New Report: Bankruptcy Should be an Option for Student Loans

The Center for American Progress recently released a report advocating that some student loans should be dischargeable under federal bankruptcy laws. The report recommends limited bankruptcy protection based upon the repayment terms and track record of employment for students from a particular institution.

This is encouraging because it could cause some institutions to take their students job prospects more seriously. Essentially, if a school had a poor track record of employment for its students, or their students regularly defaulted on student loans, those loans may be dischargeable. The hope is that this would force lenders to create loans that are better for borrowers, and discourage predatory practices because both lenders and, quite possibly, institutions could be on the hook if loans were able to be discharged in bankruptcy.

While this is a great first step, it does not go far enough. As the number of people with unmanageable student loans has exploded, their options for repaying the debt have shrunk. Ultimately it would take an act of Congress to restore bankruptcy protection to student loans, so if you or someone you love is affected by student loan debt, please contact your congressman or congresswoman and make your voice heard.

Chapter 13: Why It Might be the Right Chapter for You

When considering filing for bankruptcy, most people think only of Chapter 7, where you are not required to pay back your creditors. However, your financial situation may in fact be better suited to a Chapter 13. Are you struggling with sky-high interest rates on your car? Is your mortgage company threatening to foreclose on your home? In a Chapter 13, you are able to keep both your home and car through a repayment plan, even if those creditors have been unwilling to work with you in the past.

Saving Your Home

If you have fallen behind on your mortgage payments because of a job loss, illness, or unexpected expenses, you can put what you are behind on your mortgage (arrears) into your bankruptcy repayment plan. You will pay this amount over time, rather than the lump sum your mortgage would require otherwise. You will also be permitted to make your regular mortgage payments again. If you fall behind on property taxes, you can also pay those taxes through your Chapter 13 Plan.

Lowering Car Payments

If you have fallen behind on your car loan, you can include it in your Chapter 13 Plan and lower the interest rate substantially. We know that cars depreciate quickly. If your car was purchased more than two and a half years ago, you have the option to pay only the current value of the vehicle (called a “cramdown”). The rest of the amount owing on the car is paid as an unsecured claim, which only receives a percentage of the total amount owed.

Benefits of Chapter 13

Much like a Chapter 7, individuals who file under Chapter 13 are protected by the automatic stay. This is a bankruptcy court order that requires your creditors to stop attempting to collect from you. Once your Chapter 13 is filed, your creditors cannot call you, send you letters, file lawsuits against you, or garnish your wages.

A Chapter 13 is a great tool for individuals who now have a regular paycheck but have fallen behind on bills due to unemployment or medical issues. You may have tried to get back on track on your own, but have found that your mortgage company or car loan creditors are unwilling to work with you. The benefit of a Chapter 13 is that the bankruptcy code requires creditors to accept your repayment plan as long as it meets the bankruptcy code’s requirements. You should consult with an experienced bankruptcy attorney who can assist you in understanding how a successful repayment plan can help you.

Divorce and Bankruptcy: When to File

If you are currently involved in a divorce proceeding, you undoubtedly have many concerns. If you or your soon-to-be ex-spouse have significant debts, you are also likely considering whether you should file for bankruptcy. Filing jointly before the divorce is final does save you money on filing fees for the bankruptcy court. However, there are many factors to consider when deciding when to file.


Chapter 7 vs. Chapter 13

If you file a Chapter 7, you can get rid of most of your unsecured debts such as credit cards and medical bills. Because you can receive a discharge in a few months, your bankruptcy would be completed quickly before a divorce. However, if you choose to file jointly, both incomes have to be included in the determination of eligibility to file for Chapter 7. A Chapter 13, on the other hand, takes 3-5 years to complete a repayment plan. If Chapter 13 is the best option for you based on your financial situation, you should consider filing as an individual.

Property Division in Divorce Settlement for bankruptcy before a divorce can simplify the issues regarding the division of debts and property in a subsequent divorce. For example, if you filed a joint Chapter 7, because you and your spouse are no longer responsible for your unsecured debts, you do not have to agree to pay any joint debts in a divorce settlement.

If you filed for divorce first and agreed to be responsible for jointly-held debts, your subsequent bankruptcy might not eliminate your responsibility to pay those debts. Your spouse could force you to pay the debts even after a completed bankruptcy.

Another important issue to consider before filing for bankruptcy jointly is whether your state’s exemption laws allow you to protect all the property you own with your spouse. Michigan allows you to use the federal exemptions, which permit you to double your exemption amounts if you file for bankruptcy jointly. If you have a lot of property, it may be better to file jointly to fully protect your property.

Because there are many issues to consider based on you and your spouse’s unique financial situation, you should consult with an experienced bankruptcy attorney who can guide you through the process and provide advice as to the best option for you.

Dangers of Filing Bankruptcy On Your Own

Debtors exploring the option of filing a bankruptcy on their own, without an attorney, may be in for a few unwelcome surprises if they do not know what they are getting themselves into. While it is permissible for you to file on your own, it is not advisable for several reasons. Bankruptcy is a very complex area of law that many experienced attorneys do not practice due to its difficult nature. In addition, bankruptcy courts have particularized rules and codes that must be followed precisely for your case to proceed smoothly.

One common pitfall is individuals who choose to file for bankruptcy, but have filed under the wrong chapter. There are specific requirements of both Chapter 7 and Chapter 13 that must be met in order for you to be allowed to file under that chapter. If you file under the wrong chapter, it may result in you losing your property or not being granted a discharge of your debts.

Another difficult aspect of filing on your own is the paperwork. Many individuals do not realize that there are nearly 50 pages of petition, schedules, statements, and other documents to be completed in a typical Chapter 7. If you are missing documents, your case could be dismissed without even being reviewed. In addition, the Trustee in your bankruptcy case will require documentation such as mortgages, bank statements, paystubs, vehicle titles, and more that must be submitted in order for your case to proceed.

Debtors also often misunderstand property exemptions when filing on their own. These exemptions allow you to retain and protect assets and personal property, but they work differently based on which chapter you file, and vary if you choose federal or state exemptions. In addition, if you fail to accurately list an asset such as a tax refund or bank account, you may lose that asset.

It is important to consult with an experienced bankruptcy attorney who can ensure that all of your assets are protected and that you will be entitled to a discharge in your case. If you have filed on your own and experiencing some of the problems discussed here, contact an attorney immediately who may be able to assist you in amending your bankruptcy documents to prevent any issues in your bankruptcy.