| ASSET | EXEMPTION DESCRIPTION | LAW | IMPORTANT CASES & NOTES |
| Homestead | $120,000 of home equity per debtor. No more than 2 lots in City or Village, 160 acres farmland. Sales proceeds protected for 6 months. | §40-101, 40-111, 40-113 | Must reside in the home on the date the bankruptcy is filed to claim exemption. |
| Life Insurance & Annuity Contracts | Life insurance or annuity contract proceeds to $100,000 | §44-371 | Exemption only applies to cash values accrued more than 3 years prior to filing bankruptcy. |
| Fraternal benefit society benefits of up to $100,000 | §44-1089 | ||
| Retirement/Pension | Stock, Pension, or Similar Plan or Contract. | §25-1563.01 | Limited to an amount “reasonably necessary” for the support of the debtor. |
| Tax Exempt Retirement Accounts | 11 U.S.C. §522 | In re Euse (2011) Nebraska debtors qualify for the federal exemption of tax deferred retirement accounts in addition to §25-1563.01. | |
| County Employees | §23-2322 | ||
| Military Disability Benefits to $2,000 | §25-1559 | ||
| School Employees | §79-948 | ||
| State Employees | §84-1324 | ||
| State Patrolmen | §81-2032 | ||
| Judges | §24-710.02 | ||
| Burial Plot | §12-517 | ||
| Crypts, lots, tombs, niches & vaults | §12-605 | ||
| Perpetual Care Funds | §12-511 | ||
| Immediate Personal Possessions | Typically used to protect wedding rings, family photos, jewelry. | §25-1556((1)(a) | |
| Clothing | §25-1556(1)(b) | ||
| Health Aids | Professionally prescribed health aids | §25-1556(1)(f) | Does this cover a wheel-chair van? It has been used this way but there is no case on point. |
| Motor Vehicle | $5,970 per debtor | This exemption is commonly combined with the “Wildcard” exemption of §25-1552 to protect up to $11,940 of equity in vehicle. Temporarily unemployed debtor seeking work eligible for exemption. In re Quintero. | |
| Household Goods & Furniture | $3,582 per debtor in household furnishings, household goods, household computers, household appliances, books, or musical instruments |
§25-1556(1)(c) |
Indexed to inflation. Updated every five years. |
| Public Benefits | Aid to Disabled, Blind, Aged and Aid to Dependent Children | §68-1013 | |
| Workers Compensation Benefits | §48-149 | ||
| Unemployment Compensation | §48-647 | ||
| Social Security Benefits | 11 U.S.C. §407 | In re Carpenter | |
| Tools of the Trade | $5,970 per debtor for tools used in trade, other than a motor vehicle | §25-1556(1)(d) |
Indexed to Inflation. Updated every 5 years. |
| Wages | 85% of wages or pension payment for Head of Household or 75% for all others. | §25-1558 | |
| Health Savings Accounts (HSA) | Protection up to $25,000 except for judgments for qualified medical expenses | §-8-1,131 | |
| Personal Property |
Wildcard Exemption. Protects up to $5,970 per debtor of any personal property, including vehicles, bank accounts, etc. This exemption is indexed to inflation and is updated every five years: Revenue Ruling 2023-1 |
§25-1552 |
This exemption is commonly combined with the motor vehicle exemption of §25-1556 to protect up to $11,940 of equity in vehicle. Protects cash, bank account deposits, tax refunds and any other personal property. Exemption may be used to take back garnishments incurred within 90 days of bankruptcy that exceed $600. |
| Tax Refunds |
$5,970 per debtor. Earned Income Credit |
||
| College Savings Accounts | Education IRA Accounts§529 College Savings Plans | 11.U.S.C. §541(b)(5) & (6) | Protects funds deposited into a qualified college savings account more than one year prior to bankruptcy. |
Additional Child Tax Credit Exemption in Nebraska Bankruptcy Cases
The 8th Circuit Court of Appeals has ruled that the Additional Child Tax Credit is a protected asset in bankruptcy cases filed in Missouri. In re Hardy, case number 14-1181 (2015). Are such tax credits exempt in Nebraska bankruptcy cases?
Missouri law protects a person’s right to receive a “Social Security benefit, unemployment compensation or a public assistance benefit” Mo. Rev. Stat. §513.430.1(10(a). The term “public assistance benefit” is not defined under Missouri law, so the court reviewed the history of the Additional Child Tax Credit, especially the legislative history of recent amendments favoring lower income taxpayers.
In reversing the lower courts, the 8th Circuit found that the Additional Child Tax Credit was indeed a “public assistance benefit” even though some of the credits went to higher income families.
Whether Nebraska’s public assistance exemption applies to the Additional Child Tax Credit is less clear. Nebraska’s public assistance exemption law states the following:
“No person shall have any vested right to any claim against the county or state for assistance of any kind by virtue of being or having been a recipient of assistance to the aged, blind or disabled, aid to dependent children, or medical assistance for the aged. No such assistance shall be alienable by assignment or transfer, or be subject to attachment, garnishment or any other legal process.” Neb. Rev. Stat. §68-1013.
Is Nebraska’s protection of “aid to dependent children” the legal equivalent of Missouri’s protection of a “public assistance benefit?” Does the Nebraska exemption only protect financial aid paid directly by state welfare offices or does it more broadly cover benefits received through a tax credits intended to benefit the elderly, disabled and minor children?
The Missouri public assistance benefit statute is located in the middle of a list of various property exempted in bankruptcy cases, whereas the Nebraska aid to dependent children law is contained in a chapter of laws describing public benefits paid by the state to its poorer citizens. Does this distinction make a difference? Just as Missouri’s public assistance benefit is a somewhat vague and undefined term, the Nebraska protection of aid to dependent children is equally vague and undefined.
Nebraska also protects aid to poor families in another statute:
§ 68-148. General assistance; not alienable; exception:
No general assistance shall be alienable by assignment or transfer, or be subject to attachment, garnishment, or any other legal process, except that a county may pay general assistance directly to any person, corporation, or other legal entity providing goods or services, as described in section 68-133, to the poor person.
This time the Nebraska law speaks to a “general assistance” and not just aid to dependent children. Did the Missouri and Nebraska legislatures anticipate their exemption laws being extended to protect Additional Child Tax Credits delivered through federal income tax refunds? Probably not. But what is clear that both states intended to protect government benefits specifically designed to alleviate the financial burdens of lower income families.
At this time it is unknown how the Nebraska bankruptcy court would rule on this issue. It seems like the better argument is that such tax credits are protected, but debtors are better counseled to file their bankruptcy case after their tax refunds are received until a Nebraska ruling is issued.
Image courtesy of Flickr.
Is the Payday Lending Industry Doomed? CFPB Issuing New Regulations
What if a bar could not serve a customer a second drink until one hour after the first drink was consumed? What if a donut shop could not sell a second serving unless they determined if the consumer would burn off all the calories by the end of the day? What if a tobacco store could not sell a second pack of cigarettes without first taking a lung x-ray? What if casino gamblers could not place successive bets until completing a session with a gambling addiction counselor?
The Consumer Financial Protection Bureau has announced that it will issue a complex set of regulations that are designed to prevent consumers from renewing high interest rate payday loans over and over again. The impact on the payday lending industry should be devastating.
Today we are taking an important step toward ending the debt traps that plague millions of consumers across the country,” said CFPB Director Richard Cordray. “Too many short-term and longer-term loans are made based on a lender’s ability to collect and not on a borrower’s ability to repay. The proposals we are considering would require lenders to take steps to make sure consumers can pay back their loans. These common sense protections are aimed at ensuring that consumers have access to credit that helps, not harms them.
The CFPB proposals target consumers loans that must be paid back in full within 45 days. Most payday and auto-title loans are due within two weeks, and CFPB research indicates that 4 out of 5 payday loans are rolled over within two weeks. According to the bureau, what starts off as a short-term loan usually turns into a long-term “debt trap.”
Lenders making high interest rate payday loans would have to comply with one of the two following regulations:
- Debt Trap Prevention:
- Lenders would have to determine if borrowers could repay the loans at the outset.
- Lenders would have to collect paycheck stubs and tax returns to determine the borrower’s income.
- Lenders would have to document borrower’s major obligations, repayment history and credit profile.
- A 60-day “cooling off” period between loans would be required.
- To make 2nd and 3rd loans the lender would have to obtain additional documentation to verify if the consumer could repay the loan.
- Debt Trap Protection:
- Lenders would be limited as to how many loans they could extend to a consumer in a one year period.
- Lenders could not keep consumers in debt on short-term loans for more than 90 days in a 12-month period.
- Rollovers would be capped at two – three loans total – followed by a mandatory 60-day cooling-off period.
- The second and third consecutive loans would be permitted only if the lender offers an affordable way out of debt.
The impact of these regulations on the payday lending industry would be immediate and substantial. The very notion of determining whether a payday borrower can repay the debt is absurd. The proposed regulations are not designed to “regulate” the industry but to destroy it. When 80% of the industry’s customers renew their loans every two weeks can no longer receive more than 3 rollovers in a year, the impact on the industry will be significant. The proposed CFPB regulations will weed out many lenders and certainly reduce industry profits in general. When these reforms roll out sometime next year, the payday lending industry will cease to exist as we know it today.
Image courtesy of Flickr and Jason Comeley.
Student Loans Discharged as Undue Burden: New Hope for Borrowers
On February 25, 2015, the Nebraska bankruptcy court issued a new student loan opinion that should lift the hopes of debtors overburdened by student loans. See In re DeLaet, Case #13-04032.
What is striking about this opinion is that the court granted a discharge of student loans to a relatively young debtor in good health. The facts of the case are as follows:
- The debtor is 28 years old and is in good physical health.
- The debtor had no dependents and was engaged to be married.
- She graduated from college in 2009 with a degree in Fine Arts and English.
- She owed $169,711 of student loans.
- $27,045 of her loans were Federal Student Loans and those loans were enrolled in an Income Based Repayment (“IBR”) plan with the Department of Education. None of the federal student loans were discharged.
- $142,66 of the loans were Private Student Loans (i.e., not guaranteed by the government).
- The debtor was unable to find work in her field of study and testified that she submitted hundreds of job applications.
- The debtor eventually found employment as a child welfare case worker earning $17.68 per hour.
- There were no gaps in the debtor’s employment history. She consistently held jobs even if it was outside her area of education and took part-time jobs earning minimum wage.
- The debtor did make payments on the private loans and sought out payment options with the private loan providers but eventually was unable to afford the payment.
- The private student loan providers told the debtor that she was “out of options” and simply had to earn more money.
- The debtor’s mother had co-signed her private loans.
- The debtor’s fiance was reluctant to marry until the student loan problem was resolved.
- The debtor sought discharge of her private loans under Bankruptcy Code section 523(a)(8).
A debtor seeking discharge of a student loan must prove that payment of the loan would impose an “undue hardship” on the debtor or the debtor’s family. The 8th Circuit Court of Appeals applies a “Totality of the Circumstances” test to determine if an undue hardship exists. Courts must examine the following factors when reviewing student loan cases:
- The debtor’s past, present, and reasonably reliable future financial resources.
- The debtor’s reasonable and necessary living expenses.
- Other relevant facts and circumstances
- The debtor has the burden of proving undue hardship by a preponderance of the evidence. The burden is rigorous.
- If the debtor’s reasonable future financial resources will sufficiently cover payment of the student loan debt – while still allowing for a minimal standard of living – then the debt should not be discharged.
Educ. Credit Mgmt. Corp. v. Jesperson (In re Jesperson), 571 F.3d 775, 779 (8th Cir. 2009) (citing Long v. Educ. Credit Mgmt. Corp. (In re Long), 322 F.3d 549, 554-55 (8th Cir. 2003).
A thorough review of the debtor’s monthly income and expenses revealed that she had $214 left after paying basic living expenses. She negotiated an Income Based Repayment plan with the Department of Education to pay $215 per month towards the $27,045 federal loan, leaving nothing left over to pay her private loans.
What is so striking and encouraging about this court ruling is how absolutely practical and realistic it is. Debtors are often denied their discharge application based on unrealistic expectations of what it costs to live in a modern era. For example, even though the creditor complained that the debtor spent $32 on internet, $93 on cell phones, $12 on recycling and $50 on miscellaneous expenses, the court balked at the suggestion that these expenses were unnecessary:
It is silly to suggest that Internet and cell phone expenses are not reasonable and necessary in this digital age. I find no fault with this category of expenses.
Student loan opinions are frequently characterized as being unrealistic and arbitrary. Courts often seem out of touch with the economic realities facing younger families, but this decision stands out for its realism:
Ultimately, this case boils down to the Defendants’ belief that, with time and a willingness to relocate, Ms. DeLaet might be able to find a better-paying job. Well, that might be true: given time and a willingness to relocate, she “might” be able to find a better-paying job – that is probably true of any employed person – but that is certainly not a reasonably reliable future financial resource. Also, what about the payments that are coming due in the meantime? The numbers are what they are – at this time, she does not have the net income to pay the loans owed to the Defendants. So, the debt just keeps getting larger and larger with default interest and capitalization and the Defendants can sue her to try to collect their debts.
Wow, we can judge cases by what is presently realistic, not by what “might” be true in the uncertain future. The numbers are what they are. Let’s talk about what is actually happening, not about what might happen if the debtor was somebody else.
This is an encouraging opinion. There is new hope for the honest but unfortunate debtor.
8th Circuit Protects IRA Annuity Contracts
The 8th Circuit Court of Appeals has ruled that retirement funds rolled over from an Individual Retirement Account to purchase an annuity are exempt from the bankruptcy estate. In re Miller (No. 13-3682). Prior to filing bankruptcy, Joseph Miller, rolled over $267,319 from his IRA account to purchase an annuity contract from Minnesota Life Insurance Company. The annuity was to pay the debtor $40,497.95 for the next 8 years. Although it is clear that funds held in IRA accounts are exempt, the trustee argued that the funds lost that protected status when the annuity was purchased because the annuity did not meet the tax qualification rules of Internal Revenue Code Section 408.
Section 522(b)(3)(C) of the Bankruptcy Code provides that funds which are exempt from federal taxation are thereby made exempt from the claims of creditors. Such funds are not part of the “bankruptcy estate.”
The Chapter 7 Trustee in Miller argued that the rollover of funds from the IRA account exceeded the $6,000 annual premium limit imposed by IRC 408(b)(2)(A), and hence the fund were no longer exempt from taxation or protected in bankruptcy. The 8th Circuit rejected this argument by pointing out that there is a difference between a “rollover contribution” and a “premium payment.” The Court ruled that “a rollover contribution is distinct from a premium.”
In a similar case, the Massachusetts bankruptcy court also ruled that funds rolled over to an IRA annuity are exempt from the bankruptcy estate under 522(b)(3)(C). In re LeClair, 461 B.R. 86 (Bankr. D. Mass. 2011).
Important facts about IRA Accounts in Nebraska Bankruptcy Cases:
- In addition to the federal retirement exemption statute of 522(b)(3)(C), Nebraska has its own exemption statute protecting retirement funds. Neb. Rev. Stat. 25-1563.01. So, if the federal exemption does not apply it may be possible to protect the retirement account under Nebraska’s law.
- Inherited IRA accounts are not protected in bankruptcy.
- IRA accounts which allow the debtor to borrow against the account may be at risk in bankruptcy.
If in Doubt file Chapter 13:
Sometimes it is difficult to determine if an account is exempt from federal taxation and, as a result, whether the account is protected in bankruptcy. Debtors with sizable retirement savings simply cannot risk losing those funds in Chapter 7. Keep in mind, Chapter 7 trustees are paid on commission–they earn bonus income if they uncover unprotected assets worth selling. If there is any real doubt as to whether an retirement is account is protected in Chapter 7, the debtor is best advised to file for Chapter 13 and agree to pay back some of their debt over a 3 to 5 year payment plan. Chapter 13 trustees are not empowered to liquidate assets and payment plans are typically based on what a debtor can really afford to pay back. If in doubt, file 13.
Image courtesy of Flickr and 401kcalculator.org
Making the List: How to Figure Out What You Owe
A key to getting good results in a bankruptcy case is to make sure that each and every creditor receives notice of the bankruptcy filing. Failure to notify a creditor may lead to disastrous results, including the debt not being discharged or the bankruptcy case itself being dismissed for intentional withholding of information.
About the first question your bankruptcy attorney will ask this: How much do you owe? It sounds like a simple question, but the common answer is “I don’t know–I don’t even want to know.” There comes a point in the debt cycle that a person stops opening the mail, answering the phone and no longer bothers to figure out who or how much they owe.
How do you figure out what you owe when all the paperwork–the bills, the collection letters, the court summons–is gone? How can you even determine if you should file bankruptcy if you don’t have a list of what you owe?
- Get a Credit Report. There are lots of commercials advertising free credit reports, but the only really free credit report a person can obtain without having to sign up for some type of credit monitoring service is found at www.AnnualCreditReport.com. Under federal law, the major credit reporting agencies must provide one free copy of your credit report each year. Get all three reports offered by TRW, TransUnion and Equifax.
- Organize your paperwork. Start opening the piles of mail with all those nasty “Past Due” notices. Open those letters from collection agencies and match them to each creditor. Some clients use separate folders for each creditor or debt.
- Search Court Records Online. Most court records are now online and can be searched for free or for a minimal charge. Here is the link to Nebraska’s online court search (which requires a subscription) and the free Iowa online search portal.
- Tax Debts. Not sure if you owe taxes or even if you filed all required tax returns? The most direct way to solve that question is to call the IRS at 1-800-829-1040. Don’t be afraid to call. Most people answering the IRS phones are very nice. If by chance you speak to a rude person just hang up and call again. If you suffer from Telephobia, then use IRS form 4506-T to request an Account Transcript of each tax debt you owe. An Account Transcript is basically a time diary of each tax you owe showing when a tax return was filed, who filed the return (the IRS or you), the date the tax was assessed, and the balance presently owed. Since many income taxes become dischargeable three years after they were due (or two years after they were actually filed, whichever date is later), it is critical for the bankruptcy attorney to know exactly if the tax returns were filed and when they were filed. Account Transcripts provide that critical information.
- Write Name & Address of potential creditors. There is no penalty for listing a debt you are unsure about. In fact, the bankruptcy creditor list can actually state whether a debt is uncertain. If you don’t have a bill for a medical service performed a year ago and you are not sure if insurance paid all or some of the debt, list the debt anyway. All your bankruptcy attorney needs to list a debt is the Name and Address of the creditor–they don’t need the actual bill. If in doubt, list the debt.
Should you file bankruptcy? Is the debt total too small to justify such a drastic action? If not, what type of bankruptcy should you file? Chapter 7, 13, 11 or 12? The qualify of the advice you receive will largely depend on the amount and nature of the debt owed. Make a good list.
Image courtesy of Flickr and sfgirlbybay.
Private Student Loan Discharge: Are Bankruptcy Courts Getting it Wrong?
New York attorney Austin C. Smith writes an important article in the American Bankruptcy Institute under the heading The Misinterpretation of 11 U.S.C. 523(a)(8) suggesting that federal courts have been misapplying the student loan exception to discharge since 1990.
Section 523(8) of the Bankruptcy Code provides that bankruptcy does not discharge an individual debtor from any debt for:
(A)(i) 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
(ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or
(B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986.
Prior to the Bankruptcy Reform Act of 2005, private student loans were dischargeable in bankruptcy. The change in the bankruptcy law in 2005 was to add subsection (B) above to provide that a Qualified Education Loan as defined by Section 221(d)(1) of the Internal Revenue Code was excepted from discharge. In all other respects, the law remained the same.
The error federal courts are making, according to Smith, is when they deny discharge to private student loans because they are “educational benefits” under section A(ii) when in fact section A(ii) does not address private student loans. Section A(ii) existed prior to the reform act of 2005, so to claim that any loan that confers an educational benefit is excepted from discharge is to argue that private student loans were not dischargeable prior to 2005, and that simply is not the case.
The term “educational benefit” is being interpreted so broadly that it makes the addition of Section (B) unnecessary. Indeed, how could any private student loan not also be an educational benefit? Is not any loan to a student also a benefit to their education?
According to Smith, the courts have lost track of the history of 523(a)(8). In 1990 Congress amended the law to deny discharge to any obligation to repay an educational benefit, scholarship or stipend. The amendment was spurred by an 8th Circuit case of U.S. Dept. of Health and Human Services v. Smith in which the bankruptcy court discharged the debt of a medical student who accepted a scholarship on the condition that he work in a “physician shortage” location for a certain number of years. The law was amended in 1990 to prevent discharge of these conditional scholarships. The 1990 amendment prevented discharge for any debt:
(a)(8) 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 for an obligation to repay funds received as an educational benefit, scholarship or stipend.
Smith argues persuasively that the 1990 amendment was never designed to protect loans. Conditional scholarships were the target of the 1990 amendment.
[A] growing number of courts have realized the difficulty of the resultant logic: Interpreting “educational benefit” to except from discharge any loan that in any way facilitates education renders the remaining provisions of the statute meaningless. If any money lent to any person for any educational purpose is protected, then the remaining provisions of § 523(a)(8) — provisions carefully crafted to protect federally insured loans, nonprofit loans and other loans qualified by the IRC — become superfluous.”
What is a Qualified Educational Loan under Internal Revenue Code 221(d)(1)?
A QEL is “any indebtedness incurred by the taxpayer solely to pay qualified higher education expenses. The term “qualified education expenses” is defined as “the cost of attendance at an eligible educational institution.” Cost of attendance is “tuition, books, and a reasonable allowance of room and board as defined by the institution.” Private loans in excess of this limit are not “qualified” (i.e., they may not be taken as deductions on a tax return) and they are not protected from the bankruptcy discharge.
The problem is, federal bankruptcy courts are, according to Smith, bypassing the required tax analysis demanded by IRC 221(d)(1) and just declaring private loans nondischargeable educational benefit.
The most extreme example of this misapplication of the student loan discharge law in found in the case of Carrow v. Chase Loan Serv., 2011 Bankr. Lexis 823 (Bankr. N.D. 2011). Despite the fact that the debtor received the maximum federal loan amount for which she was eligible and thus all the private loans issued by Chase Bank could not be certified because they were beyond the debtor’s eligibility, the court nevertheless declared the debts to be nondischargeable because they were clearly an “educational benefit.”
Contrast the Carrow opinion with the opinion of the 7th Circuit in case of In re Oliver, 499 B.R. 617 (7th Cir. 2013). In that case the 7th Circuit held that a debtor’s failure to repay tuition did not constitute a qualified educational loan and therefore ruled the tuition debt discharged. The bankruptcy court for the Northern District of California made a similar decision recently. Inst. of Imaginal Studies v. Christoff, 310 B.R. 876, (N.D. Cal. 2014).
The Take Away:
Bankruptcy attorneys need to spend more time determining whether the private loans their clients are facing are Qualified Educational Loans under IRS 221(d)(1) and, if not, bringing Adversary Proceedings to determine whether those debts are excepted from the bankruptcy discharge. Special attention must be paid as to whether the private loans exceed the school’s certified cost of attendance.
Image courtesy Flickr and iwearyourshirt.
New Nebraska Student Loan Case: No Discharge When Income-Based Options Exist
Obtaining a discharge of student loans is a rare occurrence these days, and when the loans in question are exclusively Federal loans, the chances of discharging the debt are slim. The Nebraska bankruptcy court reinforced that reality in an opinion issued on January 8th. See In Re Harris, Adversary Case #14-4001.
A disturbing trend in student loan litigation continues in this case of a debtor filing a Pro Se complaint—that is, to file a complaint without any attorney representation. Most of the case law in student loan cases—and perhaps in consumer law in general—is frequently obtained by individuals who cannot afford to pay an attorney and so they opt to represent themselves. There would probably be a lot more meaningful case law in this area if attorneys would manage the litigation, but as of yet there is no effective device to pay for the expensive litigation cost involved in such cases, a very unfortunate reality.
The facts:
- Age: The debtor is 50 years old.
- Dependents: The debtor supports a 19 year old daughter with no disabilities.
- Income: The debtor earns $38,000 per year but had earned as much as $55,000 per year at a previous job.
- Physical Condition. No mention of any significant medical issues were mentioned.
- Marital Status: Single
- Federal Student Loan Balance: $32,643
- Private Student Loan Balance: $0
- Income-Based Repayment Options: 10-year repayment plan based on income was available since the debtor worked for a non-profit hospital organization.
The Law:
- Bankruptcy Code Section 523(a)(8) provides that a bankruptcy will not discharge any debt for student loans “unless excepting such a debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents
This litigation was doomed from the start. After going through a list of the reasonable expenses of the debtor, the court zeroed in on the key factor of the case: the debtor was eligible for a 10-year Income Based Repayment (“IBR”) since all the loans were Federal loans and she was employed by a nonprofit employer. Under the Public Service Loan Forgiveness Program (“PSLFP”), administered by the Department of Education, federal student loans may be forgiven after a debtor makes 120 qualifying payments while employed by a government or nonprofit employer. 34 C.F.R. § 685.219(b). Also, under the PSLFP program, any forgiven loan balance at the completion of the program is not subject to taxation—no 1099 Forgiveness of Debt form will be issued. Since the debtor was able to complete this program by age 60, the court declined to discharge her student loan debt.
It is important for debtors considering an application for a Hardship Discharge of student loans to classify their loans into two separate categories: (1) Federal Loans and (2) Private Loans. Since Federal loans have increasingly flexible payment terms available, it is rare for bankruptcy courts to discharge these obligations in the absence of significant long-term medical ailments suffered by the debtor or members of the debtor’s household. Private student loans, are more commonly discharged in bankruptcy proceedings, especially when lenders fail to offer debtors meaningful repayment options.
Image courtesy of Flickr and Thisisbossi.
Bucket List Budgeting–Why Everyone Need a Fun Fund
“Wealth is the transfer of money from the impatient to the patient.” Warren Buffett
Deborah Sutton writes an excellent article in The Desert News about budgeting for the fun things in life. The word “budget” has a negative vibe to it. To budget is to deny yourself—to live within your means and that implies not enjoying as much fun as when you don’t live on a budget. Living on a budget is about as much fun as going on a celery and oatmeal diet.
The human brain has a lot psychological resistance to the entire idea of budgeting and dieting,” said financial psychologist Brad Klontz. To purposely cut out enjoyable things creates a sense of depravation and it leads to overspending and overeating.
According to Klontz (@DrBradKlontz), establishing a budget with a “Fun Fund” is essential in order to motivate a person to stick to the spending plan.
When people get really excited about a certain goal, like a vacation or a new TV, saving is almost effortless. It becomes fun to do it,” said Klontz.
Nobody is going to stick to a high fiber diet that has no flavor, no matter how healthy it is. Burn out is the common problem. The same is true with financial planning—there must be a constant pattern of rewards to make the process palatable. There should be short-term rewards and long-term rewards as well.
The key to making the Fun Fund work is to establish separate bank accounts that are funded with direct deposits each payday. Most payroll departments can directly deposit into 3 or more accounts. If not, your bank can automatically move money from one account to another each payday if you request it.
Another key to making the Fun Fund work is to keep the contribution small. All it takes is $20 per week to be able to purchase a $500 television in 25 weeks. To stay motivated you need to be rewarded. You need to make getting out of debt a game–a fun game. It is also okay to have more than one Fun Fund so that you can finance short-term and long-term rewards at the same time.
Getting out of debt in a marriage takes teamwork. Opposites seem to attract, and most marriages have a miser and a spender personality. The trick to establishing true teamwork is to make sure that each spouse is getting what they need, and that’s never going to happen unless the spender spouse sees a reward for good behavior. Nobody is going to stick to a budget that is all work and no play.
Changing habits is never easy, and the hardest part is the beginning. Learning how to prepay for the fun things is life is a lesson worth learning.
Image courtesy of Flickr and americangirlo77.
A Failure to Prioritize: Tips for Creating a Real Personal Budget
I meet too many smart clients who earn terrific income but their financial life is a mess. What’s more, their cell phone bills are paid in full each month, the cable bill is paid, the dog groomer was paid and even the pizza delivery guy was paid a tip, but despite all their hard work and income somehow the mortgage did not get paid and a foreclosure sale is pending. When you ask why they are 10 payments behind on the mortgage even though they earned enough to pay it in full each month they answer that some emergency or unplanned expense came up—medical bills, car repairs, etc.—and then it began to snowball from there.
When I interview most married clients they describe their financial payment system like this. I love you. You love me. Since we love each other so much let’s get married, have kids, and open a joint bank account. Let’s work hard and deposit all our money into that one account. Here is your debit card and here is mine. All month long we use the debit cards and then at the end of the month let’s meet up at the kitchen table and pay the bills. Of course, the problem is that this was a hard month. Well, the truck broke down and little Tommy needed school pictures and we had that terrible vet bill when the dog decided it could fly. There just isn’t enough money left to pay the mortgage. Yes, what we have here is a failure to prioritize.
The fact is, some bills are more important than others. Paying the mortgage is more important than buying pizza on Friday night. We all know what these priorities are: Mortgage, Utilities, Insurance, Car Payment, House Taxes, Cell Phones, etc. There are just some bills that if you don’t pay them they kick you in the behind.
Here is the trick that can save your finances and perhaps your marriage as well. Add up all the priority expenses you must pay each month and then figure out how much they come to each paycheck. For example, if you pay $1,000 for rent, $300 for utilities, $400 for a car payment, $100 for auto insurance each month, then your monthly priority figure is $1,800. If you are paid twice a month, then you need to set aside $900 per paycheck to pay the priority bills.
Now read this: Do not mix your priority money with the rest of your money. Take the first $900 of earnings on payday and deposit it into a separate bank account. Most employers will directly deposit your paycheck into several accounts. Open a new bank account and tell your payroll department to deposit the first $900 of each paycheck into the new account. You don’t want debit cards for this account. In fact, it is best if you don’t even request paper checks. Learn how to use the free on-line BillPay service offered at most banks. When the next paycheck arrives later in the month you should have all $1,800 required to pay the priority bills. Set up the BillPay service to automatically pay your priority bills on time each month. See how simple this is? Money automatically is deposited each payday and is automatically mailed to creditors each month. No more late fees. No more defaults.
The basic idea here is to build a wall between your money—divide and conquer—by keeping the priority bill money in a separate account from the money you use to pay daily expenses. Some folks call this “Envelope Budgeting” because they actually put cash into separate envelopes each payday to pay their important bills. It’s the same concept. Divide the money. Do not comingle the funds used to pay your most important bills with money used for day to day living.
The basic idea here is to build a wall between your money—divide and conquer—by keeping the priority bill money in a separate account from the money you use to pay daily expenses
Writing a budget on paper is not budgeting. Unless the budget takes action it is no more a budget than an architect’s blueprint is a home. To budget means to divide, and not just on paper but in a physical way. You need a payday action plan. Where does the most important money you earn go on payday? Into a joint account commingled with other less important money or into a separate purpose-driven account? By utilizing separate bank accounts funded directly on payday with specific spending purposes you can take control of your money and ensure that your financial goals are achieved.
Image courtesy of Flickr and Simon Cunningham