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Redwood City California Bankruptcy Law Blog

How bankruptcy courts treat student loan debt

In most cases, those in California and throughout the country who have student loan debt cannot discharge it in bankruptcy. This policy was put in place because of a fear that people would simply file for bankruptcy after getting their degree. However, there are exceptions to the rule for those who can pass the Brunner test. The Brunner test is invoked to determine if forcing a person to make student loan payments constitutes an undue hardship.

To pass the test, a person must show that making payments would not allow him or her to maintain a reasonable standard of living. Furthermore, it must be shown that this will be true for as long as payments must be made. Finally, a good faith effort must have been made to attempt to pay off a balance owed. In some cases, this means simply attempting to negotiate a payment plan that works for the debtor.

Minimum credit card payments could lead to debt for decades

Emergencies sometimes force people in California to use their credit cards. Reliance on credit cards has resulted in American households owing an average credit card balance of $8,195. A person with roughly $8,000 in credit card debt who only makes the minimum monthly payments would need about 23 years to pay off everything at an average interest rate of 17.41 percent.

During those decades, the debtor would pay approximately $11,000 in interest on the original balance. Minimum monthly payments take so long to reduce the debt because they only equal about 1 percent of the balance.

What will happen to your stuff if you file for Chapter 7?

Making the choice to file for bankruptcy is not easy. You may feel embarrassed and hopeless about your financial situation, but taking this step can help you achieve a better financial future. In the meantime, however, you may wonder what bankruptcy will mean for your personal property. 

Some California consumers refrain from filing for Chapter 7 bankruptcy because they are unsure of what taking this step will mean for their personal property. Chapter 7 is liquidation bankruptcy, but that does not mean you will lose all of your property. There are certain exemptions available that can allow you to retain many of the assets that are most important to you. It may be helpful to learn more about how bankruptcy works and what it will mean for you.

Credit card balances in the U.S. continue to rise

Financial analysts in California and around the country have been voicing concerns about a looming consumer debt crisis for several years, and their arguments are growing more strident as American households sink deeper and deeper into debt. The financial information website WalletHub keeps track of revolving debt in the United States, and its report for the third quarter of 2018 reveals that American households now owe an average of $8,284 to credit card companies.

That figure represents a 2 percent increase in the average revolving debt balance in just one year, and WalletHub experts believe that the current level of indebtedness is just $177 per household away from becoming unsustainable. Rising interest rates are making matters even more difficult for individuals and families who are struggling to cope financially. The Federal Reserve raised interest rates four times in 2018, and more hikes can be expected in 2019.

Why opt for Chapter 13 bankruptcy

People in California facing significant, unrepayable debt may turn to personal bankruptcy to find relief. There are two types of personal bankruptcy available: Chapter 7 and Chapter 13. If a person files for Chapter 7 bankruptcy, a trustee liquidates his or her assets, uses the proceeds to pay off some amount of the outstanding debt and discharges the remainder. However, Chapter 7 isn't the best option for everyone seeking debt relief, especially if they have certain key assets to maintain or they have a relatively high income.

A federal means test determines whether a person could pay their debts over time in order to keep their home or other valuables from being liquidated. Under Chapter 13 bankruptcy, the person works with an attorney to develop a five-year plan to repay outstanding debts. During that period, the debts are repaid as supervised and approved, and a remaining balance would be discharged after five years. Under this structured plan, the person could seek debt relief while maintaining the home or other items. During that five-year period, all of a person's disposable income is to be directed toward debt. The bankruptcy court will allow for some personal expenses, but his or her overall finances are subject to court approval on an ongoing basis.

Calculating a payment plan for a Chapter 13 bankruptcy

California residents who have declared Chapter 13 bankruptcy might wonder how their payments will be calculated. There are a few kinds of bankruptcy a person might file for, but the most common types are Chapter 7 or 13. With Chapter 7, many eligible debts can be discharged.

Chapter 13 allows a person to keep some property, such as a home, and pay off debts over a period of three or five years. The payment is made to a trustee who then distributes the payments to creditors. Filing for Chapter 13 requires a person to have a reliable income source, but it does not necessarily have to be the same amount every month, and it does not have to come from employment income. It may be from alimony, a pension or other sources. Based on income and expenses, the person might not pay the same amount every month. The amount paid could change regularly.

Meeting the qualifications for Chapter 7 bankruptcy

California residents facing bankruptcy may be interested in learning about the bankruptcy means test. This test helps to determine whether an individual who is in debt meets the qualifications to file for Chapter 7 bankruptcy. In times past, it was easier for an individual filing for bankruptcy to meet the criteria because the courts had broader discretion in determining if a person was eligible for bankruptcy.

This changed in 2005 when Congress passed the Bankruptcy Protection Act of 2005. The purpose of this law was to provide consistent standards and serve as a counterbalance to some of the more lenient standards that had been put in place earlier. Now, this means that before filing for bankruptcy, the majority of filers will need to meet the standards laid out in the means test.

Context matters when talking about debt

As of late 2018, Americans had a total of $3.93 trillion in consumer debt when not accounting for mortgages. California residents and other Americans are expected to add another 5 percent in credit card balances throughout the rest of the year. Therefore, it is believed that consumer debts will eventually hit $4 trillion in the near future. While it only took five years to go from $3 trillion in debt to $4 trillion, it may not be cause for alarm.

This is because Americans have saved about $2.5 trillion more than they have accumulated in debt since 2008. It is also worth noting that homeowners have more equity in their properties than they did in 2008. Of course, it doesn't mean that individuals shouldn't keep an eye on their own spending habits. It is worth reviewing card balances and interest rates to ensure that debt stays at a reasonable level.

The limitations on how often one can file for bankruptcy

The concept of allowing a debtor to get relief from unmanageable economic distress with a fresh start has a long history in the U.S., dating back to bankruptcy's incorporation within the Constitution. Although bankruptcy operates under federal jurisdiction, California has its own state-specific rules. A lot of the state rules concern which items are included and the maximum value for property that is exempt from attachment by creditors.

Initially, there are two types of bankruptcy for an individual, Chapter 7 and Chapter 13. The primary difference is a Chapter 7 is considered a full discharge of debt while Chapter 13 is a restructuring of debt with a partial repayment to creditors. Nothing in the bankruptcy code specifies how many times an individual can declare bankruptcy, but legal experts explain the code does restrict how long one must wait to file after a previous filing was discharged. Precisely how long depends on the type of bankruptcy previously filed and the type presently contemplated.

Options for paying off credit card debt

It's that time of year. You're likely spending a bit more money than you typically do throughout the year because the holiday seasons have begun. Whether you host your extended family for a Thanksgiving gathering or are among thousands of California shoppers who stand in long lines at department stores for Black Friday sales, it is not uncommon to start racking up credit card debt between November and January.

It might not be so bad if your holiday shopping were the only expense you'd have at this time of year. The problem for most people, however, is that daily living expenses still exist, and, for some people, extenuating circumstances arise, such as an unexpected medical emergency, a loss of income, needed car repairs, etc., that can cause already just-balancing financial scales to tip in the wrong direction. This can spark an after-holiday financial crisis.