Bankruptcy won't relieve student loans, taxes due
As the economy continues to struggle, one indicator keeps rising nearly every month: bankruptcy filings.
Job losses, medical payments and other financial pressures have pushed an increasing number of Americans to the courts in search of protection from creditors.
Yet bankruptcy isn’t a magical solution for many debt-burdened people. It won’t give everyone the clean financial slate they envisioned.
Bankruptcy-eligibility rules are tighter today than in years past. In particular, Chapter 7 filings, which generally provide a fresh financial start, are basically limited to people with moderate incomes. Chapter 13 filings, which allow debtors to arrange a repayment plan, come with restrictions of their own. About 98 percent of Arizona filings are either Chapter 7 or 13 cases.
In addition, not all types of debts can be discharged in bankruptcy proceedings, which pose an obstacle for the thousands of Arizonans who have or will start the process this year. Some obligations, like child support, are designed to protect vulnerable parties. Tempe attorney Joe Volin said, “The ones that come up a lot are student loans, taxes, child support and alimony, along with criminal fines and restitution. More people seem to realize you can’t get out of those things.”
Steven Kaminski learned that the hard way. The 39-year-old Ahwatukee resident filed for bankruptcy several years ago but wasn’t able to wipe the slate clean on his education loans. Student debts aren’t easy to eliminate. Neither are child support, alimony and past-due income taxes.
Kaminski had accumulated about $36,000 in loans upon earning his bachelor’s degree in business from DeVry University about a decade ago.
But because of lingering medical expenses, other bills, bouts of unemployment and a modest-paying job, he hasn’t been able to pay off those obligations. Kaminski said ever-mounting interest payments have pushed his student-loan burden to near $100,000.
Kaminski concedes he applied for the loans voluntarily and did use the money to further his education. But he’s still frustrated by his inability to dig out of the hole, and the quandary has left him wondering why certain debts can be wiped out but not others. He also cautions students about incurring a lot of debt that could turn into a long-term burden.
“I’m very bitter about the whole thing,” he said. “If I could just get rid of the interest, I’d think that would be a win.”
Student loans
In metro Phoenix, with its weak real-estate market and deteriorating job conditions, bankruptcy filings are rising especially quickly – up 88 percent so far this year compared with the first eight months of 2007. That’s above the national pace of filings (up 29 percent) and the overall Arizona rate (up 77 percent).
Bankruptcy filers used to be able to get out from under student loans, but Congress tightened the rules decades ago amid reports of abuses.
Specifically, students taking out big loans to fund a law, business, medical or other professional degree sometimes would discharge the debts in Bankruptcy Court, then turn around and start high-paying careers, said Don Gaffney, a partner at Snell & Wilmer in Phoenix.
Today, education debts, including loans not guaranteed by the government, can be discharged only when bankruptcy filers can show hardship, and that’s not easy.
“You would pretty much need to be working at the poverty level through no choice of your own,” Volin said.
Kaminski said an attorney once told him he’d basically need a severe impairment to discharge the education-loan obligation. The issue hinges on being able to earn a reasonable living.
Gilbert attorney Chris Dutkiewicz said, “You’d need to prove you can’t pay now and never will be able to pay.”
On the other hand, you might be able to get out from under an education debt if you didn’t borrow the money specifically for educational purposes.
“If you paid all your tuition on a credit card, you might be able to discharge it,” Dutkiewicz said.
The key question, he adds, is what did the lender think when the loan was granted, based on wording in the contract?
Child support, taxes
Child support and alimony are other types of personal debts that will stay in place despite a bankruptcy filing.
“The law is pretty straightforward: You can’t get rid of them,” Volin said. “The best we can do is set up a payment plan under Chapter 13.”
Past-due bills for income taxes, sales taxes and the like also aren’t easily discharged in bankruptcy, although there’s some wiggle room here.
In particular, you might be able to clear up some old income-tax bills through bankruptcy, but there are catches.
First, the debts must be at least 3 years old, meaning tax bills from 2004 or earlier. Also, you must have filed a tax return for the debts in question at least two years ago, and the Internal Revenue Service must have assessed you for the unpaid taxes at least 240 days ago.
Nor will a judge discharge a debt involving a fraudulent tax return or willful tax evasion.
The same basic rules pertaining to federal income-tax discharges also apply to Arizona taxes, Volin said.
Reach the reporter at or 602-444-8616.
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