Student Loans In Bankruptcy

Discharging Student Loans in Bankruptcy

It is very unlikely that you will be able to discharge any part of your student loans in a bankruptcy case, either under chapter 7 or chapter 13.

The Bankruptcy Courts in Colorado (that is the 10th Circuit of the Federal District Court system) are bound by the “Brunner” test which gives every advantage to your student loan creditors and leaves you little room to argue.

The Brunner test is a 3 part test. First the court asks whether the debtor is able to maintain a minimal standard of living while paying the loans. Second the court looks at the debtor’s physical mental and emotional health and asks whether any disability that could prevent repayment is a condition which is likely to continue. Third the court will look at whether the Debtor has made a good faith effort to repay the loan.

In this context it is very difficult to proceed toward getting rid of these loans. The existence of income sensitive repayment programs is used against debtors when judges make these decisions. They reason that if you are able to pay on the loan, at all, you should not get out of it even if your payments do little to reduce the principal balance.

Recently (Jan 2016) the Supreme Court refused to decide a case brought by a lawyer who had $220,000 of student loans and was unable to find a job. In certain districts, the Court uses a “totality of the circumstances approach,” which can make it easier for debtors to get relief. Bankruptcy lawyers in Colorado were hopeful that the Supreme Court would take up the case and decide that the Brunner test should not be used.

Congress got us into this mess by authorizing student loan lenders to borrow from the government at 0% interest, lend that money to students at effective rates of 10% and promote the idea that everyone needs education to succeed in life. That may be true, but if we were to set out with the intent of causing costs to rise, we couldn’t have come up with a better system. When Congress realizes that student loans are crippling the economy and hurting the very businesses that are competing for citizen’s dollars. They will act.

In the meantime it is important to stay on top of your student loans, there are programs that can help reduce your payment and there is hope that the future may bring relief. You may be eligible for deferment. But defaulting is VERY expensive and will only add to your burdens long term. If you would like a consultation about student loans in the context of bankruptcy please call (303) 501-4028.


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Tax Refunds and Bankruptcy

Many of my clients are concerned with the treatment of their tax refunds within a bankruptcy case. In a Chapter 7 “liquidation” case tax refunds are not exempt, which means that portion of the year’s tax refunds which remain unpaid can be taken from a client in a bankruptcy case. Earned income credit(s), or EICs, are exempt and certain types of child tax credits may be exempt in Colorado. These are exceptions to the general rule.

If it is toward the end of the year, or if you file a case in say February, a family could lose their entire tax refund by filing their case at the wrong time. Therefore it sometimes makes sense to wait to file a case in order for a family to get their tax refunds in the door before filing.

In a Chapter 13 or “repayment plan” bankruptcy tax refund can usually be kept during the life of the plan. However, because they would’ve been non – exempt in a Chapter 7, your bankruptcy lawyer will want to reconcile the anticipated tax refunds in your Chapter 13 plan.

There is nothing illegal or even morally wrong with planning a bankruptcy so that a client is allowed to keep the maximum amount of property possible, including the tax refund. This kind of “negative” estate planning is perfectly legal and accepted by the bankruptcy court in Colorado.

Earned income credit(s), or EICs, are exempt and certain types of child tax credits may be exempt in Colorado. These are exceptions to the general rule. In a Chapter 7 case, a person filing bankruptcy is also only concerned with one year’s worth of tax refunds (from the IRS and the Department of Revenue), it is not the case that you may forfeit all of the refunds you get in the future.

For working class families, tax refunds are an important part of savings for the year and your bankruptcy lawyer should be aware of your likely refund, both as to timing and amount so that appropriate planning can be done. All too often I see the results of clients being poorly informed on this issue, making arrangements at Court to turn over their refunds. This is largely avoidable with planning.

If your refund is anticipated to be small, and what is “small” changes but typically $400-$500 is the limit, many trustees will not bother collecting the asset, as doing so will not pay much of your debt in the bankruptcy case. But, because having an asset case (as opposed to a case where you do not turn over any property to the trustee) has other important consequences, the entire issue is best handled by avoiding it entirely by getting your taxes done and refunds in the door and spent on something useful. If you “owe” tax, it can also help you qualify for bankruptcy, so getting taxes filed is always part of my planning with clients.

Please call (303) 501 – 4028 anytime should you have questions about bankruptcy in Colorado. – Robert Gauss, (303) 501 – 4028.

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Four Signs That A Bankruptcy May Be Necessary

1. You Are Not Making Progress Long Term on Your Balances.
If you are making minimum payments only on your consumer debt and can not seem to make progress on the balances, a bankruptcy might make sense. This depends on the circumstances including the level of debt and the reasons you are not making progress. For some people making minimum payments on a $10,000 debt for a while may make sense. For others, those with a fixed income or those facing health challenges, that same $10,000 balance may be an unacceptable burden where bankruptcy makes all the sense in the world.

2. You Are Not Enjoying Life Long Term.
Having significant debt is very stressful. If your debt is such that over a long period of time, you face stress and unhappiness such that it effects your health, you might consider a bankruptcy. Many of my clients endured many years of stress before they made the decision to file. I have seen this stress ruin marriages and cause serious disease. I can honestly say I have never had a client who expected to file bankruptcy or who planned a bankruptcy. Conversely, I usually hear from people who are very relieved to have a fresh start, and wish they had considered the idea years earlier.

3. You Are Considering Using Home Equity or Retirement Funds to Pay Credit Cards.
This is almost always a bad idea, depending on the numbers involved and the age of the person. A thirty year old with 100s of thousands of retirement funds who can eliminate a $10,000 debt , where that is the person’s only debt, may want to do that. What I typically see however, is a much older person with a family using precious retirement funds or home equity to pay a debt off where that debt makes little difference to the overall picture. A person should definitely not use retirement funds or home equity to “buy time.”
4. Your Family Needs You to File In Order to Secure a Better Quality of Life.
People with children, elderly relatives or sick relatives often come to the conclusion that bankruptcy is the only way they will be able to continue to help a dependent.
The Overall Message From the Gauss Law Firm:
Bankruptcy is a very personal and contextual decision. It depends on many things. This is yet another reason I charge a fair rate for the expertise involved in filing a case. Most clients of mine get a free initial consultation where we take a serious and honest look at the necessity of filing. I do this for free because I don’t want to be one of those unfortunate lawyers who pressure their clients into a filing in order to earn fees. I have plenty of clients after 20 years, and I don’t need to “sell” you on something that isn’t right for you. If you would like a consultation please call 303-501-4028.



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