Unlock the debtor’s prison of student loans

Earlier this year, a judge denounced the myth that student loans can’t be erased in bankruptcy court as she excused a Navy veteran from having to pay $221,000 in education debt. Bankruptcy judge Cecelia G. Morris’ decision garnered plenty of headlines, along with speculation that the ruling might make such discharges easier.

The battle isn’t over, though. A few days later, Morris’ ruling was appealed by the Education Credit Management Corporation, a nonprofit company that guarantees and services federal student loans for the U.S. Department of Education.

In my latest for the Associated Press, what the American Bankruptcy Institute’s Commission on Consumer Bankruptcy recommends to begin freeing borrowers from their loans.

Q&A: Options for high debt, low income

Dear Liz: I’m 87 and drowning in debt, owing more than $21,000 with an income of $23,000 from Social Security and two small pensions. I don’t like the idea of debt consolidation but is that better than bankruptcy? My only asset is a 2003 car.

Answer: Debt consolidation merely replaces one type of debt (say, credit cards) with another, typically a personal loan. You are unlikely to qualify for such a loan and even if you did, your situation wouldn’t improve much if at all because your debt is so large relative to your income.

You may be confusing debt consolidation with debt settlement, which is where you or someone you hire tries to settle debts for less than what you owe. Debt settlement can take years and may not result in much savings, since the forgiven debt is considered taxable income and hiring a debt settlement company can cost thousands of dollars. In addition, people in the debt settlement process risk being sued by their creditors. Bankruptcy is typically a better option for most people because it costs less, is completed more quickly and ends the threat of lawsuits.

You may not need to file for bankruptcy, however, if you’re “judgment proof,” which means that even if you stop paying your creditors and they successfully sue you, the creditors wouldn’t be able to collect on those judgments. That’s typically the case when someone’s income comes from protected sources, such as Social Security and certain pensions, and they don’t have any assets a creditor can seize.

Please discuss your situation with a bankruptcy attorney who can review your options. You can get a referral from the National Assn. of Consumer Bankruptcy Attorneys at www.nacba.org.

Q&A: One spouse’s debts might haunt the other after death

Dear Liz: I have a terminal illness and have less than a year to live. My wife and I are in our 80s and don’t own anything: no cars, no homes. My wife has an IRA worth $140,000 that pays us $2,000 a month, and she has a small pension of $1,400 a month. We receive $3,900 from Social Security, for a total monthly income of $7,200.

We have $72,000 in credit card debt that is strangling us. I told my wife that after I’m gone she should simply ignore that debt and advise creditors that I have passed away. Or should we attempt to file bankruptcy now?

Answer: Your return address shows you live in California, which is a community property state. Debts incurred during marriage are generally considered joint debts, so expecting creditors to go away after your death is not realistic.

Your wife’s retirement also could be at risk because California has limited creditor protection for IRAs. Federal law protects IRAs worth up to $1,283,025 in bankruptcy court, but outside bankruptcy, creditor protection depends on state law. In California, only amounts “necessary for support” are protected.

You really need to consult with a bankruptcy attorney to discuss your options. You can get referrals from the National Assn. of Consumer Bankruptcy Attorneys at www.nacba.org.

Tuesday’s need-to-know money news

Today’s top story: 3 questions to help grow your retirement savings. Also in the news: 7 annoying international travel fees you can shrink or skip, why waiting to file bankruptcy can hurt you, and 7 ways to retire without Social Security.

3 Questions to Help Grow Your Retirement Savings
Evaluating your current position.

7 Annoying International Travel Fees You Can Shrink or Skip
Leaving your more money for souvenirs.

Why Waiting to File Bankruptcy Can Hurt You
Making a bad situation worse.

7 Ways to Retire Without Social Security
Creating your own retirement income.

3 money tasks you shouldn’t tackle on your own

No one cares as much about your money as you do, but never asking for help can be dangerous — and expensive.

In a previous column, I detailed the hazards of trying to do your own estate plan and how problems often aren’t apparent until it’s too late to fix them. The following financial tasks also are more complex than they may seem, and the consequences for ignorance can be severe. In my latest for the Associated Press, why hiring an expert help may ultimately save you a bundle.

Why NFL players go broke, and what you can learn

Terrell Owens originally was famous for his many National Football League records and over-the-top touchdown celebrations. But he’s also famous for running through most of the $80 million he made during his 15-year career, thanks in part to bad investments and business deals.

“Having a lot of money it’s good but at the same time you have to be smart with it,” Owens says. “You have to really find the right people to help you manage that money going down the road.”

Sports Illustrated once estimated that 78 percent of NFL players end up broke or under financial stress after they retire. In an interview with NerdWallet, Owens and his friend Eric Dickerson, the Hall of Fame running back most famous for his time with the Los Angeles Rams, talked about their experiences and what young athletes should know about building a solid financial future.

Q&A: Debt settlement vs. filing for bankruptcy: Pros and cons

Dear Liz: I owe a credit card company about $16,900. I have not been able to make payments for almost two years and have no money. They recently sent me a proposal to pay off the entire amount at 30 cents on the dollar by making 24 payments of a little over $200 per month. I’m concerned they can then resell the unpaid amount to a debt collector and that it really isn’t a solution for the entire debt to be extinguished, even if I agree to their proposal. Am I right?

Answer: In the past, poor record-keeping and unethical behavior meant some debt buyers routinely re-sold debts that were supposed to be settled. While that can still happen, it’s less likely, especially if you’re dealing with the original creditor or a company that’s collecting on the creditor’s behalf, rather than a company that purchased an older debt.

You’ve been offered a pretty good deal, says Michael Bovee, president of debt settlement company Consumer Recovery Network. Typically debts are settled for 40 to 50 cents on the dollar.

That doesn’t mean you should take it, necessarily. You have to be able to make the payments to get the debt settled, for one thing. Also, any debt that’s forgiven can be treated as income to you. The creditor will send you (and the IRS) a Form 1099-C showing the forgiven amount and you’ll typically owe income taxes on that amount unless you’re insolvent. If you’re in the 25% tax bracket, that would add roughly $3,000 to the cost of settling this debt.

Many people who can’t pay what they owe are better off skipping debt settlement and filing for Chapter 7 bankruptcy, which erases credit card balances, medical bills, personal loans and many other unsecured debts in three to four months. Chapter 7 typically has a bigger impact on your credit scores than debt settlement, but it legally erases the debts and prevents creditors from filing lawsuits against you. If you try to repay this debt and fail, or if you continue simply ignoring it, you could get sued.

You can get a referral to an experienced attorney from the National Assn. of Consumer Bankruptcy Attorneys at www.nacba.org. Discuss your situation and your options before you decide how to proceed.

Debt settlement a bad alternative to bankruptcy

Debt settlement isn’t the Wild West industry it was a decade ago, when people routinely paid hefty upfront fees to companies that failed to deliver any relief.

Thanks to increased regulation and enforcement, the much smaller number of settlement companies that remain often do what they promise: persuade at least some of a borrower’s creditors to forgive part of the debt, typically in exchange for a lump sum payment.

Several people I’ve interviewed lately reported positive experiences with debt settlement, so I decided to take another look at the industry. It turns out that hiring a negotiator could be a reasonable alternative to bankruptcy for some. But debt settlement is not as consumer-friendly as the industry presents it, and some of the people who praised the companies didn’t fully understand their alternatives or the longer-term consequences of settling debt.

In my latest for the Associated Press, a look at the biggest problems with debt settlement.

Q&A: The woes of this car-less worker can’t be fixed with junkers or leasing schemes

Dear Liz: My spouse and I are in Chapter 13 repayment bankruptcy and have a few more years to go. We’re obviously on a tight budget.

My spouse has the reliable car, but I’ve already paid $1,500 cash each for two junkers and it’s caused major stress. I know we can petition the court and be allowed to get financing, but we do not want to and can’t afford to on our budget.

I am, however, up for an evaluation and raise soon at the small, private company where I work.

I am thinking of asking that instead of a raise, they lease a vehicle for me. I do travel sometimes for business so it could be legitimized in that sense. If they leased a vehicle for, say, $200 a month, that would be close to the raise I’m expecting.

The real question is how to handle insurance and liability. Is it possible for my company to lease a vehicle but have the insurance liability fall on me, meaning would I be able to insure it under my own policy though the lease would be through the company?

Answer: Probably not.

A personal auto policy might not even cover your own car if it were used primarily for business. Personal policies typically wouldn’t cover a car owned or leased by your employer.

Also, businesses usually need more liability coverage than most individuals carry, since companies can be bigger lawsuit targets. You can ask for a leased car in lieu of a raise, but expect the cost of the insurance to be part of the calculation and be prepared for the company to decline.

It’s unfortunate you bought two junkers in a row, because the amount you ultimately spent could have bought you one decent car.

Car comparison site Edmunds has advice for finding reliable vehicles for $2,500, which it says is a reasonable budget for buying a solid car.

The vehicles are likely to be 10 to 15 years old and may have over 150,000 miles on the odometer, but if they’ve been well-maintained they can be reliable rides for several more years.

You’re likely to get the best deal via a private party sale, and you’ll want a good mechanic to check out any car before you buy. Your mechanic may even have a lead or two on cars that could be good candidates.

Your raise may allow you to revisit the idea of financing a car, albeit at a high interest rate.

As you know, you won’t be able to buy anything extravagant, and the purchase will have to be approved by both your trustee and the court. If the car is a necessity for you to get to work and you’ve been in your repayment plan at least two years, you have a good chance of being allowed to finance it.

If the car is not a necessity, you may have other options.

If you live in a city, a transit pass may get you to most of the places you need to go and you can rent a car or use a ride-sharing service when you need more custom transportation. Many people have discovered that cars are a costly hassle, and they live just fine without them.

Q&A: How one spouse’s bankruptcy filing affects the other spouse

Dear Liz: If one spouse files for bankruptcy, how does that affect the other spouse? What happens to the joint accounts?

Answer: How the nonfiling spouse is affected depends on whether they live in a community-property or a common-law state.

Most states are common-law states. Property and debts acquired during marriage can belong to only one spouse.

In these states, the filing spouse’s separate property and their share of any jointly owned property become part of the bankruptcy. Any property that isn’t protected under the state’s bankruptcy exemption laws can be taken and sold to pay creditors.

The bankruptcy trustee may try to partition any joint property so only the filing spouse’s share is sold, but if that’s not possible the whole property may be sold and the nonfiling spouse will be paid for his or her share. The bankruptcy erases the filing spouse’s separate debts and share of any joint debts, but the nonfiling spouse still has to pay his or her share of those joint debts.

In community-property states, property and debts acquired during marriage typically belong to both spouses, even if they’re in only one spouse’s name. So a bankruptcy filing by one spouse in a community property state can put more property at risk. (Community-property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.)

As in common-law states, a completed bankruptcy erases the filing spouse’s debts but leaves the other spouse on the hook for his or her share of any joint debts.

In community-property states, though, the nonfiling spouse can get a benefit known as a “phantom discharge.” If the filing spouse gets debts wiped out and is able to protect community property under the state’s exemption laws, then that property stays protected. As long as the couple is married, creditors won’t be able to touch it.

Bankruptcy has gotten complicated enough that you’ll want to get good, solid advice from an experienced bankruptcy attorney before you proceed with any filing. Most such attorneys offer a free or low-cost initial consultation to discuss whether it’s the right solution for your situation. You can get referrals from the National Assn. of Consumer Bankruptcy Attorneys at www.nacba.org.