When you are a student, you are always told you can get a loan for college. After all, it’s your education that helps you succeed later in life. But what happens when you’re unable to start your career because of insurmountable debt? People are beginning to learn that a student loan bubble is coming, and if you’re a college student, you could be next. The cost of many colleges has gone up, and the same goes for student loans.
Student debt is a huge and growing problem, and many students are struggling to repay their loans. But just how difficult is it to eliminate a student loan through bankruptcy? While student loans are not dischargeable in bankruptcy the same way that other forms of debt are, some student loans can be eliminated, depending on the type of loan you have, the amount of money you owe, and other factors.
In the past, discharge of student loans in bankruptcy was considered virtually impossible. Several startling cases in recent years are beginning to change this picture.
To repay student loan debt outside the case of death, disability, or borrower protection prior to repayment, you must file a Chapter 7 or Chapter 13 bankruptcy.
In a Chapter 7 bankruptcy – think liquidation – most of your assets are sold and used to pay off debts. Chapter 7 bankruptcy filing may be preferable for people with limited income who cannot pay their debts to various creditors and lenders in full or at all.
Chapter 13 bankruptcy provides for the reorganization of your assets. Unlike Chapter 7, your property will not be sold when you file for Chapter 13. You must complete a court-ordered repayment plan that may allow you to keep your property.
In addition to the need to file for bankruptcy, a 1998 amendment to the Bankruptcy Code indefinitely eliminated the initial seven-year waiting period (between the time payments are due and the time they can be used in bankruptcy). This made student loans in Chapter 7 or Chapter 13 bankruptcies repayable ONLY in cases of unfair hardship. This is a unique standard that other debts, such as credit card debt or medical debt, do not have to meet.
It is for the court to decide whether a borrower meets the criteria for unfair hardship. Courts apply different tests, but most use the Brunner test, which is based on Brunner v. The New York State Higher Education Corporation is located. To perform the Brunner test, the following must be demonstrated:
1. The debtor cannot, on the basis of his current income and expenditure, maintain the minimum standard of living for himself and his dependants if he is forced to pay the student loans.
2. Other circumstances indicate that this situation is likely to continue for a significant part of the student loan repayment period.
3. The debtor made a good faith effort to repay the loans.
In a recent case – Kevin Jared Rosenberg v. New York State Society for Higher Education, 7. January 2020 – a federal judge in New York (the Honorable Cecilia G. Morris, Chief U.S. Bankruptcy Judge) wrote off more than $220,000 in federal student loans by ruling that Rosenberg met the Brunner test.
The Court’s decision in Rosenberg also indicates that the Brunner test has been criticized as too high a standard for most bankruptcy filings.
Those who, like Mr. Rosenberg, have been out of school for years and are struggling with student loan repayment should find the Brunner test itself quite easy. In many cases, however, the interpretation of Brunner introduced penalty provisions that were not actually included in the decision in that case.
Other cases have confused the Brunner test with other judicial decisions and standards, such as. B. Briscoe v. The Bank of N.Y. ruled in 1981 that the borrower’s inequitable hardship was not sufficiently extraordinary:
The ability to repay student loans should be based on the certainty of desperation, not simply the current inability to meet financial obligations…. The term unfair is not defined in the Code, but is a term of art left to the discretion and judgment of the court.
Another example is Jean-Baptiste v. Education. Credit Management. Corp. in 2018, this standard that undue hardship was not considered hopeless is entrenched. He also states that the debtor must prove that his inability to repay his student loan is likely to continue for a significant portion of the repayment period in order to satisfy the second Brunner factor.
Over time, these interpretations – or misinterpretations – of the Brunner test have taken the place of the actual wording of the Brunner decision. Some courts even consider it bad faith for someone who is having trouble repaying a student loan to try to eliminate that debt in bankruptcy court.
It’s no wonder that bankruptcy experts think it’s nearly impossible to discharge student loan debt!
The 31st. August 2020, McDaniel paid $200,000 in private student loans. This case is noteworthy because the court found that Ms. McDaniel did not have to prove that she suffered unfair consequences because her loans were used for something other than tuition. The bankruptcy court found that the borrower’s private student loans did not constitute an obligation to repay funds received as educational benefits and therefore were not subject to the Brunner test.
This decision can certainly be used in future cases where the interpretation of the obligation to repay monies received as educational allowances will be developed. For now, however, it may be limited to the jurisdiction of the 10th Circuit, which includes only Colorado, New Mexico, Oklahoma, Utah and Wyoming.
Sheldon Leary successfully paid off $416,877.56 in federal student loans in bankruptcy. But the judge also imposed more than $378,000 in fines on Great Lakes in September 2020. This lawsuit has more to do with the negligence of the student loan servicer than with the Brunner test discussed above.
In 2015, Leary filed a voidable bankruptcy against Great Lakes Higher Education, the company that administered his loan. Great Lakes did not participate in the adversarial process, nor did the Department of Education. None of them responded. As a result, in March 2016, the bankruptcy court ruled in Leary’s favor and discharged his federal student loans, as his petition was denied.
Great Lakes tried to collect the debt and even threatened to garnish Leary’s wages. In doing so, they completely ignored the numerous warnings and orders given to them in the court’s March 2016 discharge order.
Mr. Leary filed a motion for contempt, alleging that Great Lakes had failed to comply with the bankruptcy court’s order discharging its federal loans. Great Lakes acknowledged receipt of the document but did not respond to the court orders. Judge Glenn imposed a fine of $123,625.52, which was also ignored.
At the August 2020 hearing (more than FOUR years after Leary’s decision), Great Lakes’ counsel blamed inadvertent procedural errors for Great Lakes’ failure to respond to or participate in previous hearings on fines and injunctions.
Judge Glenn wrote:
The Court considers this frivolous excuse completely insufficient. Great Lakes’ … has been a named defendant since September 2015 – this places mr. Leary at a significant disadvantage.
The court thus affirmed Leary’s earlier waiver of a $416,877.56 federal student loan debt. Also, the fines against Great Lakes were tripled to $354,629.62, including an additional $24,000 fine for Great Lakes. This penalty should be paid directly to Mr. Leary for the damages he has suffered over the past five years due to his unfavorable credit rating, aggravation, loss of sleep and anxiety, harassment, pain and suffering, in addition to the deterioration of his family situation.
The judge also ordered Great Lakes and the Department of Education to report the repaid loans to the credit bureaus as fully repaid.
We received emails about Mr Leary’s case as soon as it was reported in the media – frankly, his case is an anomaly. Had Great Lakes responded to Mr. Leary’s bankruptcy petition, it would not have been penalized for not responding and would not have been penalized for Mr. Leary’s suffering.
I have more faith in bankruptcy cases like Rosenberg’s or McDaniel’s, which undermine the myth that student loans cannot be repaid in bankruptcy.
Bankruptcy is an affordable and beneficial option for anyone struggling with debt. Under the Bankruptcy Code, the applicant always has the option of going to court and asking in good faith for a discharge of the debt, regardless of the amount of the debt. The first step in choosing a bankruptcy option is to seek legal advice.
If the Brunner test does not apply to you, but you still need help navigating student loan programs and repayment options, consider student loan repayment assistance.
The experts at Student Loan Planner have extensive experience paying off monstrous student loan balances. We have helped more than 3,600 clients manage more than $935 million in student debt. We can also create a custom plan for you. You don’t have to do it alone anymore.
This source has been very much helpful in doing our research. Read more about what happens to student loans in chapter 7 and let us know what you think.
Frequently Asked Questions
Can Bankruptcy clear student loans?
Bankruptcy filings are on the rise and more and more student loan debt is getting wiped out in the process. Although some of this is due to the Great Recession, the majority of it stems from the fact that more and more students are attending college, racking up a ton of debt in the process. According to the Institute for College Access and Success, the average debt for a 2013 graduate with a bachelor’s degree was $28,400, while the average for a graduate with an associate’s degree was $16,700.
The most common type of bankruptcy is Chapter 7, which allows you to get rid of most of your debts, but not student loans. If you’re considering filing for bankruptcy, you’ll want to know how it affects your student loans, since student loan debt is not discharged in either Chapter 7 or Chapter 13 bankruptcy. However, you may be able to get rid of student loan debt through a different method, called undue hardship.
How do I prove undue hardship for student loans?
One of the most common misconceptions that people have about the undue hardship process for student loans is that you have to be destitute to qualify. This is not true. As long as you can demonstrate that the monthly payments you would have to make on the loans would have a substantial and lasting impact on your ability to maintain a minimal standard of living, you may be eligible for undue hardship. In other words, regardless of whether you have a lot of student loans or just a few, it does not matter. Proving undue hardship is a very complicated process that might not be available to all student loan borrowers.
In order to prove undue hardship, you will need to provide the loan holder with documentation proving that you have suffered from exceptional circumstances that are beyond your control and are causing you to experience severe financial difficulties. Documenting your hardships can be a challenging task, especially since you are trying to prove that your hardship is exceptional.
Do student loans ever get written off?
The majority of students repay their student loans on schedule with no problems. Sometimes, however, life gets in the way—a parent dies, a spouse loses a job, a disability prevents you from working. If that happens, you may be eligible for a postponement or forgiveness of your student loans, or may be able to get loans discharged by a court. While these options can be a lifeline to some, for others they are a myth perpetuated by politicians and others who do not understand the current laws.
Not surprisingly, student loans have gotten stricter in the last couple of years. Even so, there are cases when the financial aid office has forgiven student debt and written off loans. (And sometimes the IRS has too.) To qualify for loan cancellation, you have to meet the conditions set out by the Department of Education, which is very difficult to do. You may qualify, however, if you are totally and permanently disabled or you died, leaving a surviving spouse and/or children who qualify for Federal Student Aid.