Florida Bankruptcy and Tax Attorney Explains How Bankruptcy Affects Tax Refunds and the Earned Income Tax Credit

When filing for personal bankruptcy, the right to receive a tax refund usually becomes property of the estate. In some instances, the debtor may have a property interest in excessive withholding by an employer, which will become part of a refund due after the filing of the bankruptcy. Such refund is prorated over the entire year, with the pre-bankruptcy portion considered property of the estate.  There might be a way to protect your refunds though – Talk to a bankruptcy and tax attorney in the know!

Certain other tax credits also become part of the bankruptcy estate, however, there is some precedent for distinguishing the earned income tax credit. The Earned Income Tax Credit (EIC) is ax credit for certain people who work and have low wages. A tax credit usually means more money in your pocket. It reduces the amount of tax you owe. The EITC may also give you a refund.  This tax credit is excluded from the estate because a debtor can have no legal or equitable interest in the credit prior to receiving it. Hence, the child tax credit can only be considered property of the estate after a full tax year ends.

The simplest way to ensure that a debtor will be able to retain control over a tax refund, whether or not it includes as earned income tax credit, is to wait for the refund to be received before filing for bankruptcy. Such refunds can then be used for living expenses of the debtor, including attorney’s fees or property that can be exempted once the bankruptcy is filed.

The delay of filing may not be appropriate if the tax return is subject to interception by the IRS on a government claim. In some situations, the government can seize both an overpayment of withholding taxes and the earned income tax credit. One way of protecting the right to a tax refund may be to elect to apply it to the following year’s taxes.  Bankruptcy might even be the solution to getting rid of those tax problems – see if your taxes are eligible!

In many cases, a debtor can assert an exemption to protect a tax refund or the earned income tax credit based on federal or state wild card exemptions, or other state exemptions. The earned income tax credit may also qualify for exemption based on state or federal exemptions for public assistance benefits. Long story short – you should definitely talk to a qualified Florida Bankruptcy Attorney about these issues and PLEASE PLEASE PLEASE make sure that attorney has some knowledge about taxes too.

How Debt Collectors Operate in Clearwater Florida

Consumer Credit in the U.S.

With outstanding consumer debt in the United States having doubled over the last twelve years to $2.5 Trillion in 2009, the collection industry has grown significantly. While the extent of serious delinquencies fluctuates with business cycles and unemployment, the typical default rate on unsecured credit issued by banks, retailers, credit unions, and finance companies is around 2-3%.  However, at the onset of the current financial crisis, the delinquency rate went from 2.21% in 2006 to 6.52 % in 2009 for consumer credit cards, and 1.12% for residential loans rising to 9.1% in 2009. These numbers are consistent with the delinquency rates in Florida and in particular, the Tampa Bay Area of Florida, which includes the likes of Clearwater and Saint Petersburg.

Financially Distressed Consumers

The major causes of serious consumer delinquency have been shown to correspond with an increasing incidence of unemployment, illness, and marital problems.  A contributing factor has also been the credit industry’s overextension of credit and accordingly, predatory lending practices among unwary consumers.  The federal Fair Debt Collection Practices Act (FDCPA) and other state consumer protection laws, such as the Florida Consumer Collection Practices Act (FCCPA) have been enacted to protect debtors from abuse and harassment by collectors. Often, the targets of debt collectors are lower-income, minority consumers who are unable to afford the fee to retain a lawyer and file for bankruptcy to obtain bankruptcy’s promise of a fresh start.

Abusive Debt Collection

The objective of Debt collectors is to first identify the portion of delinquent consumers who can afford to repay some or all of their debts, and second to convince consumers to pay the particular collector before paying other creditors or even the consumers’ own living expenses.  These efforts often include extreme measures to coerce consumers into paying on the delinquent debt.

Common abusive and illegal collection tactics include:

(1) The use or threat of use of violence or other criminal means to harm the physical person, reputation, or property of any person.

(2) The use of obscene or profane language or language meant to abuse the hearer or reader.

(3) The publication of a list of consumers who allegedly refuse to pay debts, except to a consumer reporting agency.

(4) The advertisement for sale of any debt to coerce payment of the debt.

(5) Causing a telephone to ring or engaging any person in telephone conversation repeatedly or continuously with intent to annoy, abuse, or harass any person at the called number.

(6) The placement of telephone calls without meaningful disclosure of the caller’s identity

If you reside in Tampa Bay, St. Petersburg, or Clearwater and have been contacted by debt collectors, please contact The Pikramenos Law Group at 813-413-1300. Under the FDCPA and FCCPA, you may be eligible to avoid your debts and/or receive money as a result of unlawful collection tactics. We also offer personal bankruptcy services, which may serve to forgive your debts and give you a fresh financial start!

In the face of the current economic recession, debt settlement companies have sprung up throughout the Tampa Bay are and all over the rest of Florida and the nation, offering financially distressed families a reduction of their personal consumer debt. These companies, and occasionally less reputable law firms, say they will negotiate lower pay-offs by offering creditors lump-sum payments from consumers. However, many of these businesses rarely deliver on their promises of debt reduction, which if often attributable to the high fees they charges and how they apply payments.

How It Works

Solicitation of debt settlement services to Tampa Bay consumers can usually be heard on the radio. When consumers sign up, the company advises consumers to stop paying on their unsecured debt (credit cards, etc.,), implement a savings plan which the client pays into every month, and wait for the debt settlement company to work out a payoff with the creditors using the customer’s savings. It’s a very straightforward process, and settling a consumer’s debt can be as simple as making a few phone calls to the creditors.

Why It Hurts More Than Helps Consumers

Investigations by the Federal Trade Commission (FTC) have found that debt settlement companies rarely have a 100% success rate in settling their customers’ debt, and typically only 10% of their customers complete the program. One of the major problems with the success of these programs is that they collect upfront fees before settling the debts. This makes it more difficult for the customer to save funds to settle. The advance fees are usually calculated as a percentage of the consumers’ total debt, with figures that range between 10%-18%. Moreover, once the fees are collected upfront, there is no guarantee at what rate the debt will settle, if at all. The consumers’ problems are often compounded when the debt settlement program requires them to stop paying on all credit cards, even if they are current. This may cause creditors who refuse to settle with the debt settlement company to file lawsuits and pursue claims to judgment often resulting in the consumer’s wage and/or bank accounts being be garnished, and liens placed on their real or personal property. Unfortunately, many debt settlement companies are rarely willing to give refunds, leaving consumers worse off than when they initially started the debt settlement program.

Dear Debtors, Fear Not the 341 Meeting of Creditors? 341 Hearing Address

Debtors who are considering filing for personal chapter 7 or chapter 13 bankruptcy in the Tampa Bay area are often concerned about their involvement at the required section 341(a) Meeting of Creditors. This article helps to address some of those concerns by providing a description of how the hearing is conducted, and what debtors should expect.

A debtor who files a personal bankruptcy petition will be required to attend a section 341(a) meeting of creditors, which is typically scheduled between twenty-one and forty days after the filing of the debtor’s bankruptcy petition. Debtor’s can be relieved to know that this is the debtor’s first, and often only appearance at any kind of hearing during the entire bankruptcy process. Moreover, it is often an informal hearing, held at a location other than the courthouse, and does not require the presence of a bankruptcy judge. The hearing is conducted by a U.S. trustee, and will last anywhere from three to thirty minutes. At such time, the trustee will ask the debtors a series of routine questions regarding their income and assets as disclosed in their petition. The following is a list of all of the locations for Florida 341 Hearings (341 Meeting of your Creditors):
Jacksonville, FL (3-40) – Suite 1-200, 300 North Hogan Street

Ocala, FL (3-62) – Grand Jury Hearing Room, 2nd Floor – 207 NW 2nd Street

Viera, FL (6-76) – Florida Room, 3rd Floor, Building C

Viera, FL (6-77) – Courtroom 3D, Moore Justice Center

Orlando, FL (6-60) – SouthTrust Building, 135 W. Central Avenue, 6th Floor, Suite 600

Ft. Myers, FL (9-92) – #2-101 U.S. Courthouse, 2110 First Street

The ultimate purpose of the hearing is to give the debtor’s creditors a chance to examine the debtor and his/her affairs, however, despite the name of this hearing, creditors rarely appear. In rare instances, creditors may attend to ask questions for discovery purposes, or to coerce debtors to re-affirm the debt that they owe to that particular creditor.

Before attending this hearing, the debtor’s attorney should prepare the debtor with information regarding the contents of the final petition, so that the debtor can respond appropriately to the trustee’s questions. Although, if the debtor expresses a lack of awareness in response to the trustee’s inquiries, there usually are not apparent consequence so long as the debtor is being truthful. Debtors should also be comforted by the fact that their attorney will be by their side during the entire length of the hearing.

Payday loans are usually sought out by consumers in Tampa Florida who have an immediate need for cash and whose payday is far away. There are many companies that do payday loans, but think Amscot, Advance America, even some pawn shops around the Tampa Bay area have been seen to do Cash Advances and Payday loans. These types of loans do not require a credit check, however, the fees associated with them can be dangerously high, ultimately leaving many consumers unable to repay. Typically, these types of loans spell big trouble for consumers as they tend to not repay these debts, the amount snowballs and then the consumer begins receiving harassing phone calls throughout the day. Fortunately, there are ways to stop the creditor harassment by seeking the advice of a qualified Tampa Florida Creditor Harassment Attorney. .You can even get money for the collection agencies BAD BEHAVIOR (up to $1000 per violation)!

Alternatively referred to as “cash advance” or “deferred deposit” loans, payday loans are usually short-term, and the amount borrowed is often small or modest. Typically, the consumer writes a post-dated check for the amount borrowed plus the lender’s fee. This fee can sometimes be a percentage of the face value of the amount borrowed, or simply a fixed fee. For example, if a consumer obtains a 2-week loan of $200, he/she would write a post-dated check for $240 ($40 lender’s fee). If the loan is not repaid upon its due date, the lender may use the post-dated check to electronically transfer the entire balance to payoff the borrower’s loan, or extend the initial term of the loan. If the consumer decides to “roll over” the balance for another term, an additional lender fee is imposed.

Unfortunately, this Tampa Florida Bankruptcy and Creditor Harassment Attorney sees many consumers and debtors who obtain payday loans that are often unable to repay their loans when they come due, and resort to rolling over their balances for an additional term. This leads to an accumulation of fees and a greater loan balance, which makes it difficult for consumers to pay. Many don’t pay at all, thinking that ignoring the problem will make it go away.

Lenders who are otherwise unable to collect the money owed to them, will often assign the collection of their debts to collection agencies who will contact the consumer to repay. These debt collectors can harass the consumer by making repeated calls, using profane language, threatening to sue, serve process, or file criminal charges, all in an effort to convince the debtor to pay on the debt. They may also call consumers’ friends, relatives, or places of employment.

Fortunately, under the Federal Debt Collection Practices Act (FDCPA), such inappropriate and extreme collection efforts can be unlawful, and consumers have a right to sue unscrupulous collectors. If successful, the consumer can be awarded actual damages, statutory damages (up to $1000), as well as their attorney’s fees and costs.

If you have been inappropriately contacted by a debt collector with regard to repayment of a delinquent payday loan, you may be eligible to seek compensation and possible relief from your debt. Many attorneys will help consumers pursue these types of claims on a contingency basis (meaning you only pay if your case prevails).

OFTEN OVERLOOKED EXPENSES

• Bank charges (monthly checking account fees, ATM fees, overdraft fees, new check orders, online bill-pay fees, etc.)
• Home office supplies (computer, printer, toner, ink, paper, software, general office supplies, etc.)
• Tax return preparation fees
• Postage
• Other accounting fees
• Work expenses (including lunches and snacks)
• Ongoing legal fees and costs
• Parking, tolls
• Medical/hospital/vision/dental/specialist/physical therapy/chiropractor/mental health visits
• Job hunting (resumes, mileage, postage, fees, stationery)
• Medical equipment (canes, crutches, wheelchair, brace, oxygen, etc.)
• Home alarm system maintenance and fees
• Eye glasses (care and replacement)
• Home landscaping and lawn care (lawnmower, trimmer, gas, mulch, etc.)
• Contact lenses and solutions
• Home maintenance (pressure washing, painting inside/outside, etc.)
• Dental hygiene products (toothpaste, whiteners, brush, floss, mouthwash)
• Pool care
• Physical therapy products (TENS unit, weights, strengthening aids, etc.)
• Motor vehicle oil changes
• Batteries for hearing aids and other health care devices
• Tires
• Non-prescription medications, antacids
• Car washes
• Pain killers (Tylenol, aspirin, Excedrin, etc.)
• Other motor vehicle maintenance (brakes, tire rotation, washer fluid, etc.)
• Cold, allergy and sinus medications
• Annual registration cost for Motor Vehicles
• Vitamins
• Inspection, preparation costs
• Humidifier, neti pot, dehumidifier (and supplies)
• OnStar System payments
• Weight loss programs and aids
• EZ Pass costs
• Hair care and personal grooming products
• Pet food
• Beauty/barber shop
• Veterinary visits (including regular shots)
• School meals (lunches, breakfasts at school)
• Pet grooming and care
• School uniforms
• Dry cleaning, laundering
• Books and school supplies
• Shoe shines
• Musical/band/orchestra instrument (purchase or rental, repairs and maintenance, piano tuning, strings, etc.)
• Clothing alterations
• School fees (book fees, music fees, sports fees, field trips, etc.)
• Monthly magazine and/or newspaper subscriptions
• Before/after school care
• Monthly website subscriptions
• College expenses (dorm furnishings, fees, books, laundry, etc.)
• Church tithes
• Boy/Girl Scout programs
• Charitable donations
• Music lessons
• Office and school contributions for gifts, charity, projects
• Music books
• Christmas, birthday, anniversary gifts
• Dance lessons/classes/recital fees/competition fees
• Cigarettes
• Dance shoes, attire, costumes, make-up
• Beer, wine, alcohol
• Sport participation fees
• Life insurance
• Sporting equipment, clothing (cleats, bats, balls, gloves, rackets, helmets, etc.)
• Children’s allowance
• Summer camp and summer activities
• Babysitters
• Gym/YMCA fees
• Pre-paid cell phones
• Other membership fees Emergency cell phone notification system for a senior citizen or anyone with a major disability

Back when the new BAPCPA was passed in 2005 I co-wrote an article published by the American Bar Association with attorney Alan Gassman, that deals a lot with this issue.  That article can be found on my website here:  http://www.piklawgroup.com/how-the-2005-bankruptcy-abuse-prevention-and-consumer-protection-act-affects-planning-for-physicians-and-physician-practices/

I have met with many clients and have had other attorneys ask about whether or not property that is the subject of a trust set up by the debtor (the debtor is the Grantor) is safe in Bankruptcy.   Whether a person’s trust is safe from creditors outside of bankruptcy or after declaring bankruptcy is a very similar analysis.  We must look to see first whether the debtor is a beneficiary under the trust. A person who stands to benefit from the trust is a beneficiary.  In 2005, the BAPCPA created new law that makes transfers to self-settled trusts or similar devices subject to being set aside in bankruptcy when made within 10 years of filing. This applies if the transfer was made with “actual intent” to hinder, delay, or defraud present or future creditors. For this rule to apply, the debtor must be a beneficiary of the trust. See 11 U.S.C. § 548(a)(1)

A revocable living trust is a type of separate ownership which allows the owners to control property while still passing it on to others without requiring a probate proceeding.  Unfortunately, the most common type of living trust (the revocable type) will not do anything to protect your assets from creditors. The creditor can still obtain assets in your trust to satisfy judgments for debts you owe him or her. This makes sense since whether the asset is in a revocable living trust or not, you still control it. So, the idea that a living trust has some kind of bankruptcy advantage is another myth.

An Irrevocable trust set up may not be reachable by the trustee as property of the estate.  This becomes more true where the trust was set up prior to the debtor having any debt problems or where the trust did not render the debtor (at the time of creating the trust) insolvent.

Trusts with Spendthrift Provisions are Safe Aren’t They? Not necessarily.  Some people think they are protected because they have a spendthrift provision in their revocable living trust.  A spendthrift provision typically states that a beneficiary may not assign or convey his beneficial interest.  A court will rule in favor of a trustee for Debtors who create an irrevocable trust with the debtor himself as trustee and the “primary beneficiaries” being his “surviving issue . . . and the lineal descendants of non-surviving issue.” Even where Debtor is not named a beneficiary but as trustee the Trust Agreement often provides the debtor “sole discretion” to make distributions from the trust “to provide for the health, the education, or the support or maintenance in the customary manner of living of the trustor” while he[the debtor] was alive. The Trust Agreement contained a standard spendthrift clause.

Every state has a fraudulent conveyance statute that governs this. But, essentially, if you transfer assets when you know, or reasonably should know, that you will need those assets to pay a just debt — then a court could deem that transfer to be fraudulent and the creditor could still recover the asset(s).
Additionally, it is possible, in some states, that you could be found to have the specific intent of defrauding a creditor and have thereby committed a criminal act.
So, the bottom line is this:
1. Revocable living trusts (the most common kind of living trusts) cannot be used to protect assets from creditors in bankruptcy.
2. Irrevocable trusts can possibly be used to keep assets away from creditors. HOWEVER, if the purpose of the transfer of an asset to the irrevocable living trust is to keep the asset from a creditor who you owe a just debt to — then, the transfer could be revoked and you could have committed a fraudulent conveyance.

In short, where the debtor is a beneficiary under the trust or can control the assets of the trust, the property of the trust may not be safe.  If you are worried about Asset Protection, there are ways we commonly advocate of setting up an irrevocable trust so that the property will be perfectly safe in a bankruptcy and you can also retain complete control over those assets.  This is the best of both worlds – asset protection while retaining control!

The National Association of Consumer Bankruptcy Attorney’s Principal Paydown Plan was recently lauded. While the plan is not new, it is time for consumers to be more aware of how this Plan might help them. NACBA strongly supports a cramdown process that would reduce principal balances owed on mortgages down to the values of the homes, the Principal Paydown Plan acts slightly differently and would still help even if a cramdown is not allowed.

The key components of the Principal Paydown Plan are:

• This plan restructures certain undersecured (underwater) mortgages in Chapter 13 bankruptcy cases so the homeowner can pay down the loan principal and reduce negative equity and acquire equity faster than with the existing loan
• This is accomplished by reducing the interest rate to 0% for five years, letting the borrower’s entire monthly loan payment go directly to the principal
• During the five-year period, the borrower’s minimum monthly housing payment is calculated similar to a HAMP modification payment, at 31% of gross income
• At the end of the initial five-year period, the remaining principal balance is amortized over 25 years at the Freddie Mac survey rate
• The bankruptcy judge, with the assistance of the Chapter 13 Trustee, reviews the borrower’s budget to confirm the eligibility of the borrower and feasibility of the payments; and they oversee the implementation of the plan
• There is no cramdown – the benefit to the borrower is achieved by actually paying down the loan
• In exchange for this benefit, the borrower agrees to a general settlement of all claims against the lender and servicer and avoiding future title and loan litigation
• The federal government and US taxpayers’ substantial liability on Fannie Mae and Freddie Mac (all GSE) owned and insured loans would be reduced by this plan
• Private mortgage investors will benefit similarly

The National Association of Consumer Bankruptcy Attorneys has been working on and trying to get put into action their “principal Paydown Plan” which is designed to help people in Chapter 13 from foreclosure. Recently members of Congress and the Director of Federal Housing Finance Agency cited the plan as being “Credible” and “Promising”. I have pasted the email below.

I keep telling my clients (and anyone listening) that Consumer Bankruptcy Attorneys should be allowed to help their clients to not only strip unsecured liens, but to also cramdown their first mortgages to the current values of the house, reset their interest rates to fixed rates and at a reasonable percent to truly reflect the values of the home and provide an answer to those who have lost their jobs. This doesn’t come without repercussions to debtors as they will have to actually file for Chapter 13 in order to do this, but it ensures that only those who are truly interested in saving their homes will utilize the plan. Not only would people be allowed to catch up on missed or late payments, but they would be able to get rid of second and third mortgages and reduce the principal on their first mortgage down to the value of the house and reset variable and high interes rates to something more commensurate with what is being offered currently.

The Email from 10/27/2011:
Dear NACBA Member,

I am pleased to report that NACBA’s “principal paydown plan,” designed to help struggling homeowners in chapter 13 save their homes from foreclosure, is now under serious consideration by the Federal Housing Finance Agency (FHFA), as evidenced in the news release below. This is the result of work over the past year by the NACBA Board, Legislative Committee and individual NACBA members to explain and build support for this plan among lawmakers, policymakers in the various federal agencies and the White House, and with consumer, housing and other allies. The concept of the principal paydown plan grew out of the recognition that it would not be possible to get legislation adopted that would address the continuing foreclosure crisis and that instead we would need a solution that could be implemented outside of the legislative arena.

We greatly appreciate the support and work on this from key members of Congress, including Representatives Cummings, Lofgren and Conyers, among so many others. Likewise, we appreciate the efforts of so many NACBA members who traveled to Washington to meet with their Members of Congress to discuss this and other bankruptcy-related issues or who met with their congressional delegation in the district office.

We will continue to keep you up to date on new developments on this issue.

Ike Shulman
NACBA Legislative Chair

UNITED STATES CONGRESS

For Immediate Release
October 26, 2011

FHFA Director Praises Principal Paydown Plan as “Promising” and “Credible”
Pledges to Provide Members an Assessment in Two Weeks

Washington, DC (Oct. 26, 2011)—During a meeting today with 19 Members of Congress, Edward DeMarco, the Acting Director of the Federal Housing Finance Agency (FHFA), praised a principal reduction proposal by Rep. Zoe Lofgren and pledged to provide an assessment within two weeks of how it could be implemented.

Rep. Elijah E. Cummings, the Ranking Member of the House Committee on Oversight and Government Reform, hosted the meeting with Rep. Dennis Cardoza, Co-Chair of the Housing Stabilization Task Force, to discuss additional measures to address the foreclosure crisis.

Members lauded the latest move by FHFA. In response to DeMarco’s comments, Cummings said, “If Mr. DeMarco actually works with us to implement this proposal, it would be an important step to address this crisis, especially on the heels of his announcement Monday that he will implement the President’s plan to help responsible American homeowners refinance at today’s historically low rates.”

Rep. Lofgren stated, “I am encouraged that the Federal Housing Finance Agency is considering a plan similar to the one I’ve long advocated. Allowing homeowners to pay down the principal balances on their mortgages more rapidly in conjunction with Chapter 13 filings is a sensible solution. Linking this to the bankruptcy process will help those who truly need it and avoid the administrative failures that have plagued other modification initiatives. I believe this plan is entirely consistent with FHFA’s obligation to minimize taxpayer losses in Fannie Mae and Freddie Mac, and I look forward to Director DeMarco’s answer two weeks from now.”

Rep. Lofgren’s proposal would allow homeowners in Chapter 13 bankruptcy to pay down loan principal and reduce negative equity during a five-year period with no interest. In exchange, homeowners would agree to settle claims against servicers, thereby avoiding litigation and reducing taxpayer liability.

During today’s meeting, Mr. DeMarco said his legal team had already begun reviewing the proposal. “Based on initial feedback,” he said, the proposal “has a lot of promise,” “strikes me as being responsible,” and appears to be a “credible way” to address the crisis while recognizing various interests in mortgaged properties. He committed to Members that he would provide a more detailed assessment of the proposal within two weeks.

Today’s meeting was a follow-up to a previous meeting Cummings and Cardoza hosted on October 6, 2011, during which Members pressed DeMarco to implement the President’s recent proposal to eliminate barriers faced by underwater homeowners seeking to refinance their mortgages at current market interest rates. DeMarco announced on Monday that FHFA would be taking several steps to reduce these barriers.

Cummings issued a release on Monday stating, “I commend the President for proposing this idea in his speech to Congress, and I thank Mr. DeMarco for listening to the concerns of Members and their constituents. The changes announced today will provide additional relief for middle-class Americans and an important boost for our economy. But we must not stop here. Economists warn that the housing crisis is ‘ground zero’ for the economy and jobs, and this is only one modest step towards addressing it.”

I was recently inspired to write a blog about discharging student loans after some of my fellow law school comrades struck up a discussion concerning stimulating the economy by allowing student loans to be dischargeable.  Well they are, but only in true lawyer-like fashion – “in certain circumstances”.  Now let’s see what those circumstances are.

Almost every Bankruptcy court relies on what is called the Brunner test (a case decided in 1987 that outlined when a debtor can discharge debts based on an undue hardship).  The case Brunner v. New York State Higher Education Services Corp., 831 F.2d 395 [2d Cir. 1987]) requires a debtor to prove the following:

(1) That the debtor cannot maintain, based on current income and expenses, a minimal standard of living for the debtor and dependents if forced to pay off student loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that the debtor has made good faith efforts to repay the loans.

The facts of the Brunner case are liable to be significantly different than that of the potential debtor trying to discharge their student loan debts post 2005 Bankruptcy Reform of BAPCPA. When Brunner filed for bankruptcy, student loans were eligible for discharge 5 years after the date they first became due.  Brunner filed for bankruptcy only about a year after completing her masters degree in Social Work.  At the time of filing she was unemployed, but was in good physical health and had no dependents. Her debts totaled $9,000.  Brunner had made no payments whatsoever on the loan but had purchased a used car for $2400 cash two months prior to filing for bankruptcy.  The court gave descent insight as to the types of facts that might had persuaded it to rule in favor of discharge:

“She is not disabled, nor elderly, and she has–so far as the record discloses–no dependents. No evidence was presented indicating a total foreclosure of job prospects in her area of training. In fact, at the time of the hearing, only ten months had elapsed since Brunner’s graduation from her Master’s program. Finally, as noted by the district court, Brunner filed for the discharge within a month of the date the first payment of her loans came due. Moreover, she did so without first requesting a deferment of payment, a less drastic remedy available to those unable to pay because of prolonged unemployment. Such conduct does not evidence a good faith attempt to repay her student loans.”  Brunner at 397

Since the Brunner decision, undue hardship has become the only criterion for discharge of student loans in bankruptcy, and court interpretations of the three prongs have become increasingly stringent.

The average student loan indebtedness is now $25,000, with many individuals owing amounts comparable to home mortgages, amortizing over thirty years with monthly payments in excess of $1000. The U.S. Department of Education reported default on student loan to be almost 9 percent for a two-year period ending in 2010, versus 7 percent for the previous period.  U.S. student loan debt reportedly amounted to more than $900 billion, more than the total amount of credit card debt.

Don’t’ think that just because your case sounds like it may fit, that it will.  Courts will undoubtedly look at efforts to increase income and at evidence of unnecessary expenditures during periods when income might have allowed loan repayments to be made. Debtors contemplating asking for a hardship discharge would do well to have their attorney review recent bankruptcy cases for facts surrounding recent discharges of student loans in their districts and around the country. They might be surprised, for example, to learn that life insurance, unless court-ordered, will most likely be considered a luxury. Refusal of income-contingent repayment plans has also been argued as evidence of lack of good faith.