Monthly Archives: December 2015

Student Loan Discharges and IBR

Many bankruptcy court judges, including some  STUDENTloanWEBof debt

in Detroit, Michigan, look at whether a bankruptcy

debtor is in, or has applied for, an Income Based

Repayment (IBR) plan for government student loans,

when a debtor is trying to discharge his student loans.

I blog about getting caught in that web of student loan debt on this, my bankruptcy blog, and my student loan blog,

The government has pushed its various income based student loan repayment plans as the solution.

There are a couple of plans, and it depends on what kind of student loan(s) you have, how it would work for you.

Basically, after 25 years of making whatever payment the formula dictates, you are discharged of liability for the rest of your student loan debt.

HOWEVER, you may be taxed on the forgiven amount of student loan debt.

I agree with Steve Rode that there should be no presumption, which amounts to a requirement in some courts, that a debtor be on an IBR plan for studentLgovernment student loans.

I mean, if you qualify under an IBR to make zero dollar per month on your student loans, does that not mean that you cannot afford to repay them.

Or, in bankruptcy code terms, that it would be an undue hardship for you to have to repay the student loans?

From Rode’s Huffington Post article on a bankruptcy court decision NOT presuming that an IBR basically precludes a bankruptcy court discharge of student loans:

This next section is worth reading closely. Here is what Judge Federman said about this case, “In determining how much weight to give to eligibility for IBRP, a court, contrary to the Department’s position, must be mindful of both the likelihood of a debtor making significant payments under the IBRP, and also of the additional hardships which may be imposed by these programs. As stated, interest and other charges would continue to accrue while the Debtor participated in IBRP, meaning that the total debt would be increasing. The overhang of such debt could well impact not only the Debtor’s access to credit over the 25-year IBRP period, but could also affect future employment opportunities and access to housing. And, decades of mounting indebtedness, even with a zero or minimal payment amount, can impose a substantial emotional burden as well. Indeed, in the Debtor’s case, the evidence showed that he has already suffered emotionally from his ongoing debt struggles and was in fact hospitalized in part because of it. Furthermore, borrowers who default while in an IBRP program lose eligibility. For someone with the Debtor’s income, and of his age, an inability to make one month’s payment over a 25-year year period is highly likely, given the possibility of medical conditions leading to additional expenses and loss of income, as well as other short-term financial emergencies encountered by those with nothing to fall back on.

And, even if the Debtor were able to navigate the 25-year program without a misstep, he could well then be faced with a significant tax debt when the debt is forgiven. To explain, discharge of a debt in bankruptcy is not itself a taxable event. However, forgiveness of a student loan at the end of the IBRP period is taxable in the same way as forgiveness of any other debt outside bankruptcy. That is, to the extent a debtor’s assets exceed liabilities after the forgiveness, the forgiven debt is taxable income. Thus, if the Debtor were able over the next 25 years to timely pay his IBRP payments, as well as pay his child support and other expenses, and to somehow accumulate reserves to fall back on for retirement or otherwise, he would then be rewarded with a tax bill based on the amount of principal, interest and other charges owed to the Department at the time of forgiveness, when the Debtor is likely to be at least 65 years old. In contrast, discharge of his student loans in bankruptcy would give the Debtor the opportunity to use his fresh start to support his children and improve his financial situation before he is too old to do so. While “the mere possibility of tax consequences at the expiration of the 25-year repayment period is not dispositive of the issue of whether the [IBRP] represents a viable avenue for repayment of the student loan debt,” it is a factor which may and should be considered based on the facts of a particular case.

Uh, yup.

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Bankruptcy (Not) News: Banks Still Winning

Sarah Lazare wrote this story a while ago for the Common Dreams website: Holder’s six years of service under the administration of President Barack Obama were defined by his refusal to criminally prosecute any of the financial institutions that drove the 2008 financial meltdown and subsequent recession. “If we had a more aggressive media, thisContinue Reading