As I've explained in earlier bankruptcy blogs, the two most often-used types of bankruptcy to provide relief from consumer debt are Chapter 7 and Chapter 13.  By way of quick review, a Chapter 7 bankruptcy is a liquidation bankruptcy.  While that only occasionally happens, the bankruptcy court trustee can take legal possession of the debtor's assets (except for certain assets that are exempt under the law), sell those assets, using the cash to pay each of the creditors at least part of what is owed.  Then, some of the remaining debts are discharged, meaning forgiven.  (Of course, there are debts that cannot be discharged, including child support, alimony, most student loans, and certain taxes.)

Chapter 13 bankruptcies, by contrast, are reorganizations.  This form of bankruptcy usually allows a debtor to keep most or all of his assets and to arrange a full or partial repayment of debts over a three to five year period.  All of the debtor's "disposable" income goes towards repaying the Chapter 13 debts according to the agreement.

One very ironic thing that happens around bankruptcy courts is that creditors' representatives stand outside the courtroom waiting for the proceedings to conclude.  They then approach the person who's just filed bankruptcy and make an offer to "reaffirm" the debt owed to that company.  Say you've just had your debt to ABC Company discharged and wiped off the records in court as part of your Chapter 7 bankruptcy.  Now ABC is offering you new credit if you'll take the old debt back as well. Needless to say, almost never (there could be some exceptions with very small debts) is this offer anything but a trap for the unwary.

Renew your vows with a spouse?  Wonderful idea!  Reaffirm your debts?  Before even considering the possibility, better renew your talks with your consumer bankruptcy attorney!

A client's son graduated from Ivy Tech Community College a week or so ago, and I got a blow-by-blow description from my client of the impressive Coliseum ceremony.  The keynote speaker, none other than Indiana Governor Mitch Daniels, was honored for proposing state government funding to provide every high school graduate in Indiana the opportunity to attend at least two years of college.  The overriding goal, Daniels explained, is to create the well-trained workforce Indiana needs to attract and keep business in our state.

My clients and friends know what a strong interest I have in the economy of Indiana.  As a bankruptcy attorney serving 68 Indiana counties, I know what a strong connection there can be between job training and financial survival for my Indiana bankruptcy clients, and, in fact, for all our citizens.  Statistics show high school dropouts are twice as likely as graduates to slide into poverty.  In my earlier bankruptcy blog about student loans, I made the point that the Indiana bankruptcy laws are designed as a safety net to help people who have been overwhelmed by debt due to circumstances beyond their control.  I stressed that the safety net can function only when the majority of citizens, as a group, have the financial strength to support it.  Education is such a very important key to our health and financial health as a state!

As part of a survey conducted by InTech magazine, engineers were asked how often new technology forces workers to obtain new skills and refine their knowledge.  The top choice was "Once a year", followed by "Quarterly ".  Since one of the three main drivers of bankruptcy filings is job loss, that means people need to stay in school and graduate, but then to be prepared to keep up by continually educating themselves throughout their working lives.

The centerpiece of Gov. Daniels' words to the Ivy Tech graduates was the importance of mastering our English language.  "Sharpening your writing and speaking skills will do more than any other single thing to set you apart in the world of work", he advised.  Good advice for us all….

Earlier this week in my bankruptcy blog, I wrote about new legislation concerning student loans.  I explained that I have a crucial interest in the subject, because, as a bankruptcy lawyer in Indiana, I help clients analyze their debts.  Very often, I find that college loans play a role in the burdens families have, along with their mortgage loans, credit card bills, and medical bills.

The new federal legislation is aimed at easing the burden in several ways, including raising the amount each student can borrow, allowing parents to put off making payments on PLUS loans until their child is finished with school, and giving the U.S. Education Department authority to buy up loans from student lenders, so that those lenders will have capital to offer new loans.

And that brings me to today's subject - student loans here in Indiana.  As of the start of the next academic year, Indiana University Bloomington campus and IUPUI will each go back to getting loans directly from the federal government, which is what they used to do prior to 2004. (After 2004, private lenders issuing federally backed loans dominated the student loan market.)  But, this year, more than 50 lenders announced they will stop making private loans because of subsidy cuts and because of how difficult it is to sell student loan-backed securities. 

The IUPUI and Bloomington IU decisions about student loans are of special interest to me, because I have law offices in Indianapolis and in Bloomington.  I know that this calendar year, more than one hundred schools around the country have applied to join the federal government's Direct Loan Program, bringing the total number to 1500.  Twice that number of schools are still using the Federal Family Education Loan program, the one using private loans, but I expect that ratio to change as other Indiana schools  convert to the Direct Loan program.

There's another piece of the problem that directly relates to my work as a consumer bankruptcy specialist. Sallie Mae, one of the largest private lenders issuing federally backed private loans, employs more than 3000 workers in Indiana. Sallie Mae itself has reported losses in the first quarter of the year, and says it isn't able to make profitable loans at this time.  Because my ear is always to the ground when it comes to employment here in our state, I worry that might mean job losses, one of three primary causes of bankruptcy.

Funny, you might think - a bankruptcy attorney worried about unemployment causing bankruptcy?  As a matter of fact, yes.  Doctors make their living trying to heal the sick, but they don't want people to get sick!  The Indiana bankruptcy laws (in the writing of which I played an important role) are designed as a safety net to help people overwhelmed with debt by circumstances beyond their control.  We the people (and I mean all of us), are ultimately the ones providing that safety net, which can function only when the majority of the people as a group has the financial strength to support it.   

Every year, U.S. students borrow nearly $85 billion a year to pay for college.  But, with the credit crunch in our economy, more than 65 private companies have backed out of the student loan market altogether.  The lenders that are left are pickier and their loans have become more expensive.  Just in the past couple of weeks, the U.S. Congress has taken steps to ease the crunch in time for students to lock in their finances before school starts in the fall.

The new legislation addresses many aspects of the problem.  First of all, the amount each student can borrow goes up by $2,000.  Freshmen will be able to borrow $5,500 (as opposed to $3,500), sophomores $6,500, and juniors and seniors $7,500.  The main idea is to replace more expensive private loans with government loans.

The second set of “breaks” the new bill provides has to do with PLUS loans that parents take out for their children’s college.  In the past, the parents needed to start repaying the loan within 90 days of taking it out.  Under the new legislation, parents will be allowed to put off making payments until their child is finished with school.

One very, very important part of the new bill is that the U.S. Education Department will have the authority to buy up loans from student lenders, giving those lenders capital to use for new loans!

As I’ve said many times before in this bankruptcy blog, I always try to stay on top of the economic news, so that I can give the most relevant advice to my Indiana bankruptcy clients.  Quite often, as I sit down with each client to analyze what the debts are, I find that, along with mortgage loans, credit card debt, and medical bills, college loans play a role in the burdens family members are dealing with.  What can create even more hardship in a bankruptcy filing, almost never are student loans discharged by a bankruptcy court. 

However, as an attorney who deals with matters of debt every day, I was fascinated to learn that, under this new bill, parents can be up to 180 days late on their mortgage payments, have outstanding medical debts will still be allowed to take out PLUS loans for college.  What this says to me is that I will have more time to work with my clients and to plan a strategy which may or may not include filing bankruptcy.  Meanwhile, their children will be able to get started on their college education.

When most people think about the bankruptcy system helping people gain relief from debts, the first two kinds of debt they usually bring to mind are credit card debt and mortgages.  But, as a bankruptcy attorney in Indiana, I very often find myself dealing with student loan debts along with those others.  And, as I've written in earlier blogs, student loans can pose the greatest problem of all.  That's because it is very, very rare for student loans to be discharged in bankruptcy. 

To understand what's going on today with student loans, you need to remember that student loans for college started out being government loans.  Then, about 15 years ago, private lenders started getting into the student loan business, issuing federally backed loans.  The capital for all those loans came from selling securities to investors backed by the loans.  Now what's been happening with the credit crunch and so many people having difficulty paying back the loans, there's not very much of a market for the loan-backed securities.  Many companies are actually getting out of the business.  So, there is less money available for students, and the fees for servicing the loans are higher.

Meanwhile, what many parents had been doing was taking out home equity loans to help pay for their children's college. I don't need to tell you that it's a lot harder now to qualify for a home equity loan.  What's more, the value of many homes has fallen to the point that there's very little equity to borrow against!  It's a real squeeze, getting money for college.

Where I come into all this in my Indiana bankruptcy law practice is that my work involves helping people make a plan to handle all their debts.  Depending upon their situation, I am usually able to help them negotiate a plan of repayment with their mortgage lender and perhaps with other creditors and avoid or at least defer filing bankruptcy.  Or, they will file Chapter 13 (repayment plan) bankruptcy and pay off all their loans, including student loans, over time, under bankruptcy court supervision.  If neither of these two options is available, debtors can file Chapter 7 bankruptcy, under which many of the debts will be discharged by the court (probably not including the student loans).

The work I do is aimed at providing a fresh financial start for people whose circumstances have become impossible for them to deal with alone.  Since I know that student loans, with almost no exceptions, will need to be paid back, I try to help people get smart about student loans well before trouble looms.

Zach, one of the readers of my blog, asks about student loans that are not government-backed, and whether bankruptcy can be a help with those loans from private lenders.

Unfortunately the answer is still a big N.O..  Back in 2005, bankruptcy law was changed (Bankruptcy Abuse Prevention and Consumers Protection Act) to extend the same protection to for-profit student loan lenders as is given to nonprofit and government lenders, meaning that no student loans can be discharged through bankruptcy court.  (The only exception ever made is if you can prove "undue hardship" to the judge, and that is an extremely difficult standard to satisfy.)

Just this past month, the U.S. House defeated a bill that would have partially changed the situation by allowing private student loans more than five years old to be treated just like any unsecured loans.

So, sorry, Zach, no can do.  However, in earlier blogs I've written about cases in which an overall strategy for handling debts through bankruptcy was able to ease the pressure on the client to the point that he was able to make payments on the student loans.

I need to add here that the minute a debtor senses that matters are getting out of hand is when that person needs to seek out professional help.  The earlier I, as a consumer bankruptcy counselor and bankruptcy lawyer, can meet with a client, the greater the number of options will remain open for us to use.

Not a day goes by that someone doesn't ask me whether filing bankruptcy can provide any relief for them from student loans that never seem to get paid down.  Since people know how involved I have been with revising the bankruptcy laws of the state of Indiana and with dealing with thousands of debtors every year, it's natural that people would turn to me with questions about student loan debt.

While I'd love to be able to give a more hopeful answer, the truth is that, almost without exception, student loans are not dischargeable by the bankruptcy courts.  The U.S. Bankruptcy Code provides that the only time student loans can be discharged is when the loans impose an "undue hardship".  Essentially the courts interpret this to mean a person would need to prove permanent and total disability for the court to recognize "undue hardship".

So, should you rule out declaring bankruptcy if a big part of your  debt consists of student loans?  Not at all.  When you file bankruptcy, the student loans won't be discharged, nor will the interest stop accruing on those loans.  But what will happen is this - the people pursuing you to collect on your overdue student loans will be put "on hold" for up to five years.  In the bankruptcy process, some of your other debts might be discharged, buying you time to pursue your career and get back on your feet financially.  Without being hounded by phone calls from collectors, you will have a better chance of catching up to the point where you can resume payments on the student loans. 

There’s an old joke about a washing machine repairman who, with just one push of a button on the back of the appliance, was able to get the machine back into perfect working order.  The bill he presented to the homeowner: $601.00.   Aghast, the woman asked, “$601.00 just for coming out here and pressing a button?”  “Well,” explained the repairman with a little smile, “my pressing the button only cost you $1.00.  But knowing which button to press?  That’s what costs $600.00!”

I’ve written before about why, in the vast majority of cases, it does not make good sense to file bankruptcy in Indiana without the help of a bankruptcy attorney.  Just to reinforce that point, here’s a case where specialized knowledge made all the difference in the world to a person filing not just one, but two bankruptcy cases back to back!

By way of background, bankruptcy law states that a person cannot receive a bankruptcy discharge within a certain number of years of receiving a prior chapter 7 bankruptcy discharge.  But, in this particular situation, the goal was not getting a discharge, but getting the automatic stay of collection activity.  It took a skilled and experienced bankruptcy attorney to design a plan that would accomplish that goal within both the spirit and the letter of the law.

In this true story the debtor (whom I’ll call Bud) had two kinds of debt, each quite substantial.  One type was “non dischargeable”, a combination of student loans and back taxes owed for the preceding three years.  The second type consisted of unsecured debt.  Neither a Chapter 7 nor a Chapter 13 bankruptcy filing alone would have given Bud a fighting chance to get back on his feet.  Instead, with the advice of his bankruptcy attorney, he filed a Chapter 7 case first, then some months later, a Chapter 13 bankruptcy.  (U.S. bankruptcy attorneys call this a Chapter 20.)

The result was a discharge of many of the unsecured debts, so that Bud was able to make Chapter 13 payments and still keep up with repaying the taxes and student loans, while utilizing the benefits of Chapter 13 law.. One knowledgeable attorney, knowing “which button to push” – and in what order - made the difference here between a hopeless situation and a plan that allowed our friend Bud to rebuild his life.

As I was explaining in an earlier blog, bankruptcy mostly comes in “cans”, meaning that there are many forms of debt relief that bankruptcy can help with.  During my almost twenty five years practicing bankruptcy law in Indiana, I myself have been impressed with just how much help can come out of a bankruptcy.  Bankruptcy is truly a powerful tool, but, as with any tool, it can’t be used recklessly, and amateurs need professional help using the tool.

The bankruptcy “tool” is designed to help eliminate unsecured debts.  That’s the kind of debt where the creditor does not have a lien on property to back up the loan. Bankruptcy can even help with obligations like child support and alimony.  While everyone knows you’re essentially expected to live up to those obligations, bankruptcy can help you catch up if you're behind with the payments. The same is mostly true of student loans. In a Chapter 13 bankruptcy, the student loans can be included in the plan, so you can pay them off over time. 

Missed mortgage payments and missed car loan payments can also be part of a repayment plan under a Chapter 13 bankruptcy.  Chapter 7 usually does not help with missed payments on a mortgage or a car loan.

The bottom line is that bankruptcy, just like any other tool, cannot fix every problem for every debtor.  From my point of view as an indiana bankruptcy attorney , the sooner in the process a client sits down with me and goes over all the facts and all the possible strategies, the more help I am going to be able to provide. 

Bankruptcy does come mostly in “can’s”, as I like to say, but there are some “cannots” in there as well.