Changes On The Horizon
A group of 12 senators introduced legislation recently that would amend the current bankruptcy code to allow private student loans to be held in the same regard as other private unsecured debt and therefore be dischargeable in bankruptcy. Unfortunately, this is just a proposal, as of the date of this posting.
Student Loans Were Dischargeable Until
Up until 1976, federal and private student loan debt were both completely dischargeable in bankruptcy. Then Congress got into the act and began steadily narrowing the grounds upon student loan debts could be discharged. In 1998, Congress rendered federal student loans completely non-dischargeable absent a showing of undue hardship which courts have construed to be nearly impossible to demonstrate.
In 2005, despite fierce opposition from consumer protection advocates, including then-bankruptcy professor Elizabeth Warren, Congress even made private student loans non-dischargeable in bankruptcy. As a result, student borrowers who find themselves unable to repay their loans are now saddled with this debt for life. Sadly these loans are not eligible for the alternative payments plans that are now offered to public student loans.
The rationale behind making thee private student loans non-dischargeable is fairly suspect. How are private student loans, generally high-interest obligations, offered by banks for profit similar to other non-dischargeable debts where the idea is that the debts should not be discharged to protect either victims or the public good.
Filing A Complaint To Determine Dischargeability
This will start the process that leads up to an adversary proceeding. Its technically a lawsuit but closely related to the bankruptcy proceedings.
Studies have shown that about 40 percent of people who filed for an adversary proceeding are able to discharge most, if not all, of their student debt.
However, discouraged early on that the odds of winning chapter 7 for student loans are slim, one-tenth of petitioners dont bother filing the complaint.
Filing the complaint, and if possible, having an attorney skilled in bankruptcy at your side can improve your odds of getting your debt discharged.
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Duration Of Undue Hardship
The second prong of the Brunner Test requires the borrowers inability to repay the debt must be likely to continue for a significant portion of the repayment term of the loan. Just how long is a significant portion of a loans repayment term?The judges ruling in Brunner v. New York Higher Education Services Corporation indicated that the repayment term is generally ten years:
- After all, it is not unreasonable to hold that committing the debtor to a life of poverty for the term of the loan generally ten years imposes “undue” hardship.
But when the Brunner Test was issued, in 1987, student loans could be discharged after five years without requiring a showing of undue hardship. This suggests that a significant portion of the repayment term is less than five years. Otherwise, borrowers could have obtained a discharge after five years without needing to demonstrate undue hardship. A showing of undue hardship was necessary only if the borrower wanted to discharge their federal or private student loans in less than five years. A five-year standard has been used in other discharge options for federal student loans, such as Total and Permanent Disability Discharge. See 20 USC 1087. So it would be reasonable for the U.S. Department of Education to decide that student loan discharge in bankruptcy is legal when the borrowers situation is of a permanent character and has lasted for at least five years.
The History Of Student Loans In Bankruptcy
Student credits are fundamentally non-dischargeable, nearly everybody knows this. There are some quite certain conditions where even today you can have your understudy credit obligation released, yet that is a restricted exemption that regularly requires a battle and cash to battle. We will talk about the present condition of dischargeability in a future post.
The scene around understudy credits and chapter 11 has not generally been so barren. In the no so distant past these credits were dischargeable. A while ago when they were dischargeable, the expense of instruction was a lot of lower and the absolute understudy credit obligation was a small amount of what it is presently. With understudy advance obligation at present being a 1,200,000,000,000.00 dollar issue keeping individuals away from buying homes or participating in the more extensive economy, with a little assistance they may get dischargeable yet again.
A Brief History.
The Rising Cost of Education.
The Building of the Student Debt Prison.
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When To File An Adversary Proceeding: Chapter 7
If you choose to file for Chapter 7, you can file the adversary proceeding right after filing your bankruptcy case. If you’ve already gone through Chapter 7 bankruptcy and your case has been closed, you may still be able to file an adversary proceeding to get your student loans discharged. How much time you have to do so depends on where you live and the courts.
If your Chapter 7 case is already closed, you must first move to reopen your bankruptcy case. This is procedural and does not restart the bankruptcy or eliminate the discharge you may already have received for your debt.
Student Loan Debt Discharge Procedure
To seek discharge of student loans, you need to file an adversary procedure, which is a lawsuit within the bankruptcy case. You would file a Complaint to Determine Dischargeability, then have to go to court to prove undue hardship. This is not a simple matter, and it would be advisable to consult a bankruptcy attorney.
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If You Ignore Your Debts
Ignoring your student loan debts is the worst option. Once youre in default on government-held loans which accounted for 90% of all student loans in the 2016-2017 school year the federal government has extraordinary collection powers. It can garnish wages, seize tax refunds or portions of Social Security benefits, and place liens on bank accounts and property.
And unlike other types of debt, there is no statute of limitations on federal student loans. That means that a student loan debtor can be hounded to the grave by the federal bureaucracy or the agency that services loans on behalf of the Department of Education.
Also, after a stipulated number of months of non-payment, a loan can be transferred to a private collection agency. Additional fees and collection costs are then added to the loan balance.
Rather than trying to ignore your student debt problem, its best to take action as soon as possible, even if that means going into bankruptcy.
Student Loans To Be Dischargeable In Bankruptcy
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A bill to restore student loan dischargeability was introduced
Billion Dollars Of Student Loan Debt Gone?
into the Senate today with Democrat and Republican co-sponsors.
I hope this is BIG news.
Back in the last millennium, when I started practicing law, student loan debt
was dischargeable, if the first repayment, not counting any forbearance time,
was due 7 years before the bankruptcy was filed.
No big deal then, when total student loan debt was counted in the billions, not the 1,7 trillion dollars we have today,
And back then there was no means test, not even a budget of income and expenses with the prospect of your case being dismissed for substantial abuse.
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If You Need Additional Student Loan Help
If bankruptcy or settlement arent options for you, federal student loan borrowers can enroll in an income-driven repayment plan to keep payments manageable. Private loan borrowers should contact their lender to find out the options available to lower payments.
First speak with your servicer or lender to:
Discuss repayment options.
Take a temporary payment pause.
Temporarily reduce your monthly payments.
If your problem is with your lender or servicer or youre not getting the help you need, look for a legitimate student loan help organization that offers counseling. Consider these vetted resources for student loan help they are established organizations with verified histories:
Student loan help resource
Advice on debt settlement, bankruptcy, default and forgiveness. Licensed in Missouri and Illinois.
Many of these organizations offer advice for free. In some cases, you may need to pay a fee, as with a certified nonprofit credit counseling agency or if you hire an attorney.
None of the organizations above calls, texts or emails borrowers with offers of debt resolution.
Offers of help that you have not sought out are likely to be scams. While its not illegal for companies to charge for services such as consolidation or enrollment in a payment plan, those are steps you can do yourself for free.
Avoid any debt relief companies that demand money upfront.
How To Prove Undue Hardship For Student Loans
To discharge student loans via bankruptcy, you will have to prove they pose an undue hardship during your adversary proceeding.
The U.S. Bankruptcy Code doesnt define undue hardship, so bankruptcy courts have different interpretations for its meaning. Most use whats known as the Brunner test to determine whether bankruptcy filers student loans meet the undue hardship standard.
You must prove that you meet all three parts of the Brunner test to get your college debt discharged:
1. Making student loan payments would keep you from maintaining a minimal standard of living based on your current income and expenses. To meet this, you generally must have bare-bones expenses and must have done everything in your power to increase your income, without success.
2. Additional circumstances make it very likely that your financial situation will persist for a significant portion of your remaining loan period. Among other things, you may be able to successfully meet this if you have a serious mental or physical disability, received a poor-quality education or have maximized your income potential in your field.
3. Youve made “good faith” efforts to repay your loans. You may meet this prong by making some loan payments, attempting to negotiate a payment plan and working to slash unnecessary expenses and increase income.
Different jurisdictions and judges have different interpretations of these standards so your outcome will depend on your location and the judge you get.
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Current Student Loan Bankruptcy Law
Section 523 of the U.S. Bankruptcy Code makes student loans exempt from discharge absent undue hardship.
Specifically, 11 U.S.C. Â§ 523 says that education debt is exempt from discharge in both Chapter 7 bankruptcy and Chapter 13 bankruptcy if:
Are private student loans exempt from discharge? Private student loans are exempt from discharge in bankruptcy if they are a qualified education loan. A private loan is a qualified education loan if it did not exceed the student’s cost of attendance and the student attended a school eligible to participate in the Federal Student Aid Program.
Can You File Bankruptcy On Student Loans
Certain debts may not be discharged in bankruptcy. Student loans are in the category of nondischargeable debts however, the bankruptcy law makes an exception where the student loan debt would impose an undue hardship on the debtor and the debtors dependents.
The Bankruptcy Code does not define undue hardship, so the bankruptcy judge must decide the matter. You must show that you have a greater hardship than that normally faced by someone filing bankruptcy. Bankruptcy courts apply various tests to determine whether there is undue hardship. The most common tests are the Brunner test and the Totality of Circumstances Test.
The Brunner Test requires you to meet all of the following requirements:
1. Considering your current income and expenses, you cannot maintain a minimal standard of living for yourself if you are required to repay your student loans.
2. Your current financial situation is unlikely to improve for a significant portion of the loan repayment period.
3. You have made a good faith effort to repay your student loans.
Under the Totality of Circumstances test, the court looks at all relevant factors to decide whether an undue hardship exists. This leaves it up to the judge to determine the relevant factors. If you have a Health Education Assistance Loan , the loan must have become due more than seven years ago, and you must satisfy the judge that repayment would create an unconscionable burden on you.
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When Is Student Loan Discharge In Bankruptcy Legally Allowed
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The U.S. Department of Education has the legal authority to allow a borrowers federal student loans to be discharged in bankruptcy, in certain circumstances. It has not, however, generally exercised this authority.
What Year Did Student Loans Become Nondiscahrgeable
Student loans first became nondischargeable in bankruptcy in 1976 as part of Â§ 439A Higher Education Act of 1976. Except in cases of undue hardship, Section 439A prohibited debtors from discharging student loan debt until 5 years after the start of the repayment period.
Why are student loans exempt from bankruptcy? Student loans are exempt from bankruptcy because many politicians feared that young people would borrow substantial sums to pay for college and then discharge their student loans in bankruptcy right after graduation. As a result, starting in the early 1970s, Congress began changing the bankruptcy laws to require a borrower to prove undue hardship before she could discharge her student loan debt.
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The Additional Step: Filing An Adversary Proceeding
Here’s where things get more complicated. As stated earlier, just filing for bankruptcy under either Chapter 7 or Chapter 13 is not enough to have your student loans discharged. You must take the additional step of filing an adversary proceeding.
Under the U.S. bankruptcy code, an adversary proceeding is a proceeding to determine the dischargeability of a debt. In other words, it’s a lawsuit within a bankruptcy case. Included in the adversary proceeding paperwork is “a complaint.” The complaint includes administrative details, such as your bankruptcy case number, along with the reasons you are seeking to discharge your student loans in bankruptcythe circumstances of your undue hardship.
Thisadditional step is necessary because student loans and a few other types of debt have stricter requirements for discharge than credit card debt, for example. These requirements are described in section 523 of the U.S. bankruptcy code. The keywording that relates to the discharge of student loans is: A discharge under…this title does not discharge an individual debtor from any debt…unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtors dependents.” Note the words “undue hardship,” which is discussed below.
Defenses To Bankruptcy Discharge
The U.S. Department of Education often raises the availability of income-driven repayment and disability discharges as a defense to bankruptcy discharge. Bankruptcy discharge is thus usually limited to the following situations:
- Borrowers who have a disabled dependent with high ongoing cost of care
- Private student loans that do not offer a disability discharge or income-driven repayment
- Student loans that do not satisfy the requirements for a qualified education loan, such as bar study loans, residency and relocation loans, and loans at unaccredited colleges
- Disabled borrowers who are ineligible for a total and permanent disability discharge due to income above the poverty line, yet still have insufficient income to repay the student loan debt
- An excessive amount of debt prevents the borrower from obtaining affordable payments even if the borrower maximizes income and minimizes expenses
- Borrowers are not eligible for income-driven repayment on Federal Parent PLUS loans
While advocates continue to push for reversal of the bankruptcy law that has eliminated student loan discharge, the prospects of that happening any time soon appear to be dim. The best hope for overwhelmed student debtors appears to rest with jurists who liberally interpret the undue hardship standard and the few lawyers who represent student loan bankruptcy cases pro bono.
For the most part, though, overwhelmed student debtors have little hope of relief in the near term.
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Paying Off Debts Not Discharged In Bankruptcy
If you have debts that cannot be part of a bankruptcy, there may be ways to alleviate the financial obligation to improve your cash flow. For example, if you are continuing to pay off a mortgage, you may have an option to renew at a lower interest rate or increase your amortization to lower your monthly payments.
If you have a considerable car loan and cannot afford your payments, you may need to sell and downgrade to a more affordable vehicle. It can be a tough choice, but cars are so sturdy these days that even older, higher-mileage models can provide worry-free transportation for several years.
Items like child support, alimony, or income tax arrears can be more challenging to deal with. For income taxes, contact the CRA to see what arrangements they may be willing to make to help you catch up. And while Im no family law expert, you may be able to renegotiate the terms of your child support or alimony. If two parties agree, anything is possible, and it never hurts to ask.