Bankruptcy discharge: private student loans can be wiped out in some cases

Many people are under the incorrect belief that student loans can’t be wiped out in bankruptcy. However, there are at least two ways to get rid of student loans in a bankruptcy case.

The first is to show the court that the loan would cause “undue hardship” and so based on that borrower’s specific situation, the loan should be wiped out. We discuss that in another article. The second is to prove that a particular loan does not meet the legal definition of “educational loan” under the Bankruptcy Code and therefore is just an ordinary loan that can be wiped out in bankruptcy.

There are two “exceptions to discharge” that may prevent student loans from being wiped out in bankruptcy.

  1. An educational loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or

  2. 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

Governmental unit or nonprofit institution

This exception covers federal and state loans. It also covers loans “made under any program funded in whole or in part by a nonprofit institution.” This sentence in the bankruptcy law caused a whole bunch of student lenders to use nonprofits just for the purpose of funding/guaranteeing their loans. In the paperwork, you may see the name of a nonprofit like The Education Resources Institute (TERI). We believe that many of these loans were not meaningfully funded by nonprofits, but instead the lender “rented” the nonprofit’s name just to avoid the loans being dischargeable in bankruptcy. This is one factor we’ll look at if we represent you in your student loan bankruptcy case.

Qualified education loan

A qualified education loan is a very complex definition that requires looking at a handful of different federal laws, but basically the loan had to be made to an eligible student (half-time or more), at an accredited school, and the loan may not have been for more than the cost of attendance at the school, and solely for educational expenses.

How to make your case

Although the two definitions above make the majority of student loans non-dischargeable in bankruptcy, we believe that a lot of loans don’t meet either definition. You can make your case either by filing an “adversary proceeding” in your bankruptcy case, or by using these arguments as a defense to a student loan collection lawsuit after you have filed bankruptcy. We are one of the only law firms in Minnesota that handles student loan discharge cases, and our prices begin at $5,000. Get in touch if you have questions.

Bankruptcy discharge: student loans can be wiped out if there is "undue hardship"

Many people are under the incorrect belief that student loans can’t be wiped out in bankruptcy. However, there are at least two ways to get rid of student loans in a bankruptcy case.

The first is to show the court that a particular loan does not meet the legal definition of “educational loan” under the Bankruptcy Code. We discuss that in another article. The second one is to show that the loan would cause “undue hardship” and so based on that borrower’s specific situation, the loan should be wiped out.

In Minnesota, courts look at three factors to figure out whether a loan causes undue hardship.

  1. The borrower’s past, present and reasonably reliable income and assets;

  2. A calculation of the borrower’s reasonable necessary living expenses for their family; and

  3. Any other relevant facts and circumstances.

This test is applied case-by-case and really depends on how well a borrower can paint the financial picture both that they can’t afford to pay their loans now, and also convince the court they will not be able to pay in the future. It’s helpful to be able to prove some kind of disability or condition that makes it harder to work or makes the stress of student loans too much to bear.

It’s much easier to wipe out private loans than federal loans using the bankruptcy process. Discharging student loans requires that you file bankruptcy first, and then file a separate case, called an adversary proceeding, against the student lender. Typical fees in a student loan discharge case are between $7,500 and $15,000, but they vary case-by-case.

We’re one of the only law firms in Minnesota who handle student loan discharge cases. Get in touch for a free consultation to figure out whether you’ll qualify.

How chapter 7 bankruptcy works

The word “bankruptcy” may conjure images in your mind of auctioneers selling all your property except the clothes on your back. The reality is that Chapter 7 bankruptcy isn’t anything like that. The three most common reasons that people file bankruptcy are divorce, job loss, and medical bills. It’s very likely that you have friends, family or co-workers who have gone through bankruptcy and that you never heard a word about it.

So how does Chapter 7 bankruptcy work? We offer a 30-minute free phone consultation where we can review your options with you. We collect information about your income, expenses, debt and assets. After this initial evaluation we help you figure out whether you qualify for Chapter 7 (this will depend on income, family size, etc. though most folks who come see us do qualify).  Next, we discuss whether the debts can be wiped out in bankruptcy. Taxes can be dischargeable sometimes, same with student loans. Alimony/child support are dischargeable. Credit cards, personal loans, utility bills and medical bills can be wiped out.

If the client qualifies for Chapter 7, we discuss the ramifications of bankruptcy. It may be more difficult to get a mortgage for the next few years and any car loan you take out will likely be at a higher interest rate than someone who hadn’t filed might qualify for, but in general, you can overcome these disadvantages by building credit after bankruptcy. Job seekers and people who might be looking to rent an apartment should know that only a very small percentage of employers and landlords will run credit checks.

Next, the conversation turns to assets. People want to know what property they can keep in a bankruptcy. The short answer is that you would only have to surrender property which is not “exempt.” The bankruptcy code is full of exemptions. Your clothes, furniture, household goods are safe unless you’re a Kardashian or something. You can generally keep your house and car, though some people use bankruptcy to get rid of underwater houses or cars.

The Process

If a client decides to file, we get started putting together all the required paperwork and filling out schedules. Then we file the case with the court. This filing begins what is called the “automatic stay.” During the automatic stay no creditors can contact you, either by telephone or by mail. If they do, we may be able to sue them and collect money damages.

Approximately one month after filing, you’ll meet with a bankruptcy trustee. This is called a 341 meeting. It’s the trustee’s job to make sure you aren’t hiding assets anywhere. It usually takes less than five minutes.

About sixty days after the 341 hearing, if all goes well, the bankruptcy is confirmed and all your dischargeable debts are eliminated. This means that the creditors can never attempt to collect the debts again, and you get a fresh start.

Can I wipe out tax debt in bankruptcy?

This post describes how to deal with tax debt in bankruptcy.  Tax debt is one of the hardest kinds of debt to shake. First of all, the IRS knows where you are. Also, they have special enforcement powers to collect their debt. They can put a lien on your house or your property without suing you. They can take money in your bank account without a judgment. They can seize tax refunds. They can take you social security. And they can also garnish your wages, often for a lot of money. But contrary to popular belief, tax debt can be wiped out in bankruptcy , especially if it's old. Here's how it works.

1. The rules: For income tax debt to be wiped out in bankruptcy, the following three rules must apply:

Rule 1: The income tax return must have been due more than three years ago. The first question we ask to figure out income tax dischargeability is whether the tax return was due more than three years before the date of bankruptcy filing. 2008 income taxes were due on April 15, 2009. Today is February 8, 2012. These taxes are not dischargeable today, but they pass this test if we wait until April 16 to file. But there's one wrinkle. If you filed for a six-month extension that year, your tax return wasn't due until October 15, 2009. So if you're looking to discharge income taxes, we can't file your bankruptcy case until October 16, 2012.

Rule 2: The income tax return must have been filed more than two years ago. This one seems easy. If the return was filed more than two years before today, this test is satisfied. In some cases, the taxpayer never actually files a return, and so the tax agency files one for them (sometimes called a "substitute return."). When that happens, the two-year clock never starts running, and until the taxpayer actually files his/her own return, this test can never be met.

Rule 3: The tax must have been assessed more than 240 days ago. This means that the tax agency's determination that you owe a debt must have been made more than 240 days ago. The "determination" can be a few different things--wither you filed your return and acknowledged you owe a balance. That's an assessment. Or the IRS changed your return to say that you owed a balance. That's an assessment too. Finally, if you were audited, and the IRS added a balance based on the results of the audit, that's an assessment too. This part of the test is the most confusing, and you might want to see a tax professional (tax accountant or attorney) to figure out the assessment date.

2. Other factors add time to the clock. If you've filed bankruptcy before, the amount of time your case was open, plus six months, are added to all the time limits above. Also, filing an Offer in Compromise with the tax agency can stop the clock.

3. Some kinds of taxes are never dischargeable. Income taxes can be discharged if they meet all the above tests. There are other kinds of debts, such as sales taxes or payroll taxes collected on behalf of an employee, that will never be dischargeable. See a tax attorney if you're facing these types of debts.

4. If a tax debt can't be discharged, you still may be able to stop collection by filing Chapter 13. Chapter 13 bankruptcy stops all collection efforts by a tax agency, and allows you to spread the tax debt over a three to five-year period. This can be a big relief when the tax agency is looking to put liens on your property or garnish your wages, sometimes up to 90 percent of your income.

How does Chapter 13 work?

How does Chapter 13 work? Clients are asking us about Chapter 13 Bankruptcy, and while it has some similarities to Chapter 7, it's also way different. Chapter 7 fits best where you can't pay your debts and don't have many valuable possessions, but Chapter 13 makes sense if you have substantially more income (you can pay a portion of what you owe over time) and/or you own property that is not covered by the bankruptcy exemptions.

Chapter 13 can stop foreclosure

We often use Chapter 13 to stop foreclosure. Chapter 13 can allow a homeowner to catch up on missed mortgage payments, pay tax debts over time, or to wipe out an underwater second mortgage.

How Chapter 13 works

We figure out your disposable income, which basically means your take-home pay minus your actual living expenses.

How much do I have to pay to creditors? Once we know your disposable income, that may be close to what your "plan payment" will be. Your plan payment is the amount of money you will pay to your creditors over a three-to-five-year period. In general, your plan payment goes to pay off your secured debt (like a car loan) in full, as well as your priority debt (overdue taxes, government penalties, etc.) A portion of your general unsecured debt (credit cards, medical bills, legal judgments) is paid out of the rest of your plan payment, but that doesn't have to be paid in full, and lots of times, can be paid at pennies on the dollar..

How do I make my plan payments? You make plan payments directly to the Bankruptcy Trustee, who tacks on an additional fee (in Minnesota, the fee is about 7 percent of your payment) and spreads each payment out to your creditors. You need to have steady enough income to stick to payments, because if you miss them your case will almost certainly be dismissed.

How much does Chapter 13 cost? The filing fee is currently $310, which is 25 bucks less than the Chapter 7 filing fee. The total attorney's fee for Chapter 13 is usually more than Chapter 7, but most times you end up paying the same or even less, since we have the ability to take some of our fees from the plan payments, meaning that it comes out of your creditors' pockets, not yours.

How do we know which chapter you should file? There are a few common scenarios where you might choose a Chapter 13 bankruptcy.

How do I stop foreclosure?

The most common problem people come to see about is foreclosure. Knowing you might lose your home in foreclosure is scary, but there are a lot of ways we can help you get back into good standing on your mortgage so we can keep you in your house. In this post I run down some of the options out there:

1. Try for a loan modification. In our opinion, most of the loan mod programs out there are nearly worthless. HAMP can be a good fix for a homeowner behind on payments, since it reduces monthly payments AND puts your loan back into good standing. But since there's no way to force lenders to comply with HAMP, most people are left out in the cold (and pushed into foreclosure). It's been very rare to see a homeowner get a HAMP modification, but that doesn't mean you shouldn't try it, hoping to catch the right person on the right day and catch a lucky break.

As for the lenders' "internal" modification programs, your guess is as good as ours whether you'll qualify.  Since the criteria and terms of these mod programs are usually secret, you're at the lender's mercy. So if you go this route, negotiate and negotiate hard. Even though the customer service rep on the phone might not realize it, the bank is probably going to lose a lot of money if they foreclose on you. Show them why. It might be helpful to order an appraisal--if the lender knew your house was $100,000 underwater, they might not think it's such a good idea to kick you out of it.

2. Don't hire loan modification sleazeballs. If foreclosure is the number one problem we see in our office, 1A is people who have paid sleazy loan modification outfits to help them stay out of foreclosure. These programs are expensive, and most of the time they just don't work. In particular, stay away from: 1) out-of-state companies (it's harder to get your money back), 2) companies that tell you to stop making your mortgage payments; and 3) for-profits that ask for a large up-front fee without telling you what they can do for you or how they can do it. So many people get caught up in these scams, and it only creates a bigger mess to clean up once the scammer runs away with the money and leaves you right where you started or worse.

3. Consider Chapter 13 reorganization. Chapter 13 is a way to force a lender to accept repayment of your arrears over time. It's ideal for the person who missed a bunch of payments, but now has the income not only to make the payments, but also to catch up and stop foreclosure. Chapter 13 allows you to pay your mortgage arrears in equal installments over a three- to five-year period. It can be surprising when a lender refuses to let you catch up on your mortgage, even when it knows you have the income for it. This way you can call the shots and force them to accept your money.

4. Strip off your second mortgage. If you didn't have to pay your second mortgage, could you afford to catch up on your mortgage? As of earlier this year, in a Chapter 13 reorganization we can strip second mortgages (and third mortgages, and fourth...) where the value of the house is less than the balance of the first mortgage. It's called lien stripping. To do this, we need an appraisal to prove the value of your home. Once we can prove that your second mortgage is fully unsecured, we can strip the lien in Chapter 13.

5. More people have just been moving on. If you can't afford your mortgage payment, can't qualify for a modification, and bankruptcy won't help your situation, it's time to make some hard choices. If you have an underwater house, meaning you have no equity, what do you really own? And if you have to pay $10,000 just to get back into good standing, is it really worth it? If you decide to abandon a home to foreclosure, you can usually live in the house mortgage-free for at least six months while the foreclosure runs its course. For many of our clients, this is just enough time to save up some money to make the transition to a new place to live comfortably. And if you have a second mortgage that won't go away in the bankruptcy, well we can usually wipe that out in Chapter 7.

How taxes can be wiped out in Chapter 13

Many of our Chapter 13 clients are struggling with tax debt. Tax debt can be tricky in Chapter 13 bankruptcy, but here are a few advantages and disadvantages you'll want to know about if you have significant tax debt.

  • Get your tax transcripts. To diagnose and fix your tax problems, you'll need to get account transcripts from the IRS for each year you owe a balance. These documents are a history of when your tax was due, when the return was filed, and when each charge was added to your account. You'll can get account transcripts on the IRS web site. If you have trouble getting these before you make your appointment, we can get transcripts for you if you give us power of attorney and pay a transcript fee.

  • Priority claims must be paid in full. A priority tax claim is an income tax debt that is recent (generally speaking, less than three years old, but the actual calculation is complex and you should speak to an attorney). For the most part, these are the same tax debts that can't be discharged in bankruptcy (with some exceptions), and so you'll want them to be paid off by your bankruptcy. In Chapter 13, a priority tax debt must be paid in full over the life of your Chapter 13 plan (three to five years). So if you owe $10,000 in priority tax debt, you can generally pay that debt in Chapter 13 in roughly $200 a month payments.

  • The benefit of priority tax claims in bankruptcy is that they must be paid before non-priority debt, like credit cards or medical bills. So if your disposable income is $250 a month and you owe $10,000 in priority tax debt, the first $200 of each payment will go to taxes, which need to be paid anyway, and only $50 will go to credit cards. The higher your priority debt, the less you'll pay in non-priority debt and the more you can discharge at the end of your bankruptcy case. One thing to remember is that even if you pay priority tax debt in your Chapter 13, you may have to pay some accrued interest (currently four percent) after your plan is over.

  • Tax liens must be paid off, but can be modified. If you have a tax lien filed against you, this can present some new problems. Tax debts with liens on them are classified as "secured debts" in bankruptcy. This means that, like priority debts, they need to be paid in full over the life of your plan. What makes secured debts tricky is that the IRS can classify a tax debt as secured even when that debt would otherwise be dischargeable in bankruptcy. This means that by getting a lien, the IRS is preventing you from discharging certain debts in a Chapter 13 case. The good news about tax liens is that they can be "crammed down" in bankruptcy. To determine the secured claim created by a tax lien, you count up all the assets you have. Your secured claim is the lesser of the dollar amount of the lien, or the value of all your property put together. Contact a bankruptcy attorney if you have tax liens, because there are sometimes other creative things we can do to save you money.

  • Some tax debts are neither priority nor secured, and these can be discharged in Chapter 13. Some older tax debts can be discharged in Chapter 13. This means that sometimes, when you come to see an attorney about your tax debts, we may advise that you wait to file, in order to age out certain debts and make them dischargeable. If they're dischargeable, this means they get thrown into the pot with all your credit cards, medical debts and personal loans, and they're paid out of your disposable income. Whatever can't be paid out of disposable income after all the other higher-priority debts are paid, are wiped out at the end of a successful Chapter 13.

The Bankruptcy Means Test: Is it going to stop me from filing Chapter 7?

The means test is one of the bankruptcy mysteries our clients ask about most often. The means test was created by the 2005 bankruptcy amendments, and was meant to make it harder for high-income folks to file bankruptcy.

To decide whether clients qualify to discharge their debts in Chapter 7, the courts are concerned with two major questions: 1) Does a consumer have enough assets to pay off their debt? and 2) Does a consumer have enough income to pay off their debt? The means test helps the court answer the second question.

Your attorney will compile the last six months of all income your household has received, and compare it against the median household income of a family your size in your state—for example, as of this post, the median household size for a family of two in Minnesota was $72,734. This information is available on some handy tables on the U.S. Trustee's web site. If your household income is less than the median, congratulations—you've finished the form and you can file Chapter 7!

If your household income is more than the median, you may still be able to file Chapter 7, but there are a whole set of other calculations that your attorney will need to go through involving your monthly expenses to find out. These include some standard expenses that can be found on the U.S. Trustee's web site, as well as some actual monthly expenses. Once you deduct these expenses from monthly income, the goal is generally to have a very low number for your leftover—or disposable—income.

But filling out the means test form requires a whole lot more than just looking up some numbers and plugging them into a chart. First of all, some of the deductions are backward-looking over the past six months. Some are forward-looking. And some are hypothetical (an expense is allowed if you should be spending on it). Also, many of the expenses have rules--you can't take the expense unless certain criteria are met. These rules are based on the Bankruptcy Code and court cases interpreting the bankruptcy law. This is why you'll need a good attorney who knows the ins and outs of bankruptcy, not just someone who will fill out your bankruptcy forms without much legal analysis.

Some cases are exempt from the Means Test, for example, cases where most of the debt is business debt rather than consumer debt, or where the debtor is a disabled veteran or military reservist/guardsman.

These are just the basics. In other articles, we've gone more in-depth so you can understand more about the means test and how you can qualify for Chapter 7 bankruptcy.

What happens to my car loan when I file bankruptcy?

In this post we discuss what happens to a car loan when a borrower files bankruptcy.

Options in Chapter 7 bankruptcy

In Chapter 7, you have three options for dealing with a car loan. These options are to surrender the car, reaffirm the loan, or "retain and pay."

  • Surrender: If you file Chapter 7 and you wish to get rid of your car with a loan, you have the option of surrendering the car to the bank. The upside to this is that you can walk away from the loan, without having to pay any deficiency (i.e. the difference between the amount of the loan and the value of the car that you would generally owe if you walk away form a car loan.) The deficiency is wiped out in a Chapter 7 case.

  • Retain-and-pay: This is the most common option for car loans in Chapter 7. You get to "discharge" your car loan, which means they can never come after you personally for any unpaid amount on the loan. However, instead of surrendering the car, you keep the car, and continue making the payments for as long as you want. Both the borrower and lender act as if the bankruptcy had never been filed. Once the loan is paid off, you can get the lien released, and own the car free and clear, just as if you hadn't filed bankruptcy. Some lenders won't go for this, typically credit unions and some banks, and instead they'll demand a "reaffirmation agreement."

  • Reaffirmation: Some lenders don't want to let you discharge your personal obligation on the loan, and instead demand a reaffirmation, which is a legal process where you renew your promise to pay the loan, and unfortunately you keep your personal liability. Typically, it's credit unions that tend to demand reaffirmation agreements, and a few banks out there. Ask your attorney if your lender will accept retain-and-pay or demand a reaffirmation. If you choose reaffirmation, you will likely have to go to bankruptcy court so that the judge can explain the consequences to you and make sure you understand.

Chapter 13 tools for car loans

In a Chapter 13 case, you can reduce the principal of the car loan, reduce the interest and catch up on arrears.

  • Reduce principal: In Chapter 13 you can "cram down" a car loan, but only if you took the loan out more than two and a half years ago. To do this, we find the current value of the car. Then we can reduce the principal of the car loan from the current balance, to just the value of the car. So if you owe $9,000, and the car is worth $5,000, cram down reduces the balance of your loan from $9,000 to $5,000.

  • Reduce interest: For many car loans in Chapter 13, you can reduce the interest rate on the car loan from an exorbitant rate to something more reasonable. In past cases we have reduced interest rates to somewhere between 4 and 6 percent, typically. This can be a big help for subprime car loans.

  • Catch up on arrears: In Chapter 13, if you're behind on a car loan, you can use bankruptcy to force the lender to accept catch-up payments. So if you're $1,000 behind on the car, you can take those arrears and stretch them over a three-to-five year period, pay a small monthly payment to catch up (say, $20-35 a month in this scenario), and then resume making your regular monthly payments. This is a good option if you're facing repossession.

If you're struggling with a car loan or facing repossession, and don't know what to do, you have plenty of options inside or outside bankruptcy. Get in touch with a lawyer to learn more about the tools available.

Emergency bankruptcy in Minnesota

What is emergency bankruptcy? 

An emergency bankruptcy filing is a way to stop impending collection action, like a garnishment, foreclosure sale, lawsuit or tax lien. Once the emergency case is filed, no collectors can take any action against you. And if they do anyway, we can sue them, or undo the action (at the very least). To file an emergency bankruptcy, we don't need to file as much information as we would in a full bankruptcy. The emergency filing gives us14 days to file all the remaining bankruptcy documents.

How long does emergency bankruptcy take? 

We can file an emergency case in a day or two, if it's necessary. We've even filed them the same day as the initial client meeting. But keep in mind that the closer we are to the emergency, the better chance we wouldn't be able to file it in time. Also, rush bankruptcy cases cost more than standard cases.

How to get ready

Document collection might be the hardest part of bankruptcy. The one thing that you need before filing an emergency case is a list of your creditors. As far as the full bankruptcy goes, there are a couple of things here that might be tricky. For example, you'll need to have filed your most recent taxes before filing bankruptcy (your last four years of tax returns need to be filed for a Chapter 13). Self-employed bankruptcy filers need to provide a profit & loss. The more complicated the case, the harder you'll have to work to make sure everything is filed in time. You should make sure to have these things before filing bankruptcy.

Also, you'll have to do your online credit counseling before an emergency filing. There's no room for mistakes on this one. If your online credit counseling is not completed before a bankruptcy, the case will be dismissed. Talk to your attorney about how to get the case completed on a rush basis.

The 14 day deadline

If you can't complete the full bankruptcy within 14 days of filing an emergency case, the case will be dismissed automatically by the court. On the one hand, this still achieved the desired effect—the bankruptcy still stopped the collection temporarily, which would have bought you some time. But on the other hand, it also could make it harder to re-file (the court can be a bit stricter with people who file multiple times).

If you need an emergency bankruptcy, get in touch with an attorney right away. But make sure to leave plenty of time!

Bankruptcy trustees are "clawing back" tuition paid for debtors' kids

According to an article in the Wall Street Journal, Bankruptcy Trustees are using a legal argument called "fraudulent transfer" to take back tuition payments clients have made to their children's colleges. This can be a shock to people, but trustees do things like this all the time. Here's how it works:

Under bankruptcy law, all the property you have at the time of your bankruptcy filing is part of the bankruptcy estate. If you have property above certain exemption amounts, the trustee can demand turnover of that property. This would seem to incentivize people to get rid of assets before filing bankruptcy. You can understand the temptation for someone to sell their boat to their brother for $1.00.

Bankruptcy law has a way of dealing with this problem, called fraudulent transfer law. A fraudulent transfer in Minnesota can occur when someone gives away property for less than "equivalent value." This allows the trustee to "claw back" the property and distribute it equitably to all the creditors.

But is college tuition a fraudulent transfer? The trustee's theory is that if you were paying for college tuition for yourself, it wouldn't be a fraudulent transfer because you received equivalent value for the transfer. But when you pay tuition for your adult children, (which you're not legally obligated to do) you don't receive anything in return (other than children who are less likely to need your support in the future). In that way, it's like a gift, and can be pursued as a fraudulent transfer.

So if the trustee claws back the tuition, kids have a problem. The school will want its tuition, and may hold back transcripts or diplomas, or prevent registration for the next semester, until they're paid up. So this is a scenario bankruptcy filers really want to avoid.

There might be some defenses. For example, if the property would have been exempt anyway, it might not be a fraudulent transfer. But this issue hasn't been directly addressed by binding caselaw in Minnesota, and so it's no sure thing. To brainstorm other solutions to this problem, get in touch.

5 Tips for Streamlining Your Bankruptcy

The number one thing that slows down a bankruptcy case is the speed with which clients can assemble the necessary documents. By following these five tips, you can ensure that your bankruptcy moves quickly, and that you're prepared for any issues that could arise during the process.

Go Paperless

It’s time to get rid of that mountain of paperwork and bills. Sign up to receive digital statements from your bank and financial accounts, and request to receive your pays stubs digitally. It also pays to switch your utilities, mortgage, car payments and regular payments to e-bills. This allows you to stay up to date on your assets and liabilities, and makes submitting your documents to your attorney as easy as sending an email.

Track your spending

Whether or not you are planning on filing bankruptcy, it’s good practice to keep track of where your money goes each month. How much do you spend on groceries? Entertainment? How about your pets? Often, its more than our clients realize. We recommend apps like ‘Mint’ or ‘You Need a Budget’ to keep track of your expenses. This info can go straight into your bankruptcy petition and will ensure a high level of accuracy.

Separate your business and personal accounts

Many of our clients are business owners. Whether you manage your own company or sell crafts on weekends, you need to track your company’s profit and loss. It’s not only bad business to conflate your personal and professional expenses and funds – it can also get lead to you getting audited by the court after you file your bankruptcy.

Organize Your Important Documents …

Designate one spot for your important documents. It can be anything from a drawer to a folder to a safe. Whatever it is, only put important documents in it. Car titles, your social security card, birth certificates, your insurance policies and court documents are all great things to keep together. Keep things like bills, statements, and mail separate from this.

…and Shred the Unimportant Ones.

People are often afraid to throw away anything that looks ‘official’. People end up with piles of bills, collection letters, and spam mail, along with a whole lot of anxiety. Shred anything that is outdated, useless, or irrelevant. There is no reason to hold on to more than one copy of the same bill. Only keep the most recently dated one. By getting rid of excess, a seemingly enormous pile can be quickly whittled down to only the necessary things. Also, if you have already switched to paperless statements, your past statements will be readily accessible, so there is doubly a reason to hold onto them.

Divorce debts in Chapter 13 bankruptcy

In another post, we wrote about how to deal with divorce debts in Chapter 7 Bankruptcy. Chapter 13 has different rules and different ways to deal with family court debts.

Some Family Court debts can be wiped out in Chapter 13

Chapter 13 can't discharge “domestic support obligations”. Domestic support obligations (child support/maintenance) can't be wiped out in any form of bankruptcy, Chapter 7 or 13. In Chapter 13, to get a discharge the debtor must pay all child support/maintenance arrears, as well as all payments due during the three to five years of the Chapter 13 plan.

But Chapter 13 can wipe out other debts created by a divorce decree. Debts created by a divorce decree that don't count as domestic support obligations (e.g. property settlements, equalizers, or promises to pay joint marital debts) can be wiped out in Chapter 13 bankruptcy. These debts aren't always wiped out in a Chapter 7, so for people with large debts like this, Chapter 13 can be a much better choice.

Spreading family court debt out over time

Child support and maintenance arrears can be spread out over five years in Chapter 13. If you're behind on child support and maintenance, Chapter 13 gives you the ability to put those arrears into a Chapter 13 payment plan. This wouldn't relieve you from your obligation to pay child support or maintenance payments that come due after the bankruptcy is filed, but if you're facing garnishment or other collection, it can buy you breathing room to pay arrears over time. This may also reduce the amount you're required to pay your other, unsecured creditors.

As discussed above, Chapter 13 has many advantages over Chapter 7 when it comes to dealing with divorce debts. If you have questions about how to deal with your family law debts in bankruptcy, get in touch.

Divorce debts in Chapter 7 bankruptcy

Divorce is one of the leading causes of bankruptcy. People often have questions about how to deal with debts from their divorce. Depending on how a debt is categorized in the divorce decree, you might be able to wipe it out in bankruptcy, or it might stick around.

1. Child support and maintenance cannot be discharged in Chapter 7 bankruptcy. Certain debts in bankruptcy are called "domestic support obligations," including child support and spousal maintenance/alimony. These debts can never be discharged in bankruptcy, and are also "priority" debts, meaning that if the trustee gets any money from you, those debts are paid off first.

2. Debts incurred in a divorce cannot be discharged in Chapter 7 bankruptcy (although they can be in Chapter 13). Any other debt created by a divorce cannot be discharged in Chapter 7. This includes property settlements or "equalizers." Also, certain obligations by one spouse to pay marital debts can be considered non-dischargeable. To figure this out, you'll want to look for "hold harmless" language in your decree, which describes what obligations won't be discharged.

3. Some divorce lawyer fees are dischargeable in Chapter 7, some are not. If you owe fees to your divorce lawyer when you file bankruptcy, that debt is wiped out in bankruptcy. You may be ordered to pay your ex-spouse's attorney's fees by the court, and that debt might be non-dischargeable in bankruptcy because you're paying attorney's fees to "support" the ex-spouse.

4. Family lawyers should pay attention to the wording they use in divorce decrees. As described above, words matter in a divorce decree. Depending on how a debt is described, it might be dischargeable or non-dischargeable in bankruptcy. Make sure your lawyer is thinking about these issues when going through a divorce with a significant amount of debt.

I forgot to add a creditor to my bankruptcy

As hard as we try to find all of your creditors before a bankruptcy, every once in a while one slips through the cracks. What happens when a creditor gets left out?

1. First of all, don't get any ideas. All creditors are "included" in bankruptcy. You can't leave one out, purposely or accidentally. So there's no point in "forgetting" to list a creditor, for example, in hopes that you can keep a credit card open. And remember, you sign your bankruptcy under penalty of perjury, so it's illegal to leave any information out of your bankruptcy papers. And as your attorney, I know better and won't let it happen. So don't try.

2. In a no-asset Chapter 7 case, all debts are discharged whether listed or not. If a debt is dischargeable, then it's wiped out in a typical Chapter 7 bankruptcy whether it's listed or not (as long as it wasn't left out intentionally.) Typically when a creditor has come out of the woodwork after a Chapter 7, we just send them a letter notifying the of the bankruptcy, and that's enough to protect you. After that, any attempts to collect the debt would be illegal.

3. In a Chapter 7 cases with assets, debts may not be discharged unless listed. Unlike a no-asset case, in which a creditor generally has nothing to gain from being listed in the bankruptcy, in a case where assets are going to be distributed to creditors, it does harm the creditor to be unlisted. Section 523(a)(3) of the Bankruptcy Code makes a debt like this non-dischargeable if it wasn't listed in the bankruptcy.

4. In a Chapter 13 case, a creditor must at least be added before the case is finished. In a Chapter 13 case, a creditor must have been listed in the plan to be discharged.  So if you've forgotten to add a creditor, and you're already in your Chapter 13 plan, it's probably wise to go back and add the creditor. This is probably fixable, since Section 523(a)(3) doesn't apply to Chapter 13.

Same-sex married couples can file bankruptcy together

We wrote about the evolving status of same-sex couples in bankruptcy here and here. Now that the Supreme Court has struck down the Defense of Marriage Act, the federal government must recognize same-sex marriages valid in the state in which they were performed. Although this specific issue hasn't come to bankruptcy court, it's clear that the bankruptcy system will have to follow the Supreme Court's ruling and allow same-sex married couples to file joint bankruptcy cases.

1. Anyone legally married in Minnesota can file bankruptcy together in Minnesota. Any married couple can file a joint bankruptcy case if their bankruptcy was legally performed in Minnesota. This includes same-sex couples whose weddings were performed on or after August 1, 2013.

2. Anyone legally married in another state can file bankruptcy together in Minnesota. Any couple married in Iowa, New York, or any of the other 11 states allowing same-sex marriage can file a joint bankruptcy. It's not clear how a Canadian marriage, for example, would shake out in U.S. bankruptcy court, but I'm sure this is something we'll learn soon.

3. Anyone who's legally married in any of these states can file bankruptcy together anywhere in the U.S. The full faith and credit clause of the Constitution basically says that a public act (such as marriage) valid in one state is also valid in any other state. This means that any same-sex couple married in any of the 13 states allowing same-sex marriage can file a joint bankruptcy anywhere in the U.S.

4. Filing a joint bankruptcy has benefits. Most attorneys will price a joint case lower than two individual cases. Instead of paying two attorney's fees, a same-sex married couple can now pay one. The same thing goes with for the court's filing fee. Plus it's much easier to provide an attorney one set of information, rather than having to handle each case separately. This is a BIG deal.

Watch out for fraudulent transfers in bankruptcy

A fraudulent transfer is a transfer of property before filing bankruptcy that may get you in trouble. If you've given away or sold any property in the six years before filing a bankruptcy case. you might be on the hook after your bankruptcy.

1. When you're actively trying to screw your creditors. An actual fraudulent transfer is where the bankruptcy debtor transfers property actually intending to evade his creditors. So for example, a bankruptcy filer gives away a car to her nephew three months before filing bankruptcy because she doesn't want her creditors to be able to seize it. That may be a fraudulent transfer. And the bankruptcy trustee can go after the bankruptcy filer and her nephew to get back the car (or the cash value of it.) An actual fraudulent transfer can also result in the bankruptcy discharge being taken away.

2. When you're not trying to screw your creditors, but do it anyway. A constructive fraudulent transfer is where the bankruptcy debtor gives away property and doesn't get fair value for it. So the bankruptcy filer isn't trying to evade creditors, but sells her car to her nephew for $1,000 when it's really worth $10,000. The bankruptcy trustee may have a claim against the filer and her nephew for the remaining $9,000 value of the car. Because this kind of transfer isn't made with bad intent, it won't be a basis for taking away the bankruptcy discharge. The trustee must show that the bankruptcy filer (1) was insolvent; and (2) didn't get fair value back for the transfer.

3. The person who received the transfer may also be on the hook. The bankruptcy debtor isn't the only one who can be chased by the trustee for a fraudulent transfer. The person who received the goods can also be sued. The best defenses the recipient may have are (1) that the property wasn't actually worth anything in the first place; and (2) the transferee accepted the property in good faith and gave back fair value for the property.

4. The trustee can look back six years to find fraudulent transfers. The bankruptcy forms require a filer to disclose any transfer made within the two years before filing. However, the trustee can go after any fraudulent transfer made up to six years back. So people who have a fraudulent transfer in their past often wait until the time limit is passed before filing a bankruptcy.

We deal with fraudulent transfer issues all the time. If you have questions about a fraudulent transfer you made before your bankruptcy, or if you're being sued by a trustee, get in touch.

The bankruptcy process in Minnesota

In this post we describe the bankruptcy process in Chapter 7 and Chapter 13 so you know what to expect when you come see us.

1. You get in touch. Give us a call at 612-564-4025. We can often get you in the same or next day. Your first meeting will be about an hour long. As soon as you decide to hire us, we spring into action, organizing your paperwork and preparing your case. At this point, you can send your debt collectors directly to us—no more endless phone calls.

2. We prepare your case. It generally takes us three weeks to file your bankruptcy petition—a collection of relevant documents and an asset inventory. Once we file your case, collection activity—such as letters, calls, lawsuits and foreclosures—stops immediately. As we prepare your case, we help you choose the best type of bankruptcy for your unique situation—Chapter 7 or Chapter 13.

3. We help you choose what type of bankruptcy is best for you. 

  • You might choose Chapter 7 if: 1) Your expenses are way higher than your income, leaving nothing extra to pay your debt; 2) You don’t own a home, or if you do, you’re up to date on your mortgage payments; 3) You don’t own many valuables.

  • You might choose Chapter 13 if: 1) You can afford to repay some of your debt, but not all of it; 2) You’re behind on your mortgage or you’re underwater with a second mortgage; 3) You have valuable assets, such as home equity, that you want to hold onto.

4. Will I have to go to court? In bankruptcy, you generally don’t have to go to court. Instead, you meet with a bankruptcy trustee a month after your filing date. The trustee evaluates your financial situation. We make sure you’re well prepared, and we’ll be by your side to make sure it all goes smoothly.

5. Finishing your case in Chapter 7. Chapter 7 usually lasts three to four months. Your bankruptcy is typically completed 60 days after meeting with the bankruptcy trustee. Once your case is finalized, your debts are wiped out forever.

6. Your Chapter 13 payment plan.  In Chapter 13, you’ll make monthly payments for three to five years to pay off your debt. We’ll be your lawyers the whole time, in case you need help or your financial situation changes. Once you make your last Chapter 13 payment, your remaining debts are wiped out.

7. Rebuild credit. People who put in some effort to rebuild their credit after bankruptcy can usually make their score rise a lot faster than people who just wait for their credit to fix itself. We meet with all our clients free of charge after the bankruptcy is over to see how we can help clean up your credit report and give you tips for building new credit.

What does Chapter 13 bankruptcy cost?

In an earlier post, we wrote about how we price our Chapter 7 cases. One of the first things a potential client wants to know during a consultation is how much bankruptcy costs. Obviously, every case is different, but here’s a rough version of how we price cases in Chapter 13.

Flat fee

In Chapter 13, you pay a flat fee out-of-pocket. When you're in financial trouble, you want predictability. You don't want your lawyer to run up the bill on you. That' why we quote you a flat fee at the beginning of the process, and that's what you pay. No fine print, no hidden fees. We agree on it at the start so you can plan for the expense.

Payments over time

You don't need to pay your whole fee upfront in Chapter 13. Unlike Chapter 7, in a Chapter 13 case we don't need the whole bankruptcy fee up front. In fact, in many cases Chapter 13 costs less upfront than Chapter 7--some people even opt for Chapter 13 because of our flexible pricing. We generally require a minimum of $1,000 before filing in a Chapter 13, but this can depend on your case.

We get the rest of our fee out of your creditors' pockets. In Chapter 13, we can apply to the court for our remaining fee. Because this comes out of the Chapter 13 payments you're already paying, in most cases it doesn't cost you an extra dime. In fact, if you're looking for an extra way to stick it to your creditors, here it is. The money we receive from the Chapter 13 payments would have lined their pockets if we hadn't applied for it. Our total fee comes out to $2,500 for below-median income cases, $3,000 in above-median cases, or greater if we can prove to the court that it was necessary to charge more.

Filing fees and costs

In a Chapter 13 case, there is a court filing fee of $310 and mandatory credit counseling fees (for our clients, credit counseling runs around $60 for a single filer or $80 for joint filers). You pay those fees to us and we forward them as needed.

And remember--you may not want to bargain-hunt on bankruptcy. The best lawyers will quote you a fair price, but the worst ones will probably discount their fees to try to take business from the good ones. You want a lawyer who’s experienced enough to understand a lot of the tricks and traps of bankruptcy. You also want someone who’ll be available to answer your questions, and won’t blow you off because they’re too busy with all their other cases. And you want someone who’s willing to use the bankruptcy law creatively to help you improve your situation.

What to expect at the bankruptcy meeting of creditors

This post describes what you can expect at your bankruptcy meeting of creditors in Minnesota.

1. What's a bankruptcy meeting of creditors? A meeting of creditors, sometimes called the "341 meeting," is a requirement of bankruptcy. In most bankruptcy cases, you do not have to appear in court. You go to a meeting of creditors instead. In most cases, the meeting is just a formality, but it's important to prepare either way.

2. When is the meeting? Usually three to five weeks after you file your bankruptcy case.

3. Who shows up at the meeting? The bankruptcy meeting of creditors happens in public, so other bankruptcy filers and attorneys will be there. There is also the bankruptcy trustee, who conducts the meeting. The judge is never at the meeting of creditors.

4. But it's called the meeting of creditors. Won't my creditors be there? Creditors show up VERY rarely to these meetings. In the last 100 cases we've been involved in, a creditor has shown up only once, and we totally expected it and prepared for it. Credit card companies, car lenders and mortgage companies almost never show up.

5. What do I need to bring? This is important. The meeting will be canceled and rescheduled if you don't bring proof of ID and social security number. You'll also need your most recent paystub and all bank statements covering the date of filing. We'll ask you for all this stuff way before your meeting so we have backup copies in case you forget.

6. How long does the meeting take? The trustee usually schedules five cases every half hour. So your meeting should take more than a few minutes, unless we've told you that your case is complicated. But if that's the case we'll make sure you're well prepared.

7. What should I wear? Just dress like you would to a meeting at our office. There's no need to dress up, just dress neat (and don't overdo it on the bling--if you come in looking like a zillionaire, people will wonder why you're filing bankruptcy.)

8. What will the trustee ask me? Here are a few questions the trustee is likely to ask:

  • Is this your signature on the petition and schedules? Did you read the petition and schedules before you signed them? Is the information true and complete?

  • Have you listed all of your assets on the schedules? Are you a co-owner of any property with anyone else? (e.g. family cabins)

  • Do you expect to come into any money, such as an inheritance?

  • Does anyone owe you money?

  • Have you paid any creditors in the last 90 days, other than minimum payments?

  • Are you a party to any lawsuits you haven’t identified in your schedules?

  • Are you owed any domestic support? Do you owe domestic support?

  • Have you transferred any property to anyone in the last year? Is anyone holding property for you?

  • Have you previously filed bankruptcy?

9. How should I answer? Just tell the truth. Don't feel like you need to tell a whole story--keep your answers short and sweet--but answer truthfully and completely. If you don't know the answer to a question, ask for clarification--it's better not to answer right away than to answer incorrectly.

10. Where is the meeting?