Student Loans and Bankruptcy

By Kelley Snyder, Paralegal and Charice Holtsclaw, Managing Attorney

Currently, student loans (whether private or federal) are not dischargeable in bankruptcy. However, with that being said, you can attempt to discharge them in bankruptcy if you can prove that the payments are an undue hardship. This can be incredibly difficult to prove though because you have to show that you are physically unable to work and you will not be able to make money (essentially for the rest of your life). This action is a separate motion that is filed with the bankruptcy court called an adversary case.

Politicians are starting to realize that student loans are becoming a major problem and they are doing what they can to provide some assistance. On January 23, 2013 three senators reintroduced the “Fairness for Struggling Students Act of 2013” and the “Know Before You Owe Act of 2013” to try to help with the student loan epidemic (Orenbuch). The goal of these acts is to revise current bankruptcy rules to allow PRIVATE student loans to be discharged (Orenbuch). This particular bill has been introduced previously and failed to pass (Orenbuch).

Federal student loans are the main issue facing borrowers today. There are approximately $1 trillion in outstanding federal student loans in the United States currently (Orenbuch). These bills do not address federal loans, just private. However, there are numerous consumer groups that are currently pushing to make it easier to discharge federal student loans as well (Orenbuch).

Many opponents believe that if these bills pass it will make it difficult for borrowers to obtain loans. They believe that lenders will impose higher interest rates, making it even more expensive to get an education. Supporters of the bills believe that it will in fact give incentive to private student loan lenders to make good loans. Knowing that they could potentially be discharged could potentially deter them from making risky loans (Cohen).

Considering that the same bill has failed previously, it is hard to judge the likelihood of it passing this time around. But, it is definitely worth keeping an eye on if you are burdened by student loan debt, especially private loans.

In the meantime, your best recourse for dealing with your federal student loan debt is to work with your lender to see if you’re eligible for the Income Based Repayment option. More information on that can be found on the Department of Education’s website here: http://studentaid.ed.gov/repay-loans/understand/plans/income-based

Sources:

1. Orenbuch, Moshe, and Meredith Roscoe. “Student-Loan Bill Won’t Get an Easy Pass.” Barron’s. 6 March 2013. 
2. Cohen, Steve. “Allow Private Education Loan Debts to Be Erased in Bankruptcy.” US News & World Report. 6 March 2013. 

Tax Relief for Mortgage Debt

With all of the “fiscal cliff” talk recently, it’s hard to pinpoint exactly what came of it and if the tax revisions/extensions affect you. One benefit is a one year extension of the tax relief for people whose lenders forgave a portion of their mortgage debt (1). If the bill had not passed, mortgage debts forgiven in short sale, loan modification, or foreclosure would be considered taxable income. That means you could be responsible for paying taxes on an already difficult loss. For someone struggling with income loss and losing a home, the last thing they need is to be slapped with a large tax bill.

According to RealtyTrac.com, 1 in every 1,274 homes in Missouri received a foreclosure filing in November, 2012. In Kansas, that number was 1 in every 1,255 homes for November 2012(2). With numbers that high, it’s easy to see just how many people could have been affected had the bill not passed.

This bill now expires on January 1, 2014. Some government programs encouraging loan modifications and short sales expire on that date as well. Daren Blomquist, vice president of RealtyTrac believes that because there are so many foreclosure listings, there will be a couple of years of short sales to come. He believes that the bill will likely be extended again next year, but there is no guarantee(3).

Recent mortgage settlements have encouraged lenders to work with their customers that are behind. They are being pushed to allow customers to examine alternatives to foreclosure. And, extension of the tax relief bill makes it more appealing to customers as well. However, these options, including loan modification, deed in lieu of foreclosure, and short sale can be complicated, time consuming, and confusing. It’s best to speak to an experienced attorney and real estate agent to figure out which option best suits your situation after speaking to your lender to see what is available.

By
Charice Holtsclaw, Managing Attorney
and
Kelley Snyder, Paralegal



1 “Fiscal Cliff Pact Also Aided Troubled Homeowners” The Sacramento Bee. 5 January 2013. http://www.sacbee.com/2013/01/05/5093513/fiscal-cliff-pact-also-aided-troubled.html

2 “Fiscal cliff bill extends tax relief for struggling homeowners facing foreclosure.” OregonLive. 3 January 2013. http://www.oregonlive.com/front-porch/index.ssf/2013/01/fiscal_cliff_bill_extends_tax.html

3 RealtyTrac. http://www.realtytrac.com/trendcenter/ks-trend.html

Thinking Ahead: Attorney Fees

The beginning of a new year often represents the opportunity to start fresh. For many, this means committing to resolutions such as getting in shape or completing unfinished projects. For others, beginning anew involves other significant changes such as defending the dissolution of a marriage, seeking modification of child custody or support, bankruptcy and paternity actions.

On the tail end of the holiday season, the thought of paying any lump sum towards attorney fees can often seem overwhelming or simply not feasible. But with tax season just around the corner, the next few months provide the perfect opportunity to begin planning and saving. Consider using this year’s tax refund as a payment towards retaining an attorney to help you navigate your legal matters. If you are currently represented and owe outstanding fees, using your tax refund to pay the remaining balance is a simple way to get caught up.

In general the legal process can often be time-consuming and expensive. Once you have hired an attorney to represent you, there are several measures you can take to help minimize your own attorney fees.

• Identify and communicate your goals and expectations. It might be helpful to rank them according to what you feel the most strongly about. Discuss your goals and expectations with your attorney to avoid future misunderstandings. Be reasonable and realistic. Remember that resolving disputes amicably can not only set a positive tone moving forward, it can also spare you from a financially and emotionally draining courtroom battle. Recognize the importance of being agreeable and knowing when to settle. 
• Keep track of your questions and issues that you would like to discuss. Making a list will allow you to ask all of your questions at one time without forgetting anything. Contacting your attorney by email can often be a more cost-effective approach to communication. While you will still be billed for the time spent reviewing and responding to your email, the fees will generally be lower than those for phone calls during which it is easy to become sidetracked. Keep in mind that other members of the attorney’s staff with lower hourly rates, such as law clerks and paralegals, may be able to assist you with certain questions or concerns related to administrative matters such as billing. 
• When you speak to or meet with your attorney, take notes to help you remember what was discussed and any instructions your attorney may have given you. This will help eliminate confusion and unnecessary delay in the form of your attorney re-explaining matters to you or making repeated requests for information. Be prepared. Keep a calendar with important dates and deadlines. 
• Respond promptly and completely to your attorney’s requests. In addition to collecting the requested documents, keep them organized. This will allow your attorney to spend more time working with the information itself and less time trying to dig through an unorganized stack of papers. 
• Remaining calm will also allow you to listen and communicate more effectively. One key to remaining calm is managing your own stress and taking measures to protect your own well-being. Remember that the process can often be very emotional, especially when it comes to family law matters. It is not uncommon to experience anger, frustration, sadness, and depression. While your attorney will assist you through the legal process and protect your interests, he or she is not a licensed psychologist. Finding a therapist or a counselor to help you work through the emotional components will allow you to spend the time you have with your attorney more productively. 
• Finally, remember that your attorney can only estimate costs and fees at the outset of the representation. Recognize that circumstances often change and the budget might need to be readjusted throughout the process. 

Contributed by Kelly Thompson, Law Clerk