Student Loans

STUDENT LOAN DEBT CAN BE MANAGED OR ERASED

FACTS ABOUT STUDENT LOAN DEBT

Total student loan debt is presently about $1.23 Trillion.
Total credit card debt is $733 Billion,
Student loan debt exceeds credit card debt by 68%.

STUDENT LOAN DEBT IS A NATIONAL CRISIS – Student loan debt is regularly referred to as a national crisis by commentators, attorneys and politicians.

COST OF STUDENT LOAN IS OFTEN GREATER THAN THE INCOME GRADUATES WILL EARN TO REPAY IT – The amount of debt students incur for their education has increased, but incomes earned from the education funded by student loan debt has not increased accordingly.

PRIVATE STUDENT LOAN CRISIS is like the mortgage crisis, i.e., lenders made loans without regard to whether the individuals could re-pay. Private student loan debt can be challenged in the same manner many mortgages were successfully challenged related to the mortgage crisis

MANAGING STUDENT LOAN PROBLEMS

KNOW YOUR STUDENT LOANS – All federal loans are listed at the NSLDS Website. You can identify private student loans from your credit report (subtract the federal loans). It may be necessary to call the schools to get this information. Private student loans are installment loans with a bank.

PRIVATE STUDENT LOAN OPTIONS – No reduced or income-based payment options are available. If you are current, continue to pay and stay current. You could also try to refinance to a lower interest rate with SoFi and roll private and federal loans together. If you are not current, you could call the bank and try to get back into repayment status with them. You may also try to wait out the statute of limitations (4 years from the last payment, so if you haven’t made payments for 2 years, you would have 2 years left on the statute of limitations). Note, there is no statute of limitations for federal loans. An interesting idea you might consider is plan a strategic default, wait until when or if private lender sues, and carefully evaluate the validity of the underlying contract and documentation. Whereas you might not be able to eliminate student loan debt in bankruptcy, your attorney has a chance of winning a lawsuit known as NCT lawsuit, National Collegiate Student Loan Trusts. Billions in overdue private student loan debt can be erased because of missing paperwork.

KNOW YOUR REPAYMENT OPTIONS FOR FEDERAL LOANS IN GOOD STANDING – You can do this yourself with the use of two excellent websites: Student Aid Website and NSLDS. See discussion below.

GET DEFAULTED FEDERAL LOANS OUT OF DEFAULT BY EITHER CONSOLIDATION OR REHABILITATION – Consolidate student loan debt by getting a new student loan that pays off all of the old loans including loans in default. You need at least two loans to consolidate. Loans being garnished are not eligible, to restore them to eligibility, make a few payments to get the garnishment stopped. If Consolidation is not an option, try Rehabilitation. Each loan is rehabilitated individually. You must make 9 payments in 10 months. The rehabilitation is complete when you complete the 9 payments. If you rehabilitate then default, you can’t rehabilitate again.

ELIMINATING STUDENT LOANS IN BANKRUPTCY

ELIMINATING STUDENT LOANS IN BANKRUPTCY IS VERY HARD TO ACHIEVE IN MOST INSTANCES. 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

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 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.2^nd 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 the 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.3^rd 549 (8^th 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 non-discharge ability 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).

PAYMENT OPTIONS FOR FEDERAL STUDENT LOANS IN GOOD STANDING

Loan Forgiveness and Taxation of Forgiven Debt Income. A common element of all income-driven plans discussed hereafter is that they provide for loan forgiveness after either 20 or 25 years of payments. Borrowers will get a 1099 for the forgiven debt and will owe taxes on it. There are certain instances specified in the Internal Revenue Code where borrowers may be excluded from this tax requirement such as insolvency.

Income-Driven Payment Plans. There are five different income-driven repayment plans: IBR (Income Based Repayment), IBR for New Borrowers, ICR (Income Contingent Repayment)< PAYE (Pay as you Earn), and REPAYE (Revised Pay as you Earn).

All payment plans are based on your income, some plans require consideration of your spouse’s income.

All payment plans require you to verify your income annually. If you do not, you drop out of the plan, you can always get back in the plan.

Payments are adjusted up or down each year based on your income for that year.

If you remain in the program for the required 20-25 years and make all of your payments, then whatever balance you still owe is forgiven. Borrowers will get 1099 for the amount of the forgiven debt and will owe taxes on it. There are certain instances specified in the Internal Revenue Code where borrowers may be excluded from this tax requirement such as insolvency. This is one of the few options for the forgiveness of your student loans. In the past, student loan debt was dischargeable in bankruptcy after a period of regular repayment for so many years. Forgiveness of debt in whole or part may be negotiated in litigation to discharge the debt in bankruptcy.

The Federal Student Aid Website will evaluate all of your options for you for income-based repayment of your debt. Your attorney can help you navigate this website if you desire.

CHAPTER 13 ADMINISTRATIVE DEFERRMENT CAN HELP DEBTORS WITH STUDENT LOANS.

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 repay 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) if not paid by the government. 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 repayment 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.2^nd 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 the significant portion of the repayment period of the student loans;
That the Debtor has made good faith efforts to repay the loans.

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

PRIVATE STUDENT LOANS

Private 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. PRIVATE STUDENT LOANS MAY BE DISCHARGED IN BANKRUPTCY IN SOME INSTANCES. Abuse Prevention and Consumer Protection Act of 2005 expressly included private loans in the presumption of non-discharge ability 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 list of federal student loans 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 under certain circumstances.

CANCELLATION OF STUDENT LOAN DEBT – Student loan debt can be cancelled or forgiven outside of the context of an income-dri8ven plan under very specific and narrow circumstances such as the Closed School Discharge, Total and Permanent Disability Discharge, Death Discharge; False Certification of Student Eligibility or Unauthorized Payment Discharge; Unpaid Refund Discharge; Teacher Loan Forgiveness. Teacher Cancellation.