Discharge of Student Loan Debt in Bankruptcy
To obtain student loan debt relief in Bankruptcy Court, an individual must show a “undue hardship” (a debilitating illness). The court must use a totality of the circumstances test and look at every aspect of a debtor’s situation and assesses it on a case-by-case basis. The Court may even looked at the income of both the debtor and their spouse when deciding whether or not the debt rose to the level of an undue hardship (In re Hicks).
Where the Loan Came From
Student loans are either backed by the federal government or provided by a private lending institution.
Federal Student Loans
Pursuant to 20 U.S.C.A. § 1091a(a), loans backed by the federal government have no statute of limitations with regards to collections. Furthermore, 20 U.S.C.A. §1091a(b) provides that “... no limitation shall terminate the period within which suit may be filed, a judgment may be enforced, or an offset, garnishment, or other action...” may be taken. The federal government reserves many powers to ensure it can collect on student loan debt.In the event of a student loan default, the government can withhold money from your wages, your tax refund or other federal payments (also known as a treasury offset), or pursue a judgment against your delinquent debt.
Private Student Loans
In contrast, private loan servicers have a statute of limitations (Florida Statute §95.11 - actions must be brought within five years) to bring a cause of action against a debtor. It is important to note that this is five years of non-payment, if a debtor stops payment for a year and then makes a random payment, the term begins all over again. Private loan servicers cannot affect federal benefits in the same manner as the government, but they can seek to garnish wages, lien property, and pursue other remedies associated with obtaining a judgment in the state of the client’s loan origination.
Every Sarasota and Manatee County Florida professional (Doctor, Lawyer, Executive, Business Owner, etc.), real estate investor, as a result of our litigious society, needs to insure their assets and wealth are protected from creditor claims. Asset protection planning involves structuring the manner in which assets are owned to reduce the risk of liability exposure (liens, garnishment, creditor claims, etc.). Under Florida law we have many techniques to protect your assets today and for future generations
FLORIDA HOMESTEAD PROTECTION LAW: The Constitution of the State of Florida exempts “homestead” property from levy and execution by judgment creditors. The Florida Constitution defines homestead as an individual’s principal place of residence, up to one-half acre within a municipality and up to 160 contiguous acres (including lots with separate legal descriptions and separate tax numbers) in any county in Florida. The Florida courts have liberally expanded the definition of homestead property to include a single family house. condominium unit, manufactured home, and mobile home (under certain circumstances). To qualify for homestead protection, a debtor must be (i) a permanent Florida resident and (ii) the property must be his or her primary residence. Florida real property titled in the name of a Revocable Trust can be homestead property. In addition, the Florida Statutes provide that property owned by a land trust may be homestead property. However, a vacation home or investment property cannot be considered a Florida homestead residence. The biggest benefit of Florida’s homestead protection is its unlimited monetary protection. Under a Florida Supreme Court ruling, an individual may invest unprotected, non-exempt assets into his or her homestead property, at any time, by either buying a new home or paying down the principal balance of an outstanding mortgage with full confidence the funds are creditor protected. There are limited exceptions to this general rule. The Florida homestead protection does not apply to tax liens, mortgages, homeowner association assessments, or mechanic liens associated with homestead property repairs or improvements. Under bankruptcy law, Florida homestead protection is only available up to $137,000, unless the debtor has occupied the Florida homestead real property and/or a previous Florida homestead property for a continuous 40-month period.
FLORIDA TENANTS BY ENTIRETY:“Tenants by entirety” is a special form of joint tenancy ownership which is available only to married couples in Florida. Under Florida law, in order to qualify as tenants by entireties property, the property (real property, tangible personal property, and intangible personal property) must have certain characteristics: (i) joint ownership and control; (ii) identical interest in the property; (iii) the interest must have originated in the same instrument; (iv) the interest must have commenced simultaneously; (v) the parties must have been married at the time they acquired the property, and (vi) the surviving spouse will own the property after either spouse dies. Tenants by entireties protection is only effective if a creditor has a claim against only one of the spousal owners. The Florida Supreme Court has said that any real or personal property owned jointly by a hustand and wife is presumed to be owned as tenants by entireties. Tenants by entireties ownership will be terminated upon: (i) a divorce; or (ii) death of one spouse. Non-Florida residents may also utilize “tenants by entireties” as an asset protection shield. Tenants by entireties protection is based on Florida common law and is available to any married couple living in the United States. All that is required is the joint ownership by the married couple of Florida property to protect the asset from one spouse’s judgment creditors.
FLORIDA SPENDTHRIFT TRUST: A spendthrift trust works as an asset-protection shield because the trustee, not the beneficiary, controls the trust's assets and when they are distributed to a beneficiary. Recent Florida case and application of the new Florida trust code provisions affirm that even bad facts will not change the result as long as the trust instrument contains the requisite spendthrift trust language. It is important to note that a recent 2nd DCA case(Berlinger v. Casselberry) has thrown doubt as to the ultimate protection that may be provided to the beneficiary.
FLORIDA STATUTORY EXEMPTIONS: The State of Florida provides its permanent residents with statutory exemptions from creditor claims. The exemptions include:
Salary or Wages. Under Section 222.11 of the Florida Statutes, wages, earnings or compensation of a head of household which are due for personal labor or services, including wages deposited into a bank account (provided they are traceable and identified as such) are exempt from garnishment. A Florida resident is classified as “head of household” if they financially support someone for whom they have a legal or moral support obligation (spouse, child, or parent). For eligibility purposes, the dependant does not have to reside in the debtor's primary residence. With a married couple, only one spouse can be a head of household.
Life Insurance Policies and Annuity Contracts. The Florida Statutes protect the cash value in insurance and all annuity policies from creditor claims. The insurance protection applies only to the cash surrender value of a life insurance policy for an owner or insured. Death benefits are not protected from the creditors of the policy beneficiary. The Florida courts have liberally construed the statutory exemption for annuities contracts and arrangements. It will also apply to the proceeds of personal injury settlements structured as an annuity. In addition, the protection of cash value insurance and annuities extends to proceeds of the assets after receipt. Florida courts have held that funds withdrawn from a cash value insurance policy and annuity payments received by a debtor remain protected after they are deposited in a financial account, as long as the funds can be accurately traced back to the exempt assets.
Pension and Profit Sharing Plans, IRAs. Section 222.21(2)(a) of the Florida Statutes provides that any money or other assets payable to participant or beneficiary in a qualified retirement or profit sharing plan is exempt from all claims from creditors of the beneficiary or participant. Florida law also specifically protects pension plans designated for teachers, county officers and employees, state officers and employees, police officers, and firefighters. It is important to note that a debtor's IRAs are exempt from creditor claims, but that inherited IRAs are not exempt from creditors.
Disability Income. Disability income benefits received under any disability insurance policy are exempt from legal process in Florida. Automobile Exemption. A Florida resident may protect up to $1,000 of equity in an automobile.
Miscellaneous Exemptions. The Florida Statutes provide asset protection exemptions for professionally prescribed health aids, qualified prepaid college tuition, hurricane savings accounts, medical savings accounts, and unemployment benefits. A minor’s custodial account (Uniform Gift to Minors Account) will be protected from the debtor's creditors because the account is considered property of the minor beneficiary.
FEDERAL AGENCIES CAN GARNISH HEAD OF HOUSEHOLD SALARY OF FLORIDA DEBTORS: Florida statutes state that earnings of the "head of household", including wages, salary, and commissions, are exempt from garnishment. This statutory exemption will not protect Florida debtors if they owe money to a federal government agency. Federal agencies can garnish up to 15% of your earnings even if you are exempt from garnishment under Florida law. Most people are aware that the IRS has extraordinary collection tools, but this super wage garnishment powers are available to the federal government to collect all non-tax debts. A federal agency may, without court order, order an employer to withhold 15% of your salary or, garnish distributions from your own business to satisfy a non-tax debt even if state law does not permit wage garnishment. However, a federal agency may not garnish your wages if you have not been in your current job for at least 12 months and you were involuntarily separated from your previous job. Garnishment of Social Security Benefits:Section 6334 (c) of the Internal Revenue Code (26 U.S.C. 6334 (c)) allows Social Security benefits to be taken to collect unpaid Federal taxes. If your monthly benefit is more than $750, the IRS may garnish fifteen percent of your social security monthly benefit for taxes that are at least six months in arrears. The IRS is required to notify you before it begins to garnish, and you can appeal the garnishment for"hardship.”
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FLORIDA HOMESTEAD BANKRUPTCY RULES
Under the U.S. Bankruptcy Code, a debtor must maintain domicile within the state of Florida for 730 days (2 years) prior to filing a bankruptcy petition, in order to enjoy the exemption laws of the state of Florida. If the debtor does not live in Florida for the 730-day period, then it is necessary to determine where the debtor resided for 180 days preceding the 730-day period (days 731 through 910). The court will use the exemption law of the state where the debtor was domiciled the greatest number of days during such 180-day period.
In addition to the 180-day rule, a 1,215-day rule applies to qualify protection of a Florida homestead in bankruptcy. A debtor cannot exempt any amount of the homestead property worth in excess of the current cap ($160,375) that is acquired during the 1,215 days before the bankruptcy filing.
Marc J. Soss, Esquire
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