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Yes, It Really Is Possible To Discharge Student Loans In Bankruptcy

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More than 44 million Americans have student loans, owing a collective $1.5 trillion (yep, with a “t”). And if the sheer amount of student debt our country faces isn’t scary enough, about 1 million borrowers go into default every year. That means they haven’t made a payment for about a year and the debt has been sent to collections.

Usually, when people have so much debt that it becomes unmanageable, bankruptcy is a last-resort option they can pursue. Though the effect on their credit can be devastating, they may decide it’s worth it if it means finally getting some breathing room.

But when it comes to student loan debt, that’s a different story. In fact, many claim it’s impossible to discharge student loans in bankruptcy.

We spoke with Adam Minsky, a lawyer in Boston with a practice dedicated solely to helping student loan borrowers, to find out if that’s really true.

Why is discharging student loans in bankruptcy so difficult?

“Congress carved out a specific exemption in the bankruptcy code that treats student loans differently than any other type of consumer debt,” Minsky said.

That exemption, passed in 2005, is known as the Bankruptcy Abuse Prevention and Consumer Protection Act, which applies to all federal and private student loans. Unless the borrower can prove they face undue hardship as a result of their student loan debt, those loans are exempt from discharge when filing for bankruptcy.

“The other problem is that Congress didn’t really define this term ‘undue hardship,’” Minsky said. “And whenever Congress passes a law that doesn’t define a term, it’s really up to the courts to interpret what that term means.”

Defining ‘Undue Hardship’

How the vague standard of undue hardship is defined varies from court to court. “There’s no one set of factors that courts will look at,” Minsky said. “Courts use a couple different tests, depending on what circuit you’re in.”

However, one of the early cases to interpret that term was the Brunner case, which set the standard for what undue hardship means. According to Minsky, in most circuits, courts will use the Brunner test, which requires borrowers to demonstrate the following:

  1. They cannot maintain, based on current income and expenses, a minimal standard of living for the debtor and dependents if forced to repay the student loans.

  2. 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.

  3. They have made good-faith efforts to repay the loans.

Essentially, Minsky explained that the court must evaluate the borrower’s past, current and future circumstances to try to figure out whether or not they meet the standard. Minsky noted that the court will consider factors such as the borrower’s age, health, job history and income, age of the loans, payment history and other exceptional circumstances, such as a sick family member who requires a lot of care.

Clearly, there’s quite a bit of subjectivity that goes into a court’s decision.

“There’s precedent that judges have to follow, but you can certainly get a different outcome depending on the court,” Minsky said, which he pointed out is true in any type of legal matter. “Ultimately, it’s a lot of speculation.”

For instance, it’s impossible to predict for sure what the future holds for a particular borrower. And yet that’s a major part of the court’s evaluation.

Federal Vs. Private Student Loans

Another potential snag for borrowers pursuing bankruptcy is if they have federal loans.

Both federal and private student loans are treated the same under the bankruptcy code, and both are subject to the same undue hardship standard. However, according to Minsky, the difference is that federal loans have income-driven repayment options, which can lower payments to a small percentage of the borrower’s income. In some cases, that payment can be as low as $0.

“That is being used by the Department of Education and federal guaranty agencies as a reason for arguing that a borrower doesn’t meet the standard,” Minsky said. “The argument is, ‘well, you can get onto an affordable payment plan, so how can it possibly be an undue hardship?’ So it’s not that they’re treated differently under the law, it’s that there could be different arguments used depending on those specifics.”

Even so, federal loans aren’t necessarily a deal-breaker. Minsky said there’s still the administrative burden of having to recertify your information each year. Plus, income-driven payment options promise to end in loan forgiveness after 20-25 years of payments, depending on the program, and there are tax consequences to that. Any forgiven debt is taxed as income for the year, which could be too large a bill for a struggling borrower to handle.

Is filing bankruptcy for student loans ever a good idea?

Minsky explained that filing for bankruptcy requires something called an adversary proceeding. “It’s basically a fancy term for suing your student loan lenders in bankruptcy court,” he said. That means going through the litigation process, which could be long, draining and expensive.

For that reason, it doesn’t always pay to pursue bankruptcy, especially if the borrower has alternative options for stopping a lawsuit, getting out of default or getting onto a loan repayment program. “Bankruptcy is usually the option to consider when there are no other options, in which case, even with the chances being so tough, it could be worth exploring,” Minsky said.

Filing for bankruptcy on student loans might be costly and time-consuming, but one thing is for certain: It’s not impossible.

“It becomes this self-fulfilling prophecy where people don’t go for it because they think it’s not viable or it’s not an option at all,” Minsky said. “And so few people go for it, which reinforces the notion that it is extremely unlikely or impossible.”

In fact, a 2011 study by Jason Iuliano of the University of Pennsylvania Law School found that close to 40 percent of borrowers who included their student loans in their bankruptcy filings got a portion or all of that debt discharged. However, only 0.1 percent of people who filed for bankruptcy actually tried to discharge their student loans.

The study also found that those who were successful tended to share three qualities: They were unemployed, had a medical hardship and had lower annual incomes the year before they filed for bankruptcy.

Bankruptcy isn’t a silver bullet by any means. If you have another option for getting your student loan payments down to an affordable level, take it. If you’re out of options, bankruptcy can be a last resort.

“It is not easy and it is not always going to be cheap, but it is far from impossible. And for some people, I think it is a viable option to pursue,” Minsky said.

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4 things kids need to know about money

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(NC) Responsible spending includes knowing the difference between wants and needs. Back-to-school season, with added expenses and expectations around spending, is the perfect time to not only build your own budget for the year ahead, but also to introduce your own children to the concept of budgeting.

The experts at Capital One break down four basic things that every child should know about money, along with tips for bringing real-life examples into the conversation.

What money is. There’s no need for a full economic lesson,but knowing that money can be exchanged for goods and services, and that the government backs its value, is a great start.
How to earn money. Once your child understands what money is, use this foundational knowledge to connect the concepts of money and work. Start with the simple concept that people go to work in exchange for an income, and explain how it may take time (and work) to save for that new pair of sneakers or backpack. This can help kids develop patience and alleviate the pressure to purchase new items right away that might not be in your budget.
The many ways to pay. While there is a myriad of methods to pay for something in today’s digital age, you can start by explaining the difference between cash, debit and credit. When teaching your kids about credit, real examples help. For instance, if your child insists on a grocery store treat, offer to buy it for them as long as they pay you back from their allowance in a timely manner. If you need a refresher, tools like Capital One’s Credit Keeper can help you better understand your own credit score and the importance of that score to overall financial health.
How to build and follow a budget. This is where earning, spending, saving and sharing all come together. Build a budget that is realistic based on your income and spending needs and take advantage of banking apps to keep tabs on your spending in real-time. Have your kids think about how they might split their allowance into saving, spending and giving back to help them better understand money management.

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20 Percent Of Americans In Relationships Are Committing Financial Infidelity

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Nearly 30 million Americans are hiding a checking, savings, or credit card account from their spouse or live in partner, according to a new survey from CreditCards.com. That’s roughly 1 in 5 that currently have a live in partner or a spouse.

Around 5 million people — or 3 percent — used to commit “financial infidelity,” but no longer do.

Of all the respondents, millennials were more likely than other age groups to hide financial information from their partner. While 15 percent of older generations hid accounts from their partner, 28 percent of millennials were financially dishonest.

Regionally, Americans living in the South and the West were more likely to financially “cheat” than those living in the Northeast and Midwest.

Insecurity about earning and spending could drive some of this infidelity, according to CreditCards.com industry analyst Ted Rossman.

When it comes to millennials, witnessing divorce could have caused those aged 18-37 to try and squirrel away from Rossman calls a “freedom fund”.

“They’ve got this safety net,” Rossman said. They’re asking: “What if this relationship doesn’t work out?”

As bad as physical infidelity

More than half (55 percent) of those surveyed believed that financial infidelity was just as bad as physically cheating. That’s including some 20 percent who believed that financially cheating was worse.

But despite this, most didn’t find this to be a deal breaker.

Over 80 percent surveyed said they would be upset, but wouldn’t end the relationship. Only 2 percent of those asked would end the relationship if they discovered their spouse or partner was hiding $5,000 or more in credit card debt. That number however is highest among those lower middle class households ($30,000-$49,999 income bracket): Nearly 10 percent would break things off as a result.

Roughly 15 percent said they wouldn’t care at all. Studies do show however that money troubles is the leading cause of stress in a relationship.

That’s why, Rossman says, it’s important to share that information with your partner.

“Talking about money with your spouse isn’t always easy, but it has to be done,” he said. “You can still maintain some privacy over your finances, and even keep separate accounts if you and your spouse agree, but you need to get on the same page regarding your general direction, otherwise your financial union is doomed to fail.”

With credit card rates hovering at an average of 19.24 percent APR, hiding financial information from a partner could be financially devastating.

But, Rossman adds, it’s not just about the economic impact but also the erosion of trust.

“More than the dollars and cents is that trust factor,” he said. “I think losing that trust is so hard to regain. That could be a long lasting wedge.”

Kristin Myers is a reporter at Yahoo Finance. Follow her on Twitter.

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7 Examples Of Terrible Financial Advice We’ve Heard

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Between television, radio, the internet and well-meaning but presumptuous friends and family, we’re inundated with unsolicited advice on a daily basis. And when it comes to money, there’s a ton of terrible advice out there. Even so-called experts can lead us astray sometimes.

Have you been duped? Here are a few examples of the worst money advice advisers, bloggers and other personal finance pros have heard.

1. Carry a balance to increase your credit score.

Ben Luthi, a money and travel writer, said that a friend once told him that his mortgage loan officer advised him to carry a balance on his credit card in order to improve his credit score. In fact, the loan officer recommended keeping the balance at around 50 percent of his credit limit.

“This is the absolute worst financial advice I’ve ever heard for several reasons,” Luthi said. For one, carrying a credit card balance doesn’t have any effect on your credit at all. “What it does do is ensure that you pay a high interest rate on your balance every month, neutralizing any other benefits you might get from the card,” Luthi explained. “Also, keeping a 50 percent credit utilization is a surefire way to hurt your credit score, not help it.”

Some credit experts recommend keeping your balance below 30 percent of the card limit, but even that’s not a hard-and-fast rule. Keeping your balance as low as possible and paying the bill on time each month is how you improve your score.

2. Avoid credit cards ― period.

Credit cards can be a slippery slope for some people; overspending can lead to a cycle of debt that’s tough to escape.

But avoiding credit cards on principle, something personal finance gurus like Dave Ramsey push hard, robs you of all their potential benefits.

“Credit cards are a good tool for building credit and earning rewards,” explained personal finance writer Kim Porter. “Plus, there are lots of ways to avoid debt, like using the card only for monthly bills, paying off the card every month and tracking your spending.”

If you struggle with debt, a credit card is probably not for you. At least not right now. But if you are on top of your finances and want to leverage debt in a strategic way, a credit card can help you do just that.

3. The mortgage you’re approved for is what you can afford.

“The worst financial advice I hear is to buy as much house as you can afford,” said R.J. Weiss, a certified financial planner who founded the blog The Ways to Wealth. He explained that most lenders use the 28/36 rule to determine how much you can afford to borrow: Up to 28 percent of your monthly gross income can go toward your home, as long as the payments don’t exceed 36 percent of your total monthly debt payments. For example, if you had a credit card, student loan and car loan payment that together totaled $640 a month, your mortgage payment should be no more than $360 (36 percent of $1,000 in total debt payments).

“What homeowners don’t realize is this rule was invented by banks to maximize their bottom line ― not the homeowner’s financial well-being,” Weiss said. “Banks have figured out that this is the largest amount of debt one can take on with a reasonable chance of paying it back, even if that means you have to forego saving for retirement, college or short-term goals.”

4. An expensive house is worth it because of the tax write-off.

Scott Vance, owner of taxvanta.com, said a real estate agent told him when he was younger that it made sense to buy a more expensive house because he had the advantage of writing off the mortgage interest on his taxes.

But let’s stop and think about that for a moment. A deduction simply decreases your taxable income ― it’s not a dollar-for-dollar reduction of your tax bill. So committing to a larger mortgage payment to take a bigger tax deduction still means paying more in the long run. And if that high mortgage payment compromises your ability to keep up on other bills or save money, it’s definitely not worth it.

“Now, as a financial planner focusing on taxes, I see the folly in such advice,” he said, noting that he always advises his client to consider the source of advice before following it. ”Taking tax advice from a Realtor is … like taking medical procedure advice from your hairdresser.”

5. You need a six-month emergency fund.

One thing is true: You need an emergency fund. But when it comes to how much you should save in that fund, it’s different for each person. There’s no cookie-cutter answer that applies to everyone. And yet many experts claim that six months’ worth of expenses is exactly how much you should have socked away in a savings account.

“I work with a lot of Hollywood actors, and six months won’t cut it for these folks,” said Eric D. Matthews, CEO and wealth adviser at EDM Capital. “I also work with executives in the same industry where six months is overkill. You need to strike a balance for your work, industry and craft.”

If you have too little saved, a major financial blow can leave you in debt regardless. And if you set aside too much, you lose returns by leaving the money in a liquid, low-interest savings account. “The generic six months is a nice catch-all, but nowhere near the specific need of the individual’s unique situation… and aren’t we all unique?”

6. You should accept your entire student loan package.

Aside from a house, a college education is often one of the biggest purchases people make in their lifetimes. Often loans are needed to bridge the gap between college savings and that final tuition bill. But just because you’re offered a certain amount doesn’t mean you need to take it all.

“The worst financial advice I received was that I had to accept my entire student loan package and that I had no other options,” said Gina Zakaria, founder of The Frugal Convert. “It cost me a lot in student loan debt. Now I tell everyone that you never have to accept any part of a college financial package that you don’t want to accept.” There are always other options, she said.

7. Only invest in what you know.

Even the great Warren Buffett, considered by many to be the best investor of all time, gets it wrong sometimes. One of his most famous pieces of advice is to only invest in what you know, but that might not be the right guidance for the average investor.

In theory, it makes sense. After all, you don’t want to tie up your money in overly complicated investments you don’t understand. The problem is, most of us are not business experts, and it’s nearly impossible to have deep knowledge of hundreds of securities. “Diversification is key to a good portfolio, and investing in what you know leads to a very un-diversified portfolio,” said Britton Gregory, a certified financial planner and principal of Seaborn Financial. “Instead, invest in a well-diversified portfolio that includes many companies, even ones you’ve never heard of.”

That might mean enlisting the help of a professional, so make sure it’s one who has your best interests at heart.

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