Student Loans in Chapter 7 Bankruptcy: What to do after the bankruptcy is over?

Eagle Ridge Resort, Galena Illinois

Eagle Ridge Resort, Galena, Illinois

Student Loans in Chapter 7 Bankruptcy: What to do after the bankruptcy is over?

  • Do You Need a Post Bankruptcy Consultation? $25 for new clients, free for NLO Clients

One of the thorniest issues in a Chapter 7 Bankruptcy is often what happens to student loans.  Student loans are not dischargeable – i.e. they do not go away as a result of filing bankruptcy!  However, student loans do eventually disappear sort of like a “balloon loan”.  All student loans die after 25 years after the date of first repayment plus deferments.

Until that time – you are on the hook and must continue paying.  Recently, a client shared with me his experience in dealing the aftermath of a Chapter 7 Bankruptcy.  Below is a narrative of the status of the loan mid-way just after the 341 meeting:

Debtor’s account is not past due.

Sallie Mae received the 341 Meeting of the Creditors Notice.

Student loans placed on hold while in bankruptcy status.

No payments due during the life of the bankruptcy.

This hold on the accounts does not affecting Debtor’s credit.

Debtor needs to call Sallie Mae when bankruptcy is discharged.  At that time, his account is reactivated and billing will begin again.  Debtor will then begin to owe payments.

There will be no arrears at the time of reactivation.  Interest will accrue during the bankruptcy’s life, but Sallie Mae cannot advise Debtor of what the interest may be or has been because that  can be construed as trying to collect on the debt.

Sallie Mae cannot tell Debtor what his balance is, but they can confirm or deny what he says the balance is.

Debtor does not have access to his account via the internet during the bankruptcy.

This exception gives us a rare window into the behavior of the student loan servicer during the pendency of a Chapter 7 Bankruptcy.

Summary of Student Loan Treatment before, during and after a Chapter 7 Bankruptcy:

Prior to Filing your Bankruptcy, you should pay on your student loans or seek deferment.

  1. Failure to do this will result in garnishment up to 15% of your gross income

After you bankruptcy is filed, you CAN make voluntary payments on the student loan.

  1. This will keep your balance from rising.
  2. This IS NOT necessary.
  3. Only manual payments (check)
  4. Taking a “break” from payments for 4-6 months may allow you to improve your cash flow position to give you a “fighting chance” to be in good financial standing

After your bankruptcy is closed, you should resume making your payments. 

  1. Recommend calling lender to confirm amount of payment and how to make payment
  2. Electronic payments resume being available

For more information about filing a Chapter 7 or Chapter 13 Bankruptcy, please email NLO Nelson Law Office Bankruptcy Information

To Call and speak with a Bankruptcy Attorney and Set-Up a free Bankruptcy Consultation, please call 877-GO-GO-NLO (877-464-6656).

Post-Bankruptcy Survival Guide…Budgeting, Planning and Lifestyle Changes


You’ve successfully completed your bankruptcy.  In 75% of cases, you’ve just completed a Chapter 7 Bankruptcy, which is oftentimes called a “Liquidation” or “Straight” Bankruptcy.  Other debtors have typically completed a Chapter 13 Bankruptcy, which is unique in that it uses a 60 month repayment program to keep debtors on track with their budget and also pay back between 10% and 100% of their debts.  This guide here is especially designed to help those debtors who are leaving a Chapter 7 Bankruptcy.

As you know, the filing is done by your attorney, then 30 days later you have a 341 Meeting of the Creditors.  Ninety days after that you typically have a discharge order and your case is closed.  Here’s the problem,  you have just gone from having typically $60,000 in credit card debt with minimum payments of $1200 and payday loans, garnishments and all sorts of other things that disrupt planning and budgeting.  In this guide, we will discuss how to plan a good budget in the newly-created stable environment.

In The First Year

The first year after a Chapter 7 Bankruptcy can be traumatic. In many cases, a car was surrendered, a house given up at foreclosure, and possibly a new job has replaced the job lost which caused the bankruptcy in the first place.  So let’s talk about the big things to worry about in the first year:

1.  Set Up a Budget
2.  Determine how long you can live in your home if it was surrendered in the bankruptcy
3.  Figure out inexpensive transportation options if you gave up a car in the bankruptcy

The Budget:

Items that cannot be changed:
1.  Electricity
2.  Gas
3.  Water and/or Sewer Bill
4.  Basic Telephone Service
5.  Basic Food
6.  Basic Dry Goods

For Electricity and Gas Bills, you should get on a “budget” plan that allows you to pay the same amount each month. If you are estimating your budget amount, simply take one year of bills and divide the total of all the bills by 12.  This is your average amount spent on that utility.

For Water and/or Sewer Bill, determine whether paid monthly, quarterly, semi-annually or yearly.  If anything other than monthly, set up a savings account at a bank specifically for this bill and the put the same amount in monthly and transfer the necessary amount into your checking account when you are making payments.

For Basic Telephone Service, remember that this is a discussion only for the first year and designed to see how low you can get your fixed utilities that you must have.  The goal is to see just how much flexibility you have.  In this area, you should determine if you want a mobile phone or landline.  The bottom line is, you don’t need both.  I recommend a voice-only plan for less than $50 per month.  Internet Service, TV Service and other services are nice but not necessary for everyday life.  Bottom line: those are part of the choices you get to make with your “extra” income that is now under planning.

Basic Food – What is this?  This is the food that is necessary to live.  Not necessarily what you want or desire, but what is necessary to live a healthy life.  Bottom line: Meat, Fruit, Bread, Dairy.  The typical family of four spends about $800 on these necessary items.  If you have trouble with staying in the budget, simply try one week without the following:
a. Bottled Water
b. Soda
c. Candy
d. Booze (Beer, Wine & Liquor)

Even though this isn’t fun, the point of this exercise to find out how much power you can yield by removing any lack of control over your necessary “fixed” budget items.

Basic Dry Goods:  What is this?  This is the old fashioned way to describe items such as: Toilet Paper, Soap, Razor Blades, Garbage Bags, Cleaning Supplies, Cookware, First Aid Supplies,  Toiletries & Cosmetics.  The typical family can keep this under $400 per month.  If you are having trouble staying within these budget amounts try eliminating:

1. Paper Towels

2. Magazines and Newspapers

3. Anything that won’t be used in the next week

4. House Decorations

5. New Sheets, Linens, Towels, etc.

Items that can be changed:
1. Transportation
2. Insurance
3. Medical
4. Education
5. Recreation
6. Vacation
7. Hobbies and Interests
8. Eating Out, Drinking and Concerts
9. Unnecessary Home Repair or Decoration

Transportation:  Do you need two cars?  Can you do with one or none?  Does your job require you to travel in a way that you need a car?  Is the car that you own a low cost car to run?  This can usually mean less stylish and prestigious transportation, but the reduction in stress from a low cost car is superior to the satisfaction of a prestigious car.

Do you need life insurance?  Do you have kids who will need money if you die?  If so, great…now how much?  Think about this, if one of you dies and the surviving spouse has three years of income to live on, he or she won’t have much trouble getting into a new job and situation to replace the income lost.  If both of you die, then you should have enough money for your guardians to take car of your children for at least several years after you death.  Bottom line:  a 20 year policy of term life insurance equal to your salary times 3 is enough.  This should never be over $100 per month for a healthy married couple in their 30’s.  Do not buy whole life insurance or buy insurance to pay off your house.  This is useless.  The maintenance cost and taxes on a home will take it away from the survivor even though there isn’t a mortgage any more.

Auto Insurance is another one.  If you have less than $10,000 in cash and all of your other assets are in retirement accounts, than the State Minimum Liability Requirements are all you need.  If you have a loan, then get the minimums for collision to satisfy the lender.  As you get more assets you should increase this coverage.  This includes increased equity in your home.

With Health Insurance, the bottom line is: if you don’t have a policy at all from work or paid by yourself, you should get a basic policy that at least gives coverage for the big events and also gets you access to reduced rates at hospitals.  Sometimes a family of 4 can get a policy like this for under $400.  However, you should switch jobs to one that provides health insurance as a benefit until the new Health Care Act changes how we are able to purchase health insurance.

Medical.  This is an easy one.  If you are on a lot of recurring medications which are a monthly fixed amount that you cannot afford, you need to sit down with your doctor and find out which ones are really necessary for your survival and which ones can be swapped out for older cheaper medications that will allow you to survive until you can afford the medications you really want  but may not really need.  A very frank and direct discussion with your physician is necessary because they are not incentivized to reduce your costs.

Education.  You may want to send your kids to a private school, but if the money doesn’t exist now, it may or may not later.  Bottom line: compare your net tuition after scholarships and grants (not loans) with the cost of public, magnet or charter school offerings and try to figure out something does not overburden your fixed expenses.  In the future, if your income increases, you can simply allocate that additional income towards a private school education.  On average, the IRS estimates that a family should spend no more than $147.50 per month on a child’s education pre-college.  While this amount may not work for everybody, it is a good guide to how much to budget for pre-college education.

Recreation.  This is a tough area to budget for, but essentially, in the first year especially, you need to get the most bang for the buck and to be very selfish about making sure that you spend your funds on activities that you and your family like and not to just please others who have suggested an activity.

Vacation.  Depending on your job, vacation may or may not be included.  Bottom line, we all need a vacation.

Here’s a primer on vacation:  There is the one day vacation, the weekend extended and the week off.  Bottom line, if you can do it, one week of vacation away can have dramatic benefits for your mental health and can refresh you greatly.  If one week doesn’t work either because of cost or scheduling days off at work, you should consider extending a holiday weekend and going away somewhere.  Here’s the bottom line: take 30% of your annual discretionary budget and try to save it in a special savings account for your vacation.  If you end up with $900, then pick a destination based upon $450 in upfront charges to go and $450 to spend along the way.  In the end, it is the experiences you have on vacation that are most important and not what you did and/or how much money you spent.

Hobbies and Interests.  It is important to do something that takes your mind off of work and family but is compatible with your obligations to work and family.  For example, you may not be able to afford a sailboat, but maybe you can sail for free as crew.  You may not be able to afford a motorhome, but you may be able to afford a really good tent and use it twelve times every summer.  Your interest may be Roll-Royce History, but you won’t be owning a Rolls-Royce Collection.  You may want to be part of a local club, work as a volunteer at a museum or simply collect books and memorabilia.  When it comes to sports, the cheapest choice is TV, but let’s face it, if sports is your life and you like baseball, then maybe a partial season of tickets is the way to go.

Out to Eat Drinks and Concerts.  Look at how much extra money you have every month and decide how much you want to allocate towards going out, concerts and other entertainment.  If your budget isn’t big, then may pick a concert once every 3 months instead of a mediocre list of events every week.  Or eat before going out and just have drinks.  In the first year after bankruptcy, creativity is the key.  The problem is friends and family who may have unreasonable expectations of  your ability to entertain and spend money going out – this is the first time you will really see what the quality of those relationships are.  After a frank discussion about what you will not be doing any more, you will see the true colors of your friends and learn how to navigate family politics.

Planning Items for the Future

Take the amount of money that is discretionary every month and think about how you would like to spend it:  General Saving,  Saving for something specific, Education, Vacation, Saving for Kids, Saving for Retirement.

After The First Year

1.  Look for a new job
2.  Get a new career
3.  Plan for education to get new career and more income.
4.  Reduce commute to work
5.  Improve Education and reduce cost through public schools that meet your children’s needs
6.  Purchase more reliable car with lower operating costs
7.  Find better place to live
8.  Plan a vacation

Looking For A New Job.  If you have been in the same job for years without any pay increase, maybe it’s time to consider looking at whether your skills are worth more money elsewhere.  This can help with making your budget looser and letting you explore new hobbies, interests and vacations.  The typical jobseeker who is currently employed looks for 6-12 months for a better job before moving on to the next job.  Bottom line: It never hurts to look around.

Getting A New Career.  Before you lose your job, get downsized, get laid off or suffer cutbacks or furloughs at work, it’s time to look at whether you are working in the right industry.  For example, the printing industry has suffered continuous declines for at least 10 years as many types of information are now delivered digitally.  A person with a printing background who has a good grasp of graphic layout should maybe head to a different firm to do web design or advertising layouts which may not be printed but use the same set of skills.  Bottom line: if you are in a dying industry, they usually don’t come back and it is best to switch industries before you are laid off.

Plan Education For A New Career.  It sounds easy, but the typical graduate degree earned while working takes 5 years.  Bottom line: if you think you need more education to make the next step in your career and continue to have increased income, you need to start now to have the education you need in five years.  Choosing a school is dependent upon net cost, logistics and your schedule.

Reduce The Commute To Work.  Reducing your commute to work can sometimes save thousands of dollars per year and sometimes save 10 hours a week in wasted time.  Bottom line:  if you work in an industry where a company is located closer to home, it may take 6 months to a year to make the change.  It is good to start the planning now.

Reduce The Cost of Schooling.  Sometimes you have to break a comfortable habit.  If you have been at a private school for years, but it contributed towards your bankruptcy, then you have to recognize the fact that you may not be able to send your child to private school.  Sometimes Scholarship and Grants can help, but if you need to reduce your budget now to stay out of financial trouble, you should put other concerns aside and do what you need to do.

Purchasing a Reliable Car.  Many times, the least costly car isn’t the one with the lower gas mileage or one that is a car that everybody thinks is great.  What’s important is reducing the overall cost which includes:  Maintenance, Gas, Oil and Insurance.  To do this right, you should look over all of your maintenance costs for the last year, call your insurance company to see how your existing and proposed car rate for premiums, and compare mileage costs.

Find A Better Place To Live.  Finding a better place to live should include the following factors:  1. Proximity to your job 2. School System Quality if you have children 3. Functionality and Space of the New Residence 4.  Overall Cost versus how much you to spend in your budget.  For most people leaving bankruptcy, you must wait three years after your house is sold in foreclosure to qualify for an FHA First Time Homebuyer Loan.

Plan a Vacation.  The key to a long, happy life is making activities outside of work the focus and making work an enjoyable means to an end.  Planning frequent high-quality vacations with an emphasis on moderate cost and high-quality activities is the key.  The best vacations are always planned months in advance and often include friends and family.  Good planning is free.  Great Value is Priceless.

For more assistance with your post bankruptcy situation, please call us at 877-GO-GO-NLO or email our firm at

The Dangers of Non-Bankruptcy Credit Consolidation

The Bankruptcy Act of 2005 wrote in a number of provisions that “encourage” potential bankruptcy debtors to consider non-bankruptcy debt relief such as Credit Consolidation.  The problem with Credit Consolidation is that it is not regulated and is not a global settlement of debts.Also, the cost of credit consolidation is usually between 30 to 50 cents on the dollar which typically is more expensive than what most debtors pay in a Chapter 13 Bankruptcy.

Just last week, Lisa Madigan, Illinois Attorney General filed a Cease and Desist Order Against Legal Helpers, an Illinois Based Debt Consolidation Firm under the new law effective January 1, 2011, that prohibit any non-lawyer from offering non-bankruptcy debt consolidation.

So what’s the solution?  Bottom line is this: If you are wealthy enough that a bankruptcy is more harmful than good, the traditional route to take is to spend some serious money on legal fees to restructure you debt and also defend lawsuits as they arise.  For most people’s debts that are beyond their ability to pay, bankruptcy is the only safe choice because it is court supervised and is global in its effect.  This is not to say that Bankruptcy is the best debt relief ever, but is simply to say that only in a bankruptcy can you get the automatic stay which stops all lawsuits and debt collections from happening without court order.  Also, in a bankruptcy,  a repayment plan uses long established and well thought out priority rules to determine which debts are paid in preference to other debts.  Lastly, all parties in bankruptcy proceedings generally have attorneys, which helps to ensure that the focus is on debt relief and not on silly mistakes of procedure or allowing one creditor to have preference over another.

Here is a typical example of why non-bankruptcy debt relief through non-attorney assisted credit consolidation is now prohibited in Illinois:

Sally and Ben are married with two children.  Their family income is $50,000.  They have $2000 of tax debt from last year, Ben owes child support arrears to his ex-wife in the amount of $10,000 and Sally has $60,000 in credit card debt.  Ben and Sally own a modest home with an $80,000 mortgage and $500 per month payments.  Ben and Sally are 4 months behind on their mortgage payments and are about to have foreclosure lawsuit filed against them.  Sally has two court judgments against her.  Both have been sent to collections.  15% of Sally’s gross income is being deducted each month for these garnishments.  Currently Sally will be in garnishment for 5 years before they are paid off.

What should they do?

If they file a Chapter 7 Bankruptcy, all of the credit card debt will be gone, and they can surrender their house and move out in approximately 6 months. Ben will still be garnished for his child support arrears up to 50% of his gross income, and he and Sally will also have to make steep payments on their back taxes.  The family will move into low quality rental housing within 9 months.

If they file a Chapter 13 Bankruptcy, all of the credit card debt will be paid at 10 cents on the dollar or $6000 over 60 months.  The arrearage on the home mortgage will be paid first without interest and is approximately $2000 over 60 months.   The tax debt will be paid back before all other creditors at 100% with 9% interest over 30 months.  Ben and Sally will be able to keep their home.  Ben will pay back all of his child support arrears without interest over the 60 month plan at 100%.  In this case, the garnishments stop, meaning that the family now only pays 10% of its gross income not to just two unsecured creditors but in satisfaction of ALL of the unsecured creditors.  This is where the good deal is.  Also – if Ben and Sally had a car loan, it would be converted today to 6.25% interest with payment spread out over 60 months.

If they went with debt consolidation, Ben and Sally would most likely pay $4500 for debt consolidation services up front.  Then they would pay approximately $1200 per month for at least 36 months.  At the end of the 36 months, the creditors who voluntarily agreed to a reduce payoff would be gone and paid off.  The creditors who did not join in would still be owed money and most likely would have filed a lawsuit for collection and have entered a garnishment against Ben and Sally.  The Child Support would be paid through garnishment of Ben’s salary up to 50% of his gross income, and the tax debt would be paid through a tax lien which would tie up all of their real and personal property, freeze their bank accounts and ruin their credit rating.

Bottom line: when the Bankruptcy Reform Act of 2005 was enacted, part of the goal was to increase the payout to credit card companies.  This has been accomplished by increased payouts under Chapter 13 plans and the means test that forces everyone with above mean income into a Chapter 13 repayment plan.

Bottom line: voluntary credit consolidation was bad for most people prior to 2005, and it is still bad today.

Only the very rich with very private and expensive attorneys benefit from these types of restructuring, and usually it is done to simply keep control of many assets with very little equity but lots of income.

For more information about debt relief through bankruptcy, please email  or call 877-GO-GO-NLO to set up a free bankruptcy consultation.

Citation to Discover – The Hearing you Never Want to Miss!

Oftentimes, client’s will come into my office with a stack of bills, primarily credit cards and several unpaid default judgments.  However, the court hearing that usually makes them come in an deal with the bills and unpaid judgments is the “Citation to Discover.”  The real name for this hearing should be “Garnishment Alert – You’ve got about one month until 15% of your gross paycheck starts to disappear.”

So what is a “Citation to Discover?”  Put simply, it is a hearing that demands your presence to learn about all of your assets and your place of employment.  Unlike simply seeking a garnishment, a “Citation to Discover” seeks to also learn about the location of your bank accounts and any other assets you may have.

What’s the result of not showing up?  A body attachment, which is a nice way of saying a warrant is out for your arrest, so that you can appear at this hearing and explain why you are in contempt of court…for not showing up at the scheduled “Citation to Discover” hearing.

So if you show up, what happens:?  You tell the creditor the location of your employer/s and your bank account/s.  Depending on the size of the unsatisfied judgment, all of your bank accounts will be emptied and the remaining balance of the unsatisfied judgment will be taken as a garnishment.  A garnishment is 15% of your gross income until the judgment is satisfied.

What if I already have two other garnishments occurring?  No Problem, the court simply allows the first two garnishments to complete.  Then when those judgments are fully paid, your new garnishment starts automatically.  In effect, you always see 15% of your gross pay deducted for garnishments all of the time until all three unsatisfied judgments are paid off.

Conclusion:  You should always show up at a “Citation to Discover” hearing.  You should meet with a bankruptcy attorney about one to two weeks before the hearing to determine whether a bankruptcy is good alternative to being garnished.  You should also consult with an attorney regarding any balances that you have in your bank accounts because shortly after your testimony at a Citation hearing, all balances in your accounts will be taken by the creditor just before the garnishment starts.

Chapter 13 Bankruptcy is a great solution to the “Citation to Discover” Trap.  Let’s say you have no savings, are already in a garnishment and now face the prospect of two more garnishments.  In this situation, you already are putting out 15% of your gross income towards the garnishments.   Most Chapter 13 plans only pay out 10% to unsecured creditors – that’s all creditors with all of your debts discharged in five years or less.  In a garnishment you pay 15% and not all of your debts are cleaned up.  Chapter 13 is less costly and globally solves all of your debt issues.

When Should I File Bankruptcy?

When Should I File Bankruptcy? – NLO Nelson Law Office  Generally people should file a bankruptcy immediately if possible to avoid further damage to their credit, stop lawsuits and eliminate harassing phone calls and solicitations.  However, the time to file can change when the following situations arise.

1.  Home Mortgage Modification.  Generally speaking, you should wait to file a bankruptcy after the modification has become permanent.  It is a good idea to wait until the modification is delivered to you in  writing.  However, if a lender is delaying a decision on a modification or has withdrawn a trial modification then the time to file a bankruptcy is now.  Oftentimes after a trial modification has failed, the next step is a Chapter 13 bankruptcy which allows a debtor to command debt relief instead of requesting it from a lender.  The only downside being that a Chapter 13 requires adequate income to afford the Chapter 13 Plan.

2.  Foreclosure not started or not completed where a deficiency judgment is unknown.  In a situation where a debtor is filing a bankruptcy for no other reason than to get rid of the liability on a deficiency judgment in foreclosure, often times it is good to wait to see if the deficiency judgment is actually entered and whether the creditor pursues collection.  Bottom line – if it is beneficial to wait and see if a bankruptcy is necessary – than wait – however, what is you become ineligible for a Chapter 7 bankruptcy while waiting or you have unnecessary stress while waiting to file bankruptcy.  The key is case by case, however, the old rule of thumb which is to file now is usually good except for special circumstances such as these.

3.  Recently a debtor came into my office with about $60,000 in credit card debt and two lawsuit filed.  He asked whether he need to file now and was worried about having enough time to get his legal fees together prior to filing.  Basically in this case, you file shortly before the garnishment actions start from the lawsuits.  The best time to file is several days before any citation order is entered.

We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code. CALL 877-GO-GO-NLO (877-464-6656) FOR A FREE BANKRUPTCY CONSULTATION TODAY! SATURDAY APPOINTMENTS ARE AVAILABLE.