Will Bankruptcy affect our Child's College Financial Aid?

Most Financial Aid packages include some loans and if you file for bankruptcy it may affect your child's eligibility for certain loans. The rules for federal loans and private loans are different.

Private student loans, like any other credit after bankruptcy, will depend greatly on the circumstances that surround the bankruptcy. If the student did not file bankruptcy their applications for private loans should not be affected, unless the parent is required as a co-signor. If the parent is required as a co-signor and they filed for bankruptcy they should discuss the circumstances of the bankruptcy with the potential lender. Many private loans will exclude co-signors or borrowers who have filed for bankruptcy within the last seven years no matter what the circumstances. There are no laws that require private companies to loan money in these circumstances and each company will assess their own risk differently.

Federal student loans are governed by specific bankruptcy anti-discrimination rules. Under 11 USC 525(c), lenders backed by the federal student loan programs cannot deny a student a loan based on the student previously filing for bankruptcy. This means that Stafford Loans, which are federal student loans to the student directly, will not be affected by a bankruptcy of either the student or the parents (but can be affected if their are delinquencies or defaults on previous student loans).

PLUS loans, however, (which stands for Parent Loans for Undergraduate Students) can be denied based on negative credit history of the parents. A bankruptcy within the last five years would be considered adverse credit history. If parents apply for and are turned down for PLUS loans students may qualify for increased Stafford loans, which could help make up some of the difference.

For more information read this article on Bankruptcy and Financial Aid.

Thank you to Larry Dannenberg and College Solutions for pointing us to this information.

What is Bankruptcy Fraud, and How Can I Avoid Becoming Lenny Dykstra?

Former major league slugger and touted stock picking guru Lenny Dykstra fell on hard financial times after a number of his business ventures began to fail. Like many entrepreneurs in the later half of the past decade, Lenny filed for bankruptcy.

For many individuals, filing bankruptcy allows for a "new start." Unfortunately for the former Met and Phillie, the trouble that plagued him during much of his playing and post-playing career also followed him into bankruptcy. The center fielder nicknamed "Nails" for his tough style of play was arrested on charges of bankruptcy fraud after his bankruptcy trustee's claim that Dykstra improperly removed, sold, and destroyed property that was part of his bankruptcy estate.

Bankruptcy fraud is when a debtor falsely claims bankruptcy, attempts to conceal his assets, launches petition mills (schemes that claim to help financially-strapped tenants from eviction), or files multiple claims in different states. It is a felony, and carries a sentence of up to $250,000 and/or five years in prison.

The lesson here is... well... don't do that. It is important to understand that bankruptcy trustees can, and often do, investigate into the truth of someone's bankruptcy petitions. If they find something that they believe was deceitful, your bankruptcy petition could be denied, and you could face criminal charges. Be sure to disclose everything to your bankruptcy attorney.

If you would like more information about how to best prepare for bankruptcy, contact Attorney Matthew Trask or call 508.655.5980 to schedule a one-hour consultation.

What’s my car worth? Automotive Valuation for Bankruptcy Purposes

The Bankruptcy Court has provided some guidance for valuing a car for the purpose of a Bankruptcy Petition:

“[A]djusting the Kelley Blue Book or N.A.D.A. Guide retail value for a like vehicle by a reasonable amount in light of any additional evidence presented regarding the condition of the vehicle and any other relevant factors” is an appropriate means of reaching retail value. In re Morales, 387 B.R. at 45.

The court agrees that the Kelley Blue Book is an appropriate starting point for a valuation analysis. The values it supplies are based on actual transactions occurring in relevant regional markets. They are admissible under Federal Rule of Evidence 803(17). The Kelley Blue Book is objective, serves the interests of standardization and predictability, and is cost-effective, which benefits the parties.

But the Kelley Blue Book retail values cannot be the final word. Retail value under 11 U.S.C. § 506(a)(2) and the Kelley Blue Book’s suggested retail value have slightly different meanings. Suggested retail value under the Kelley Blue Book “assumes that the vehicle has been fully reconditioned,” and only “represents dealers’ asking prices and... the starting point for negotiation” between a consumer and a dealer. Kelley Blue Book Auto Market Report 4 (May 2010)

By contrast, 11 U.S.C. § 506(a)(2) requires the retail value to mean “the price a retail merchant would charge for property of that kind considering the age and condition of the property.”

The Kelley Blue Book value therefore must be adjusted for two things. First, it must reflect the actual condition of the car if that condition is not optimal. Second, it must reflect the fact that the Kelley Blue Book value is the asking price for a retail sale, not the final price, as it is reasonable to believe that dealers do not sell vehicles frequently at the asking price."
(See In re Penny)

As a practice tip, consult both NADA and Kelley Blue Book private party value as a starting point, and then consider the actual condition to make appropriate adjustments.

An Act Regulating Debt Collection Takes Effect

This past Thursday, April 7, 2011, An Act Further Regulating Debt Collection became effective. The Act significantly raises personal property exemptions in Massachusetts. These exemptions limit the property that creditors can take in the execution of a lawsuit or in a Chapter 7 bankruptcy liquidation.

In a Chapter 7 Bankruptcy debtors will still have the choice between using the Federal Exemptions and the State Exemptions. In Massachusetts, these exemptions include up to $500,000 in personal residence equity (so long as certain requirements are met). And in order to get that significant residence exemption, up until April 7, 2011, debtors had to choose a significantly lower amount of personal property exemptions.

But under this new law, the personal property exemptions are similar in both schemes. There are some categories where the Federal Exemptions are higher and some where the Massachusetts Exemptions are higher. To choose the best scheme for your situation, you should consult with an experienced bankruptcy counsel who can help you evaluate your options.

For more information about the specific property exemption changes in the new law, read our section by section evaluation: New Massachusetts Property Exemptions: The Return of 2 Cows, 12 Sheep and 2 Swine.