Adversary Proceeding Student Loans All Your Questions Answered
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Bankruptcy wipes away bills for credit cards and medical expenses with the stroke of a judgeâs pen. But student loan debt doesnât go away as easily. To get a discharge, you have to start a second bankruptcy process: a student loan adversary proceeding.
Student loan borrowers can use bankruptcy law to eliminate their higher education debt. But getting that type of relief isnât automatic. It requires filing a lawsuit â called an adversary proceeding â after your bankruptcy case starts.
Ahead, learn what a student loan adversary proceeding is and how to file it to try and meet the undue hardship standard.
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Am I Able To Discharge A Federal Student Loan Without Having To File Bankruptcy
In most situations, neither federal student loans nor private student loans are eligible to be discharged in bankruptcy. However, in some cases, you can have a federal student loan discharged if you experienced serious problems with your school, worked in public service, or have a severe disability.
The Types Of Student Loans That Cannot Be Discharged In Bankruptcy
Student loans cannot be discharged if they meet any of the following three criteria:
- They are backed by or issued from the government
- The funds were received as an educational benefit, scholarship, or stipend
- They are private loans where the student attended an eligible institution and the loan funded only educational expenses
Based on these criteria, more often than not, student loans are not automatically eligible to be discharged during bankruptcy. If a loan does not qualify for discharge under the above standard, you can still discharge student loans if you can prove that the loans constitute an undue hardship. This process, however, is incredibly difficult and requires the debtor to satisfy a three-part test .
The Brunner Test for Undue Hardship
The three-part Brunner Test is as follows:
First, you must provide proof of your income and expenses to demonstrate that you are unable to maintain even a minimum standard of living.
Second, you must prove that this financial situation is likely to continue for a significant amount of time in the future.
Third, you must prove that you have, up until that point, made a good faith effort to repay the student loan. What constitutes a good faith effort is not explicitly defined, and therefore it is left up to interpretation by the court. Though some courts are more flexible and lenient with this provision, others have cited that filing a claim of undue hardship in and of itself demonstrates a lack of a good faith effort to repay.
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Can Michigan Residents Include Student Loans When Filing For Bankruptcy
The ability to include student loans when filing for bankruptcy depends on the specific type of loan you have and your individual situation. To determine whether you should try to discharge your student loans through bankruptcy, the best course of action is to talk to an experienced bankruptcy attorney. They will be up to date on the latest legal developments and can advise if your case is likely to meet the many complicated criteria. Even if your student loan debt is not discharged through bankruptcy, the proceedings may help to lessen or delay your student loan payments.
Can Student Loans Be Discharged Under Chapter 7
You may be able to have your student loans discharged under Chapter 7 bankruptcy, but the terms under which this could occur can only be decided in bankruptcy court. Chapter 7 bankruptcy is more likely to work in cases of extreme undue hardship where it would be impossible for the applicant to repay their loans under any repayment plan.
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Can Student Loans Be Discharged In Bankruptcy
Except in rare situations, bankruptcy law states that neither federal loans nor private student loans are eligible for a bankruptcy discharge. To discharge a student loan in bankruptcy, you must file an adversarial proceeding . An AP is a lawsuit filed within the bankruptcy court, after a bankruptcy case has already been filed. APs can result in full trials before the bankruptcy judge. APs are very different from normal bankruptcy proceedings.
To file an AP, you may need a bankruptcy attorney that is experienced and skilled in litigation. Many bankruptcy attorneys only want to file straightforward bankruptcies and rarely file APs. You need to be careful in choosing an attorney if you’re going to try to discharge a student loan. Ask any prospective attorney if they have filed APs in the past. Even if you file an AP, you will only be successful in securing a discharge for a student loan if you pass the Brunner Test.
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Contact A Jacksonville Bankruptcy Attorney For Help With Student Loans
Student loan debt is a crushing financial burden for many individuals and families. If you are struggling with student loans, a bankruptcy filing may help.
Call The Law Offices of Justin McMurray, P.A. at 904-248-4482 or use the contact form on our website to request a free consultation with our Jacksonville bankruptcy lawyer.
Thank you for contacting us. We will get back to you shortly.
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Present Inability To Pay
Warnerearned $48,657 as a clinical psychologist in 2013, and after monthly expenses he had only $31 left each monthavailable to pay his Lenders. The court, therefore, found that Warner lived a”frugal” existence and could not pay the $1,700 monthly paymentrequired to service his student loan debt and maintain a minimal standard ofliving. Warner, therefore, satisfied the first Brunner element.
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Bankruptcy May Not Be The Best Option
Bankruptcy is, by its very nature, a long and complicated process. Those with burdensome student loans have certain other options they should first investigate, including:
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Income-driven repayment plan: This is a federal student loan repayment option that can lower monthly payments for those who qualify. It is based on specific factors, such as income, family size, loan type, and current location.
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Student loan forbearance or deferment: For debtors with federal student loans, this option can temporarily reduce or even suspend payments to help them avoid defaulting on their loans.
-
Loan forgiveness: Hardship programs through certain private lenders or the government can forgive loans for debtors who are employed by certain government or non-profit organizations. The Public Service Loan Forgiveness is one such program.
Mr. Troutman can provide additional information about these and other programs to his clients with student loans who wish to avoid bankruptcy.
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.
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It Will Impact Your Credit
First, it will have a long-lasting impact on your credit. Depending on the reporting agency and credit score range youre at, your score could drop as much as 200 points. While this gradually improves over time, bankruptcies can stay on your credit report for up to 10 years, affecting your ability to borrow. This is something to keep in mind, especially if youre planning to make a big purchase such as a house or a car in the near future.
Persistence Of Financial Circumstances During Therepayment Period
Brunnerrequires a court to evaluate not only present hardship, but to make aprediction about future ability to pay. Factors to consider include a debtor’smental and physical health, dependent’s needs, age and other conditionsaffecting earning capacity. Also considered are prospects for income in thedebtor’s profession, in this case clinical psychology. The court noted that the”most important factor” to satisfy this element is that the debtor’scircumstances must “be beyond the debtor’s control, not borne of freechoice.”
Warnerstipulated that he had no mental or physical incapacity, and no dependents. Thecourt assessed him at trial to be in “good health, alert, intelligent, andsophisticated.” While the court determined that Warner’s currentcircumstances did not allow him to repay his Lenders, it found that he could doso in the future. The court looked to his future earning potential based onBureau of Labor Statistics and determined that Warner was likely to earnapproximately $70,000 in the near future, which would allow him to startrepaying some of the debt. Warner, therefore, failed to meet his burden for thesecond element.
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Can Your Debts Be Erased In Student Loan Bankruptcy Yes Heres How
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The Fresh Start Through Bankruptcy Act Of 2021
Might there be a light at the end of the tunnel? On August 3, 2021, a United States Senate Judiciary Committee held a hearing to address the issue of student loan debt and bankruptcy. At this hearing, Senator Dick Durbin and Senator John Cornyn , co-sponsored a bill to reform the current bankruptcy law with regard to student loan debt.
Their effort, known as the FRESH START Through Bankruptcy Act of 2021, proposes that federal student loan debt be permitted to be discharged during bankruptcy proceedings beginning ten years after the first student loan payment is due. It also holds Institutions of Higher Education accountable, requiring that colleges partially refund the government if a students loans are discharged later through bankruptcy. As the changes would apply only to federal student loans, the bill maintains the undue hardship clause for private loans.
At this time, no further action has been taken. It will be interesting to watch the progress of the FRESH START Act over the coming weeks and months.
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Get A Bankruptcy Attorney
A borrower is more likely to obtain a bankruptcy discharge of their student loans if they are represented by an experienced attorney.
However, most bankruptcy attorneys are unwilling to pursue an undue hardship claim because these cases involve an adversarial proceeding, which are expensive and involve a lot more work. It can cost $10,000 or more to pursue an adversarial proceeding and borrowers who file for bankruptcy usually dont have the money to pay the lawyers fees. Lenders are also likely to appeal the decision, so a favorable decision is unlikely to be final.
Even if you dont have an attorney and are representing yourself pro se, always show up in court. If you dont show up when required, the lender can win the case by default.
What Is The Brunner Test
The Brunner Test is a tool created by bankruptcy judges to measure whether student loans are causing a debtor undue or ordinary hardship. Judges needed it because lawmakers never defined what “undue hardship” meant, even though they changed the bankruptcy code several times over the years.
The test comes from a 1987 case in which a woman named Marie Brunner tried to get rid of her student loans less than a year after earning a master’s degree. To discourage people from rushing to bankruptcy after graduating, the New York judge laid out a three-prong test that grants a discharge if the answer to each question is “yes”:
- Have you made a good-faith effort to repay the loans?
- Are you unable to maintain a minimal standard of living while making the payments?
- Is your financial situation likely to persist?
Soon, other judges found the three-part tool useful and used it in their cases, referring to it as the Brunner Test. You can click here to read Brunner v. New York State Higher Education Services Corp., .
Despite the attacks, the Brunner Test remains the law of the land in many bankruptcy courts across America.
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One Case Discharges Student Loans In Bankruptcy
One of the long-held rules in a Michigan bankruptcy was that debtors could not escape their student loan debt, even after filing for bankruptcy. Now, a recent court case may give those who are struggling with unmanageable student loans some hope that bankruptcy can be a way out of their situation.
Getting student loans discharged in bankruptcy is not impossible. However, it is extremely difficult. A borrower must show that they have made every reasonable effort to pay back the loans and that they will not be able to maintain a standard of living if they are obligated to repay them. They must also show that they will face the same circumstances post-bankruptcy that will make repayment of the loans impossible. Traditionally, courts have not discharged student loan debt.
This particular borrower owed over $200,000. Even after bankruptcy, he would have been $1,500 in the red each month factoring in his student loan payments. Here, the judge found that it would have been impossible for the borrower to maintain any standard of living, and he would have been right back in the same place given the amount of his student loan debt. This ruling is from one judge and is not a precedent. However, the hope is that other bankruptcy judges may start thinking the same way and give student loan debtors some relief.
Jeremy Shephard
Adversary Proceeding Student Loans What Is It
An adversary proceeding is a separate lawsuit within a bankruptcy case. Like any other lawsuit, it starts with a disagreement. A student loan adversary proceeding is a type of lawsuit usually filed by a borrower seeking to get rid of their debt because repaying it causes them an âundue hardship.â
The evidence needed to meet that standard is interpreted differently depending on where you live. Some jurisdictions have the judge review a âtotality of the circumstancesâ for the borrower and decide. Others use a less flexible standard, the Brunner Test, that grants a discharge only if the judge answers âyesâ to three questions:
- Have you made a good-faith effort to repay the loans?
- Are you unable to maintain a minimal standard of living while making the payments?
- Is your financial situation likely to persist?
Regardless of which test is used, the bar to getting an undue hardship discharge is high but not impossible to overcome, especially for loans from private lenders. You can click here to learn how getting a private student loan bankruptcy discharge can be easier.
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Alternatives To Chapter 7 Bankruptcy
Its always important to consult with an attorney to understand the specifics of your case and to know whether you might have alternatives to Chapter 7 bankruptcy. Chapter 7 bankruptcy is a serious decision and should not be taken lightly. Sometimes, simpler or less consequential avenues may be possible. Other times, another form of bankruptcy may be more appropriate, such as Chapter 13 or Chapter 11.
Individuals who are engaged in business, such as corporations, partnerships, or sole proprietorships may prefer to remain in business and avoid any type of asset liquidation. In these circumstances, Chapter 11 might be more appropriate.
If you are currently making payments on your debts, a Michigan Chapter 7 bankruptcy may not always be the best option. Bankruptcy is considered a last resort – when there is no possible way to pay back your debts and you face asset acquisition, such as foreclosure, or wage garnishment. Chapter 7 can be a huge relief for these individuals but can cause more problems for those who do not need it. If you are currently paying some of your debts but have missed payment son others, there may be more options, such as debt settlement of debt consolidation.