Category Archives: Chapter 13

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.

 

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.

Bank Workouts

While negotiating debt workouts with banks in the last few months, I’ve noticed a number of clients coming into my office with a significant financial problem: the bank has a lien on all of their assets, and they don’t have the cash flow to ensure that everyone gets paid, including the landlord, the bank, and other general creditors.

In these situations an old saying by Donald Trump seems appropriate: “When you owe the bank 1 million bucks and can’t pay it, you have a problem. When you own the bank 10 million bucks and you can’t pay it, the bank has a problem.” In other words, when cash flow is tight, the entrepreneur needs everyone involved to work with him.

Of course, if everyone can work together, the hard-working entrepreneur can pull his way out of a slump. However, sometimes in such a situation despair can set in, and the entrepreneur becomes filled with apathy, losing his drive. The obvious solution is to give the debtor a little breathing room, so that he can get back to focusing on what’s most important to resolving their financial issues: cash flow.

In a number of recent situations, my first approach was to sit with the bank, once learning they had collateral and all the assets of the business. This may seem like a precarious or risky position, but actually it is to the small businessman’s benefit. When the bank has the first claim on all the assets, there is nothing to fear from general creditors, who have no claim on assets due to the fact the debt is unsecured. As you can see, keeping the bank happy is critical.

But just because the bank is happy doesn’t mean the debtor’s problems are over. The debtor must continue to work hard, and work steadily. Creditors need to be alerted to the fact that bankruptcy is possible, if workout discussions are not productive for all parties. The debtor’s attorney will need to handle all lawsuits, and everyone involved needs to be given enough information to understand exactly what’s going on.

Are you worried about these kinds of issues? Call me on my small-business hotline, to discuss these matters, or schedule a consultation in the office by calling (317) 266-8888. We will try our best to get to the bottom of your issues, and help you to solve them quickly with minimal aggravation.

Can inaccurate credit reports be corrected?

Yes, they can.  The Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act (FACTA), allows the consumer to question accuracy of reports, and furnish proofs to be considered in making corrections.  Several years ago, I taught a seminar just after a change in the law.  You can examine those seminar materials here:  Fair Credit Reporting and mortgage reporting, bky issues .  If you want to read the law yourself, you can access it here:  FCRA as amended by FACTA

In essence, those rules provide that you have the right to one free report each year, and you can apply for that report from each of the three credit reporting agencies (CRAs): Experian, Equifax, and TransUnion.  If you would like the form to use, you will find it here:  Annual Credit Report Request Form .  If you are turned down for a loan, you can get the credit report which was used to evaluate your credit, and it is also at no cost.

In order to dispute inaccurate (including incomplete) credit entries, you must contact the CRA with information showing the inaccuracy, and they have 30 days to investigate.  Hopefully, they will make the correction with no further effort on your part.

Review my attached writing to consider all the myriad ways a credit report can get inaccurate.  Frankly, it is amazing we have accurate reports.  A number of years ago, it was estimated that 40% of the reports have errors which will lead to denial of credit, and 80% of reports have errors in general.  With that in mind, looking at your report once a year is a good idea.

One common area of inaccuracy is the listing of debt discharged in  bankruptcy.  Often, the report is not updated after bankruptcy.  Even though debt is washed out in bankruptcy, the credit report is silent as to that issue, giving the impression that the debt is still owed!  Thus, it is always wise to review the credit report 6 months after a bankruptcy discharge.  If you continue to pay on debt after a bankruptcy, the creditor must continue to report your payments after bankruptcy, in order for the report to be accurate.

Does Debt Settlement really work?

Lately, I have done a fair amount of lecturing to CPAs and others about debt settlement, illustrating the techniques used for handling debt with this bankruptcy alternative.  For a description of the relative advantages in comparison t0 Chapter 13 bankruptcy, I have composed a summary:Chapter 13 compared to Debt Settlement.

Of course, some will worry about tax issues in debt settlement, as well they should.  The good news is that an insolvent debtor can escape taxation on debt forgiveness, using the IRS insolvency rules.  Want to calculate if you qualify?  Use the Insolvency Worksheet.

If you are a professional who wants the best information, I would suggest IRS Pub 4681 , which details the rules in depth.  Also, the IRS website on this topic is useful:  Debt Forgiveness IRS websites .  In any event, those loaded up with consumer debt should consider debt settlement as a useful alternative to Chapter 13 bankruptcy, or other debt workout alternatives.

A radio show…….why bother?

Most Saturday mornings, I start the day with a warm cup of coffee while I read the newspaper, or maybe several different newspapers, if I haven’t yet caught up with the news of the week.  After immersing myself in reading for a while, I take some time to peruse the articles that I’ve arranged on the kitchen table in front of me.

As the “theme of the week” becomes clearer, I’m typically lost in thought while I organize the main “themes” and my presentation.  And before you know it I’ve got the topic for my weekly radio show.

Once done, I critique it. Was it compelling?  Lucid?  Relevant?

Why bother?  Just for the thrill of thinking out solutions to everyday problems in a world where people need someone to trust.  In the practice of law, communication is everything.  Let us start with building trust, based on reliable and solid advice.