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Student Loans How To Deal When You Are Delinquent: Three Options To Consider

I find it amazing how the higher educated institutions have managed to hoodwink both the Federal government as well as the rest of Americans with Student Loans.  The American Dream should include a good education not only K-12 but also a higher education.  The core concept of Student Loan program is good and of sound principles but like anything good greed and  people’s personal agendas have destroyed its core concept for the advancement of a few.  Meanwhile, the masses are left dealing with the result of the greed.

American Universities and Colleges are supposedly the best in the world.  I would hope that they are the best at something with all the money that they manage to ascertain yearly from Americans each year trying to better their circumstances.  One thing is for certain, Universities and Colleges are the best at legalize robbery.  They sell the hopeful on a good education from their institution will get you a job that will make you more if you did not come to their institution.  As a result, millions of Americans each year take Student Loans out from the Federal government on a representation that cannot quite be back up by Universities and Colleges.  In fact, these institutions can only promise one thing—if you need to take student loans out you can come to our institution and we will take your money.

I could go on and on about the wrongs of these legalize robbery that appears to be absolutely found with our government.  The issues Student Loans cause are that the payments being due and people simply not being able to pay back even the minimal monthly amount.  In my office, I have seen an increase of clients between the ages of 25-30 years old that are facing delinquencies with their Student Loans.  They come and see me because they have hit an age that they realize that they must do something to fix the problem and also because they want to have a family, home and the American dream.  As any of us in our youth, we ignore the situation and until we really need to do something about it.

Let us define delinquent Student Loans.  Delinquent Student Loans are loans that are not in deferment or forbearance, but are loans that the student is not paying whether because they cannot afford them or simply are not paying.  I will tell you that the most common scenarios is that it took my clients nearly 5-10 years to actually get a good enough or steady enough job to afford to make payments on student loans and still be able to live and eat.  So the point is that because they could not make payments, Student Loan companies accelerated the loan and are now expecting the entire amount to be paid.  There might be a judgment issued against the student and a garnishment order issued by the court and the student finally getting on track with a job is facing total disaster because the wage garnishment will eliminate their ability to financially survive.

So what are your options when you are delinquent?  There are three solid choices to consider:

1. Workout payment arrangements: If you are delinquent and the student loan provider has either filed a complaint or is threating to file a complaint against you for past due payments, you can reach out to the lawyer representing the student loan provider or you can contact the provider directly to try and work out a payment with your provider.  At this point, you still have an opportunity to try and get back on track with a payment arrangement.  The only problem with this option is that your student loan provider/attorney must want to agree to an arrangement.  The law is clear that once they accelerate the loan due to the student’s failure to make payments, the student loan provider can take actions against the student.

2. Fight the Complaint in Court:  If you are delinquent and a complaint is filed as a result of your delinquency, you do have the right to fight the complaint.  You will need to file an answer and go to court or you can hire an attorney to help you fight the complaint.  The only problem with this option is that you will need a little help from the court to either help prevent the student loan provider from accelerating the loan or to work out a payment arrangements.  Additionally, I want to be very clear here—if you signed up for the student loans and took courses and you know it—you are not getting rid of your student loans in one of these cases.  The best case scenario in this situation is to prevent the acceleration of the loan and workout a payment arrangement that you can afford.

3. File a Chapter 13 Bankruptcy Case:  A Chapter 13 Bankruptcy case is not just for people who fallen behind on their mortgages or car payments.  It is a reorganization case for consumers to reorganize their financial circumstances including dealing with delinquent student loans.  Now, I think most people know that student loans are non-dischargeable unsecured debt i.e. you can not get rid of it!  However, the Chapter 13 Bankruptcy case gives you an option that can allow you to get a grip of the delinquent loans and the interest rates that are charged by student loan providers that can nearly doubt your loans owed.

How does it work?  In a Chapter 13 case, the interest being charged by your student loan provider is stayed which means there is no interest charged.  So, the amount that you enter into your bankruptcy case with remains the same amount throughout your case.  Once you establish the amount of your student loans, you can set forth a plan payment amount in your Chapter 13 that you can afford.  In other words, you are forcing the student loan provider to take a monthly payment from you even if they denied you before and demanded the full amount to be paid.  You are taking control of the situation.  Finally, only the student loan amount is non-dischargeable not the attorney’s fees or cost.  Therefore, you can file an objection to those fees and cost being tack on to your student loan amount as being non-dischargeable.

Generally, my clients that have finally gotten that job that is consistent and yield enough to make a plan payment each month after expenses have chosen the Chapter 13 route.  Often the clients find themselves at the end of their Chapter 13 plan completed paid in full and completely relieved of the ongoing curse known as student loans.  Additionally, the Chapter 13 case, unlike the first two choices, cleans up the student’s credit report.  Student loans will destroy a student’s credit irrespective of how current the student is on all of the other debts that they owe on.

Irrespective of the choice that is made on how to approach student loan issues, the result is that students must pay for student loans.  So, if you are one these students that are being threaten by past due student loans, you need to do something and these three options should be seriously considered.


Debtor’s can now strip second mortgages in Chapter 7 bankruptcy

For many years, it has been well settled law that a Debtor who owns real estate with more than one mortgage can file a Motion with the Bankruptcy Court to eliminate, or “strip,” the second mortgage or equity line from that property. More specifically, “[t]o the extent that a lien secures a claim against a debtor that is not an allowed secured claim, such lien is void.” 11 U.S.C. § 506(d). The caveat to this rule, however, it is that the law was just as well settled that only those consumers in a Chapter 13 case could take advantage of 506(d). Up until recently, a Debtor who filed a Chapter 7 bankruptcy case and wanted to discharge all unsecured debt was not allowed to strip a second lien. The reason for this rule was that, in a Chapter 13 case, the Trustee retains an interest in the property for the bankruptcy estate. Conversely, in a Chapter 7 case, presuming the Trustee abandons any exempt asset, there is no interest in the property by the estate and section 506(a) does not apply. As a result, the court cannot bifurcate the debt into secured and unsecured debt, and without this bifurcation there is no unsecured debt to discharge. Additionally, a Chapter 7 discharge does not extend to an in rem claim against property; the discharge is limited to a discharge of personal liability. Dewsnup v. Timm, 502 U.S. 410 (1992).

This week, however, the rule that lien strips cannot take place in Chapter 7 bankruptcy has been turned on its ear. In Re: McNeal, Case: 11-11352, Lorraine McNeal v. GMAC Mtg. held that, at least in the 11th Circuit, even though a Debtor still cannot cramdown the value of an investment property as clearly noted in Dewsnup, a Debtor can strip a junior lien from a primary residence. The Court reasoned that because the United States Supreme Court in Dewsnup disallowed only a “strip down” of a partially secured mortgage lien and did not address a “strip off” of a wholly unsecured lien, it is not “clearly on point” and as such, the issue was not intended to be addressed by that Court.

Upon a reading of this opinion, it seems that this case is ripe for appeal because the court essentially held that, where the Supreme Court only discussed a cramdown in a Chapter 7 case under 506, entirely stripping a junior lien was not addressed. As such, the 11th Circuit Court reasoned, there is no restriction on lien stripping. To me, this argument is a little thin. Under this ruling, a Debtor cannot reduce the principal owed to a Creditor, but that Debtor can completely eliminate it. If this holds up, though, it could be very helpful to many Debtors who meet all of the criteria for a Chapter 7, but find themselves in a Chapter 13 for no other reason then to file a Motion to Avoid a Lien.

Can Mortgage Settlements with The United States Government Help You?

Since the fall last year, I read so many different articles about Attorney Generals of various states working with the US Attorneys to resolve litigation brought against mortgage companies. The interesting part is that all the articles start out as a big splash of how the US Attorneys are fighting for the little guys and suing all these mortgages companies for their bad acts. Then, the next story I read is that some settlement was reached and the Debtor is entitled to some sort of special relief.

I wrote a blog not to long back about one of the special relief opportunities offered to foreclosed property owners. I wrote that article because I wanted to get the word out to Debtors who might have been harmed and simply could not understand the opportunity they might have. I am writing this article for the same reason.

Another settlement has been agreed upon between the US Attorneys and mortgage companies. I wanted to get the news out. However, this new settlement offer is about reducing the principal amount owed by reducing the amount of monthly payments. It is interesting because the first announcement makes a big splash by saying that the banks are to reduce the principle amounts by $100,000s. What it does not tell you like the foreclosure sale settlement is that the Debtor will need to qualify for the settlement and that the principle reduction comes only by the reduction of the mortgage payments to 25 % of the Debtor’s income.

Ok—so what am I trying to say? Is it just me or are these settlements really not true settlements? Can they really help a Debtor that the banks screwed and let’s face it the Feds also screwed by allowing the bad behavior go on? It is all a sham?

We really cannot know that answers to any of these questions until the banks and the Feds are required to disclose if and when the settlements actually worked. However, I would like to bring to your attention to an article that outlined what an executive from a mortgage company has outlined as the requirements for this new settlement.

Executives say borrowers receiving the letters are eligible, but they still have to prove they qualify. In order to be eligible, a borrower must be 60 days late on the mortgage payment as of Jan. 31, 2012. The borrower has to owe more on the mortgage than the home is currently worth, commonly known as being “underwater” on the mortgage, and the borrower’s loan must either be owned by Bank of America or serviced by Bank of America for an investor who is allowing the modifications. In order to qualify for the modification, the borrower must answer the letter with full documentation of income, showing that under the terms of the modification they can still make the monthly payment. A borrower with no income would therefore not qualify. A borrower’s current monthly payment must be more than 25 percent of gross income, and the borrower must show they are unable to afford that. “If you can afford to make your monthly payment and are choosing not to, you will not get this principal modification,”
says Sturzenegger ,bank executive.

If the borrower qualifies, Bank of America will bring the monthly mortgage payment down to 25 percent of the borrower’s gross income. That could mean principal forgiveness well over $100,000, as there is no limit to the amount of the mortgage. If enough borrowers respond, it could cost Bank of America far more than it committed to in the settlement. See Bank of America Offers Principal Reductions to 200,000 Homeowners, By Diana Olick at http://finance.yahoo.com/news/bank-of-america-offers-principal-reductions-to-200-000-homeowners

All of these “terms and conditions” really do not sound like the bank is doing anything different than they have promised in the last several years to help distressed home owners. It does not sound like a settlement at all does it? Instead, it sounds like a settlement in face value only and not intended as a real action to be taken by the bank.

So it begs the question of do settlements like this one the ones that occurred before actual provide any benefit to homeowners? You read the articles and try out the system but it looks like this settlement may again be a splash for the bank and the government to ring the political card and save their butts leaving the Debtor’s butt hanging in the wind—AGAIN.

If you are a distress homeowner that needs help, I encourage you to seek out professional help from a consumer debt advocate and really learn your options. If you wait for a settlement by your federal government, you might be waiting awhile.

Why The Theory That Americans Are Too Broke To Go Bankrupt Is A Very Dangerous Suggestion For Consumers and Simply Not True

I am writing this piece in response to an article entitled Americans: Too Broke To Go Bankrupt by Blake Ellis | CNNMoney.com published on Mon, May 7, 2012 6:55 AM EDT. See http://finance.yahoo.com/news/americans-too-broke-bankrupt-105500347.html.  In this article, Mr. Ellis suggests that the pricing for filing a bankruptcy case is too high and that Americans cannot afford the prices. Money is important whether it is one dollar or a million dollars.  However, the amount of money that a Debtor pays for a Bankruptcy case verses the benefits received from the case is clearly something that Mr. Ellis has failed to mention in his article.  Mr. Ellis also fails to mention that most jurisdictions placed limits on the amount of fees that an attorney can charge a Debtor to prepare and administer the case.

Nevertheless, let us really examine what Mr. Ellis is trying to say in his article.  He is suggesting that $1,500.00 is too much for Debtors to pay to get relief of debt that could range from $20,000.00 to more than $100,000.00.  Let us put a fee of $1,500.00 into perceptive for Debtors with $30,000.00 of debt owed to unsecured creditors.  I use $30,000.00 as example because this is the average amount of unsecured debt that our clients come into our office seeking relief from.  We find that the average monthly minimum payment that our clients are paying each month on this amount of debt adds up to nearly $1,100.00 a month.

If you take a step back from this debt you realize that, for the same price to pay on the minimum payments each month, a bankruptcy case can be filed.  This issue is very concerning for me because often our clients do not want to spend $1,500.00 for a fee to resolve their debt, however, they find it ok to continue to pay almost the same amount to their credit card companies while struggling each month to pay their basic utilities or put food on the table for their children.

Bankruptcy was designed to help Debtors deal with their debt so that they do not have to make the choice of paying for food or paying their credit cards.  Mr. Ellis’ article fails to address the value that a bankruptcy case can bring to a Debtor.  Instead, he wants us all to believe that it is too expensive for Debtors to even think about filing.  This is very dangerous.

The reason this is dangerous is because it gives Debtors the idea that they cannot file, which is simply inaccurate.  If Debtors do not file when they should, they could suffer a lifetime of creditors always coming to collect against them, court judgments, and bad credit.  Bankruptcy was designed to allow people who fall on hard times to protect themselves from collections, court judgments, and bad credit for life.  Debtors can turn their whole lives around in only three months in a Chapter 7 case or three to five years in a Chapter 13 case.

Our firm works with Debtors when it comes to fees.  We understand that Debtors may not be able to pay a full fee immediately.  We often set fees arrangements based upon what our client can pay each month.  Most of our clients realize that once they eliminate high monthly payments, which go mostly to interest on credit cards, they have the ability to live on their income without the need of credit cards and can afford the fee to pay for a bankruptcy case.

My major concern with Mr. Ellis’ article is that it misses the practical point of bankruptcy and the benefits that should never be overlooked.  Yes, it does cost some money to complete a bankruptcy cases with an attorney, but the amount is affordable and no one should use a price for services to deter people from getting a fresh start with a bankruptcy case.

Should you be able to keep a vacation home in a Chapter 13 Bankruptcy?

Recently, there have been many discussions on various social media sites relative to an interesting bankruptcy topic: whether a Debtor should be able to keep a second home or investment property after filing for bankruptcy.  My position on this subject is that, as part of a bankruptcy filing, Debtors need to take responsibility for their finances and liabilities, especially those with secured debts.  However, in some cases a Debtor can afford to retain a vacation or investment home while in a Chapter 13.  Additionally, many of these homes may be in a prime position for a Motion to Determine the Unsecured Status of a Lien (Cramdown).  Taking advantage of the ability to cramdown a lien may be the main reason for a Debtor to file a Chapter 13.  This type of bankruptcy is designed to help reorganize one’s finances, and in many situations, those investment homes do produce more income then they incur though mortgage and upkeep.  As a result, the property adds to the Debtor’s disposable income and, therefore, it is in the creditor’s best interest for the Debtor to retain the property and make a higher plan payment.  I think that each case is unique, and any determination regarding a second property needs to be analyzed on a case-by-case basis.

Let’s break this question down in a bit more detail.  First off, why did a Debtor file for bankruptcy under Chapter 13?  Many Debtors file due to the need to discharge unsecured debt, but their income simply does not allow them to file a Chapter 7.  Other Debtors file to cure missed mortgage payments from a financial hiccup, which has since been cured.  Finally, due to the state of the real estate market, a new type of Debtor has started to appear, those who can pay their bills and have significant income, and also have vacation homes or investment properties that generate income, but have no equity or in many cases negative equity.

If the bankruptcy case was filed due to the third type of Debtor, then the case is simply trying to right a financial injustice and ensure that the loan being paid by the homeowner is in line with the real estate fair market value.  Here, the additional real estate is being used to generate income, and that income can be used to pay other bills and creditors.  However, without a Cramdown, the homeowners may simply walk away from the home, adding to the distressed real estate market by voluntarily putting another home into foreclosure.  The result of that action would only be to drag the fair market value price down for the whole neighborhood.

On the other hand, if a Debtor has a vacation home that is costing thousands of dollars each month and not generating any income, then a different analysis is needed.  In those cases, I would ask what caused the Debtor’s financial hardship?  If the second home was the main reason the Debtor can’t pay other creditors, then it very well may be time to walk away from the vacation house so that other debts can be resolved.

At the end of the day, it really does come down to a case-by-case analysis.  If you are in this position, you need to take a hard look at your finances and where your money is coming from and where it is going.