The Real Threat to Retirement in America

It seems pretty harmless at first.  The first several years, even decades go by as you begin to build a retirement savings.  You feel proud that you are on your way to retirement.  What an accomplishment that would be; to have enough money to retire one day.  Then, life happens and the kids need to go off to college; parents are aging and need support; an accident happened to your husband.  Now what?

Debt begins to pile up slowly at first, just like the retirement nest egg.  It takes years, even decades for it to creep up on you.  We don’t even notice the debt at first.  We just fit it into the budget and make a payment plan. Then, one day it suddenly becomes unmanageable.  Here comes the question:

Should I use retirement accounts to pay off my debts? 

The real threat to your retirement accounts is YOU. Your retirement accounts are safe from creditors.  This means that if you filed for bankruptcy, you could eliminate your debt and keep your retirement account(s).  All of it.  Also, under California laws, your retirement accounts are protected from a levy or lien too.  And remember, no one else has the power to pull money from your account.

When you make early withdrawals from your retirement account and you don’t pay that money back, you will incur early withdrawal penalties and taxes.  These costs can cut your net check nearly in half!  Even if you borrowed money from your 401k, then you’re losing out on the precious time value of money.  Don’t know what the time value of money is?  Click here.

So, the next time you’re facing unmanageable debts and you think that pulling money from your retirement account is a good idea, it’s time to consult with your local bankruptcy attorney to see if you might have another option.  For more information on the saving vs. eliminating debt conversation, click here. Thanks to Cathy Moran for her article on this subject, here.

Private Student Loan Taken For Son’s Drug Treatment Discharged in Bankruptcy

flickrjjenniferelyseIn a recent decision by Hon. Richard M. Neiter, United States Bankruptcy Judge in the Los Angeles Division of the Central District of California presiding, it was determined that loans taken for the treatment of a minor child for a drug addiction were dischargeable in bankruptcy. The decision came down on July 7, 2015 in adversary case no. 2:14-ap-01722-RN.

In this case, Plaintiff, Tamara L. Schwartz, executed a Credit Agreement to obtain loans for her son to be placed in a lockdown rehabilitation facility, Youthcare/Pine Ridge Academy, in Draper, Utah to cover her portion of the treatment expenses for her son’s drug addiction. The loan executed was a “Non-Negotiable Credit Agreement—This is a Consumer Credit Transaction” through Bank of America, N.A. as (“Lender”). The type of loan taken pursuant to the Credit Agreement was a “TERI K-12 loan.” This was a private student loan!

Ms. Schwartz sought to have the bankruptcy court determine that this student loan debt was dischargeable pursuant to 11 U.S.C. §523(a)(8)(B).  There is a two-tiered analysis to determine dischargeability under this theory: first, whether a debt is an educational “ loan ” and, if it is, then whether it meets the Internal Revenue Code definition of “qualified education loan,” In re Oliver, 499 B.R. 617 (Bankr. S.D. Ind., 2013); see also, Inst. of Imaginal Studies v. Christoff (In re Christoff) (Bankr. N.D. Cal., 2014). The Court’s tentative ruling can be found here.

Back in 2012, we obtained a student loan discharge on Undue Hardship standards, which represents another way to eliminate student loans in bankruptcy.  See, Schaffer v. ECMC, here.  We continue to add tools to our tool boxes to help consumers eliminate their debts, including student loans.

Photo credit:  Jennifer Elyse, Flckr

Student Loan Forgiveness Taxes Better than Debt

I’ve read a couple articles recently that warn about taxes when student loans are forgiven under the Income Driven Repayment program for federal student loans.  The articles are, Beware Taxes When Your Student Loan Debt is Forgiven by Lifehacker (@lifehacker); and There’s a huge catch if the federal government forgives your student debt by Business Insider (@businessinsider).  The Lifehacker article assumes a small loan of less than $40,000.00 that grows interest over 25 years as its example and provides forgiveness of nearly the same amount with a 25% tax bill!  I have no idea how they calculated the interest rate and their assumption of a 25% tax bill in 25 years potentially creates a false sense of fear of an imaginary reality!

We don’t even know whether a tax bill would be issued in these cases, after 25 years of an Income Sensitive Repayment plan.  We don’t know whether the borrower will even survive that long, be in retirement, or disabled.  What I do know is that the majority of folks I work with to obtain these income-based type program provides immediate relief now and control over the next 25 years.  If their income significantly increases, then the borrower would eventually repay their student loans completely.  However, if their financial situation worsens and the debt is forgiven after 25 years, the MIGHT receive a tax bill for the cancelled student loans.

All this fuss and these warnings about income taxes on cancelled student loan debt that is forgiven 25 years in the future are at least bringing awareness to student loan borrowers struggling to repay their federal student loans.  My opinion is that taxes are cheaper than the actual debt paid!  Keep in mind that this program is only available to federal student loans and does not apply to private loans, which make up about 10% of the more than $1.2 TRILLION dollars in student loan debt.

What I do as a Bankruptcy Lawyer

iStock_000015318996XSmallI believe the world view of even the thought of filing bankruptcy is financial suicide for many people.  They believe their financial lives, credit scores, reputations and even careers are over.  It’s like the “Scarlet Letter” “B” is written, stitched, into the fabric of the rest of their lives.  When networking, I’ve even said that I’m the last stop on the train to financial freedom, or that I am the “Grim Reeper” of the financial world.  While many agree, I’m just making light of the very powerful force that I am to those dealing with unmanageable debts.

The very first thing I do as a bankruptcy lawyer is to analyze a client’s financial situation.  I look at everything they own [cars, boats, timeshares, homes, retirement, etc.] and then look at not only how much they owe, but what types of debts like taxes, student loans, credit cards, mortgages and how many. I also talk a lot about budgets, which is income and expenses and if there is any money left after expenses are paid.  This is all usually provided to prospective clients BEFORE they even hire me.  Did you know that you could get FREE financial analysis from a bankruptcy lawyer?  With that information, I can explore options that range from full repayment to a Chapter 7 liquidation bankruptcy case.

Where most people see financial ruin, I see an opportunity to show people the time value of money, explaining that the sooner they end their cycle of debt, the sooner they can save and plan for their future. If it will take you longer than five (5) years to get out of debt (besides your mortgage) then bankruptcy can save you time and money.  Don’t believe me, then check out this article.

Are You Stressed About Student Loan Debt?

female college graduate with parentsEarlier this month the Consumer Financial Protection Bureau (@CFPB) launched a public inquiry into student loan servicing practices.  Read their full press release here. It’s time your voice was heard.  From my experience, the main barriers to repayment continue to be a lack of information made available to students from the time they take out loans to go to college through the repayment process and the importance of keeping their loans in good standing.

Industry Practices That Create Repayment Challenges

  • I know that when a student loan goes into default, the charges added for collections can be up to 18% of the amount borrowed.  These default charges can spiral out of control quickly for stressed out borrowers who already cannot afford their student loans.
  • Many borrowers are not even aware of deferment, forbearance, or better yet, an income sensitive repayment options.  For more information on repaying your federal loans visit the Student Loan Borrower Assistance website here.
  • Bankruptcy may be an important option to consider when facing overwhelming student debt and dealing with private loans too.  We can control payments and buy time under a controlled repayment plan, or perhaps there is an undue hardship that would totally discharge student loans in bankruptcy.

Don’t wait until loans go into repayment.  Take immediate control and keep those student loans in good standing from the start to prevent balances owed from spiraling out of control.  That’s my best advice to our newest graduating class of 2015.


Citimortgage Agrees to 90% Settlement of Junior Mortgage After Bankruptcy

iStock_000015201389SmallA former debtor in a Chapter 7 bankruptcy case recently hired my firm to get rid of the lien that survived the bankruptcy.  This, in spite of the recent Supreme Court Decision handing banks yet another victory.  Read the New York Times (@NYTimes) Article, here. The Supreme Court ruling will now prevent underwater homeowners from easily discharging home equity loans and other types of second mortgages in Chapter 7 bankruptcies, according to the New York Times. Keep in mind that junior mortgages remain eligible to be “stripped” down or avoided and removed under Chapter 13 of the Bankruptcy Code. Certain restrictions apply.

Back to the Chapter 7 client.  When a debtor discharges his debts in a Chapter 7 bankruptcy, even the mortgage debt has been eliminated.  HOWEVER, mortgage lenders continue to enjoy the benefit of a lien against the real property of the debtor’s home. So, while the mortgage company can never come after the debtor to collect on the mortgage debt itself, unless that they negotiate to release or remove that junior mortgage (also known and home equity lines of credit), the lien will simply remain attached to the home. That’s where a debt settlement lawyer can help.

If the Supreme Court won’t help consumers who need it most, then certainly a debt relief lawyer can and one debtor just obtained a settlement and release of a junior mortgage lien that was previously discharged in his Chapter 7 Bankruptcy.  He will pay only 10% of the original balance owed on the junior lien and when he is finished paying 36 monthly payments, the lien will be released.  In just three (3) years, he will only have one mortgage!  Now that’s a win for consumers.

Auto Title Loans Create Cycle of Debt

2010 07 31_0483Do you need cash now?  Then look no further than your driveway and turn your car into cash,” as the ads normally go. Desperate for cash and with lenders selling these loans like “crack dealers to drug addicts,” it’s no wonder why many are stuck in a vicious cycle of debt. The LA Times (@LaTimes) recent article on the auto title loan industry in California warns consumers to be wary of these loans that force consumers to borrow more than they need at more than 100% interest rates! Read the LA Times article, here.

California law currently puts no limit on the interest rates for loans greater than $2,500.00, which is why auto title lenders will push unwary borrowers into taking more money against their cars than they really need.  I can only assume that you would feel “special” or “happy” to hear that you’re approved  for more than you originally requested, but BEWARE that the hand that is about to give you cash has a BITE. The sting comes in the form of high interest rates that can be anywhere from more than 100% more than 400% interest! Also, if you don’t repay these loans, they’ll take your car!

Auto title loans are riskier than payday loans because your car can be repossessed if you don’t repay the loan.  However, there are better solutions that include considering filing for bankruptcy, if the reason for the loans is to repay other debts, or if you’re stuck in a cycle of debt where you continue to take more loans to repay other loans.  Last week I discussed several options for dealing with your car in bankruptcy and redemption loans could very well help you keep your car and lose that debt.

What To Do About Your Car in Bankruptcy

Freedom - happy free couple in carHere in southern California, everyone needs their cars to get around.  It’s no different when filing bankruptcy.  A frequently asked question is, “How can I keep my car when I file for bankruptcy?” The short answer is you can absolutely keep your car and file for bankruptcy.  However, the more important question would be do you simply reaffirm the debt, or would redemption be more beneficial?  In a prior post I talked about reaffirmation of an auto loan. In this article, I’ll be discussing in detail what redemption is and when it might be right for you.

The term Redemption is found in the Bankruptcy Code under Section §722. A redemption loan allows a borrower in Chapter 7 bankruptcy to “cram down” a loan to the retail value of the vehicle and force a lender to accept a reduced payoff. The reduction in principle can save the borrower hundreds or even thousands of dollars over the life of the loan! Source: Quality Finance

Do You Think You Could Benefit From a Redemption Loan?  Here are some questions to ask your bankruptcy lawyer.

  1. Are you a debtor in a Chapter 7, or are you about to file a Chapter 7 bankruptcy case?
  2. Is your car less than 10 years old?
  3. Does your car have less than 120,000 miles on it?
  4. Have you been in your current job for at least six (6) months?
  5. Do you owe more on your car that it is really worth? Check your car’s value here.

Redemption allows you to keep your car for the current fair market value and get a new loan that can lower your monthly payment and lower the total amount owed. Keep your car and lose those overwhelming car payments.

Who Needs Student Loan Forgiveness?

In a recent Wall Street Journal (“WSJ”) (@WSJBankruptcyBeat) series on the Great Student Loan Debt Debate, several of their examiners discussed what to do about student loans in bankruptcy. Let’s start with the goal of bankruptcy, which is to help the HONEST BUT UNFORTUNATE DEBTOR, see the WSJ article here. This is a person who has more debt than they can handle and are overburdened due to medical issues, job loss, or the need to care for family members creates a financial hardship. Many, but not all debts are discharged in bankruptcy and student loans seem to be the hot topic lately because more than 40 million Americans have a total of more than $1.2 Trillion dollars of outstanding student loan debt.

The WSJ Examiners recently debated whether the bankruptcy code should be amended to allow for the forgiveness of student loan debt in bankruptcy. There were many viable solutions made.  Some, taking back the bankruptcy limitations set out in the 2005 BAPCPA Amendments, which allowed student loans to be discharged after a 7-year repayment period had elapsed.

I propose that we start with cutting the ridiculous salaries at colleges and universities throughout the country who have been soaking up Title IX funds for decades without anyone blinking an eye.  Next, we go after the likes of the lending industry because they have had the comfort of knowing their loans would survive bankruptcy for the past 10 years, so they have been loaning without limit like a crack dealer to a drug addict. I believe that simply limiting the total amount a student may borrower without forcing schools to cut their costs and lenders to reign in their underwriting, this mess won’t stand a chance.  Also, if all the parties involved don’t take corrective action, America will continue to lose its world education ranking.

In bankruptcy, I fight these issues and see that some of my clients could benefit from a hardship discharge, but simply do not have the resources to hire me to litigate an adversary proceeding to prove it.  The creditor push back is enormous and we must take these cases all the way to trial, or have the matters heard on summary judgment.  This is cost prohibitive for our overburdened debtors.  We also have some debtors who may be forced into continual Chapter 13 bankruptcies only to keep hundreds of thousands of dollars in student loan debt under control until their death, which doesn’t seem like a solution at all.

Here is the follow-up to the WSJ Student Loan debate and what its readers thought, here. Tell me what you think?  Do we need student loan forgiveness in bankruptcy?

Song About Bills Shows You’re Not Alone

With nearly 800,000 bankruptcy filings over the past few years and the folks over at Credit Slips (@CreditSlips) estimating the trend continuing, those that file for bankruptcy protection are truly not alone.  Then, we begin hearing this catchy new tune on the radio simply entitled “Bills” by an emerging artist named Lunch Money Lewis (@LunchMoneyLewis). It’s a lighthearted tune that might be good for Monday morning motivation, but do you really want to be on that hamster wheel forever? You can view the full song over at YouTube (@youtube) here.

I am an avid reader of the Credit Slips blog and when they posted about this song, I had a listen.  I agree that it’s enjoyable and I too always view things through the eyes of a bankruptcy lawyer. I think that there’s got to be another song that sheds light on a life after bankruptcy and without debts.  Sure, we’ll always have bills like utilities, healthcare and the like, but we don’t need to be burdened with debt.  After all, that is what bankruptcy is all about.

I am throwing down a challenge to Mr. Lunch Money to create a song about how happy those good people are after bankruptcy.  I’ll say that it’s like a country song in reverse where you get your life back, get the girl back, get that job you always wanted and go on to greater things in life.