What Is It So Difficult To Prove An Undue Hardship
All three prongs of the test must be satisfied before a student loan can be discharged. The second and third prongs are much more difficult to meet. In particular, the second prong tends to end the analysis for most debtors. This is because the standard is very strict. In the Seventh Circuit, a debtor must demonstrate that their situation presents a âcertainty of hopelessness.â Being unable to find a good job does not establish a certainty of hopelessness. Being unable to find a job in your chosen profession does not establish a certainty of hopelessnessâthis is particularly bad news for debtors with advanced professional degrees.
Whatâs more, just because your current situation is hopeless, it must be certain to remain hopeless. Unlike any other debt, the possibility that you might be able to repay your student loans at some point in the future is a factor that courts will consider. Barring a serious disability or other condition that will prevent a debtor from working ever again, it is difficult to say what situation is sufficiently certainly hopeless. These factors are very fact sensitive. There is no one fact pattern that will always satisfy the test. It will always come down to the individual circumstances.
Quite simply, the way the law currently stands, it is extremely unlikely that your student loan debt can be discharged in bankruptcy. Barring action by Congress, this will not change any time soon.
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The process to get a hardship discharge of your student loan debt can be intimidating. Not only do you have to file bankruptcy, but you also have to pass different tests and provide evidence of your current financial situation and reasonably reliable future income. On top of that, you have to show your inability to repay your loans will last for a significant portion of the repayment period of the student loans.
If all of this seems like a lot, let me help. I’ve helped many student loan borrowers just like you file student loan bankruptcy. Schedule a free 10-minute talk so we can discuss how I can help you do the same.
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I’m a student loan lawyer that helps people like you with their federal and private student loans wherever they live.
What Happens If Your Student Loans Aren’t Discharged
If, as in most cases, your loans are not discharged in bankruptcy, here’s what happens.
- Chapter 7 bankruptcy. In Chapter 7 bankruptcy, if payment of your loans is not an undue hardship, you’ll still owe them when your bankruptcy case is over.
- Chapter 13 bankruptcy. If you can’t discharge your student loans, Chapter 13 bankruptcy provides some other ways that can help. For example, you’ll likely be able to pay a reduced amount during your Chapter 13 planalthough you’ll be on the hook for whatever amount is left after your repayment period ends.
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How Do I Begin The Process Of Getting My Loans Discharged
The first step in getting your loans discharged through bankruptcy is filling out an adversary proceeding. An adversary proceeding is necessary because determining if student loans can be discharged through bankruptcy is not a trivial matter. It requires that you explain their reasoning and provide evidence to support your argument. You can think of the adversary proceeding as a âpetition for bankruptcy.â You will likely need to retain an expert that can testify about your ability to be employed in the future or if that employment will continue to yield a low income.
A legitimate legal defense to you paying your student loan may exist, especially if you attended a for-profit vocational or trade school. In the last few years, specific colleges have come under fire for unfair or deceptive practices resulting in students paying for virtually worthless degrees.
Student Loans Are Difficult To Discharge
You can usually discharge unsecured debts, like credit card debt, medical bills, and personal, loans, in bankruptcy. Student loans are also unsecured debts, but bankruptcy treats them differently. Unlike most other unsecured debts, you cannot automatically discharge them in Chapter 7 or Chapter 13 bankruptcy.
To discharge student loans, you must to file a separate lawsuit in your bankruptcy case, called an adversary proceeding. To win that proceeding, you must show the court that paying your student loans will cause you or your dependents a hardship. The standard for proving a hardship differs depending on your jurisdiction but is always a steep obstacle to overcome.
To learn more about what constitutes a hardship, read Student Loan Debt in Bankruptcy.
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What If I Dont Qualify To Discharge Student Loans Through Bankruptcy
You have many options available to you if you are having a hard time repaying your student loans:
You can see if you qualify for a Repayment Assistance Plan to reduce your monthly payments or a Revision of Terms Plan to give you more time to repay your loans. We provide more details for managing your student debt on our Student Loan Debt page.
Our local debt professionals will be happy to review all of the options available to you. We will personally guide you through all the methods and steps you can take to eliminate your student debt. Request a call today for a free appointment, with no obligations.
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Changes To Bankruptcy Law
Over the years, different members of Congress have introduced legislation to make student loans dischargeable in bankruptcy like other types of debts. But, unfortunately, that legislation has gone nowhere.
And while America waits for Pres. Joe Biden to forgive student loan debt, another proposal to change the treatment of student loan debt in bankruptcy was introduced, this time by Sen. Elizabeth Warren. Sadly, like the legislation before it, the Consumer Bankruptcy Reform Act of 2020 has yet to go anywhere.
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Loan Discharge Because Of Disability
If you are disabled, you may be able to get your loans discharged without having to go through bankruptcy proceedings.
With certain federal loans, Total and Permanent Disability Discharge is available to those who are totally and permanently disabled. If youre eligible, the loan servicer can forgive the total remaining balance of your loans. For more information and how to apply, visit DisabilityDischarge.com.
Although not all private loan lenders offer discharges in the case of disability, some do. For example, College Ave will forgive the remaining balance if the borrower becomes permanently disabled.
If you have a disability and want to apply for a loan discharge, contact your lender directly via the customer service department. Explain your situation and what has changed since you took out the loans, and ask if the lender offers loan discharges in the case of disability.
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.
What Is A Private Student Loan
Federal student loans such as Stafford Loans and Plus Loans are guaranteed by the federal government. That means that if you default on these loans, the federal government pays for the loan. By contrast, if you default on a private student loan, the lender is out of luck. To be considered “student loans” the debts must be used solely for qualified higher education expenses.
Qualified higher-education expenses are the “cost of attendance” at an “eligible educational institution.” Eligible educational institutions include almost all accredited public and private, including for-profit, post-secondary institutions. That is, virtually all post-secondary institutions such as colleges and vocational institutions.
The “cost of attendance” includes tuition, fees, room, board, books, necessary equipment and materials, supplies, transportation, and even personal computers. For most students, federal student loans will only cover a portion of their necessary expenses. The student may need extra money for room, board, supplies, etc. To cover these additional expenses, students take out private loans on top of their federal student loans.
Student Loans Are Generally Nondischargeable In Bankruptcy
Yourbankruptcy discharge does not wipe out certain types of debt. These arereferred to as nondischargeable debts. Unfortunately, student loans areone of them.
Generally, the only way to discharge student loansthrough bankruptcy is to prove that paying them back is an “unduehardship” for you. This is extremely difficult to prove and is usuallyonly granted in rare circumstances . As aresult, in almost all cases, you will still be required to pay back yourstudent loans after receiving a bankruptcy discharge.
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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.
Can I Discharge A Private Student Loan In Bankruptcy
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In a Nutshell
Private student loans are loans extended by private lenders that are not backed by the federal government. This article will cover the limited relief methods available for private student loans. The article will also discuss dischargeability challenges in a bankruptcy filing.
Written byAttorney John Coble.
Private student loans are loans extended by private lenders that are not backed by the federal government. These loans are only to be used for qualified educational expenses. Private student loans don’t have many of the relief provisions allowed for by federal student loans. There are rarely any income-based repayments, forbearances, and deferments made available when debtors repay these loans. This article will cover the limited relief methods available for private student loans. The article will also discuss dischargeability challenges in a bankruptcy filing.
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Proving Undue Hardship In Student Loan Bankruptcy
For now, the burden is on borrowers to establish their qualifications for undue hardship that satisfy the court theyre in front of. While it might seem easy to prove financial dire straits, that isnt always the case, according to Michael Fuller, a bankruptcy attorney.
You have to be in a somewhat extreme situation, Fuller said. It is often people who are sick, people who are on disability or people who have an extreme financial situation that is not going to improve.
For instance, Fuller said he recently worked pro bono with a single mother of four kids who owed several hundred thousand dollars on student loans. While she was employed, the woman was unable to make payments on her loans. When filing bankruptcy on her student loans, Fuller was able to demonstrate the debt caused undue hardship for her and her dependents and had her outstanding loans discharged.
Why Should I Make Payments On My Student Loan During Bankruptcy If I Don’t Have To
Interest on a student loan continues to accrue on your loan balance during bankruptcy. Please consult with your bankruptcy attorney to discuss your options… Read more >
Interest on a student loan continues to accrue on your loan balance during bankruptcy. Please consult with your bankruptcy attorney to discuss your options. Learn more >
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Discharge Student Loans In Bankruptcy Courts Disagree But Reform Could Be Coming
UNITED STATES – JULY 14: Chairman Richard Durbin, D-Ill., arrives for the Senate Judiciary Committee … nomination hearings for several U.S. district judges on Wednesday, July 14, 2021. Durbin recently announced he would hold a hearing on student loans and bankruptcy.
Recent bankruptcy decisions on discharging student loan debt have led to confusing and conflicting outcomes for borrowers. But efforts to reform the bankruptcy code to more easily allow student loans to be discharged in bankruptcy are continuing.
To discharge student loans in bankruptcy, most borrowers must show that they have an undue hardship, which is a difficult standard to meet and is not well-defined in statute. Bankruptcy courts have created legal tests, which vary by jurisdiction, to help judges determine whether a borrower meets the undue hardship standard.
But to prove undue hardship or otherwise discharge student debt in bankruptcy, borrowers must initiate an adversary proceeding, which is essentially a lawsuit against their student loan loan lenders brought within the bankruptcy case. The adversary proceeding can be a long and invasive process for borrowers, and it can be costly to retain an attorney to assist. Student loan lenders often have significantly more resources than borrowers, which can provide an advantage. Consequently, many student loan borrowers are not able to prove undue hardship, and many others decline to pursue the avenue at all.
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.
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What Happens To Student Loans In Chapter 13 Bankruptcy
Chapter 13 bankruptcy is a reorganization where youre required to repay part of your debt, likely over three to five years. Some of your remaining debts may be discharged at the end, including student loans.
|Chapter 13 in the news|
|In August 2020, a bankruptcy court affirmed the cancellation of $200,000 in education debt for a Colorado couple. The potentially landmark ruling was the final result of a Chapter 13 filing.|
Heres what happens to student loans under Chapter 13 bankruptcy:
Lenders stop hounding you. Upon filing your Chapter 13 bankruptcy petition, an automatic stay is granted. This prohibits most creditors including student loan servicers from trying to collect debts. This protection typically continues through your repayment period.
Student loans dont take top priority. Student loans in Chapter 13 bankruptcy are considered nonpriority unsecured debt. This means you arent required to pay the full amount of your student loans through the Chapter 13 repayment plan.
Your monthly payment may change. The amount you end up paying toward your student loans in Chapter 13 bankruptcy depends on your repayment plan. Your student loans receive a pro rata share, which will likely represent a dollar amount less than your regular monthly student loan payment. In some cases, your student loan debt might be discharged .
Chapter 13 And Student Loans
A case under chapter 13 is often called reorganization. In a chapter 13 case, you submit a plan to repay your creditors over time, usually from future income. These plans allow you to get caught up on mortgages or car loans and other secured debts. If you cannot discharge your student loans based on undue hardship in either a chapter 7 or chapter 13 bankruptcy, there are still certain advantages to filing a chapter 13 bankruptcy. One advantage is that your chapter 13 plan, not your loan holder will determine the size of your student loan payments. You will make these court-determined payments while you are in the Chapter 13 plan, usually for three to five years. You will still owe the remainder of your student loans when you come out of bankruptcy, but you can try at this point to discharge the remainder based on undue hardship. While you are repaying through the bankruptcy court, there will be no collection actions taken against you. You may have other options, depending on how judges decide these cases in your judicial district.; For example, some judges allow student loan borrowers to give priority to their student loans during the Chapter 13 plan.
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