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.
Qualified higher-education expenses are the “cost of attendance” at an “eligible educational institution.” Eligible educational institutions 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.
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.
Borrower Unable To Repay Debt
When deciding whether to oppose an undue hardship petition for bankruptcy discharge, the U.S. Department of Education should also consider the:
- Borrowers current and future income
- Borrowers age and health
- Amount of time that has passed since the debt was incurred
For example, the U.S. Department of Education could adopt a standard that allows undue hardship discharge for borrowers who are age 65 and older. More than a third of elderly borrowers age 65 and older are in default on their student loans.
The U.S. Department of Education should also consider whether the borrower dropped out of college and was unable to complete their education. In these cases, borrowers have the debt but no degree that can help them repay that debt.
The U.S. Department of Education could also allow bankruptcy discharge for borrowers who are living under the poverty line and who are likely to continue in such a low-income status for at least five years.
Student Loan Repayment With Private Lenders What If You Cannot Pay
Federal student loans include many provisions to help borrowers repay their loans. These features include income-based repayment plans, loan forgiveness for work in certain jobs, as well as opportunities for forbearance, and deferment. Private student loans do not generally provide these kinds of relief. Private student loans operate like any other loans from a bank or other financial institution. If you can’t pay on time, the private institutions will engage in collection activities against you.
Note that the Coronavirus Aid, Relief, and Economic Security Act suspends payments for federal student loans until September 30, 2020. Unfortunately, the CARES Act doesn’t apply to private student loans. Some private lenders have created their own internal programs that can help to make your student loan payments easier to manage. However, these programs are not required by law as with federally backed student loans.
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How Student Loan Bankruptcy Works
If youre considering student loan bankruptcy, falling behind on your payments will have had a major impact on your life. Perhaps your wages have been garnished because a lender took out a judgment against you. The federal government may have kept your tax refund and applied it to your federal student loans because they were delinquent or in default.
Your student debt is probably just one component of the financial challenges you are currently facing. In fact, if student debt is your only problem, you are unlikely to succeed in getting it discharged through bankruptcy. Filing for student loan bankruptcy is not easy and does not guarantee that you will walk away debt-free. But if your credit is shot, bankruptcy could be a faster path to financial health than continuing to struggle to pay your debts.
There is no special type of bankruptcy called “student loan bankruptcy.” Succeeding in having student loans discharged through bankruptcy involves filing Chapter 7 or Chapter 13 and then taking an additional step, which is filing an “adversary proceeding,” or AP. The AP must be filed to have your student loans considered for discharge.
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.
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What Debts Are Not Discharged In Bankruptcy
Oct 7, 2021Bankruptcy
Although bankruptcy is often the best possible option, it isnt right for everyone. Depending on your situation, this strategy might trigger certain consequences, such as lowering your credit score, forcing you to part with higher-value property, or downsizing your business.
Sometimes, it might simply fail to accomplish its basic purpose: eliminating your debt. While bankruptcy can discharge massive portions of debt, some of what you owe may be left untouched.
More specifically, bankruptcy will NOT discharge:
- Debt from a family court judgment. Were you recently divorced? The judge may have awarded your ex-spouse child support, alimony, attorneys fees, or other types of payments. If you are behind on these payments, do not expect bankruptcy to eliminate what you owe.
- Debts owed to government agencies. This includes fines, penalties, taxes, and student loans .
- Court fines and penalties. This includes criminal restitution, personal injury awards resulting from your operation of a motor vehicle while under the influence, and more.
- Unscheduled debts. To receive a debt discharge, you must list the debt on your bankruptcy petition. Otherwise, it will not be included in your discharge. Some jurisdictions, however, may allow an exception if you made an innocent mistake and have no assets that can be liquidated.
Decide Which Type Of Bankruptcy To File For
Next, on your own or with your lawyer, youll need to decide whether to file for Chapter 7 or Chapter 13 bankruptcy. Student loan bankruptcy can be addressed under either Chapter 7 or Chapter 13 bankruptcy, though its treated differently under the two categories.
Below is a breakdown of some of the qualifications and how each type of bankruptcy treats student loan debt:
Chapter 7 bankruptcy
- You must prove you have little disposable income available to pay off your debt.
- Most unsecured debt can get wiped out.
- Student loan debt may be eligible for discharge.
- The process can take about four months.
Chapter 13 bankruptcy
- You have some income to use to repay some of your debts.
- Your debt will be restructured, and some of it will need to be repaid.
- Student loan debt may be eligible but your repayment will be restructured, not discharged.
- The court process can last from two to six months, and the repayment plan can take three to five years.
Note that personal bankruptcy can come at the cost of hurting your credit for years. When it comes to your credit report, a Chapter 7 bankruptcy remains there for 10 years, while a Chapter 13 bankruptcy stays for seven years, which can make it difficult for you to secure loans or credit, as well as favorable rates. When you file for bankruptcy, you can also rack up significant legal and court fees along the way.
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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.
How An Ohio Bankruptcy Lawyer Can Help You
Your lawyer might be able to help you prove undue hardship and seek the elimination or reduction of your student loan debt by:
- Considering your options and determining whether bankruptcy is best for you
- Determining whether Chapter 7 or Chapter 13 bankruptcy is more appropriate
- Reviewing your financial situation to evaluate whether you may qualify for an undue hardship discharge
- Valuing assets, maintaining records, and preparing paperwork on your behalf
- Communicating and negotiating with creditors on your behalf
- Representing and advising you during bankruptcy court hearings
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Why Some Object To Allowing More Student Loan Discharges In Bankruptcy
Not everyone agrees that student loan discharge in bankruptcy should be legally allowed more often. Two of the most common reasons that people give for why the Education Department should continue to oppose student loan discharge in bankruptcy as often as it has in the past are:
- The availability of income-driven repayment plans
- The legal ability to use Social Security offsets to cover student loan debts instead
But, as we explain below, both of these arguments break down at some level. Let’s take a closer look.
Traditional Definitions Of Undue Hardship
Unfortunately, Congress did not define what it meant by ‘undue hardship.’ So it was left to the courts to decide when student loans loan discharge in bankruptcy would be legally allowed. The courts have established two standards:
- The Brunner Test in the 2nd, 3rd, 4th, 5th, 6th, 7th, 9th, 10th and 11th circuits
- The Totality of Circumstances Test in the 8th circuit.
The 1st circuit uses both tests.
Brunner Test
The Brunner Test involves three prongs, all of which must be satisfied:
Totality Of Circumstances Test
The Totality of Circumstances Test is similar, but does not include the third prong from the Brunner Test and is more flexible. Under the Totality of Circumstances Test, the court considers:
- The borrowers past, present and future financial resources
- The reasonably necessary living expenses for the borrower and the borrowers dependents
- Other relevant facts and circumstances affecting the borrowers ability to repay the debt
Unlike the Brunner Test, there is no requirement that all three prongs must be met.
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Lawmakers Call For Investigation After Npr Report On Troubled Student Loan Program
Iuliano says the outcome and how much student debt is forgiven, if any, can have a lot to do with what particular judge you end up with and what the rules are in that bankruptcy district.
Some of that is because of the language of the original statute stating that student loan borrowers have to meet a threshold of “undue hardship,” he says. Iuliano says Congress has never defined what that means, so a lot of discretion is left up to the courts and the particular judge you get.
Harrison Wadsworth, a consultant for the Consumer Bankers Association, notes that most student loans are issued by the government. But for loans from private lenders, he says relaxing the bankruptcy rules to make it easier to reduce or eliminate student debt could push up interest rates. “Lenders would have to be careful about making loans and probably have to charge more for them,” Wadsworth says.
Lauren eventually found a lawyer who took her case and charged her about $3,000, doing some of the work pro bono. And going through bankruptcy, she got her debt reduced from about $200,000 to around $100,000, with the bulk of that reduced to a 1% interest rate.
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.
Congress extended the five-year bankruptcy ban to seven years in 1990. Then Congress extended it to the borrowers lifetime in 1998.
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.
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Other Forms Of Student Debt Relief
While current bankruptcy law does not allow student loans to be discharged, there are other options for debt relief. The alternatives to bankruptcy discharge have mostly occurred in the form of income-driven repayment plans, of which there are currently four. Borrowers with private student loans also have the option to refinance to get a lower interest rate.
Can Student Loans Be Cleared Through Bankruptcy 4 Questions Answered
For decades, student loans have mostly been prohibited from being discharged through bankruptcy proceedings. That could change under the FRESH START through Bankruptcy Act. Here, public policy scholars Brent Evans and Matthew Patrick Shaw, both of Vanderbilt University, explain why student loan debt cannot usually be cleared through bankruptcy and how that might change if the proposed bill becomes law.
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Can Bankruptcy Get Rid Of Student Loans
Filing bankruptcy can allow you to eliminate debt and get a clean slate financially, either through a structured payment plan or a liquidation of your assets. Many types of debt can be discharged in bankruptcy, but student loans typically aren’t included on that list.
It is possible to include student loan debt in your bankruptcy filing and get it approved by the court if you can prove undue hardship, but that process can be difficult. If you’re struggling financially and are thinking about filing bankruptcy, here’s how to know if your student loans are eligible.
Student Loans To Be Dischargeable In Bankruptcy
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A bill to restore student loan dischargeability was introduced
Billion Dollars Of Student Loan Debt Gone?
into the Senate today with Democrat and Republican co-sponsors.
I hope this is BIG news.
Back in the last millennium, when I started practicing law, student loan debt
was dischargeable, if the first repayment, not counting any forbearance time,
was due 7 years before the bankruptcy was filed.
No big deal then, when total student loan debt was counted in the billions, not the 1,7 trillion dollars we have today,
And back then there was no means test, not even a budget of income and expenses with the prospect of your case being dismissed for substantial abuse.
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Private Student Loan Bankruptcy Is Getting Easier
The truth is that it is getting easier to discharge private student loans. But itâs not automatic. Many borrowers will still need to jump through extra hoops to get a discharge.
Finding a bankruptcy attorney or law firm thatâs willing to file an adversary proceeding can be challenging. Thatâs where I come in. Iâve helped many people just like you successfully navigate filing bankruptcy on their private student loans. Schedule a free 10-minute talk so we can discuss how I can help you do the same.
Stop Stressing.
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 A Lot Like The Subprime Mortgage Debacle Watchdog Says
But he says the rules are still too restrictive. Lawless researched the issue with a group of attorneys and former judges for the American Bankruptcy Institute, a professional organization. They’re recommending that Congress rewrite the rules on student loans in bankruptcy. Under the proposal, Lawless says, “after seven years from when the loans became due, they would be treated pretty much like any other debt in a bankruptcy case.”
There is at least some support for that in Congress. Part of the obstacle now is that the current rules often require paying your lawyer more money to attempt to get student debt forgiven.
Lawless says it costs on average about $1,200 to file a typical Chapter 7 bankruptcy case. Bankruptcy attorneys say it can cost thousands of dollars more to pay your lawyer to jump through the extra hoops related to student loan debt, unless you find one who will do that for a reduced rate.
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