STUDENT LOANS AND BANKRUPTCY Lesson 1: Uncle Sam Comes First

Education, in the form of short-term vocational programs to graduate or professional curriculums, refers to the attainment of knowledge and skills that enable the next generation to become productive, contributing members of society. Although nowhere in the world is education more valued than in this country, the cost of education has transformed this fundamental building block of modern society into a luxury. In recent years, total educational debt has surpassed all other forms of consumer debts except home mortgages, prompting many to forecast educational debt as the forerunner for the next debt crisis. Aside from the rising cost of education, the borrowing rate has also soared since the Great Recession. This debt burden has, in turn, erected new barriers for newly-minted graduates to participate in the credit market.

The rapid rise in educational borrowing is closely followed by double-digit increases in student loan defaults. The federal government has provided borrowers with some safe haven from a life-long debt shackle, in the form of consolidation or forgiveness programs.  However, many such programs force borrowers to endure the same stringent conditions as that of a Chapter 13 bankruptcy debtor. Repayment plans typically last 2 to 5 times as long as the average Chapter 13 plan, and the amount forgiven (if any) at completion is still taxable as income.

Despite the limited nature of relief provided under government consolidation and forgiveness programs, borrowers should consider them first for a few reasons: (1) the cost-benefit analysis, compared to more expensive and riskier debt relief mechanisms – e.g., litigation or bankruptcy; (2) the government’s ability to expeditiously seize income and tax attributes without a formal court action; and (3) the proportion of total debt that government debt typically occupies in the average student borrower’s portfolio. Indeed, the importance of prioritizing federal loans in any repayment plan cannot be understated. Federal loans now constitute approximately 85% of all outstanding educational debt, and 93% of new loans. Unlike private loans, these loans are made without regard to student creditworthiness. More importantly, collection charges, upon default, can constitute over 19% of the repayment. This is equivalent to a payoff amount that adds nearly a 25% to the balance of the loan.  Additionally, credit diminution will hinder the student borrower from obtaining other forms of credit, not to mention the negative effect on housing or job applications.

Under standard repayment programs, the borrower pays a fixed amount of at least $50 per month for 10 years. This provides for the shortest repayment period, but the highest monthly amount. Borrowers with high loan balances may extend the repayment term, which may be either fixed or graduated, through consolidation. Consolidation terms range from 10 to 30 years.

Students struggling to meet standard repayment criteria may apply for Income Contingent Repayment (ICR) programs. The monthly ICR payment is calculated each year based on adjusted gross income of the borrower and her household, but capped at 20% of the borrower’s discretionary income. If the income is not sufficient to cover accumulated interest, the interest is capitalized once a year. However, capitalization will not exceed the original amount owed when the borrower entered into the repayment program; interest will only continue to accrue without further capitalization. The repayment period is also capped at 25 years, and any unpaid portion is forgiven at the end of the ICR term.

Alternatively, a student debtor might consider an Income Based Repayment (IBR) program. In order to qualify, borrowers generally must have a loan balance that exceeds their annual gross earnings. Payment under the IBR program is capped at 15% of the borrower’s adjusted gross income exceeding 150% of the state poverty level. Borrowers that earn below 150% of the state poverty level may stay current without any payment. Borrowers become recertified based on their adjusted gross income and household size every year. As with ICR programs, forgiven debt is potentially taxable as income. For low-income borrowers with legacy Federal Family Education Loan (“FFEL”) Program loans who do not qualify for IBR programs, Income Sensitive Repayment Plans provide reduced payments based on an income formula for a period of up to 10 years.

For newer borrowers (those who received their first disbursement of federal student loan after October 1, 2011), there is a Pay-As-You-Earn Repayment (PAYE) program. Borrowers may qualify if their annual gross income is below total loan balance. The monthly repayment is capped at 10% of discretionary income and any amount remaining unpaid after 20 years is forgiven.

ICR, IBR and PAYE may be augmented with the Public Service Loan Forgiveness program, which grants loan forgiveness to public employees who have made 120 qualifying payments or maintained a 10-year fixed payment schedule. This supplemental option provides the additional benefit of non-taxable debt forgiveness. There is also a host of specialized loan forgiveness programs aimed at members of particular profession and/or special classes (e.g. teachers, veterinarians, lawyers, military personnel, disabled individuals).

Repayment programs should never be confused with non-permanent solutions such as deferment or forbearance programs. Although such programs allow the borrower to pay later and avoid immediate default, they do not help relieve the ultimate debt burden. As to forbearance programs, interest continues to accrue during the forbearance period and is typically capitalized at the end of the term. Settlement options are available to pay off large debts, but come as a rare luxury available only to borrowers able to make a sizable down payment and/or high installment payments paid over a short time span.

It is essential for student borrowers to explore the full panoply of repayment options for federal government loans before resorting to more drastic measures such as litigation or bankruptcy. Although there are various options available in both Chapter 7 and Chapter 13 bankruptcies for student borrowers, which will be explored in future blogs this month, a borrower’s efforts to seek out repayment alternatives will also better the borrower’s chances to discharge the educational debt in bankruptcy. This is yet another compelling incentive to explore all the options available and be creative when it comes to managing your financial life.

-Michael Li, Esq.

Black & LoBello on AM720 KDWN

Listen to the Legal Hour on AM720 KDWN from March 26th, 2014 in which Michael Li, Esq., and Cliff Marcek Esq., discuss lawyers’ relationships with a judge (2:30), bankruptcy filings in Las Vegas (3:45), effects of bankruptcy (5:45), causes of bankruptcy dismissal (7:00), considerations for bankruptcy (8:30), Mr. Marcek’s professional experience (10:45), injury litigation (14:15), guardianship and trust (15:45), bankruptcy and IRS debts (19:00), state district court (21:30), proposed bill for a court of appeals (25:20), civil court cases (30:00), Mr. Marcek’s bid for District 19 judgeship (32:20) and The Rotary Club (34:50).

Click here to listen to the Legal Hour on KDWN AM720 recorded on March 26th, 2014.

Tune in as Black & LoBello offers free legal advice on a wide range of topics

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To listen to past shows, visit our radio show archive page.

破产 (Top Considerations for Debtors Contemplating Consumer Bankruptcy)

如果您在考虑申请个人破产的话, 您将会面对许多未知的疑问与困难的选择。 在最新的破产法下, 联邦政府提高了申请个人破产的限制, 以防止滥用破产法下特有对债务人的保护和特权。与中国现行的破产法不同, 美国的破产法有将近120年的历史。在这段发展进程中, 破产法、司法机构和破产法律师总结归纳出多种不同的方案来解决各形各类的个人经济困境。 尽管个人申请破产并不是一个完美的恢复经济情况的方式, 但恰当运用加上适当的时间, 个人破产可以帮您重启一条新的人生道路。 在您走进律师楼寻求法律帮助以前, 请先考虑以下问题:


(一) 您可以在三年内还清您的债务吗 (并且同时还可以维持正常性的生活) ? 如果答案是肯定的话, 恭喜您, 您的经济状况应该比较健康。 但如果答案是否定的话, 您可以开始考虑用破产来解决您的问题。 取决于您的个人情况, 条款七或条款十三类型的破产都可能适合您的需求。


(二) 您现有的收入是多少? 如果您的收入超过内华达州州法下的限制和联邦政府的特定标准, 您只可以申请条款十三类型的破产。 通过该类型的破产, 您有机会来减少您的债务,并可以在三到五年内付清您所现有的债务。


(三) 您现有的资产中有哪些不可缺少? 而有哪些您现有的资产由于附着太多拖欠的债务和征收的利息因此您无法保留? 在不同的州法和联邦法下, 您有权利保留很多不同种类的资产, 包括房产、车辆、日常用品、退休金等。


(四) 您现有的债务是什么类型的? 很多信用卡债务, 拖欠的医药费, 房屋贷款等等, 都可以通过破产来免除。 然而,有些债务像抚养费和税务则不允许通过破产来免除。 不过如果您其他的债务可以减少, 则您会有更强的经济能力来解决通过破产程序无法免除的债务。


(五) 您有面临着以下几种紧急情况吗?


由于拖欠房产贷款, 您抵押的房产将被执行或拍卖

由于拖欠租金, 您将无法继续居住在您所租的住所内

在各种情况下, 防止失去您的驾驶权

因即将发生的诉讼, 造成工资被扣押


通过宣布破产, 至少可以临时禁止以上一些对您不利的程序。


(六) 您的债务与您的房产权有关吗? 在联邦破产法下, 特别的条款限制您消除与房产有关的债务。 如您的破产申请被认定为 “单独房产”案, 破产法将赋予您的债权人一定的优势。 在这种情况下, 咨询专业的破产的律师是您最保险的方法来避免抵押的房产被加速执行和拍卖。


(七) 您的债务是商业性的或于您自己的公司有关吗? 与”单独房产”案相同, 联邦破产法提供特别的条款来限制”小型商业”案例。 然而不同的是,如果法官同意认定案子为”小型商业”案,债务人一般占有优势。 虽然成功率比较高, 这类案子含有多种程序上的陷阱和时间上的限制。 所以要在申请前作好妥善的准备。


(八) 您是否已经试过各类与破产无关的方法来减少或消除您的债务? 申请破产对您的个人信誉及购物权有一定的影响。所以在申请以前,应该先考虑一下庭外和解,仲裁,或各种另外在州法和合同法下的解除债务的办法。通过近几年的金融危机,本州的州政府制定了许多对债务人有利的条款,包括一些有本所的律师参与起草的法条。一个有能力的破产律师不仅需能成功地引导您处理复杂的破产程序,他还需具有丰富的合同法和商业法经验。





If you’re contemplating filing consumer bankruptcy, you will undoubtedly encounter a multiplicity of questions and options.  Under the current version of the Bankruptcy Code, the federal government erected significant barriers restricting consumer bankruptcy filings, in an effort to prevent abuse and limit the privilege of bankruptcy protection to those in dire financial straits.  Compared to current Chinese bankruptcy law, uniform statutes and rules governing bankruptcy in America enjoys nearly 120 years of historical development.  During this period, the Code and its accompanying rules, the institutions administering the laws and regulations, as well as the lawyers specializing in bankruptcy practice have invented a wide spectrum of legal mechanisms for confronting financial difficulties of all shapes and sizes.  Although the institution itself is imperfect, under the right timing and circumstances, consumer bankruptcy filing can help pave a new path to extricate you from your financial woes.  However, before you step into your next law office to consult your attorney on the complexities of the process, here are some basic questions to review:

(1) Are you able to repay your debts within 3 to 5 years while still maintaining a normal lifestyle?  If you answer “yes,” then you are relatively good financial standing and bankruptcy may not be necessary or helpful for your situation.  However, if you answer “no,” or is unclear as to your current financial condition, it may be helpful to review your situation and the options that are available under the bankruptcy code.

(2) What is your current income? If your current gross income exceeds Nevada statutory median and fails the Code’s income restriction, then you may be limited to filing a Chapter 13 Readjustment bankruptcy. Through Chapter 13, you’re able to eliminate or mitigate a wide variety of debts through a combination of repayment and discharge.

(3) Out of your current assets, what can you afford to keep? Depending on the particular state statutory and/or bankruptcy specific exemption laws, you have the right to retain a portion of your assets including such items such as your homestead, motor vehicles, personal essentials, retirement accounts, etc.

(4) What is the nature of your current debts or liabilities? Through bankruptcy, consumers can successfully eliminate or mitigate a variety of debts such as credit card bills, medical bills and even mortgages and other liens on property.  By contrast, some debts or liabilities, such as domestic support and student loans, may be preserved and are very difficult to eliminate even through bankruptcy.  Nonetheless, keep in mind that debts and liabilities eliminated or mitigated with respect to one creditor translates to an enhanced ability to service interest and/or principal on other debts.

(5) Are you facing emergency situations such as the following:

  • Your utilities are about to be cut off
  • You’re facing imminent foreclosure on your realty collateral
  • You’re facing imminent eviction and termination of your leasehold interest
  • Your driving privileges are about to be suspended
  • You’re facing litigation in which your assets may be seized and wage may be garnished

Through bankruptcy, you can, at a minimum, put a halt on some of these above-referenced processes.

(6) Are your debts or liabilities related to real estate that you own? Under the Code, there is a select class of cases deemed “Single-Asset Real Estate” (SARE) cases in which your bankruptcy filing may fall.  If classified as such, be advised that the Code provides additional protection to creditors holding debts secured by the real estate collateral that is undergoing reorganization. As these processes require a detailed reading of the law, the most conservative approach is to consult an attorney who specializes in bankruptcy and restructuring matters.

(7) Are your debts and liabilities related to your business or ownership in commercial entity? Like SARE cases mentioned above, the Code makes special provisions for cases classified as “Small Business Debtor” cases.  However, here, the advantage under the Code goes to the debtor rather than its creditors.  Notwithstanding this advantage, however, there are a number of pitfalls resting within the Code’s prescription as to the documentation and deadlines that debtor must comply in such cases.  As a result, the debtor should be adequately prepared with the requisite paperwork and strategy prior to filing.

(8) Have you already attempted or undertaken other forms of debt relief efforts? Filing bankruptcy can have tremendous impact on your personal credit and ability to finance future transactions. Consequently, it is often recommended that the borrower should exhaust all out-of-court remedies before resorting to bankruptcy. In light of the recent financial crisis, Nevada legislature has enacted a litany of debtor friendly laws and regulations, the ideas for some of which originated from attorneys of Black & LoBello. In sum, a competent bankruptcy attorney should not only possess expert knowledge of the Code and rich experience in practice, but also be able to equip her client with debt relief tools under non-bankruptcy law.

Bankruptcy law provides a strange universe of principles and procedures that bewilders both the non-legally trained mind as well as non-bankruptcy lawyers.  This is yet another reason why expert knowledge and practical exposure to bankruptcy practice are so vital to help a lawyer efficiently decipher the client’s interests, needs and issues, in preparation for formulating a risk-averse plan of financial rescue.  Whether through bankruptcy or non-bankruptcy law, the source of relief can arise from a variety of forms and approaches.  While the crisis has shown us that many financial perils are inevitable, a competent attorney can serve as your guiding light as you embark on a dark, uncertain future.

- YanXiong (Michael) Li

For more information, contact YanXiong (Michael) Li at

Mr. Li is fluent in both English and 中文 (国语和上海话)

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