The Importance of Planning Exemptions

When most of your clients are typical consumers needing to file bankruptcy, exemption planning isn't something you have to do very often. Most people don't own extravagant property, and certainly aren't part of the mythical set of folk who run out and buy a bunch of stuff in anticipation of bankruptcy. So even the modest exemptions provided by Missouri's Legislature are sufficient to protect the core stuff that people need from day to day. However, some situations do arise from time to time that require a more nuanced look at a person's property and how to exempt it before filing a bankruptcy.

Now, by "exemption planning," I mean taking the available property exemptions and applying them judiciously to my client's available property, thereby maximizing what they can keep after filing a Chapter 7, or minimizing what must be paid to unsecured creditors in a Chapter 13. I do not mean the large-scale transfer of assets to an exempt form on the eve of filing a case - that way lies litigation (as a judge once said "when a pig becomes a hog he gets slaughtered"). You can, in some circumstance (and depending on state law), transfer some assets from a non-exempt form into an exempt form, but care must be taken not to run afoul of the law and open yourself to expensive and risky adversary proceedings in the bankruptcy.

This process really calls for the skills and knowledge of an experienced attorney. Missouri alone has over 40 statutes that purport to exempt property. This doesn't mention the various federal exemption statutes that still apply, nor the mountains of case law devoted to interpreting the statutes. I don't pretend to know all of that, I merely know how to access the information, read it and form an opinion from which you can make a decision (all that bit cost me was three years of school, huge student loan debt, and 10 years of practice). It just isn't reasonable to expect a layperson to know how all that pieces together, and where the pitfalls lay.

Sometimes, a client cannot escape the fact that he or she will have to relinquish some property to the bankruptcy; it can be a tax refund, a car, artwork, season tickets to the local sporting franchise, or a piece of real property (even your home, in some instances). That is the trade-off for filing a Chapter 7 - you give up some property rights in exchange for protection from creditors and a discharge of debt. I have cases where a $1,500 tax refund was surrendered, but $150,000 of debt was discharged. My client complained, but if you could get your credit cards to settle for 1% of what you owed them, you would jump on that in a second.

Losing property in a bankruptcy isn't a failure. Losing property unexpectedly in a bankruptcy is. With proper planning, you can know what is coming, prepare for the eventuality, and even minimize the impact of property loss.

I Know Students Loans Don't Discharge, So I Don't Have to List Them, Right?

Um, not so much. Section 521 of the bankruptcy code requires a debtor to list all of their debts in their bankruptcy schedules. It doesn't matter what you intend to do with the debt, or if the debt wouldn't discharge anyway. The debt must be listed, so notice can be given to the creditor.

Okay, so you have to list the student loan in your bankruptcy schedules, and you know they will (with a few rare exceptions) survive your bankruptcy and be there at the end of your case. What can you do with them? The answer, as always in bankruptcy law, is it depends on what you are filing.

If you file a Chapter 7, there isn't much to do in the case of the student loans. The case will likely be over in a few months, and you will go back to doing what you were doing before the case started.

You aren't currently up-to-date on your student loan payments? Well, consider these options:

• Change your repayment option. The student loan programs have several ways to approach repaying your loans, including extended repayment periods up to 30 years, graduated repayment plans, income contingent repayment, or income based repayment. Contact your federal student loan program for more details.
• Consider a deferment. If you are going back to school, for instance, you may be eligible for a payment deferment. The requirement to make payments is temporarily stopped, but interest will likely still accrue on your loans.
• Forbearance. If you have a financial hardship (and a bankruptcy client may very well have one), you may be eligible for reduced or eliminated payments, but once again, some interest (on non-subsidized loans) may still accrue.
• Consolidation. If you have loans with several agencies, or simply several loans, you may be eligible for consolidation, which will give you only one payment per month, and may gain you a break on the interest rate. Not all loans are eligible to be consolidated, however, and you should carefully examine the terms of any proposed new loan.

If you file a Chapter 13, there are several options to consider. In some districts (including one of mine), there are explicit options in a Chapter 13 plan to allow a debtor to continue to pay the monthly payment and to help catch up on arrears on the loan. Sometimes, however, the requirements of the plan are such that it isn't possible to make both the plan payment and the loan payment each month. In that case, you may be able to simply treat the student loan like any other unsecured creditor (like a credit card), with the understanding that it will be there, with interest, at the end of the Chapter 13.

As always, talk to a qualified, licensed attorney before deciding on what is right for you. A student loan isn't going away, and you need to plan for it before you file a bankruptcy, so you can have it under control along with the remainder of your finances.