Families Not Just Students Feel The Weight Of The Student Loan Crisis
For those who do try, though, Iuliano’s research finds that about half the time the person gets some or all of the student loan debt erased. One study he did found that they got help through bankruptcy about 40% of the time. And he says more recent data from this past year show that figure rising to more than 50% of the time.
“So I think that’s really important for bankruptcy attorneys to see that there are judges out there who are willing to grant undue-hardship discharges and that people are much more likely to obtain relief in bankruptcy for their student loan debt,” Iuliano says.
Just this month, a federal judge in New York discharged more than $220,000 in student loans for a borrower. In her ruling, Chief Bankruptcy Judge Cecelia Morris criticized the fact that even many lawyers “believe it impossible to discharge student loans.” She added, “This Court will not participate in perpetuating these myths.”
Robert Lawless, a law professor at the University of Illinois, says, “I think we’re reaching a tipping point with what the bankruptcy courts are doing.” He says he hopes more people are able to get help through bankruptcy.
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.
Havent There Been Cases Where People Still Got Rid Of Their Students Loans Through Bankruptcy
Absolutely. Though difficult, it is still possible to have student loans discharged through bankruptcy by meeting the undue hardship requirement. A 2011 study found that only 1 in 1,000 student loan borrowers who declared bankruptcy even tried to have their student loans discharged. However, those that did succeeded at a rate of 40%.
Section 523 of the Bankruptcy Code does not set out a specific test to determine what qualifies as undue hardship. The federal courts are split on what the appropriate standard should be for discharging student loan debt. The Second Circuit case, Brunner v. New York State Higher Education Services Corporation, established three requirements that determine whether undue hardship applies.
First, the borrower must demonstrate that if forced to repay the student loans, they will be unable to meet a minimal standard of living based on income and bills.
Second, the borrower must be unable to repay for a significant portion of the repayment period.
Third, they must have made good-faith efforts to repay the student loan.
If a bankruptcy court agrees that a borrower meets these three requirements, the court can discharge the student loan debt.
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Consumer Proposal: Student Loans
A consumer proposal is an option to negotiate repayment terms with your creditors through a Licensed Insolvency Trustee, for much less than what you owe today. Student loans can be included in a consumer proposal, and are eligible for release, if they meet the seven-year rule.
Stay of Proceedings When you file personal bankruptcy or make a consumer proposal, one of the major benefits is a stay of proceedings. This prevents your creditors from taking further action to collect on your debts, including student debt.
- If your debts are eligible for automatic discharge in a bankruptcy or release in a consumer proposal, then, once your bankruptcy or proposal is completed, your debts go away. No further payment is required.
- If your student debts are less than 7 years old however, your student loan lender, even the government, is still unable to collect while you are bankrupt or in a consumer proposal. You can opt to continue to make payments against your non-dischargeable student debt while in a consumer proposal. Many find this feasible since their credit card and other debt payments, have been eliminated. As long as your student loan lender files a claim in your consumer proposal, they will received their pro-rata share of the consumer proposal payments you make, like any other unsecured creditor. This dividend further reduces any student loan debt that remains upon completion of your consumer proposal.
Old Federal Loan Programs
There are a few federal student loan programs that are no longer available. But, they still show up online when you do a search for federal loans, so itâs good to know what they are.
Federal Family Education Program
Under FFEL, the loans were made by private lenders, insured by guaranty agencies, and then insured again by the federal government. Basically, if the student defaulted on a loan issued under FFEL, the federal government would pick up the tab and repay the private lender. No new FFEL Program loans have been made since July 1, 2010.
Federal Perkins Loans
This type of federal loan has a low interest rate and is reserved for students with exceptional financial need. No new Perkins Loans have been made since September 30, 2017.
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What Happens If The Court Does Not Wipe Out The Credit Card Debt
If the bankruptcy court finds in favor of the credit card lender , here’s what might happen:
- you will remain liable for the credit card charges
- the court might find that your entire credit card balance is not nondischargeable, not just the payments that went towards student loans
- you will probably have to pay your attorney a separate fee for defending the lawsuit, and
- you may have to pay the credit card company’s attorneys’ fees and costs.
File A Complaint To Begin The Adversary Proceeding
Now that youve filed for your bankruptcy, erasing your student loans takes yet another step. It takes filing an additional lawsuit known as the adversary proceeding. You may understand now why it is so essential to have an attorney working with you on this complicated legal process.
To file for an adversary proceeding, you must file a written complaint which outlines your case. Then your case is litigated in front of the judge who renders a final ruling for full discharge, partial discharge, or no discharge.
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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|
Private Student Loan Bankruptcy Issues
If your student loans are private bank loans like a student line of credit or student credit card debts, then these types of consumer debts are eligible for automatic discharge under the BIA no matter how old they are. This is true for student loans that are not guaranteed by the Ontario or Canadian government. Private student loan debt in bankruptcy is treated like any other unsecured consumer debt. It is automatically discharged with no waiting period. If you are unsure about whether your private student debt qualifies for elimination through a bankruptcy or consumer proposal, book a free consultation with one of our Licensed Insolvency Trustees to talk about your situation.
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What Happens When Your Chapter 13 Case Is Over
At the end of the Chapter 13 plan period, your bankruptcy will likely discharge the remaining amounts you owe on your credit cards and other unsecured debts, even if you don’t pay those claims in full through your Chapter 13 plan.
The bankruptcy case will not get rid of your remaining student loan debt, however. Your lender will recalculate your payments based on your loan balance at the end of your case and set up a new payment schedule. At that time, you may be in a better position to afford your student loan payments, especially after discharging other debts.
Financial Situation Unlikely To Improve
Sometimesespecially during a recessionits hard to find work. But as the economy changes, opportunities improve. Ultimately, its up to you to prove that your current financial difficulties will stay the same going forwardat least throughout your loan repayment period.
Understand that the undue hardship exception exists to protect people suffering from extreme life difficulties, such as being rendered quadriplegic in a tragic accident. While courts frequently grant requests from the permanently disabled, theyre less sympathetic toward people who have made bad educational decisions. For example, the chances wouldnt be nearly as good for a baker who overspent on a culinary program only to find out that the vast majority of available jobs pay minimum wage. The baker wouldnt automatically lose, however. Courts consider requests on a case-by-case basis.
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Philadelphia Bankruptcy Lawyer To Help You Clear Private Student Loans
Are you looking for help with unaffordable private student loans? Generally, most private student loans are not forgiven, so if you are looking for private student loan forgiveness, you will probably be out of luck.
However, individuals can discharge their private student loans in bankruptcy if their loans do not qualify for an exception to discharge. Here are the circumstances under which you can get rid of private student loans. Call us at 625-9600 for your free, no-obligation consultation if you think one of these circumstances may apply to you and your private student loan. If you need a Philadelphia bankruptcy lawyer, the law offices of David M. Offen can help.
What Occurs To Our Credit Standing As I File For Bankruptcy
Its vital that you keep in mind that if you decide tove been recently lacking payment obligations, have used up all or your main readily available financing, or your debt is almost certainly uncontrollable and youre imagining filing case of bankruptcy, their credit ratings score will in all probability currently end up being adversely suffering. Filing for bankruptcy will hit your credit rating, delivering an R9 standing, which will remain on the apply for around seven decades. But bankruptcy proceeding provides you a fresh start, which helps that fix your credit score more quickly than another debt settlement tips.
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Who Can Qualify For A Bankruptcy Hardship Discharge For Student Loans
In a few cases, a debtor can obtain a hardship discharge for a student loan by filing a Chapter 7 bankruptcy case. However, you must prove that paying the student loan will result in an undue hardship to discharge the student loan debt in bankruptcy.
The court has established three elements that a debtor must meet to discharge student loans in bankruptcy. The requirements are referred to as the Brunner test because they are taken from the appellate case of Brunner vs. New York State Higher Education Services Corp. A debtor must prove all three elements before the debtor can get rid of student loans in bankruptcy.
The three elements you must prove to discharge student loans in bankruptcy under the Brunner test are:
- Considering your income and reasonable living expenses, paying your student loan payments makes it impossible for you to maintain a basic standard of living
- Your current financial situation is unlikely to change during the repayment period for the student loan and,
- You have made a good faith effort to repay your student loans given your financial situation.
Courts have differing views on what constitutes a basic standard of living and good faith effort to repay the student loan. However, for a debtor who was repaying student loans on time until the debtor became disabled from a permanent disability, it could be possible to obtain a hardship discharge for a student loan.
If You Did Not Attend An Eligible Education Institution Your Private Student Loan Is Dischargeable As Ordinary Unsecured Debt
For the purposes of bankruptcy, a qualified educational institution is a college or other post-secondary school authorized to participate in the U.S. Department of Education Student Loan program.
26 U.S.C. 25A
Eligible educational institution The term eligible educational institution means an institution which is described in section 481 of the Higher Education Act of 1965 , as in effect on the date of the enactment of this section, and which is eligible to participate in a program under title IV of such Act.
Page 37 of IRS publication 970 describes an eligible educational institution as
any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education. It includes virtually all accredited public, nonprofit, and proprietary postsecondary institutions.
If the school you attended was not accredited or not eligible to participate in the U.S. Department of Education student loan program, the loan you took out to attend that school may be dischargeable as ordinary unsecured debt. Call us to schedule your free consultation and we will help you find out.
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If You Ignore Your Debts
Ignoring your student loan debts is the worst option. Once youre in default on government-held loans which accounted for 90% of all student loans in the 2016-2017 school year the federal government has extraordinary collection powers. It can garnish wages, seize tax refunds or portions of Social Security benefits, and place liens on bank accounts and property.
And unlike other types of debt, there is no statute of limitations on federal student loans. That means that a student loan debtor can be hounded to the grave by the federal bureaucracy or the agency that services loans on behalf of the Department of Education.
Also, after a stipulated number of months of non-payment, a loan can be transferred to a private collection agency. Additional fees and collection costs are then added to the loan balance.
Rather than trying to ignore your student debt problem, its best to take action as soon as possible, even if that means going into bankruptcy.
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.