Do Your Private Student Loans Fall Under The Statute Of Limitations
If your private student loans are still protected, there is still some good news. All private student loans are no longer legally collectible once they have expired under the statute of limitations in your state. Unlike federal student loans that have no statute of limitations, private student loans are not guaranteed by the government and can fall under the rules of each state. In that case, while they may be listed as a debt on your bankruptcy filing, there isnt much of a need since the lender can no longer sue you or garnish your wages over those debts. In some states, the statute of limitations is as little as three years. In others, it is 15 years.
As of , federal student loans are no longer guaranteed by the federal government, though they are made directly. All loans taken out before this date are still considered federal student loans and do not fall under the same statute of limitation rules as private student loans.
How Robert Murphy Might Save Us All
This just in student loan debt may about to become far easier to discharge via bankruptcy proceedings, and itll all be due to a 65 year old man named Robert Murphy.
To pay for college for three of his kids, Robert Murphy borrowed several Parent PLUS student loans between 2001 and 2007, racking up $246,500 in debt after interest accrual.
When he lost his job in 2002 and found himself unable to get a new assignment, Robert knew he was in big trouble.
After running through all his retirement savings and having his home foreclosed on, Robert and his wife have been left living on $15,000 in annual income from her Teachers Aide salary.
Its a sad story, but theres a silver lining, because Robert Murphy appears poised to win an appeals case in a Boston federal court who could rule in his favor and expunge every cent of the debt hes racked up.
Does Bankruptcy Cover Student Loan Debt
If you file for bankruptcy, it might be possible to obtain a partial or full discharge federal or private student loan debt, however, it can be extremely difficult to discharge student debt because you must prove undue hardship to qualify. Essentially, you must explain to the court why you cannot feasibly repay your loans.
Reasons that might qualify for undue hardship include having a disability or medical issue that is preventing you from working, living on a fixed income without the possibility of a salary increase, or family-related issues that are keeping you from earning a living. If you want to attempt to discharge your student loans through bankruptcy, you need to file a formal complaint with the bankruptcy court and prove that repayment would cause undue hardship to you.
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Which One Is Better
Most borrowers do not have a right to choose which option they want. In most cases, the possibilities are noted in loan terms. You might qualify for deferment, while forbearance can be inaccessible or vice versa. First, you need to check your loan agreement.
Second, each option is granted under specific rules. For example, if you have already graduated, it can be hard to get a deferment.
Besides, both options have advantages and disadvantages. On the bright side, you do not repay the debt for a few months and focus on your finances. During this time, you can think of a way out of the debt struggles. In this sense, deferment can be more desirable as it can last for four years.
On the other hand, during the period you do not repay the debt, loan interest payments will continue accumulating. Hence, you might end up paying more for your student loans in the long term. We understand that these options do not reduce your debt obligations like private student loan forgiveness should do, but they are worth trying as you do not have many opportunities.
What Outcome To Expect
If you pursue student loan discharge in bankruptcy, there are three possible outcomes.
- Full discharge: The court may decide that your debt will be fully discharged, and you will not have to make any more payments.
- Partial discharge: A portion of your debt may be discharged, but youll be responsible for the rest based on your individual circumstances and ability to repay. For example, a court may decide that you cannot repay your private student loans and discharge them, but you may still have to repay your federal loans, because youd be able to afford to cover them under an alternative payment plan.
- No discharge: You may be required to repay the full balance of your loans. However, the court may adjust other aspects of your loan, such as your interest rate, if it determines that such a change would make repayment financially possible for you.
Its important to keep in mind just how few people who file for bankruptcy will end up with one of the first two outcomes. As we noted above from a 2011 study, just 0.04% of people who declared bankruptcy and sought to have their loans discharged received a partial or full discharge of student loan debt.
Plus, even a successful discharge of student loan debt carries the long-term effects of a bankruptcy on your credit. The bankruptcy process isnt for everyone, and its important to understand the details before taking any action.
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Which Undue Hardship Test Will You Face
I cant answer that question with any shred of accuracy, and to get an accurate answer, Id recommend that you consult with a local bankruptcy attorney.
Courts in different parts of the country use different tests, but it appears to be up to the judges discretion on how this stuff is handled.
And to add to the confusion, some courts take the test as an all or nothing deal where you either qualify for having your entire loan discharged or fail to qualify for having any of it discharged, while others will allow you to discharge some portion of your loan depending on the results of the test.
However, to help give you an idea of what youll be facing when trying to get approval for an undue hardship discharge, heres a breakdown of the most common undue hardship tests in use today:
File For An Adversary Proceeding
Whether you hire a lawyer or go it alone, youll need to file for an adversary proceeding, which is a hearing to determine the possibility of discharging your student loan debt. Youll have a hearing in bankruptcy court and your creditors are required to be present. At that hearing, youll need to provide evidence that you qualify for undue hardship standards.
This is part of the process that is unique to bankruptcy and student loans. Note that you cant proceed with a student loan bankruptcy without this step.
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Talk To A Bankruptcy Lawyer
Need professional help? Start here.
If You Need Additional Student Loan Help
If youre struggling with your student loan debt, first speak with your servicer or lender to:
Discuss repayment options.
Take a temporary payment pause.
Temporarily reduce your monthly payments.
If your problem is with your lender or servicer or youre not getting the help you need, look for a legitimate student loan help organization that offers counseling. Consider these vetted resources for student loan help they are established organizations with verified histories:
Student loan help resource
Advice on debt settlement, bankruptcy, default and forgiveness. Licensed in Missouri and Illinois.
Many of these organizations offer advice for free. In some cases, you may need to pay a fee, as with a certified nonprofit credit counseling agency or if you hire an attorney.
None of the organizations above calls, texts or emails borrowers with offers of debt resolution.
Offers of help that you have not sought out are likely to be scams. While its not illegal for companies to charge for services such as consolidation or enrollment in a payment plan, those are steps you can do yourself for free.
Avoid any debt relief companies that demand money upfront.
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Can You Transfer Private Student Loans To Federal Loans
Since private loans dont offer as many benefits, you may wish to transfer private student loans to federal loans. But private loans are entirely separate from federal loans. Once your debt is in a private lenders hands, it stays that way.
But some private lenders may offer similar benefits to federal loan programs. Each lender is different, so before taking out a private student loan, be sure to compare lenders and their different repayment plans to see who offers the most generous terms.
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Health Professional Loan Repayment
Federal loan forgiveness programs might not be accessible for private borrowers. However, there exist different organizations or states which offer loan repayment programs for private debtors. One of such programs is NHSC loan repayment available to health professionals.
Loan repayment programs can involve student loans from private lending institutions, but not all will qualify. Refinancing and consolidation loans are also eligible if they only cover the educational debt.
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Why Cant People Get Rid Of Student Loans Through Bankruptcy Now
Although not impossible, discharging student loans in bankruptcy is difficult. Due to a 1976 law, student loans are not treated during bankruptcy proceedings like other forms of debt, such as credit card debt or auto loans. This policy stems from a federal commission on bankruptcy laws, which heard testimony that claimed the easy discharge of educational loans in bankruptcy could undermine federal student loan programs. Congress was concerned that students might borrow thousands of dollars from the federal government, graduate, declare bankruptcy to have their student loans discharged and never repay their educational debt.
In an extension of the Higher Education Act of 1965, Congress passed the 1976 law, which made borrowers wait five years after the first student loan payment was due before they could have the loan discharged through bankruptcy. Congress created an exception that allowed for discharge within that five-year period if the loan caused undue hardship.
Currently the undue hardship exemption is the only way to have student loans discharged in bankruptcy that is a much higher threshold than many other common forms of debt. This higher threshold includes both federal student loans and, since 2005, most forms of private student loans.
What Is The Standard For Discharging Student Debt In Bankruptcy
Generally, the standard to discharge student loans in bankruptcy is a showing that the payment of the debt will impose an undue hardship on you and your dependents. Generally, most courts will use the Brunner test to determine if there is an undue hardship imposed on you and your dependents.
The Brunner test has three main factors that courts will focus on:
- Whether you can maintain a minimal standard of living for yourself and your dependents if you must repay the student loan
- Whether you and your dependents have circumstances, above and beyond normal circumstances, that will extend through at least a significant portion of the loan and
- Whether you have made good faith efforts toward repaying your student loan.
We will go into further detail about each of these factors below.
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The Latest News About Student Loan Bankruptcy
In the past it has been difficult to get a private student loan discharge in bankruptcy, but several recent court cases have proved that it is possible.
One notable case came to the U.S. Court of Appeals for the 2nd Circuit from the U.S. Bankruptcy Court for the Eastern District of New York. In the original case, U.S. Bankruptcy Judge Elizabeth Strong concluded that private student loans were not part of the Bankruptcy Code Section 523, which states that any obligation to repay funds received as an educational benefit, scholarship or stipend is typically not eligible for discharge.
She maintained that the section of code did not define student loans or educational benefit, and that referring to a loan as an educational benefit would be an unconventional way to discuss a loan. The appeals court affirmed the lower courts ruling, arguing the U.S. Bankruptcy Code did not prohibit the discharge of a private student loan in bankruptcy.
Some see the 2nd Circuit decision as hope for a loosening of the criteria in private student loan bankruptcy discharge. However, in June 2021, the U.S. Supreme Court refused to hear the case of a Texas woman who sought to have her private student loans discharged under a different standard so it appears that the undue hardship requirement may still be in effect.
How Will Student Loan Bankruptcy Affect My Credit Score
Unfortunately, student loan bankruptcy will ultimately carry with it some serious consequences, and will likely negatively affect your credit score. Even if bankruptcy seems like the best choice for you right now, you should still heavily consider the long-term repercussions that will impact your credit over the next several years. In the case of a Chapter 7 bankruptcy, it takes only about 90 days to forgive the debt tax-free. While the process may seem like its over, there is still more work to do to make up for the impending hit to your credit score.
Building credit, especially for younger borrowers, is not easy when bad credit gets in the way of owning a credit card. You can find secured credit cards with lower annual fees and payment alerts. You are less likely to be denied a secured credit card than a standard credit card, so repairing your credit doesnt feel like an impossible goal.
Chapter 13 And Student Loans
A case under chapter 13 is often called reorganization. In a chapter 13 case, you submit a plan to repay your creditors over time, usually from future income. These plans allow you to get caught up on mortgages or car loans and other secured debts. If you cannot discharge your student loans based on undue hardship in either a chapter 7 or chapter 13 bankruptcy, there are still certain advantages to filing a chapter 13 bankruptcy. One advantage is that your chapter 13 plan, not your loan holder will determine the size of your student loan payments. You will make these court-determined payments while you are in the Chapter 13 plan, usually for three to five years. You will still owe the remainder of your student loans when you come out of bankruptcy, but you can try at this point to discharge the remainder based on undue hardship. While you are repaying through the bankruptcy court, there will be no collection actions taken against you. You may have other options, depending on how judges decide these cases in your judicial district. For example, some judges allow student loan borrowers to give priority to their student loans during the Chapter 13 plan.
Debts Owed Directly To Schools For Tuition
Since the exception to discharge applies to an educational benefit, overpayment or loan, debts owed directly to a school for something other than the receipt of loan funds, grants or scholarships should be dischargeable. For example, tuition, book or room and board fees owed a college should be dischargeable.
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Should You File Student Loan Bankruptcy
While student loan bankruptcy discharge is possible, its likely only worth exploring in the following instances:
Youve exhausted all payment options. If you have federal student loans, see if you can afford income-driven repayment or qualify for a loan forgiveness program. Private student loans have fewer options for struggling borrowers. Still, call your lender or servicer and ask whether they can temporarily lower your payment or interest rate.
Youre past-due on your student loans. If you haven’t missed payments, youll likely have a hard time proving your loans are causing undue hardship. Bankruptcy makes more sense in instances of student loan default especially if you have defaulted on private student loans and your lender is suing you in an attempt to garnish your wages.
You have no pathway out of default. Federal student loans have options to get out of default, including loan rehabilitation and consolidation. If youve defaulted on a loan multiple times, you may have exhausted these options.
These situations are no guarantee a bankruptcy court will discharge your student loans, but it has happened for some borrowers. A study published in the American Bankruptcy Law Journal in 2012 found that, in 207 bankruptcy cases in which debtors included their loans, 39% won full or partial student loan discharges.