Bar News - July 20, 2016
Federal Practice & Bankruptcy: Practical Solutions that Address Bankruptcy Clients’ Major Fears
By: Theresa Spearing
Although not an exhaustive list, this article addresses some common client questions and fears and provides some practical solutions for clients contemplating bankruptcy.
Will I be able to protect all my property?
Many people think they cannot keep their property. An exemption in bankruptcy allows a debtor to keep certain property or assets even after bankruptcy is filed. Exempt property cannot be seized or sold to satisfy the debts of the person filing for bankruptcy. In most cases, property and assets can be protected. However, I have found that even if there is some exposure, it is often property that is not easily ascertainable by the bankruptcy estate (i.e. land with no road access, a vehicle located in another state) and therefore not worth the time and money to go after it. I have also found that if there is property that cannot be protected, the trustee is often willing to negotiate a fair settlement for both the creditor and the debtor.
If I file for bankruptcy, will my credit score take a major hit?
Most individuals who are contemplating bankruptcy already have a low credit score. The good news is that a debtor can reestablish credit after about two years and get a collateral credit card immediately (a secured credit card that uses money you place in a security deposit account as collateral). Unlike with debt consolidation and debt settlement, the debtor cannot begin improving his or her credit until all the debt is resolved; that can take anywhere from three to five years, and that is only if the debtor stays on track.
Do I have to give up my credit cards?
I wish I had a dollar for every client who has asked me, “Do I have to give up my credit cards?” The short answer is, yes. All creditors must be included when a client files for bankruptcy. Once a case is filed, a notice is sent to all creditors. In most cases, when a credit card company receives notice of a bankruptcy, it cancels the credit card.
However, a credit card with a zero balance technically is not a debt and does not need to be listed. Nevertheless, the creditor could still learn of your filing by other sources, such as credit bureaus and other reporting services, and even though you have not listed that debt, the company may still decide to cancel your credit card.
One way to keep a credit card is to reaffirm the debt. A debtor does this by signing a contract that makes him or her personally liable for the debt, despite the bankruptcy filing. Essentially the debtor loses the benefit of a discharge for that debt. Absent a compelling reason, reaffirmation of a credit card is not recommended. In most cases, debtors totally wipe out their credit card debt thereby receiving a fresh start to begin rebuilding their credit.
Will I ever be able to get a car or mortgage loan again?
Clients who file bankruptcy can still get a car loan and a mortgage afterwards, but there are some hurdles that must be overcome.
With regard to a car loan, the client’s interest rate will likely be higher after filing bankruptcy. It is important for the client to view his or her credit report and pay particular attention to what the report says about previous auto loans, because those are often more heavily weighted in the credit-scoring models used by auto lenders. Positive on-time car loan payments reported during and after bankruptcy can be helpful when negotiating your interest rate.
Obtaining a car loan will be easier for a client who has a car to trade in and a down payment. If the client can secure a car loan prior to filing for bankruptcy, that is recommended. A client in this circumstance will be required to sign a reaffirmation agreement after filing bankruptcy so it is advisable for the client to make sure the terms of the loan are affordable.
Clients who have filed for bankruptcy should shop around for the best rate and not assume the first rate offered is the best available.
People who have filed for bankruptcy are not barred from obtaining a mortgage, but the timing of mortgage availability depends on the type of loan your client is seeking.
For an FHA or VA loan, clients must wait two years after your Chapter 7 discharge. In a Chapter 13 case, for an FHA loan, the person must have 12 months of satisfactory plan payments, bankruptcy court approval and for both an FHA and VA loan, must provide an explanation for the bankruptcy.
For a USDA loan, there is a three-year waiting period after discharge, or 12 months after Chapter 13 plan payments (with court approval) or one year after Chapter 13 is discharged. Conventional loans have a four-year waiting period after a Chapter 7 discharge, and two years after receiving a Chapter 13 discharge. However, if a Chapter 13 case is dismissed without a discharge, there is a four-year waiting period from the date of dismissal.
Keep in mind once these time periods have passed, your client must still meet all the other typical qualifications, such as being credit-worthy and having reliable and sufficient income.
Can I discharge my student loans?
Although most student loans are not dischargeable, private student loans may be discharged, if certain criteria are met. The debtor must file an adversary proceeding against their creditor and meet the standards in what is called the Brunner Test. Brunner v. New York State Higher Education Services Corp outlines the requirements: (1) that the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for herself and her dependents if forced to repay the loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that the debtor has made good faith efforts to repay the loans.
Research conducted by Harvard Law School found that student loans are able to be discharged in almost 40 percent of cases. Of this nearly 40 percent of loans, 24 percent were able to be fully discharged, 14 percent were able to be partially discharged and another 12 percent were modified to create an affordable repayment plan.
Considering the high cost of education and the potential client base out there that could benefit from discharging private student loans, it may be worthwhile for more attorneys to investigate this possible niche market.
Theresa Spearing, an attorney at Douglas, Leonard & Garvey in Concord, focuses her practice in the areas of family law, estate planning, real estate and bankruptcy. She can be reached by email at or (603) 224-1988.