Student Loan Cancellaton: Bankruptcy
Plaintiff Hilal K. Homaidan borrowed student loans from Sallie Mae to attend Emerson College in Boston. The student loans were two Tuition Answer Loans, which totalled $12,567. The plaintiff said these student loans were not used to pay Emersons cost of attendance and went directly to his bank account. After graduating, Homaidan filed for Chapter 7 bankruptcy to discharge his student loans. The bankruptcy court granted discharge but wasnt clear in its decision whether private student loans would be cancelled too. Navient, the lender, proceeded to collect payment of the private student loans from Homaidan, the borrower. Homaidan agreed to pay off the private student loan under a mistaken belief that these student loans werent included in the discharge order. However, after paying off the private student loans in full, Homaidan reopened his bankruptcy case to argue that the private student loans he mistakenly paid were discharged in bankruptcy.
Can You File Bankruptcy To Discharge Private Student Loans Yes
âYou may have heard that you can’t file bankruptcy for student loans. Thatâs not entirely true. Itâs possible to discharge private and federal student loans in bankruptcy â but the process is more burdensome than wiping out credit card debt, medical bills, and other types of debt
Federal student loans are less likely to be discharged in bankruptcy because they offer flexible, income-based repayment plans, deferments, forbearances, and loan forgiveness. Those things make it challenging for student loan borrowers to prove they have an undue hardship â something that must be proven before any judge will even consider discharging a student loan debt of any kind.
But private student loan lenders don’t offer the same types of benefits as the Department of Education. Although itâs still going to be a hard sell to the judge, it’s easier to file bankruptcy on private student loans and get a discharge. Plus, there’s new bankruptcy law from cases and proposed legislation that may eventually allow borrowers to get rid of their private loans without having to jump through extra hoops.
Ahead, learn more about private student loan bankruptcy.
Private Student Loan Bankruptcy Issues
If your student loans are private bank loans like a student line of credit or student credit card debts, then these types of consumer debts are eligible for automatic discharge under the BIA no matter how old they are. This is true for student loans that are not guaranteed by the Ontario or Canadian government. Private student loan debt in bankruptcy is treated like any other unsecured consumer debt. It is automatically discharged with no waiting period. If you are unsure about whether your private student debt qualifies for elimination through a bankruptcy or consumer proposal, book a free consultation with one of our Licensed Insolvency Trustees to talk about your situation.
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Defaulting On Student Loans
How many parents have student loans?
The Department of Education said that 3.3 million borrowers had $74.5 billion in Parent Plus loans in 2016 to pay for their childrens education. Another study by the University of Southern California said the average parent borrows $21,000, but that parents with incomes higher than $120,000 borrow an average of $30,000.
The Consumer Financial Protection bureau said that 2.8 million people 60-and-over were paying on student loans in 2017. That is four times the number who borrowed in 2007. Even worse, the Government Accounting Office says that 37% of student loan borrowers age-65 and over are in default.
If youre considering bankruptcy, your loans are probably already in default, meaning you havent made a payment in more than 270 days . This is more common than you may think. The national default level on student loan repayment is approximately 10%, meaning that 4.4 million borrowers are in default on Americas $1.4 trillion student loan problem.
The Department of Education said that the default rate was falling in 2016, but that is misleading according to many experts because nearly 6.5 million borrowers were in deferment or forbearance, two forms of delay before a borrower goes into default. Austin said his research indicates that 40% of student loan borrowers are either delinquent or in default .
Bankruptcy Cant Help You Get Rid Of Federal Student Loans
Federal student loans are rarely eligible for discharge in bankruptcy.
There are a few exceptions.
If you can show that repaying the loan would cause undue hardship, you may be able to discharge the loan. This is difficult to do, so its important you work with an experienced bankruptcy attorney if this is something you want to accomplish.
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Complaints That Discharge Orders Are Being Violated
Consumer complaints raise serious questions about whether student loan companies are violating discharge ordersmeaning theyre unlawfully collecting on loans even after a borrower has been through bankruptcy.
One consumer shared:
I have argued numerous times that loan was discharged as part of my chapter 7 bankruptcy . They have collected monthly payments since then as part of the charge off, they have been reporting my account as late each month since then to the various credit agencies even though Ive been paying their agreed upon monthly payments. As per a number of recent cases, it has been determined that in fact the loans were dischargeable.
Another consumer wrote:
Another consumer wrote:
Student loan companies cannot collect debts that a consumer no longer owes. As noted above, certain types of education loans are dischargeable in bankruptcy without the higher standard and without the filing of an adversary proceeding. Collecting on debts that have been discharged through bankruptcy might not only violate the Consumer Financial Protection Acts prohibition on unfair, deceptive, and abusive practicesit could also violate the order of a United States bankruptcy judge.
These complaints raise serious concerns about the practices of private student loan owners, lenders, servicers, and collectors and their handling of bankruptcy discharges.
Has Your Loan Been Discharged?
Tips To Determine If A Private Student Loan Is A Qualified Education Loan
The Bankruptcy Code determines whether a private student loan is a qualified educational loan based on a definition set out in the IRS Code to determine if student loan interest is deductible from income for federal tax purposes. That IRS definition of a qualified education loan requires the loan be used for qualified educational expenses by an eligible student attending an eligible educational institution. As a result, this requires a creditor bear the burden to show a private student loan meets ten conditions described below. If the lender can prove that all ten conditions apply, then the loan is only dischargeable if the consumer can show undue hardship. But at the time of loan origination if any of the ten conditions do not apply, then the loan is dischargeable.
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Eliminate Student Loan Debt
If you are experiencing problems paying your Ontario student loan we can answer questions that will help you resolve student loans. We offer a free, no obligation consultation. One of our experts will personally review your situation and answer all your student debt related questions. Let us help you choose the correct solution to resolve your student loan debts.
Explain The Proposed Law To Allow Bankruptcy For Student Loans
If enacted, the bipartisan FRESH START through Bankruptcy Act would change the current law to remove the lifetime ban on student loan discharge in bankruptcy and replace it with a 10-year ban.
Under the proposed law, if borrowers can show that paying their student loans caused undue hardship during the first 10 years, then they can get it discharged after that 10-year period is over without having to prove that it would be an undue hardship from that point forward.
This change would only apply to federal student loans, not private student loans. Any discharge of private student loans, regardless of the repayment timeline, would still require proving undue hardship.
To help shoulder some of the financial cost to the federal government of this proposed change, the bill also includes an accountability measure for colleges and universities. The schools would have to reimburse the government for a portion of the discharged student loan amount depending on the cohort default rate and repayment rate of the institution at the time the first loan payment comes due.
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Other Student Loan Discharge Tests
Other tests also exist, such as a particular test for Health Education Assistance Loans . You must show that the loan became due more than seven years before, and repayment would impose an “unconscionable” burden on your life. To find out the test used in your jurisdiction, talk to a local bankruptcy attorney.
Does Bankruptcy Clear Tax Debt Can You File Bankruptcy On Irs Debt
Generally, no. Most government debts, including those to the IRS or state tax agencies, are not discharged in bankruptcy. There can be exceptions to older tax debt when the tax returns were properly filed. You will need to continue making payments on them after your bankruptcy. Your bankruptcy lawyer can advise you on whether you have a chance at wiping out your tax debt, but in general, this is very unlikely. However, if you have a very high amount of tax debt, your attorney may be able to negotiate a more reasonable payment plan for you.
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Hidden Consumer Rights And Remedies Regarding Private Student Loans
Federal student loans are dischargeable in bankruptcy only based on undue hardship . Creditors have worked hard to foster the misconception that the same standard applies to all private student loans. See, e.g., Student Borrower Protection Center, Morally Bankrupt: How the Student Loan Industry Stole a Generations Right to Debt Relief Letter from Senators Durbin, Brown, Whitehouse, and Warren to CFPB Director Chopra . In fact, private student loans are generally dischargeable in bankruptcy unless they meet each of ten conditions described below.
This article provides practice tips to determine if a specific private student loan is generally dischargeable and provides advice on dealing with private student loans in bankruptcy. The article then turns to remedies available to consumers subject to collection efforts after their private student loans are discharged in bankruptcy. Also considered, even where there is no bankruptcy filing, are consumer remedies for misrepresentations made to a borrower that allege a private student loan is not generally dischargeable. The article concludes with a brief discussion of remedies for other abuses related to private student loans.
Refinancing Student Loans Can Save You Money
First and foremost, its important to understand why youd want to refinance your student loans.
Refinancing is a tool that helps you save money short-term and long-term. If you refinance to a lower rate, youll likely pay less interest over time. You might also have the option of switching from a variable rate to a fixed rate, which means you wont need to worry about rate fluctuations in the future. Rates have never been lower than they are right now.
Additionally, consolidating multiple loans into a single loan can reduce how much you owe each month. Not to mention, having one loan instead of two or more is just more organized. And if your original loan had a co-signer who wants out, refinancing helps you take care of this.
But refinancing isnt always the best choice.
Refinancing can remove the protections and benefits outlined in the terms of your original loan.
There has also been talk of the current presidential administration forgiving $10,000 or more in federal student loan debt. Many debtors had the option of pausing their payments during the COVID pandemic. Waiting to refinance allows you to take advantage of the moratorium on payments due. And if your debt will be forgiven, theres no sense in bothering with refinancing. Not to mention that refinancing with a private lender could disqualify you for loan forgiveness.
To learn more about student loan forgiveness, check out this information from the federal government.
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Can You Discharge Private Student Loans In Bankruptcy Financial Options For Students
The following article is a summary prepared by the authors of various articles about bankruptcy. It is not intended as, and should not be read as, legal advice. If you feel you need to consider bankruptcy, you should contact an attorney in your area who is qualified to lead you through this complex and weighty decision. You should not rely on this article or any Internet article to guide your decision.
Contrary to conventional wisdom, a private student loan, much like a federal student loan, is dischargeable under the right circumstances and has been since 2005. Popular thought may lead you to believe that filing bankruptcy on your private student loans is hopeless, but thats not exactly true.
If you cant repay your student loans, or you do not qualify for public service loan forgiveness or flexible student loan repayment plans, such as an income driven repayment plan, extended repayment plan, or Pay As You Earn Repayment Plan , then bankruptcy may be an option to consider. This is especially true for borrowers who take loans out after , as Congress looks to end PSFL and other repayment programs.
As a student, you can also take advantage of credit cards intended just for students to begin building your credit and earning rewards. Check out Credit.coms expert guide to the best credit cards for students to earn cash back and save on things like books, dining, entertainment, and even electronics.
Can Private Student Loans Be Discharged Due To Disability
Private student lenders will be required to discharge the loan balance for both borrowers and co-signers if a borrower becomes permanently disabled under the Private Loan Disability Discharge Amendment.
Students who are disabled and cannot engage in substantial gainful activity or are unable to find work may be eligible for student loan forgiveness. A disability can be shown in three ways in order to qualify for the total and permanent disability discharge. Every year, only a small percentage of borrowers are eligible for a disability discharge. In order for a borrower to be considered for total and permanent disability, he or she must have a doctors certification that they are unable to engage in significant gainful activity. Through a data matching effort with the VA and the Social Security Administration, the Department of Education is assisting borrowers who may qualify for student loans. Your federal loans will be forbearant as long as your TPD discharge application is submitted. The supporting documentation includes a copy of the VAs determination of unemployability, as well as an SSA notice of award for SSDI or SSI.
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Civil Contempt For Violation Of The Discharge Injunction
Any violation of a discharge injunction violates a bankruptcy courts order, potentially resulting in a civil contempt finding. The court can assess a remedy of payment to the consumer for actual damages, punitive damages, and attorney fees. There is no statute of limitations and relief can be afforded to all similarly affected borrowers where the same creditor violated the same courts discharge injunction.
It is possible a consumer may be able to bring an affirmative action to recover from a discharge injunction violation. See NCLCs Consumer Bankruptcy Law and Practice § 188.8.131.52. But the better approach is for the consumer to ask the court to issue a civil contempt ordertypically by the judge who issued the discharge order in the reopened bankruptcy case or a judge in the same bankruptcy district. See, e.g., In re Belton v. GE Capital Retail Bank, 961 F.3d 612, 616617 .
As described above, it will be hard for a lender to argue that it thought the second exception applied, that the loan was an educational benefit, in the face of the clear-cut rulings of the three recent circuit court of appeals decisions described earlier. The lender will then have to claim that it had an objectively reasonable basis for concluding that the loan was dischargeable because it believed that the loan met all ten conditions described above, as required for the third exception to apply.
Biden Administration Announces Student Loan Forgiveness
Borrowers with student loan debt have been vocal supporters of the Obama administrations proposed relief. President Obama announced in January that he would establish a Presidential Advisory Committee on Student Loan Forgiveness, which would advise him on how to assist borrowers in repaying their loans. The Biden administrations announcement of student loan forgiveness is limited to federal student loans. Individuals who own or make private loans are not eligible for forgiveness. As a result, even if the borrowers file for bankruptcy, their private loans will have to be paid back. Bidens announcement that the government would forgive student loans is a significant step in the right direction, but it is not the only option available. Other programs can be used to assist borrowers in repaying their debts and putting their lives back on track.
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