For this segment we are providing an explanation of what the” present ability to pay” or “undue hardship” standard means. If you are reading this blog, you probably do not feel like you have the current ability to pay your student loans. The undue hardship/present ability to pay is a standard looked at by the Justice Department and the Department of Education to determine if you can afford to pay back your student loans.
If your expenses exceed your gross income (the amount you make before taxes or payroll deductions are taken out) you are presumed to lack the present ability to pay. These might not be your actual expenses, but rather expenses that are specified in the IRS guidelines. Where your expenses for items such as food, housekeeping supplies, apparel, medical expenses, etc. are below the amount allowed by the IRS National Standards and your net income does not cover those expenses you cannot maintain a “minimal standard of living”. Keep in mind your actual expenses may vary from what the IRS guidelines find to be reasonable. Similar guidelines operate in the means test of the bankruptcy petition.
For example, pet expenses are not considered. There are limitations on transportation expenses which includes gas, insurance, and vehicle maintenance. If you do have a reasonable expense that exceeds the IRS standards, those can be considered. You must have a persuasive reason why your expenses are higher than the IRS guidelines.
For example, higher medical expenses due to an ongoing medical condition or higher transportation expenses because you live far from work. In addition to National Expense Allowance Standards, there are also Local Standards. If your actual expenses exceed the local standard amount, the Department Attorneys should generally limit your allowable expenses to the standard amount.
If you have reasonable expenses that are not yet incurred such as currently living with a family member, but moving to an apartment in the future those expenses are considered. If you have sufficient discretionary income to make a full student loan payment as required under your loan agreement, then you are deemed to have the ability to pay and have no undue hardship.
The standards are a bit tricky so its helpful to consult with an attorney to determine if you qualify for partial or full discharge of your student loan. Stay tuned for our next segment on the “future ability to pay” standard.
I will be doing a seven-part series to answer questions on how to get an undue hardship discharge of your student loans in bankruptcy. I have been getting questions from both current and potential clients who have heard about the recent new guidance from the Department of Education / Department of Justice on student loan discharges wondering if the new guidance applies to their situations.
The series will include the following parts:
Part I: What recent changes have been made to assist borrows in qualifying for student loan discharge?;
Part: II: Element #1, Explanation of Present Ability to Pay your Student Loans;
Part III: Element #2, Future Ability to Pay your Student Loans;
Part IV: Element #3, Good Faith Efforts to Repay your Student Loans;
Part V: How does the Debtor’s Assets play a role in dischargeability of their student loans?;
Part VI: When is a partial discharge possible, if the debtor is ineligible for a full discharge of their student loans?;
Part VII: What is the process/procedure to get my student loans discharged?
The new student loan guidance is effective for any bankruptcy cases that are open as of November 17, 2022. Older cases cannot be reopened. You would need to file another bankruptcy case whenever you become eligible. Only loans issued from the Department of Education qualify for the discharge. According to the “Brunner Standard” which is what we have been following: (1) The debtor cannot presently maintain a minimal standard of living if required to pay the student loan; (2) Circumstances exist that indicate the debtor’s financial situation is likely to persist in the future for a significant portion of the loan repayment period; and (3) The debtor has made good faith efforts in the past to repay the student loan.
The current standard is whether the payment of the loan would cause an undue hardship on the debtor. Whether the debtor has a present and future ability to maintain a minimal standard of living while making student loan payments and has made a good faith attempt to repay their student loans. So, the standard is essentially the same. However, there are now clearer guidelines on exactly what those standards mean and the circumstances that would qualify someone. The guidelines are intended to ensure more consistent treatment for student loan discharges and to facilitate an easier fact gathering process for the United States Attorney’s office and the Department of Justice.
SBA Loan funds were intended to be used for normal operating expenses such as rent, inventory, employee payroll, working capital, purchasing products, purchasing equipment, and paying off business debt. If you have misapplied those proceeds and used them to pay your personal bills or only pay yourself disbursements under the loan then the SBA can request an audit. If you do not respond within to their inquiry within 30 days, it will be considered an admission that the loan funds were misapplied.
Penalties include having to pay 1 ½ times the amount of the loan, collections, or even criminal prosecution. Ordinarily SBA loans are dischargeable in bankruptcy. However, if funds were misapplied then you could face a 727 action wherein the United States Trustee’s office will contest the dischargeability of the debt. I would only recommend filing a bankruptcy on those funds if you did in fact use the proceeds for business purposes and your business was still unable to be sustained and you have a bank trail of how the money was spent.
I also look at how much of the loan got disbursed to you personally. For example, if your salary was normally $30,000 annually then you start paying yourself $100,000 salary once you got the EIDL funds those funds that could be considered misapplying those funds. The same if you only paid yourself a salary and distributions and paid no other business expenses. If you have more specific questions, it is best to consult with an attorney.
People often assume that if their house or bank accounts that are joint with another person they are protected from creditors as Tenants by the Entireties. That may not always be the case. Tenants by the Entireties ownership in Florida requires six characteristics. If any of the six unities is not present, it’s not exempt from creditors.
These six unities must exist for the asset be owned as Tenants by the Entireties:
Unity of Possession (joint ownership and control). This requires equal ownership, equal use and equal control over the property. This means that either party could sell the property and its owned 50/50.
Unity of Interest (the interests in the account must be identical). For example, both account holders can deposit or withdraw funds without the other party’s permission.
Unity of Title (the interests must have originated in the same instrument); You cannot later add that person to the account. They must have always been on the account since it was opened.
Unity of Time (the interests must have commenced simultaneously); Both people must take ownership of the funds/property at the same time.
Right of Survivorship; For example, when one spouse passes away the other spouse immediately becomes the sole owner of the property; and
Unity of Marriage: This means that both spouses must have been married at the time the property became titled in their joint names. There can be no tenancy by the entireties with friends, family members or unmarried partners. It requires marriage.
If one of these six unities is not present, then ownership as Tenants by the Entireties fails and the asset will be subject to the creditor’s garnishment. Entireties can exist for both real and personal property. If both spouses owe the debt or have joint debts in a bankruptcy, the property is not exempt. This can be complex so it’s benefical to have an attorney analyze what property may be exempt and out of reach of creditors.
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With home ownership and rental costs on the increase, many people are choosing alternatives such as residing in a mobile home, RV or houseboat. When it comes to filing for bankruptcy we always need to analyze if your property is exempt from the trustee. Ordinarily anything recreational such as an RV, boat, jetski, etc. would be considered a luxury item that would not be exempt.
Florida law has established certain criteria for determining if an RV or boat qualifies as homestead. There is a six-prong test used by the courts to determine the abode is exempt:
Debtor’s intent to make a non-traditional abode his homestead.
Whether the debtor has no other residence.
Whether evidence establishes continuous habitation. Are you going back and forth between a house up north then coming back and using the RV temporarily or is it a permanent home?
Whether the debtor maintains a possessory right associated with the land establishing a physical presence. For example, renting a lot to keep the RV parked.
Whether the non-traditional abode has been physically maintained to allow long-term habitation verses mobility. Is the RV taken on vacations or is it parked and set up with utilities.?
Whether the physical configuration of the abode permits habilitation. If it is set up for full-time use for example, it has a bathroom, kitchen, etc.
Florida has a specific exemption for mobile homes. Please reach out if there is any question on whether your property is exempt.
