In Part VI of our series, we are discussing the possibility of getting a partial discharge of your student loans if you are unable to get a full discharge. A partial discharge can occur where the bankruptcy court discharges a portion of the outstanding student loan debt while requiring you to pay the remainder of the balance. The bankruptcy code is silent on the issue of whether the bankruptcy courts may offer a partial discharge of student loans based on undue hardship. However, this issue has been litigated and is recognized by several court of appeals. A partial discharge will require that the debtor establish elements necessary for an undue hardship determination.
According to the departmental guidance regarding student loans, the department of education attorneys may consider a partial discharge if they have made the determination that the debtor has the ability to make some payment on the loan while maintaining a minimal standard of living, but an inability to make the full standard monthly repayment. That is distinguishable from getting a full discharge where the debtor is completely unable to maintain a minimal standard of living and has no disposable income after paying their expenses. A partial discharge should result in a balance lower than the debtor’s discretionary income so they can afford the monthly loan payment over the remaining term of the loan. A partial discharge may also be available if a debtor can liquidate assets to pay a portion of the debt but is unable to make the monthly payment while maintaining a minimal standard of living.
In the last part of our series, we will be discussing the process/procedure to get my student loans discharged?
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.
There are three types of tax debt. The first type is unsecured priority tax debt which is not dischargeable in bankruptcy. That includes recent tax debt within the last three years.
The second type is unsecured non-priority tax debt. This type of tax debt is dischargeable in bankruptcy. This would include tax debt for returns that were due and filed over three years ago or assessed by the IRS over 240 days prior to filing your bankruptcy case. We can verify the date the tax got assessed by the IRS if you obtain an account transcript.
Interestingly, there are times when the tax return was timely filed over three years ago, but the IRS assesses the tax liability years later. This often occurs during an audit where additional tax debt is assessed.
Tax debt will not be dischargeable if the taxes haven’t been timely filed or filed within two years of filing for bankruptcy. Fraud or tax evasion would also be grounds for having your debt be non-dischargeable.
The third type of tax debt is secured tax debt where the IRS files a lien against your property. This occurs less frequently. We recommend contacting the IRS Insolvency Unit approximately 60 days after receiving your discharge to confirm that your tax debt is discharged.
We have clients who move here from other states who are behind on their state income tax. Fortunately, we don’t see this issue too often since Florida has no state income tax.
State income tax essentially follows the same rules as federal income taxes in terms of whether those taxes would be dischargeable or not in a bankruptcy. If you have specific questions about your outstanding tax debt, feel free to contact my office.
It is quite a bit of work for both the client and our office to make sure we have all the proper documentation to analyze your case and prepare the bankruptcy petition. The bankruptcy petition is not a “simple” or “basic” form. Clients are surprised to learn that the petition is between 50-60 pages. It has to be filled out accurately and completely.
There is a burden on both you as the client, as well as myself, as the attorney to do our due diligence to make sure we do not miss any information. We need six months of payroll, or if self-employed, you would need to provide six months of profit and loss statements by month; two years of income tax returns; two years of corporate returns if you own a business; vehicle titles and/or car registrations; identification, three months minimum of all bank statements for every account, including retirement accounts such as IRAs, ESOP plans, FRS plans if working for the government.
If you are on social security we need the social security benefits letter confirming your monthly payment. The same is true for pensions, annuities, or veterans benefits to confirm the amount of your monthly payment. Additional information that we may need to review are: a martial settlement agreement if you have been divorced within the last two years, payoff statements for your mortgage and vehicles, paperwork for any lawsuits, deeds to any real property, trust documents, HUD or bill of sale for any home or vehicle sales or trade ins for the last two years.
We also need information regarding the value of all of your assets and we go through questions also to make sure you are an eligible bankruptcy candidate. That is why people hire an attorney. It can definitely be a daunting task without help. There are many aspects of analysis to evaluate if you have non-exempt property, is there anything the trustee could make you pay back such as insider payments to family members, or friends. Having legal guidance will prove to be valuable and make the process go much more smoothly.
There are occasions where I get phone calls from potential clients where either a bank account has been “frozen” or money has been seized by a creditor out of their account or their wages have been garnished out of their paycheck.
This can lead to a very dire situation if you are living paycheck to paycheck and money that you are counting on to buy groceries or pay rent is now gone. When that occurs, our first step is to analyze whether the creditor appropriately garnished your wages or bank account. For example, if the source of the money in your bank account is social security funds, those funds would be exempt from garnishment.
If that is the case, you might be able to file a claim of exemption in the underlying case to see if the judge would reverse the garnishment order and “unfreeze” those funds.
Filing for bankruptcy will immediately stop any collection efforts in the future. If the creditor was entitled to the garnished funds, they are not required to retroactively reimburse you for those funds that were taken before you filed your bankruptcy case. If the creditor garnishes anything after you file your bankruptcy case, you would be entitled to get those funds reimbursed.
Whenever you get served with a lawsuit, it is important to speak with an attorney as soon as possible to determine if you do have any exemptions to the garnishment and to discuss the best timing for filing your bankruptcy case. That way the situation can be handled to ensure that you prevent a garnishment.