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The old adage is that consumers in financial stress should look to filing bankruptcy as their last resort.

I’m sure the saying was created by lenders and others hoping to keep people from eliminating debt.

But waiting to file bankruptcy can be dangerous.

That’s why I think people in financial trouble should consider bankruptcy as a first resort instead.

Figuring out how bankruptcy might help right from the onset of financial problems will make people better informed.

It may help them avoid some of the problems created when they choose a different option.

For example,

  • Waiting to file bankruptcy until after creditors have judgments means wages and bank accounts are subject to garnishment. I frequently have clients who wait until a judgment is entered and wages are being garnished before contacting me. By then they’ve already lost money and the judgment may create future delays in refinancing or selling their home.
  • Waiting to file bankruptcy until retirement accounts have been emptied means you’ve lost an asset that would have been exempt in bankruptcy. Most people already have too little saved for retirement. Using what little you have to pay off debt that can easily be discharged in bankruptcy jeopardizes not only your own future but perhaps that of your children.
  • Waiting to file bankruptcy until after you’ve tried some debt management programs means you’re likely no more closer to being out of debt than you were. Many of the debt consolidation or debt management programs found on the Internet or late-night television are scams. But even the legitimate debt management programs mean you’re having to pay off debt that could be discharged in bankruptcy.

Although bankruptcy isn’t the answer for everyone in debt, it’s almost always one of the first things debtors should at least consider.

The post Don’t Make Bankruptcy Your Last Resort appeared first on Thompson Law Office, P.C..

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In 2005 Congress added a new subsection to the Bankruptcy Code. It expanded the nondischargeability of student loans to include “any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual.” Generally, this expanded the nondischargeability of student loans to private student loans. However, by limiting the exclusion to “qualified education loans,” Congress left open the possibility of discharging certain private student loans.

The Internal Revenue Code defines “qualified education loan” as “any indebtedness incurred by the taxpayer solely to pay for qualified higher education expenses (A) which are incurred on behalf of the taxpayer, the taxpayer’s spouse, or any dependent of the taxpayer as of the time the indebtedness was incurred, (B) which are paid or incurred within a reasonable period of time before or after the indebtedness is incurred, and (C), which are attributable to education furnished during a period during which the recipient was an eligible student.”

The Internal Revenue Code defines “qualified higher education expenses” to broadly include such things as tuition, fees, room and board, books, supplies, transportation and even the purchase of a computer. However, the qualified expenses are limited to the “cost of attendance” at the school for the student and the expenses must be for attendance at an “eligible education institution,” defined as an institution eligible to participate in a Title IV federal financial assistance program.

These definitions create several openings for the discharge of private student loans in bankruptcy regardless of whether the borrower can prove an undue hardship. For example, if the private student loan was incurred for a purpose other than to pay for education expenses it should be dischargeable. Private student loans incurred to pay off credit card debt or make home improvements as well as educational expenses should be dischargeable because the loan was not made “solely” for the purpose of paying education expenses.

If a student loan borrower is not “an eligible student” the loan should be dischargeable. For example, some for-profit schools aggressively market to people who have not yet graduated from high school or obtained their HeSET (formerly GED) or High School Equivalency Test. These students should be able to discharge loans obtained prior to the time they became eligible. To be an eligible student, the borrower must be enrolled at least half-time and be seeking a degree. Study abroad is only eligible to the extent it is approved for credit by the home college or university.

The expenses must be incurred on behalf of the debtor, the debtor’s spouse or a dependent of the debtor. A grandmother or favorite uncle who co-signed for the student debtor should be able to discharge in bankruptcy any private student loans incurred, unless the student was a dependent.

Private student loans incurred at institutions that are not eligible to participate in federal financial assistance programs should be dischargeable. For example, private student loans to attend many diploma mills or unaccredited schools should be dischargeable.

The post Discharging Private Student Loans in Bankruptcy appeared first on Thompson Law Office, P.C..

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Federal student loan borrowers facing financial hardship severe enough to not be able to make their loan payments have some options available to them. Borrowers who default on payments can either “rehabilitate” their loan or “consolidate” into a new loan. After rehabilitation or consolidation, a borrower can get into an income based or income contingent repayment program. Rehabilitation requires borrowers to make nine monthly payments over a ten-month period. Payments must not be more than what is reasonable and affordable for the borrower. However, collection fees up to 16% of the unpaid principal and interest are capitalized into the loan balance upon completion of the rehabilitation. Rehabilitation is only available one time to borrower who default on their loan payments. After rehabilitation, a borrower can select an income based (IBR) or income contingent (ICR) repayment plan.

Borrowers in default can also consolidate their loans into the direct loan program and then select an income based or income contingent repayment plan. They will also face an additional collection fee of up to 18.5% of the balance. The IBR program allows borrowers with a financial hardship to reduce their monthly loan payments. The payment cannot exceed 15% of the borrower’s household income above 150% of the applicable poverty level, divided by 12. The payment is recalculated every year and if a borrower successfully pays for 25 years the remaining balance is forgiven. However, the debt forgiven is treated as taxable income.

The ICR program also allows borrowers to reduce their monthly payments. The ICR payment cannot exceed 20% of a borrower’s household income above 100% of the poverty level divided by 12. The payments are recalculated annually and again result in high collection fees and forgiveness of debt after 25 years. The ICR is the only program available to Parent PLUS borrowers.

The “Pay As You Earn” (PAYE) plan is available to borrowers with loans disbursed in or after 2012. Eligible borrowers pay 10% of their discretionary income and can have the loan balance forgiven after 20 years. The “Revised Pay As You Earn” (REPAYE) program is available to direct loan borrowers and allows borrowers to pay 10% of their discretionary income. Borrowers with undergraduate loans are eligible for loan forgiveness after 20 years of repayment but borrowers with graduate loans are eligible for forgiveness after 25 years of payments. The “Income Sensitive Repayment Plan” (ISRP) is only available to borrowers with guaranteed federal student loans and the payments can fluctuate based on a borrower’s annual income.

Deferments and forbearances are available to borrowers facing financial hardship or those who are in school full-time. These options do nothing however to create long-term solutions for defaults. Interest continues to accrue on unsubsidized loans and will be capitalized into the principal when the deferment or forbearance period ends if it hasn’t been paid otherwise. Since payments are not being paid during the deferment or forbearance periods, borrowers are not making an progress towards having the loan balances forgiven. The ease of granting a deferment or forbearance makes it a favorite solution offered by loan servicers however. In a 2013 conference call with investors, a Navient official said it was less expensive to put borrowers into a forbearance than to help them get into an income based repayment plan that wold eventually result in a forgiveness of the loan.

Borrowers will need to be assertive at seeking the best loan repayment option rather than only relying on the advice of their servicer.

The post Federal Student Loan Repayment Options appeared first on Thompson Law Office, P.C..

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In 2005 Congress added a new subsection to the Bankruptcy Code. It expanded the nondischargeability of student loans to include “any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual.” Generally, this expanded the nondischargeability of student loans to private student loans. However, by limiting the exclusion to “qualified education loans,” Congress left open the possibility of discharging certain private student loans.

The Internal Revenue Code defines “qualified education loan” as “any indebtedness incurred by the taxpayer solely to pay for qualified higher education expenses (A) which are incurred on behalf of the taxpayer, the taxpayer’s spouse, or any dependent of the taxpayer as of the time the indebtedness was incurred, (B) which are paid or incurred within a reasonable period of time before or after the indebtedness is incurred, and (C), which are attributable to education furnished during a period during which the recipient was an eligible student.”

The Internal Revenue Code defines “qualified higher education expenses” to broadly include such things as tuition, fees, room and board, books, supplies, transportation and even the purchase of a computer. However, the qualified expenses are limited to the “cost of attendance” at the school for the student and the expenses must be for attendance at an “eligible education institution,” defined as an institution eligible to participate in a Title IV federal financial assistance program.

These definitions create several openings for the discharge of private student loans in bankruptcy regardless of whether the borrower can prove an undue hardship. For example, if the private student loan was incurred for a purpose other than to pay for education expenses it should be dischargeable. Private student loans incurred to pay off credit card debt or make home improvements as well as educational expenses should be dischargeable because the loan was not made “solely” for the purpose of paying education expenses.

If a student loan borrower is not “an eligible student” the loan should be dischargeable. For example, some for-profit schools aggressively market to people who have not yet graduated from high school or obtained their HeSET (formerly GED) or High School Equivalency Test. These students should be able to discharge loans obtained prior to the time they became eligible. To be an eligible student, the borrower must be enrolled at least half-time and be seeking a degree. Study abroad is only eligible to the extent it is approved for credit by the home college or university.

The expenses must be incurred on behalf of the debtor, the debtor’s spouse or a dependent of the debtor. A grandmother or favorite uncle who co-signed for the student debtor should be able to discharge in bankruptcy any private student loans incurred, unless the student was a dependent.

Private student loans incurred at institutions that are not eligible to participate in federal financial assistance programs should be dischargeable. For example, private student loans to attend many diploma mills or unaccredited schools should be dischargeable.

The post Discharging Private Student Loans in Bankruptcy appeared first on Thompson Law Office, P.C..

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Federal student loan borrowers may have their loans discharged outside of bankruptcy under several different programs:

  1. Borrowers who can show a “Total and Permanent Disability” (TPD) may have their loans discharged. Regulations allow a borrower to request a discharge of their federal loans with a doctor’s certification that they are unable to earn a substantial income as a result of a physical or mental disability. Borrowers can also use a Social Security Disability award letter in lieu of the doctor’s certification. Veterans who have been determined by the VA to be unemployable because of a service-connected disability may also request a discharge of their federal loans. There is a monitoring period following the approval of a TPD discharge with restrictions on how much income can be earned by the borrower during the monitoring period. Debt discharged through a TPD is taxable income and may result in taxes owed on the amount forgiven unless the borrower qualifies for an exclusion for insolvency.
  2. A “Closed School Discharge” allows borrowers who were attending a school that closes at the time they were enrolled to request that their federal loans be discharged. Borrowers must show they were unable to complete the program at another school or were unable to transfer credits to another school.
  3. A “False Certification Discharge” allows a borrower to request discharge of loans when a school falsely certifies that the student was eligible for the loan. For example, a student who has failed to graduate from high school or obtain an equivalent certification is not an eligible student. Borrowers may also apply for a false certification discharge in the case of identity theft.
  4. A “Death Discharge” allows a loan discharge for a parent or surviving spouse if the student borrower dies.
  5. The “Teacher Loan Forgiveness Program” allows teachers to have up to $17,500 of federal student loans forgiven if they meet certain repayment requirements.
  6. The “Public Service Loan Forgiveness Program” allows borrowers employed in public service to have the remaining balance of their loans forgiven after they make 120 loan payments. There are restrictions,  however, on the type of employer that qualifies for this program and it is only available to borrowers with direct federal loans. Many borrowers with loans guaranteed by a state guaranty agency or non-profit and insured by the federal government have mistakenly believed that their loans are eligible for this program. The regulations state that debt forgiven under the Public Service Loan Forgiveness Program is not taxable income.
  7. Survivors of or eligible victims of the September 11th attacks in New York City may request discharge of their federal student loans.

The post Discharging Federal Student Loans Outside Bankruptcy appeared first on Thompson Law Office, P.C..

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Federal student loan borrowers facing financial hardship severe enough to not be able to make their loan payments have some options available to them. Borrowers who default on payments can either “rehabilitate” their loan or “consolidate” into a new loan. After rehabilitation or consolidation, a borrower can get into an income based or income contingent repayment program. Rehabilitation requires borrowers to make nine monthly payments over a ten-month period. Payments must not be more than what is reasonable and affordable for the borrower. However, collection fees up to 16% of the unpaid principal and interest are capitalized into the loan balance upon completion of the rehabilitation. Rehabilitation is only available one time to borrower who default on their loan payments. After rehabilitation, a borrower can select an income based (IBR) or income contingent (ICR) repayment plan.

Borrowers in default can also consolidate their loans into the direct loan program and then select an income based or income contingent repayment plan. They will also face an additional collection fee of up to 18.5% of the balance. The IBR program allows borrowers with a financial hardship to reduce their monthly loan payments. The payment cannot exceed 15% of the borrower’s household income above 150% of the applicable poverty level, divided by 12. The payment is recalculated every year and if a borrower successfully pays for 25 years the remaining balance is forgiven. However, the debt forgiven is treated as taxable income.

The ICR program also allows borrowers to reduce their monthly payments. The ICR payment cannot exceed 20% of a borrower’s household income above 100% of the poverty level divided by 12. The payments are recalculated annually and again result in high collection fees and forgiveness of debt after 25 years. The ICR is the only program available to Parent PLUS borrowers.

The “Pay As You Earn” (PAYE) plan is available to borrowers with loans disbursed in or after 2012. Eligible borrowers pay 10% of their discretionary income and can have the loan balance forgiven after 20 years. The “Revised Pay As You Earn” (REPAYE) program is available to direct loan borrowers and allows borrowers to pay 10% of their discretionary income. Borrowers with undergraduate loans are eligible for loan forgiveness after 20 years of repayment but borrowers with graduate loans are eligible for forgiveness after 25 years of payments. The “Income Sensitive Repayment Plan” (ISRP) is only available to borrowers with guaranteed federal student loans and the payments can fluctuate based on a borrower’s annual income.

Deferments and forbearances are available to borrowers facing financial hardship or those who are in school full-time. These options do nothing however to create long-term solutions for defaults. Interest continues to accrue on unsubsidized loans and will be capitalized into the principal when the deferment or forbearance period ends if it hasn’t been paid otherwise. Since payments are not being paid during the deferment or forbearance periods, borrowers are not making an progress towards having the loan balances forgiven. The ease of granting a deferment or forbearance makes it a favorite solution offered by loan servicers however. In a 2013 conference call with investors, a Navient official said it was less expensive to put borrowers into a forbearance than to help them get into an income based repayment plan that wold eventually result in a forgiveness of the loan.

Borrowers will need to be assertive at seeking the best loan repayment option rather than only relying on the advice of their servicer.

The post Federal Student Loan Repayment Options appeared first on Thompson Law Office, P.C..

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One of the more common questions we’re asked is: “Should I file bankruptcy?” Ultimately, the choice is yours, but perhaps we can help make the decision easier. Let’s address this fact first: No one wants to file bankruptcy. You do it because you need to, and it will improve your life in the long run. So, how do you know when you need to? Below are some factors we’ve identified that may help:

  • You’re being garnished or receiving correspondence from a local attorney who is threatening garnishment.(Typically at this point the only thing to stop a garnishment is to file a bankruptcy).
  • You were thinking about bankruptcy this same time last year and discussed it with your spouse or other family members. (Are you still robbing Peter to pay Paul? Let’s face it–if you are still struggling with debt after trying to deal with it on your own for more than a year, you may not be able to solve it by yourself.)
  • You’re heading towards a life changing event but already can’t make ends meet. (Are you meeting those minimum payments on your credit card but still having to use them for emergencies….AND you’re a) expecting a baby, b) worried about losing your job, c) heading towards retirement?)
  • You have no savings. (Not just a 401k, IPERS or IRA. Do you have a savings account to draw from instead of turning to your credit card? )

Sometimes life throws you a curve ball. A car breaks down, your child becomes ill, your furnace breaks, you lose your job, or you get a divorce. Sometimes these things happen all at once. If you are accustomed to using credit to deal with such unexpected expenses, you are in a downward spiral. Eventually, you will use your credit card one too many times, you’ll miss a payment, or you’ll hit your spending limit. The next emergency that comes up could just be the straw that breaks the camel’s back.

Let’s talk about your financial situation, and how you can regain some financial stability. E-mail us at nthompson@thompsonlawoffice.net.

The post Bankruptcy: Your New Years Resolution? appeared first on Thompson Law Office, P.C..

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St. Louis bankruptcy attorney Wendell Sherk has published a riff on a popular Christmas song – Do You Owe What I Owe? We thought it worthy of sharing it with you this holiday season.

(To the tune of “Do You Hear What I Hear?”)

Said the neighbor to the young man,
“Do you owe what I owe?
Bills up to the sky, young man,
Do you see what I see?
A choice, a choice, waiting in the night
A new start to end the year alright,
A fresh start for a New Year’s Night.”

Said the collector to the young man,
“I know what you owe,
Bills up to the sky, little debtor man,
Do you hear what I say?
Pay what you can’t pay, little debtor man!
With a voice as big as the sea,
With a voice as big as the sea.

Said the young man to the lawyer kind,
“Do you know what I owe?
In your palace warm, lawyer man,
Do you know what I owe?
An arm, a leg, I’ll be out in the cold–
Help me save a little silver, or gold,
Help me save a little silver, or gold.”

Said the judge to the people everywhere,
“Listen to what I say!
Be at peace, people, everywhere,
Listen to what I say!
A fresh start, a new start, waiting in the night
To bring you peace and goodness,
To bring you quiet in the night.”

If financial stability is your new years resolution, email us today!

The post A Debtor’s Christmas Carol appeared first on Thompson Law Office, P.C..

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The high cost of a college education forces many people to take out federal and private student loans. Federal loans offer several repayment options, including some tied to a borrower’s income with forgiveness of the remaining loan balance after 20 to 25 years. Private loans can sometimes be obtained at lower interest rates than those available on federal loans.

But even with flexible repayment options and favorable interest rates, the number of borrowers defaulting on student loans is high. The consequences of default are also high. Default on a federal student loan can lead to garnishment of wages without oversight by a court. It can also result in offset of tax refunds and government benefits like Social Security. Default on private student loans can also lead to wage garnishment.

While most debts can be discharged in bankruptcy, student loans have a special status that makes discharging them very difficult. However, there are some student loans that can be discharged in bankruptcy. Below is a description of what types of loans and in which situations it might be possible to discharge student loans in bankruptcy. Remember that these cases need to be brought before a bankruptcy judge who might view the law differently, so there is never a guarantee of discharge, but the following types of cases present the possibility of discharge of student loans.

  1. Private student loans to attend a school that isn’t an “eligible education institution.” Private student loans must be used to attend an “eligible education institution” for them to be non-dischargeable in bankruptcy. To be an eligible institution means the school can participate in federal financial aid programs. Most schools and colleges are eligible institutions but some aren’t For example, some for-profit unaccredited trade schools, flight schools and “diploma mills” aren’t eligible institutions. If a private student loan was obtained to attend an unaccredited school, the loan should be dischargeable in bankruptcy.
  2. Private and federal loans to students who aren’t “eligible students.” Schools wanting to enroll students who don’t first obtain a high school or GED must have the student take and pass an approved “ability to benefit” test. This test determines whether the student has competency in areas like reading comprehension and math to be able to benefit from attending college. If no such test was administered and passed before enrollment, a student without a high school diploma or GED should be able to discharge the loan.
  3. Private student loans obtained for expenses or services beyond the cost of attending school. A student loan that’s not dischargeable in bankruptcy must be obtained only for the payment of school expenses. If a private student loan is made for the purpose of paying other expenses, like payment of credit card debt, it should be dischargeable in bankruptcy.
  4. Private student loans for individuals not the debtor, the debtor’s spouse or the debtor’s dependent. Private student loan lenders frequently require a co-signer but the exception to discharge under the bankruptcy code only applies if the higher education expenses are incurred on behalf of the debtor, the debtor’s spouse or the debtor’s dependent.
  5. Debts owed directly to schools for tuition. Since the exception to discharge applies to “an educational benefit, overpayment or loan,” debts owed directly to a school for something other than the receipt of loan funds, grants or scholarships should be dischargeable. For example, tuition, book or room and board fees owed a college should be dischargeable. This exception to discharge has resulted in much litigation, but considerable caselaw supports the position that where no promissory note was signed and no grants or other funds were received by the debtor, the debt owed should be dischargeable in bankruptcy.
  6. Student loans where repayment will cause an “undue hardship” on a debtor or the debtor’s dependents. No exception to discharge has resulted in more litigation than this one because it relies heavily on the special facts present in each debtor’s case. In Iowa, the bankruptcy courts look at all the circumstances of the debtor’s situation to determine whether payment of the student loans would create an undue hardship. Many factors, including the debtor’s health, age, current and future income, expenses, amount of debt and the number and health and age of a debtor’s dependents, all play a role in determining whether the student loans cause an undue hardship.

Although discharging student loans in bankruptcy isn’t easy or often done, in some circumstances the discharge should be clearly available to a debtor. If you have one of the loans or situations mentioned above, contact Nancy L. Thompson Law Office, P.C. to see if you can be helped.

The post Discharging Student Loans in Bankruptcy appeared first on Thompson Law Office, P.C..

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To pay for college many students borrow money from the federal government or a private lender. Student loans made or guaranteed by the federal government usually offer the best terms and repayment plans. For example, some payment plans for federal student loans are tied to a borrower’s income and offer forgiveness of the remaining debt after a borrower makes payments for 20-25 years. Federal student loans also offer subsidized interest rates and more options to borrowers who default on their loans. The problem with federal loans is that there is no statute of limitations on collection, default might result in wage garnishment without court intervention and the government can offset tax refunds and benefits like Social Security.

Private student loans, made by a private lender without any involvement of the federal government, don’t come with the same benefits as federal loans. For instance, private lenders aren’t required to offer payments based on a borrower’s income or to forgive debt. Some private lenders might make favorable payment plans and settlements but there are no laws forcing them to do anything helpful for a borrower. Most private loans also require a co-signer.

Many of the lawsuits collecting private student loans in Iowa are filed by one of the National Collegiate Student Loan Trusts. These trusts contain thousands of private student loans sold by the original lenders to National Collegiate Funding and then to one of the trusts. Not only are the loans bought and sold, but the debt collection agency trying to collect the loan has probably also changed.

When a debtor  is sued, the party filing the suit has to prove it owns the debt. If the company suing doesn’t own the debt then it is not the real party to bring the lawsuit. This is an important legal rule. If the company suing a borrower can’t prove ownership of the debt, someone else could sue the same debtor the same debt sometime in the future.

In the lawsuits filed by one of the National Collegiate Student Loan Trusts, the trusts are often unable to prove they own the student loans. They can’t prove the borrower’s loan was sold to the trust or that the loan balance being collected is correct. The original loan documents may be missing and the trusts may be suing after the statute of limitations has passed.

If you have a private student loan being held by one of the National Collegiate Student Loan Trusts and want to know your rights, contact the Nancy L. Thompson Law Office, P.C.

The post Private Student Loan Borrowers Facing Lawsuits appeared first on Thompson Law Office, P.C..

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