Recently I published an article over on AVVO about how debtors trying to get themselves out of student loans through a bankruptcy filing soon find themselves caught in a Catch-22 situation. You can read it here.
It wasn’t always this way; up to the mid 1990’s, student loans were dischargeable in bankruptcy seven years after graduation. It was a fair rule, and should be restored. Call your Congressman!
By Doug Beaton
If you have been looking into bankruptcy, and have a lot of student loan debt, you probably have discovered that it isn’t easy to wipe out these loans in bankruptcy court.
Eliminating a student loan requires filing an adversary proceeding (a fancy name for a lawsuit) in addition to the basic bankruptcy case, and then getting yourself declared a special “hardship” case.
This is a difficult, although not impossible, task for most bankruptcy debtors.
But all is not necessarily lost: a bankruptcy in tandem with other proactive action might be a viable course of action.
Syndicated columnist Anya Kamenetz has written that there is no need to go begging just because you have student loan debt. In particular, she advises that you
* not try to avoid the problem by “forgetting” about it;
* investigate income based repayment programs. These are not bankruptcy, and some take 25 years to complete, but can be a way of managing unwieldy payments;
* investigate “forebearance” and “graduated repayment” clauses in the loans you have signed;
*if you (or a loved one) is still in school, avoid private student loans to the extent possible.
For those deep in debt, forbearance or income based repayment plus a bankruptcy filing may be all they need to relieve debt pressures, avoiding the long and costly adversary proceeding route.
By Doug Beaton
When it comes to student loans and bankruptcy, the news is typically grim all around. Student loans can’t be discharged through a typical Chapter 7 case, unless the debtor can prove they are an “undue hardship.” The procedure for claiming undue hardship involves filing suit against the lender and litigating with them; this will typically cost a lot of money, which people with undue hardships don’ t have . . . . and on and on it goes.
So the next question becomes, what is a student loan, anyway? On this subject, the Internet is full of bad advice, because it is quite common to see that only “federal” student loans are subject to the hardship rules. This, it turns out, isn’t true anymore. Private student loans are non-dischargeable was well; as I said, the news on this front is typically all bad!
The misunderstanding goes back to the changes to the bankruptcy code enacted in 2005 (which were mostly bad for consumers, anyway). A new definition of student loan was put in that includes “any other [non-governmental] education loan that is a qualified education loan, as defined in section 221(d)(1) of the federal tax code.”
Turning to the tax code “a qualified education loan” turns out to be any debt incurred by a taxpayer solely to pay “qualified education expenses”.
Qualified education expenses, in turn, are defined by yet other act, the Higher Education Act. They include tuition and fees, books, supplies, transportation, and personal expenses, room and board,
dependent care for children of the student, and telecommunication expenses.
So in the end, just about any private loan connected in any way with going to school will be treated as a non-dischargeable in bankruptcy. Not a very consumer friendly area of the bankruptcy code, I’m afraid!
By Doug Beaton
Imagine waking up one day and finding that your student loan bills were more than half a million dollars.
That is what has happened to Columbus, Ohio family practitioner Michelle Bisutti, according to the Wall Street Journal. She signed on for about half of that bill; when she graduated from medical school in 2003, she had taken out about $250,000 in loans to get her degree. But a deferment while she did her residency, default charges and relentlessly compounding interest have added the rest, and the balance even includes a $53, 870 fee from a collection agency.
“Maybe half of it was my fault because I didn’t look at the fine print,” Dr. Bisutti says. “But this is just outrageous now.”
Dr. Bisutti has found that ditching a student loan is virtually impossible, especially once a collection agency gets involved. Although lenders may trim payments, getting fees or principals waived seldom happens.
Sallie Mae, the nations largest private student lender, supports reforms that would allow student loans to be dischargeable in bankruptcy for those who have made a good-faith effort to repay them, says spokeswoman Martha Holler.
By Doug Beaton
Recent changes to the bankruptcy laws make the elimination of student loans through filing bankruptcy very difficult. In particular, once the debtor has filed her case, she must then file a separate lawsuit in the bankruptcy court against the lender, and then prove to the court that the student loans are causing an “undue hardship,” preventing financial rehabilitation. If the case cannot be settled by agreement with the lender, the debtor may have to conduct a full trial before a bankruptcy judge.
Some of the daunting challenges presented by this rather unusual procedure were demonstrated by one of the last cases decided by the United States Bankruptcy Court in Massachusetts in 2009. The debtor had graduated from Stonehill College with her bachelor’s degree several years ago. She worked a variety of jobs and paid down her student debt while working.
Then the problems came. The debtor married and with her husband had two small children. Her husband was eventully diagnosed with a “violent” seizure disorder, which put him on disability and put her in the position of being unemployed and a full time care taker. By the time she filed for bankruptcy, she had $100 in the bank, about $25 left over in discretionary money left at the end of each month, and sometimes not even that, as she often had to visit pawn shops to make it until her husband’s check arrived.
One of the defenses raised by the lender at the trial was the availability of deferrment or forebearance options in lieu of a bankruptcy discharge. This is a common tactic. The law, however, does not prevent you from seeking a hardship discharge just because deferrment may be an option, and this was emphasized in the Massachusetts decision.
The bankruptcy judge in this case reiterated the strict standard that debtors will be held to before student loan debt will be discharged: they need to see “truly exceptional circumstances, such as illness or the existence of an unusually large number of dependents.”
Fortunately for this debtor, the court agreed that her woes were extraordinary, and she won her trial. The case is Torres v. Department of Education and you may want to read it if you think you are in a similar situation.
Consumers in the Merrimack Valley who find themselves burdened with student loans they can’t pay should seek the advice of a good bankruptcy attorney. Even then they may face a daunting challenge, but preferably they don’t go it alone.
By Doug Beaton