Can Student Loans Be Discharged?

It’s getting to the point, for many, where the cost of a college education is one of the biggest of life’s expenses, greater even than the cost of a home. Not surprisingly, as many college graduates struggle to find good jobs, many consider bankruptcy as an option to get their finances under control. The key question—can student loan payments be discharged in a federal bankruptcy filing?

Though many people don’t know it, there are limited circumstances where student loan payments can be wiped out under the bankruptcy law. Under what is known as the Brunner test (so named because of the U.S. Supreme Court case that laid down the principles for discharge of a student loan), you can discharge student loan obligations if you can demonstrate that repayment would cause you an “undue hardship.”

Under Brunner, a debtor can eliminate student loan debt by showing all of the following:

  • The debtor does not have sufficient income to maintain a minimal standard of living for himself/herself and dependents
  • The debtor has no reasonable prospect that the current financial situation is likely to change
  • The debtor has made a good faith attempt to pay off student loan debt

It’s important to understand that, without evidence to the contrary, most courts will presume that a debtor’s income will increase over time and that a debtor will be able to attain a minimal standard of living. Accordingly, any debtor seeking discharge of a student loan payment will need to affirmatively demonstrate that his or her situation is not likely to change. A debtor may introduce the following types of evidence to support that claim:

  • A mental or physical disability
  • Lack of education or training
  • Poor quality of education
  • Lack of job skills
  • Age of debtor

Exploring the options for income based repayment or discharge of student loans through various federal programs is a good idea and also a necessary first step. You can find information about what types of loans you have at this site: https://www.nslds.ed.gov/nslds/nslds_SA/. Information about federal student loan forgiveness and cancellation can be found here: http://studentaid.ed.gov/repay-loans/forgiveness-cancellation

If you resort to a bankruptcy, discharging student loans will require that you file a “bankruptcy lawsuit” in the bankruptcy seeking a judgment of dischargeability.  Achieving success is possible, but difficult at present. Hopefully courts or Congress will find a way to ease the path to dischargeability.

Contact Neuner & Ventura, LLP

We understand the stress, anxiety and confusion that can be associated with a potential bankruptcy filing. We offer a free initial consultation to every client. For an appointment, call Neuner & Ventura at 856-596-2828 or send us an e-mail. We do, however, reserve the right to charge a fee to review any work done by another attorney. Evening and weekend appointments are available upon request.

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Student loan debt at record levels- what options are there?

In late May 2012, the Federal Reserve Bank of New York reported  that debt from educational loans in the U.S. rose 3.4 percent to $904 billion in the first quarter,  increasing  from $874 billion three months earlier.  This, while all other forms of household debt fell a combined $383 billion, according to the report. Ninety-day delinquency rates for student loans is now higher than that of mortgages, auto loans and home equity lines of credit.

This is a massive problem that voters and lawmakers are going to have to deal with. At the personal level, most but not all of these debts cannot be discharged or eliminated in bankruptcy, under the present law.  Not all loans used for education are exempt from discharge. Only the following types of loans are protected:

1. Loans made, insured or guaranteeds by a federal, state or other government

2. Loans made under a program that received  funding from government or a nonprofit institution.

3. Educational loans qualified under certain sections of the Internal Revenue Code.

The first step is to locate or ask for all the information on  any programs under which the loan was made. This can usually be obtained from the original financial aid office.

In a very few cases of extreme hardship, the law does allow even these types of loans to be discharged. This is a difficult test to meet.

Even without an ability to discharge these loans, for people drowning in other debt using a bankruptcy to remove that debt load can make the job of repaying student loans easier. We also encourage clients to reach out to the student loan lenders for relief in repayment terms.

In those cases where there is a co-signer on the loan, a Chapter 13 bankruptcy provides a means to focus payments made under a bankruptcy plan towards repayment of the student loans.

For anyone facing these types of debts careful planning and consideration of all the choices is critical. Bankruptcy is one tool, but it is not right for everyone. Ignoring the problem is worse. Consultation with experienced legal counsel is very important. Long term planning for all involved is key to long term financial stability.

Student Loans-nondischargeable in bankruptcy-time for a change?

Recently, Sen Richard Durbin of Illinois stated at a hearing on the issue that it was time to reverse a 2005 amendment to the Bankruptcy Code that made it impossible to discharge student loans taken out under government programs or qualified under such programs. http://www.bloomberg.com/news/print/2012-03-20/durbin-urges-private-student-loans-be-discharged-in-bankruptcy.html. We quite agree. Student loans have become another “easy money” disaster in the making, much like the easy mortgage loans that go so many people in trouble and have now generated a long-term housing crisis.

Before 1998, student loans could be discharged after 7 years. Now, the only way such loans can be discharged is by showing special hardship. That showing is very difficult to make, and generally requires that the borrower have no present income, and no prospect of any income any time in the future.

We see plenty of people who are saddled with student loans that are 3-10 times their total annual income. Most have no extra money in which to make any payment, without foregoing basic necessaries like food, transportation, or basic medical care.

Many student loan lenders, unlike mortgage lenders, seem to be far more willing to adjust payment terms to meet the borrower’s financial realities. (They can afford to wait, knowing there is no escape and the interest keeps accruing. The result can be perpetual debt. To be fair, if the bankruptcy law changes, lenders may end up being more aggressive and the cost of student loans could go up. But we think that freely lending to people without regard to their ability to repay and without some avenue for repayment or relief is not in our society’s best interest.

We hope the change comes about. One alternative is to make such loans dischargeable in Chapter 13 through a repayment plan, or to setting easier standards for a court to find them dischargeable. However, even if changes in the law do not come (and the lenders have a powerful lobby), many people can discharge other debts or make other arrangements through bankruptcy that can contribute to solving the student loan problem. This needs a careful and individualized review by a qualified attorney.

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