Student Loan Bankruptcy Gap
Each year, a quarter of a million student loan debtors file for bankruptcy. Of those, fewer than three hundred discharge their educational debt. That is a success rate of just 0.1 percent. This chasm between success and failure is the titular Student Loan Bankruptcy Gap, and it is a phenomenon that is unprecedented in the law.
From the same paper:
The most troubling aspect, though, is that the gap does not result from existing law. Contrary to the prevailing wisdom, the student loan discharge laws do not present an insurmountable hurdle. About half of all bankrupt student loan debtors would obtain relief if they took the appropriate legal steps.5
Specifically, the data show that creditors have adopted a case-selection strategy that distorts precedent and masks the true likelihood of obtaining a student loan discharge. In particular, creditors are engaging in strategic settlementa process that involves settling unfavorable cases to avoid adverse precedent and aggressively litigating favorable cases to tilt the law in their favor.
And frequently creditors do not want settlement agreements disclosed though in a filed lawsuit that can be difficult.
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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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.
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What Outcome To Expect
If you pursue student loan discharge in bankruptcy, there are three possible outcomes.
- Full discharge: The court may decide that your debt will be fully discharged, and you will not have to make any more payments.
- Partial discharge: A portion of your debt may be discharged, but youll be responsible for the rest based on your individual circumstances and ability to repay. For example, a court may decide that you cannot repay your private student loans and discharge them, but you may still have to repay your federal loans, because youd be able to afford to cover them under an alternative payment plan.
- No discharge: You may be required to repay the full balance of your loans. However, the court may adjust other aspects of your loan, such as your interest rate, if it determines that such a change would make repayment financially possible for you.
Its important to keep in mind just how few people who file for bankruptcy will end up with one of the first two outcomes. As we noted above from a 2011 study, just 0.04% of people who declared bankruptcy and sought to have their loans discharged received a partial or full discharge of student loan debt.
Plus, even a successful discharge of student loan debt carries the long-term effects of a bankruptcy on your credit. The bankruptcy process isnt for everyone, and its important to understand the details before taking any action.
Federal Loans And Hardship
Your student loan holder may choose not to oppose your petition to have your loans discharged in bankruptcy court if it believes your circumstances constitute undue hardship. Even if your loan holder doesn’t, it may still choose not to oppose your petition after evaluating the cost of undue hardship litigation.
For federal loans, the Department of Education allows a loan holder to accept an undue hardship claim if the costs to pursue the litigation exceed one-third of the total amount owed on the loan . Private student lenders are likely to apply similar logic.
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Have You Considered Other Repayment And Forgiveness Options
Can you file bankruptcy on student loans? Maybe. Should you? That depends on your personal situation.
Filing bankruptcy on student loans is a complicated, intrusive and extensive process. In fact, Fuller advised not doing it at all if you can. It should be a last resort, he said.
There are many alternative solutions to filing bankruptcy on student loans. For example, federal loans come with options such as income-driven repayment plans and deferment or forbearance. These programs could provide relief without the extreme step of bankruptcy.
You also have the option to apply for forgiveness, either through an income-driven repayment plan or Public Service Loan Forgiveness . PSLF is available to those who work for certain public service organizations, such as government agencies or nonprofits.
And if you have private student loans, talk to your lender. They might have a hardship program for student loans that you didnt know about. Fuller suggested sending to your private loan servicer a letter via certified mail outlining your financial hardships, your income and how much youre able to pay. Your servicer may respond with a repayment plan that provides some relief. After all, you dont lose anything by asking.
Before filing bankruptcy on student loans and trying to fight against a system that makes it difficult to discharge your debt, be sure to research your other debt repayment options for student debt relief.
Andrew Pentis and Alli Romano contributed to this report.
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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Consider Consulting With An Attorney
You’ll find the Brunner test or other standards applied to Chapter 7 and Chapter 13 debtors in lots of court cases. Knowing how the court in your jurisdiction ruled previously could help you determine the likelihood of your success.
If you have a substantial amount of student loan debt, it might be worthwhile to consult with a local bankruptcy attorney. The chances are that if you decide to litigate either the dischargeability issue or assert a defense to the loan in bankruptcy court, you’ll need an attorney to represent you.
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
Are Student Loans Dischargeable In Bankruptcy
In bankruptcy, you can discharge many different types of debt. That includes unsecured debt like credit cards, personal loans, collection accounts, medical bills, business loans and, in some cases, even student loans.
By law, bankruptcy trustees are required to prioritize certain types of debts in regard to when they get paid. For example, things like child support and alimony, unpaid taxes and criminal fines must be paid before your unsecured debts, which are considered non-priority.
While priority debts generally cannot be discharged, you may be able to be released from accounts included in the non-priority category. Student loans are counted among non-priority debts, but you’ll still have a really hard time discharging them in Chapter 7 or Chapter 13 bankruptcy. The only exception is if you can prove that your student debt has caused undue hardship to yourself and your dependents.
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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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.
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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Can Student Loans Be Discharged In A Chapter 7 Bankruptcy
Can Student Loans be Discharged in a Chapter 7 Bankruptcy?
You might have found yourself in a situation where you are overwhelmed with student loans that you absolutely cannot pay back, and be wondering whether a Chapter 7 Bankruptcy is the answer? Well, the answer is it depends. Filing a Chapter 7 Bankruptcy under certain conditions, may help to discharge your student loans. Below, I will provide you with some basic information and guidelines.
Generally, student loans cannot be discharged. However, there is a limited exception to this general rule of undue hardship. If an undue hardship exists on the debtor and the debtors dependents, student loans may be subject to a discharge with a Chapter 7 Bankruptcy.
What does that mean?
An undue hardship exception is a little tricky, but not impossible. To qualify for the undue hardship exception, you must prove that you are currently unable to make your payments and you will not be able to make your payments in the future. The courts have generally favored the use of a three-prong test, the Brunner test, named after a case that laid out a three-pronged standard or guidelines for judges to use when determining whether or not they should discharge a debtors student loan debt. However, more recent cases have strayed away from the use of the Brunner test, and guidelines are becoming more lenient.
The Brunner Test
This basically means:
Minimal Standard of Living
Nothing will ever Change
Reasons For The Department Of Education To Oppose Fewer Undue Hardship Discharge Petitions
The U.S. Department of Education can choose to not oppose undue hardship petitions for the bankruptcy discharge of federal student loans. It should exercise this authority more often. Here are a few recommendations for when undue discharge petitions for student loan should be allowed without opposition.
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Landmark Bipartisan Bill Would Allow Student Loan Discharge In Bankruptcy: Key Details
WASHINGTON, DC – MAY 19: Sen. Richard Durbin asks questions during a Senate Appropriations … Subcommittee hearing on May 19, 2021 in Washington, DC.
A new, bipartisan bill that will be introduced into the Senate would allow borrowers to discharge their student loan debt through bankruptcy.
The bill, called the Fresh Start Through Bankruptcy Act, would amend the bankruptcy code to more easily permit student loan discharges under certain conditions. The bill is sponsored by Senator Richard Durbin and Senator John Cornyn .
While it is not impossible under current law to discharge student loan debt through bankruptcy, it can be quite difficult. To do so, most borrowers must show that they have an undue hardship, which is a challenging legal threshold to meet. The bankruptcy code itself does not adequately define what undue hardship even means, so courts have created tests , to help judges issue rulings about whether or not a borrower meets the tough standard. In many jurisdictions, borrowers must prove that there is a certainty of hopelessness to their circumstances an often impossible task.
Legislative text for the bill should be released in the coming days, which will provide more details on the particulars of the reform proposals.
When Do Student Loans Qualify Under Undue Hardship
The criteria for demonstrating undue hardship can vary from court to court, and meeting the standard in any court can be difficult. However, there are two tests courts generally use to determine whether you’re experiencing undue hardship from your student loans. Depending on the court, there may be other tests that are used to determine whether you qualify to include student loans in your bankruptcy discharge, but these are the most common:
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