Minimal Standard Of Living
The first factor that will be taken into consideration is your ability to maintain a minimal standard of living for yourself and your dependents given your student loan debt and monthly payments. This does not mean that only people living in poverty with no possessions will satisfy this requirement. Courts will look at your monthly income and your monthly expenses including the amount necessary to repay your student debt. The purpose of this is to determine the reasonableness of your budget as a whole.
A minimal standard of living includes, among other things, furnished and maintained shelter, basic utilities, food, clothing, vehicles, insurance, and even the ability to pay for a source of recreation. Again, the court will look at the reasonableness of each of these expenses.
This prong can be tough to meet for individuals with federal student loans due to the fact that there are income-driven repayment plans available, which can greatly lower monthly payments. If your monthly student loan payment is $0 or something close to that, it is hard to argue that such a small amount is preventing you from sustaining a minimal standard of living. However, it is possible for an individual to have unaffordable payments even while on an income-driven repayment.
Courts may also consider the individuals spouses income in addition to the individuals income when determining the minimal standard of living even if the individuals spouse has not declared bankruptcy as a co-debtor.
Preparing For The Adversary Proceeding
The court will look at a number of factors in determining undue hardship. One factor it will likely consider is whether you made a good-faith effort to repay your loans. That good-faith effort may include trying to rearrange your payment schedule. If you havent already, contact your loan servicer and ask about alternative payment plans. You could end up reducing your monthly payment amount or even postponing making payments altogether.
If your lender refuses to adjust or pause your payments, document whom you spoke to and the date and time of the call. You might need to use this information as evidence in court.
You may also need to present information on your income, budget and debt burden during the adversary proceeding. In most cases, youll have already collected this material as part of the overall bankruptcy filing process.
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.
Student Loans And Taxes
Various forms of educational debt relief may be available to you under the 2017 Tax Cuts and Jobs Act. However, none spell forgiveness. For example, the Act provides tax cuts for educational costs.
However, if youve applied for Sallie Mae complete forgiveness because youre disabled, youll be happy to learn that under the Act the forgiven loan no longer counts as income.
Several other proposed changes to laws affecting student loans are in the works. For example, the cap for income-driven repayment plans may increase from 10 percent of discretionary income to 12.5 percent. So keep an eye on the news for updates on what passes and what doesnt.
Sallie Mae Not Opposed To Bankruptcy Relief For Student Loans
A college student holds up a t-shirt reading ‘bail out schools, not banks.’
Alan Collinge, founder of StudentLoanJustice.org , and Sallie Mae on the same page? Can such a thing be? Well maybe not exactly, but it may be that they are not as far apart as you think. A couple of weeks ago I heard from Martha Holler, Senior Vice President, Corporate Marketing & Communications for Sallie Mae.; Being a mere $193 billion company, they don’t have the kind of media access a famous activist like Alan Collinge has, so they wanted to talk to me about how to get their story across on the forbes.com platform.; Here is the email from;Ms. Holler;that got us going:
I read Alan Collinges blog and your comments about it with interest and would welcome the opportunity to discuss student loan debt and recently proposed legislation. I will be in New York on April 24 with Sallie Mae President & COO Jack Remondi and SVP of Public Policy Sarah Ducich and would love to meet. Would you have 45 minutes to meet with us?
As we discussed the arrangements for the meeting,; my conscience was stricken with the notion that I was becoming guilty of impersonating a journalist.; I was afraid that this email might cause them to cancel, but I sent it anyway in the interest of full disclosure:
We supplemented the team with John Whalen, an Interlock intern, who was immensely helpful, not least in handling much of the driving including especially the city part.
Sallie Mae On Increasing College Costs
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What These Dischargeable Loans Look Like
Lets look at those section that describe what an eligible education institution or qualified education loan really is.
According to this bankruptcy code section the loan may not be automatically discharged:
unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtors dependents, for
an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or
an obligation to repay funds received as an educational benefit, scholarship, or stipend;
any other educational loan that is a qualified education loan, as defined in section 221 of the Internal Revenue Code of 1986, incurred by a debtor who is an individual;
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.
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.
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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Consider Consulting With An Attorney
You’ll find the Brunner test or other standards applied to Chapter 7 and Chapter 13 debtors in lots of court cases. Knowing how the court in your jurisdiction ruled previously could help you determine the likelihood of your success.
If you have a substantial amount of student loan debt, it might be worthwhile to consult with a local bankruptcy attorney. The chances are that if you decide to litigate either the dischargeability issue or assert a defense to the loan in bankruptcy court, you’ll need an attorney to represent you.
Proving Undue Hardship In Student Loan Bankruptcy
For now, the burden is on borrowers to establish their qualifications for undue hardship that satisfy the court theyre in front of. While it might seem easy to prove financial dire straits, that isnt always the case, according to Michael Fuller, a bankruptcy attorney.
You have to be in a somewhat extreme situation, Fuller said. It is often people who are sick, people who are on disability or people who have an extreme financial situation that is not going to improve.
For instance, Fuller said he recently worked pro bono with a single mother of four kids who owed several hundred thousand dollars on student loans. While she was employed, the woman was unable to make payments on her loans. When filing bankruptcy on her student loans, Fuller was able to demonstrate the debt caused undue hardship for her and her dependents and had her outstanding loans discharged.
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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.
Private Student Loans Can Now Be Discharged In Bankruptcy But Consider The Alternatives First
In July 2021, a federal court ruled that private student loans can be discharged in bankruptcy. But student loan refinancing may offer a better way to manage your college debt without significantly damaging your credit score.
Bankruptcy is a legal proceeding that provides financial relief for consumers who cannot repay their debt. Many types of debts can be forgiven in bankruptcy, including credit card debt and medical debt. But certain types of educational benefits, such as federal student loans, cannot be discharged in bankruptcy.
In previous bankruptcy cases, it was unclear whether private student loans were dischargeable loans until July 2021, when a federal court ruled that private student loans are not considered qualified higher education expenses under the U.S. Bankruptcy Code.
Discharging private loans in bankruptcy may provide much-needed respite for debtors who can’t meet their debt obligations, but bankruptcy has a lasting impact on an individual’s finances and credit score. It’s important to consider the alternatives before resorting to bankruptcy.
If you’re having trouble making your private student loan payment, then refinancing may be the answer. By refinancing your college debt to a lower rate, it may be possible to reduce your monthly payment so you can avoid defaulting on your loans.
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Popular Misconceptions Theres Nothing You Can Do About Student Loan Debt
One of the biggest misconceptions about student loans is that it is impossible to have these loans discharged in bankruptcy, she points out.
Most attorneys will even tell you that. While the path to discharge is challenging, it is possible and I accomplished this for myself, she says, adding, Do not trust student loan resources, and even student loan lawyers, who tell everyone to forget about filing bankruptcy. Either they are poorly informed, or have an agenda which is not in the debtors best interest.
Procedure To Discharge Your Student Loan In Bankruptcy
If you want to try to discharge your student loan in bankruptcy, you must file an adversary proceeding to determine dischargeability with the bankruptcy court. But that’s not all. You’ll need to present evidence and prove to the court that payment of your loans will cause an undue hardship. It’s likely that you’ll need to retain an expert to testify about your ability to be gainfully employed in the future.
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Just Because A School Offers Loans They May Still Be Discharged
Here is an example of a school which is offering Sallie Mae SLM Financial loans to pay for flight training. Silverhawk Aviation Academy says, Silverhawk Aviation Academy is one of only a handful of helicopter schools who is very fortunate to be able to continue to offer SLM Financing to our qualified students for their flight training loans.
The Sallie Mae Smart Option Student Loan® is an ideal solution for students who still need funds after they have maximized free money and federal loans. With this loan, students can borrow up to the full cost of their education, less other aid received.
As of the publication of this article Silverhawk Aviation Academy is not on the list of accredited schools from the Department of Education.
Or how about TekSeekers IT Training. This company says students can apply for a technology training loan through Sallie Mae SLM Financing but they are not on the list either.
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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Where To Start When Applying For Forbearance
If you want to apply for forbearance, get in touch with your lender. See what options are available and what the process is to apply. Its important to know about time limitations or good faith payments, particularly when dealing with Sallie Mae.
Additionally, while your payments are on pause, its likely interest will continue to accrue. This will add even more to your student loan balance.
Before choosing this option, weigh the costs of interest and the total of any good faith payments. Also, be mindful that there is a finite amount of months to put off payments. So, you want to make sure you really need it. If you do, forbearance can certainly help.
Consider Hiring A Lawyer
While you dont technically have to go through a lawyer when filing bankruptcy on student loans, bankruptcy can be an incredibly complex process. It requires determining which type of bankruptcy youll file for and submitting an extra lawsuit, called an adversary proceeding . Going through it all alone could mean extra time, incorrect filings and, possibly, a lost case.
However, one thing to consider is that hiring a student loan lawyer could actually hurt your chances for discharging your student loans in bankruptcy, according to Fuller. Thats because some judges may feel that if you can afford fees for an attorney, then you can afford to be paying back something on your loans, which would disqualify you from experiencing undue hardship.
If you dont know a lawyer, dont worry. You can find one through the American Bar Association. You might be eligible for a lawyer at no cost to you through the Legal Services Corporation, an independent nonprofit created by Congress that offers financial support for civil legal aid to low-income Americans. Just make sure you pick a lawyer that specializes in bankruptcy and has very good reviews.
If you opt to handle your case yourself, a recent study by the American Bankruptcy Journal noted that debtors without a lawyer were just as likely to have their student loans discharged by a bankruptcy judge as those who worked with an attorney.
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