Undue Hardship And Student Loan Discharge
To succeed in having your student loans discharged, you must demonstrate that not having them discharged would cause you to experience “undue hardship.” For a bankruptcy court to take your side, you will have to meet specific conditions. The problem is that there is no uniform set of conditions.
However, your student loan creditorswhich may include lenders, servicers, and collection agencies, depending on the types of loans you have and how far behind you are on paymentsmust;also meet specific conditions. They must satisfy the preponderance of the evidence standard, a high standard that requires them to prove that their claims against you are valid. They must also prove that your loans meet the conditions of section 523.
What Are Alternatives To Bankruptcy For Student Loans
About 250,000 student loan borrowers file for bankruptcy annually, according to academic research from Villanova University but perhaps you shouldnt be among them.
Before filing for bankruptcy, find out if youre eligible for these alternatives for your student loans:
Rather than filing for bankruptcy, getting an income-driven repayment plan or requesting a temporary stop to payments could help you get back on your feet.
What Is A Private Student Loan
Federal student loans such as Stafford Loans and Plus Loans are guaranteed by the federal government. That means that if you default on these loans, the federal government pays for the loan. By contrast, if you default on a private student loan, the lender is out of luck. To be considered “student loans” the debts must be used solely for qualified higher education expenses.Â;
Qualified higher-education expenses are the “cost of attendance” at an “eligible educational institution.” Eligible educational institutionsÂ; include almost all accredited public and private, including for-profit, post-secondary institutions. That is, virtually all post-secondary institutions such as colleges and vocational institutions.Â;
The “cost of attendance” includes tuition, fees, room, board, books, necessary equipment and materials, supplies, transportation, and even personal computers. For most students, federal student loans will only cover a portion of their necessary expenses. The student may need extra money for room, board, supplies, etc. To cover these additional expenses, students take out private loans on top of their federal student loans.
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Undue Hardship: The Standard For Discharging A Student Loan In Bankruptcy
In order for a student loan to be discharged, you first need to file a bankruptcy case . From there, you have to file a separate lawsuit, called an adversary proceeding, in bankruptcy court. You can bring an adversary proceeding to discharge student loan debt at any time while the case is open, and the case may even be reopened after it is closed in order to file your adversary proceeding.
As with any lawsuit, there is a Plaintiff and one or more Defendants . It is the Plaintiffs responsibility to meet the legal standard of proving undue hardship in court.
The process begins with the Plaintiff filing and serving a Complaint on the Defendants. Each Defendant gets a limited period of time to file an Answer or risks a default judgment against them. From there, both parties move through a pre-trial process called discovery, which allows both sides to trade documents, information, and collect testimony through depositions. At the conclusion of the discovery phase, the court holds a trial and issues a decision.
The goal of the adversary proceeding is to prove to the bankruptcy judge that;requiring repayment of your student loans after bankruptcy would cause an undue hardship on you and your dependents. The problem, however, is that undue hardship means doesnt always mean what we think it means.
How To File For Bankruptcy With Student Loans
The first step to filing for bankruptcy with student loans is locating a lawyer who has expertise in this area. Working with knowledgeable legal counsel can help you navigate the process, although you should know that bankruptcy can cost thousands of dollars and that being able to afford an attorney may mean that youre ineligible for discharge based on undue hardship.
Some student lawyers may offer a free consultation, however, where they can go over your options and let you know if bankruptcy is a viable option for you.
You then have the option of declaring Chapter 7 or Chapter 13 bankruptcy, but you must be able to demonstrate that repayment would impose undue hardship on you and your dependents,according to the U.S. Department of Education.
Proving undue hardship will take place in an adversary proceeding in bankruptcy court, it notes. Further, your creditors or representatives of your creditors may be at the proceeding in order to challenge your claim.
Which type of bankruptcy should you consider? That depends on your ability to work and receive an income, as well as what you hope to achieve. There are two main types of bankruptcy for consumers:
After you file for Chapter 7 or Chapter 13 bankruptcy, you or a bankruptcy attorney will need to file a complaint to start the sequence of events that leads to the adversary proceeding. At that point, you may receive a discharge of all of your student loans, a discharge of part of your loans or no discharge at all.
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How To Pursue Student Loan Discharge In Bankruptcy Proceedings
Meeting the standard of undue hardship is incredibly difficult, so its worth speaking with a;bankruptcy lawyer to see if its even a possibility in your unique situation. However, you may be able to claim it under certain circumstances, such as living with a permanent disability or terminal illness.
Even if you think you meet the standard of undue hardship, its important to understand that discharging student loans involves additional work on top of the standard bankruptcy proceeding.
Its not as simple as filing for bankruptcy, Kantrowitz says. Its an adversary proceeding within a bankruptcy proceeding. That means the lender gets to defend against bankruptcy discharge.
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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.
The Totality Of The Circumstances Test
The Totality of the Circumstances Test, on the other hand, involves bringing to court every single piece of paperwork that could be relevant or helpful to your petition for bankruptcy. The court will review the supporting documents that you will submit and decide if, under bankruptcy laws, undue hardship exists.
Successful bankruptcy proceedings can help you reach your goals. While it is not easy to have your student loan covered by your filing, it is not entirely impossible. For questions on how student loans can be part of the bankruptcy process or if you wish to learn how to file for bankruptcy, contact us. Our bankruptcy law firm in Jackson will help you understand the twists and turns of this legal process. Call us at Rollins Law Firm and consult with a reliable Jackson bankruptcy attorney.
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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.
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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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 .
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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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:
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.
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So What Really Constitutes Undue Hardship
Those cases where borrowers have succeeded in having their student loans discharged are insightful. Specifically, a court might agree that repaying your loans would be an undue hardship if you cant maintain a minimal standard of living for yourself and any dependents, if the hardship will continue throughout the loans repayment period, and if youve sincerely tried to repay your loans before filing bankruptcy.
What does a court consider a minimal standard of living? Again, case law and some common sense can be a guide. It might mean:
- Your income has been below the federal poverty level for several years and doesnt show signs of improving.
- Youre on public assistance or dependent on a family member.
- You have a debilitating mental or physical illness or permanent injury.
- You have a child with a serious illness who requires round-the-clock care.
- Divorce reduced your family income with no hope of it returning to its previous level.
- Disability checks are your only source of income.
- You depend on public assistance to support your children.
- You support a spouse who was seriously and permanently injured in a car accident or who has developed a total disability.
The Basics Of Declaring Bankruptcy
In a bankruptcy filing, the trustee will check if the filer is indeed making payments for certain types of debts. To keep property that serves as collateral, one must be able to pay back secured debts from creditors. Additionally, part of the duties of your bankruptcy trustee is to ensure that you pay all your priority debts, which would often include child support, alimony, criminal fines or penalties, or certain tax debt.
According to bankruptcy laws, most of your other unsecured debt would likely be discharged after bankruptcy. Unsecured debts would usually pertain to your credit card debt, medical debt, or personal loan debt. In general, however, a bankruptcy case would not automatically exempt a bankrupt individual from being asked to pay off his or her student loan debt, even if it is unsecured.;
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Student Loan Discharge In Chapter 13 Bankruptcy
Before we talk about student loan forgiveness in a Chapter 13, lets put some events into context.
Vietnam War protests were a big part of the social upheaval of the late 1960s. That change might seemingly have nothing to do with legal and financial matters like bankruptcy, but it does. Allow us to explain.
Debt Relief Alternatives To Bankruptcy
Bankruptcy has serious consequences. A Chapter 7 bankruptcy will remain on your for 10 years, and a Chapter 13 will remain for seven years. That can make it more expensive or even impossible to borrow money in the future, such as for a mortgage or car loan, or to obtain a credit card. It can also affect your insurance rates.
So itâs worth exploring other types of debt relief before filing for bankruptcy. Debt relief typically involves negotiating with your creditors to make your debts more manageable, such as reducing the interest rates, canceling some portion of the debt, or giving you longer to repay. Debt relief often works to the creditorâs advantage, too, as they are likely to get more money out of the arrangement than if you were to declare bankruptcy.
You can negotiate on your own or hire a reputable debt relief company to help you. As with , there are scam artists who pose as debt relief experts, so be sure to check out any company that youâre considering. Investopedia publishes a regularly updated list of the best debt relief companies.
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