher than that figure now. That figure is already an all-time record, however, and slightly higher than the previous record of $1.021 trillion recorded in April 2008.
Credit card debt wasn’t the only debt type to surge in recent months. The Fed report also shows that non-revolving debt, which includes student and car loans, increased by $16.8 billion to $2.8 trillion.
The delinquency rates for credit cards also increased from 7 percent to 7.5 percent over the past year.
An early warning sign?
It’s important to stress that not everything in the Fed report was bad news. The ratio of credit card debt to gross domestic product is still just five percent compared to 6.5 percent in 2008. Also, that 7.5 percent delinquency rate is much lower than the 15 percent delinquency rate witnessed during the financial crisis.
However, there are reasons to be concerned. As CNBC reports, a recent study found that only 39 percent of Americans have enough savings to cover a sudden $1,000 expense, such as a medical bill or car repair. Another study found that 69 percent of Americans have less than $1,000 in savings. Furthermore, with the Fed expected to continue increasing interest rates this year, paying off those credit cards is going to become even harder. As a result, many consumers find themselves in a precarious situation whereby a sudden expected change in their circumstances could spell major financial trouble.
For those who are struggling with keeping up with credit card payments and other debts, it may be time to consider bankruptcy. Of course, bankruptcy is not the best option for everybody, but in many cases it can offer the relief, both from debt and from creditors, that people need to finally get back on their feet. A bankruptcy attorney can help clients understand what their options may be and inform them about whether bankruptcy could potentially help them improve their long-term financial situation.
-On behalf of David Nickless
A variety of options may be available short of filing bankruptcy.
Unexpected financial stress can happen to any business, in any sector, of any size or type. Any number of things in the economy or in governmental regulation can occur that impact the bottom line. For some smaller or family businesses, unexpected personal crises can spill over into the health of the business.
If this sounds like your current situation as a business owner, it is time to consult professionals about how to solve the issues before you. Talk to a lawyer who works with businesses to solve financial problems, including bankruptcy.
Legal counsel can look at the nature of your business and the type and extent of financial distress. If needed, you can also consult other professionals like accountants or appraisers, depending on your needs. Considering your short- and long-term goals for your family and your business, the attorney can explain the options available to you and their pros and cons.
While you may ultimately decide to file bankruptcy, which may be a good option for you, other alternatives may end up being better choices for your situation.
Obviously, your plan will vary depending on whether you want to remain a going concern or if it is smarter for you to take a different path. While you might change your mind later, consider whether you want to stay in business (even if you might have to adjust it to continue), sell the business, or wind it down and liquidate the assets.
When a business carries too much debt, it may be possible to restructure or reorganize that debt by negotiating with creditors to modify the terms of debts like mortgages, operating loans or lines of credit. Many ways to do a workout exist that either result in reduction of debt principal, lowered payments or interest, or lengthened time for repayment.
Related options include:
- Receivership: A third party manages the business assets through the period of financial stress.
- Assignment for the benefit or creditors or ABC: Often used as a liquidation technique, in an ABC the business transfers its assets to a third party who will sell them to pay off the business creditors.
- Trust mortgage: A trustee is given a mortgage of the business property. The trustee runs the business and pays its obligations until the business is either financially sound, when the business operation returns to its owners, or it becomes necessary to wind it down if financial recovery does not occur.
There may be relief through unconventional means. Perhaps you have an investor or a family member who would like to go into business with you. Maybe the business could become leaner by closing down part of its operations to concentrate on a smaller version of itself. Perhaps it could remain viable by moving to a smaller or cheaper location or laying off staff. Can you eliminate or postpone some expenses? Could you sell some assets? Consider all options and their pros and cons.
Finally, be sure you do discuss bankruptcy options thoroughly with a bankruptcy attorney, so you are fully informed in making decisions to move forward.
The lawyers at Nickless, Phillips and O’Connor in Fitchburg, Massachusetts, represent business owners in a wide variety of debt relief and reorganization options, including bankruptcy.
-On behalf of David Nickless
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