Thriving-in-Bankruptcy_1248017_imageRecently, I was talking with a colleague who was wondering if there was anything that could be done on a particular case.  His potential client had a significant amount of debt.  But, there was also an asset that had significant value.  If the debtor filed a chapter 7, the chapter 7 trustee would sell that asset and use the cash to pay creditors.  If the debtor were to file a chapter 13, the debtor would have to pay the excess equity through the plan to his unsecured creditors.  But the debtor could not afford to pay that excess equity through the plan.  My colleague was asking if there was anything else?  I assured him that he had not missed anything.

Just to catch up, in bankruptcy, a debtor is allowed to keep a certain amount of property.  This is called exempt property.  Any property that a debtor has over what is allowed to be kept as exempt is, in a chapter 7 case, sold and the proceeds used to pay creditors.  So, if you have a bass boat stashed behind your brother-in-law’s shed that is worth $10,000 and you have used up all of your exemptions, if you file a chapter 7, the trustee is going to sell your bass boat to pay your creditors.

In a chapter 13, the chapter 13 trustee will not sell your bass boat but he or she will insist and the court will require that you pay your unsecured creditors through your chapter 13 plan an amount equal to the value of your bass boat.  That is because, in a chapter 13, your unsecured creditors must receive what they would have gotten had the bass boat been sold in a chapter 7 if it is non-exempt.  This is called the best interests of the creditors’ test.

The point behind all this is that my colleague was desperately trying to find a way to help his client get out of debt without losing a very valuable asset.  While, as bankruptcy lawyers, this is what we do, the law is such that bankruptcy cannot fix everything without some pain.  As far as the bankruptcy court is concerned, if you, as the debtor, turn over your non-exempt assets to be sold in order to pay to your creditors, the court will then eliminate or “discharge” any remaining debts that you cannot pay.  To put a finer point on this, if you owe $50,000 in credit card debt, getting out for selling your $10,000 bass boat and using that money to eliminate all of your debt is a good deal (20% payout?).

My point back to my colleague was that lawyers cannot fix everything and that bankruptcy cannot fix everything.  A debtor has debt.  A debtor also has assets.  Bankruptcy allows a debtor to minimize the damage from having too much debt but not necessarily eliminate all of the damage (or pain).  Bankruptcy also allows a debtor to prioritize the items that are important to him or her and allocate the scarce resources (money) to retaining those prioritized

Bankruptcy is a powerful tool for dealing with too much debt–probably the most powerful tool.  But, it is not necessarily the tool that will fix every financial problem.  It has some limitations of which a debtor should be aware.

If you are facing issues with too much debt, consult with an experienced bankruptcy attorney near you.


student loan debtMost people, both lawyers and non-lawyers, believe that filing bankruptcy does not result in a discharge of a student loan.   That, for the most part, is true under the 2005 Bankruptcy Act amendments.  The code, as amended, does not provide for the discharge of a student loan in a bankruptcy.  UNLESS…the debtor brings a lawsuit and asks the bankruptcy judge to make a determination that the continued existence of the student loan will create an “undue hardship” on the debtor.    That “undue hardship” is the hard part — convincing a judge that in this particular case with this particular set of facts that this particular debtor will not be able to make any kind of meaningful payment on the balance of the student loans.   Each federal judicial circuit uses its own method of determination of “what exactly is an undue hardship?” The Department of Education recently issued a guidance letter on whether a student loan dischargeability lawsuit will be litigated or whether the Department of Education will recommend agreeing to the discharge.   Private student loan lenders have no such policy and it will be up to the individual creditor/lender to determine if their attorney will defend such a lawsuit vigorously or agree to settlement before a trial or go to trial to let the judge decide the issue.

This kind of lawsuit is not for the everyday person to attempt on their own as disastrous results can occur.  This kind of lawsuit is not for the everyday attorney to file as the bankruptcy court has its own unique set of rules and its own way of doing business and conducting litigation proceedings.   An experienced student loan litigation attorney is part of the toolbox that a debtor must have in order to successfully discharge a student loan with any certainty.   Sometimes, litigation is not the answer.  Litigation is expensive.   Some attorneys require a large retainer; others will take payment plans.    Sometimes, a better result is obtained through  negotiation.   Negotiation with a bankruptcy attorney or student loan attorney as your shield is also a way to reduce the balance of the student loan debt.    Negotiation is also going to cost the debtor money.   Debtors will need to choose where their funds are best placed — payment on a student loan balance that will survive until age 150 or payment to an attorney who can bring some relief to a financially stressed budget.

A list of qualified student loan attorneys can be found here; these attorneys attended workshops brought by Joshua Cohen, an attorney who made the decision to read every federal regulation on student loans and the issues regarding payments, bankruptcy and settling with the lenders.     A list of experienced consumer protection attorneys who also handle student loan issues can be found by searching here at the  National Association of Consumer Advocates.  Bankruptcy attorneys who may deal with student loan issues in bankruptcy can be found here through the National Association of Consumer Bankruptcy Attorneys.

Can the battle be won?  Yes!    Pick the battle carefully.   Choose your weapons carefully (a good attorney and a good set of facts).

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