How Do I Challenge My Student Loan Debt In Bankruptcy
Once you have filed for bankruptcy or we have re-opened a prior bankruptcy, the next step to discharge student loans in bankruptcy is to file a separate action within the bankruptcy case, known as an adversary proceeding. This adversary proceeding is similar to a lawsuit in that it will start with the filing of a complaint and can proceed through a trial and appeal, if necessary.
This process, within a bankruptcy, can be very difficult and our highly specialized student loan lawyers are some of the few attorneys that understand how to best proceed with challenging student debt through an adversary proceeding.
Government Versus Private Loans
The federal government is the lender for a significant percentage of student loans. However, private financial institutions, such as banks, also offer loans to students, primarily because many students cannot fund their entire education without such supplementation. It doesn’t matter whether you have a government or a private student loan. To discharge either in bankruptcy, you must show that repaying the loan would cause undue hardship.
How Student Loan Bankruptcy Works
If youre considering student loan bankruptcy, falling behind on your payments will have had a major impact on your life. Perhaps your wages have been garnished because a lender took out a judgment against you. The federal government may have kept your tax refund and applied it to your federal student loans because they were delinquent or in default.
Your student debt is probably just one component of the financial challenges you are currently facing. In fact, if student debt is your only problem, you are unlikely to succeed in getting it discharged through bankruptcy. Filing for student loan bankruptcy is not easy and does not guarantee that you will walk away debt-free. But if your credit is shot, bankruptcy could be a faster path to financial health than continuing to struggle to pay your debts.
There is no special type of bankruptcy called “student loan bankruptcy.” Succeeding in having student loans discharged through bankruptcy involves filing Chapter 7 or Chapter 13 and then taking an additional step, which is filing an “adversary proceeding,” or AP. The AP must be filed to have your student loans considered for discharge.
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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.
Does Bankruptcy Clear Private Banks Student Loan Debt
A private student loan is a loan given to finance higher education. Its interest rates are higher than that of a federal loan. A federal loan is a loan that is given by the government. A potential candidate may qualify for a lower interest if he or she has excellent credit, and also qualify for a higher borrowing limit.
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Newburgh Area Bankruptcy Attorneys Examine Student Loans In New York
A bankruptcy filing does not create a safe harbor from student loan debt. Although past due tuition owed to an institution is usually dischargeable in bankruptcy, student loans rarely are, particularly when their funding comes from governmental agencies or non-profit institutions . However, when the funding comes from private, for-profit lenders there are instances when the student loan, or a portion thereof, can be discharged. A private educational loan is only non-dischargeable if it is a qualified education loan, which means that:
- The school attended must be a Title IV accredited school. If the school is not accredited, the loan may be dischargeable. Examples of non-accredited schools might include trade schools, foreign medical schools, courses preparing graduates for the Bar exam, etc. and
- The amount borrowed for the academic year in question cannot exceed the annual cost of attendance for the school. Any portion of the annual loan in excess of these limits may be dischargeable and
- The borrower must be an eligible student, meaning one who is enrolled at least on a half-time basis and is degree seeking and
- The loan is not a mixed use loan. The funds borrowed must be entirely used to pay for qualified higher education expenses.
- Maintain a minimal standard of living for the debtor and his dependents.
- This state of affairs will continue for a significant period of time.
- The debtor has made a good faith effort to repay the loan prior to the bankruptcy filing.
Consider Other Options Before Bankruptcy
Obtaining a bankruptcy discharge of your student loans is not easy, and fortunately there are other steps desperate borrowers can take before making this last-ditch effort.
“In proceedings where clients of ours have tried , if they can’t prove that they have no hope of paying back the debt, then the Department of Education usually responds by telling the borrower to enroll in an income-based repayment plan,” Hornsby explains.
Federal income-driven repayment plans recalculate your monthly bill based on any changes in your income. Your monthly student loan payment is therefore reflective of how much you can afford to pay.
Hornsby suggests income-driven repayment plans such as Pay As You Earn and Revised Pay As You Earn . With these programs, your credit score won’t be ruined like it would in bankruptcy proceedings, plus you’ll only need to pay 10% of your discretionary income. After the repayment period ends, any remaining balance is forgiven.
If your monthly payment is just too high, consider refinancing your student loans. Through refinancing, you can both score a lower interest rate and extend your loan term so that your monthly payments are lower. Though this means more months, or years, of interest collecting, it can help you in the immediate term if you are tight on cash.
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How Does Bankruptcy Work
When you need to discharge your private student loans, the first thing you need to do is find a reputable bankruptcy attorney. It may not be a mandatory court order to have legal representation, but its your best bet at navigating the very complicated bankruptcy process.
Private student loans are not easily discharged its a unique process that falls into three categories:
- Federal student loans
- Private student loans
- Federal Parent loans These are sometimes called Plus loans.
Sometimes, its easier to qualify for hardship relief for federal student loans than private student loans, but there are options you can explore with your attorney.
When To Register An Adversary Proceeding
Once you file case of bankruptcy, the next thing in order to get a student-based loan release will be file an adversary proceeding. An AP is really what legal actions were referred to as in bankruptcy process.
a borrower or cosigner can start the education loan bankruptcy processes by submitting an adversary proceeding inquiring the bankruptcy proceeding assess to release federal loans or exclusive debts because undue difficulty.
Section 7 case of bankruptcy matters become over with rapidly . Thus, you might need more hours supply your self a much better potential for getting a discharge. Luckily, government law cannot arranged a deadline for processing an adversary to release student education loans. So can submit the AP before or after your own case shuts.
Section 13 situation grab 3 to 5 age to accomplish. That you do not receive a release until when you produced your best installment below your strategy. Consequently, various jurisdictions may force one hold back until your own Chapter 13 is practically more before theyre going to allow you to register an adversary proceeding.
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Criteria Based On The Educational
- The loan must have been borrowed to pay for the education of a student who is enrolled at an eligible educational institution. Eligible educational institutions are defined as Title IV colleges and universities. If the educational institution was not accredited or not eligible for U.S. federal student aid, the loan is not a qualified education loan.
Note that these criteria apply to the design of the loan, not necessarily to how the borrower chose to use the loan proceeds.
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Iuliano says the outcome and how much student debt is forgiven, if any, can have a lot to do with what particular judge you end up with and what the rules are in that bankruptcy district.
Some of that is because of the language of the original statute stating that student loan borrowers have to meet a threshold of undue hardship, he says. Iuliano says Congress has never defined what that means, so a lot of discretion is left up to the courts and the particular judge you get.
Harrison Wadsworth, a consultant for the Consumer Bankers Association, notes that most student loans are issued by the government. But for loans from private lenders, he says relaxing the bankruptcy rules to make it easier to reduce or eliminate student debt could push up interest rates. Lenders would have to be careful about making loans and probably have to charge more for them, Wadsworth says.
Lauren eventually found a lawyer who took her case and charged her about $3,000, doing some of the work pro bono. And going through bankruptcy, she got her debt reduced from about $200,000 to around $100,000, with the bulk of that reduced to a 1% interest rate.
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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.
What Happens If The Court Finds There Is Undue Hardship
In the unlikely event that the court finds that repaying the student loans would indeed put an undue hardship on the person filing for bankruptcy, there are a few different things that could happen.
The loans might be fully discharged. This means that the borrower will not need to make any more loan payments. All activity from collections agencies would stop too.
The loans may be partially discharged. In this case, a portion of the debt would be discharged. The borrower would still be required to repay the portion of the debt that is not discharged.
The loan terms may change. In this situation, the borrower will still be required to repay the debt. But there will be new terms on the loan, such as a lower interest rate.
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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.
When To File An Adversary Proceeding: Chapter 13
In a Chapter 13 bankruptcy, when you can file an adversary proceeding also depends on the bankruptcy court rules where you live. Regardless of when you file, your student loan nightmare will not be complete if you win the adversary proceeding. That’s because you have to wait until you’ve completed the necessary Chapter 13 plan payments and earned your discharge order for your other debts before your student loans will be discharged.
If you are allowed to file the AP early in your case, you might get the proceeding over with sooner and obtain a decision on your student loans. The table below compares Chapter 7 and Chapter 13 bankruptcy.
|Comparing Bankruptcy Options|
|Varies by state|
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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 youve 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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When To File An Adversary Proceeding
After you file bankruptcy, the next step to get a student loan discharge is to file an adversary proceeding. An AP is what lawsuits are referred to as in bankruptcy proceedings.
A borrower or cosigner can start the student loan bankruptcy process by filing an adversary proceeding asking the bankruptcy judge to discharge federal loans or private loans due to undue hardship.
Chapter 7 bankruptcy cases are over with quickly . As a result, you may need more time to give yourself a better chance of getting a discharge. Fortunately, Federal law does not set a deadline for filing an adversary to discharge student loans. So can file the AP before or after your case closes.
Chapter 13 cases take 3 to 5 years to complete. You don’t receive a discharge until after you made your final payment under your plan. Consequently, different jurisdictions may force you to wait until your Chapter 13 is almost over before they’ll let you file an adversary proceeding.
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Can You File Bankruptcy On Student Loans
Filing bankruptcy on student loans is possible, but youll have to go through a difficult process to do so. To discharge your student loan debt through bankruptcy, you have to prove that you cant pay back your student loans without it having an extremely negative impact on you and your dependents.
Courts are left with some room to interpret your eligibility. Most, but not all, federal courts of appeal evaluate hardship using a set of standards known as the Brunner Test, which was established as the result of a 1987 federal court ruling, Marie Brunner v. New York State Higher Education Services Corp.
Can you file bankruptcy on student loans? First, can you pass the Brunner test?
|The factors of the Brunner test are outlined by the U.S. Department of Educations Federal Student Aid office and include three main points:
Other courts, namely the 1st U.S. Circuit Court of Appeals and the 8th U.S. Circuit Court of Appeals, rely on a different standard, known as the totality of circumstances, which considers your past, present and future financial resources reasonable living expenses and other relevant factors related to bankruptcy proceedings.
Definition Of Undue Hardship
If you are unable to now or in the future, repay your student loan without it negatively impacting your ability to maintain a minimum standard of living you have met the criteria the court defines as undue hardship. Most of the time the court wants to see some medical issue or other form of disability. The definition of undue hardship is called the Brunner Test.
The Brunner test dates back to a court decision in 1987. There are some courts that use a different standard and definition of undue hardship, but only your attorney will be able to navigate those discrepancies. Ultimately, the court gives weight to whether or not youre seeking a discharge of your private or federal student debt loan in good faith.
The court will look at your attempts to repay the loan and when you failed to meet your loan obligation. They will try to determine if youre unable to pay back your student loan due to poor financial decisions rather than a true hardship.
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