My friend Gene Melchionne trotted out the brutal numbers on repayment of a student loan for four years at a private university.  No matter how enriching the education, the loan may be the financial death of the graduate.

But what sorrows me are the parents of those same students who have guaranteed or cosigned those loans.  The co signor is equally liable with the student for repayment of the debt. The cosignor may have no control over whether the loan gets deferred (with interest during deferment added to principal) or whether the student honors the committment to pay.  On Gene’s numbers, you can see in an instant why the student borrower might not be able to pay, even assuming the graduate got a decent job.  But the parents remain equally liable.

The cosigned loan is still a non dischargeable debt should the parents file bankruptcy.  I’m seeing a fair number of folks in their late 50′s and 60′s, nearing retirement, or enduring unemployment, and their kid’s student loan is a millstone around their neck.

Frankly, I’m waiting for a stalwart couple of a certain age for an opportunity to argue to a bankruptcy judge that repayment of the offspring’s student loans at this point in the parents’ life is an undue hardship.

Image courtesy of besighyawn.

My post on what to do when you can’t make your Chapter 13 payments on Bankruptcy Law Network, written for consumers,  sparked a couple of responses from my lawyer colleagues there.  Chip Parker observed he needed a refresher on how-to, since hardship discharges hadn’t been see much in the last decade in Florida.

Turns out my other bud, Kent Anderson, had written on the showing necessary for a hardship discharge for Lexis.

The exchange and cross pollination that is available to us as lawyers and consumers via the internet never ceases to energize me.

Dismissed and discharged. These two terms are at the opposite ends of the scale of results in bankruptcy, yet they are often confused.

A debtor gets a discharge and is relieved of the legal liability for the dischargeable debts in the bankruptcy case.

A dismissal means the bankruptcy case was terminated short of the discharge.  It could be dismissed at the request of the debtor or upon the motion of the trustee or the court.  But it means that the case has been close without a discharge.

A case in which a discharge is entered will be closed by the court when all the legally necessary steps have been met, such as the trustee’s report.

Can I keep a credit card out of my bankruptcy for future emergencies, clients routinely ask.  The short answer is that you can properly omit from your bankruptcy filing any card issuer with whom you don’t have a balance.  Those issuers are not creditors at this point.

The broader question is just how useful is plastic as a safety net?  With the wave of cancelled cards and lowered debt limits, joined with massive interest increases, I have my doubts that you can count on a credit card as the functional equivalent of cash in the bank.

Then there is the question of fraud:  use of a card when you know you may not be able to repay the charge may be fraud under bankruptcy law.  If the card issuer can prove fraud, the challenged charges survive the bankruptcy discharge.

So, my routine advice is not to pay more than a couple hundred dollars to pay off a card so you can exclude it from the bankruptcy filing.  More than that, put the money in  the bank as the start of  your rainy day fund of cash in the event of emergencies.

A bankruptcy court in Oakland recently rebuffed a mortgage lender who claimed it had been defrauded by borrowers who lied on the loan application. The judge agreed the debtors falsely inflated their income, but found that the lender had not reasonably relied on the false representations. The lies were not enough to make the debt non dischargeable when the lender was asleep at the switch.

The broader question in the mortgage meltdown is whether the Wall Street firms that bought these liar loans from the sleeping lenders have any recourse against the lender. Can the seller of the loan escape responsibility for selling a financial instrument of questionable value? Did the Wall Street buyer have to investigate the actual bona fides of the loans or is it entitled to rely on the lender’s representation that the loan was sound?

Street smarts suggest that Wall Street was content not to look too closely at these loans so it could pretend that all of this profitable paper was what it was puffed up to be. Under the theory of the Hill case, they, too, may be found not to have been reasonable in their reliance.

One of the petty struggles I have with clients is convincing them that they need to include all of their debts in bankruptcy. Sometimes, they will tell me they don’t want to include their car loan in the case because they “need the car”. Sometimes I find the student loan payment in the budget but not on the list of creditors.

Part of the issue is grounded in confusion between scheduling a debt and discharging the debt. Debtors are required to list all of their debts and risk denial of discharge if they don’t. However, debts are not necessarily discharged just because they are listed. The Bankruptcy Code specifies a number of debts that simply aren’t dischargeable in bankruptcy. Those debts still must be listed.

The desire to exclude debts from the schedules is sometimes fanned because debtors don’t know that they can reaffirm debts during their case. A reaffirmation agreement essentially waives the discharge as to that particular debt and puts the parties back on the same legal footing as they had before the bankruptcy was filed.

Clients are frequently surprised when they learn that they can continue to pay a discharged debt voluntarily if they wish. “Pay the dentist after the case is filed if you wish, but list them in the bankruptcy if you owe money when the case is filed. ”

Then, there are the clients who “love” their credit card issuer and want to keep paying because of loyalty or out of fear of being without plastic. I have to tell them that for some card issuers, the love is one sided, and the issuer will cancel the card independently of being listed or not in the case.

Moral of the story, there are a number of options for debts post filing, so don’t get tripped up by leaving out creditors.

I’m accustomed to advising clients about big ticket debts like mortgages, auto loans and back taxes. I was surprised when a client, resigned to letting her house go to foreclosure, was absolutely delighted to know that she could free herself from her unhappy relationship with Verizon Wireless at the same time.

Bankruptcy terminates executory contracts in place when the case is filed. So the balance of the two year contract with the unsatisfactory provider could be terminated, and the early cancellation penalty treated just like any other unsecured creditor.

I’m adding to my list of things to do before you file, like change banks and cancel automatic payments from your checking account, consider dumping your cell phone provider.

Spend the rents generated by a property in foreclosure and you may have invited big trouble even if bankruptcy is in your future.

The borrower in the typical real estate transaction pledged the rental income and other proceeds of the encumbered property to the lender along with the real estate, as security for the obligation to repay the loan. Those rents are “cash collateral” in which the lender has a legal interest.

The borrower may have a fiduciary relationship to the lender with respect to those rents. Failure to pay them over to the lender may be a species of fraud, potentially non dischargeable in bankruptcy.

I’ve seen a rash of clients in the past couple of weeks who have rental houses that are now, or soon will be, in foreclosure. Once a notice of default is recorded, starting the foreclosure process, the lender won’t accept payments unless the borrower can tender the entire amount necessary to cure the default.

So, the borrower is collecting rent from the tenants but the lender isn’t accepting payment of those rents if not sufficient to cure. The borrower is in possession of a hot potato.

My advice to such clients is to set up a bank account and deposit any rent net of the costs of preserving the property to this separate account which contains only the cash collateral that belongs to the lender in question.

I haven’t yet had to figure out if/when the lender will accept payment of those funds, but that’s a far better problem to have than a nondischargeability action against the borrower for fraudulent misuse of the lender’s security.

If this fact pattern mirrors your situation, get an attorney involved in making sure that you don’t lose more than the property to foreclosure.

My colleague at the Bankruptcy Law Network Karen Oakes talks about some reasons a debtor in bankruptcy may want to object to a claim filed in the case. There is another, a real bombshell, arising out of a 9th Circuit Court of Appeals case Siegel 143 F.3d 525.

Siegel addressed a post bankruptcy dispute between the discharged debtor and his mortgage lender. Even though Siegel’s bankruptcy case had been a no asset case, in which there was no practical need to examine the bona fides of the claims filed, the 9th Cir. held that the Bankruptcy Code presumption that a filed claim was allowed, bound the debtor after bankruptcy.

This holding, which seems to me to be a case of bad facts make bad law, is scary in at least two very common fact patterns in bankruptcy. One is the pattern in Siegel, involving the debtor and the mortgage lender. A second could be the Chapter 13 case that is dismissed, either voluntarily or involuntarily. Will an unchallenged claim in a dismissed case be deemed accurate and enforceable against the debtor?

I don’t know, but I’d rather not find out on my watch.

Jay Fleischman discusses whether the failure to correct a credit report after a bankruptcy discharge is really a violation of the discharge injunction. I have experienced two very real examples of how the continued reporting of discharged debt shadows a debtor’s fresh start.

The first is in the insidious use of credit scores for pricing of insurance. I find no linkage between credit worthiness and insurance claims. It appears to me to be a situation where Fair Isaacs, or other providers of credit scores, has sold insurers on the idea. Why should the insurers resist? It gives them a reason to increase premiums.

More distasteful in my mind is the situation where a homeowner has a refinance or home purchase in process. When the lender finds a credit report still studded with apparently unpaid debt, the would be borrower must chose between paying the discharged debt or losing the loan. Nice work for the creditor: do nothing, even when the law requires you to report correctly, and garner money to which you have no right.