Student Loans: GREAT strategy or STUPID idea???

[hckyfn80]

I'm new here, so maybe this idea has been discussed before. Also, I may be completely off my rocker (likely)...or may be a complete genius (highly unlikely). In any case, here is my situation and idea:

My girlfriend, before meeting me, racked up about $90,000 in PRIVATE school loans. She was in school working on her PhD, but recently decided it wasn't for her and has left the program with just her Master's and has taken a job making $17 an hour because that's all she could get.

Now, I know under the new BK laws that no student loans can be discharged under a Ch. 7 BK (which is a such a retarded law since lenders prey on on suspecting and uninformed students like my gf was at the time, but I won't get into that now). My idea:

1) apply/get quotes on numerous unsecured personal loans (signature loans) ranging from about $5,000 to $10,000. Many lenders base these small types of loans solely on credit scores and she should be able to find enough lenders to total to $90,000.

2) Wait until all approvals have been received, and then sign all of the Notes simultaneously on the same day...that way, the Lenders will not be aware that numerous loans are going out (there is obviously a lag in how fast accounts are reported to the credit bureaus).

3) Immediately pay off the $90,000 private student loan leaving only the various unsecured, personal loans.

4) Pay on these for the 90 day window or slightly longer.

5) Declare Ch. 7 bankruptcy.

So, am I crazy? Is this BK fraud? Abuse? Will a trustee or judge see right through this? While I am not even close to familiar with all of the BK rules, I can't think of how it violates any "technical" rules. I would also think that the individual creditors would be less likely to challenge anything or bring forth fraud allegations because the personal loans would be diversified and each lender would only have about $5,000 to $10,000 exposure.

I'm sure someone, somewhere has already thought of this idea. Please chime in and let me know the feasability of this plan.

[SUB]

I'm sure someone, somewhere has already thought of this idea.

Maybe, if so I bet they're still thinking about it, from jail!

[technoreid1]

Don't quote me but I think suzie orman said to do this a few years ago....

I think she said to pay your student loans with your credit cards and then PAY your credit cards, not go bankrupt....

techno

I'm new here, so maybe this idea has been discussed before. Also, I may be completely off my rocker (likely)...or may be a complete genius (highly unlikely). In any case, here is my situation and idea:

My girlfriend, before meeting me, racked up about $90,000 in PRIVATE school loans. She was in school working on her PhD, but recently decided it wasn't for her and has left the program with just her Master's and has taken a job making $17 an hour because that's all she could get.

Now, I know under the new BK laws that no student loans can be discharged under a Ch. 7 BK (which is a such a retarded law since lenders prey on on suspecting and uninformed students like my gf was at the time, but I won't get into that now). My idea:

1) apply/get quotes on numerous unsecured personal loans (signature loans) ranging from about $5,000 to $10,000. Many lenders base these small types of loans solely on credit scores and she should be able to find enough lenders to total to $90,000.

2) Wait until all approvals have been received, and then sign all of the Notes simultaneously on the same day...that way, the Lenders will not be aware that numerous loans are going out (there is obviously a lag in how fast accounts are reported to the credit bureaus).

3) Immediately pay off the $90,000 private student loan leaving only the various unsecured, personal loans.

4) Pay on these for the 90 day window or slightly longer.

5) Declare Ch. 7 bankruptcy.

So, am I crazy? Is this BK fraud? Abuse? Will a trustee or judge see right through this? While I am not even close to familiar with all of the BK rules, I can't think of how it violates any "technical" rules. I would also think that the individual creditors would be less likely to challenge anything or bring forth fraud allegations because the personal loans would be diversified and each lender would only have about $5,000 to $10,000 exposure.

I'm sure someone, somewhere has already thought of this idea. Please chime in and let me know the feasability of this plan.

[One Half Full]

It would be interesting to see what those with more legal experience than I have say to this. Paying off one type of loan with another type of loan doesn't sound totally iffy, but in preparation for a BK might. I don't know. It would all be very closely tracked by bankers of course. I believe you would leave a paper trail a mile wide. I think you have to give them more like 6 months of bank statements. Even if the GF were given money by the microloan kid, the transfers would be on the bank statement. 90 thousand in transfers on one day for a person with a 17$ per hour job would likely cause some sort of alarm bells to ring.

Don't know. I am not a lawyer.

[aachudneymiles]

I think that's bk fraud and trustee would be all over you and creditors would be pissed. Let us know how that go's for ya!!

[MajorMike]

Omg Red Friggin Flags If I Ever Saw Them!!!!

[butterflywings]

I think if you put the student loans on credit cards and spread the 90k debt out over 10 cards and waited a year or 2 to file then maybe it would fly. How could the trustee claim you knew you were going to file BK the year or so before.

That is definitely though cutting close to BK fraud. I wouldn't do it myself.

[diviaruba]

Stupid Idea

Don't over-rely on the 70/90 presumption of non-dischargability, and being outside of it, as a safe harbor to prevent creditor objections. With a strategy like that, with an obvious attempt to turn non-dischargable student loans into dischargable consumer debt, the look back could be years, especially given the size of the debt and your simultaneous transfers.

There are twelve (non-exclusive) "Dougherty Factors" used in weighing a debt's non-dischargability used to gauge fraudulent intent as to whether a debt was incurred by false pretenses, false representation or actual fraud. That scheme would seem to violate a majority of them.

These factors are: (1) the length of the time between the charges made and the filing of bankruptcy; (2) whether or not an attorney has been consulted concerning the filing of bankruptcy before the charges were made; (3) the number of charges made; (4) the amount of charges made; (5) the financial condition of the debtor at the time the charges were made; (6) whether the charges were above the credit limit of the account; (7) whether the debtor made multiple charges on the same day; (8) whether or not the debtor was employed; (9) the debtor's prospect for employment; (10) the financial sophistication of the debtor; (11) whether there was a sudden change in the debtor's buying habits; and (12) whether the purchases were made for luxuries or necessities. See Dougherty, 84 B.R. at 657.

[keepmine]

Frankly, this has been done before but as Diviaruba says, don't bet on the 90 day window.
She needs to plan on paying the minums for at least a year or more and then wait as long as humanly possible to file to file. The deal needs to make a little financial sense as well. Is the interest rate lower than the rates on the student loans for starters.
A huge red flag will be waved when a young person with this much debt files. The trustee will very likely want some details.

[Minnymouth]

If you want to find a way to a prison cell, this will quickly get you there...........

Super bad idea..............

[Flamingo]

It's fraud, no way around what it is. Note that under the old law and when we filed Chapter 13, we had to provide ONE YEAR of bank statements and list transactions on our credit cards in the filing for a period of ONE YEAR over a certain amount (I believe it was $500). That was 2002 - this is now 2008 and a much more srtingent BK law for both 7's and 13's. It is you that has to live with the risk of knowing the fraud can be discovered; what is the percentage of the risk? Probably very high. It's up to you whether or not to take it. Do not rely on the 90 day lookback. If something is suspected, they will go further and then there are always the creditors who could suspect something also when they check back when they receive the filing...

That Master's on her resume will someday get her a great job - all she has to do is look and maybe relocate to find a good job in her area of expertise. She needs to be proactive. Would it bother her to have a degree like that knowing it's payment was obtained fraudulently? Also there would be BK on her record for 10 years which could prevent her from getting that great job....better think about this one really good....

Best of luck...

[HHM]

Unless these loans actually gave you a better interest rate than the student loans (which is doubtful), your plan is blatant fraud (not to mention that fact that you REALLY are doing this to get them discharged in BK). The problem you have is not timing, or anything like that, it is simply that there is no reasonable basis to do the transaction, there is no point in doing it, except to get the student loans turned into general unsecured debt.

At a minimum, (1) there would need to be some rational basis to do the loans in the first place (i.e. a lower interest rate, longer term, lower payment), (2) you would need to spread out the taking of the loans over a year, (2) you would need to wait a minimum of one year, but probably longer, and during that time she would have to make on time, minimum payments.

But, even if you did all that, I think you will still get nailed, and such a blatant attempt could lead to criminal BK fraud and not just creditor objections.

[FreshLikeADaisy]

One thing to keep in mind is that just because you convert a debt doesn't automatically make it dischargeable (though it certainly helps, IF you can get away with it). For instance, I was reading recently that if you use a credit card to pay your taxes (normally non-dischargeable) and then try to have that credit card debt discharged, the portion you used to pay your taxes may very well end up being excluded. Just because you paid with a credit card doesn't mean that your taxes are now dischargeable. I would also imagine that the more recent the transaction, the worse it would be for the debtor: if I charged my taxes to my credit card five years ago, but am only now filing bk, that would not be the same issue as if I did so last month.

Seems to me that an obvious use of unsecured credit to "convert" student loans into dischargeable debt would not only not be discharged, but land you in some pretty hot water. At the very least, you would have to spread out the transactions over several months at least (which kills part of the plan anyhow) and then wait several *years* before you file bk... during which time the bk laws will likely change yet again. All in all, not a good idea unless you have a few years to work with it before filing and are willing to take the risk that the whole scheme gets your case dismissed, or even worse, you get charged with fraud.

Also, as Diviaruba pointed out, there's more than one indicator for the courts and trustees in determining bk fraud. At the very least, the fact that the loans were obtained en masse on one day or even the same week, in a total amount that obviously exceeds the ability to pay, is certainly going to invite creditor objections, if not charges of fraud from the court. At the very least you will have to be prepared to fight each and every one of those creditor objections separately, and pay a pretty penny for an atty to do it, IF you can find one that would take on that kind of uphill battle for you. Don't count on the relatively low dollar amount of each loan to save you: any creditor who pulls your credit bureau will see exactly what you did anyway, and if a creditor is the suing type a low dollar amount won't change that. Read through the posts in the collections section of people who are getting sued and dealing with wage garnishment over as little as $2000.

I'm glad you asked; I would have hated to see you try to follow through on this. God knows I've had some crazy ideas myself , we all do when it gets bad, I think. But this one ain't a winner, sorry. Good luck!!!

[JRScott]

I wouldn't do this. The Trustee sees something like this he's going to file a motion for the presumption of abuse arises. Make you pull up about 2-5 years worth of financial information and most likely charge you with bankruptcy fraud at the end of his investigation. This is a bad plan .

[hckyfn80]

Thanks everyone for chiming in. It appears to be a consensus that it's too risky of an idea, that the possible consequences outweigh the potential benefits. Please know that I wasn't maliciously scheming to attempt fraud...just trying to think outside the box.

Part of me thinks the creditors would have a hard time proving fraud because most of them, for signature loans, advertise them like "use them for anything you want: vacations, debt consolidation, home improvements, etc." They don't restrict use so using them for school loans shouldn't be in violation.

I do agree though that the BK judge/trustee would not be so keen on the idea especially since the rates wouldn't be much better (if at all) and the loan term certainly would be shorter. It would be a red-flag. Follow-up questions though: how far back does the trustee go though? Do they really analyze every debt in extreme detail (when incurred, how much, how much paid, etc.) or do they only go back a brief period? I guess I'm wondering if the trustee, in a year or so from now, would look to see where the loan proceeds went to. Or would their analysis be limited to the type of debt and that it's been paid on for about a year?