Federal Student Loans Vs Private Student Loans
While the process to get both federal and private student loans discharged in bankruptcy is the same, experts agree that it is far more difficult to get federal student loans discharged than private ones.
Why? For one, most federal student loan bankruptcy cases are handled by the Educational Credit Management Corporation . Henry Sommer, president of the National Consumer Bankruptcy Rights Center, says that since ECMCs attorneys get paid by the Department of Education, they can invest more money in litigation than attorneys from the private sector.
ECMC will fight tooth and nail, says Sommer. Even in the strongest cases, they will fight, and if they lose the case, they will appeal, he adds. In some instances, US attorneys will also be called as part of the defense team.
Hiring an attorney to handle your case could cost you between $1,200 to $3,200, depending on the type of bankruptcy you file for. If you add student loans discharge into the mix, Sommer says that this could end up costing you around $5,000 more, unless they give you a discount or agree to work the case on a pro bono basis.
But paying an experienced attorney to help your case could also hurt your chances of winning.
“They could use that against you saying, Hey, you do have money because you actually were able to hire this person. So, its kind of a catch 22,” says Sommer.
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.
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.
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Alternatives To Student Loan Bankruptcy
Bankruptcy is not the best fit for everyone. Here are some options to consider to help you deal with your student loan debt:
Refinance for a lower interest rate. Depending on your student loan balance, credit score, and income, you may be able to find a lender that offers a much lower interest rate. While refinancing won’t get rid of the debt, the lower interest rate may make it easier to pay off your loans faster.
Request a deferment or forbearance. If you’re struggling with your private student loans, ask for a deferment or forbearance to give you some relief. You can also ask your student loan servicer if they offer interest rate reduction programs and other flexible repayment options.
Apply for an income-driven repayment plan.IDR Plans are affordable repayment plans offered by the federal government to federal student loan borrowers. These plans allow you to pay 10 to 15% of your discretionary income for 20 to 25 years. Any loan balance remaining after you make your final payment will be forgiven.
Check eligibility for discharges. The federal government and some private lenders will discharge your student loan debt due to total and permanent disability. You may also be entitled to a discharge if your school misrepresented your ability to transfer credits or get a job or if the school closed.
How Can I Discharge My Student Loan Debt
To discharge student loan debt in bankruptcy, you have to first file a bankruptcy case and then file an adversary proceeding. The adversary proceeding is the name given to lawsuits in bankruptcy proceedings. You can file the AP before your bankruptcy case ends. You can also file it after youve gotten a bankruptcy discharge.
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What Is In The Bill
Again, does not apply to the 100 billion or so of private student loans, for reasons unfathomable to me.
Student loan debt follows you to your grave. For years, I have supported allowing struggling borrowers to discharge their loans in bankruptcy as a last resort. Our bipartisan bill finally gives student borrowers some who were misled into taking out costly loans by predatory for-profit colleges a chance to get back on their feet when they have no other realistic path to repay their loans, said Durbin.
Our bill, the FRESH START Through Bankruptcy Act, will provide important relief to students and accountability for schools, said Cornyn. Some schools have taken advantage of the American taxpayer for too long and the students are the ones harmed by their excess, so Im glad to see this bill introduced today and Im looking forward to building support for it.
The press release on the student loan dischargeability bill is here.
Interesting are the provisions about forcing colleges, within certain parameters, to pay the government 30% or 35%. of discharged student loan debt,
Finally some skin in the game for the institutions that have profited enormously from the student loan bubble.
On first reading, I have not quite figured out the triggers in the statute for this repayment obligation, but it has to do with how much student loan debt the college has and how much is being repaid.
I like this part too.
This bill ha just been introduced.
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.
Chapter 13 Vs Chapter 7
If theres any doubt in your mind about your chances for getting the Bankruptcy Discharge approved, then youd better file Chapter 13.
Why? Because when you file bankruptcy under Chapter 13, youre agreeing to undergo a debt reorganization, which restructures your debt, instead of wiping it out entirely, which will allow you pay the debt off in a way that prevents you from remaining impoverished.
Chapter 13 debt reorganization plans provide you time to save up money so you can actually afford those bills which you dont have any funds for now, and can be used for any kind of debt, including student loans , but also mortgages, credit cards, and other stuff that you never should have bought in the first place since you definitely couldnt afford it, but did so anyway.
The reason I think you should consider filing Chapter 13 is that youll have options in case your discharge is denied. What do those options look like? Im glad you asked!
Good Faith Efforts To Repay
The third factor that courts look at is whether you have made good faith efforts toward repaying your student debt. This is a measure of your efforts to obtain employment, maximize income, and minimize expenses. Some considerations that courts have taken into account include making payments when the debtor could, seeking deferment when necessary and negotiating an income-driven repayment plan. If you would qualify for an income-driven repayment plan, but you fail to sign up, this will be a negative factor for your case.
It is also important to note that the court will look to see if the student debt is a significant portion of your overall debt such that if you are able to discharge other debts in bankruptcy, you will free up money that can be used to pay off your student loans.
If you have consistently put in the effort to make payments and avoid missing payments at all costs, this can generally be an easier prong to prove. Nevertheless, when you are trying to discharge student loans in bankruptcy, it is critical to show you have made good faith efforts to repay.
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Student Loans Are Difficult To Discharge
You can usually discharge unsecured debts, like credit card debt, medical bills, and personal, loans, in bankruptcy. Student loans are also unsecured debts, but bankruptcy treats them differently. Unlike most other unsecured debts, you cannot automatically discharge them in Chapter 7 or Chapter 13 bankruptcy.
To discharge student loans, you must to file a separate lawsuit in your bankruptcy case, called an adversary proceeding. To win that proceeding, you must show the court that paying your student loans will cause you or your dependents a hardship. The standard for proving a hardship differs depending on your jurisdiction but is always a steep obstacle to overcome.
To learn more about what constitutes a hardship, read Student Loan Debt in Bankruptcy.
Discharge For False Certification Or Unauthorized Payment
This student loan discharge option applies primarily to direct loan or FFEL program loans. Its offered to victims of identity theft or false certification. There are a few different ways to qualify:
- Your school falsely certified you as eligible to receive loans even though you didnt meet the requirements.
- Your school signed your name on an application or promissory note without you knowing about it.
- Someone took out a loan in your name .
- You trained for an occupation at school you cant engage in due to a physical or mental condition, your age, a criminal record,or another qualifying reason.
If something suspicious happened with your student loans, you could qualify for this discharge option. Contact your loan servicer for more on how to prove false certification, unauthorized payment or identity theft.
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When To File An Adversary Proceeding
After you file bankruptcy, the next step to get a student loan discharge is to file an adversary proceeding. An AP is what lawsuits are referred to as in bankruptcy proceedings.
A borrower or cosigner can start the student loan bankruptcy process by filing an adversary proceeding asking the bankruptcy judge to discharge federal loans or private loans due to undue hardship.
Chapter 7 bankruptcy cases are over with quickly . As a result, you may need more time to give yourself a better chance of getting a discharge. Fortunately, Federal law does not set a deadline for filing an adversary to discharge student loans. So can file the AP before or after your case closes.
Chapter 13 cases take 3 to 5 years to complete. You don’t receive a discharge until after you made your final payment under your plan. Consequently, different jurisdictions may force you to wait until your Chapter 13 is almost over before they’ll let you file an adversary proceeding.
Show Education Loan Repayments Can Be An Undue Hardship
It must be noted, that courts would not have constant markers for just what precisely satisfies undue trouble. What one court may consider hardship that is undue another might not. As an example, a student that is 50-year-old debtor who has got consistently made $8.50 one hour being a telemarketer could get given a release, while a 30-year-old situation may well perhaps not. The court may rule that at 50, you were stuck that is likely a cycle of poverty, however a 30-year-old has yet to exhibit a history of low wages.
Due to the changing landscape of wages in comparison to student loans some judges have actually redefined just what undue difficulty means. In 1987 as soon as the Brunner test was initially developed, education loan borrowers failed to face nearly as much financial obligation as todays millennials do. In 2014, a court discovered that borrowers dont need to be at poverty level income hardship that is undue. The court described a minimal total well being as poverty and mere hard.
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Student Loan Discharge In Bankruptcy
It is possible to discharge student loans in bankruptcy although it is not easy. The procedure is that an adversary proceeding must be filed in the bankruptcy court to prove that the undue hardship standard has been met.
In addition to discharge for undue hardship, we file adversary cases to show that in many cases, private student loans are actually nothing more than consumer loans disguised as student loans. If we can show that the private loan is a non-qualified education loan, it is discharged like any other consumer debt such as a credit card. Various arguments exist such as the loan amounts were beyond the cost of attendance, for an ineligible institution or for an ineligible student. We teach this topic to other attorneys around the nation and while it is a relatively new argument, there is plenty of case law supportive of discharge. If you have an attorney tell you that a student loan can never be discharged in bankruptcy, that is the old and very outdated view, and frankly, you should see another attorney who actively practices in this area every day.
The procedure is as follows:
The well known Brunner standard is followed in Florida which requires that you show:
the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for the debtor and the debtor’s dependents
additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans and
I Think Ill Qualify What Should I Do Next
To start the process, youll first need to file a petition called an adversary proceeding, which requests a Court Judgement called a determination on whether or not you deserve to receive approval for having your loans forgiven.
After filing the Adversary Proceeding Petition , youll then get into the Undue Hardship process I outlined above, and need to prove to a Court that youre really struggling under the weight of those loans.
Remember, if you cant make it look like your debt is LITERALLY DESTROYING YOUR LIFE, then you probably dont want to take a chance at going down this route, because its a huge pain in the ass that youd probably rather avoid.
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Want Help Filing Student Loan Bankruptcy Let’s 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. I’ve 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.
Hey, Iâm Tate.
I’m a student loan lawyer that helps people like you with their federal and private student loans wherever they live.
Student Loans In A Chapter 13 Bankruptcy
Although student loans also face non-dischargeability in a Chapter 13 bankruptcy, there are advantages to filing for Chapter 13 bankruptcy if you are unable to get the student loans discharged in Chapter 7 bankruptcy. These include:
- Automatic stay on collection of student loans during bankruptcy proceedings this applies to all other debts as well
- An automatic stay also applies on any co-debtor or guarantor of a debt during the case
- Delay or reduction of payments to student loans during the Chapter 13 repayment period
- No requirement to pay off the loan completely during the repayment period
In Chapter 13 bankruptcy, student loans are treated as a low-priority debt just like credit cards and other unsecured debts. The only difference is that while credit card debts and other unsecured loans can be discharged at the end of the repayment period, student loans are not discharged. Youll be responsible for resuming payments on student loans at the end of the bankruptcy repayment period. However, Chapter 13 bankruptcy can give you the breathing room you need to fix your financial situation so youre in a better position to make the payments once the repayment period is over.
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