How do I discharge student loans in bankruptcy?
After graduation, many students are saddled with huge debts. The work they get after they leave college does not pay well enough and they are constantly in default on their student loans. One of the ways that people can discharge debts is by filing for bankruptcy. However, as you may have heard, it can be difficult to discharge student loans in bankruptcy. And, you are wondering, how do I discharge student loans in bankruptcy? Read on for the truth about student bankruptcy loan discharge.
The so-called threshold that you need to cross to get a student loan discharge by bankruptcy is set very high. Nevertheless, difficult does not equal impossible. Some former students have succeeded in discharging their loans through bankruptcy. Learn the exceptions to the law that may allow you to do this and then follow through with the help of a knowledgeable attorney.
Undue Hardship Can Be a Reason to Discharge Student Loan Debt
The bar was raised for the discharge of student loan debt via bankruptcy in 2005. That is when Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act. This law makes it more difficult for both private and federal student loan debt to be discharged though bankruptcy. An exception to this law is when the former student proves undue hardship caused specifically by the loan.
Matthew T. Desrochers is an attorney specializing in debts from student loans. He says that the borrower needs to pass what is called the Brunner test. According to a federal court decision from 1987, there are three things to prove to demonstrate undue hardship.
- The person is unable to maintain a minimal standard of living for themselves and for their family with their current income and living expenses
- There is no likelihood of a change in the person's other expenses or their income during the term of the loan
- The person has attempted to make payments with “good faith” efforts
The task of the former student is to demonstrate that they meet all three criteria. If this can be proven, it is possible that a student loan will be dischargeable.
The Differences between Private and Federal Student Loans
Federal Student Loans
Federal Family Education Loan Program (now discontinued)
Credit union loans
Loans from states
Loans from schools
Basically, all non-federal loans are considered to be private.
Accordingly an important difference between federal and private student loans has to do with the IDR or “income driven repayment” plan offered for federal loans.
What is an IDR? For a federal student loan, payments can be adjusted, based on what city you live in, the size of your family, and your income. Depending on the circumstance so the person, payments could be a low as $0 a month! Payments are made according to the plan for as long as 25 years and then the balance is forgiven.
Clearly, if they have an IDR payment close to or at $0 a month, paying the loan has no effect on their standard of living and is not a cause for hardship. Thus the person fails the first part or “prong” of the Brunner test.
There are no IDRs for private loans so it is unlikely that a person can make lower payments over the years. This makes paying the loan more difficult if not impossible and makes under hardship easier to prove.
Despite the difficulties caused by IDRs, there are situations where it still possible to prove undue hardship. Desrochers points out an example of a middle class ex-student who has a family and lives in an expensive city. This person may need to pay $500 or even $300 with an IDR. But, because expenses are so high, this person cannot afford health insurance, mortgage payments, and other normal expenses. This person may be able to pass the Brunner test.
How to Decide If You Have a Case for Student Loan Bankruptcy Discharge
The first thing he looks at to see if a client has a chance to obtain bankruptcy relief from their student loan debts. So, the first thing you should do is take a close look at your budget before contacting an attorney. If you decide to see the attorney, make sure that you have your income and expenses in order so that the attorney can examine them.
A thing to think about as you look at your budget is how the opposing side and the court will view your circumstances. Have you made real and verifiable efforts to find work that pays well enough? And, do you have control of your expenses? These are critical issues when asking for bankruptcy relief for undue hardship.
When looking at your budget, remember that the other side will look at your bills as well. If you are repeatedly buying coffee at Starbucks and putting it on your credit card, they will contend that you could do a better job of controlling expenses in order to make loan payments.
And, surprise, surprise, you may be criticized for doing something as well-intended as saving for retirement. According to Desrochers, saving money for retirement is not a legal right when you owe money for student loans. A judge may direct you to make loan payments instead of putting money aside in savings.
Another issue that may arise is if a person has looked for a second job in order to make loan payments.
While a person may be in dire financial straits right now, will that situation last forever? The court will want to know if, in the future, your financial conditions will change allowing you to make loan payments. If you have chronic and incurable health issues, these could make it unlikely that you could work in the future. This situation could satisfy the second part of the Brunner test.
Passing all three parts of the Brunner test can be difficult but not impossible. This is where you need to consult with a competent attorney who does this kind of work, like Matthew T. Desrochers.
Undue Hardship and Private Loans
Private loans for which undue hardship must be proven to discharge debt in bankruptcy include loans funded by nonprofits like the school you went to or certain qualified educational loans.
Some private loans that are not “qualified loans.” For these kinds of loans, the bankruptcy laws treat them like other unsecured debts typically handled in bankruptcy proceedings.
Matthew T. Desrochers specializes in bankruptcy cases involving this kind of private student loan. He highlights three important things that could help you decide if your loan is or is not a qualified educational loan.
- Your school was not ineligible. Schools with federal accreditation are Title IV certified. This certification is necessary for qualified educational loans. If the school was not certified under Title IV you could not get a federal loan and your loan was not qualified.
- Your loan exceeded the cost of attending school. Qualified loans are for expenses of education and include books, tuition, board, and room. If your loan exceeded these expenses, the excess is not qualified.
- Eligible students only. To be an eligible student, a person needs to have taken a half-time schedule of classes or more. Loans to part-time students may not qualify.
In all three of these instances, it may be possible to get them discharged through a bankruptcy proceeding. Desrochers says that not all attorneys are familiar with this newer law interpretation. If the first advice you get is that the lawyer cannot help you, consider looking for an attorney with more experience in this area.
Considerations before You Declare Bankruptcy
Bankruptcy may be the right answer for student loan debts, but the process will take at least eight months and probably longer. And, you will need to be able to pay the attorney fees. There are attorneys who will offer financing without any interest. And, the person may have friends or family members who will come to their aid with a one-time payment. If the amount of the debt is huge, it may be smart to pay the fees for a competent attorney to help achieve discharge of loan debts via bankruptcy.