Procedure To Discharge Your Student Loan In Bankruptcy
If you want to try to discharge your student loan in bankruptcy, you must file an adversary proceeding to determine dischargeability with the bankruptcy court. But that’s not all. You’ll need to present evidence and prove to the court that payment of your loans will cause an undue hardship. It’s likely that you’ll need to retain an expert to testify about your ability to be gainfully employed in the future.
When Did Private Student Loans Become Nondischargeable
While federal student loans have been nondischargeable in bankruptcy since 1976, private student loans didnât receive the same treatment until 2005. That year, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act to make it more difficult for borrowers to file for Chapter 7 bankruptcy and, instead, push more debtors to file Chapter 13.
As part of the Act, Congress amended 11 USC Â§ 523 to prevent the bankruptcy discharge of education loans that did not exceed the studentâs cost of attendance at certain higher education institutions. These types of debts are referred to as qualified education loans.
How to find out if you have private student loans? The easiest way to find out what type of student loans you have is to check your credit report against the loans the Department of Education shows you have with them. You can do that by creating an account with studentaid.gov. Any student loan you see on your credit report but not on the website is a private loan.
These Private Student Loans Can Be Easily Discharged In Bankruptcy
In my recent article and research on the discharge of Sallie Mae and private student loans, here, I discovered there is a special subset of private student loans that can be easily discharged in a consumer bankruptcy filing.
Update June 15, 2016 New information comes out on private student loans and bankruptcy involving if the schools were Title IV eligible. See this and this.
Also be sure to read Here is Why Your Private Student Loan May Able to Be Eliminated in Bankruptcy for even more information on this subject.
In fact, not only can they be discharged but when they are pointed out as meeting the criteria you will read about below they appear to be discharged without objection of the lender. In general they were disposed of with just a small amount of bankruptcy paper shuffling in an adversary proceeding.
The private loans in this special subset of easily dischargeable private student loans are for schools or education that was obtained at an ineligible education institution. The definition of which is important.
Now it might take a bit of reading here to become familiar with the exact type of private student loans Ive found that are able to be easily eliminated but if you stick with this article, by the end you will have a much better understanding if you can eliminate all or part of your private student loans in a bankruptcy filing.
Here are two total student loan debt discharge examples that demonstrate what I am describing.
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How To File For Student Loan Bankruptcy
Discharging student loans comes at the end of the bankruptcy process. Heres what you need to do first.
1. Find a bankruptcy attorney. While an attorney isnt absolutely necessary, working with one especially one with at least some student loan experience can help you navigate the complicated process more smoothly.
Filing for bankruptcy costs anywhere from several hundred to several thousand dollars, depending on your location and the cases complexity. Plus, there are attorney fees for the adversary proceeding required to get student loans discharged.
However, you likely wont qualify for student loan bankruptcy discharge if you can afford an attorney, says Michael Fuller, a Portland, Oregon-based consumer attorney who takes on student loan bankruptcy cases pro bono.
Here’s where to find free legal help:
Legal Services Corporation: Search for local legal aid by ZIP code.
Student Loan Borrower Assistance: This nonprofit has a list of legal aid organizations by state.
Massachusetts Student Loan Bankruptcy Assistance Project: A group of attorneys and law firms offering free representation for adversary proceedings.
Oregon Student Debt: A pro bono student loan organization.
2. File for Chapter 7 or 13 bankruptcy. You must file for bankruptcy before your student loans can be discharged. Your attorney can help determine the type of consumer bankruptcy thats best for you: Chapter 7 or Chapter 13.
» MORE:How borrower defense to repayment works
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Private Student Loans Bankruptcy: Are They Dischargeable
You may have heard that you canât file bankruptcy for student loans. But thatâs not true. It is possible to discharge student loans in bankruptcy. Still, the process is more burdensome than it is with wiping out credit card debt, medical bills, etc.
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.
But private student loan lenders donât offer the same types of benefits as the Department of Education. As a result, itâs often easier to discharge those loans. Plus, thereâs 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.
Are Private Student Loans Now Dischargeable
Media coverage of recent rulings from bankruptcy judges would lead you to believe that private student loans are now dischargeable. Thatâs not entirely accurate.
While there have been major rulings over the past few years that made some education loans made by some private lenders dischargeablein some places, thatâs not true in all bankruptcy courts across the United States.
Most people who file bankruptcy with education loans made by a private lender will still need to file a separate bankruptcy proceeding to let a judge decide their eligibility for discharge.
Circuit Courts that have ruled that private student loan debt was discharged:
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Criteria Based On The Student
The student who is using the student loan:
- Must be enrolled on at least a half-time basis.
- Is seeking a degree, certificate or other recognized educational credential.
- Cannot be a dual enrollment student. A dual enrollment student is a student who is simultaneously enrolled in an elementary or secondary school in addition to a college or university.
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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Private Student Loans Bankruptcy: Is It Getting Easier
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If you need solutions for your student debt:
Find help: Options for legit student loan help resources and organizations to contact.
Pause payments: Find out the differences between student loan forbearance and deferment.
Get out of default: Learn the consequences of and remedies for defaulting on your student debt.
Declare bankruptcy: Explore how to discharge student debt in bankruptcy.
Student loan borrowers who seek to have their debt canceled in bankruptcy what’s known as discharge typically find it an expensive process with standards that can be difficult to meet. But recent bankruptcy court rulings and lawmakers’ support of relief for overburdened borrowers may signal a change is coming for private student debt.
In July 2021, a New York-based federal appeals court refused to dismiss a lawsuit against Navient for violating a court order to discharge loans, and ruled that private student loans are not protected from discharge in bankruptcy.
These decisions could serve as a precedent for future bankruptcy cases involving student loans, says John Rao, an attorney with the National Consumer Law Center.
Student Loan Discharge In Bankruptcy
It is possible to discharge student loans in bankruptcy although it is not easy. The procedure is that an adversary proceeding must be filed in the bankruptcy court to prove that the undue hardship standard has been met.
In addition to discharge for undue hardship, we file adversary cases to show that in many cases, private student loans are actually nothing more than consumer loans disguised as student loans. If we can show that the private loan is a non-qualified education loan, it is discharged like any other consumer debt such as a credit card. Various arguments exist such as the loan amounts were beyond the cost of attendance, for an ineligible institution or for an ineligible student. We teach this topic to other attorneys around the nation and while it is a relatively new argument, there is plenty of case law supportive of discharge. If you have an attorney tell you that a student loan can never be discharged in bankruptcy, that is the old and very outdated view, and frankly, you should see another attorney who actively practices in this area every day.
The procedure is as follows:
The well known Brunner standard is followed in Florida which requires that you show:
the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for the debtor and the debtor’s dependents
additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans and
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How Will Student Loan Bankruptcy Affect My Credit Score
Unfortunately, student loan bankruptcy will ultimately carry with it some serious consequences, and will likely negatively affect your credit score. Even if bankruptcy seems like the best choice for you right now, you should still heavily consider the long-term repercussions that will impact your credit over the next several years. In the case of a Chapter 7 bankruptcy, it takes only about 90 days to forgive the debt tax-free. While the process may seem like its over, there is still more work to do to make up for the impending hit to your credit score.
Building credit, especially for younger borrowers, is not easy when bad credit gets in the way of owning a credit card. You can find secured credit cards with lower annual fees and payment alerts. You are less likely to be denied a secured credit card than a standard credit card, so repairing your credit doesnt feel like an impossible goal.
How To File Bankruptcy In Kentucky For Free
Chapter 7 bankruptcy is a relatively quick process to eliminate debts while keeping property the Kentucky bankruptcy laws protect from your creditors. Since you do not have to have a lawyer help you, you can keep the costs down by filing without one, either with Upsolves help or without it. Folks making less than 150% of the federal poverty guidelines may even be able to have their court filing fee and credit counseling costs waived.
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Recent Definitions Of Undue Hardship
Although not necessarily the same as undue hardship, financial hardship has a similar definition. Financial hardship is defined in the regulations for administrative wage garnishment as:
- An inability to meet basic living expenses for goods and services necessary for the survival of the debtor and his or her spouse and dependents.
Financial hardship is determined by comparing costs incurred for basic living expenses for the borrower, the borrowers spouse and the borrowers dependents with all income available to the borrower from any source. The regulations for administrative wage garnishment were added in 2003 and are based on the Debt Collection Improvement Act of 1996 . Although Congress did not initially define the term ‘undue hardship,’ the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 added a definition of undue hardship at 11 USC 524:
- It shall be presumed that such agreement is an undue hardship on the debtor if the debtor’s monthly income less the debtor’s monthly expenses as shown on the debtor’s completed and signed statement in support of such agreement required under subsection is less than the scheduled payments on the reaffirmed debt. This presumption shall be reviewed by the court.
This is the equivalent of the first prong of the Brunner Test.
Qualifying For Student Loan Bankruptcy Discharge
A discharge of your student loans may be possible if you prove you have an undue hardship that prevents you from making student loan payments, orwith private loansif the loans did not provide an educational benefit.
With federal student loans, there is no standard set of guidelines for demonstrating undue hardship. Most courts rely on the Brunner Test, which requires you to prove that:
- You wouldnt be able to maintain a basic living standard if you made loan payments.
- Your financial hardship will last an extended amount of time.
- You made a good faith effort to repay your loans before filing for bankruptcy.
Not only are these circumstances extremely challenging to prove, the Brunner Test is somewhat subjective. Not only every state, but every jurisdiction will have different standards in determining whether the Brunner Test applies, said Leslie Tayne, a financial attorney and the founder and managing director of Tayne Law Group, in an email to The Balance.
Its not the only test that exists, however. The courts of the Eighth Circuit, for example, use the totality of circumstances test, which looks at the borrowers overall situation. This benchmark is considered less restrictive than the Brunner Test.
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File For An Adversary Proceeding
Whether you hire a lawyer or go it alone, youll need to file for an adversary proceeding, which is a hearing to determine the possibility of discharging your student loan debt. Youll have a hearing in bankruptcy court and your creditors are required to be present. At that hearing, youll need to provide evidence that you qualify for undue hardship standards.
This is part of the process that is unique to bankruptcy and student loans. Note that you cant proceed with a student loan bankruptcy without this step.
Havent There Been Cases Where People Still Got Rid Of Their Students Loans Through Bankruptcy
Absolutely. Though difficult, it is still possible to have student loans discharged through bankruptcy by meeting the undue hardship requirement. A 2011 study found that only 1 in 1,000 student loan borrowers who declared bankruptcy even tried to have their student loans discharged. However, those that did succeeded at a rate of 40%.
Section 523 of the Bankruptcy Code does not set out a specific test to determine what qualifies as undue hardship. The federal courts are split on what the appropriate standard should be for discharging student loan debt. The Second Circuit case, Brunner v. New York State Higher Education Services Corporation, established three requirements that determine whether undue hardship applies.
First, the borrower must demonstrate that if forced to repay the student loans, they will be unable to meet a minimal standard of living based on income and bills.
Second, the borrower must be unable to repay for a significant portion of the repayment period.
Third, they must have made good-faith efforts to repay the student loan.
If a bankruptcy court agrees that a borrower meets these three requirements, the court can discharge the student loan debt.
But bankruptcy courts in the Eighth Circuit and occasionally courts in the First Circuit reject Brunner and examine the totality of the circumstances instead.
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