STUDENT LOANS AND BANKRUPTCY ADVANTAGES

Student loans can be discharged under Chapters 7 or 13 if a Debtor can demonstrate that excepting the student loan from discharge would impose an “undue hardship” on the debtor and dependents,  11 U.S.C. Section 523(a)(8).  Proving undue hardship can be difficult, and requires filing an adversary proceeding (“lawsuit”) within the bankruptcy proceeding to present evidence to a bankruptcy judge that failing to discharge the student loan debt would cause undue hardship to the debtors and dependents.

PROVING UNDUE HARDSHIP

studyingTo obtain a discharge of student loan debt in Chapter 13 or 7, the Debtor must prove that re-payment of the debt imposes an undue hardship on the Debtor and dependents.  Most Circuits including the Tenth Circuit which encompasses the District of Utah, apply a three-prong standard developed in the Second Circuit via Bruner v. New York State Higher Educ. Serv. Corp., 831 F.2nd 395 (2d Cir. 1987).

  • The debtor cannot maintain based on current income and expenses, a “minimal” standard of living for herself and dependents if forced to repay the loans;
  • That additional circumstances exist indicating that this state of affairs is likely to persist for significant portion of the repayment period of the student loans;
  • That the Debtor has made good faith efforts to repay the loans.

In addition, the Tenth Circuit Judges have the discretion to consider the totality of a debtor’s circumstances in evaluating a claim of undue hardship.  The Eighth Circuit elucidated in Long v. Educ. Credit Mgmt. Corp., 322 F.3rd 549 (8th Cir. 2003), that totality of circumstances should include consideration of:

  • Past, present and reasonably reliable future financial resources;
  • A calculation of the debtor’s and dependent’s reasonable necessary living expenses;
  • Any other relevant facts and circumstances surrounding each particular bankruptcy case.

Many Courts at the Circuit level have held that failure to consider or pursue repayment options such as IBR/ICR favors nondischargeability based on prong 3 of the Brunner standard.  Conversely, numerous other Courts have criticized IBR/ICR.  Suggesting a demise of the Brunner standard, the bankruptcy court in the Western District of New York, recently noted that the term “repayment period” as used in Brunner envisioned a maximum repayment term of 10 years – not the 25 years contemplated under income-driven repayment terms.  That bankruptcy court also indicted Brunner with the observation that “… if Congress ever were to require this writer to instruct a student loan debtor that he or she must carry the burden of proving that he or she has a certainty of hopelessness,’ this writer would retire”.  In re Bene, 474 B.R. 56 (Bankr. W.D.N.Y. 2012).

FLEXIBLE, AFFORDABLE STUDENT LOAN PAYMENT OPTIONS (Inside or Outside of Bankruptcy)

  1. Income Based Repayment (IBR)
  2. Income Contingent Repayment (ICR)

 

CHAPTER 13 ADMINISTRATIVE DEFERRMENT CAN HELP DEBTORS WITH STUDENT LOANS.

young lawyer in the office. attorney for the law.

Chapter 13 can offer a significant amount of protection to Debtors with student loans unable to make the payments. Upon initiating a Chapter 13 case, student loans are placed in a special administrative deferment status pursuant to the Higher Education Act.  Student loan creditors are prohibited from pursuing collection efforts against a Debtor (no calls, monthly statements or payments). Student loan debt is paid through the bankruptcy an amount equal to the amount paid to the individual’s other unsecured creditors, either a pro rata portion of a pot, or a percentage.   For example, if an individual is paying 15 cents on the dollar to their general unsecured creditors under the terms of a Chapter 13 debt consolidation plan, a student loan creditor would also be paid 15 cents on the dollar while the Debtor remains in Chapter 13. If no amounts are being returned to the unsecured class, no payment would be made on the student loan.  Even if student loan debt is excluded from a Chapter 13 re-payment plan, the stay against collection efforts remains in effect.  The student loan survives the bankruptcy whereas most of the other debt is discharged.  The Debtor would thereafter be required to make arrangements to re-pay the balance of the student loan.  Interest continues to accrue on the unpaid balance of the student loan during the term of the bankruptcy plan (three to five years).  In some instances, Debtors may continue to make payments on their student loans while in Chapter 13.  If a Debtor is paying back 100 percent of their debt pursuant to the terms of a Chapter 13 Plan, the Debtor is permitted to continue to make payments on their student loans.

CHAPTERS 7 and 13 HARDSHIP DISCHARGES CAN HELP DEBTORS WITH STUDENT LOANS.

To obtain a discharge of student loan debt in Chapter 13 or 7, the Debtor must prove that re-payment of the debt imposes an undue hardship on the Debtor and dependents.  Most Circuits including the Tenth Circuit which includes the District of Utah, apply a three prong standard developed in the Second Circuit via Bruner v. New York State Higher Educ. Serv. Corp., 831 F.2nd 395 (2d Cir. 1987).

  • The debtor cannot maintain based on current income and expenses, a “minimal” standard of living for herself and dependents if forced to repay the loans;
  • That additional circumstances exist indicating that this state of affairs is likely to persist for significant portion of the repayment period of the student loans;
  • That the Debtor has made good faith efforts to repay the loans.

In addition, the Tenth Circuit Judges have the discretion to consider the totality of a debtor’s circumstances in evaluating a claim of undue hardship.  The Eighth Circuit elucidated in Long v. Educ. Credit Mgmt. Corp., 322 F.3rd 549 (8th Cir. 2003), that totality of circumstances should include consideration of:

  • Past, present and reasonably reliable future financial resources;
  • A calculation of the debtor’s and dependent’s reasonable necessary living expenses;
  • Any other relevant facts and circumstances surrounding each particular bankruptcy case.

Many Courts at the Circuit level have held that failure to consider or pursue repayment options such as IBR/ICR favors nondischargeability based on prong 3 of the Brunner standard.  Conversely, numerous other Courts have criticized IBR/ICR.  Suggesting a demise of the Brunner standard, the bankruptcy court in the Western District of New York, recently noted that the term “repayment period” as used in Brunner envisioned a maximum repayment term of 10 years – not the 25 years contemplated under income-driven repayment terms.  That bankruptcy court also indicted Brunner with the observation that “… if Congress ever were to require this writer to instruct a student loan debtor that he or she must carry the burden of proving that he or she has a certainty of hopelessness,’ this writer would retire”.  In re Bene, 474 B.R. 56 (Bankr. W.D.N.Y. 2012).

FLEXIBLE, AFFORDABLE STUDENT LOAN PAYMENT OPTIONS (Inside or Outside of Bankruptcy)

  1. Income Based Repayment (IBR)
  2. Income Contingent Repayment (ICR)

PRIVATE STUDENT LOANS

guy-phonePrivate student loans provide educational funds to students who have exhausted their federal loan limits or are otherwise ineligible to borrow under the federal loan programs.  The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 expressly included private loans in the presumption of nondischargeability under 11.U.S.C. Section 523(a)(8).  Certain private student loans, however, can probably be discharged in a consumer bankruptcy filing.

  • Private student loans offered by major lenders can fall into this category.
  • If the school was not an eligible educational institution explained hereafter, it can be easily discharged in a bankruptcy adversary proceeding.
  • If a full discharge is not available, partial discharges are, if funds were used for things other than a “qualified higher education expense”.  For example, if the funds were used for things other than tuition, books, supplies and required equipment, that part of the student loan may be eliminated in bankruptcy.
  • Flight schools, truck driving schools, IT training, coaching, vocational training, mechanic schools, cooking schools, beauty schools, foreign unaccredited medical schools and other such educational organizations are most likely to fall within this category of readily dischargeable loans.

In order for a loan to be qualified as a private school loan, it must have been made under a government or nonprofit student loan program, or it must be a qualified educational loan under Section 221(g)(1) of the Internal Revenue Code, for attending an eligible education institution as defined in Section 221(d)(2) of the Internal Revenue Code, and incurred for costs of attendance as defined in Section 472 of the Higher Education Act.  Failure of a private student loan to meet any of these criteria means that the loan is fully dischargeable, because it would not qualify under Section 523(a)(8) of the Bankruptcy Code.  In addition, even if a school is accredited, it must also have offered Title IV federal loans or the private loans may not be protected from discharge in bankruptcy.

As a first step, check the following list, and if the loan in question is not on the list, it is likely not made by an eligible education institution, and may be discharged in bankruptcy.

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