What Happens To My Student Loans In Bankruptcy
Student loans and bankruptcy are a complicated area, and not many bankruptcy filers understand how bankruptcy affects their student loan debt and what their options are and how they differ between Chapter 7 and Chapter 13 bankruptcy.
Most Student Loans Are Not Dischargeable in Bankruptcy
In general, student loans are not dischargeable in bankruptcy. That means you will still owe them when your bankruptcy is over.
Now, they only way to get rid of your student loans in bankruptcy is to claim that repayment of the loans creates an undue hardship. The only way this can be proven is through what is called an adversary proceeding. This is like a separate lawsuit within your bankruptcy case. It involves litigation, and will require expert witnesses, depositions ad other witness testimony. As a result, it is not cheap.
Aside from costing you a good chunk of money, winning an undue hardship discharge is incredibly difficult. Most courts, including Colorado, follow the test set out in the Brunner case out of New York . Brunner is a three-part test in you must prove:
1. That the debtor cannot both repay the student loan and maintain a minimal standard of living 2. That this situation is likely to persist for a significant portion of the repayment period of the student loans and3. That the debtor has made good faith efforts to repay the loans.
The bottom line is that in the vast majority of bankruptcy cases, discharge of student loans is simply not an option.
Can You Get A Federal Student Loan Bankruptcy Discharge Via Undue Hardship
It absolutely IS possible to get rid of your Federal student loans by filing for bankruptcy, it just isnt easy.
Heres how it works: in the 1970s, Congress passed a law banning the regular bankruptcy avenue for student loans, but left a tiny sliver of hope for people, stating that if borrowers could prove that having to pay back their loans would created an undue hardship on their life, then they could still wipe out their debt via bankruptcy proceedings.
The problem with this rule is that Congress NEVER DEFINED what an undue hardship actually is, so its been left to Courts to decide what constitutes an undue hardship.
For several decades, the restrictions on this process were extremely tight. Like, so tight that NOBODY was qualifying for discharges, but things have relaxed a little bit in recent years.
When I say a little bit, I mean that a handful of bankruptcy discharges have been approved. And while thats way more than we saw getting approved previously, it doesnt mean that trying to get a bankruptcy discharge would be a good idea, because the odds are still so low.
Can The Court Discharge A Portion Of My Student Loan Debt
Yes. The court is not forced to choose between all or nothing in a student loan discharge case. The court has the option to discharge a portion of your student loans if they choose to.
When looking to discharge student loans in bankruptcy, the possibility of a partial discharge can be good or bad, depending on your situation. Sometimes, a partial discharge allows us to drastically reduce your student loan payments which can change your life.
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Everything You Need To Know About Student Loans In Canada
Many Canadians struggle with student loan debts. A crushing student debt load can be detrimental to young people just starting off their careers and their inability to service this debt can put pressure on family members who attempt to assist in paying these student loan debts.
According to the Canadian Federation of Students , the national student loan debt was $15 billion in 2015. And a 2020 report by the Huffington Post puts that number at $22 billion today.
As you can see, student loan debt is a big issue in this country. In fact, 49% of college students had debt in 2015 according to Statistics Canada.
Studies show that student debt can impact mental health, and its the main reason that young people decide to opt out of higher education. However, obtaining a student loan can still be a worthwhile undertaking, provided you choose a field of study that will increase your earning potential in the future. Keep in mind that you can still apply for a student loan even if youre bankrupt.
Thats why its an issue that should be dealt with seriously, requiring careful planning and an understanding of bankruptcy laws. You want to pay off your student debt and ask for relief so you can go on with your life.
If you have student loan debt, learn now about waiting periods to file for student loan bankruptcy.
Understanding the ins-and-outs of Canadian insolvency laws will help you make your claim correctly and avoid any headaches with an incorrect claim.
Filing For Bankruptcy On Your Student Loans Is Hard To Do
In order to file bankruptcy on student loans, borrowers have to meet a multi-part test proving that they have no chance of ever being able to pay the debt back. They have to demonstrate that paying their student loans would cause them “undue hardship.”
“Congress didn’t define what it meant by ‘undue hardship,’ so it was left to the courts to decide,” says higher education expert . As such, courts use a common method called the Brunner Test to evaluate whether or not a borrower qualifies for student loan discharge through bankruptcy. Through the Brunner Test, a borrower must prove the following:
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Get A Bankruptcy Attorney
A borrower is more likely to obtain a bankruptcy discharge of their student loans if they are represented by an experienced attorney.
However, most bankruptcy attorneys are unwilling to pursue an undue hardship claim because these cases involve an adversarial proceeding, which are expensive and involve a lot more work. It can cost $10,000 or more to pursue an adversarial proceeding and borrowers who file for bankruptcy usually dont have the money to pay the lawyers fees. Lenders are also likely to appeal the decision, so a favorable decision is unlikely to be final.
Even if you dont have an attorney and are representing yourself pro se, always show up in court. If you dont show up when required, the lender can win the case by default.
Student Loans Should Be Easier To Discharge In Bankruptcy Aba Argues
Student debt is a real and present crisis, Christopher Jennison told the ABA House of Delegates in August at the ABA Hybrid Annual Meeting.
Jennison, then a Maryland State Bar Association delegate and YLD assembly speaker, had risen to introduce Resolution 512. It urges Congress to amend the U.S. Bankruptcy Code to allow borrowers to discharge student loans without proving that repayment of the debt imposes an undue hardship on them or their dependents.
Jennison pointed out that the division previously brought a resolution to the midyear meeting in February that urges Congress and the executive branch to develop and implement programs to help law students and graduates who are experiencing financial hardship because of their loan obligations. He told the House, which overwhelmingly approved the resolution, to think of this measure as the next logical step.
While there are other policy solutions to address the underlying causes of high student debt and the high cost of legal education, it is imperative to create a lifeline for those who are several years into practice and are drowning in debt by removing hurdles to clearing insurmountable educational debt in bankruptcy proceedings, said Jennison, who now serves as a delegate-at-large to the House.
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What Is The Standard For Discharging Student Debt In Bankruptcy
Generally, the standard to discharge student loans in bankruptcy is a showing that the payment of the debt will impose an undue hardship on you and your dependents. Generally, most courts will use the Brunner test to determine if there is an undue hardship imposed on you and your dependents.
The Brunner test has three main factors that courts will focus on:
- Whether you can maintain a minimal standard of living for yourself and your dependents if you must repay the student loan
- Whether you and your dependents have circumstances, above and beyond normal circumstances, that will extend through at least a significant portion of the loan and
- Whether you have made good faith efforts toward repaying your student loan.
We will go into further detail about each of these factors below.
Loan Servicer Quits The Business
Pennsylvanias student financial aid agency plans to end its role as a federal student loan servicer when its current contract with the U.S. Department of Education expires later this year, . . .
Always seemed weird to me that the a state government agency, which makes and oversees student loans in Pennsylvania, got into this business in the first place.
PHEAA plans to continue to invest its earnings from its other student loan business lines to supplement the state funding for the college student grant program it administers.This year, it is putting $15 million of its earnings to help boost the maximum college grant to $5,000 the grants do not have to be repaid. When combined with the investment from PHEAAs earnings made over the past decade, it brings this supplemental funding for the grant program to over $1 billion.
But this is my favorite part:
In the 12 years since PHEAA accepted the terms of its federal servicing contract, the federal loan programs as managed by the U.S. Department of Education have grown increasingly complex and challenging while the cost to service business increased dramatically, New said in a statement.
When the student loan servicers have trouble figuring out the government rules, you understand why the student loan borrowers have such a hard time.
Always leave them laughing:
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Types Of Loans That Are Not Qualified Education Loans
- Mixed-use loans, such as credit cards, personal loans, auto loans, home equity loans, HELOCs and cash-out refinance of a mortgage, are not qualified education loans because they were not borrowed solely to pay for qualified higher education expenses.
- Direct-to-consumer loans are not qualified higher education loans because they are designed to overcome restrictions on the amount borrowed and thus may exceed the colleges cost of attendance. Such loans are not school certified and therefore the college financial aid office cannot enforce a cost of attendance cap on the annual loan amount.
- Bar study loans are not qualified education loans because they are not used to pay for qualified higher education expenses. The borrower is also not an eligible student, since the student has already graduated.
- Residency and relocation loans are not qualified education loans for the same reasons as bar study loans.
- Continuing education loans and career training loans are not qualified education loans because the student is not enrolled on at least a half-time basis and is not seeking a degree or certificate.
- K-12 loans are not qualified education loans because they are not used to pay for qualified higher education expenses.
As these loans demonstrate, there are several characteristics of a loan, the student, the borrower or the educational institution that may prevent it from being considered a qualified education loan.
Can Parent Plus Loans Be Discharged In Bankruptcy
Parent PLUS Loans can be discharged in bankruptcy like other types of federal and private student loans. But you first have to file a lawsuit in your bankruptcy case called an adversary proceeding. In the adversary complaint, you’ll have to show the bankruptcy judge that repaying the loans would cause an undue hardship to you and your dependents. Proving undue hardship is challenging.
Most bankruptcy courts look at your proof using the Brunner Test, which reviews three criteria:
You can read more about the student loan bankruptcy process here.
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Demand Proof That The Student Loan Debt Is Owing
In any court case involving student loans, demand proof that the debt is owed. In particular, ask for a copy of the signed promissory note, especially if the loan has been sold.
The lender may not have the original loan promissory note or a copy. If so, they will have difficulty proving that the borrower owes the money or that they hold title to the debt.
Spreadsheets showing a history of loan payments are business records and are not proof that the debt is owed.
Generally, courts show a lot of deference to lenders. Many will allow the lender to provide a copy of the promissory note that was in use at the time and proof that the borrower received or benefited from the loan proceeds in lieu of the borrowers actual signed promissory note.
But, if there is any evidence that suggests that you did not borrow the loan, present it and challenge the veracity of the lenders proof. For example, compare the signature on the promissory note with your actual signature and present the court with copies of your signature on other documents. If you were incarcerated at the time the loan was supposedly borrowed, present the court with documentation of this, since incarcerated individuals are ineligible for federal student loans.
How Do I Challenge My Student Loan Debt In Bankruptcy
Once you have filed for bankruptcy or we have re-opened a prior bankruptcy, the next step to discharge student loans in bankruptcy is to file a separate action within the bankruptcy case, known as an adversary proceeding. This adversary proceeding is similar to a lawsuit in that it will start with the filing of a complaint and can proceed through a trial and appeal, if necessary.
This process, within a bankruptcy, can be very difficult and our highly specialized student loan lawyers are some of the few attorneys that understand how to best proceed with challenging student debt through an adversary proceeding.
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Student Loan Borrowers Defrauded By Their Schools
The Biden administration has expanded relief under the Borrower Defense to Repayment program, which can wipe out the federal student loan debt of borrowers who were defrauded by their college, university, or trade school. Specifically, the administration reversed a prior policy that had allowed for partial relief under the program, which permitted the Department of Education to provide limited or minimal student loan forgiveness even for approved claims.
The administration also approved over a billion dollars in new student loan forgiveness for former students of ITT Technical Institutes under the Closed School Discharge program, which provides relief to borrowers who were unable to complete their degree or certificate program due to a school closure.
Proposed Legal Changes To Student Loan Discharge In Bankruptcy
Before 1976, student loans could be discharged in bankruptcy without a waiting period and without requiring the borrower to demonstrate undue hardship prior.
But a 5-year waiting period was added by the Education Amendments of 1976 for borrowers who could not demonstrate undue hardship. The waiting period was increased from 5 years to 7 years in 1990 through the Crime Control Act of 1990 and eliminated in 1998 through the Higher Education Amendments of 1998.This left demonstrating undue hardship as the only option for discharging student loans in bankruptcy. But Senators Richard Durbin and John Cornyn introduced the FRESH START Through Bankruptcy Act of 2021 on August 4, 2021.
TheFRESH START ACTwouldrestore the ability of borrowers to discharge federal student loans after a 10-year waiting period without demonstrating undue hardship. And under certain circumstances, the college attended by the student when the loans were borrowed would be required to repay as much as half of the discharged debt.
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How To Qualify For A Federal Student Loan Bankruptcy Discharge
In 2019, its never been easier to qualify for a Federal Student Loan Bankruptcy Discharge. Why? Because all sorts of recent legal battles have set precedents for discharging Federal student debt in bankruptcy.
And back on February 21st, 2018, one of the biggest signs of a sea change occurred when President Trumps Administration announced via Secretary of Education Betsy DeVos that they were looking for public comments on bankruptcy standards for student loan debt.
That may seem odd coming from the worst student loan couple in the countrys history, after all, this is the same pair who planned on scrapping the Public Service Loan Forgiveness Program and who have already attempted to kill off the Borrowers Defense Against Repayment Program, but perhaps theyve seen the light on the bankruptcy issue?
The conventional wisdom to current day has been that Federal Student Loans cannot be discharged via Bankruptcy, but the reality is that it is possible to wipe out your Federal loans by filing for Bankruptcy, its just extremely difficult .
In fact, this is one of the only cases where its easier to get rid of Private loans compared to Federal loans, and if youre interested in that, then be sure to check out my 2018 Guide to Private Student Loan Bankruptcy Discharge.