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Can You File Bankruptcy On Student Loans In Collections

Whats Different About The Conway Case

The case for allowing students to file for bankruptcy over loan debt

Typically, bankruptcy courts rely on the precedent set by the 1987 case titled Brunner v. New York State Higher Education Services to decide whether or not private student loan debt can be discharged during bankruptcy proceedings.

The so-called Brunner test that emerged from this case requires that debtors prove three things in order to receive approval for having their debt discharged:

  • That they cannot maintain a minimal standard of living for themselves, and their dependents, if forced to continue repaying their private student loan debt
  • That their inability to repay the loan while maintaining a minimal standard of living is likely to persist throughout the remaining lifespan of the loan
  • That they have made a good faith effort to repay the loan
  • These conditions have left a great deal of wiggle room for judges to rule that borrowers shouldnt be eligible for bankruptcy discharges, using logic like:

    • He may not be able to make the payments now because of unemployment or underemployment, but since hes only 30, hell almost certainly be able to land another real job and start making payments again at some point in the future.
    • She may be having trouble making payments now, but once her children turn 18 and start fending for themselves, shell have enough disposable income again to resume making her monthly private student loan payments each month.

    What To Know About Bankruptcy

    There are two types of bankruptcy: Chapter 7the most commonand Chapter 13. In both cases, if youre successful in filing, you wont have to repay certain debts, and wage garnishment and other debt collection activities will end.

    Chapter 13 bankruptcy gives filers who have a consistent income a payment plan to pay off debts within three to five years. The remaining debt is discharged after that time. Under Chapter 7 bankruptcy, theres no payment plan, and discharge can happen sooner, but your eligible assets will be sold to pay off your debts. After that, any remaining debt will be discharged.

    In both cases, theres a downside: The bankruptcy will appear on your credit report for 10 years if you file for Chapter 7 and seven years if you file for Chapter 13. And unless you choose Chapter 13, you might also lose the collateral you put up to back secured debt, like a mortgage, that hasnt been paid and has a lienor a legal claimagainst it.

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    Another Positive Court Ruling: Lesley Campbell

    While Robert Murphys case hasnt lead to a major revolution in the way that private student loan bankruptcies are handled , weve got another indication of thing getting better from a ruling over the debt of Lesley Campbell, who owed $300,000 and filed for bankruptcy in 2014.

    This was a brave decision for her, and one that apparently less than 1,000 bankruptcy filers even ATTEMPT each year , and a risk that was entirely worth taking, because Lesley Campbell just won!

    While she wasnt able to discharge the entire $300,000 she owes, she did successfully get her bar study loan of $15,000 discharged, due to U.S. Bankruptcy Court Judge Carla Craigs ruling that her other student loan debt and the bar study loan werent quite the same.

    In the ruling, Judge Craig determined that the bar study loan did not constitute an educational benefit under the law, which is what youre NOT allowed to discharge during bankruptcy proceedings. If you have bar study loans of your own, or any other loans that were used to help cover college costs, but which you think you could argue did not provide an educational benefit, then its time to consult with an attorney!

    And, while this may only be a small crack in the wall forming, at least a crack is forming at all. The more cases like this, where people successfully get bits and pieces of their student loan debt discharged, the sooner the large student loans themselves are likely to appear on the negotiating table.

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    Are All Of The Debtor’s Debts Discharged Or Only Some

    Not all debts are discharged. The debts discharged vary under each chapter of the Bankruptcy Code. Section 523 of the Code specifically excepts various categories of debts from the discharge granted to individual debtors. Therefore, the debtor must still repay those debts after bankruptcy. Congress has determined that these types of debts are not dischargeable for public policy reasons .

    There are 19 categories of debt excepted from discharge under chapters 7, 11, and 12. A more limited list of exceptions applies to cases under chapter 13.

    Generally speaking, the exceptions to discharge apply automatically if the language prescribed by section 523 applies. The most common types of nondischargeable debts are certain types of tax claims, debts not set forth by the debtor on the lists and schedules the debtor must file with the court, debts for spousal or child support or alimony, debts for willful and malicious injuries to person or property, debts to governmental units for fines and penalties, debts for most government funded or guaranteed educational loans or benefit overpayments, debts for personal injury caused by the debtor’s operation of a motor vehicle while intoxicated, debts owed to certain tax-advantaged retirement plans, and debts for certain condominium or cooperative housing fees.

    Process For Discharging Student Loans

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    Student loan bankruptcy is usually part of a Chapter 7 or Chapter 13 bankruptcy filing. The Chapter 7 bankruptcy is an attempt to have all unsecured debt discharged. The Chapter 13 bankruptcy is an attempt to have the debt reorganized in payments the borrower can afford.

    Student loan bankruptcy laws are tilted heavily in favor of the lender. There are strict guidelines as to whether your student loans can be erased and they apply to any loan specifically granted for education expenses, including both private and public student loans. They apply to student borrowers as well as parents borrowing loans to pay for their childrens education.

    If you want to pursue bankruptcy for you student loan debt, the first step would be to find a reputable bankruptcy attorney. One of the reasons so few student loan bankruptcy cases are successful is because more than 50% are filed by the borrower, who has no legal training or understanding of the court system. According to Austin, probably another 40% or more are pro bono cases, meaning the lawyer is donating his time for free.

    Either way, the odds are stacked against the borrower right from the start.

    To succeed, you must be able to prove that your student loans impose an undue hardship on you and your dependents. The term undue hardship has endless interpretations, but most of them have favored creditors.

    Courts use three criteria for verifying undue hardship:

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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.

    How Does Private Student Loan Bankruptcy Work

    During the bankruptcy process, youll need to issue a formal complaint arguing that your student loan debt is placing an undue hardship on your life, preventing you from being able to provide basic life needs for yourself and/or your dependents.

    Its tough to receive an undue hardship discharge for certain types of private students loans in some cases, its impossible. But there are really rare cases where this may be possible, so lets talk about how to make that happen.

    The difficulty in proving an undue hardship is determined by the type of school you attended, the specific school where you received your education, the type of educational program you borrowed money to attend, and your specific financial situation that youre currently facing.

    Its that last element thats most important, because to get approved for the discharge you have to be able to prove that your loans are making it difficult for you to afford basic necessities, thereby essentially threatening your ability to survive.

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    Benefit Of Satisfying 7

    Satisfy the 7-year waiting period form the date of the bankrupts end of their education
    Filing for personal bankruptcy If you file for personal bankruptcy more than seven years after the date of the ?end of your education? then you are entitled to an automatic discharge of your outstanding student loan
    Making a consumer proposal If you make a consumer proposal more than seven years after the date of the ?end of your education? then you are entitled to a discharge of your outstanding student loan on the date you satisfy your obligations under your consumer proposal

    If you file for personal bankruptcy in circumstances where you do not satisfy the seven-year waiting period, you are not entitled to an automatic discharge of your student loan debt, and your bankruptcy will have no impact on your legal obligations arising from that indebtedness. If you fail to satisfy the 7-year waiting period you will, however, be entitled to have most, if not all, of your other unsecured consumer debt discharged or forgiven as a result of your bankruptcy.

    Federal Loans And Hardship

    Can I Declare Bankruptcy On Student Loan Debt?

    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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    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 .

    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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    Take Steps Early To Avoid Credit Damage

    If you’re not sure you can make your student loan payments, take steps early to avoid missing payments and default. Both of these scenarios can damage your credit score, making it difficult to qualify for refinancing or get approved for favorable credit terms in the future.

    As you decide the best path forward for you, monitor your credit regularly to understand how your actions impact your credit score. Credit monitoring can also help you spot potential issues before they cause significant damage.

    How To File Bankruptcy For Student Loan Debt

    Can You File Bankruptcy on Student Loans

    In the meantime, while we wait to see how lawmakers handle changes to the bankruptcy code, you have options if student debts are dragging you down. Many opt for loan consolidation or arrange a deferment of their student loan payments until their financial situation improves.

    Another option is to explore filing for bankruptcy. Without the expansion of existing laws, your student loan debt is unlikely to be discharged when you file. However, it would free up money to put toward your loan payments each month. If you file for Chapter 13, you might be able to build your loan into your repayment plan.

    If youd like to discuss the possibility of filing for bankruptcy or you want someone to assess your financial situation, we can help. Contact the Law Office of Robert M. Geller at to schedule a free consultation.

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    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.

    Consolidate Or Rehabilitate Your Loans

    Another way to resolve debt in collections is by consolidating or rehabilitating your loans. Those with federal loans can apply for a Direct Consolidation Loan.

    Your loan servicer will work with you to determine a monthly payment you can afford. You need to make those payments on time for three months to be eligible for consolidation or agree to enter into an income-driven repayment plan.

    Alternatively, you can apply for loan rehabilitation, which involves agreeing to make nine, consecutive, on-time payments, after which your monthly payments will be adjusted to 15% of your discretionary income.

    Note that only federal student loans are eligible for consolidation and rehabilitation. Private student loans are eligible for consolidation through refinancing with a private lender, but youll probably have a tough time qualifying if youre in student loan collections.

    You could try speaking with a lender about your options, and find out if adding a cosigner to your application could help.

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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.

    Is It Even Possible To Discharge Student Loan Debt In Bankruptcy

    Bankruptcy and Student loans

    Discharging your student loans in bankruptcy isnt impossible, but it requires navigating a challenging process that can be difficult to prove. If youre going to try to get out from under your loans in a bankruptcy, you should understand the requirements to qualify.

    Getting your loans discharged in bankruptcy is theoretically possible, but its not your ordinary bankruptcy proceeding, and its incredibly difficult, says Mark Kantrowitz, publisher and vice president of research for SavingForCollege.com.

    According to one study, only 0.1% of student loan borrowers declaring bankruptcy even try to get their student loans discharged. Of that fraction, 40% succeed. In other words, just 0.04% of people who have filed for bankruptcy and sought to have their loans discharged received either a full or partial discharge of their student loans.

    If nothing else, these stats prove that student loan discharge is possible. But the legal requirements are discouraging and for those who do try, its a tough proposition.

    Under current law, student loans cant be claimed in a bankruptcy except in certain circumstances. The only way these loans can be discharged is if theyre found to cause undue hardship on the borrower or the borrowers dependents.

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