Episode 32: What Long-Term Disability Policyholders Need To Know About Filing Bankruptcy As A Recipient Of Disability Benefits
In this week's episode learn about: "What Long-Term Disability Policyholders Need To Know About Filing Bankruptcy As A Recipient Of Disability Benefits" and much more!
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Hey, I am Nancy Cavey , national Aricia and individual disability attorney. Welcome to winning isn't easy today. We're going to talk about disability and bankruptcy with my special guest attorney, Christina fare . Now, unfortunately being disabled and having to live off of your disability insurance benefits can cause a lot of significant and painful financial problems. Should you file for bankruptcy? Are there alternatives to bankruptcy? When should you file? Is it going to ruin your credit? Am I a bad person? If I file for bankruptcy, let's learn to answer these questions and more in today's episode, before we get started, we've got to give you a legal disclaimer. We're both lawyers and we have to tell you that the podcast just isn't legal advice. The Florida bar says we have to say it . So we've said it. So let's get going. Christina, can you tell me first, how did you become a bankruptcy attorney? Bankruptcy is certainly something I tripped into. I don't think anybody goes to law school and says my life goal is to be a bankruptcy attorney. I certainly don't know anybody who said that. So I became a lawyer in 2008, which was right in the economic downturn. And we were seeing a lot of foreclosures and I was working at a firm that handled foreclosures and protected consumers and homeowners. And what we realized was that bankruptcy was actually a great court constructed and protected way to help people try and save their homes. And so that's kind of how I got shoved into it. And I didn't realize that I would love it this much, and I just really appreciate the help I can bring to clients as well as the professionalism of the attorneys that I work with and interact with on a daily basis. So tell me, what do clients need to know generally about bankruptcy, the various chapters of bankruptcy and what might be the right alternative for them? Sure. So a lot of times when a client has a debt, bankruptcy is not their first option and I agree it should not be, but when we look at what our options are, they're kind of limited. And so the options, when you have a debt are one, you can pay it off. And then we need to look at how reasonable is that. If you're current on your payments, you're going to have a monthly payment. It's going to include some interest . And then we need to look at whether that payment combined with all your other payments is feasible. If it's something you can, the second option is you can try and settle that debt and settling the debt is usually an opportunity for you to negotiate with your creditor and pay a smaller amount. Sometimes that's difficult for clients because what they're expecting from the creditor side is they're expecting a lump sum. So if you owe for example, $5,000, but the creditor is willing to take $2,000. They don't want $2,000 over payments . They need $2,000 right now. And so whether or not you have $2,000 ready to go for that, creditor is sometimes the bigger concern. The third option then to get out of it is to file bankruptcy. If it's the kind of debt that can be discharged, most credit cards can be with certain exceptions, but then you're looking at what other issues could arise if you file for bankruptcy.Speaker 2:
So , uh, I know that the primary reasons for filing for bankruptcy is divorce. And that might be as a result of a disability. Um, a person's lost their job. A person's gotten behind , uh, on their , their mortgage payments, whether they've got medical debt. Can you just speak a moment to , uh, first the impact of a disability on a divorce, on , um, filing for bankruptcy?Speaker 1:
So a lot of times I think those are three great categories. That's what we really see a lot of is divorce, loss of income and medical issues that have created some type of loss of income. When we're looking at divorce or disability or things like that in relation to bankruptcy, we need to look at the different chapters. So for a chapter seven bankruptcy case, that's what some people call a fresh start. I kind of look at it as the Walmart of bankruptcies , because you can do everything there. If you go to a Walmart, you can get your tires changed. You can get an eye exam, you can get groceries, you can buy a sofa, there's all sorts of things you can do in Walmart. Same thing with a chapter seven, you can address a home that you're behind in payments on. You can keep your disability payments. You can surrender a lease lots of things to do for purposes of disability, your disability, monthly payments are going to be protected. You do not need to worry about them. And a chapter 13 chapter 13 is for wage earners. So if you're on disability, you might not be eligible to file a chapter 13 because you're not earning a wage. You're not earning income, which is a requirement to file chapter 13. A chapter 13 is also usually reserved for people who have higher income than the national average. And the national average is based on how many people live in your household, as well as what your gross income is for your household. The problem with gross income calculations though, is that not everything counts towards gross income in a bankruptcy. So for example, social security benefits don't count towards that gross income. However, what we see is most people who have social security don't earn enough to even be close to that median. And so, because a chapter 13 is a reorganization, as opposed to that fresh start, we talked about in chapter seven, a chapter 13 requires a little bit of repayment based on your income to pay off those debts . And the final individual option we see as a chapter 11 and a chapter 11 is for really high debt or really high income clients. And that's just not something we're seeing a lot with people who have disability are receiving disability or anything like that.Speaker 2:
But let's say I'm disabled. I have my house I'm behind , uh , on my house payments, but I want to keep my house, but can I is a chapter 13 where I w I want to beat it to try to keep that houseSpeaker 1:
Used to be that used to be that chapter 13 was the only place that you could keep that house in the middle district of Florida, which is in our Tampa Bay area. You can also request a modification for your mortgage in a chapter seven. And so when you're looking at keeping your house, you kind of have a few options. One is catch up on it all in a lump sum. And again, a lot of things we're going to see in bankruptcy as this lump sum concept. Most people just don't have that. If you're behind six months on your mortgage payments, that could be eight, $10,000. Most people don't have that available. So lump sum, not a good option in bankruptcy, both chapter seven and 13, the middle district has an option for you to do a mortgage modification mediation. And that allows you and your mortgage company to see if there is a possibility to modify your mortgage based on what your bank allows, what the investor on your mortgage allows and what your financial options are. Now, this is great for someone who receiving income on a monthly basis, who may have gotten behind shortly, but has now either fix the problem or gotten back to work or receive some additional income. That's a great fix as this mortgage modification, mediation. A lot of people have tried that outside of bankruptcy. And a lot of times what we hear is you get the run around from your bank. You get the, we never got your paperwork. You didn't fill it out completely. Oh, you filled out the wrong form. Oh, you did it in blue ink. It should have been in black. The beauty of doing it in the bankruptcy court is the bankruptcy court has removed all of those games. So they have a very specific portal set up to keep everybody in line and everybody behaving well. So it is good if you are tech savvy, or if you have a lawyer who's tech savvy to make sure you understand how to upload your documents to the portal, how to read portal messages, but it prevents and removes that game claim we see outside of bankruptcy. So our mortgage modification is going to depend on whether you have the financial ability to keep this house and whether the bank has their rules and regulations that allow that to take place. A lot of times, until you get into the bankruptcy modification, mediation, you don't know those numbers and you don't know those regulations. So sometimes it's a discovery process, not just a fixing process. If you're denied a mortgage modification and you still want to keep your house, then the only option is going to be to catch up on your mortgage payments. And you can't do that in the chapter seven. And so you would have to either convert to a chapter 13 or originally file a chapter 13 in order to catch up on the payments. And then what happens in the chapter 13 is we look at whether catching up it's feasible. So when a chapter 13, you have five years to catch up on your missed mortgage payments. So if you have something such as 8,000, $10,000 that you're catching up on, you could probably catch up on that in five years. If you're in the 30 thousands of how much you're behind in your mortgage payment, that's going to be a different calculation. And so, unless your income has reallySpeaker 3:
Ballooned reallySpeaker 1:
Increased, you've had a family member move in. The feasibility of catching up is going to be a problem. And so sometimes as a bankruptcy attorney, I have to be the bearer of bad news to say, yes, I know you want to keep this house. I know that this is important to you, but the numbers just aren't there to make it happen. Wow, that's a kind of information was a lot . We're going to kick it a short, short break to kind of digest all of this. We'll be back in a minute , Welcome back to winning. Isn't easy. So one of the questions I get from my clients is should I be filing for bankruptcy with my spouse? Or should I be doing it alone? What's the, your general thoughts about that? So when we look at the benefits of filing together or filing separately, a lot of times for spouses who are married in the same house, not considering filing for bankruptcy, there's usually no benefit to filing separately because everything is doubled. So for example, as an individual, you get a thousand dollar exemption towards a vehicle. You get a thousand dollars in personal property. If you own a home and you want to keep it, or you get $5,000 exemption, if you don't own a home, if you rent or live with family, if you file together that number doubles. So it's , it's a straight double. So when we look at spouses and whether one should file or both should file, it's really who has the debts . And sometimes we want to be strategic. If you are in a place in your life where you're going to need to purchase a home, or you're going to need to purchase a car, we want to think about preserving credit scores and keeping them good. And so maybe one spouse who has the debt files and the other spouse keeps their debt and their credit score at a lower place. Also, if you get rid of this spouse's credit card debt, you might have more money to pay off this spouse one. So you can keep one spouse's credit, good one spouse's credit then goes into a rebuilding process. However, if both of you have debts, you are older in age, you already own a home. The payment's fine , your cars are fine. Then it might make sense to have both. If you go ahead and file sweep, all that debt away and then start rebuilding credit together because there's not really anything you need credit immediately.Speaker 2:
So , um, one of the questions and circumstances that happened in disability claims , uh, is that they may be overpaid their disability insurance benefits because , uh , social security awards, a retroactive payment of, of , uh , social security disability benefits to my client and to their children. And the insurance company says, Oh, you've been overpaying. We want all of our money back and we want it now. So the question is, can you , uh , discharge an overpayment of , uh , short or long-term disability benefits or even social security, disability benefits in bankruptcy?Speaker 1:
So the sad part is usually no, no, any amount that you owe to a government entity, like the social security administration is not going to be dischargeable in bankruptcy for purposes of, if you received that money through an insurance policy, that's going to be questionable. And we're going to need to look into that individual policy on a case by case basis. So if you did receive an overpayment, you want to have all of your paperwork, your policy, that letter, that set everything out. You want to have that. So your lawyer can take a look at it for the social security administration repayment, because it's a payment owed to a government entity. It's actually going to go into a separate categorization of what we call priority debt and priority. Debt is not dischargeable. So that SSA overpayment is going to be considered just like it would be if it was money owed to the IRS money owed for alimony money owed for student loans. So it goes into that non-dischargeable category. Again, a lot of times what we're seeing is, Oh, they want a lump sum payout, which of course nobody has. You don't have that $33,000 available. So then we look at whether a chapter 13 case would be right for you. Because again, the chapter 13 gives you that five years to repay that money back. So rather than having social security garnish come after you start pulling money out, you could possibly set yourself up on a more comfortable payment plan through a chapter 13, but that's also going to take a look at what social security proposes their repayment looks like. Sometimes it's better to do it in the bankruptcy. Sometimes you're getting a better deal staying out of bankruptcy. So we really need to know the numbers. Bankruptcy is a very numbers game.Speaker 2:
Well, you mentioned a word I hear a lot, and that is the question of where I can discharge my student loans , uh, in bankruptcy or alternatively, should I be using , uh, the student loan forgiveness program. That's eligible for people , uh, who are disabled. So what are your thoughts about that?Speaker 1:
So the dischargeability of student loan test in bankruptcy is extremely high. It's an extremely high burden. And so there's been talk about student loan reform for quite some time. And so until it gets passed until we know what that looks like, sadly, the law, as it stands right now is student loans are not discharged in bankruptcy. And so we go back to the concept of bankruptcy as a numbers game. And so we always want clients to really embrace the knowledge. And that's difficult because student loan numbers are not fun. They look like monopoly money of how much we all owe . You know, it's , it's just a lot of money, regardless of whether you have a little bit of loans or a lot of loans, it's a lot of money. And so we encourage people to look into one, what is your loan right now? What is the balance? What is the monthly payment? What is the interest rate? How are you scheduled right now to pay it off? So for example, if your loans right now are scheduled to be paid off in 15 years, and it's an okay payment, it's not making you eat, you know , cans of beans every night, then maybe it's okay. And maybe that's a better option than the student loan forgiveness program, which is a 25 year plan. So you want to look at numbers to understand how is it going to differ among all the different options. Have you looked into refinancing your student loans, if your interest rate dropped, how much would that change your monthly payment? And those are things that I get really excited about interest rates and emiratisation schedules and finding that right plan to figure out your debt situation. I have been very lucky to do that with my own debt and my own finances. And so I'm really motivated and inspired to help other people figure out their numbers also, but kind of having, having a figuring out of, have you looked into refinancing, what would those numbers look like? What do these numbers look like right now, if you do go towards the public , um, the student loan forgiveness program, what are those numbers going to look like? So do a little bit of homework, have to not be an ostrich, pull your head out of the sand. Let's kind of confront these numbers head on and let's make a smart choice.Speaker 2:
And of course, one of the other tools that I mentioned is a , a discharge of at least federal student loans based on disability. Um, any thoughts or suggestions about that is that program available for private student loans?Speaker 1:
The private student loans are always a question because it's, what were the private student loans used for. And so we've seen private student loans for a variety of things. As an attorney, there are private loans that go just for an attorney who is taking a bar exam. And so there's questions of, since that's not towards education, is that dischargeable. And this is really a tough case by case basis, because you have to look at how that student loan is guaranteed, where it came from private or not. And then what was the money used for more importantly, what does the loan agreement say the money is supposed to be used for? So that's really important on the private loan side from the federal loan side with disability in bankruptcy court for a very long time. And it's still pretty much the , the law of the land is what we call the Bruner test. And the burner test says that you can discharge your student loan .Speaker 2:
If you meet thisSpeaker 1:
Super high threshold that you are just going to be incapable of repaying these loans at any time, anywhere in the future. And so a lot of people can say, well, clearly I can never pay back my $80,000 of student loans, but Bruner was a very special case. He had a lot of student loans ended up being a quadriplegic was just not going to be able to earn an income to do that. If you are mostly able-bodied , if you can sit at a desk and be a call center person, if you can work in retail, if you can drive for Uber, the court's going to see that you can earn an income and that you are going to be able to make a repayment. And most people just don't meet the Bruner test months, sorry. In recent months, we've actually had a case that came out about a doctor and the doctor had doctor student loans, and he actually was unable to match for his residency. And then he just couldn't get a job anywhere. He tried getting jobs for walking clinics, like those minute clinics that you see, and he tried a variety of odd jobs and just wasn't able to make the payments on the medical bills on the student loans from his medical degree. And so the court did discharge some of his student loans, but not all. And so, again, it's a very high standard right now. And I always tell my clients, unless you are the quadriplegic, who's unable to work. Your ability to have those loans discharged is going to be extremely, extremely high.Speaker 2:
Of course, we do have the other program that allows people to apply for a discharge of their federal student loans aged under this stability , primarily with the social security disability award or a VA finding of a unemployability. So that's a , that's an option which would be , uh, based on their personal circumstances and any award of social security benefits, or , uh , a VA finding of , uh , of an unemployed bully . Correct?Speaker 1:
Correct. And that's actually all gonna take place outside of bankruptcy. So filing the bankruptcy really wouldn't help that cause that's more of an administrative finding. So if that is something that applies to you, please get the paperwork start calling. A lot of those services also have advocates who can help walk you through the process, answer your questions. A lot of the forms come with some instructions on how to fill them out, grab a family member, grab a cup of coffee, get it done. Because if that is an option, please look into it. It's better to have applied and get denied than not to have applied at all.Speaker 2:
So are there any other questions or considerations that we , um , should discuss and what I'm going to throw out quickly? Is it a lot of people feel that they're a bad person. If they have to apply for a bankruptcy, despite the biblical injunctions that basically approved bankruptcy. So a lot of our clients are struggling with disability. They don't feel all that great about themselves or their circumstances. And now they're confronted with bankruptcy. What, what would you say to them?Speaker 1:
I unfortunately hear this often. So if you are the person who is concerned about filing bankruptcy, because you know, you owe the money and you feel that you have a moral obligation to pay it back. I understand. And we hear that a lot. The way I look at it is you have a moral obligation to pay back the $45 blender that you purchased, what you don't and should not feel you have the moral obligation to is pain, the late fees, the interest rate. And then when you miss a payment, the late fee on the interest rate on the late fee on the interest rate. So yes you might. Exactly. So yes, you have an obligation to pay back the $45 , but now capital one, chase discover whoever is now charging you $2,363 for that $45 blender. So yes, I, your moral obligation for the $45, you've probably already paid that back. The 2,363 is all those fees and costs that keeps capital one giving their CEOs, these large bonuses. So let's really look at where the moral obligation should be. And it shouldn't sit in this guilt with you on . Now , there are thing that we also consider too with disability payments is people always worry. What's going to happen to my disability. What's going to happen to that bank account that that money goes into. Don't worry. It doesn't go anywhere. It doesn't freeze any bank account. The only thing you want to make sure is sometimes if you have a credit union account, credit unions have a little bit of different rules. So if you have a credit union account, you want to make sure that you know, that, that your attorney knows that, but under the federal laws, your disability payments are fully exempt and cannot be reached by your creditors inside or outside of bankruptcy. So you want to make sure that you know, that money's going to be protected.Speaker 2:
Well, we know Wells Fargo has a bit of a nasty habit of freezing accounts , uh , with , uh, clients, any specific advice about certain institutions, such as Wells Fargo or credit unions and what they should be doing , uh , before they file bankruptcy to protect what is in the accounts.Speaker 1:
Yeah. I wish I had that right answer. I feel like it's right in the shop with my crystal ball. Um, but the hard part is, is that some of the larger banks just don't play by the normal rules. They play by other people's rules. And so the most important thing though, is, do not make rash decisions. And a lot of times we hear clients go, Oh, well, I just went to the bank and I took out all the money. So they couldn't freeze my accounts. Oh my gosh, please don't do that please. Don't where is that money? Where did it go? The court's going to want to know where it went. And if you're doing quick, irrational, quick making decisions, things like that in the 90 days before you file bankruptcy, it's automatically considered bad faith. And so a lot of times you might not intend for it to look that way, but it could. So don't make quick decisions, just come and speak with the attorney. A lot of times we will send a letter to the institution, notify them that you're filing bankruptcy and then try to kind of head them off at the pass and hope that they don't freeze your bank. Accounts, accidents happen. Sometimes it can happen, but that's really why having a lawyer on your case is helpful is because I have the resources and tools to fix it faster than you might not as an individual. So that leads me to my next question. How do people find the right bankruptcy attorney for them? So I feel it's kind of like dating and we've talked about that in our last podcast, Nancy it's you have to find a lawyer that you feel comfortable talking about this stuff with. This is not fun. I don't wake up every morning and say, you know what? I want to talk about people who have terrible financial situations who don't know what their outs are. And so we just really try to be understanding. You want to feel like your lawyer is hearing you and is able to understand your concerns. We talked about. The one concern is that people feel like they're a bad moral person. There are a hundred different ways you could be feeling right now for people who have gone through a divorce. They're angry. They had this household, everything was fine. Now they have all this debt. That's not good. So you want to find a lawyer that you can talk to. That helps you feel like everything's going to be okay, because at the end of the day, it will. And we're going to help you get through this process. You're going to be able to see results. Your debt's going to go away. Your credit score is going to improve, and you're going to start rebuilding that credit and that life that you had. So just find somebody you think, and you feel is going to get you to that place. And so how do my clients reach out to a great attorney like you to get the legal advice and representation we'd love to hear from your clients, your guests, colleagues, friends. If someone, you know, has a question about debt, how to figure it out, how to pay it off. All of our bankruptcy consultations are free. Please contact us. You can find us on social media. I'm on LinkedIn. You can find Fe her law on Facebook. You can call us at (727) 359-0367. You can email me [email protected] . We've got a great blog about fixing your credit scores. What bankruptcy will do to affect your house, your pension. Please read up, please reach out to us. Let us answer your questions. Wow. Thanks for all this great information and being my guest today. Thanks. Thanks for having me, Nancy. My pleasure.