Defaulting On Student Loans
How many parents have student loans?
The Department of Education said that 3.3 million borrowers had $74.5 billion in Parent Plus loans in 2016 to pay for their childrens education. Another study by the University of Southern California said the average parent borrows $21,000, but that parents with incomes higher than $120,000 borrow an average of $30,000.
The Consumer Financial Protection bureau said that 2.8 million people 60-and-over were paying on student loans in 2017. That is four times the number who borrowed in 2007. Even worse, the Government Accounting Office says that 37% of student loan borrowers age-65 and over are in default.
If youre considering bankruptcy, your loans are probably already in default, meaning you havent made a payment in more than 270 days . This is more common than you may think. The national default level on student loan repayment is approximately 10%, meaning that 4.4 million borrowers are in default on Americas $1.4 trillion student loan problem.
The Department of Education said that the default rate was falling in 2016, but that is misleading according to many experts because nearly 6.5 million borrowers were in deferment or forbearance, two forms of delay before a borrower goes into default. Austin said his research indicates that 40% of student loan borrowers are either delinquent or in default .
Can Your Debts Be Erased In Student Loan Bankruptcy Yes Heres How
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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
Above And Beyond Normal Circumstances
The second factor that courts will take into account is whether you have circumstances that are above and beyond normal circumstances and whether these circumstances will extend throughout a significant portion of the term of the loan. This can be tough to show in some cases because it can be subjective and speculative.
Some of the potential circumstances that courts have seen as above and beyond normal circumstances include serious mental or physical disability of the individual or the individuals dependents which prevents employment and circumstances relating to an individuals employment opportunities including poor quality of education, maximized income potential in the chosen education field, and limited remaining years in the individuals work life.
As stated above, these circumstances must extend throughout a significant portion of the loan. They can not simply be a temporary situation that is likely to change in the near future. Due to the subjective nature of this factor, you will require the submission of evidence to prove your circumstances.
When you are trying to discharge student loans in bankruptcy, it is critical to show your circumstances are above and beyond normal circumstances. Our experienced student loan lawyers are skilled in putting together the best argument and supporting evidence, including expert reports, etc., to show that your circumstances are above and beyond normal circumstances.
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Expected Changes In Bankruptcy Student Loans
In October 2022, the Federal Student Aid chief operating officer informed Congress that the Education Department is working on improving the conditions for bankruptcy cases. He mentioned that the current rules for bankruptcy on student loans are not acceptable, and the process does not work well.
Therefore, the Education Department is working on new solutions to improve the bankruptcy process. Meanwhile, the advocates recommended the Education Department support the borrowers rather than oppose them. Such a shift could help some borrowers to get bankruptcy on student loans.
Yet, there is still no exact decision on the new rules. However, the FSAs chief operating officers notes create positive expectations from the process.
Bankruptcy And Financial Aid
This page answers common questions about the relationship between bankruptcy and financial aid, such as student loans. The first answer concerns the impact of bankruptcy on eligibility for student loans. The second answer discusses whether student loans can be discharged through bankruptcy.
Thanks to Pat Somers of the Univ. of Arkansas at Little Rock and Art Bilski of the Illinois Student Assistance Commission for their assistance with this section.
Bankruptcy and Eligibility for Financial Aid
Will a bankruptcy affect a students future eligibility for student loans and other financial aid?
The answer to this question is a complex one because several issues are involved. It depends on the nature of the student loan programs and the type of bankruptcy.
Whatever the circumstances behind the bankruptcy, the student should talk with the financial aid administrator at the school he plans to attend, and explain the situation. The financial aid administrator may be able to guide the student to certain loan programs or lenders that may fit his needs.
Generally speaking, a bankruptcy should have no impact on eligibility for federal student aid.
The anti-discrimination rules appear in 11 USC 525:
Discharging Student Loans Through Bankruptcy
- if the borrower files an undue hardship petition
Types of Bankruptcies
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Should You File Student Loan Bankruptcy
While student loan bankruptcy discharge is possible, its likely only worth exploring in the following instances:
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Youve exhausted all payment options. If you have federal student loans, see if you can afford income-driven repayment or qualify for a loan forgiveness program. Private student loans have fewer options for struggling borrowers. Still, call your lender or servicer and ask whether they can temporarily lower your payment or interest rate.
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Youre past-due on your student loans. If you haven’t missed payments, youll likely have a hard time proving your loans are causing undue hardship. Bankruptcy makes more sense in instances of student loan default especially if you have defaulted on private student loans and your lender is suing you in an attempt to garnish your wages.
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You have no pathway out of default. Federal student loans have options to get out of default, including loan rehabilitation and consolidation. If youve defaulted on a loan multiple times, you may have exhausted these options.
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These situations are no guarantee a bankruptcy court will discharge your student loans, but it has happened for some borrowers. A study published in the American Bankruptcy Law Journal in 2012 found that, in 207 bankruptcy cases in which debtors included their loans, 39% won full or partial student loan discharges.
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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Private Banks Student Loan Debt
Private student loans can be offered by banks. Some of the qualifications for a private student loan likely include: you must have been enrolled in an eligible school, meet credit and income criteria, be able to apply with a creditworthy cosigner, intend to use the loan for education, and meet citizenship, age and education. Student loans are some of the loans eligible to file for a bankruptcy case.
How To Reopen A Bankruptcy Case
After you get a discharge, you’ll need to file a motion to reopen your bankruptcy before you can file your complaint. Reopening your bankruptcy case doesn’t affect your discharge. It’s a formality that ties your adversary case to your bankruptcy case.
Before preparing and filing the motion, check with the bankruptcy court to see if they have any particular rules you’ll need to follow or fees you need to pay or ask be waived.
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Likelihood Of Discharging Student Loans
Why Is It So Difficult To Discharge Student Loans?
In 1976, Congress prohibited federally guaranteed student loans from being discharged in bankruptcy except under conditions of undue hardship. This was in response to largely unfounded fears of too many student debtors looking for an easy way out of their obligations.
This put student loan debt in the same category as financial obligations like child support, alimony and criminal fines.
In 2005, Congress added private student loans to the list of debts that cannot be discharged.
In most bankruptcy cases, consumers dont even attempt to have student loans discharged. Instead, their lawyers focus on other issues such as .
Austin said that less than 1% of bankruptcy filings include student loans, even when there is a compelling case. He cited a situation in which a single mother on a teachers salary and battling cancer didnt bother filing for bankruptcy, despite more than $150,000 in student loan debt.
However, in most cases, the legal hurdles that have to be overcome are so daunting that most lawyers advise their clients not to seek a discharge for student loan debt in their bankruptcy filing. Also, there are now several income-driven repayment plans such as Pay As Your Earn , Repay As You Earn , Income Contingent Repayment and Income Based Repayment that most borrowers should be able to find a program they can afford.
Surprisingly, about 40% of the cases that are filed, actually are successful.
Very Few Attorneys Work These Cases
There are many attorneys that work traditional bankruptcy cases, but Iuliano points out that only a handful of them actually work on student loan bankruptcies as the main core of their practice.
And having a good attorney is a very important part of the process, says Iuliano.
Since getting student loans discharged is such a difficult task, you will need an attorney that knows all the tips and tricks to litigate the case effectively. If youre unsure where to find a good attorney for your case, you can check out Lexria , which is an online platform that connects borrowers with attorneys that specialize in student loan bankruptcies.
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Private Loan Modification Or Settlement
Your options to reduce private loan payments or get out of default vary greatly based on the lender. Communicate directly with your private lender or servicer to explore loan modification programs if you cant afford your payments long-term.
If youre behind on your loans, you could consider reaching a settlement agreement with the lender or collection agency. At which point, you would pay a lump sum settlement thats less than your total outstanding balance. But you may have to pay taxes on this amount, and it could be unaffordable.
If you can, consult a tax professional or lawyer with student loan expertise if youre in communication with a collection agency about a settlement.
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 Can Go Wrong
There exist many factors to consider before deciding on bankruptcy. Unfortunately, if not evaluated properly, the borrower can get more debt. This consequence can happen if the debtor files for Chapter 13 bankruptcy and he/she owes other loans with higher priority than student debt. Besides, a bankruptcy filing is an expensive process. If the court does not waive the fees, the borrowers will need to pay extra.
It is possible to get an attorney to guide you through the process. However, a debtor who can afford to pay the attorney will not probably meet the undue hardship condition. Overall, try to get a third-party expert help to decide if you really need to file bankruptcy or you can access other options.
Cancel Student Loans: What The Court Said
Heres what the court found:
- Navient argued that Congress sought to exclude from student loan discharge all private student loans.
- Absent a showing of undue hardship, three types of student loans cant be discharged in bankruptcy: loans and benefit overpayments backed by the government or a nonprofit obligations to repay funds received as an educational benefit, scholarship, or stipend and qualified private educational loans.
- The sole question is whether the student loans constitute an obligation to repay funds received as an educational benefit, since Navient didnt argue that the student loan fell in either the first or third categories.
- The court embarked on an analysis of stautory interpretation of the U.S. Bankruptcy Code to determine the underlying meaning of the operative words in the text.
- The term educational benefit is undefined and potentially vague. The court concluded that the terms should be interpreted in light of its listed companions, suggesting educational benefits means conditional grant payments similar to scholarships and stipends. Since scholarships and stipends generally dont have to be repaid, the plaintiff in this case isnt required to pay these private student loans.
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If Youre Drowning In Student Loans With No Solution In Sight You Might Have Considered Declaring Bankruptcy
Unfortunately, discharging student loans in bankruptcy can be one of the most challenging tasks in whats already a complicated legal process. Still, trying to get rid of student loans in bankruptcy can make sense for some borrowers. If you think it might be worth the effort, heres what you should know before getting started.
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Dont Assume Your Private Student Loan Is Not Dischargeable
It would be a complete mistake to not assume part or all of any private student loan is not dischargeable or allowed to be eliminated in a bankruptcy filing.
This is an emerging area and there are frankly not that many people familiar with this topic. The general assumption is that private student loans are not dischargeable in bankruptcy and that would be both factually and practically wrong. As Ive demonstrated to you, some can be.
I highly recommend anyone who is interested in this topic should read the paper by Mark Kantrowitz, here.
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What To Know Before Filing
Now that weve looked at bankruptcy options and alternatives, there are some key points to consider before determining whether bankruptcy is the right option to take:
- Your chances are better if you are looking to settle a private student loan. This is because federal student loans offer income-driven repayment plans, whereas private student loans do not.
- If your student loan is your only debt, youre less likely to be successful with filing bankruptcy. The more debt you have, the more circumstances appear to be beyond your control.
- Youll have to pay court filing fees if you decide to pursue bankruptcy. These fees can be costly but may be waived in certain circumstances.
