How Bankruptcy Can Stop Wage Garnishments
If a creditor is garnishing your wages, you may be able to stop the garnishment and even get some of your garnished wages back by filing bankruptcy.
If a creditor is garnishing your wages, you may be able to stop the garnishment and even get some of your garnished wages back by filing bankruptcy . However, certain exceptions do apply. Read on to learn more about how bankruptcy can help you stop wage garnishments.
The Automatic Stay
When you file bankruptcy, an automatic stay goes into effect that prohibits and stops most collection activities by creditors. This means that wage garnishments are also stopped as long as the bankruptcy stay is in effect. If a creditor wants to resume collection efforts, it must ask the court to lift the stay. The court will lift the stay only if the creditor has a valid reason for doing so. An unsecured creditor such as a credit card company simply wishing to resume a wage garnishment is not a valid reason for the court to lift the stay.
(To learn more, see the articles in Bankruptcy’s Automatic Stay .)
Exceptions to The Automatic Stay
The automatic stay does not apply to domestic support obligations such as child support or alimony. These are considered priority debts that are unaffected by the automatic stay and cannot be discharged by filing bankruptcy. So if your wages are being garnished to satisfy domestic support obligations, the garnishment will not stop if you file bankruptcy.
What Happens to Wage Garnishments After Bankruptcy?
The automatic stay ends when you receive a discharge, your case is dismissed without a discharge, or when the court lifts the stay. If you receive a discharge and the underlying obligation for the wage garnishment (such as credit card debt) was included in the discharge, the creditor cannot resume the garnishment to collect the debt after bankruptcy. If your case gets dismissed without a discharge, then the creditor can continue the wage garnishment after dismissal.
Can I Recover Wages Garnished Prior to Filing Bankruptcy?
If certain conditions are met, you may be able to get back some of your wages even if they were garnished before bankruptcy. You can usually get back wages garnished within the 90-day prior to your bankruptcy filing if they were over $600 in aggregate and you have enough exemptions to cover them. (To learn how exemptions work, see Bankruptcy Exemptions.)
If you meet these requirements, you can file a complaint in your bankruptcy and ask that the creditor return the garnished wages. If you are represented by an attorney, whether this makes financial sense will depend on how much your attorney will charge for filing the complaint and the amount of wages you are looking to recover.
Practical Tips For Getting Garnishments Stopped Quickly
When you file bankruptcy, you are required to list all your creditors so they can be notified of the bankruptcy. However, there is a chance that creditors may not be alerted in time to put a stop on garnishments after the case is filed.
If you want to make sure the garnishment stops immediately, you should give notice of the bankruptcy to the payroll department of your company. Also, most wage garnishments are handled by the local sheriff’s office. So you should also notify the sheriff or other levying officer of your bankruptcy so he or she can put a stop to the garnishment immediately.
For more on dealing with debt collectors, check out Nolo’s section Debt and Debt Collectors .
Student Loan Borrowers Assistance > Bankruptcy
Student loans are difficult, but not impossible, to discharge in bankruptcy. To do so, you must show that payment of the debt “will impose an undue hardship on you and your dependents.”
Courts use different tests to evaluate whether a particular borrower has shown an undue hardship.
The most common test is the Brunner test which requires a showing that 1) the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for the debtor and the debtor’s dependents if forced to repay the student loans; 2) additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and 3) the debtor has made good faith efforts to repay the loans. ( Brunner v. New York State Higher Educ. Servs. Corp. , 831 F. 2d 395 (2d Cir. 1987). Most, but not all, courts use this test.
If you can successfully prove undue hardship, your student loan will be completely canceled. Filing for bankruptcy also automatically protects you from collection actions on all of your debts, at least until the bankruptcy case is resolved or until the creditor gets permission from the court to start collecting again.
Assuming you can discharge your student loan debt by proving hardship, bankruptcy may be a good option for you. It is a good idea to first consult with a lawyer or other professional to understand other pros and cons associated with bankruptcy. For example, a bankruptcy can remain part of your credit history for ten years. There are costs associated with filing for bankruptcy as well as a number of procedural hurdles. There are also limits on how often you can file for bankruptcy.
How to Discharge Student Loans in Bankruptcy
Whether a student loan is discharged based on hardship is not automatically determined in the bankruptcy process. You must file a petition (called an adversary proceeding) to get a determination. This sample gives you an idea of what your complaint should look like.
If you already filed for bankruptcy, but did not request a determination of undue hardship, you may reopen your bankruptcy case at any time in order to file this proceeding. You should be able to do this without payment of an additional filing fee. Chapter 10 of NCLC’s Student Loan Law publication includes extensive information about discharging student loans in bankruptcy.
UNDUE HARDSHIP EXAMPLES
It is up to the court to decide whether you meet the “undue hardship” standard. Here are a few examples of successful and unsuccessful cases.
- A 50 year old student loan borrower earning about $8.50/hour as a telemarketer was granted a discharge. The court agreed that the borrower had reached maximum earning capacity, did not earn enough to pay the loans and support minimal family expenses and appeared trapped in a “cycle of poverty.”
- A college-educated married couple proved undue hardship and were able to discharge their loans. They both worked, but had income barely above poverty level. The court noted that the borrowers worked in worthwhile, although low-paying careers. One worked as a teacher’s aide and the other as a teacher working with emotionally disturbed children. Even with a very frugal budget, they had $400 more a month in expenses than income. Their expenses included $100 monthly tuition to send their daughter to private school. Relatives paid for most of this and the couple testified that they objected to the public school’s corporeal punishment policy. In agreeing to discharge the loans, the court also found that the couple had acted in good faith because they asked about the possibility of a more affordable repayment plan. Not all courts are as sympathetic to borrowers who work in low-paying careers. For example, one borrower was denied a discharge because he worked as a cellist for an orchestra and taught music part-time. The court suggested that this borrower could find higher-paying work. Another court came up with the same result for a pastor. The court found that it was the borrower’s choice to work as a pastor for a start-up church rather than try to find a higher paying job.
- A number of courts have granted discharges in cases where the borrower did not benefit from the education or went to a fraudulent school.
- There have been mixed results when borrowers have tried to show that their financial difficulties will persist into the future. For example, one court found that a borrower’s alcoholism was not an insurmountable problem, but some borrowers have won these cases. In one case, a borrower’s testimony about her mental impairment, including evidence that she received Social Security benefits, was enough to convince the court of undue hardship. The court agreed with the borrower that her ongoing mental illness was likely to continue to interfere with her ability to work.
- In finding undue hardship in a 2011 case, the judge found that a 58 year old and 60 year old couple’s past employment experience showed no likelihood that their financial circumstances would change for the better before they reached retirement age. The judge also considered accrued post-bankruptcy medical expenses in the amount of $22,000. There was nothing in the record to suggest that the medical debt would be forgiven. Both borrowers suffered from various medical ailments. Although there was no medical expert testimony of disability, the borrower’s own testimony was sufficient to who that their health problems limited future employment prospects.
Even if you cannot prove undue hardship, you still might want to consider repaying your student loans through a Chapter 13 bankruptcy plan.
A case under chapter 13 is often called “reorganization.” In a chapter 13 case, you submit a plan to repay your creditors over time, usually from future income. These plans allow you to get caught up on mortgages or car loans and other secured debts. If you cannot discharge your student loans based on undue hardship in either a chapter 7 or chapter 13 bankruptcy, there are still certain advantages to filing a chapter 13 bankruptcy. One advantage is that your chapter 13 plan, not your loan holder will determine the size of your student loan payments. You will make these court-determined payments while you are in the Chapter 13 plan, usually for three to five years. You will still owe the remainder of your student loans when you come out of bankruptcy, but you can try at this point to discharge the remainder based on undue hardship. While you are repaying through the bankruptcy court, there will be no collection actions taken against you. You may have other options, depending on how judges decide these cases in your judicial district. For example, some judges allow student loan borrowers to give priority to their student loans during the Chapter 13 plan. You should discuss these options with a bankruptcy attorney .
The Resources section has more information about finding a lawyer to help you. When shopping around for a lawyer, make sure that you let the lawyer know that you want to discharge your student loans in bankruptcy. You should ask a lot of questions to see if the lawyer understands this process. It is not as straightforward as filing a regular Chapter 7 bankruptcy petition. You should assume the lawyer is not knowledgeable in this area if he tells you that student loans cannot be discharged in bankruptcy. The truth is that you can discharge your student loans if you can prove undue hardship. You should always have an opportunity to talk to a lawyer before you pay anything. Make sure you have a clear idea of what the lawyer will do for you and what you will be charged.
Graduate school debt is playing a key and often overlooked role in the ballooning of overall student loan debt, new research suggests.
Graduate school debt is playing a key and often overlooked role in the ballooning of overall student loan debt , new research suggests.
By Jennifer Liberto @CNNMoney March 25, 2014: 11:02 AM ET
Students who went to university for a graduate degree borrowed $57,600 in 2012, a 43% increase from $40,209 in 2004, according to new research released Tuesday by the New America Foundation.
“The jump in graduate school borrowing is bigger than I thought it was going to be,” said the report’s author Jason Delisle, director of the Federal Education Budget Project.
Overall student loan debt is a little more than $1 trillion, outpacing all other loans except mortgages.
Though the research doesn’t say how much of it comes from graduate students, separate federal data showed that graduate loans were 41% of student loans issued in the fall of 2012. That’s despite the fact that graduate students were only 17% of all student loan borrowers, according to New America, a think tank.
“Are graduate students thinking: I’ve got less money to get a graduate education, so I should borrow more? My employment prospects look worse, so should I borrow more? That’s problematic,” Delisle said.
It certainly was the case with Robert Ridley, who will graduate this year from the University of Kentucky with a master’s degree in public policy and $60,000 in federal student loans.
Ridley completed his undergraduate degree in 2002 with almost no debt. However, he went back to school to get a graduate degree after struggling for years to find a decent full-time job.
Ridley is among 1.7 million graduate school students nationwide, many of whom are still borrowing more to get a leg up in this struggling economy. Some are unsure if a graduate degree will actually get them a job that will bring in extra money.
“I’ll know for sure after I graduate in December whether graduate school was the right thing to do,” said Ridley, whose undergraduate degree in sociology from the University of Cincinnati was mostly paid by a National Merit Scholarship and Pell Grants.
The New America study found that some students are getting graduate degrees that don’t necessarily lead to larger salary gains.
Those getting a Master of Business Administration took out $42,000 to finance their education in 2012, just $600 more than the same graduates borrowed in 2004.
By contrast, borrowers financing Master of Arts degrees were $58,500 in debt in 2012, or $20,500 more than in 2004.
“Those getting MBAs have decided I’m not going to borrow any more for that degree, but these other degrees that aren’t matched to careers are borrowing a lot more,” Delisle said.
Ridley is hoping graduate school will help give him a jumpstart when he gets back in the work force.
After his undergraduate degree he worked several jobs, including part-time stints doing accounting for municipal government and tutoring in accounting and math. But after he was let go from a part-time job at a university in 2004, he struggled to land an interview for any job.
“I was forced to live with my mother much longer than I wanted or needed to. I tried everything,” Ridley said.
WASHINGTON March 25, 2014 (AP)
About half of all payday loans are made to people who extend the loans so many times they end up paying more in fees than the original amount they borrowed, a report by a federal watchdog has found.
The report released Tuesday by the Consumer Financial Protection Bureau also shows that four of five payday loans are extended, or “rolled over,” within 14 days. Additional fees are charged when loans are rolled over.
Payday loans, also known as cash advances or check loans, are short-term loans at high interest rates, usually for $500 or less. They often are made to borrowers with weak credit or low incomes, and the storefront businesses often are located near military bases. The equivalent annual interest rates run to three digits.
The loans work this way: You need money today, but payday is a week or two away. You write a check dated for your payday and give it to the lender. You get your money, minus the interest fee. In two weeks, the lender cashes your check or charges you more interest to extend, or “roll over,” the loan for another two weeks.
The CFPB report was based on data from about 12 million payday loans in 30 states in 2011 and 2012. It also found that four of five payday borrowers either default on or extend a payday loan over the course of a year. Only 15 percent of borrowers repay all their payday debts on time without re-borrowing within 14 days, and 64 percent renew at least one loan one or more times, according to the report.
Twenty-two percent of payday loans are extended by borrowers six times or more; 15 percent are extended at least 10 times, the report found.
“We are concerned that too many borrowers slide into the debt traps that payday loans can become,” CFPB Director Richard Cordray said in a statement.
Some states have imposed caps on interest rates charged by payday lenders.
The industry says payday loans provide a useful service to help people manage unexpected and temporary financial difficulties.
(In the penultimate paragraph, removes inadvertant word attached to end of law firm name.) ENLARGE (Globalpost/GlobalPost)Adve
By Liz Weston
LOS ANGELES (Reuters) – Getting student loan debt erased in bankruptcy court isn’t easy, but it’s possible. Unfortunately, most borrowers can’t afford the fight that might give them some relief.
“You’d need to spend at least $5,000,” said Henry Sommer, supervising attorney at Consumer Bankruptcy Assistance Project in Philadelphia and a former president of the National Association of Consumer Bankruptcy Attorneys. The catch is that “if you had $5,000, you would not be eligible for a student loan discharge,” Sommer added.
Several recent court decisions have challenged the notion that only the worst-off borrowers, typically those who are permanently disabled, can get education debt erased. The borrowers who won these discharges had low costs, either receiving free legal help or representing themselves.
In most cases, borrowers in bankruptcy don’t even ask for help because they figure a discharge of debt is so rare. In one study of 170,000 student loan debtors who filed for bankruptcy protection in 2007, only 51 won full discharges of their debt and 30 received partial discharges.
The author of the study, which was published in the American Bankruptcy Law Journal, found that only 213 of the student loan debtors studied even tried to have their education debt discharged by filing what’s known as an “adversary proceeding.” Since bankruptcy law doesn’t allow student loans to be erased in a regular filing, this extra step is necessary before education debt can be discharged.
Of those who tried to get their student debt wiped out, in other words, two out of five got at least some relief. Based on the characteristics of those who were able to get discharges, researcher Jason Iuliano calculated that an additional 69,000 people who filed bankruptcy that year would have had a “good chance” of erasing their student loans had they filed adversary proceedings.
Iuliano speculated that one reason so few student loan borrowers seek relief is that they’ve been convinced it’s hopeless. He cited academic journals and numerous popular press articles indicating such discharges are almost impossible. Debtors are sometimes told that absent a total and permanent disability, they can’t get their loans discharged.
There may be another reason. People who file for bankruptcy are, not surprisingly, usually broke. Paying attorneys’ fees can be a stretch, and attorneys may be loathe to make the extra effort required knowing they might not be paid for it.
“Most don’t attempt an undue hardship discharge because it requires an adversarial proceeding, which is a lot more work,” said Mark Kantrowitz, a student aid attorney and publisher of Edvisors Network Inc.
Iuliano’s research showed that those who represented themselves were about as likely as those who had lawyers to win their cases. Bankruptcy attorney Sommer said few borrowers are prepared to argue their cases in court against skilled and often aggressive lawyers representing their creditors.
“Most people are not capable of doing that,” Sommer said. “This is full-scale litigation.”
The bar is certainly high. A borrower has to prove that repaying his or her student loans would be an “undue hardship.” Typically, that means meeting three tests: a current inability to pay the loans, because doing so wouldn’t allow you to maintain a minimal standard of living given your current income and expenses; a future inability to repay the money, because your financial situation is likely to continue; and a good-faith effort to repay what you owe.
In two recent decisions, though, courts granted relief to borrowers who hadn’t made voluntary payments on their debt and who refused to enroll in income-based repayment plans. The appeals court judges in both cases said enrolling would have been pointless given the women’s tiny incomes.
In a third case, the borrower was both employed and healthy, but wage garnishments by his student lenders left him unable to support his wife and two children.
Michael Hedlund was twice granted relief in bankruptcy court, but his lenders challenged the decisions both times, said Derek Foran, a partner with San Francisco-based Morrison & Foerster, who along with attorney Yonatan Braude represented Hedlund for free in those appeals. The court battles ultimately resulted in a decision by the U.S. 9th Circuit Court of Appeals that upheld Hedlund’s bankruptcy relief. That will make it harder for lenders to undermine bankruptcy court decisions in Western states in the future, Foran said.
“The problem is that the creditors have vast resources they don’t see any downside to trying to get the decisions reversed on appeal,” Foran said. “We like to feel we made the system a little fairer for debtors in the 9th district.”
February 25, 2014 /24-7PressRelease/ — The perceived social stigma attached to bankruptcy makes filing for financial protection unattractive to some. Many people worry how bankruptcy will affect their credit rating, future purchasing power and their ability to provide for their family. Bankruptcy can feel like “giving up” — there may be feelings of personal failure, or guilt and shame when contemplating bankruptcy. But bankruptcy is not waving a white flag of surrender; it is acknowledging a tricky problem and resolving it in the best way possible. Contrary to many popular notions, bankruptcy is a responsible, financially sound legal option when unmanageable debt arises.Fortunately, it has become a more accepted fact in today’s society that some people need bankruptcy protection . After the economic collapse in 2008, people from every socio-economic status realized that they may have become encumbered with too much debt, in large part because of circumstances that were hard to predict or out of their control.The Great Recession also sparked consumers to become more aware of predatory lending practices and other misbehavior by some financial institutions that can make it easy for the unwary to fall into a financial hole. Bankruptcy exists because it is a necessary and vital economic tool; one that can put a person back on sound financial footing and ease the stress of dealing with creditors on a daily basis.Bankruptcy eligibilityThere are two common types of consumer bankruptcy: Chapter 7 and Chapter 13 bankruptcies. In Chapter 7, people who are suffering from severe economic hardship may sell off a number of assets to pay off what creditors they can. Many bankruptcies are designated as “no asset” bankruptcies–in a “no asset” Chapter 7, no assets are sold. Chapter 7 often results in the discharge of some debt, and even the principal balance of some unsecured debt such as credit card balances and medical debt. Chapter 7 is useful to those who have experienced long-term unemployment, medical issues that prevent working, and individuals with few personal assets.Chapter 13 bankruptcy reorganizes debt into a manageable three-to-five year payment plan . Chapter 13 can also reduce interest rates and late fees. The primary benefits of Chapter 13 bankruptcy are that it is easier to qualify for and it allows the debtor to keep hard-earned assets such as a home and car.Anyone can find themselves in dire financial straightsPeople of all professions have sought bankruptcy protection. A recent article by a financial planner highlighted the author’s own personal experience with bankruptcy, even though he advised people on financial matters for a living. Bankers, business owners and professionals of all stripes have fallen on hard times and sought bankruptcy protection. People who are in debt and contemplating bankruptcy should contact an experienced bankruptcy attorney to discuss their financial situation and to see if filing for bankruptcy is right for them.Article provided by Sulaiman Law Group, LTD
Allow Private Education Loan Debts to Be Erased in Bankruptcy
Struggling borrowers should be able to discharge their private student loan debts
By STEVE COHEN
Steve Cohen is a Democratic representative from Tennessee.
Millions of Americans pursue college educations and training for new careers, which is good for them and for our nation. Yet these efforts are costly. This year, total student loan debt exceeded $1 trillion, more than any other kind of consumer debt. Debt from student loans issued by private for-profit lenders is troublesome. Unfortunately, current law prevents struggling borrowers from discharging their private student loan debts in bankruptcy like they can with other kinds of debt. This situation must change.
Private for-profit student loans often lack consumer protections. They typically have variable interest rates with no caps, exorbitant fees, and hidden charges. Also, many lenders use aggressive, high-pressure tactics to target vulnerable individuals, including young people without much financial experience. Private lenders are not required to—and often do not—provide the deferments, income-based repayment plans, cancellation rights, or loan forgiveness that are available to federal loan borrowers.
[Read John Hupalo: Discharging Private Student Loans Is Counterproductive]
Currently, educational debts survive bankruptcy unless the borrower can prove that repayment would impose an “undue hardship.” To demonstrate this hardship, however, the borrower must pursue expensive legal action, entailing a full-blown trial. This presents a Catch-22 because it forces a borrower, already in financial distress, to spend thousands of dollars on attorney fees and expenses to prove “undue hardship.” Meanwhile, private lenders have almost unlimited resources to litigate and little incentive to settle such disputes. Worse still, the “undue hardship” standard is vague and, as a result, courts have applied it inconsistently. Cumulatively, these factors effectively preclude borrowers from discharging private student loan debts.
Finally, there is no principled reason that for-profit lenders should enjoy special protection not given to other creditors. Under bankruptcy law, only certain debts cannot be discharged, such as spousal and child support, certain taxes, and debts incurred based on the debtor’s fraud or other bad actions. These exemptions exist for principled policy reasons that don’t apply to private student loans.
Also, private lenders do not deserve protection under the Bankruptcy Code because the “undue hardship” provision, first enacted in 1976, was intended to protect the taxpayer dollars that fund federal student loan programs. Yet Congress, in 2005, extended this protection to for-profit educational lenders, even though no taxpayer money was at stake.
[Check out U.S. News Weekly, an insider’s guide to politics.]
To address this problem, I introduced the Private Student Loan Bankruptcy Fairness Act, which would allow private education loan debts to once again be erased in bankruptcy just like other types of debts. This will help ensure that people can improve their lives through education without fear of financial ruin.
Opponents of my legislation claim that making private student loans dischargeable will result in higher interest rates. No evidence supports this claim, and it is telling that private loan interest rates have not decreased since 2005. If anything, private lenders have an incentive to make risky loans, knowing that they will not be discharged. By restoring bankruptcy dischargeability, my legislation will ensure that lenders only make prudent loans and will encourage private lenders to work with financially distressed borrowers to modify loan terms.
Current law unjustly punishes those who sought to improve their lives by getting an education but became victims of predatory lenders. My legislation corrects this injustice.
Costly Debt Settlement Schemes Prey on the Most Debt-Burdened Consumers Struggling to Recover from Economic DownturnNACBA: COSTLY DEBT SETTLEMENT SCHEMES PREY ON THE MOST DEBT-BURDENED CONSUMERS STRUGGLING TO RECOVER FROM ECONOMIC DOWNTURN
What a Half Million Unwary Consumers Don’t Know: Schemes Only Work for 1 in 10 Who Pay for Them; Consumer Alert: Debt Settlement Programs Seen as “#1 Threat to America’s Most Indebted Consumers.”
WASHINGTON, D.C. – October 17, 2012 – As few as one in 10 unwary consumers who are lured into so-called “debt settlement” schemes actually end up debt free in the promised period of time, making the risky schemes the No. 1 threat facing America’s most deeply indebted Americans, according to a major new consumer alert issued today by the nonprofit National Association of Consumer Bankruptcy Attorneys (NACBA).
Available online at http://www.nacba.org, the NACBA consumer alert notes: “Already struggling with home foreclosures, harsh bank and credit card fees, and other major financial challenges, America’s most deeply indebted consumers are now falling victim to a major new threat: so-called ‘debt settlement’ schemes that promise to make clients ’debt free’ in a relatively short period of time. Unfortunately, most consumers who pursue debt settlement services find themselves facing not relief but even steeper financial losses. Even the industry acknowledges – though not in its ever-present radio and online advertising – that debt settlement schemes fail to work for about two thirds of clients. Federal and state officials put the debt-settlement success rate even lower – at about one in 10 cases – meaning that the vast majority of unwary and uninformed consumers end up with more red ink, not the promised debt-free outcome.”
The private debt-settlement industry remains robust. More than 500,000 Americans with approximately $15 billion of debt are currently enrolled in debt settlement programs, according to industry estimates. And there is room for further growth: One in 8 U.S. households has more than $10,000 in credit card debt.
Durham, NC bankruptcy attorney Ed Boltz, NACBA Board member and incoming NACBA president, said: “Based on what bankruptcy attorneys are seeing across the nation, we believe that debt settlement schemes are the number one problem facing America’s most deeply indebted consumers today. Bombarded with slick radio and Web advertising falsely promising a smooth road to being debt free in a short period of time, these companies prey on the most desperate victims of the economic downturn. These particularly vulnerable consumers usually end up getting sued, stuck with outrageous fees, more deeply in debt, and far worse off in terms of their credit score.”
Earlier this year, NACBA focused national attention on the “student debt bomb,” which then was identified as the fastest growing consumer debt problem being handled by consumer bankruptcy attorneys.
Richard Thompson, a Rialto, California, retiree and victim of a debt settlement scheme, said: “I was told they could settle my $89,000 in debts for a total of $39,000 if I made payments of $1,800 for 22 months. I was contacted about a chance to settle $15,000 debt for $6,000 but my debt-settlement company ignored the offer. In fact, I paid them a total of $25,200 as they kept on ignoring settlement offers from creditors. I thought they were taking care of me by bringing my debt down, but all they were doing was taking my money. I ended up with $25,000 more in debt than I started out with. Before I retired I worked 25 years as a manager, now I have had to go back to work as a part-time security guard to help make ends meet.”
Bankruptcy attorney Trisha Connors, a NACBA member from Glen Rock, New Jersey who has testified before the New Jersey Law Revision Commission on debt settlement abuses, said: “Over the last three years, I have worked with 12 different for-profit debt settlement companies and over 25 clients who came to me after their debt settlement program failed to serve them. The results with each client were the same: exorbitant fees being paid, settlement (at best) of one small credit card debt, and mounting late fees and penalty interest charges on the unsettled debts. When clients informed the debt settlement companies of their desire to exit the program, the firms kept all or most of the accumulated savings for debt reduction as ‘fees.’ Every person I dealt with who had been current on their debts prior to contacting a debt settlement program told me that the sales representative told him the only way to be successful in the program is to stop paying credit card bills.”
Ellen Harnick, senior policy counsel, Center for Responsible Lending, said: “Debt settlement companies require clients to default on their debts before they will negotiate. This adds late fees and penalty interest to their debt and frequently results in the client being sued by creditors. Since only a tiny proportion of debts are actually settled by these companies, clients are typically left worse off than they were when they started.”
In addition to highlighting the stories of three victims of debt settlement schemes, the NACBA consumer alert notes the following:
• There is now across-the-board agreement on the danger that debt settlement schemes pose to consumers. The Better Business Bureau has designated debt settlement as an “inherently problematic business.” Similarly, the New York City Department of Consumer Affairs called debt settlement “the single greatest consumer fraud of the year.” Across the country, the U.S. Government Accountability Office (GAO), the Federal Trade Commission, 41 state attorneys general, consumer and legal services entities, and consumer bankruptcy attorneys have all uncovered substantial evidence of abuses by a wide range of debt settlement companies.
• Debt settlement schemes encourage consumers to default on their debts. Because creditors frequently will not negotiate reduced balances with consumers who are still current on their bills, debt settlement companies often instruct their clients to stop making monthly payments, explaining that they will negotiate a settlement with funds the client has paid in lieu of their monthly debt repayments. Once the client defaults, he or she faces fines, penalties, higher interest rates, and are subjected to increasingly aggressive debt-collection efforts including litigation and wage garnishment. Consequently, consumers often find themselves worse off than when the process of debt settlement began: They are deeper in debt, with their credit scores severely harmed.
• “Self help” may be the best answer for smaller debt burdens. If you have just a single debt that you are having trouble paying (such as a single credit card debt) and you have cash on hand that can be used to settle the debt, you may be able to negotiate favorable settlement terms with the creditor yourself. Creditors typically require anywhere from 25 to 70 percent on the dollar to settle a debt so you will need that much cash for a successful offer. Be sure to get an explicit written document from the creditor spelling out the terms of the debt settlement and relieving you of any future liability. Also be prepared to pay income taxes on any of the forgiven debt.
• Nonprofit credit counseling agencies can help, but must be vetted carefully. If, like most people, you owe multiple creditors and do not have the cash on hand to settle those debts, you may want to consult a non-profit credit counseling agency to see if there is a way for you to get out of debt. But make sure to check it out first: Just because an organization says it’s a “nonprofit” there is no guarantee that its services are free, affordable or even legitimate. Some credit counseling organizations charge high fees (which may not be obvious initially) or urge consumers to make “voluntary” contributions that may lead to more debt. The federal government maintains a list of government-approved credit counseling organizations, by state, at www.usdoj.gov/ust. If a credit counseling organization says it is “government approved,” check them out first.
• Bankruptcy will be an option for some consumers. Bankruptcy is a legal proceeding that offers a fresh start for people who face financial difficulty and can’t repay their debts. If you are facing foreclosure, repossession of your car, wage garnishment, utility shut-off or other debt collection activity, bankruptcy may be the only option available for stopping those actions. There are two primary types of personal bankruptcy: Chapter 7 and Chapter 13. Chapter 13 allows people with a stable income to keep property, such as a house or car, which they may otherwise lose through foreclosure or repossession. In a Chapter 13 proceeding, the bankruptcy court approves a repayment plan that allows you to pay your debts during a three to five year period. After you have made all the payments under the plan, you receive a discharge of all or most remaining debts. For tax purposes, a person filing for bankruptcy is considered insolvent and the forgiven debt is not considered income. Chapter 7 also eliminates most debts without tax consequences, and without any loss of property in over 90 percent of cases. To learn more about bankruptcy and whether it makes sense for you, go to http://www.nacba.org/Home/AttorneyFinderV2/.
NACBA urges consumers to steer clear of any companies that:
• Make promises that unsecured debts can be paid off for pennies on the dollar. There is no guarantee that any creditor will accept partial payment of a legitimate debt. Your best bet is to contact the creditor directly as soon as you have problems making payments.
• Require substantial monthly service fees and demand payment of a percentage of what they’ve supposedly saved you. Most debt settlement companies charge hefty fees for their services, including a fee to establish the account with the debt negotiator, a monthly service fee, and a final fee– a percentage of the money you’ve allegedly saved.
• Tell you to stop making payments or to stop communicating with your creditors. If you stop making payments on a credit card or other debts, expect late fees and interest to be added to the amount you owe each month. If you exceed your credit limit, expect additional fees and charges to be added. Your credit score will also suffer as a result of not making payments.
• Suggest that there is only a small likelihood that you will be sued by creditors. In fact, this is a likely outcome. Signing up with a debt settlement company makes it more likely that creditors will accelerate collection efforts against you. Creditors have the right to sue you to recover the money you owe. And sometimes when creditors win a lawsuit, they have the right to garnish your wages or put a lien on your home.
• State that they can remove accurate negative information from your credit report. No company or person can remove negative information from your credit report that is accurate and timely.
Boltz emphasized: “Many different kinds of services claim to help people with debt problems. The truth is that no single solution works in all cases. Bankruptcy is an option that makes sense for some consumers, but it’s not for everyone. For example, the National Association of Consumer Bankruptcy Attorneys and its individual consumer bankruptcy attorney members do not encourage every person who looks at bankruptcy to enter into it. What makes sense for each consumer will depend on their individual circumstances. We encourage everyone to get the facts and do what makes the most sense in their situation.”
Washington Post, By Dina ElBoghdady
The growing student loan burden carried by millions of Americans threatens to undermine the housing recovery’s momentum by discouraging, or even blocking, a generation of potential buyers from purchasing their first homes.
Recent improvements in the housing market have been fueled largely by investors who snapped up homes in the past few years. But that demand is waning as prices climb and mortgage rates rise. An analysis by the Mortgage Bankers Association found that loan applications for home purchases have slipped nearly 20 percent in the past four months compared with the same period a year earlier.
First-time buyers, the bedrock of the housing market, are not stepping up to fill the void. They have accounted for nearly a third of home purchases over the past year, well below the historical norm, industry figures show. The trend has alarmed some housing experts, who suspect that student loan debt is partly to blame. That debt has tripled from a decade earlier, to more than $1 trillion, while wages for young college graduates have dropped.
The fear is that many young adults can no longer save for a down payment or qualify for a mortgage, impeding the housing market and the overall economy, which relies heavily on the housing sector for growth, regulators and mortgage industry experts said.
“This is a huge issue for us,” said David H. Stevens, chief executive of the Mortgage Bankers Association. “Student debt trumps all other consumer debt. It’s going to have an extraordinary dampening effect on young peoples’ ability to borrow for a home, and that’s going to impact the housing market and the economy at large.”
Stephanie McCloskey, 26, said she feels the pinch. Two years out of college, McCloskey was confident that she could take out a mortgage and buy a townhouse in Gaithersburg, Rockville or maybe Frederick — until she met with a lender last month.
That’s when she realized she would not qualify for a mortgage large enough to pay for a home in the Maryland cities she was eyeing. According to her lender, the $500 she ponies up each month to repay her $30,000 student loan eats up too much of her income.
“I didn’t know anything about buying a house when I was taking out a student loan, so it’s almost like I am being blindsided by a decision I had to make years ago,” said McCloskey, an administrative assistant.
New federal rules
The lending climate has become less forgiving for those carrying student debt, and that’s unlikely to change anytime soon.
Federal rules that took effect last month grant mortgage lenders broad legal protections as long as they do not approve loans for prospective buyers whose total monthly debt exceeds 43 percent of their monthly gross income. The overarching goal is to protect borrowers against lender abuses.
But the rules could also make it difficult for some buyers with student loans to obtain a mortgage. Take someone seeking a $626,000 loan with a 4.5 percent interest rate to buy an $800,000 house.
If that person earned $125,000 a year and had a $450-a-month car payment, he or she would fall within the limit, said Phil Denfeld, a vice president at First Heritage Mortgage in Fairfax. But add a $100 student loan payment to the mix, and the debt-to-income ratio could climb above the new restriction.
This threshold already applies to some types of loans, including “jumbo” mortgages, which exceed $625,500 in the Washington area. But it will not apply to other types of loans for several years.
“This change can affect a wide range of people with student debt. Graduate students, law students or even parents who’ve taken on their kids’ student loan debt,” Denfeld said. “I had one parent who was trying to refinance his house, but he’d taken out a student loan to pay for his child’s college education, and his debt-to-income ratio was too high.”
Without help from her parents, Melissa Nussbaum probably could not have bought her D.C. condominium two years ago, she said. After graduating from Georgetown University with a master’s degree — and $75,000 in student debt — Nussbaum said she struggled for years to save for a down payment. Her parents came to the rescue.
“I imagine that most people don’t have that kind of opportunity where they can go to their parents and have them help,” said Nussbaum, 39. “I know people who are getting rid of their student debt by moving abroad to work in a developing country [for tax benefits and cost savings] so they can pay off their debt more quickly.”
Of the 20 percent of first-time buyers who said it was difficult to save for a down payment, 54 percent said student loans made it tough to save money, according to a recent survey by the National Association of Realtors. About half of the people polled in another of the group’s surveys said student debt was a “huge” obstacle to buying a home.
The Consumer Financial Protection Bureau sounded the alarm about this trend in 2012 and did so again in November. Speaking before the Federal Reserve Bank of St. Louis, the CFPB’s Rohit Chopra saidthat rising student debt “may prove to be one of the more painful aftershocks of the Great Recession,” with implications for the housing market.
“With more and more Americans putting big chunks of their income toward student loan payments, that means they’re less able to stash away extra cash for their first down payment,” Chopra, the agency’s student loan ombudsman, said in an interview.
Now, the Federal Housing Administration, a popular source of low-down-payment loans for first-time buyers, may make it even tougher. Currently, the agency allows the mortgage lenders it does business with to ignore student debt that’s deferred for a year or more when assessing a borrower’s eligibility for a loan. But it may scrap that waiver this year.
Researchers at the Federal Reserve Bank of New York weighed in last year with their own analysis of the student debt problem’s impact. From 2009 to 2012, the homeownership rate fell twice as much for 30-year-olds who had a history of student loans than it did for those without such debt, they said. The finding upended traditional thinking, which held that student debt signaled higher earnings and higher chances of owning a home.
Chris Herbert, research director at Harvard University’s Joint Center for Housing Studies, agrees with those who say the swelling student debt is a concern. But he also says it may not hobble young adults’ access to the housing market as much as some fear.
In his own analysis, Herbert found that student loan debt is not all piled upon recent college graduates. Rather, it is evenly distributed among age groups as of 2010. Also, the median amount borrowed for school by people in their 20s “barely budged” from 2004 to 2010, hovering around $11,000 when adjusted for inflation, Herbert said.
Only a small share of the under-30 crowd is borrowing sizable sums, he said. But the trend in that age range is worrisome: The share of borrowers under 30 with more than $50,000 in outstanding student debt doubled from 5 percent to 10 percent. (Testifying before Congress in 2012, then-Federal Reserve Chairman Ben S. Bernanke said his son would probably graduate from medical school with $400,000 in student loan debt.)
“This could explain why some of them are sitting on the sidelines,” Herbert said. “But it’s a complex issue, and everyone’s struggling to get a handle on what it means for the housing recovery.”
It’s nearly impossible to cancel your student loan debt in bankruptcy.
Fewer than 1,000 people try each year. Those who do are required to file a lawsuit against their lenders and then convince a bankruptcy judge that they’re so poor there’s no hope of ever repaying the loans.
Lawyers for the U.S. Department of Education, which guarantees most of the roughly $1 trillion in outstanding student loan debt, have been criticized for making unreasonable arguments to sway judges that struggling borrowers can afford their monthly student loan payments. Here are five of them.
CAN YOU REALLY AFFORD THOSE KIDS?
When a Minnesota woman tried to discharge more than $300,000 in student loans in 2007, lawyers for the lenders focused on her and her husband’s five kids, asking her at trial whether they were “planned.” The woman, who had gone to medical school, said she’s Roman Catholic and that two children had autism, preventing her from working. Her husband was a police officer.
“You have to make the decision to have a family in light of what you can afford,” one lawyer said.
Bankruptcy Judge Gregory Kishel found the argument “audacious,” stating that siding with the lenders would infringe on “religious practice and fundamental life-choice.”
“[The couple] brought five human lives into existence; and though it has not been without struggle, they are nurturing them in a safe, intact, two-parent family,” he said, discharging the loans. (Lender lawyers appealed the decision twice.)
In another instance, lawyers pointed out that a 34-four-year old Alabama woman “chose to have three children even though she had no husband and her health was allegedly so poor” that she couldn’t work. That argument prompted a judge to write, “There is nothing in the Bankruptcy Code that suggests that Congress did not intend for student loan debtors to procreate.”
ARE THOSE MEDICATIONS NECESSARY?
A Montana man graduated from Yale University with a master’s degree but struggled to repay roughly $130,000 in loans on his $12.41 hourly wage at a sheriff’s office.
Lawyers who examined his expenses criticized the man for taking antidepressants for his mental health problems. The criticism was so aggressive that a bankruptcy judge wrote in a 2006 opinion that he was “bothered by the apparent attack” on the man’s drug use. Lawyers also tried to convince a bankruptcy judge that the 43-year-old man should drive 800 miles to a South Dakota Indian reservation where he could get cheaper medications.
“The court was equally unimpressed by counsel’s suggestion that [the borrower] could simply use his vacation time to make the suggested monthly journeys,” the judge said before discharging the student loan debt.
CAN YOUR JAILED HUSBAND HELP OUT?
Lawyers who argued that a 25 year-old woman could afford to repay her student loans—more than $40,000—said her jailed husband could pitch in.
“Upon his release, it is reasonable to assume that he will provide some financial support,” wrote student loan lawyers in 2008. His wife, a New Hampshire woman making about $30,000 a year, was supporting their two-year-old daughter, according to court papers.
Bankruptcy Judge J. Michael Deasy didn’t buy it, pointing out that her husband hadn’t shared his earnings in the past.
“The undisputed evidence at trial was that during the three years prior to his incarceration, [the woman] never saw her husband’s paycheck; rather, he kept his paycheck and used it to pay his own expenses,” wrote Judge Deasy, who determined the woman couldn’t even afford the reduced payment of $206.72 per month offered by a lender.
“No basis exists to conclude that there will be any net contribution from the husband,” he said before discharging the loans.
WHAT ABOUT OPENING A DAYCARE?
Student loan attorneys tried to convince a Minnesota bankruptcy judge in 2008 that a 53-year-old woman should try to pay off a $50,000 student loan bill by opening a children’s daycare center—even though she was blind and sleeping on the floor of her adult son’s apartment.
Doing the math for her in court papers, the attorneys figured she could charge in $86,400 a year based on a license she once had to run a daycare with 12 children.
“[The woman] still has an interest in operating a day care center and is still capable of doing so should her living situation change,” they wrote in court papers.
The woman lived off her $569 monthly social security-disability check and didn’t own a home, a car or even furniture, said her attorney, Barbara May.
“There’s no doubt she would have gotten rid of these” loans if she had showed up to her trial, said Ms. May, who said she didn’t charge the woman for the $25,000 worth of legal work on the case. “She was just burned out….They had run her down.”
CAN YOU GET A BETTER JOB?
That’s what student loan attorneys told divorced mother of two kids (ages 1 and 2) in Kentucky who worked at a casino when she began trying to get rid of her loans in 2007.
The attorneys said in court papers that the 26-year-old woman, who made $9 an hour, was “not only in the prime of her earning years but has many left ahead of her.”
“Though [she] is gainfully employed, there are no obvious barriers to her supplementing his [sic] income with another part-time job,” they said in court papers.
The woman’s roughly $23,000 student loan tab came from a culinary arts degree from Sullivan University that she stopped pursuing because of pregnancy complications, according to court papers. Before a judge could rule on the matter, the woman signed up for a federal program that adjusted her monthly loan payments to match her income.