Wednesday, August 31, 2016

Consumer and non-consumer/business debt in bankruptcy



Here at Shenwick & Associates, we've written extensively about the "means test," which is a complex series of calculations based on household size and income to determine if a debtor is eligible to file for Chapter 7 bankruptcy. However, the means test only applies to individuals whose debts are primarily "consumer debts," as opposed to business debts, pursuant to § 707 of the Bankruptcy Code. Congress did not define the word "primarily," but most courts have defined the word to mean more than half. If more than 50% of the debtor's debts are non-consumer debts or business debts, the debtor is automatically eligible to file for Chapter 7 bankruptcy without doing the means test, and the presumption of abuse does not apply.

What are consumer debts? Section 101(8) of the Bankruptcy Code defines a consumer debt as "debt incurred by an individual primarily for a personal, family, or household purpose." Many bankruptcy courts have developed a "profit motive" test. If the debt was incurred with an eye towards making a profit, then the debt should be classified as business debt. Accordingly, a mortgage on an individual's home would be considered consumer debt; however, if a vacation home were purchased for investment purposes and rented out, then the mortgage would qualify as business debt. If an individual uses credit cards for consumer purchases, then those debts are consumer debts; however, if an individual used the credit card for business purposes, then in all likelihood that debt would be deemed business debt. If an individual guaranteed a debt for a business obligation, that personal guaranty would be deemed business debt, as would the investment losses.

According to the Office of the United States Trustee's position on legal issues arising under the means test regarding a declaration of non–consumer debts:


  • Less than 50% of total scheduled debt was incurred for personal, household or family purposes.
  • Purpose of debt is judged at the time the debt was incurred. 
  • Home mortgages are typically consumer debt.
  • Most tax debts are not typically consumer debt. 
However, with respect to tax debts, a number of bankruptcy courts outside the Second Circuit have held that those debts are business debts. See In re Brashers, 216 B.R. 59 (Bankr. N.D. Okla. 1998), which holds that the debtor's income tax obligations do not constitute consumer debt; see also Internal Revenue Service v. Westberry (In re Westberry), 215 F.3d 589 (6th Cir. 2000), which also holds that taxes are not consumer debt. Many subsequent courts examining this issue have followed the Westberry analysis.

For all of your questions regarding debts, whether they be credit card, medical, consumer, business, taxes, secured or unsecured, please contact Jim Shenwick.

Thursday, August 18, 2016

New York Times: The Big Pause You Should Take Before Co-Signing a Student Loan

By Ron Lieber

So someone has asked you to co-sign for a student loan.

Chances are, it’s your child or grandchild, or perhaps a niece or nephew. You have unrelenting faith in this teenage freshman, or near certainty that graduate school will lead to a lifetime of gainful employment. And maybe you feel badly that the family has not been able to save enough to pay the bills outright.

Fine. But be very, very careful.

When you co-sign for a loan, you, too, are responsible for it. If the primary borrower can’t pay, you have to. If that borrower pays late, your credit could get nicked as well. And the mere existence of the loan on your credit report may keep you from being able to get other kinds of loans, since lenders don’t always want to do business with people who already have a lot of debt.

In some cases, the lender will try to collect from a co-signer even if the primary borrower is dead, as a recent collaboration between ProPublica and The New York Times revealed. Legislators in New Jersey held hearings on the matter this week.

After a postrecession lull, the so-called private loans — which generally have less favorable rates and terms than federal loans, and tend to require co-signers — are making a comeback of sorts. About one in 10 undergraduates takes one out, according to Sallie Mae, the biggest lender. Undergraduate and graduate students together borrow $10 billion to $12 billion in new private loans each year, according to MeasureOne, a market research and consulting firm, and the trajectory has been upward since the 2010-11 school year.


The $102 billion in outstanding private student loans make up just 7.5 percent of the $1.36 trillion in total student loan debt; the rest is made up of federal student loans. Undergraduates, however, can borrow only so much each year from the federal government before hitting limits.

So for anyone who wants to borrow more, there are the private loans, which usually come from Sallie Mae, banks and credit unions or other entities. The Consumer Financial Protection Bureau has a helpful guide on its site that explains the difference between federal and private loans in some detail.

Most private lenders require borrowers to have a co-signer to get a loan at all or to get a better rate. During the 2015-16 academic year, 94 percent of new undergraduate private loans had a co-signer, while 61 percent of graduate school loans did, according to MeasureOne’s analysis of data from six large lenders that make up about two-thirds of the overall market.

Tempted to help out by lending your signature and good credit history to someone? Your participation could indeed make a difference. Credible, an online loan marketplace, examined about 8,000 loans and found that undergraduates looking for loans who had co-signers qualified for loans with (mostly variable) interest rates averaging 5.37 percent. Students flying solo got a 7.46 percent quote.

For graduate students, the numbers were 4.59 percent for duos and 6.21 percent for people going it alone. For its average undergraduate loan — $19,232, paid off in eight years — the savings over time would be $1,896, which comes to about $20 a month.

But co-signing comes with plenty of risk. The Consumer Financial Protection Bureau outlined a number of them in a report it issued last year. In theory, most lenders provide a process by which the co-signer can be removed from the loan at the primary borrower’s request.

Perhaps the biggest concern for co-signers ought to be the bureau’s assertion last year that lenders turn down 90 percent of the borrowers who apply for these releases. The bureau’s director, Richard Cordray, described the process as “broken.”

But Sallie Mae said that more than half of its borrowers who make this request succeed. For PNC, the figure was 45 percent for the last 12 months. Citizens Bank reported a 64 percent number, while Wells Fargo said so few people had asked for a release that it did not track the number. (It’s possible that many don’t know that it’s possible, as the bureau chided lenders for not making the rules clear.)

What accounts for this gap? The bureau’s sample includes many loans that the original lenders sold to investors. These anonymous loan owners may not have the same incentive to be customer-friendly as big-name banks.

Some co-signers can’t get a release because the primary borrower doesn’t have sufficient income or a good enough credit score — fair and square. But sometimes it’s neither fair nor square. The bureau reports numerous instances where people make several months’ worth of payments in a lump sum but then don’t get credit for the consecutive monthly payments that some lenders use to keep score on people who are aiming to release their co-signers.

Worse still, co-signers who make payments themselves may discover after the fact that the lender requires the primary borrower to make years of on-time monthly payments before it will consider a release. So efforts by the co-signer to help the primary borrower stay on track may foil their very attempt to get themselves off the loan later.

There are rarer horrors, too, where the death or the bankruptcy of the co-signer causes an automatic default, according to the bureau. At that point, a mourning child can receive a bill for the full balance, and debt collectors may chase after the executor of the estate for a dead grandfather who co-signed a loan years ago. The big banks that offer private student loans say they do no such things.

As for more likely events, like credit-sullying late payments, just 4.37 percent of borrowers were at least 30 days late on their loans at the end of the first quarter, according to MeasureOne’s look at the big private lenders. But it’s not necessarily the same 4.37 percent who are overdue at any given moment. Moreover, that number will go higher during the next downturn, and there might be more than one bad economic cycle during any individual’s tenure as a co-signer.

A CreditCards.com survey of people who had co-signed on loans of all sorts found that 38 percent ended up paying at least some money, 28 percent were aware of damage to their credit and 26 percent saw relationships suffer as a result.

So where does this leave someone trying to help and tempted to co-sign? The tough-love reply goes like this: If you need a private loan as an undergraduate especially, then your college of choice is simply not affordable. Federal loans plus savings and current income should be enough to pay all of your costs, and if they aren’t, then it’s community college and living at home for you. And no, we won’t take the debt on in our names only or yank money from home equity, since we need to think about retirement and not be a burden to you later.

But can you really bring yourself, as a parent in particular, to deny a teenager or an ambitious graduate student a shot at the better opportunities that a more prestigious and expensive school might bring, as long as the debt isn’t outsize? Even an aspiring engineer who will earn plenty?

Many people simply will not be able to say no. So a few words for them. First, keep in mind that the teenagers you’re betting on may never graduate. And if they don’t, the odds are higher of the co-signer being liable for the private loan while the college dropout earns a modest hourly wage. So be especially wary if you think there is even a chance that your child or grandchild is not committed to college.

Finally, look the primary borrower in the eye and draw out a commitment of total and utter transparency. “Don’t assume that the primary borrower is making the payments, and make sure you have an open enough dialogue that they will tell you about it before they miss that payment,” said Dan Macklin, co-founder of SoFi, a company that helps many people refinance older student loans. “I’ve seen too many people where it’s an embarrassment and not spoken about, and it’s not very healthy.”

Copyright 2016 The New York Times Company.  All rights reserved.

Monday, August 01, 2016

Statute of limitations for and credit reporting of debts

Here at Shenwick & Associates, most clients come to us with concerns about debt, from either the perspective of a debtor or a creditor. This month, we’re going to take a look at the difference between how debts are treated by law and how debts are listed on a credit report. As with all actions (lawsuits), there is a statute of limitations on how long creditors can sue you to collect on a debt, get a judgment against you, and garnish your wages or levy against your financial accounts. In New York, the statute of limitations is six years, pursuant to section 213 (2) of the Civil Practice Law and Rules (CPLR) (for “an action upon a contractual obligation or liability, express or implied . . .”). However, once a judgment has been entered against you, a creditor has up to 20 years to enforce that judgment, pursuant to section 211(b) of the CPLR. However, there are two major caveats to be aware of regarding the statute of limitations:
  1. Sometimes, creditors and/or collection agencies will attempt to sue debtors even after the statute of limitations has expired. If you or an attorney that represents you fails to appear in court to claim that the statute of limitations on the debt has expired, the court may issue a default judgment against you, and then the 20 year period for enforcing the judgment starts running.
  2. If you acknowledge a debt (in writing and signed) and/or make a payment on a debt, that will restart the 20 year period for enforcing the judgment.
With regard to reporting of debts on a credit report, rather than the state laws that govern the statute of limitations to collect on a debt and enforce a judgment, credit reports are governed by federal law, specifically the Fair Credit Reporting Act (“FCRA”), which is codified at sections 1681 through 1681x of title 15 of the U.S. Code. Under the FCRA, credit reporting agencies are required to remove information about a debt after seven years, regardless of the ownership or sale of the debt (i.e. to a collection agency) or whether or not you’ve acknowledged the debt. The seven year period commences 180 days after the last payment on the debt. However, there are also some exceptions to these general reporting requirements. They don’t apply to consumer credit reports to be used in connection with: (1) a credit transaction involving, or which may reasonably be expected to involve, a principal amount of $150,000 or more; (2) the underwriting of life insurance involving, or which may reasonably be expected to involve, a face amount of $150,000 or more; or (3) the employment of any individual at an annual salary which equals, or which may reasonably be expected to equal $75,000, or more. Remember that consumers are entitled to free credit reports every 12 months from the three big credit reporting agencies (Equifax, Experian and TransUnion) from Annual Credit Report.com. For all of your questions about debts and credit reports, please contact Jim Shenwick.

Monday, June 20, 2016

Creditcards.com: 9 debt myths debunked

By Dana Dratch

That free advice you get from friends, co-workers or the "charming" bill collector on the phone could be worth even less that what you paid for it.

From the perils of acknowledging old debts to the odds of "inheriting" financial obligations, here are nine myths that need to be permanently busted, along with a few things it pays to know about debts:

Myth No. 1: Paying old debt always raises your credit score. 
Not always. This much is true: If a debt is seven years old or younger, and it's on your credit report, paying it could improve your credit score, says Anthony Sprauve, spokesman for myFICO, a division of FICO. How much depends on how old the debt is.
The myth part comes in if a debt is too old, or isn't on your credit report.

If a debt is older than seven years, by law it should have already come off your crdit report. So repaying it won't raise your score because it's no longer considered, says Sprauve.

In fact, if the debt is younger than seven years old and for some reason is not on your report, paying it could potentially lower your score, Sprauve says. The reason: If the collector reports the payment to credit bureaus, suddenly that old debt will be added to your report. Even though the debt is now paid, it's a negative mark your report didn't previously have. 

When it comes to debt, time really is on your side. New debts affect your score more than old ones, says Laura Udis, senior financial services advocate at the Consumer Federation of America.
 
Myth No. 2: Paying an obligation 'restarts' the clock on your debt.

Half right. There are two clocks to consider. One is the length of time in which a creditor can force payment on a debt. The second is the length of time a debt can stay on your credit reports.
 
Forced-collection clock: Under state statutes of limitations for debts, creditors can use the courts system only so long to sue you for debt, get a judgment and garnish wages. But watch out: A consumer can unwittingly restart the collections clock on old debt, says Gail Hillebrand, associate director for consumer education and engagement at the Consumer Financial Protection Bureau.

Acknowledging a debt (verbally or in writing), making a partial payment or accepting a payment plan can all risk "re-aging" the debt, restarting that clock.
 
Credit history clock: No matter who owns the debt, how many times it has been sold or whether you acknowledge it, it has to come off of your credit history after seven years, says Chi Chi Wu, staff attorney at the National Consumer Law Center.

And it's illegal to tag an old debt with a new "birthday," she says.

This seven-year clock starts 180 days after the last payment the consumer made on the accounts.

One notable exception to the seven-year reporting rule: collection judgments. A judgment is considered a separate item from the original debt, Wu explains.
 
Myth No. 3: Once the statute of limitations on forced collection passes, creditors can't sue.

Not entirely. You have no legal obligation to pay a debt that's passed the state statute for forced collection, says Ira Rheingold, executive director of the National Association of Consumer Advocates. But creditors or collectors can still file a lawsuit. 

If a creditor or collector sues, and you don't have someone in court to contest the claim, the courts may assume it's valid and grant the judgment, Rheingold says. Then, just like a B-movie zombie, that once-expired debt is alive and kicking again.

So if a collector sues, you or your attorney need to show up in court and demonstrate that the statute of limitations has expired, he says. Merely sending a letter to the courts or the creditor often isn't enough to prevent a default judgment, he adds.

Short on funds? You can contact NACA.net to find a consumer attorney who will take the case for a reduced fee, Rheingold says.
 
Myth No. 4: Making a small or partial payment stops lawsuits and debt collection attempts.
No matter who owns the debt, how many times it has been sold or whether you acknowledge it, it has to come off of your credit history after seven years.
-- Chi Chi Wu
National Consumer Law Center

Not true, unless that's part of a payment arrangement you have in writing, says Udis.

When dealing with representatives for creditors or collectors, get any promises or payment arrangements in writing or record those calls, if that's legal in the consumer's state, she says.
 
Myth No. 5: Paying old debt removes it from your credit report.

Nope. If an old debt is on your report and you pay it, that doesn't mean it will stop appearing on your credit history, says Udis.

What's most likely: It will still be reported, along with a status of paid or settled, she says.

And if the original debt is more than seven years old, it shouldn't still be on your report, which means it won't be included in your credit score, whether you pay it or not.
 
Myth No. 6: If you're in debt, collectors' efforts will make sure everyone around you finds out.

"Not true at all," says Udis. In fact, just the opposite.

"Under federal law, they cannot discuss the debt," she says. The Fair Debt Collection Practices Act prohibits collectors from even disclosing that there is a debt, Udis says.

So while a debt collector could conceivably call friends or family to find you, he or she may only call one time, she says. Collectors are not even allowed to say they're calling because of a debt, she adds.
And that reason doesn't hold water if they already have your contact information.

While the federal law applies to third-party collectors (companies collecting debt for the original creditor or companies who buy the debt), some states also impose the same confidentiality restrictions on the original creditors, says Rheingold.

Worried about your job if a creditor gets a judgment to garnish your salary? Again, you're protected, says Udis. Federal law prohibits employers from firing employees because they're having wages garnished, she says.
 
Myth No. 7: Telling debt collectors to 'buzz off' means they can't call you.

Again, half right. You have the right to tell collectors (verbally) not to call you at work, and they are required to obey, says Tracy S. Thorleifson, attorney at the Federal Trade Commission.

You also have the right to ask them not to contact you again, and they have to comply. But to invoke that right (granted under the Fair Debt Collection Practices Act), you want to put the request in writing, says Udis. After that, the collector is barred from contacting you again.

One right you don't give up with a "drop dead" letter: Collectors still have to serve notice if they file a lawsuit.

Don't want to draft your own letter just to tell collectors to go away? The Consumer Financial Protection Bureau has issued a series of debt collection sample letters
 
Myth No. 8: Divorce decrees split debts into piles of 'his' and 'hers.'

Definitely a myth. Sometimes divorce courts will parcel out the payment of debts (joint and otherwise) during a divorce. (She pays the card bill; he pays the house note, etc.)

But "the court order is between you and the ex-spouse," says Hillebrand. "It doesn't change the obligation you have with the credit card company."

When you walk into court with your name on certain bills and obligations, you are just as responsible to those creditors when you walk out, Udis says.

The best options for joint debt during a divorce are to either pay it all off before the divorce is final or contact the creditors to put the entire obligation solely in one name.

Whichever move you opt for, get proof in writing and hang onto it.
 
Myth No. 9: You can 'inherit' debts.

Totally wrong. Unless a friend or family member of the deceased was already liable for a debt before the death (think joint debts or community property situations), they're not responsible for it after the death, says Robert Hobbs, deputy director of the National Consumer Law Center.

Debts can't be reassigned by creditors or collectors after death or "inherited," he adds.

What is supposed to happen: Once the creditors find out someone has died, they contact the estate and ask to be paid. The estate pays the applicable bills and distributes the assets, says Hobbs.

The best move: If you're getting calls from creditors or collectors insisting you've "inherited" debts, it may be time to chat with an attorney.

Copyright 2013 CreditCards.com.  All rights reserved.

Lifehacker: Ask an Expert: All About Dealing With Debt

Check out the questions and answers here.

Lifehacker: What Really Happens When You File for Bankruptcy?

By Kristin Wong

Bankruptcy is a last resort for people and businesses, including Gawker Media, the company that owns this site. Many companies, like United Airlines and General Motors, file for bankruptcy and continue business as usual. Individuals file for bankruptcy and often emerge in one piece, too. Bankruptcy is poorly understood, so let’s talk about how it affects your finances, or the finances of a company you follow.

The Differences Between Chapter 7, 13, and 11 

In general, people file for bankruptcy when there’s no way in hell they can meet their debt obligations. Popular assumption is that those people are bad with money and take out too much credit card debt. Sure, that happens, but often, people and companies file bankruptcy after a major financial blow. It might be a lawsuit debacle. It might be digital obsolescence. It might be an unexpected illness.

A lot of people think bankruptcy wipes out any and all debt obligations, but that’s not the case. You still have to pay up, and how you’ll pay up depends on what kind of bankruptcy you file: Chapter 7, Chapter 13, or Chapter 11. There are other types of specific bankruptcies, too (Chapter 12 is for farmers and fishermen, for example), but these three are the most common.

With Chapter 7, you may have to liquidate certain assets (like a car or a second home) to pay off at least some of the debt. Most of your assets are probably exempt, but it depends on your state, your financial situation, and whether or not that asset is essential. You have to meet certain eligibility requirements to file, and income is perhaps the most important one. As legal site Nolo explains, there’s a whole set of criteria to determine your income eligibility, but generally, you have to have little to no disposable income.

With Chapter 13, you get a plan to pay off your debts within the next three to five years, but you get to keep your assets. After it’s all said and done, some of those debts will likely be discharged. You have to qualify, though, and that means your secured debts can’t be more than $1,149,525 and your unsecured debts cannot be more than $383,175. Secured debt is debt that’s backed by collateral, like your house or car.

Chapter 11 bankruptcy works kind of like Chapter 13, but it’s typically reserved for businesses, and basically means a reorganization or restructuring for the company. Businesses can file for Chapter 7 bankruptcy, too, but again, that means a liquidation of assets, so Chapter 11 is usually a more attractive option. Companies get to keep their stuff and keep their creditors at bay while they continue their operations, but they have to come up with a plan to pay off at least some of their debt, or get it forgiven.

What Happens When You File

When you file for bankruptcy, you get an “automatic stay.” Basically, this puts a block on your debt to keep creditors from collecting. While the stay is in place, they can’t garnish your wages, deduct money from your bank account, or go after any secured assets.

Ironically, bankruptcy isn’t free. The filing fee alone is a few hundred bucks for Chapter 7 and 13, and nearly $2,000 for Chapter 11. And then there are the attorney fees. You can file without a lawyer, but it’s not recommended since bankruptcy laws can be tough to navigate. Upright Law estimates the fees for Chapter 7 are $1,000-$2,000, and Chapter 13 are $2,200-5,000. Chapter 11 costs a lot more.

Over at Forbes, attorney Robert Bovarnick explains:
In my experience, attorney’s fees run about 4% of annual revenue. If your company has $2,000,000 in revenue, expect to pay between $75,000 and $100,000 to your bankruptcy lawyer–and there may be expenses for accountants and other professionals on top of that.
You’ll also have to take a class or two. The government requires individuals to take credit counseling 180 days before you file, and you also have to take a debtor education course if you want your debts discharged.

A couple of weeks after filing, you’ll have to attend a “creditors meeting,” which is basically what it sounds like: a court meeting between you, your bankruptcy trustee, and any creditors who want to attend. They’ll all ask you questions about your financial situation and decision to file bankruptcy.

Your Assets Get Liquidated With Chapter 7

Nolo says that in most cases, Chapter 7 debtors don’t have to liquidate their property (unless it’s collateral) because it’s usually exempt or it’s just not worth it. They explain:
If the property isn’t worth very much or would be cumbersome for the trustee to sell, the trustee may “abandon” the property — which means that you get to keep it, even though it is nonexempt...Most property owned by Chapter 7 debtors is either exempt or is essentially worthless for purposes of raising money for the creditors. As a result, few debtors end up having to surrender any property, unless it is collateral for a secured debt…
After the creditors meeting, your trustee will figure out whether or not to liquidate your stuff. If it does get liquidated, that means you’ll have to either surrender it or fork over its equivalent cash value to pay back your debt.

You Get a Payment Plan With Chapter 13

With Chapter 13, you get a plan to pay off your debts, and some of them have to be paid in full. These debts are “priority debts,” and they include alimony, child support, tax obligations, and wages you owe to employees.

Your plan is based on how much you owe and what your income looks like, and it will include how much you have to pay and when you have to pay it.

The “Best Interests Test” for Chapter 11

After filing for Chapter 11, the company has to come up with a reorganization plan for their business and finances. While they can continue operating as normal, they do have to run major financial decisions, like breaking a lease or shutting down operations, by the bankruptcy court. Creditors and shareholders can offer their input on these decisions, too. This plan is basically an agreement between the debtor and creditors about how the company will pay its future debts.


The plan also has to pass a “best interests” test. This test ensures creditors will get as much money under the Chapter 11 as they would if the debtor filed for a Chapter 7 liquidation.
Filing usually takes a couple of months to wrap up, but it takes considerably longer for the actual bankruptcy to come to a close. According to Credit.com, Chapter 7 bankruptcy is generally pretty quick and closes in a few months. This makes sense, since Chapter 7 liquidates your stuff to pay off debts quickly. Chapter 13, on the other hand, can last up to five years. According to Nolo, some Chapter 11 cases can wrap up in a few months, but six months to two years is a more common time frame.

What Happens to Your Credit

Your credit score will plummet with a bankruptcy. The higher your score, the more you’ll fall. FICO estimates someone with a score in the mid 700s might see a drop by over 100 points. Of course, a low score can make your life difficult in many ways.

In general, Chapter 7 and 11 bankruptcies remain on your credit report for ten years, and Chapter 13 stays on for seven.

After bankruptcy is all said and done, most debts are discharged, but not all of them. Student loans aren’t typically dischargeable in bankruptcy, for example. Here are a few other non-dischargeable debts, according to Sutton Law:
  • Tax debts
  • Alimony and child support
  • Divorce-related debts, including property settlement debts.
  • Debts for some fines or penalties.
  • Debts for personal injury or death caused by drunk driving
In some cases, student loans are dischargeable after a bankruptcy, but you have to pass a federal test for hardship, and the Department of Education says it’s rare.

Bankruptcy is usually a desperate remedy to a helpless situation. Knowing how it works and what to expect can help you navigate some of the misconceptions and figure out what the process actually entails.

Copyright 2016 Gawker Media.  All rights reserved.

Wednesday, June 15, 2016

Credit.com: How Do Forgiven Student Loans Impact Your Credit?

By Constance Brinkley-Badgett

The idea of having your student loan debt forgiven might sound like a dream come true, but there are a few things you’ll want to consider should you be among those eligible for student loan forgiveness.

It turns out that there are many ways to get federal student loans forgiven. In fact, the Consumer Financial Protection Bureau a few years ago estimated that more than a quarter of working Americans are eligible for the Public Service Loan Forgiveness Program, but only a small percentage are actually using it.

And while student loan forgiveness in and of itself may not negatively impact your credit, the status of your loans before and after you enter into a forgiveness program could, so it’s important to thoroughly discuss with your lender how your loan discharge will be reported.

“Before entering into a loan forgiveness program, be sure you understand how the loan will be reported on your credit report,” said Rod Griffin, director of Public Education at credit bureau Experian. “For there to be no negative impact on your credit scores, the loan must be reported as if it were paid according to the original contract terms.”

That means you might need to negotiate if you’ve made any late payments or gone into default.

Let’s say you qualify for forgiveness because of a disability, and you fell behind on your student loans due to medical bills, inability to work and other factors that might impact your finances. If, when your loan is discharged, the servicer reports the missed payments to the credit bureaus, your balance will show up as zero, but those late payments will remain on your credit report.

You can try to persuade the lender (or collector if it’s gone that far) to remove the blemish from your reports, and they might consider it if you have a good explanation as to why it happened.

Also, if the lender indicates that the account was settled for less than originally agreed, that could also hurt your credit scores, Griffin said.

“It should indicate it is paid in full and that there are no delinquencies in the credit history” in order to not negatively affect your credit, he said.

Errors in your payment history also can negatively impact your credit score, so it’s a good idea to check your credit reports before entering into a student loan forgiveness plan. By doing so, you’ll be able to dispute any errors on your student loan accounts and have them corrected. You can start that process by checking your free credit scores, updated monthly on Credit.com, which will also show you major credit scoring factors like payment history. You can also get a free copy of your credit reports from each of the major credit bureaus annually.

Will You Pay Taxes?

Certain types of student loans that are forgiven are not taxable, but other types are, so it’s good to know where you stand so you aren’t shocked by a big tax bill. A good place to begin your research is our primer on taxes after student loan cancellation. While President Obama’s 2017 budget proposal seeks to exclude Department of Education loan forgiveness programs from taxable income, it will require Congressional action to make that happen.

If you’re already behind on payments, there are some options available to help you get back on track, even if forgiveness isn’t one of them. To get out of default, you can combine eligible loans with a federal Direct Consolidation Loan, or you can go through the government’s default rehabilitation program. If you make nine consecutive on-time payments (these can be extremely low), your account goes back into good standing, and the default is removed from your credit report.


Copyright 2016 Credit.com, Inc.  All rights reserved. 

Tuesday, May 31, 2016

Reaffirmation agreements for mortgages in bankruptcy


Here at Shenwick & Associates, we're devoted to helping our clients discharge as many of their debts as possible in bankruptcy. We also aggressively attempt to help our clients retain as much of their property as possible after their bankruptcy case is concluded.

However, with regard to property that's secured by a debt, whether a debtor can retain that property will often depend on whether he or she is willing to sign a reaffirmation agreement. We covered reaffirmation agreements in a recent e-mail, but have recently done some more investigation into the topic, which we wanted to share with you.

As a hypothetical, let's say we have a married couple, filing jointly, who own a house with a mortgage and are current on their mortgage payments. There is no equity in the house. They want to keep their house after their bankruptcy case is concluded and continue to pay their mortgage during the pendency of the bankruptcy case. Does this couple need to file a reaffirmation agreement with the secured creditor? Our answer, for cases filed in the Second Circuit (New York, Connecticut and Vermont) is no.

Prior to the enactment of BAPCPA in 2005, courts in several circuits (including the 2nd Circuit in Capital Communications Federal Credit Union v. Boodrow (In re Boodrow) and BankBoston, N.A. v. Sokolowski (In re Sokolowski) had held that debtors had the option (the "ride through option") to retain both real property and personal property collateral and maintain current performance on the loan. Furthermore, secured creditors could not foreclose based solely on the debtor's filing of a bankruptcy petition and failure to reaffirm.

When BAPCPA was enacted, 11 U.S.C. §§ 521(a)(6) (which governs the debtor's duties with respect to secured personal property) and 362(h) (which governs termination of the automatic stay with respect to secured personal property) specifically eliminated the ride through option for personal property. However, decisions in several circuits (including a decision from Connecticut, In re Caraballo) have held that Boodrow and Sokolowski remain binding authority that the ride through option is still in effect with respect to real property. Accordingly, in New York a mortgage on a house does not need to be reaffirmed, but a loan on secured personal property needs to be reaffirmed.

As with all of our opinions expressed in these e-mails, this is not legal advice–every bankruptcy case is different and we cannot render legal advice without being retained. To discuss your unique situation with respect to your personal and real property, reaffirmation of secured debts and whether bankruptcy is right for you, please contact Jim Shenwick.