Saturday, January 14, 2017

Bankruptcy

When your finances are out of control, bankruptcy becomes a viable option.  Chapter 7 bankruptcy represents a total discharge of your debt, while Chapter 13 provides relief through a court-approved repayment plan.

An attorney can help you evaluate pre- and post-bankruptcy options as well as determine if there has been fraud on the part of the lender or if there was no educational or economic benefit conveyed by attending college and accumulating large amounts of debt.

The 2005 Bankruptcy Abuse Prevention and Consumer Protection Act bankruptcy requires that you attend an approved credit counseling course up to six months before you file for bankruptcy known as ‘pre-bankruptcy’ counseling.

There is also a second counseling requirement: After most of your paperwork has been completed (but before your final discharge), you are required to attend a ‘personal financial management course’ which has also been approved by the Executive Office of the U.S. Trustee.

Approved agencies under the National Foundation for Credit Counseling have provided free credit counseling (the first requirement) to households with income that is less than 150% of the poverty line.

Student loan bankruptcy generally requires adherence to the Brunner Test, which is made up of three ‘prongs’:

First, the debtor’s current income and expenses are evaluated in terms of maintaining a minimal standard of living.

Second, additional circumstances are evaluated in terms of whether or not the situation has been (and will remain) hopeless.

Third, the debtor must have made a good faith effort to find and keep the best job possible as well as to minimize personal living expenses.  A willful effort to cause the default does not meet this standard.  Debtors should have attempted to qualify for income-based and income-contingent repayment plans and facts would generally have to be presented in your case to show your rationale for not enrolling in such programs, such as the accrual of large amounts of interest or that participation would force a drop in your standard of living or that you did not qualify at all.

Bankruptcy on HEAL Loans cannot be declared during the first seven years of repayment and, afterwards, a court would have to feel that it was otherwise unconscionable not to allow it.



Student Loan Settlements

Under 34 USC Section 30.70, Department of Education (DOE) can suspend collection activities and write off accounts.  Your federal student loan is considered a federal claim and an attorney or legal practitioner will follow federal protocols when it comes to writing off your account.

Congress tends to believe that collectibility increases over time.  However, this belief is not true after it has been established (based on your credit report) that you haven’t been able to pay the federal student loan in a reasonable period of time (and you have provided relevant financial data), and the following has happened:

  1. Collection efforts have failed and the
  2. Costs of continuing to try and collect from you outweigh any possible sums to be collected, and
  3. There is uncertainty as far as the Department of Education’s ability to win its case in court.

A compromised payoff can be agreed upon but would need to be paid in a lump sum.  If installments are to be made instead, the DOE may require that you sign a document that allows for the full debt to be reinstated.  These write off procedures were put into place under the old student loan program knowns as FFEL (Federal Family Educational Loan).

Believe it or not, even if you obtain a write off under these circumstances, the debt is still owed (unless the write off is for a Perkins loan).  It seems, however, that you could obtain a letter from the DOE which states that they do not intend to continue to pursue collection of the debt.

Repayment Plans

The Income Contingent Repayment Plan is available to Direct Loan borrowers only.  How do you know if you have an older, FFEL loan?  If you took out your loan on or after July 1 2010 then you won’t have an older FFEL loan because Congress got rid of those loans as of that date.  Keep in mind, you may have taken out a private student loan instead of (or in addition to) a federal student loan.

The Standard Repayment Plan will likely be selected for you if you can’t decide on a repayment plan.  Your lender (or servicer) will notify you to choose a repayment plan, but under 34 CFR Section 682.209(a)(6)(v) you have 45 days before this plan is selected for you.  The Department of Education has Ed Account authority to select any of these plans for you [under 20 USC Section 1087e(d)(2)]:

  • Standard
  • Graduated
  • Extended

When the Standard Repayment Plan is selected, your amortization schedule (Excel Spreadsheet list of payments over a fixed time period with, generally, a fixed rate of interest) will show the same monthly payment each month.  However, if there’s a variable interest rate, your monthly payment may vary.  Standard Plans are set up over a minimum of 60 months and a maximum of 120 months.  

A Graduated Plan has your payments gradually increase over a fixed time period.  If you took out your loan before July 1st 2006, you could get a Graduated Repayment Plan over 10 years or more.  If you took out your loan on July 1st 2006 or later, an Extended Repayment Plan will be set for no more than 10 years.

Extended Repayment is available if you owe more than $30,000 and repayment will be up to 25 years with fixed, regular monthly payments, or gradually increasing payments (under a Graduated Repayment Plan).  If you have both FFEL and Direct Loans you will have to have at least 30,000 in either type of loan.

The Extended Repayment option used to be available for fixed repayment periods of 30 years if you owed enough money (before July 1st 2006).  However, federal loan consolidations can be for up to 30 years (if you borrowed enough).

When you extend the loan period, you can end up paying more interest over time, unless you sign up for an Income Driven Repayment plan (like Income Based Repayment, Income Contingent Repayment or Pay As You Earn).

You lender or servicer should have My Ed Account authority to change your monthly payment under 34 CFR Section 682.209(c)(1(ii).  Your payments have to cover at least the amount of yearly accrued interest, however.
Under the older FFEL program, you can change plans at least once per year.  Special requests can be made to change the repayment plans more than one time per year for these FFEL loans.

Under the Direct Loan Program, you can change plans anytime (once you’ve entered repayment), as long as the repayment plan you’re requesting is not less than your current repayment period.  You can also select Income Driven Repayment at any time.

Go to the Department of Education’s calculator to figure out how much your monthly payment will be under each plan.  The plan you select will depend on how quickly you expect to pay off your Ed Account.

College Savings Plans

A 520 plan is a college planning tool. The number 529 is the Internal Revenue Code Section for which it is named.

There are two types of 529 plans:
  • Prepaid Tuition Plans
  • College Savings Plans

Basically, a parent (or grandparent) puts money into an account. The money can later be withdrawn to pay for the college expenses of a child (or grandchild).
If the investment account grows over time, the withdrawals should be tax-free as long as the funds are used to pay for tuition and/or room and board at a college (a.k.a. qualified higher education expenses).

Prepaid Tuition Plans
Many states have have set up Prepaid Tuition Plans for their schools and, in some cases, the investment is guaranteed. If you know which college you want your child (or grandchild) to attend, prepaid tuition plans offer an excellent opportunity to pay for college credits and units and, in some cases, other higher education expenses.
By setting up a Section 529 plan for Prepaid Tuition, you get the chance to buy tuition at current rates. That way, if the tuition at your chosen school rises, you could end up paying a lot less for their college.

Prepaid Tuition Plans outline exactly how much the recipient (beneficiary) can receive, based on the number of years of college and other factors. The amount of money you set aside each year is determined by the prepaid tuition plan and the beneficiary’s age.

Prepaid Tuition Plans are usually for state of residency and other limitations (such of length of schooling) should apply. The timing of the enrollment (set-up) will be limited and/or vary depending on the state.

College Savings Plans
A College Saving Plan is more broad based: Many expenses can be covered, not just tuition. Of course, the expenses should be directly related to the cost of higher education. There are, however, limits to the amount of money you can contribute to these types of plans.

College Savings Plans usually do not offer guarantees, but you can have the money apply to either a child or an adult, whereas the Prepaid Tuition Plan is normally for a child.

College Savings Plans are usually purchased through a licensed broker or investment specialist whereas a Prepaid Tuition Plan is usually purchased through the state of the college/institution.

After the investment account is set-up, if you withdraw the money early (and not for college), there’s a 10% penalty (reported on your tax return) for the amount the money has grown (appreciated). The state tax effect of this transaction could vary.

Some states offer incentives to purchase into a Prepaid Tuition Plan, such as a deduction on your tax return during the year of your lump-sum investment.

It’s a good idea to seek the help of a professional with regards to a Internal Revenue Code Section 529 plan.

Student Loan Intermediaries

So you’re thinking about obtaining an intermediary to go between you and your loan servicer or company to which you owe money.  But, believe it or not, these “go betweens” known as credit counseling organizations (which are debt settlement and debt management companies, essentially), are debt collectors themselves and are likely subject to the Fair Debt Collection Practices Act as well.

That is, of course, unless you figure that the credit counseling organization has assumed your debts (which is one way of looking at it) and is, therefore, working more on your side than on the side of the people you owe.  Either way, each state has its own debt collection laws.

When you sign an agreement with an intermediary, they will begin to act on your behalf.  That usually means that you agree not to communicate with your original creditor and that you agree to try to settle a balance for less than the amount owed.

Nonprofit organizations may not be deemed subject to the Fair Debt Collection Practices act, and Congress has tried to exempt these organizations from scrutiny under the FDCPA because they perform credit counseling and legitimate efforts to liquidate debt as a true intermediary between creditor and debtor.

If you have registered your phone number with the federal do not call list and have received a phone call in a 12 month period from a credit counseling organization, you may obtain damages for up to $500 (under the Consumer Protection Act as a private cause of action).  The $500 amount is tripled when the company is (or has been) making this violation in a willful or knowing fashion.  State laws against telemarketing these types of services in a deceptive manner can also apply in this situation as well.

Income Based Repayment

The Federal Family Education Loan Program (FFEL) officially ended on July 1, 2010.  That doesn’t mean that you won’t have to repay My Ed Account federal student loans, old or new.

Instead of a FFEL (Stafford) loan, you may have a Direct Loan, a Direct PLUS Loan, or a Perkins Loan or even a private loan with a bank.

There are three main types of Income Based Repayment Plans:

  1. Income Based Repayment (IBR) (Effective July 1st 2009 for FFEL or Direct Loans)
  2. Income Contingent Repayment (ICR) (for Direct Loans)
  3. Income Sensitive Repayment (ISR) (for FFEL loans)

Income Based Repayment will likely producer the best (reduced) monthly repayment, depending.  Remember, lower payments can mean that you will end up repaying your loans over a longer time period and, therefore, pay more in interest on your loans.

Even if you are approved for IBR, your monthly payment amount will be re-evaluated each year based on your income.  Once you start making more money, your monthly payment can go back up.

However, if you stay on IBR (or ICR), you can have your remaining loan balance forgiven after 25 years (or 20 years if your loans are disbursed on or after July 1, 2014).

IBR sets your monthly payment at 15% of discretionary income (or 10% of discretionary income if your loans were disbursed on or after July 1, 2014).

The monthly payment also depends on the size of your family.  If your financial troubles are near-term, you may want to consider obtaining an economic hardship deferment.

You will use last year’s Adjusted Gross Income from your federal income tax return to calculate your eligibility.

If your situation has changed since then, use the Alternative Documentation of Income form instead.

President Obama modified Income Contingent Repayment to make the special 10% IBR rate (and 20 year repayment forgiveness terms) available to borrowers without loans prior to 2008 and who also have at least one new loan in 2012 or later; Students who borrowed during his second presidential term or later (and who never borrowed before his first term) were fast-tracked these benefits.

To apply, go to your loan servicer to obtain Income Driven Repayment Plan request form or go online to www.studentloans.gov to submit your request electronically.  StudentLoans.gov has an IRS Data Retrieval Tool so you can submit your Adjusted Gross Income data electronically.

You will be able to use this method if you have filed taxes for the past two years and your financial situation (income) has not seriously changed since then.

If your financial situation has changed or your don’t want to submit your information electronically or you didn’t file your taxes, get the Income Driven Repayment Plan form from your servicer.  To find your servicer, go to www.nslds.ed.gov

If you are mailing the Income Driven Repayment Plan form to your servicer, you will want to include copies of your tax returns.  If your financial situation has changed, you will want to include the Alternative Documentation of Income form with a copy of your pay stub or other documentation.

If you are not working (or your income isn’t taxed), you can submit the form electronically at studentloans.gov or by mail to your servicer.

Collections or Forgiveness

The choice to pay or not to pay your federal student loans can come down to whether or not you believe you are obligated to pay and are able to obtain forgiveness.  Avoiding repayment is a decision that can affect your long term finances but, if you sign up for a forgiveness plan now, you can avoid debt collection issues in the future.  

If you are already in default, be sure to check out Default Consolidation and other options.  Forgiveness plans for all borrowers can take place over a long period of time; If you believe your finances will improve in the future, be sure to request a deferment or forbearance.

Congress has exempted the Department of Education from a Statute of Limitations on debt collection, which means that debt collection for a federal student loan can occur at any point in the future.

In Lockhart v. United States, the Supreme Court ruled that there was no time limit to using Social Security Benefits to pay off your federal student loan.

If the Department of Education is garnishing your paycheck, their actions will be governed by the Debt Collection Improvement Act.  Wage garnishments for student loans will likely be limited to 15 percent of disposable income, unless garnishments for other debts are included (in which case the total that can be taken is 25 percent of disposable income.)

Wage garnishments are not the only way that a debt can be collected; Administrative offset of federal benefits, as well as intercepting your tax refund are alternative methods which are allowed under the law.  Because these collection methods are effective (and allowed by Congress), you may not get sued -- you will just find that your tax refund is gone or your wages are suddenly being garnished one day.

About one in ten defaulted student loans will be collected by a private student loan collection agency and billions of dollars in federal student loans remain unpaid.  There are about 22 private collection agency contracts.  So, if you are the unlucky 10 percent, you will have to deal with a private collection agency with regards to your federal student loan debt; Unusual efforts to convince you to make payments and then consolidate your debt will likely be made.  Be sure to recognize that your can consolidate out of default with just a few payments.

If your loan is being collected by a private agency, they will correspond with the Department of Education’s Default Resolution Group - Atlanta Regional Office, U.S. Department of Education Federal Student Aid, 61 Forsyth St. SW, Room 19T89, Atlanta GA (404) 562-6012

Garnishment and tax refund interceptions are covered by the Chicago office and special cases (bankruptcy, litigation, closed school and ability to benefit discharges) are covered by the San Francisco office.

A defaulted Perkins Loan will probably be collected by the school (or by the Department of Education).  A Perkins Loan still collected by the school may not be seeking wage garnishment (or other action) until the loan is transferred to the Department of Education.

If the Department of Education isn’t collecting your loan, you will have to work with the school, guarantee agency or private collection agency when it comes to your federal student loan.  Call 1 (800) 4 FED AID to find out who is collecting on your defaulted loan.  You can also find out where to make the payment by going to www.nslds.ed.gov (use www.pin.ed.gov to recover your pin number).  Good luck!