Category Archives: Bankruptcy

financial insolvency and bankruptcy laws

Counting the Cost of Student Loans

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Unlike borrowing for housing, transportation, and cash needs, the benefit of a student loan is intangible. Although it may assist in strengthening income over time, that gradual strengthening of income is contingent upon many factors such as type of degree, finishing the degree, health, aptitude for degree specific work, ability to market oneself at a job interview, and local market demand for that skill set.  Large debt for a house or a car gives an immediate tangible result, but  large debt for college does not give one a place to sleep or means to get to work. In that sense, its value cannot be measured in the immediate present.

Normally when a consumer makes mistakes and struggles with too much debt, he can use bankruptcy to adjust his lifestyle and debt. This is not so with student loans, unless a bankruptcy “adversary complaint” is used, which may be uncertain as to result. Thus this consumer debt does not allow for mistakes!

In the worst of nightmares, the student signs on for large private loans, while attending “for profit” schools, if he does not graduate money-dice.jpgand does not advance economically due to education/skills acquired in college, this is bad news.  Without the hoped for benefits of job advancement,  the financed education can assist in creating an onerous burden of debt perhaps too heavy to carry.  Credit report damage and economic pressures can lead to lifelong financial disorientation. Obviously, one is now hampered in other investments such as buying a home, starting a business, making a career change, having children, or marriage to a spouse who chooses to stay at home with the kids.

Regardless of the fact that education is always enriching and worthwhile, the student today is wise to “count the cost”. As a rule of thumb the prospective student loan borrower must ask: “will I make enough in the 10 years after graduation to amortize (and pay off completely in level payments) the entire student loan debt at 7% interest?

To “break it on down”, $50,000 of student loan debt would pay off at $580.54 per month, twice that amount will pay off at twice that amount, 1/2 of that amount will be paid off at 1/2 that amount.  See the chart below.  The big catch is, whatever that amount is, it must be paid every month (on time) for 120 months, no exceptions.  Of course this long term commitment does not take into account job loss or underemployment, divorce, sickness of children or spouse, or one’s own health issues.

And what will it take each month to pay off that $50,000 student loan?  The math says $580.54 per month AFTER that tax man is paid. That means the aftertax dollar must be “bulked up” by 1/3, or $193.51, to $774.06 to be earned each month, so the monies can be taxed by $193.51 and the student lender can be paid $580.54.  And this plan must be steadily carried out each month, on time, for 10 years.

Loan Amount Payment Income needed/month (before taxes) Income needed/year

(before taxes)

25,000 $290.27/mo.

x 10 years

$387.03/mo.

x 10 years

$4,644.36
$50,000 $580.54/mo.

x 10 years

$774.06/mo.

x 10 years

$9,288.72
$100,000 $1,161.08/mo.

x 10 years

$1,548.12/mo.

x 10 years

$18,577.44

So one must “count the cost”.  If not, student loans are a serious dilemma, and caution is advised.

When it comes to timely payment on any financial arrangement, the ability to pay is critical.  In coming months, I will be commenting on this thorny issue of student loans and the cost of college, in the hope of shedding some light on student loan pitfalls.  Of course, I am in the business of providing practical solutions in financial matters, and I welcome your questions as we explore this topic in coming updates.

Should Lawyers Be Polite with Opposing Counsel?

 Should Lawyers be Polite with Opposing Counsel and Parties?

Of course, the answer to this question is obvious. We should all be polite with all the folks we meet, in every circumstance. Nevertheless, human nature being what it is, we sometimes have lapses in our sense of decorum.

As a lawyer it is highly advantageous to have an appropriate sense of civility. Not only does it benefit the lawyer by polishing his professional reputation, and by easing the transaction, it’s also of great benefit to the lawyer’s client.

When everyone is more relaxed in their approach it eases the exchange of opinions and points of view. As officers of the law, attorneys should strive to be solution generators. Unfortunately, we’ve all heard the jokes involving attorneys creating problems instead of helping to solve them. Lawyers should avoid making the process more tedious, expensive, and emotional, if at all possible. Simple courtesy goes a long way in making this happen.

I recently had an exchange with an opposing party who was not represented by counsel. When we went before the judge in the trial he was somewhat disorganized in his presentation. Nevertheless, I encouraged him to take his time and present all the facts as best he understood them.  I could tell the judge appreciated this relaxed approach, and the opposing party felt that he had “been heard”. We both left the hearing with no bitter feelings.

Within a few days, a written decision came from the judge, and it was partially in favor of each party. Since there were details to be worked out beyond what the judge had decided, I called the opposing party. There was no return phone call after my first voicemail. Calling him a second time, I fully intended to leave a voicemail that I would be filing a motion to compel enforcement of the judge’s order, should I not get a return call.

As an attorney with decades of experience, I know how costly it is to force “agreement”, when a more pleasant demeanor could, perhaps, create a less expensive solution more pleasing to all parties. I had no desire to type up and file motions with the court, drive out to the courthouse, have a hearing, irritate the judge with our lack of cooperation, and create hostility and antipathy with the opposing party. Nevertheless, if my second phone call was not returned, I felt I had no choice.

Much to my delight, my adversary answered the phone when I placed that second call. We both agreed that the hearing had been without contention, and he indicated to me that I had been “a perfect gentleman” in allowing his side of the story to be heard, and helping him with the presentation of his exhibits before the court.

Since there were certain details that remained to be worked out, and he had to do some fact-finding before we could do so, I encouraged him to take 7-10 days, as he requested, after which we would talk again. As the judge has already ordered the sale of the asset (our main goal), and the adversary simply wanted to have it independently appraised, there was no harm in honoring his request.  He was most pleased, and we agreed that we will talk again within 10 days.

Since this matter is one that has dragged on for a number of years for my client, it was a pleasant surprise to me that we seem headed toward resolution, only a few short months after she retained my services. I’m looking forward to letting my client know we may be able to keep her bill down, achieving a more efficient result through gentlemanly conduct.

Certainly not every lawyer thinks this way.  I fully understand the various twists and turns of legal thinking and conduct.  However, the legal system should be a way to resolve disputes, not aggravate them. It’s a way to teach people respect for the law and each other, and teach good manners as a way of efficiently advancing  polite society.

Of course, this doesn’t always happen–sometimes matters can become contentious between two opposing parties. But it’s always a pleasant surprise when people can work out their differences in a mutually satisfactory (and pleasant) way.

 

When is Chapter 7 Bankruptcy the Best Option?

When  is Chapter 7 Bankruptcy the Best Option?

When the borrower doesn’t have assets that a trustee can liquidate, a Chapter 7 bankruptcy can be quite useful.

Of course, there’s no doubt that a Chapter 7 bankruptcy is a less expensive way to resolve large amounts of debt, and this is its primary advantage over Chapter 13 bankruptcy or debt settlement. However, Chapter 7 bankruptcy is not always an available option. For instance, if a debtor’s income exceeds federal government guidelines then they will not qualify for a Chapter 7.

Most of us know that too much income or equity in a home makes it difficult to file Chapter 7 bankruptcy. However, there are other qualifiers that are significant, although their importance is not usually readily apparent. Monies in a trust, the ability to liquidate life insurance policies, a personal injury lawsuit, the expectation that the inheritance will soon be paid, and other situations can create problems in a Chapter 7 bankruptcy.  This can be quite a disappointment to the filing individual, who had believed or been told that nothing would be taken from him in the Chapter 7 proceeding.

Since most creditors are apprehensive about bankruptcy, often the mention of the “B word” allows for a productive settlement discussion, so that everyone can get “half a loaf” rather than going away empty-handed. As an attorney with 35 years of experience, I think bankruptcy is, as a last resort, an excellent settlement tool. Most creditors understand that it is much more productive to dialogue towards a mutual solution (i.e., debt settlement), rather than force the borrower into bankruptcy.

I find bankruptcy to be a highly effective backstop, which encourages creditors and borrowers to come to the table and work out a mutually satisfactory solution.  Most of us just don’t want bankruptcy, whether we are borrowers or lenders.

Since both the creditor and the debtor have something to lose, they are mindful that perhaps it is best to compromise. Unfortunately, in many situations where lawyers are involved, the costs of a settlement are needlessly driven to exorbitant heights, with the lawyers charging far more in legal fees than is necessary without considering the practical alternatives. In our office we attempt to steer away from solutions that are not cost-effective.

My primary goal is to reduce agitation between parties, limit cost, and be able to move on to more productive matters more quickly.  Given the bad public reputation of the legal profession, I want to give my clients practical solutions, without too much aggravation.  Quite frankly, it is my opinion that it should be the goal of the law to come up with effective solutions that allow all parties involved to move on. Since law is primarily a settlement device, and not “trial by combat”, we want to make sure everyone receives a fair share of a solution’s benefits. Using this approach, I have time and time again learned that the opposing counsel and his client can be used as allies, in assisting me to keep my client’s fees down.

Chapter 7 bankruptcy is an essential tool to help resolve debt issues and restore a client’s peace of mind. For that reason, I’m glad we have a solution in the law that allows people to eliminate debt, and move on to matters that are more productive.

Chapter 13 vs Debt Settlement: Which is More Cost-Effective?

 Chapter 13 versus Debt Settlement: Which is More

Cost-effective?

Often  clients are forced with a choice between Chapter 13 bankruptcy or debt settlement, because they cannot qualify for a Chapter 7 bankruptcy. This can happen for several reasons: possession of assets which prohibit them from filing a Chapter 7, or income that is too high to qualify for a Chapter 7 bankruptcy.

Of course, if you have cash assets, creditors prefer debt settlement, as “cash is king”.  Often this method is best in the eyes of both creditors and debtors.

In counseling clients about this dilemma, I like to break it down to one simple question: which is more expensive?  In answering this question we can come up with a simplified understanding of comparative benefit, and decide which approach should be taken.

To begin, it’s useful to understand that debt is always settled as a percentage of a face amount. Whether you owe $5,000 or $15,000, to the creditor it’s all the same: “What percentage can I collect?”  Creditors generally have a huge number of accounts, and their main goal is to see how much of the money owed they will be able to recover.

Generally, a 40% to 60% settlement is quite a good deal for the debtor. A settlement at 80% to 90% of the original debt is often more than the borrower feels he can afford. Obviously a 80% to 90% settlement is optimal for the creditor, preferably paid immediately.

For ease of the discussion, I’ll discuss this in terms of percentages, not dollars. In other words, when we talk about debt settlement versus Chapter 13 bankruptcy the primary question I wish to address for my client is: “what percentage of the debt must be repaid?”

In a Chapter 13 bankruptcy, where the borrower has an annual household income of $80,000-$90,000, it is most likely that he will have to pay back 100% of the debt. Because there are trustee fees and legal fees attached to the proceeding, it is not uncommon that he would pay 115% of the debt. The advantage to filing a Chapter 13 is that you’re given a period of five years to pay off your debts, under a payment plan.

On the other hand, debt settlement may confer a clear advantage, especially if it can be accomplished at 2/3 of the debt (including attorney fees). However, in debt settlement taxes must be considered. Assuming the borrower owes another 13% of the debt in taxes (which will have to be paid within the next year) this means the debt settlement would be the least expensive option. Specifically, that debt settlement would cost the borrower 80% of the original amount owed, after consideration of taxes in calculating the total cost.

In comparing Chapter 13, (which has a total cost of 115%), versus the total cost of debt settlement at 80%, it is clear there is a difference. Specifically, that difference is 35%. In other words, the consumer can often save more than a third of the debt amount, simply by doing debt settlement instead of Chapter 13 bankruptcy.

So looking at the cost-benefit analysis makes it very clear that debt settlement can often be less expensive for the borrower. However, debt settlement is not a good alternative  when the borrower doesn’t have the cash to settle in full at the time the deal is struck. For that reason, Chapter 13 bankruptcy can be an excellent way to arrange over many months the settlement of debt, allowing five years of payments to liquidate the entire debt interest-free, and without the danger of collection lawsuits.

Which one is right for you?  The best advice I can give to you: give us a call at (317) 266-8888. We are happy to answer your questions, and give you sound advice on what can become a very complex matter if not analyzed thoroughly.