Lifehacker: How Your Spouse's Student Loans Affect You

By

Alicia Adamczyk

 

Millennials are putting off marriage, have you heard? And while some talking heads would have you believe smart phones and video games are largely to blame, I’d posit it’s more likely a consequence of the combination of crushing student loan debt and low-paying jobs that has defined life for many people in Generation Y. Who wants to shell out for a wedding when you can barely afford your monthly student loan payments?

But if you do get married, you definitely need to consider how your and/or your spouse’s loans will affect the other. Take this question, from Kathryn:

If you’re on an income driven plan as part of loan forgiveness, does your partner’s income become considered your own income if you get married?

Here’s what you need to know.

Taxes

Essentially, the answer to your question, Kathryn, is yes. If you or your spouse have student loans and you’re enrolled in the Revised Pay As You Earn plan, your monthly loan payment will increase, because the plan bases your payment off of your combined adjusted gross income.

For the other three income-driven repayment plans, you can avoid this if you file your taxes separately. But you’ll miss out on the other tax benefits of filing jointly. You’ll want to ask your tax preparer which is better for your individual situation, but it’s likely filing jointly and accepting the higher monthly payment.

That’s having an impact on when and if people get married, according to Travis Hornsby, founder of Student Loan Planner. “There’s a lot of people who are getting spiritually but not legally married because of this,” he says. “People are having ceremonies but not turning in their certificates for tax purposes.”

Additionally, you may lose the student loan interest deduction, which allows student loan borrowers to deduct up to $2,500 of the interest paid on their loans from their taxable income. You don’t qualify for it if you and your spouse earn more than $160,000 combined (you do not qualify for the deduction if you file separately).

Other Factors

But there are a lot of other things to take into consideration, finance-wise, when you have loans and get married.

“Everyone getting married these days needs to have a money conversation about loans, and it needs to happen before your engagement,” says Hornsby. “Be honest, say how much debt you have and your plans to pay it off.”

One example: credit. While your spouse’s loans do not affect your credit unless you’re a co-signer, according to NerdWallet, “if your spouse takes out a student loan during your marriage and then defaults, creditors in some states can go after both of your wages and assets—or, if you file jointly, your tax refund.”

And if you’re in the market for a new house, the biggest factors to take into account are your debt-to-income ratio, down payment, salary, credit history, assets, etc., the biggest being your DTI, says Mike Brown, managing director of Comet, a company that offers student loan refinancing advice. If your only debt is student loans and you make a decent income, you’ll probably be ok. If one of you has a ton of debt, though, the spouse with the lesser amount should apply for the mortgage, says Brown.

One rule that makes paying your mortgage more manageable: “Your house should be no more than two times your joint income if you have debt,” says Hornsby. “You don’t want tons and tons of debt.”

Divorce

If you get divorced, things get, well, complicated. You may have to split the debt with your spouse, regardless of whose it is, depending on when it was acquired, says Kathleen Campbell, a Registered Investment Advisor based in Fort Meyers, Florida.

If you incurred the debt before the marriage, that’s your responsibility to pay off (and the same goes for your spouse). “So even if a couple was together for years before marriage, with the expectation that future spouse A’s income would cover spouse B’s loan payments, if spouse B incurred the loans prior to marriage, then they are spouse B’s responsibility forever,” says Campbell.

But if the debt was acquired post-marriage, things “get murkier.” “That becomes more of a legal question, depending on state laws, how the money was used, earning power of both parties, how long the degree was used during the marriage, and other factors,” she says. “So it’s a case-by-case situation when it was incurred after marriage and is still in just one spouse’s name.”

If you’re a co-signer, you’re likely on the hook, unless your spouse refinances. “The co-signed obligation is a contract between the signer and the lender, not between spouses, so that’s a firm contract,” says Campbell. “It definitely could be possible to refinance the loan in only one spouse’s name, assuming that spouse has the income and credit history to entice the lender to refinance. That could all be part of divorce settlement discussions.”

If you’re really worried, create a prenup that stipulates what happens to the debt. Then you’ll have one less thing to worry about.

© 2018 Gizmodo Media Group.  All rights reserved.
 

A ray of hope for (some) student loan debtors

Here at Shenwick & Associates, many of the people we work with have student loan debt.  This should come as no surprise, considering that Americans owe more in student loan debt than credit card debt.  We’ve written about student loan debt and how difficult it is to discharge in bankruptcy previously (mostly recently here).  This month, we wanted to tell you about a pending case that may offer hope for some student loan debtors.

Let’s start by looking at the relevant provision of the Bankruptcy Code.  Section 523 governs exceptions to the discharge of debt, and § 523(a)(8) provides that:

A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt-unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor's dependents, for-an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or an obligation to repay funds received as an educational benefit, scholarship, or stipend[.]

This case (Haas v. Navient Solutions) revolves around the question of what an “educational benefit” is.  One of the co–plaintiffs (Haas) borrowed money to prepare for the Texas bar exam in 2009.  The other co–plaintiff (Shahbazi) borrowed money to attend a unaccredited technical school in Virginia in 2002.  Haas filed for bankruptcy in 2015 and Shahbazi filed for bankruptcy in 2011.  In both cases, the debtors listed the debt to Navient’s predecessors (which we will just refer to Navient, since two Navient entities are the co–defendants) as non–priority general unsecured claims instead of priority unsecured claims.  Navient was notified of the discharge, but instead of filing adversary proceedings (bankruptcy litigation) to contest the dischargeability of these debts, Navient and various collection agencies continued to try to collect on these debts, which the co–plaintiffs allege to be in violation of the discharge injunction in § 524(a)(2) of the Bankruptcy Code.

So Haas and Shahbazi filed their own adversary proceeding against Navient, contending that the debts they were incurred were not “Qualified Education Loans” excepted from discharge, but instead “Consumer Education Loans” that targeted students attending unaccredited schools, and seeking class–action status.   Navient moved to dismiss the case, which was denied last month.

The case is far from over, and if even if the plaintiffs and their class are successful, this would only affect a small portion of student loan debtors.  In our experience, most clients have qualified educational loans, which are very difficult to discharge in bankruptcy without undue hardship.  However, for student loan debtors who have been on the ropes since the seminal Brunner decision and the changes to dischargeability of educational loans in BAPCPA, this is welcome news.  For any questions about your student loan debt, please contact Jim Shenwick.

Bloomberg: Trump Lawyer Said to Invest in Once-Valuable NYC Taxi Medallions

By Brandon Kochkodin

(Bloomberg) -- The FBI raid on the offices of President Donald Trump’s lawyer, Michael Cohen, included one surprising aspect: taxi medallions. Agents were seeking documents on Cohen’s ownership of “numerous” New York City taxi medallions, according to CNN.

That might not be as salacious as records showing payments to an adult film star or to a former Playboy Playmate, but taxi permits were once a bonanza for alternative asset investors.

Prices for the permits jumped 60 percent from March 2011 to March of 2014 when they sold for $1 million each. The S&P 500’s total return in that period was 53.2 percent.

But the entrance of Uber and Lyft has slashed their value. Permit prices dropped almost 80 percent by March 2017 before recovering a bit over the last year. It’s not clear when Cohen made his investment.

©2018 Bloomberg L.P.

March 2018 NYC Taxi & Limousine Commission sales

The March 2018 New York City Taxi & Limousine Commission (TLC) sales results have been released to the public. And as is our practice, provided below are James Shenwick’s comments about those sales results.

1. The volume of sales continues to remain low. In March, there were only 29 taxi medallion sales (excluding stock transfers).

2. 14 of the 29 sales (almost half) were foreclosure or estate sales, which means that either: (1) the medallion owner defaulted on the bank loan and the banks were foreclosing to obtain possession of the medallion or; (2) the medallion owner died, and the estate was selling the medallion. We disregard these transfers in our analysis of the data, because we believe that they are outliers and not indicative of the true value of the medallion, which is a sale between a buyer and a seller under no pressure to sell (fair market value).  An additional transfer was from an individual to an LLC for no consideration, which we have also excluded from our analysis.

3. The 14 regular sales they ranged from a low of $163,333 (four medallions), to six medallions at $180,000, to two medallions at $225,000, and two medallions at the higher end of the price scale at $300,000 and $350,000.

4. The low sales volume seems to indicate that at this stage of the market, not many parties are involved in selling or buying medallions, possibly due to the fear that medallion prices may further decrease.

5. The median of March’s sales was $180,000, a $17,500 (9 %) decrease from February’s median sales of $197,500.

6. However, politicians have spoken recently about capping the number of ride–share app drivers and/or instituting congestion pricing in Manhattan – either of these measures would stabilize or increase the price of medallions.

Please continue to read our blog to see what happens to medallion pricing in the future. Any individuals or businesses with questions about taxi medallion valuations or workouts should contact Jim Shenwick at (212) 541-6224 or via email at jshenwick@gmail.com.

SCOTUSblog: Argument preview: Court to decide whether Bankruptcy Code protects dishonest debtors

By Danielle D'Onfro

Nestled among several potential blockbuster cases in the court’s penultimate week of argument this term, there’s a quiet personal bankruptcy case. The case, Lamar, Archer & Cofrin, LLP v. Appling, ostensibly concerns the breadth of the word “respecting” in the Bankruptcy Code.

But in simpler terms, the case is about how the Bankruptcy Code treats dishonest debtors. The goal of consumer bankruptcy is giving debtors a “fresh start” so that they can get on with their lives despite past financial missteps. The Bankruptcy Code does this by discharging debtors’ personal responsibility to repay many, but not all, obligations incurred before they filed their bankruptcy petitions. Of course, relieving debtors of their obligations necessitates that their creditors bear losses.

And that result, in turn, has its own ripple effects throughout the economy — from increasing the cost of credit for everyone to further bankruptcies when a creditor cannot itself absorb the loss. The Bankruptcy Code thus balances the competing goals of providing individuals the relief they need and minimizing unfairness to creditors. One way the Bankruptcy Code does this is by limiting bankruptcy’s discharge to “honest but unfortunate debtors.” Debtors remain personally liable for any non-dischargeable debt even after the conclusion of their cases, meaning that they can face wage garnishment and any other method of collection authorized under state law.


This case arises from a dispute between Lamar, Archer & Cofrin, LLP, an Atlanta law firm, and one of its former clients, R. Scott Appling. Like many bankruptcy disputes, this one involves questionable financial and strategic choices by both parties. In 2004, Appling hired Lamar and another firm to represent him in a dispute against the former owner of his business. By March 2005, Appling’s bill had grown to $60,000, which he could not (or would not) pay at the time. He allegedly induced Lamar to continue working on the case by explaining that he was expecting a tax refund of approximately $100,000 that would enable him to pay the outstanding bill. Appling contends that he never promised that the refund would be that large, but merely represented his accountant’s best estimate. In fact, Appling received a far smaller tax refund in October 2005 and promptly spent the money on business expenses. According to Lamar, in November 2005 Appling claimed to still be waiting for his tax refund; Lamar thus kept working for Appling until June 2006, when the firm learned the truth. The firm sued and won a judgment for $104,179 in Georgia state court in October 2012.

Three months later, Appling filed for Chapter 7 bankruptcy and Lamar filed an adversary proceeding in the Middle District of Georgia, seeking a determination that Appling’s $104,000 outstanding bill was non-dischargeable under 11 U.S.C. § 523(a)(2)(A) because it was “obtained by fraud.” That case went to trial in September 2014, in order to resolve the parties’ competing accounts of two conversations that had occurred nearly a decade earlier.

The provision at issue is 11 U.S.C. §523(a)(2), which states: “A discharge … does not discharge an individual debtor from any debt … for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition.”  Then, §523(a)(2)(B) says: “(B) use of a statement in writing—(i) that is materially false; (ii) respecting the debtor’s or an insider’s financial condition; (iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and (iv) that the debtor caused to be made or published with intent to deceive.”  Whether one should read an “or” between §523(a)(2)(A) and §523(a)(2)(B) is one of the issues in this case.

The provision at issue is 11 U.S.C. §523(a)(2), which states:

(a) A discharge … does not discharge an individual debtor from any debt— …

(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—

(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition;
(B) use of a statement in writing—

(i) that is materially false;
(ii) respecting the debtor’s or an insider’s financial condition;
(iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and
(iv) that the debtor caused to be made or published with intent to deceive.

Whether one should read an “or” between §523(a)(2)(A) and §523(a)(2)(B) is one of the issues in this case.

Appling filed a motion to dismiss, arguing that his debt did not fall within the exception under Section 523(a)(2)(A) because the alleged misrepresentation was a “statement respecting [his] financial condition.” The bankruptcy court denied the motion, reasoning that the term “statement respecting the debtor’s . . . financial condition” covers only statements about a debtor’s “overall financial condition or net worth.” Because Appling allegedly lied about a single asset — his tax refund — he did not lie about his overall financial condition. The court did not grapple with Section 523(a)(2)(B).

The U.S. Court of Appeals for the 11th Circuit reversed, joining the U.S. Court of Appeals for the 4th Circuit in holding that a statement about a single asset could be a statement respecting the debtor’s financial condition. It went on to find that Lamar could not bring a claim because Section 523(a)(2)(B) provides that misrepresentations about the debtor’s financial condition are only non-dischargeable if made in writing. The Supreme Court granted certiorari on the question of “whether (and, if so, when) a statement concerning a specific asset can be a ‘statement respecting the debtor’s … financial condition’ within Section 523(a)(2).”

In their briefing, the parties offer strikingly different interpretations of Section 523(a)(2). Lamar argues that the Supreme Court should follow the U.S. Courts of Appeals for the 8th, 10th and 5th Circuits and hold that statements about a single asset are not statements respecting the debtor’s financial condition. Under this view, only misrepresentations about the debtor’s overall personal balance sheet fall within Section 523(a)(2)(A)’s exception (really, the exception to the exception, because dischargeability is the norm).

Appling, for his part, contends that whatever statements he may have made about the tax refund were statements respecting his overall financial condition and therefore fell within the exception. He rests his argument on the ample precedent interpreting terms like “respecting” and “relating to” broadly. A group of law professors, represented by the Institute of Bankruptcy Policy, make a third, and perhaps more appealing, argument in an amicus brief supporting Appling. They maintain that this case need not test the boundaries of “respecting” because Appling actually intended to talk about his financial condition — his ability to pay his bills as they came due — when he spoke about his tax return.

Although the current Bankruptcy Code dates only to 1978, Congress built the code on nearly a century of prior bankruptcy practice. Both parties argue that this historical practice militates in favor of their desired reading of the statute, but Appling’s amici have the more sophisticated argument.

They argue that Section 523(a)(2)(A) in the 1978 Code merely re-enacted provisions from the Bankruptcy Act of 1898, as amended in 1903, 1926 and 1960. The 1903 and 1926 amendments to the code codified the discharge exception, they argue, but limited it to cases in which the debtor made a written misrepresentation. Consumer lenders, being a creative lot, realized that their debt would be non-dischargeable if the debtor lied in the origination process, and so they began requiring debtors to sign forms misrepresenting their assets in the origination process. Congress attempted to fix this problem in 1960 when it provided that false written financial statements regarding a debtor’s financial condition were not a basis for denying a discharge unless the lender actually relied on the falsehood. Before Congress replaced these provisions with Section 523(a)(2) in 1978, the weight of the case law held that a statement about any one of a debtor’s assets could be a statement about the debtor’s financial condition.

If Congress meant to incorporate this case law, then, many statements about a debtor’s assets would qualify under the exception to non-dischargeability. This interpretation is appealing in practical terms: If a homeowner says “my house is in foreclosure,” the listener knows something about that homeowner’s overall financial condition, just as she does if the same homeowner says “my net worth is a million dollars.” Lamar responds, though, that this approach stretches the word “respecting” too far, arguing that it “takes a sledgehammer” to the well-established principle that debt obtained by fraud is non-dischargeable.

Depending on how it resolves the main issue in the case, the court may also need to decide how Section 523(a)(2)(B)’s “use of a statement in writing” language fits with Section 523(a)(2)(A)’s exception to non-dischargeability. Appling and the 11th Circuit treat this provision as an exception to the exception to the exception: Written fraudulent statements about the debtor’s financial condition on which the creditor relies render a debt non-dischargeable. In its opinion, the 11th Circuit explained that this rule “may seem harsh after the fact, especially in the case of fraud,” but “it gives creditors an incentive to create writings before the fact, which provide the court with reliable evidence upon which to make a decision.” The 11th Circuit’s reading seems like the most plausible interpretation of the statutory text. At the same time, though, it raises some difficulties. Lamar argues that this reading involves the court substituting its own policy preferences for those of Congress. Indeed, the 11th Circuit’s view is somewhat difficult to square with the very problem that the 1960 amendment sought to fix: shady lenders encouraging borrowers to falsify documents to render their debts non-dischargeable. Moreover, Lamar’s amicus, the National Federation of Independent Business Small Business Legal Center, raises additional states’ rights concerns, calling this reading an encroachment on the states’ prerogative to create their own statutes of frauds.

Frankly, it is surprising that the Supreme Court even chose to hear this case. Although the case largely turns on a legal question, the parties still seem to be fighting about factual premises, arguing about who said what to whom 10 years before the trial. That said, it is good to see the court willing to tolerate a slightly messy vehicle to bring much-needed clarity to the Bankruptcy Code, especially because, as I’ve observed before, messy vehicles are the norm in the bankruptcy world.

© 2018 SCOTUSblog