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If you would like to discuss your options for filing bankruptcy, contact the skilled bankruptcy attorneys at OConnor, Acciani & Levy. We can gather information about your student loans and determine whether discharge may be a possibility based on your individual circumstances. We can discuss the advantages and disadvantages of the options available to you.
We offer a free consultation so that you can find out about our services and your options without having to pay for this important information.
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.
How To Tell If Your Student Loans Qualify For Discharge
The first step is to compare your financial situation to the standards set forth by the Brunner test, which has three separate components. First, consider if repaying your student loans will negatively impact your ability to cover basic living expenses for you and any dependents. Second, consider how long this financial situation will persist, i.e. whether it will last the duration of the student loan repayment period. And third, consider if you have made good faith attempts to repay these loans before you decided to file for bankruptcy.
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Is Your Private Student Loan A Qualified Educational Loan
As stated above, if you have a private student loan, you may have other arguments available in addition to undue hardship. You can discharge private student loans in bankruptcy in a number of other ways.
There is a presumption that student loans in bankruptcy are non-dischargeable if they meet the statutory requirements. For private student loans, this requires the loan to be a qualified educational loan.
To be a qualified education loan, a private student loan must be:
- For an eligible student
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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
Student Loans: California Woman Sees Nearly $350000 Discharged In Personal Bankruptcy While Serving As Her Own Lawyer
A California woman with more than $350,000 in student debt served as her own lawyer in personal bankruptcy and saw 98% of her loans discharged in the latest case in a growing trend.
Court filings show that the Education Department and the Los Angeles-based woman, Mis Loe, agreed on August 30 that Loe would pay $7,200 of her $356,637.82 in outstanding loans .
Once Loe completes the $7,200 payment by October 2031, according to the agreement, she shall be discharged of the remaining balance of the student loan debt, pursuant to her Chapter 7 discharge order.
Furthermore, the case shows that regular people especially those in extraordinary personal circumstances are able to win for student debt discharges without a lawyer.
Its not a straightforward, easy process the data has been consistent over the past decade folks with attorneys dont do any better than individuals who dont have attorneys in this specific context of litigating the adversary proceeding, Jason Iuliano, associate professor at the University of Utah and an expert on student loan bankruptcy law, told Yahoo Finance. They both tend to get about the same level of favorable outcomes. And I cant think of another area of law where thats true, where having an attorney makes you worse off.
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When Did Private Student Loans Become Nondischargeable
While federal student loans have been nondischargeable in bankruptcy since 1976, private student loans didn’t 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 student’s 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 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.
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.
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If You Ignore Your Debts
Ignoring your student loan debts is the worst option. Once youre in default on government-held loans which accounted for 90% of all student loans in the 2016-2017 school year the federal government has extraordinary collection powers. It can garnish wages, seize tax refunds or portions of Social Security benefits, and place liens on bank accounts and property.
And unlike other types of debt, there is no statute of limitations on federal student loans. That means that a student loan debtor can be hounded to the grave by the federal bureaucracy or the agency that services loans on behalf of the Department of Education.
Also, after a stipulated number of months of non-payment, a loan can be transferred to a private collection agency. Additional fees and collection costs are then added to the loan balance.
Rather than trying to ignore your student debt problem, its best to take action as soon as possible, even if that means going into bankruptcy.
How To Discharge Student Debt
Student debt may be part of your Chapter 7 or Chapter 13 bankruptcy filing. However, discharging your student debt is not an automatic process in a bankruptcy filing. This type of debt is initially exempt from discharge. To have student loan debt discharged, you must affirmatively request the bankruptcy court discharge it by filing an adversary proceeding petition that requests the court find that repaying your student loans would cause an undue hardship. Your student loan account holder may be present at this request and can challenge it.
If you previously filed for bankruptcy without claiming undue hardship, you may still be able to reopen your bankruptcy case for the purpose of determining undue hardship.
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Can You Discharge Private Student Loans In Bankruptcy
Before 1976, borrowers could discharge private and federal student loans in a bankruptcy, just like credit card debt or medical expenses. But the introduction of the U.S. Bankruptcy Code in 1978 caused a major shift with regard to student debt.
At the time, the intent of Congress was to protect educational loans from bankruptcy abuse. The amended bankruptcy code stated that funds received as an educational benefit would no longer be discharged unless the borrower could demonstrate undue hardship.
Since the ability to discharge private student loans became limited, theres been much debate on the subject. In recent years, there have been a number of major court rulings that made it possible to discharge private student loans. Yet attorneys caution that those rulings still dont necessarily mean that all private student loans are dischargeable in bankruptcy at least not without special circumstances.
It appears as though the courts will eventually answer this question, unless Congress acts first. However, until that happens, the bankruptcy code allows for private student loans to be discharged in bankruptcy only if borrowers can meet the undue hardship standard.
It’s A Very High Success Rate
“I have never seen $350,000 of debt being discharged,” said Rohan Pavuluri. “You can imagine why people don’t even try.”
Pavuluri is the CEO of Upsolve, a nonprofit organization that helps people file for bankruptcy for free. Loe used Upsolve’s app to file her initial case, and she is now pushing for the company to expand its services to help people like her file their own student loan discharge.
Although the amount of Loe’s debt makes her case unusual, her success in having it discharged isn’t as rare as many believe. In fact, student debtors who try to wipe out education loans in bankruptcy tend to succeed more than half the time, according to research from Jason Iuliano, a law professor at the University of Utah.
In 2017, 447 debtors tried to get student loans cleared in bankruptcy, Iuliano noted in a recent paper. Of those, 234 nearly 60% either won the case or settled with their creditors.
“It’s a very high success rate once you actually go before the judge and say, ‘I deserve a discharge,'” Iuliano told CBS MoneyWatch.
The larger issue, said Iuliano, is that most people don’t even try. While about a quarter of a million people with student loans file for bankruptcy each year, only a few hundred take the extra step of filing an adversary proceeding to try to clear their student debt because most believe it’s impossible.
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Minimal Standard Of Living
The first factor that will be taken into consideration is your ability to maintain a minimal standard of living for yourself and your dependents given your student loan debt and monthly payments. This does not mean that only people living in poverty with no possessions will satisfy this requirement. Courts will look at your monthly income and your monthly expenses including the amount necessary to repay your student debt. The purpose of this is to determine the reasonableness of your budget as a whole.
A minimal standard of living includes, among other things, furnished and maintained shelter, basic utilities, food, clothing, vehicles, insurance, and even the ability to pay for a source of recreation. Again, the court will look at the reasonableness of each of these expenses.
This prong can be tough to meet for individuals with federal student loans due to the fact that there are income-driven repayment plans available, which can greatly lower monthly payments. If your monthly student loan payment is $0 or something close to that, it is hard to argue that such a small amount is preventing you from sustaining a minimal standard of living. However, it is possible for an individual to have unaffordable payments even while on an income-driven repayment.
Courts may also consider the individuals spouses income in addition to the individuals income when determining the minimal standard of living even if the individuals spouse has not declared bankruptcy as a co-debtor.
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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Having This Debt It Would Ruin Relationships For Me
American borrowers hold more than $1.6 trillion in outstanding student loans as of November 2019, according to data compiled by the Federal Reserve Bank of St. Louis.
That number has been rising steadily over the past few years and has reached an inflection point: From presidential candidates proposing cancellation of student debt Senator Elizabeth Warren pitched a plan that makes it easier to declare bankruptcy for student loans to companies offering to help pay off their employees student debt, addressing the issue has become a priority.
But politics wasnt on Rosenbergs mind.
His journey with student debt began in 1993, according to the lawsuit, when he took out student loans for his undergraduate degree. He kept up healthy financial habits, repaying his loans faithfully, until he served in the United States Navy on active duty for five years. After completing his tour of duty, he started law school at Cardozo in New York, for which he took out additional student loans.
After he graduated in 2004, Rosenberg consolidated his loans and held a little more than $116,000 in student debt as of April 2005. That number ballooned to about $221,000 over the next 14 years.
He then passed the bar exam in New York and New Jersey and joined a law firm before deciding that a law career wasnt for him.