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DISCHARGING STUDENT LOANS, TAXES OR SECOND TRUST DEEDS IN BANKRUPTCY

Atty. Paul M. Allen, Bankruptcy Lawyer

For cases filed after October 7, 1998, Student Loans are only dischargeable if (1) you can prove that having to repay it would impose an “undue hardship” on you (as defined below), or (2) for cases filed prior to October 17, 2005 – if the program under which your student loan is issued, insured, administered is a for-profit, private (non-government) entity, it may be dischargeable.

However, if the program itself, such as LAL, GSL, etc. receives non-profit funding by participation of non-profit entities, the loan is not dischargeable in bankruptcy.

To obtain a discharge based on undue hardship you must prove all of the following:

1. That you cannot maintain, based on current income and expenses, a ‘minimal’ standard of living for yourself and your dependents if forced to repay the loans;

2. That additional circumstances exist indicating that this state of financial affairs is likely to persist for a significant portion of the repayment period of the student loans;

3. That you made good faith effort to repay the loans, for example, by past payments for several years, etc. Making payments is not always required if you didn’t ever have the money to pay the loans. Forbearances may be sufficient.

Back in April 2003, the Ninth Circuit court ruled that courts have the authority to issue partial discharges of student loans, in cases where the debtor shows the ability to repay some, but not all, of the loans. This is a huge improvement in the ability to possibly discharge some of these debts, because before the rule was if you could afford to repay any of the loans, you had to repay it all.

For other alternatives to dealing with Student Loans, including income contingent repayment plans, and non-bankruptcy methods of canceling the debt, check out the following website:  http://www.ed.gov/offices/OSFAP/DCS/loan.cancellation.discharge.html

Can you be denied a student loan because you or your parents file bankruptcy?

Section 525 of the Bankruptcy Code prohibits discriminatory treatment by any governmental or other student loan program on the basis of filing a bankruptcy. In other words, a student loan agency cannot deny your loan application based on the filing, by you or anyone you know, of a bankruptcy.

DISCHARGING TAXES AND REMOVING TAX LIENS

Certain types of tax obligations, such as income taxes, may be discharged under specific circumstances. Many required factors must be met before any tax can be discharged under Chapter 7 or Chapter 13. In Chapter 7, the minimum requirements for discharging federal or state income taxes are: (1) it has been over 3 years since the returns were last due (including extensions), (2) the returns were timely filed or it has been at least 2 years since the returns were filed, (3) there was no fraud involved or attempts to evade the tax, and, (4) the taxes were not assessed within the last 240 days.

If it has been over 3 years since your returns were last due and they have not been assessed in the last 240 days, but you have not yet filed the returns or there was some kind of fraud involved in filing them, then they may be dischargeable in a Chapter 13. Again, discharging taxes is an extremely complicated area, and you should definitely consult with a knowledgeable attorney before deciding whether to file based on dischargeability of your taxes and before you take any further steps with your taxes (such as filing past due returns). Sometimes filing a late return can work against you as far as being able to discharge those taxes in a Chapter 13, so definitely speak to an attorney before doing anything.

Tax Liens that have attached to property will survive a bankruptcy.

What does that mean? It means that the lien will stay against your property regardless of your discharge of the underlying debt. So, when you ultimately sell that property, if there is extra money available, the lien will be paid first from those proceeds unless you have the lien removed.

DISCHARGING FRAUDULENT DEBTS OR FRAUD DEBT JUDGEMENTS

Debts that you incurred which were the results of an intentional or even negligent misrepresentation on your part are not dischargeable in a Chapter 7. Examples of these might be if you misstated your income on a credit card application, made false statements in order to induce someone to give you a loan, ran up your credit card debt shortly prior to filing bankruptcy, used your credit card or obtained a loan without any intent to repay it, or if someone has obtained a court judgment against you based on fraud. However, the news isn’t all-bad. These types of debts may be discharged in a Chapter 13.

RETIREMENT ACCOUNTS AND PENSION PLANS

Whether or not you can exempt amounts held in a retirement account depends on numerous factors, including which set of exemptions you choose to use (you need to discuss this with your attorney; in California, there are two sets of exemptions). According to the United States Supreme Court, if your retirement plans is ERISA approved, meaning that it contains a trust “anti-alienation” provision making it impossible to transfer or withdraw the funds prematurely, and it is automatically exempt. Individual Retirement Accounts may be exempted only up to the amount reasonably necessary for the debtor’s support and maintenance, taking into account all other anticipated and existing sources of income and expenses. Obviously, exempting retirement funds is very tricky and requires the expertise of an experienced bankruptcy attorney.

GETTING RID OF LIENS, ABSTRACTS OF JUDGMENTS AND TRUST DEEDS AGAINST YOUR PROPERTY

The bankruptcy code provides a broad range of powers, that can enable you to avoid liens that were placed against your personal property or real property (like a house). The case analysis can become very complicated to deal with, and if you have liens against your property, make sure to discuss this with your attorney.

Types of liens you may be able to get rid of judgment liens recorded against your home or specific personal property. This could also include second mortgages or trust deeds against your home if they are not secured by the current value of the property. This process is commonly known as “Lien Stripping” and what it means is that if your second mortgage is no longer secured by the property’s current value, it can be considered an unsecured debt.

Credit card debt, together with other unsecured debt is dischargeable in bankruptcy. This now includes the unsecured mortgage debt, if processed in a chapter 13 proceeding.

You may have to have your property appraised to determine current fair market value. However, it could reduce your mortgage debt significantly, and allow you to own your home that much faster.

If you have debt problems, contact the Law Office of Paul M. Allen. Consultations are free.  We have two offices to serve you: Glendale 818-334-5445 and Cerritos 562-356-9931.

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