Changes To Bankruptcy Law
Over the years, different members of Congress have introduced legislation to make student loans dischargeable in bankruptcy like other types of debts. But, unfortunately, that legislation has gone nowhere.
And while America waits for Pres. Joe Biden to forgive student loan debt, another proposal to change the treatment of student loan debt in bankruptcy was introduced, this time by Sen. Elizabeth Warren. Sadly, like the legislation before it, the Consumer Bankruptcy Reform Act of 2020 has yet to go anywhere.
The Undue Hardship Exception
To have your student loan discharged in bankruptcy, you must demonstrate that it would be an undue hardship for you to pay them. The test for determining undue hardship varies between courts. Also, many courts look at the undue hardship test as all or nothingeither you qualify to get the whole loan discharged, or you don’t. Other courts have discharged a portion of a debtor’s student loan.
Regardless of the test used, most courts are reluctant to discharge a student loan. However, if you have very low income or your loan is from a for-profit trade school, you might have a better chance.
Why Student Loan Debt Is Treated Differently
Over the years, Congress has decided that good reasons exist to stop people from getting rid of their debts by declaring bankruptcy. For instance, Congress has made child support, alimony, certain tax debts, and criminal restitution non-dischargeable. The need to protect those types of debts from discharge is obvious. But after the federal government decided to start offering federal loans, Congress chose to do the same for student loan debt.
Student loans became non-dischargeable in the late 1970s when Congress added Section 523 to the U.S. Bankruptcy Code. The thinking was that the U.S. Department of Education should be protected from borrowers racing to bankruptcy after graduating. Over the years, Congress has amended Section 523 to protect different types of federal loans , and Federal Perkins Loans) and private loans.
Currently, Section 523 protects a student loan from discharge absent undue hardship if:
- it was made or insured by the federal government
- it was made under a loan program funded by the federal government or a nonprofit
- it is a qualified education loan according to the IRSs criteria
All federal student loans are protected from student loan bankruptcy discharge. However, some private loans may not be. You can read more about discharging private loans here.
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How To File For Student Loan Bankruptcy
Discharging student loans comes at the end of the bankruptcy process. Heres what you need to do first.
1. Find a bankruptcy attorney. While an attorney isnt absolutely necessary, working with one especially one with at least some student loan experience can help you navigate the complicated process more smoothly.
Filing for bankruptcy costs anywhere from several hundred to several thousand dollars, depending on your location and the cases complexity. Plus, there are attorney fees for the adversary proceeding required to get student loans discharged.
However, you likely wont qualify for student loan bankruptcy discharge if you can afford an attorney, says Michael Fuller, a Portland, Oregon-based consumer attorney who takes on student loan bankruptcy cases pro bono.
Here’s where to find free legal help:
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Legal Services Corporation: Search for local legal aid by ZIP code.
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Student Loan Borrower Assistance: This nonprofit has a list of legal aid organizations by state.
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Massachusetts Student Loan Bankruptcy Assistance Project: A group of attorneys and law firms offering free representation for adversary proceedings.
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Oregon Student Debt: A pro bono student loan organization.
2. File for Chapter 7 or 13 bankruptcy. You must file for bankruptcy before your student loans can be discharged. Your attorney can help determine the type of consumer bankruptcy thats best for you: Chapter 7 or Chapter 13.
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Can Student Loan Debt Be Discharged Through Bankruptcy
Current estimates place the total amount of student loan debt at over $1.2 trillion, with over 7 million borrowers in default. The average amount owed by a recent college graduate is between $26,900 and $32,600, for public and private institutions, respectively. While there are numerous repayment plans, the average monthly payment for a student-loan borrower is $200 and $300. For many former students who entered college or university with high hopes of landing a high-paying job, only to have those hopes dashed by the current job market, student loan debt is an untenable expense.
The benefit of filing for bankruptcy is to wipe out debt and begin creating a new financial future. However, not all debt is dischargeable through a Georgia bankruptcy. In fact, the general rule is that student loan debt, whether it is held by a public or private lender, is not dischargeable through either a Chapter 7 or a Chapter 13 bankruptcy.
While most filers will not be able to free themselves of student debt by filing for bankruptcy, there is an exception to this general rule. If a filer can establish that repaying their student loans would cause them to suffer an undue hardship then courts may get rid of student loan debt. Georgia courts consider the following factors when considering whether paying student loan debt poses an undue hardship on a filer:
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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.
Still, its wise to avoid bankruptcy whenever possible. Consider student loan consolidation as a way to simplify education loans, and try using debt settlement to minimize other types of debt.
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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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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Questions For Your Attorney
- Does my state require me to meet the undue hardship test or does it use a different standard?
- Will a mental disability qualify as a disability for undue hardship purposes?
- What if I dont qualify for a discharge? Is there a chance the court will reduce my student loan payment?
- If I lose the adversary proceeding and my circumstances change for the worse, can I file another adversary action?
Will Filing For Bankruptcy Affect My Job
You cant be fired for declaring bankruptcy. Your employer must have a valid legal reason for terminating your employment.
You may be wondering how your current employer would even discover your filing status. If your wages have been garnished, your employer will receive a notification of your bankruptcy petition. Because once you file for protection from your creditors, all collection efforts and wage garnishments stop.
When it comes to finding a new job, some employers will run a credit check on you but bankruptcy shouldnt be a determining factor for most types of employment even for a role that requires security clearance. Youre most likely to have an issue if you are applying for a position that requires handling money.
Being upfront with a potential employer about what they will discover on your credit report might help mitigate any issues.
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How To Use Chapter 13 To Manage Student Loan Payments
Even if you can’t use bankruptcy to eliminate your student loans, you might be able use Chapter 13 bankruptcy to reduce the amount you pay on your student loans for the length of your bankruptcy case, usually 36 to 60 months.
In Chapter 13 case, you get to keep your property. In return, you must devote your disposable income to the full or partial repayment of your unsecured debts over the life of your plan. In addition to unsecured debts, you can pay some secured debts like car payments, through the Chapter 13 plan, too.
You do this by making a monthly payment to your Chapter 13 trustee. The amount of this payment depends on the property you own, your income, and your reasonable and necessary expenses. Most filers must pay their “disposable income” toward unsecured debt for the repayment period. The trustee distributes this payment among your unsecured creditors, on a pro rata basis.
Example
Suppose you make $3,000 per month. Your costs for rent, car payment, utilities, food, and other expenses total $2,700 per month. That leaves a disposable income of $300. If you were not in Chapter 13, you would also be making payments of $400 in student loans and another $300 in credit card minimums and medical bills. You would be in the hole each month by at least $400.
Calculating your Chapter 13 plan payment is more complicated than the above example. Talk to a bankruptcy attorney to find out how much your Chapter 13 plan payment would be.
Will I Qualify For Bankruptcy Protection
There is a means test in California to determine if you qualify for bankruptcy protection but for most people who are struggling to make ends meet, you will typically qualify for Chapter 7.
You cannot have filed another Chapter 7 petition within the past eight years. For Chapter 13, the window is six years.
You cannot have filed another bankruptcy petition in the previous 180 days that was dismissed because of failure to appear or for failure to comply with the courts orders or that you voluntarily dismissed because your creditors tried to recover property they had a lien against.
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Want Help Filing Student Loan Bankruptcy Lets Talk
The process to get a hardship discharge of your student loan debt can be intimidating. Not only do you have to file bankruptcy, but you also have to pass different tests and provide evidence of your current financial situation and reasonably reliable future income. On top of that, you have to show your inability to repay your loans will last for a significant portion of the repayment period of the student loans.
If all of this seems like a lot, let me help. Ive helped many student loan borrowers just like you file student loan bankruptcy. Schedule a free 10-minute talk so we can discuss how I can help you do the same.
Stop Stressing.
Hey, Iâm Tate.
Im a student loan lawyer that helps people like you with their federal and private student loans wherever they live.
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Minimal Standard Of Living
The court will not discharge your student loan if your financial situation allows you to enjoy more than a minimal standard of living. In other words, while youre allowed to support yourself and your family, your lifestyle must be extremely frugal and only provide for the necessities of life. For example, costs associated with new sneakers, knitting group classes, or even living in a safe, but higher-priced area, would likely count as unnecessary extras and thwart your discharge.
Also, the court includes the income of each member of your household when determining whether your income exceeds that needed to maintain a minimal standard of living. So if you make more than whats necessary for basic needs after taking into account your teenagers part-time job and grandmas pension, youll likely lose.
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Why Filing For Bankruptcy To Get Rid Of Student Loans Often Wont Work
Heres why, and the other options available.
Paying back student loans is not an easy thing to do. One out of every 5 borrowers with outstanding student loan debt has fallen behind their payments.
There are several ways borrowers can get help to deal with their debt burden. Bankruptcy is the most extreme. In general, the law does not allow you to get rid of student loans through bankruptcy. One exception to the rule is if a borrower can prove that paying back the loans would impose an undue hardship on and dependents. The threshold for proving that is pretty high. Plus, theres not a lot of legal guidance on what precisely an undue hardship is.
Not many people try to get rid of student loans through bankruptcy. It could be because they either dont know its an option or dont think they will prevail. One study found that only 0.1% of student loan borrowers who have filed for bankruptcy tried to discharge their student loans. Among those who do try, the success rates are high. Nearly 40% of borrowers who challenge their student debt receive at least a partial discharge.
The U.S. Supreme Court has not yet weighed in on what exactly makes for an undue hardship. However, most federal courts follow the 1987 Second Circuit decision, Brunner v. New York.
Proving hardship
Of these three prongs, the first is the most important. Typically, a borrower has to show they have both maximized their income and reduced their expenses to cover only basic needs.
Other options
When Did Private Student Loans Become Nondischargeable
While federal student loans have been nondischargeable in bankruptcy since 1976, private student loans didnât receive the same treatment until 2005. That year, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act to make it more difficult for borrowers to file for Chapter 7 bankruptcy and, instead, push more debtors to file Chapter 13.
As part of the Act, Congress amended 11 USC § 523 to prevent the bankruptcy discharge of education loans that did not exceed the studentâs cost of attendance at certain higher education institutions. These types of debts are referred to as qualified education loans.
How to find out if you have private student loans? The easiest way to find out what type of student loans you have is to check your credit report against the loans the Department of Education shows you have with them. You can do that by creating an account with studentaid.gov. Any student loan you see on your credit report but not on the website is a private loan.
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How Does Chapter 7 Affect My Student Loans
Immediately upon filing a Chapter 7 bankruptcy petition, the automatic stay prohibits most creditors, including student loan creditors, from taking collection action against you during the Chapter 7 bankruptcy, which typically lasts about 90 days. During this time you can, but are not required to, make student loan payments. When your debts are discharged at the end of the Chapter 7, your student loans will again re-enter repayment. At this point, your other debt will have been greatly reduced or eliminated by your discharge, enabling you to focus your repayment efforts on your student loans.
Types Of Federal Financial Aid
Federal student aid comes in a variety of forms. Some types of federal aid donât have to be paid back. These usually come in the form of grants, scholarships, and work-study jobs. But, since this type of financial aid usually doesnât cover the full cost of attending a college or university, most people take out student loans to cover the difference. Student loans do have to be paid back.
To apply for federal student aid, youâll have to complete the Free Application for Federal Student Aid, or FAFSA form. According to the U.S. Department of Education, financial need is one of the primary eligibility requirements for most federal financial aid programs.
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What Qualifies As Undue Hardship
Unfortunately, bankruptcy law is unclear on what makes undue hardship.
Congress never defined what undue hardship means, Kantrowitz says. They left it up to the courts to define it.
Bankruptcy courts are free to use two different tests to decide if the borrower is experiencing undue hardship the Brunner test and the Totality of the Circumstances test. According to Kantrowitz, the Brunner test is far more widely used.
Under the Brunner test, the debtor must prove three things.
Calculating When The 7
If you are contemplating filing for personal bankruptcy or making a consumer proposal in the hopes of discharging your student loan debt, you should seek the help of a Licensed Insolvency Trustee to ensure that you have satisfied the 7-year waiting period.
To be prudent, if your goal is to have your student loans discharged, you should calculate the start date on the end of your education as the latter of
- The date you actually ceased attending school, or
- the last day of your exams for your final semester
You might want to add 30 to 90 days out of an abundance of caution.
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