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Starting in 2012, about 1.6 million student loan borrowers will be able to make smaller monthly payments, and make less of these payments before the remaining balances are forgiven. On October 26, President Obama announced these improvements to the Income-Based Repayment Plan.
The changes are simple.
1. Monthly payments: Under the Income-Based Repayment Plan, payments are capped “at an amount intended to be affordable based on your income and family size.” The payment amount has been 15% of your disposable income. It is now going down to 10% of disposable income. (Click on the above link for more details on how to determine your disposable income and payment amount.)
2. Repayment term: The current 25-year repayment period is being shortened to 20 years.
Although 20 years is still a very long time, if your income is low enough the monthly payments can be very low, or even $0, meaning that you may not have to pay very much during those 20 years.
Unfortunately, this new improved Income-Based Repayment Plan only applies to people who 1) graduate in 2012 or later, 2) took out their first student loan no earlier than 2008, and 3) will be taking out at least one new federal student loan during 2012 or later. It’s clearly designed for current and future student loan borrowers.
But even if you don’t qualify for the 10%/20-year improved version, the older 15%/25-year Plan can also be very helpful—saving you money right away in your monthly budget, and also potentially saving a lot of money in your lifetime budget.
However, there ARE other limitations: none of this, including the Income-Based Repayment Plan, applies to private student loans. You need to contact your private lender to find out your options. And even if you do have a federal student loan, you cannot be in default on the loan to qualify for this Plan. To find out what type of student loans you have and their default status, go to the National Student Loan Data System for this and related information.
One million more homeowners have just become eligible for refinancing at the current very low interest rates. Until now, the federal Home Affordable Refinance Program (HARP) has been limited to homeowners with mortgages of no more than 125% of the value of their homes. By way of example, for a home currently worth $200,000, the mortgage could be no more than $250,000. Now that 125% limitation has been eliminated, allowing homeowners more deeply underwater to qualify for HARP refinancing. So some people who have not been able to take advantage of the low interest rates will be able to do so and get the resulting lower monthly mortgage payments. This change should especially help homeowners in those parts of the country hardest hit by reduced home values, where a large percentage of homeowners have been cut off from being able to use HARP.
To qualify under the revised refinancing:
1. You must have a mortgage owned or guaranteed by Fannie Mae or Freddie Mac, which include about half of all U.S. home mortgages. You can find out whether yours is by looking that up online at Fannie Mae and Freddie Mac or calling 800-7FANNIE or 800-FREDDIE (8 am to 8 pm ET for both numbers).
2. Your mortgage must have belonged to either of these two institutions by no later than May 31, 2009.
3. You cannot have been late on any of the mortgage payments during the last 6 months or on more than one payment in the last 12 months.
4. You can’t have already refinanced through HARP.
The program continues to be voluntary for the mortgage lenders, so there are additional incentives for them. Lenders have been accused of being extremely picky about income documentation and home valuation under HARP, apparently fearing that they would have to buy-back the new mortgages being sold to Fannie Mae or Freddie Mac. So the new changes eliminate most of that risk. As a result, the application process should be much easier and less expensive for borrowers.
Detailed rules are expected by the middle of November, with lenders ready to implement the revamped program starting around December 1.
Paying for the holidays with credit cards, even at a relatively modest amount, can mean that you will have to pay back those purchases if you file a bankruptcy. That could happen even if at the time you made those purchases you fully intended to repay that credit—in other words, even if you weren’t planning to file a bankruptcy.
The Bankruptcy Code contains some very specific rules about the consequences of using credit to buy “luxury goods or services” during the months before filing a bankruptcy.
If you use a credit card—or any other type of consumer credit—to buy at least $500 of consumer “luxury goods or services” through any single creditor within the 90 days before filing bankruptcy, there is a “presumption” that the debt incurred this way is nondischargeable—that it can’t be legally written off.
Don’t be fooled by the word “luxury” in that rule. That means anything not “reasonably necessary.” Arguably anything not used for survival in not “reasonably necessary.” So even modest Christmas and holiday gifts could be considered “luxuries” for this purpose.
Similar rules apply to the use of cash advances, except that the trigger dollar amount is $750 per creditor, and the period of time is within 70 days before filing bankruptcy, with the same “presumption” that the debt would not be dischargeable.
You may be thinking that these rules only create presumptions, which can be defeated. So that you can still discharge these kinds of debts by showing that you in fact you had every intention of paying them at the time you used the credit. Yes, that true, in theory but not likely in practice. First, coming up with that kind of evidence—proving your intent at some point of time in the past– is usually not easy. And second, and more important, the high cost to bring that kind of evidence to court usually makes trying to do so not worthwhile. Usually the amount of attorney fees it costs you to fight the issue is more than the amount being fought about.
What all this means that if during the holidays you use a credit card or other consumer credit exceeding these dollar limits, and then file bankruptcy within the applicable 70-day and 90-day periods, most likely you will still have to pay for whatever credit was incurred during those periods. You can avoid these presumptions by waiting to file the bankruptcy until after those periods of time have expired, but that’s not always possible. At best you’ll delay getting your bankruptcy filed, and so will delay the eventual resolution of your financial problems. And even if you wait, the creditor can still try to show your bad intention. Avoid all this by not using your credit cards and/or lines of credit whenever there is a sensible chance that you’ll have to file a bankruptcy in the near future.
Especially if you’re thinking about filing bankruptcy, resist the urge to rack up a big credit card bill for Christmas and other holiday gifts. Otherwise you may find your hands tied about what debts you can write off in bankruptcy or even when you can file your case. But before getting to these legal reasons, there are some more basic ones.
When money is tight, your anxiety about paying for gifts and for special meals clouds the holidays. If you have room on your credit cards, and very little disposable income, the temptation to use the credit cards is just about irresistible. We live in a rather materialistic culture, so when we express our love and affection through gifts we tend to let their price carry too much meaning. We feel that an expensive gift shows how close we are to someone. We also let the gifts we give, and their price, define us and our own worth. We’re no good if you can’t give our loved ones nice gifts. That’s especially true with our spouse or that someone special, and with our kids. If we can’t give our sweetheart something really special, if we don’t fill under the Christmas tree for our kids, then we feel like we are not a very good spouse, friend, or parent. We don’t want to disappoint them, and have them be disappointed in us.
This feeling may be especially intense if there is tension in the marriage, or within the household, often the case when there are intense financial pressures. It can be a vicious cycle.
In our hearts we know that the price of gift is not a true measure of the extent of our love, and certainly that gifts don’t buy love. To help you follow your wiser impulses, here are three suggestions.
First, give gifts appropriate to your financial circumstances, no matter how modest those gifts may be. That is the only responsible way, and in fact shows your love—especially to family members—a lot more than if you gave gifts you could not afford.
Second, put the energy that you would put into fretting about how to pay for a relatively expensive gift instead into creatively thinking about an appropriately priced perfect gift. Come up with something that reflects the connection between the two of you, one that the person will enjoy but also shows that you really put your heart into it.
Third, whenever possible communicate honestly with your loved ones about your financial constraints. This has to be done the right way, preserving your own dignity, and appropriate for the relationship—different for extended family, spouse, your children. Instead of being negative, it can be a constructive conversation about priorities, honesty, and what love is really all about.
I know, this is lots easier said than done.
To help motivate you, in my next blog I’ll give you some legal reasons why piling holiday charges onto your credit cards can tie your hands in ways you don’t expect.
It will be just a little bit easier or a little bit harder to qualify to file a Chapter 7 “straight bankruptcy” as of November 1, 2011. Whether it’ll be easier or harder for you depends on the state where you reside and on your family size.
What changes on November 1? The bankruptcy system looks to the U.S. Census to calculate each state’s median income, as applicable to each size of family. Median income is the amount at which half of the state’s families have incomes higher and half have lower. If your income is below your state’s median income for your size of family, then in almost all situations you can file a Chapter 7 case. But if your income is above that median income amount and you still want to file a Chapter 7 case, then you have to fill out a long and rather complicated form about your allowed expenses to determine whether or not filing a Chapter 7 case would be “abusive.” So if you want to file a Chapter 7 bankruptcy, it’s a lot easier if you’re below the median.
On November 1, new median income amounts become applicable. Some people were predicting these amounts would be lower because of the faltering economy. But in many states the income figures went up instead of down. For example, among single-person families, 31 of the states’ median incomes went up and only 19 went down. Remember, if the median income goes up, that makes it a little more likely that your income will fall below that median, and you’ll have smoother sailing qualifying for Chapter 7.
So, if your income is close to the applicable median amount, and the median is increasing for your family size in your state on November 1, then you have a better chance at falling under the median if you file on or after that date. But if the applicable median is decreasing, then you have a better chance of falling under the median if you file your bankruptcy before then, by no later than October 31.
I’m about to give you the two lists of median income amounts—the one applicable through October 1, and the other starting November 1. But before you start comparing those annual income amounts to your income, please understand that the meaning of “income” in this context is quite different than conventional meanings of that word. “Income” here is calculated using a six-calendar-month look back period that is doubled and then divided by 12 for an average monthly income. It includes all sources of income from all family members other than social security, not just taxable income.
Because of this and many other sorts of complications, yon truly need to consult with a bankruptcy attorney about whether this November 1 median income changes matter to you, and whether you should try to file before then or instead after. But to get you started, here are the two median income lists: the one to use until October 31, 2011, and the other to use after that.
Many judgments against you don’t matter once you file a bankruptcy. But certain ones are very dangerous. How can you tell the difference?
Letting a creditor get a judgment against you after it has sued you can sometimes result in that debt not being written off (“discharged”) in a later bankruptcy case. Or that debt may instead become much more difficult to discharge, even if eventually it is. But in the meantime it can turn an otherwise straightforward case into one much more complicated.
So how can certain judgments make a debt not dischargeable? Because of a basic principle of law which says that once one court has decided an issue, another court must respect that decision. The theory is that litigants should only get to use court resources once to resolve a dispute. Once a court decides an issue, it’s been decided (except for the limited exception of appeals to a higher court).
But as I said, most judgments by creditors are NOT a problem in bankruptcy. That’s because most creditor lawsuits are about only one thing: whether the debt is legally owed. A judgment that establishes nothing more than that can generally be discharged in a subsequent bankruptcy.
The judgments that are dangerous are more complicated. They arise in lawsuits in which the creditor is alleging that the person owing the debt incurred it in some fraudulent or inappropriate way. If the judgment clearly establishes that’s what happened, then the bankruptcy court later has to accept that decision. If the wording of the lawsuit and judgment shows that the behavior was of the kind that the bankruptcy laws say results in the debt not being discharged, then without further litigation the bankruptcy court would rule the same way.
These cases can get complicated because often it’s not clear precisely what the previous lawsuit decided, or whether what was decided meshes closely enough with the dischargeablility rules of bankruptcy. There’s also the question whether the matter was “actually litigated” if the person against whom the judgment was entered did not appear to defend the lawsuit or did not have an attorney. In other words you may or may not be able to get your day in bankruptcy court depending on whether in the eyes of the law you really already had your day in the prior court.
This risk of losing your chance to defend your case in bankruptcy court can be avoided by not waiting until after a judgment has been entered against you to see a bankruptcy attorney. That is especially true if the allegations against you involve any bad behavior other than not repaying the debt. As a general rule, if you get sued by any creditor you should see an attorney, even if you don’t plan on fighting the lawsuit and hiring an attorney for that purpose. That allows you to find out if the lawsuit could lead to a judgment making the debt not be dischargeable in a bankruptcy. And if so, you would then still have to option of filing the bankruptcy to prevent such a harmful judgment from being entered, instead of being stuck with it once you file a bankruptcy later.
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