Although student loan debt can almost never be discharged trough bankruptcy, a new program which went into effect on July 1, 2009 called Income-Based Repayment (IBR) may provide some relief for those who cannot afford high monthly federal student loan payments.

The U.S. Bankruptcy code at 11 U.S.C. 523(a)(8) specifically deems student loan obligations as “nondischargeable debt” (i.e., debt that cannot be discharged through a bankruptcy filing) absent a showing of “undue hardship”, which, as contemplated by the code, is a nearly impossible standard to prove.

Fortunately, the IBR program may provide some relief. IBR cannot be used to obtain an outright discharge of student loan debt, but it can help borrowers keep their loan payments affordable with payment caps based on income and family size; often capping IBR loan payments at less than 10 percent of their income household income. IBR will also forgive remaining debt, if any, after 25 years of qualifying payments.

IBR is available to federal student loan borrowers in both the Direct and Guaranteed (or FFEL) loan programs, and covers most types of federal loans made directly to students, but not those made to a student’s parent.

The IBR program requires that participants be qualified based on income, and to be eligible, it would take more than 15 percent of your income above 150% of federal poverty level to pay off your loans on a standard 10-year payment plan. IBR uses a sliding scale to determine your adjusted federal loan repayment amounts. If you earn below 150% of the federal poverty level for your family size, your required loan payment will be $0. If you earn more, your loan payment will be capped at 15 percent of your income above that amount. In most cases, that figure works out to less than 10 percent of your total income. A useful calculator to determine your eligibility is available here.

In some situations, your reduced payment under IBR may not cover the interest on your loans. If so, the government will pay that interest on your Subsidized Stafford Loans for your first three years in IBR. After three years and for other loan types, the interest will be added to the total amount you owe. While your debt may grow if your IBR calculated payments are calculated to be lower than the monthly interest, anything you still owe after 25 years of qualifying payments will be forgiven.

While student loan debt remains essentially nondischargeable, the IBR program can be used obtain meaningful relief from individuals seeking to reduce student loan payments to qualified participants.

If you are struggling with student loan debt, mortgage debt, credit card and consumer loan debt, the IBR program can be one part of a comprehensive legal strategy to address and resolve financial problems.

In addition to providing answers to commonly asked questions on our website, we also try to provide links to other resources where you may find further information. These links include the Court websites, other government websites, and organizations that we either belong to or may have further resources that could be useful to the public.

In addition we will often include in our Twitter accounts, links to blog posts from other blogs that we believe you might find interesting. You can click here to connect with Attorney Trask or Attorney Kelsey on twitter.

One particular resource that you should review if you are considering bankruptcy is the Bankruptcy Law Network, where we often find great blog posts on numerous questions involving bankruptcies. Here are just a few examples:

San Diego: New Ruling Allows Student Loans to be Discharged in Chapter 13! http://ff.im/-4nJBn

How Do I Find a Good Deal on a Secured Credit Card? http://ff.im/-4FnH5

Do I have to be a citizen to file a bankruptcy case? http://ff.im/-4hCit

How to Value a Car for Chapter 13 Plan “Secured Claim” Purposes http://ff.im/-4a82w

How Long Will My Chapter 7 Take? http://ff.im/-46Odg

What Happens If A Creditor Contacts Me After My Bankruptcy? http://ff.im/-3LIbV

“Stealth” Plan Provisions: Confirmation of Chapter 13 Plan Did Not Alter Domestic Support Obligation http://ff.im/-3uuIL

Question: What other factors should I consider when deciding when I should file for Bankruptcy?

Factors regarding the need to obtain an automatic stay will likely be dictated by your creditors, not you. The automatic stay is a useful tool in temporarily stopping foreclosure proceedings brought by your mortgage holder(s), as well as collection efforts, collection calls and lawsuits filed by your creditors, if any. This foreclosure and debt collection process generally takes a few months, not a few days, and the benefit of the automatic stay can create some additional time for the debtor to deal with logistical issues associated with preparing the bankruptcy petition, appraising assets, selling real property or finding new housing, if necessary.

In order to file for bankruptcy under any section of the Bankruptcy code (Chapter 7, 11, or 13), your federal income taxes must be filed up to the current year (2008). Other documents are necessary for preparing the bankruptcy petition and schedules, such as a credit report, current credit card statements, bank statements, and income information. If this information is not immediately available, it will take some time to collect and review. If you believe a bankruptcy filing is on the horizon, your best bet is to contact an attorney for a bankruptcy planning consultation, then begin preparing the information needed to file.

Equally important in deciding when to file is a debtor’s own ability to handle the current situation, balanced against their need to make immediate changes. Some debtors will need time to prepare for relocation to an apartment or smaller home, whereas others will be anxious to take action to save their house or get a fresh start. These factors are unique to each case, and should be discussed with an attorney before filing your bankruptcy petition.

I have been out of work for some time, my bills have gotten out of hand, and I need to file for Bankruptcy. I may be getting a new job soon. Will my new job affect my Bankruptcy filing?

If a would-be Chapter 7 debtor were to see a significant change in their income before filing a Chapter 7 bankruptcy, there is a risk that the debtor would no longer qualify under the Chapter 7 Means Test, and must file under Chapter 13. While Chapter 13 Bankruptcies are often effective in allowing a debtor to cure mortgage arrearages and keep their house, if the debtor’s intention is to pursue liquidation of all assets (including the house) or does not have real property to protect, your increased income would be required by the U.S. Trustee to fund the Chapter 13 plan, and not be used for other costs/expenses. In this case, a Chapter 7 Petition should be filed before any increase in income.

Obligations that are considered by the Bankruptcy Court to be “domestic relations orders” are non-dischargeable and priority debts. They are defined in U.S. Bankruptcy Code Title 11 Section 101 14(A).

In summary, the term 'domestic support obligation' includes child support, alimony, or other support payment, and can include payments for housing, health insurance or other costs paid on behalf of a spouse or ex-spouse. If payments are owed and in arrears then the 'domestic support obligation may also include interest and the interest is non-dischargeable as well.

It is very important when preparing a Chapter 7 Bankruptcy to be aware that these debts will not be discharged, i.e. will still be owed after the bankruptcy.

It is likewise very important when preparing a Chapter 13 Bankruptcy to be include the 'domestic support obligation' in the Chapter 13 plan as a priority debt and to be clear about how arrears will be paid versus how the ongoing payment reduces the filer's available income. If these issues are not addressed specifically, the Bankruptcy Court may find that the Plan is not binding against your ex-spouse as was the case in In re Owen, 2009 WL 693161 (Bky.E.D.Tenn. March 13, 2009). For an excellent explanation of what happened in that case check out the following article on the Bankrutpcy Law Network: "Stealth" Plan Provisions: Confirmation of Chapter 13 Plan Did not Alter Domestic Support Obligation".

Often people who are deep in debt, are more afraid to confront the reality of their situation than anything else. That fear can lead people to do things they never thought they would do: to stop opening their mail, to stop answering the phone for fear of dealing with bill collectors, or even to lie to their family and friends.

It is important to understand that you are not alone. You are not the first person to go through a crisis and there are resources out there to help you.

To read about how even an economic reporter fell into the trap of overusing credit check out this New York Times article: http://tinyurl.com/qukwpb.

When filing for Bankruptcy certain property of the debtor is exempt from the Bankruptcy estate, which means that it is not subject to being taken by the Trustee and used to pay your debts.

When filing a Bankruptcy as a resident of Massachusetts a debtor can choose to use the exemptions allowed under either State or Federal law, but you must choose one or the other. There are many exemptions that are similar under both schemes, such as the exemption of most qualified retirement plans. A table of the maximum exemptions as of April 14, 2009 in categories where the state and federal exemptions differ significantly can be found here. Please note that these figures are subject to change and you should consult with an attorney to obtain the most current figures and to decide which option you should choose.

If I am facing both divorce and bankruptcy, should I file for bankruptcy before, during, or after filing for divorce?
Answer: When a bankruptcy is filed, all lawsuits against the debtor are immediately stayed. If a bankruptcy is filed during a divorce case, the automatic stay applies to the divorce case as well. The divorce Judge may proceed on issues of child support, alimony and custody of children, but may not make any decisions relating to the division of assets and debts without the permission of the bankruptcy court, and any decisions made by the divorce Judge are reviewable by the bankruptcy Judge.
Finishing the divorce action before beginning the bankruptcy filing allows the divorce action to proceed to its natural conclusion without interruption by the bankruptcy court. It is still possible, though, for the Bankruptcy Court to undo the Agreement or Judgment of the Divorce Court if it appears the parties were attempting to defraud creditors (for instance if all of the assets were transferred to the non-debtor spouse rather split equitably). Despite this risk, it is unlikely if the division is equitable that there would be any issue, and both cases would like proceed more smoothly one after the other, rather than simultaneously.
Likewise, there are certain circumstances where it might make more sense to file for bankrutpcy prior to filing the divorce. For instance in a case where both spouses had significant debt, they can file as joint debtors so long as they are still married.
Even if only one of the parties intended to file, there is a recent case which suggests that some of the protections for the debtor extend to the non-debtor spouse (protections that might not apply if the parties are already divorced). For an excellent explanation of this case visit the Bankruptcy Law Network post titled: Actions Taken Against Non-Debtor Spouse Violate Discharge Injunction.
You should consult with an attorney that is familiar with both bankruptcy and divorce law to determine the best course of action in your specific case. The facts of your case, such as the terms of the proposed property settlement or transfers of property under the agreement may be hurtful to your bankruptcy case if you plan on filing for bankruptcy shortly after the conclusion of your divorce matter. Having an attorney that can explain the bankruptcy consequences of your decisions during your divorce will be critical in helping you get your fresh start.

When a bankruptcy is filed, all lawsuits against the debtor (the person filing the bankruptcy) are required to immediately stop. This is called the "automatic stay." If your spouse files for bankruptcy during your divorce case the automatic stay applies to the divorce case as well.

The divorce Judge may proceed on issues of child support, alimony and custody of children, but may not make any decisions relating to the division of assets and debts without the permission of the bankruptcy court, and any decisions made by the divorce Judge are reviewable by the bankruptcy Judge.

You should consult with an attorney that is familiar with both bankruptcy and divorce law and is admitted to practice in federal court because it may be neceesary to file Motions in the bankruptcy court to ensure that your rights to marital property are protected.

We recently posted this answer on our Bankruptcy Blog and thought that it could be useful to our family law audience as well.

Under the current Bankruptcy Code, a debtor who files a Chapter 7 bankruptcy will not receive a discharge from debts defined in paragraph 5 of 11 U.S.C. § 523(a) as "domestic support obligations" or debts under 11 U.S.C. § 523(a)(15) owed "to a spouse, former spouse, or child of the debtor and not of the kind described in paragraph (5) that is incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record, or a determination made in accordance with State or territorial law by a governmental unit."

"Domestic support obligations" are defined by 11 U.S.C. § 101(14A) as debts "in the nature of alimony, maintenance, or support" owed to a spouse, former spouse, or child.

These limitations on dischargability therefore apply to both child support and alimony, as well as other potential obligations under a divorce decree, such as agreements to pay joint debts or obligation to pay an ex-spouses attorney fees.

If your ex-spouse does file for bankruptcy, you may need to file responsive pleadings and argue this issue in front of a Judge if the debtor seeks to discharge the debt. If you fail to dispute the discharge, that could result in the debt being discharged. Though this is very unlikely, if you are not sure how to protect your rights you should consult with an attorney.

From the Washington Post:

The Supreme Court ruled yesterday that a financially troubled businessman lost an important right under the federal bankruptcy code because he failed to disclose all of his assets as the law requires.

In a 5-to-4 decision in Marrama v. Citizens Bank of Massachusetts, the court said Robert Marrama of Gloucester, Mass., could not convert his bankruptcy case from one chapter of the code to another, as the law ordinarily allows.

The reason, the court said, stemmed from his failure to disclose a Maine vacation home placed in a trust. Marrama, who operated a flooring company, listed the value of his interest in the property as zero, according to papers in the case

The United States Department of Justice has released the Census Bureau State Median Family Income By Family Size figures for means test calculations on Bankruptcy Cases filed on or after November 1, 2009. The new figures are available on the U.S. Trustee's website here.

Declaring Bankruptcy is a time-intensive and technical process involving financial research, preparation of documents and schedules, and attention to detail.

This is NOT how one "Declares Bankruptcy".

If you would like to learn more about the correct way to declare bankruptcy, contact Attorney Matthew Trask or Attorney Justin Kelsey for a free one-hour consultation at (508) 655-5980.

(Thanks go to Jonathan Eaton and NBC's "The Office" for providing the inspiration for this Blog).