How To Qualify For A Federal Student Loan Bankruptcy Discharge
In 2019, its never been easier to qualify for a Federal Student Loan Bankruptcy Discharge. Why? Because all sorts of recent legal battles have set precedents for discharging Federal student debt in bankruptcy.
And back on February 21st, 2018, one of the biggest signs of a sea change occurred when President Trumps Administration announced via Secretary of Education Betsy DeVos that they were looking for public comments on bankruptcy standards for student loan debt.
That may seem odd coming from the worst student loan couple in the countrys history, after all, this is the same pair who planned on scrapping the Public Service Loan Forgiveness Program and who have already attempted to kill off the Borrowers Defense Against Repayment Program, but perhaps theyve seen the light on the bankruptcy issue?
The conventional wisdom to current day has been that Federal Student Loans cannot be discharged via Bankruptcy, but the reality is that it is possible to wipe out your Federal loans by filing for Bankruptcy, its just extremely difficult .
In fact, this is one of the only cases where its easier to get rid of Private loans compared to Federal loans, and if youre interested in that, then be sure to check out my 2018 Guide to Private Student Loan Bankruptcy Discharge.
Your Student Loan Payments Could Increase
If you file for a Chapter 13 bankruptcy and your student loans are not discharged, theres a possibility you could end up paying more than you were before. Under Chapter 13, you agree to make certain payments to your creditors. So, if the court rules that your payments must equal 5% of your debt, Sommer says that means that youll have to pay 5% on your student debt, too.
Bankruptcy And Student Loan Debt
In most cases, student debts cannot be discharged in bankruptcy, but there is one exception.
Student loan debt will not be discharged in most Chapter 7 or Chapter 13 bankruptcy cases. If you can show that repaying your student loans will cause you undue hardship, you may be able to discharge them in bankruptcy.
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Process For Discharging Student Loans
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:
When Bankruptcy Doesnt Discharge Student Loans
Even if bankruptcy cannot discharge your student loans, it may still be the right option for you.
People struggling with student loan debt often have additional outstanding debts ranging from credit card debt to unpaid mortgages. Bankruptcy can discharge these other debts, freeing up more funds to pay down your student loans.
If you borrow money, you have a moral and legal obligation to pay that money back. Students and parents should take the time to do cost-benefit analysis and long-range planning before accepting student debt of any amount.
But remember that bankruptcy laws were written to give people a second chance. If your debt load is overwhelming and you dont see a reasonable way out, bankruptcy is a legitimate debt-relief option. Even if you dont meet the criteria for student loan discharge, it might be possible to discharge other debts, freeing up resources to allow you to pay the student loans.
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Student Loans And Bankruptcy: A Quick Introduction
Discharging student debt in a bankruptcy isnt impossible. However, it is really hard. The rules for student loans are different from most other forms of debt.
There are two prevailing notions among borrowers when it comes to student loans and bankruptcy. The first is that student loans work just like credit cards if you get too far over your head, you can declare bankruptcy and get a fresh start. The second is that it is impossible to discharge student loan debt through bankruptcy.
The reality is that neither is right.
Using Bankruptcy To Solve Student Loan Problems
The Ultimate Guide for Student Loan Borrowers and The People Who Love Them
For years, bankruptcy lawyers have been saying you cant use bankruptcy to protect you from student loans. This has been repeated by the media and student loan servicers for so long that everyone thinks its true.
The reality is very different. In fact, bankruptcy can be a useful tool for dealing with your student loans.
Discharge of student loans in bankruptcy is not impossible but, because weve been trained to believe that the requirements to do so are too demanding, very few people even try. For the right person, however, the discharge of student loans in bankruptcy case be a powerful tool.
Even if your student loans arent going to be wiped out in a bankruptcy case, you may decide file in order to:
Attack the validity of the ownership, enforceability or balances on private student loans
Adjust monthly payments on federal and private student loans
Cure defaults on private student loans
Resolve other debt issues to make it easier to afford student loan payments
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Federal Loans And Hardship
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.
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 .
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Dealing With Your Car
A lot of people don’t realize how many different options filing Chapter 7 in Minnesota gives them when it comes to dealing with their car. While you can’t simply return your car to the creditor in order to get out of your car loan outside of bankruptcy, you can surrender your vehicle as part of your Minnesota bankruptcy case and have your responsibility on the loan discharged. Of course, if you are happy with your car, you can also keep it even after filing bankruptcy in Minnesota. In order to do so, you will have to either agree to continue making payments according to the terms of your loan or redeem the car by paying only the value of the vehicle to the creditor and discharging the remaining balance. Keeping everything the same does require you to complete a reaffirmation agreement which has the effect of removing your car loan from the pool of debts that is getting discharged. Since that means you will be personally responsible for paying the loan in full, no matter what happens even after your Minnesota bankruptcy case has been filed and your discharge entered, you should only consider this option if you know you can make your car payment every month without issue. The second alternative, called a redemption, does require you to make a lump sum payment to the creditor, so it’s an option only if you are able to raise or borrow enough money after filing bankruptcy in Minnesota to make this payment.
What Other Help Is Available
Federal student loans offer a number of alternative repayment plans that make it easier to manage student loans. Examples include a graduated repayment plan which is modeled to start with low, affordable payments that increase as your earning potential is expected to increase an extended payment plan which stretches payments out over 25 years income-based or income-contingent repayment plans which set your payments at a percentage of your discretionary income with a 20 or 25-year term and pay as you earn plan, which ties your payments to a percentage of your income. The Office of Federal Student Aid has an excellent website that explains these options in much greater detail:
Federal student loans can also be consolidated into one single set of loans, with one single payment to simplify repayment.
Private student loans are not required to offer any alternative payment plans or assistance to borrowers. However, if you are having trouble paying private student loans, you should always ask your lender if they have any options available to help.
The National Student Loan Data System is a central website that tracks all student loans. You can contact the National Student Loan Data System here to get a free breakdown of all of your outstanding student loans.
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Erasing Student Loan Debt Under The Brunner Test
The Brunner Test is a formula devised in the Federal case, Brunner v. New York State Higher Education Services Corp, where the debtor with the student loans shows the court that:
Under the Brunner test, if you can prove undue hardship, your student loans can be completely discharged. Again, being approved for a student loan bankruptcy is not easy, and many people cannot meet this burden of undue hardship, but only a qualified attorney can let you know what your chances are of having your student loans erased with a student loan bankruptcy.
Once you file your student loan bankruptcy case, student loan bill collectors are automatically barred from contacting you any longer regarding them?buying you necessary time to work with a specialist who can erase those student loan debts or put you in touch with professionals who can help consolidate your defaulted loans. ?
What Debts Cannot Be Discharged In Bankruptcy
The following debts cannot be discharged in either a Chapter 7 or a Chapter 13 bankruptcy case. If you file Chapter 7, you will still owe these debts after your case is over. If you file Chapter 13, these debts will either be paid in full during your plan, or the balance will remain at the end of your case.
Nondischargeable debts include:
- Unlisted debts, unless the creditor had knowledge of your bankruptcy filing.
- Recent income tax debt and other tax debt.
- Fines imposed for violating the law.
- Student loans, unless you can show that it will cause a hardship for you to repay them.
- Debts you owe under a divorce decree or settlement.
In a Chapter 7 and 13 case, a creditor may object, and a judge may agree, to theseadditional debts being discharged:
- Debts incurred by embezzlement, fraud, or larceny.
- Certain credit purchases made within 90 days or cash advances made within 70 days of filing.
- Restitution or damages awarded in a civil action for willful or malicious injury to a person.
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Criteria Based On The Student
The student who is using the student loan:
- Must be enrolled on at least a half-time basis.
- Is seeking a degree, certificate or other recognized educational credential.
- Cannot be a dual enrollment student. A dual enrollment student is a student who is simultaneously enrolled in an elementary or secondary school in addition to a college or university.
Minnesota Legal Aid Organizations
Since not everyone who needs a lawyer’s assistance for their Chapter 7 bankruptcy in Minnesota can afford to hire one, Minnesota legal aid organizations help low income residents. If you don’t think the free clinics offered by the bankruptcy court are enough to help you make sure you get a true fresh start after filing for bankruptcy protection, reach out to one of the organizations providing legal aid in Minnesota to find out if you qualify for free legal assistance.
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Should You Wait To File Bankruptcy In Minnesota
Bankruptcy is a last option for many people. Before making a decision to file, most people will struggle with their rent or mortgage and other bills. Due to ongoing stress, mistakes will occur, such as paying a credit card bill instead of an electric bill or paying the monthly balance on a personal loan instead of their home owners association fee. They may even skip one or two mortgage payments to pay an unsecured debt.
People may also undertake second mortgages or withdraw from their retirement account to pay their unsecured debt. In these instances, people are avoiding the inevitable and, unfortunately, just making matters worse. Further, if youve missed a mortgage payment or car payment, then you may be looking at a foreclosure or repossession. This is especially true if youve missed multiple payments.
Other people decide to enter into consolidation loans with companies that promise to help them with their debt by negotiating with their lenders and paying a monthly payment. What these companies arent telling you is that they cant make every creditor agree to that payment and if you miss a payment, then youre still liable for that debt and liable to lawsuits and any judgments that are entered.
The Undue Hardship Tests
Currently, there are four main Tests being used to determine whether you truly do face an undue hardship, and whether or not you deserve to get your loans discharged.
These four tests are called:
- The Brunner Test
- The Johnson Test
- The Totality of Circumstances Test
Each test looks at similar things to determine how badly your student loans are impacting your quality of life, attempting to figure out if your loans will actually lead to your death, or are merely inconveniencing your ability to pursue pleasure.
Your job under any of these tests will be to prove that you may die if youre forced to keep paying back your student loans, or that at least youre be miserable, poor, and mostly unable to afford eating anything other than top ramen for the rest of your life.
What Happens To Student Loans In Chapter 7 Bankruptcy
Chapter 7 bankruptcy usually results in a liquidation of your assets. To file for Chapter 7, your current monthly income must be below the state median. If its not, you need to pass a means test to determine whether you have disposable income to pay the debt under a Chapter 13 plan. Unlike Chapter 13, Chapter 7 has no repayment plan. Some debts are fully discharged, while others are not.
|Chapter 7 in the news|
|A January 2020 bankruptcy court decision discharged the $221,385.49 student loan debt of a U.S. Navy veteran, stemming from his Chapter 7 proceeding. However, the possible watershed ruling was ultimately appealed by the borrowers loan servicer.|
Heres what happens to student loans when you file Chapter 7:
Lenders stop hounding you for money. Upon filing your Chapter 7 bankruptcy petition, an automatic stay is granted like it is with a Chapter 13 filing.
Theres no automatic student loan debt discharge. Under Chapter 7 bankruptcy, your student loans are not automatically discharged. To have your student loans considered for discharge, you can file a complaint to determine dischargeability, which initiates whats known as an adversary proceeding.
The process is quite difficult and rarely happens, but it is possible. According to a study published in 2011 that is still cited often, 40% of those who initiated the adversary proceeding were able to discharge all or part of their student loans.
Under the Brunner test, you must show that: