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"At Risk" Property During Chapter 7 Bankruptcy

Chapter 7 bankruptcy is generally a numbers game between the bankruptcy trustee and the debtor. The trustee seeks to liquidate the debtor's non-exempt assets to pay creditors, and the debtor tries to avoid liquidation of any property. When property is identified by the trustee as non-exempt, the trustee may ask the debtor to turn over the property (or its cash equivalent). The trustee will then liquidate the property and distribute the proceeds to creditors.

The United States Trustee Program reports only around four percent of all Chapter 7 bankruptcy cases are “asset cases.” In other words, statistically only one case in twenty-five has an asset that can be converted to cash and distributed to creditors. Some common types of non-exempt assets include:

• Cash money
• Tax refund
• Vehicle equity
• Home equity
• Misidentified financial account
• Unlisted property

Whenever a non-exempt asset is found by the bankruptcy trustee, the debtor’s case comes under greater scrutiny, the case is generally prolonged while the asset is administered, and creditors are invited to file proof of claims to participate in the distribution of the asset.

The key to keeping property during a Chapter 7 bankruptcy is early identification and full disclosure with your bankruptcy attorney. Poor communication between the client and attorney is usually the cause of “at risk” property. Every bankruptcy attorney has a story about a client who informs the trustee at the 341 meeting of creditors, “I didn’t tell my attorney about this property, but. . .” This story seldom has a happy ending for the client and usually results in the loss of that property.

There are many ways to protect property during a Chapter 7 bankruptcy. Be sure to discuss all of your assets with your attorney. If you have doubts whether you have an ownership interest in property, discuss it with your attorney. Your attorney can provide you legal options to protect your assets and avoid “at risk” property.

Discharging Student Loans in Bankruptcy

Recently the House of Representatives Judiciary Subcommittee on Commercial and Administrative Law held a hearing to initiate legislation to change provisions of the federal bankruptcy law that give student loan lenders an advantage over other consumer loans. Current bankruptcy law provides that student loans are generally not dischargeable under any chapter of the bankruptcy code unless the debtor can show that repayment of the loan creates an "undue hardship." Unfortunately, Congress did not define "undue hardship" in the bankruptcy code, so this interpretation has been left to the individual bankruptcy court judges.

During the Committee hearing Rafael I. Pardo, an associate professor at the Seattle University School of Law who has studied the discharge of student loans in bankruptcy, challenged Congress “to clarify the undue hardship standard.” Many courts view "undue hardship" as a high bar that is only met by a showing of exceptional circumstances (like physical or mental disabilities, or poor or no future earning potential) that result in an inability to both repay the student loans and provide a minimum standard of living for the debtor and the debtor’s family. This is a very difficult burden for most debtors to meet, and consequently bars the discharge of student loans in most cases - even while other consumer debts like auto loans, credit cards, medical debts, mortgages, and even taxes are discharged in the debtor’s bankruptcy.

Consumer bankruptcy attorney Brett Weiss, who testified on behalf of the National Association of Consumer Bankruptcy Attorneys and the National Consumer Law Center, called the situation "unfair" when other consumer loans are forgiven in bankruptcy proceedings while student loans are not. As a result of these hearings, Rep. Steve Cohen (D-Tenn.) announced his plans to file legislation to “give private student loan borrowers more equitable treatment during the bankruptcy process.”

For the time being it remains extremely difficult to discharge student loans. However, there are other non-bankruptcy programs for debtors unable to repay their loans. In some cases debtors may qualify for reduced payments, deferment, forgiveness or cancellation. Chapter 13 bankruptcy can also provide a way to cure defaulted student loans, or pay them off during the bankruptcy. If you have student loan debt, discuss your situation and options with a qualified bankruptcy attorney.