3 Factors Las Vegas Debtors Must Meet to Discharge Student Loans in Bankruptcy

One thing media discussions on student debt always include is that student debts arent dischargeable in bankruptcy. Unfortunately for many people seeking the counsel of a Las Vegas bankruptcy lawyer, their student loans will probably not be dischargeable in bankruptcy. However, technically this isnt absolutely true according to the bankruptcy code. Sometimes student debts are dischargeable in a Chapter 7 bankruptcy. Its just exceedingly difficult to pull off.

The petitioner must meet whats called the undue hardship test, which refers to the portion of the bankruptcy code that states, [T]his title does not discharge an individual debtor from any debt … unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtors dependents, for [educational loans]. (11 U.S.C. § 523 (a)(8) []) The question is, what does undue hardship mean here? The statute doesnt provide a definition, leaving the bankruptcy courts to interpret it, and interpret it they have, as in the 1987 case, Brunner v. New York State Higher Education Services Corp. The 2nd Circuit Court of Appeals (NY, CT, and VT) created a three-prong test for the debtor to demonstrate undue hardship. The debtor must demonstrate:

(1)  She cannot maintain a minimal standard of living for herself or her dependents if forced to repay the loan,

(2)  Circumstances exist indicating this state of affairs is likely to persist for a significant portion of the repayment period, and

(3)  The debtor has made a good faith effort to repay the loan.

To make things more complicated, not all courts use the Brunner test. In the 1st Circuit (ME, NH, MA, and RI) and 8th Circuit (SD, ND, NE, MN, IA, MO, and AR), the Totality of the Circumstances Test prevails, which requires the debtor to prove by a preponderance of the evidence that:

(1)  The debtors past, present, and reasonably reliable future financial resources;

(2)  The debtors and all dependants reasonably necessary living expenses; and

(3)  All other relevant facts or circumstances unique to the debtors case that prevent the debtor from paying the student loans in question, while still maintaining a minimal standard of living.

Although the Totality of the Circumstances Test gives the bankruptcy judge a lot of leeway, unfortunately the 9th Circuit, which includes Nevada, uses the more restrictive Brunner test. Thus, if you have a lot of student loan debt, it will probably be harder for you to discharge your loans than in other states. Thats not a reason to give up hope. A Chapter 7 Las Vegas bankruptcy can help you discharge other debts quickly, or you might benefit by placing your student loans in a Chapter 13 repayment plan with the hope that your income will be greater in three to five years.

First Circuit: Lender Not Obligated to Foreclose on Home Surrendered in Bankruptcy

Surrendering Property Usually Allows the Debtor to Walk Away From Underwater Property. What Happens When the Bank Refuses to Take Ownership?

One of the big advantages for consumers filing bankruptcy is the ability to surrender property they can no longer afford. Through bankruptcy, debtors can avoid a deficiency lawsuit and get rid of personal liability on a car loan or mortgage by giving back (surrendering) underwater property and walking away. However, what happens when the lender refuses to take back the surrendered property? Does effectively forcing a debtor to continue owning a surrendered asset constitute a violation of the discharge order?

First Circuit: Lender Not Obligated to Foreclose

A recent decision out of the First Circuit, Canning vs. Beneficial Maine Inc., holds that a secured creditor is not obligated to foreclose or release its lien on a surrendered home as long as theyre otherwise in compliance with state law. The issue is important because after surrender a foreclosure must occur before the bank can take ownership of the debtors home. Until the foreclosure sale, the debtor still owns the property and remains liable for insurance and HOA dues. The Court in Canning held that the banks refusal to foreclose was not a violation of the discharge order. The debtors argued that being forced to maintain the property indefinitely interefered with their right to a fresh start.

The Facts of the Case

The Canning case involved what appeared to be a fairly straightforward chapter 7 filing in which the debtors elected to surrender an underwater home. Upon receiving notice of the bankruptcy, the Cannings mortgage lender dismissed its pending foreclosure action explaining it was due to “the debtors filing chapter 7 bankruptcy.”

After receiving their discharge, the Cannings took the position that the banks failure to either release its lien or foreclose was in violation of the discharge order. They then filed an adversary case seeking actual and punitive damages as well as declaratory relief ordering the bank to take title to their house or deliver unencumbered title.

Where Property Has Value, Lender Not Required to Release Its Lien

Ultimately, the Court sided with the bank relying on the fact that the bankruptcy discharge does not extinguish the mortgage lien, only personal liability to pay the mortgage. While the bank was prohibited from attempting to collect personally from the Cannings, they were not obligated to foreclose or release their lien. Like many homes, the Cannings property had plummeted in value and the Court ruled that the bank could wait for values to recover before making a decision. Also persuasive was the banks willingness to settle and release its lien upon payment of the actual value of the property, rather than demanding the outstanding loan amount.

The record reflects that the property had significant value, that the bank did not suggest they would discharge the mortgage only upon full payment of the loan, and that the Cannings were not incurring any attendant costs.

The Court Got it Wrong

In ruling against the Cannings, the First Circuit naively argues that continued ownership wasnt forcing them to incur costs and therefore wasnt a coercive tactic. We here at National Bankruptcy Forum find that hard to believe. Any consumer attorney will tell you that one of the biggest issues facing their clients in this crazy real estate market are lingering homeowners association dues. An all too common story involves the bankruptcy debtor who surrenders their home only to be sued by the homeowners association because the lender is either too busy or too lazy to foreclose. Even after surrender, until the bank forecloses the debtor owns the property and owning property carries with it liability, liability for mishaps and injuries as well as liability for homeowners association dues. For folks who have just sworn under oath that theyre legally insolvent, these costs are especially real and tremendously stressful.

Ruling that a willful failure to foreclose does not violate the discharge order goes against the spirit of a fresh start by essentially punishing the debtors for defaulting on their mortgage. The banks argument that real estate can improve in value is theoretically accurate, however it ignores the reality behind most surrender and foreclosure scenarios. In this case the Cannings had all of their utilities shut off all utilities and moved out. Is it likely that their neglected property will increase in value? Not likely. Abandoned homes and homes that are in foreclosure bring down property values. Unless the bank intends to spend far more money maintaining and fixing up the home that it would have spent foreclosing, theres no other way to explain their behavior other than as a retaliatory action.

We think the First Circuit got this one all wrong, what are your thoughts?

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Nevada Still #1 in Top 10 List of Underwater Mortgages by State?

This month, several news outlets reported on the state of Americas underwater mortgages. The situation is grim: in the fourth quarter of 2011, the number of houses that were underwater actually grew by 3.7 percent. 11.1 million Americans live in homes in which the remaining balance on their mortgages is worth more than the full value of their houses. This comes to 22.8 percent of all homes that have mortgages, and eight percent have fallen behind on their mortgage payments. The rate is the highest its been since 2009.

The housing bubble affected states differently, especially Nevada. People with underwater homes considering filing Las Vegas bankruptcy should know theyre not alone. Yahoo! Real Estate took the data and compiled a top 10 list of states with underwater mortgages. It isnt surprising, but Nevada comes out on top with 60.1 percent of houses underwater and 4.5 percent with five percent equity or less. Worse, Nevada is the only state in which the total mortgage debt exceeds total property value. Homeowners lost an average of $150,000, and the median homes value dropped 60 percent.

Although the banks and the federal government agreed to a settlement that would give principal reductions for mortgagors, this may not be enough for Nevada homeowners, 13.4 percent of whom are 90 days delinquent on their mortgages. If youre in these circumstances, consulting with a Las Vegas bankruptcy—even if youre eligible for a principal reduction—will help you evaluate all of your options. You might be able to save money via a short sale, refinance, mortgage modification, offering your deed in lieu of foreclosure, and filing bankruptcy. Dont throw good money at a mortgage youll never pay off.

Bankruptcy Class Action Settlement Update

In 2009, a class action lawsuit brought in California challenged credit-reporting bureaus TransUnion, Equifax, and Experian with improperly reporting debts that had been discharged in bankruptcy. The defendants (that is, the credit-reporting bureaus) eventually came to a settlement with the plaintiffs (the people responsible for bringing the suit), to the tune of $45 million.

The court approved the settlement by issuing an Order Granting Final Approval, but on August 12, 2011, the defendants filed a brief challenging that order, in regards to attorney fees and costs of the case. The result of this appeal won’t be known until at least later this year: the deadline for Appellants to file relevant briefs with the court is January 23, 2012, and Appellees have until February 24, 2012.

Will You Get Settlement Money?

The lawsuit was brought because Equifax, Experian, and TransUnion improperly reported debts that had been discharged in bankruptcy on consumers’ credit reports. Rather than noting that these debts were “discharged through bankruptcy,” the credit bureaus noted that they were “120 days late” or that they had been charged off by the credit issuer.

Incorrectly reporting the status of a debt is illegal (which is why the lawsuit was filed), but it also caused a lot of grief for the people affected. When a debt is still reported as active, debt collectors may try to collect on that debt.

The result was that people who had filed for bankruptcy and gone through the entire bankruptcy process precisely to eliminate their debts and stop getting hassled by debt collectors were having to deal with debt collectors anyway (along with the stress of trying to sort out why their credit reports were incorrect).

You are eligible to collect some of the settlement if…

• You are a member of the “class” represented by this class action case. To be a part of the class, you must have received a Chapter 7 bankruptcy discharge AND had a credit report issued by one of the defendants (i.e. the three credit reporting bureaus) between March 15, 2002 and May 11, 2009 with incorrectly reported discharged debts.
• You must have submitted a claim form with relevant information no later than November 30, 2009.

If you missed the deadline, however, don’t worry too much. Even though the settlement amount seems large, it will be spread out over so many individuals that it likely won’t result to more than a few dollars per person.

If, however, you’re interested in exploring other legal options regarding errors on your credit report, you may want to consult with a lawyer about the recourse available to you.

Buying a Home after Filing for Bankruptcy

That ranch in Montana is calling your name. Or maybe it is that Montana ski chalet.  Unfortunately, if youve filed for bankruptcy, property in Montana may see like a distant dream. That light feeling you get after filing bankruptcy is all that stress being lifted from your shoulders and, there is no law against having a dream. Once you get out of debt and your finances under control there is no law that says you cant buy that piece of Montana property youve been dreaming about.

You may qualify for a home loan in as little as two years after filing bankruptcy.

To buy a home after declaring bankruptcy, you need to consider two things:

• Your level of savings for a down payment
• Your credit score

The days of zero down payments are over and it is just a bad idea overall. If you are serious about purchasing a home after bankruptcy, use the first year after bankruptcy to save every spare dollar you can. Cancel your cable subscription, eat all your meals in and start drinking cheaper beer. If you want to buy a home after bankruptcy, you are going to need a substantial savings for a down payment and dont forget about saving for the closing costs.

Your credit score is going to take a hit after declaring bankruptcy in Montana and you should start working on repairing the damage as soon as possible. Keep paying your debts on time, especially student loans and car loans. Check your credit report to make sure it reflects your new, debt-free identity. And, consider getting one credit card, use it and pay it off each month. That will help build your credit score.

Dont rush it. Before you buy a home after bankruptcy, you need to make sure your finances are in order, your credit is repaired and your saving are substantial. There is lots of land in Montana.

Jim Cossitt is a Montana bankruptcy lawyer based in Kalispell, Montana and is board certified in both business and consumer and bankruptcy law. He provides sound legal advice and asset protection planning to clients throughout Northwest Montana.

Discharging Social Security Overpayments

Many common events trigger a decrease in monthly Social Security benefits, including a change in the number of people in your home, or an increase in income. The Social Security Administration (SSA) requires that you report changes within 10 days after the month the change occurred. If the SSA does not get your reported change in time, you may receive an overpayment. Over time these overpayments can amount to a debt you cannot afford to repay.

When an overpayment is discovered by the SSA it will request that you send payment within 30 days. You are entitled to request a waiver and, if the waiver is denied, you may ask for a hearing with an Administrative Law Judge. The SSA will look at whether you acted honestly in making its decision to waive the overpayment.

If the waiver process fails, you may consider a bankruptcy. Social Security overpayments are treated like any other unsecured debt in bankruptcy. The debt can be discharged at the end of a Chapter 7 or Chapter 13 case. However, the SSA may file a timely objection to the discharge of the debt. The most common reason for objecting to the discharge is that you committed fraud by keeping additional benefits when you knew you were not entitled to them. If the SSA is successful in proving fraud, the debt will be excluded from the discharge.

In a fraud case the issue generally boils down to one question, Did you know you were not entitled to keep the extra money from the SSA? These cases are seldom cut and dry because of the SSAs complex rules, especially when dealing with return to work issues. The SSA seldom files objections in bankruptcy cases, but each case is different.

Social Security overpayments are serious business and require a serious response. If you fail to take action, the SSA will begin taking money from your monthly check 60 days after you receive notice of the overpayment. Your best response is to consult with an experienced attorney. Your attorney can help you weigh your legal options and develop a plan to deal with this debt.

Chicago Bankruptcy May Help Homeowners Haunted by Old Mortgages

Homeowners shouldn’t be surprised if they find a foreclosure notice in the mail after defaulting on their mortgage payments. But what if the bank began foreclosure proceedings for a loan you knew was already paid off?

More and more frequently, Chicago bankruptcy lawyers are seeing ghost mortgages coming back to haunt borrowers.

In a recent Reuters article, a Kansas couple refinanced their home to take advantage of lower rates. But while Wells Fargo said the original loan would be paid off in the refinance, it was never recorded in the paperwork.

As a result, the family was thrown into foreclosure – despite the fact that they had never made a late payment.

Experts attribute the problem to sloppy paperwork during the housing boom, when lenders attempted to sell as many loans as possible so they could resell to millions of investors. Now banks are using the same sloppy tactics to foreclose on as many homes as possible with reckless speed.

Some of the borrowers being pushed into foreclosure were never in default; others never even had a mortgage. Often times, a computerized banking error is the source of the mix-up.

It’s a good reminder of why it’s so important to keep tabs on the state of your credit. Banks report any late or missing payments – whether valid or not – to credit bureaus, who in turn record the discrepancies in your credit report. Having a credit score tarnished by a delinquent mortgage or a foreclosure you didn’t know about can keep you from getting future loans or lower interest rates.

Of course, the majority of folks facing foreclosure are still those who have missed one or more payments, usually because of job loss or overwhelming credit card debt.

Regardless of how you’ve gotten into a mess with the bank, filing for bankruptcy in Chicago is often the best way out.

Chapter 13 bankruptcy has the power to stop foreclosure proceedings from the moment you file, so you can protect your house and stop the bleeding on your credit report.

Whether you’re unfairly caught up in a foreclosure or are losing your house because you couldn’t afford to make payments, the effects can ruin credit, put you at risk for costly lawsuits, and, of course, threaten to snatch the roof from over your head.

Bankruptcy can put a fast stop to foreclosure, so you can start rebuilding your finances, you credit, and your life.

How the MF Global Bankruptcy Is Affecting Charities

Since MF Global filed for bankruptcy protection at the end of October, much of the media attention has been focused on the scandal of the $1.2 billion in investor money that the firm cannot account for. That money, which reportedly belongs to about 38,000 investors, may have been used for MF Global’s own (questionable) investments in European debt.

But now, as the end-of-year charity giving season is in its final throes, another kind of fallout from the MF Global bankruptcy is coming to light: its effect on charity donations. According to sources, the country’s eighth-largest bankruptcy is likely to affect charity giving in a number of ways:

• Individual donors who invested with MF Global and lost money (when the firm misplaced those funds) may be less likely to contribute to charities than they were in recent years. Because many smaller investors lost significant amounts of money (relative to their total net worth), tens of thousands of potential charity donations might have been wiped out by MF Global’s collapse.
• Corporate charity organized by the CME Group will likely not occur. In years past, sources note, the CME Group kept a trust (called the CME Trust) of $50 million to compensate investors who were unfortunately hooked into (and who lost money by) fraudulent investment schemes. In the past, most of that money got donated to charities at year’s end; this year, however, the entire trust went toward compensation of MF Global investors who lost money.
• Some charities invested money with MF Global. In addition to the individual clients who lost money, organizations (including nonprofits and charities) put their money with this firm, as it was meant to be a relatively safe investment option. Now the firm’s bankruptcy will translate to a direct loss of funds for charity investors.

It’s no secret that the wealthiest citizens of the U.S. are often the ones behind major charitable grants and donations. But few news sources have discussed the potential effect a major bankruptcy like MF Global’s, which includes debts of more than $39 billion, is likely to have on charitable organizations this year.

What is perhaps even more troubling is that this blow to charities comes during a time when individual donors have cut back on charitable contributions because of unemployment and reduced wages. Naturally, the persistently tough economy also means that more Americans than ever are in need of the support that charitable organizations traditionally offer.

In recent years, the CME Trust donated millions of dollars to Chicago-area educational institutions, including universities, charter schools, and organizations that fund education in the city. Without such donations, those and other groups could face significant financial difficulties in 2012.