Defenses To Bankruptcy Discharge
The U.S. Department of Education often raises the availability of income-driven repayment and disability discharges as a defense to bankruptcy discharge. Bankruptcy discharge is thus usually limited to the following situations:
- Borrowers who have a disabled dependent with high ongoing cost of care
- Private student loans that do not offer a disability discharge or income-driven repayment
- Student loans that do not satisfy the requirements for a qualified education loan, such as bar study loans, residency and relocation loans, and loans at unaccredited colleges
- Disabled borrowers who are ineligible for a total and permanent disability discharge due to income above the poverty line, yet still have insufficient income to repay the student loan debt
- An excessive amount of debt prevents the borrower from obtaining affordable payments even if the borrower maximizes income and minimizes expenses
- Borrowers are not eligible for income-driven repayment on Federal Parent PLUS loans
While advocates continue to push for reversal of the bankruptcy law that has eliminated student loan discharge, the prospects of that happening any time soon appear to be dim. The best hope for overwhelmed student debtors appears to rest with jurists who liberally interpret the undue hardship standard and the few lawyers who represent student loan bankruptcy cases pro bono.
For the most part, though, overwhelmed student debtors have little hope of relief in the near term.
Why Are Student Loans Not Cancelled When You Declare Bankruptcy
Modified date: Mar. 27, 2019
I bet you know someone with six figures of student loan debt. Maybe thats how much you have, or close to it. Much has been said of the student loan burden carried by millennials and how it limits their ability to buy homes and cars and make other big life decisions. A friend of mine even calls it the millennial tax, arguing that this generation funds the government with interest payments on their ever-ballooning loan balances.
Paying hundreds of dollars a month for student loans can feel impossible to recent graduates making an entry level salary.
If youre struggling or unable to pay your student loan, you may wonder if you can get rid of it. After all, you can stop paying just about any other debt if you file for bankruptcy. But federal student loans are notoriously difficult to walk away from.
Even if you declare bankruptcy, discharge from your student loan isnt automaticits a separate process. In this article well explain your options for student loan forgiveness, cancellation, and discharge. Well also describe the bankruptcy process for discharging student loans.
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.
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Bankruptcy And Financial Aid
This page answers common questions about the relationship between bankruptcy and financial aid, such as student loans. The first answer concerns the impact of bankruptcy on eligibility for student loans. The second answer discusses whether student loans can be discharged through bankruptcy.
Thanks to Pat Somers of the Univ. of Arkansas at Little Rock and Art Bilski of the Illinois Student Assistance Commission for their assistance with this section.
Bankruptcy and Eligibility for Financial Aid
Will a bankruptcy affect a students future eligibility for student loans and other financial aid?
The answer to this question is a complex one because several issues are involved. It depends on the nature of the student loan programs and the type of bankruptcy.
Whatever the circumstances behind the bankruptcy, the student should talk with the financial aid administrator at the school he plans to attend, and explain the situation. The financial aid administrator may be able to guide the student to certain loan programs or lenders that may fit his needs.
Generally speaking, a bankruptcy should have no impact on eligibility for federal student aid.
The anti-discrimination rules appear in 11 USC 525:
Discharging Student Loans Through Bankruptcy
- if the borrower files an undue hardship petition
Types of Bankruptcies
How To Prove Undue Hardship For Student Loans
To discharge student loans via bankruptcy, you will have to prove they pose an undue hardship during your adversary proceeding.
The U.S. Bankruptcy Code doesnt define undue hardship, so bankruptcy courts have different interpretations for its meaning. Most use whats known as the Brunner test to determine whether bankruptcy filers student loans meet the undue hardship standard.
You must prove that you meet all three parts of the Brunner test to get your college debt discharged:
1. Making student loan payments would keep you from maintaining a minimal standard of living based on your current income and expenses. To meet this, you generally must have bare-bones expenses and must have done everything in your power to increase your income, without success.
2. Additional circumstances make it very likely that your financial situation will persist for a significant portion of your remaining loan period. Among other things, you may be able to successfully meet this if you have a serious mental or physical disability, received a poor-quality education or have maximized your income potential in your field.
3. Youve made “good faith” efforts to repay your loans. You may meet this prong by making some loan payments, attempting to negotiate a payment plan and working to slash unnecessary expenses and increase income.
Different jurisdictions and judges have different interpretations of these standards so your outcome will depend on your location and the judge you get.
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What Is Fafsa And How Does It Work
The primary purpose of the FAFSA is to collect financial information from students to calculate what is known as an Estimated Family Contribution . The CFE Convention is the amount a family can pay each year to pursue higher education.
Debt forgiveness taxIs cancellation of debt income taxable? In general, if you have a debt waiver because your debt was waived, forgiven, or paid less than you owe, the amount of the waived debt is taxed and you must include the waived debt on your tax return for the year of filing.Is debt forgiveness taxable income?Debts that are waived, forgiven and paid are considered taxable income if the
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.
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Explain The Proposed Law To Allow Bankruptcy For Student Loans
If enacted, the bipartisan FRESH START through Bankruptcy Act would change the current law to remove the lifetime ban on student loan discharge in bankruptcy and replace it with a 10-year ban.
Under the proposed law, if borrowers can show that paying their student loans caused undue hardship during the first 10 years, then they can get it discharged after that 10-year period is over without having to prove that it would be an undue hardship from that point forward.
This change would only apply to federal student loans, not private student loans. Any discharge of private student loans, regardless of the repayment timeline, would still require proving undue hardship.
To help shoulder some of the financial cost to the federal government of this proposed change, the bill also includes an accountability measure for colleges and universities. The schools would have to reimburse the government for a portion of the discharged student loan amount depending on the cohort default rate and repayment rate of the institution at the time the first loan payment comes due.
Consumer Proposal: Student Loans
A consumer proposal is an option to negotiate repayment terms with your creditors through a Licensed Insolvency Trustee, for much less than what you owe today. Student loans can be included in a consumer proposal, and are eligible for release, if they meet the seven-year rule.
Stay of Proceedings When you file personal bankruptcy or make a consumer proposal, one of the major benefits is a stay of proceedings. This prevents your creditors from taking further action to collect on your debts, including student debt.
- If your debts are eligible for automatic discharge in a bankruptcy or release in a consumer proposal, then, once your bankruptcy or proposal is completed, your debts go away. No further payment is required.
- If your student debts are less than 7 years old however, your student loan lender, even the government, is still unable to collect while you are bankrupt or in a consumer proposal. You can opt to continue to make payments against your non-dischargeable student debt while in a consumer proposal. Many find this feasible since their credit card and other debt payments, have been eliminated. As long as your student loan lender files a claim in your consumer proposal, they will received their pro-rata share of the consumer proposal payments you make, like any other unsecured creditor. This dividend further reduces any student loan debt that remains upon completion of your consumer proposal.
The Totality Of Circumstances Test
A few states use the “totality of the circumstances” test. It might seem that this is an easier standard to meet because it doesn’t consider whether youve made a good-faith effort to repay your loans, such as consistent attempts to obtain employment, maximize income, and minimize expenses. However, the totality of the circumstances test also includes an any other relevant facts and circumstances component that could be broadly interpreted.
Under either standard, the bar to clear is high, especially for federal student loans, for which the government specifically states that the burden of proof is on the debtor to prove undue hardship.
What Happens If Your Student Loans Aren’t Discharged
If, as in most cases, your loans are not discharged in bankruptcy, here’s what happens.
- Chapter 7 bankruptcy. In Chapter 7 bankruptcy, if payment of your loans is not an undue hardship, you’ll still owe them when your bankruptcy case is over.
- Chapter 13 bankruptcy. If you can’t discharge your student loans, Chapter 13 bankruptcy provides some other ways that can help. For example, you’ll likely be able to pay a reduced amount during your Chapter 13 planalthough you’ll be on the hook for whatever amount is left after your repayment period ends.
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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.
How Biden Helped Create The Student Debt Problem He Now Promises To Fix
The former vice-president and 2020 presidential hopeful backed a 2005 bill that stripped students of bankruptcy protections and left millions in financial stress
In 10 weeks time Joe Biden will lay Joes vision for America at the feet of Iowas caucus-goers in the hope that the first voters in the Democratic presidential race will put him on the road to the White House.
Among his promises is that he will fix the student loan crisis saddling 45 million Americans with crippling debt now totalling a staggering $1.5tn. One idea is to allow people struggling to repay private student loans owed to banks and credit card companies to discharge them in bankruptcy.
The pledge is one of the most striking policies on offer from Democratic candidates in the 2020 race, given how the problem Biden now proposes to resolve came about in the first place. Private student loans were largely stripped of bankruptcy protections in 2005 in a congressional move that had the devastating impact of tripling such debt over a decade and locking in millions of Americans to years of grueling repayments.
Biden was one of the most powerful people who could have said no, who could have changed this
The Republican-led bill tightened the bankruptcy code, unleashing a huge giveaway to lenders at the expense of indebted student borrowers. At the time it faced vociferous opposition from 25 Democrats in the US Senate.
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When Does A Student Loan Debt Get Discharged
Some debts are fully discharged, while others are not. A January 2020 bankruptcy court decision discharged the $221,385.49 student loan debt of a U.S. Navy veteran, stemming from his Chapter 7 proceeding. However, the possible watershed ruling was ultimately appealed by the borrowers loan servicer.
Is It Easier To Get A Student Loan Discharge Through A Complaint
This can make it easier for you to have unnecessary hardships with your personal student debt. There is no magic complaint that will qualify you for a student loan waiver. However, there are a few things I think all student loan borrowers should point out in their complaint.
How long does bankruptcy stay on your creditHow long will a dismissed bankruptcy stay on your credit? Even if no bankruptcy exemption is granted, credit bureaus, like any bankruptcy, must file and declare filed and terminated bankruptcies within 10 years. If your credit report incorrectly lists a case as rejected, you can remove it. Wait 10 years.How long before a bankruptcy is removed from my credit report?A bankruptcy entry c
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How Do I Prove Undue Hardship
The burden of proof is on you to prove that paying of your student loans will cause you undue hardship. You will need to provide financial records and other evidence such as tax returns, bank statements, utility bills, medical records and letters from doctors, documentary evidence of job search efforts, etc.
Getting A Student Loan Discharged
If you want to successfully discharge a student loan, you must prove that the loan is causing you undue hardship. To find out the criteria for this guideline, consult with a bankruptcy attorney to see if you qualify.
Student loan bankruptcy discharge is very rare. If you cannot get the courts to discharge your student loans, speak with a bankruptcy attorney to discuss other options.
Are student loans causing you financial issues and you are considering bankruptcy? Before you proceed, get a free consultation with Douglas Jacobson Law Firm and find out the best solution to your financial problems.
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Student Loan Lending Is Oppressive And Should Be Against Public Policy
Student loan lending is clearly oppressive and should be against public policy. The student loan industry has quickly transformed education into an industry as well. Higher education should never be allowed to grow into a profit-driven industry. Education should be affordable or free: it should always be about the students or society as a whole. Higher education in the past was promoted and controlled by churches, charities, and true non-for-profit organizations. Higher education should be a mainstay of freedom. Higher education should remain untainted by corporate greed and economic oppression.
Higher education has grown into a monster funded by never ending student loan funding. Astronomical building projects, sports programs, and other non-necessary ventures dominate the higher education world. This money-raking beast has replaced previous higher education system. The old system was focused on the students, the welfare of society, and higher ideals.
Students are charged astronomical rates to attend classes. These 18-19 year old students are told not to worry: just sign the loans documents. However, most of these students have never had a job or a loan in the past. The students have no concept of the oppressive debts they quickly assign to themselves so early in life.
Does Bankruptcy Clear Student Loans Early
Could be. Bankruptcy doesn’t automatically activate student loans, but there are times when you can pay off your student debt. The easiest way to understand what happens to student loans in bankruptcy in Chapters 7 and 13 is to consider these two types of procedures, as well as several alternative ways:.
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