November 24, 2017

Bankruptcy Often the Least Desireable Option to Eliminate Student Loan Debt

elimination of debtI recently received this email from a prospective client (“Jane”) seeking to have her student loans discharged in bankruptcy.  Do you see the problems with this case?

I am permanently disabled due to cognitive decline resulting from a craniotomy to repair one of three aneurysms. I also suffer from back pain, anxiety, depression and panic attacks. In addition to my 2012 brain and gallbladder surgeries, I underwent back surgery in 2011 and two foot surgeries in 2010, and due to complications from my back surgery I have not been able to return to work. . I was very recently approved for disability retirement after 25 years as an employee with the federal government.  I also receive SSI.   I filed a chapter 7 in 2008 and am unsure what my options are in regard to having my student loans forgiven. I am seeking a full discharge.

Let’s start with the most immediate problem – currently, Jane’s eligibility to file bankruptcy.  Under Bankruptcy Code Section 727(a)(8), Jane is not eligible to file Chapter 7 for eight years after previously filing a Chapter 7 1.  Depending on when in 2008 she filed, she would have to wait until at least 2016 before filing a second case. [Read more…]

  1. assuming that the previous Chapter 7 resulted in a discharge

Social Security Disability Payees Now Eligible for Discharge of Student Loans

student loans and SSA disabilityIn an about face from former policy the U.S. Department of Education has released new regulations, effective on July 1, 2013, which state that a student loan borrower’s repayment obligations may be discharged if that borrower has been found totally and permanently disabled by the Social Security Administration.   In an absorbing 61 page restatement of Sections 674, 682 and 685 of Title 34 of the Code of Federal Regulations, the U.S. Department of Education has announced its new, streamlined procedures.

This new policy changes the procedure used by a student loan borrower can petition the Department of Education for loan forgiveness based on the borrower’s total and permanent disability. Under current procedure borrowers with student loans issued under the Perkins loan program, the FFEL loan program or the Ford Federal Direct Loan program could apply for forgiveness on the grounds of disability but the forgiveness rules did not recognize a Social Security Disability Award as proof of total and permanent disability.

In an effort to streamline the total and permanent disability process, the Department of Education will now use a common disability forgiveness procedure for all of its student loan programs rather than a different procedure for each. More importantly, a disabled borrower can now include a copy of his Notice of Award from Social Security as proof of disability. Under current rules, the Department of Education would make its own, independent decision about a borrower’s medical or mental health disability.

[Read more…]

How Chapter 7 Can Help You Pay Your Non-dischargeable Student Loans

Bankruptcy Code 523(a)(8)In my last post, I argued that the current Bankruptcy Code standard for discharging student loans is unduly harsh and burdensome.   Currently student loan debt – and this includes private student loans, government backed student loans, parent incurred loans, and loans paid to schools that have closed down before the student received training or a degree – may not be discharged in bankruptcy unless the debtor can show “undue hardship.”

The courts have read undue hardship to mean some reason beyond the debtor’s control that would preclude repayment.   This usually means that there must be some medical reason that the debtor will not ever be able to return to work.  Underemployment is specifically not a reason to allow undue hardship.  As far as the courts are concerned, debtors who are healthy always have opportunities to increase their income so that they can pay their student loan debt, whether payment comes next year or in 20 years.

It seems oddly inconsistent for the Bankruptcy Code to allow debtors to discharge income tax debt solely based on its age ( income tax debt that is 3 or more years old may be discharged) but for all intents and purposes will not allow for the discharge of student loans despite the fact that:

  • student loans are typically incurred by 17 year olds with little understanding of what real world debt means
  • colleges and student loan lenders have less disclosure requirements than credit card lenders
  • loans remain non-dischargeable even if the school goes out of business and does not provide the education
  • parents who sign for loans have no recourse even though they did not get the benefit of the education
  • colleges have used the wide availability of government guaranteed loans to boost tuition costs at many times the rate of inflation
  • colleges bear no responsibility for offering courses of education that are unlikely to result in salaries sufficient to pay the loans

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Should Student Loan Debt Once Again Be Dischargeable in Bankruptcy?

student loans and bankruptcyLast week, an editor at the Atlanta Journal Constitution contacted me to ask if I would write a guest editorial about student loans and bankruptcy.  Here is a slightly enhanced version of my editorial.  Click on the link to view the original online version of the article

Imagine graduating from college with a tassel and $80,000 of student loan debt.  Now imagine that life happens over the next 15 years – periods of unemployment, no raises, a sick child, and home repairs.  Perhaps you are one of the 50,000 metro Atlanta area families each year who make the difficult decision to file personal bankruptcy.  How does it feel to discover that your student loan debt will survive bankruptcy, never to go away.  Tax refunds?  Seized.  Wages, bank accounts, even Social Security?  Garnished. [Read more…]

Student Loan Debt may be a Bigger Problem than Credit Card Debt

how to pay student loan debtUSA Today recently reported that student loan debt in the United States, which totals $850 billion, now exceeds outstanding credit card debt in the U.S., which totals $828 billion.

USA Today gets its numbers from a web site publisher named Mark Kantrowitz, who publishes two scholarship matching services called FinAid.org and FastWeb.com.  I was unable to independently verify Mr. Kantrowitz’ numbers but if you Google “total credit card debt in U.S.” and “total student loan debt in the U.S.” you will get numbers in the range quoted in the USA Today article.

I actually thought that a more interesting element of this issue has to do with the monthly repayment numbers facing borrowers.  The USA Today article suggests that $30,000 of student loans, payable at 6.8% interest over ten years would amount to $350 per month.  At this level of debt, the average person would need to earn at least $42,000 per year.

In my practice I have frequently seen student loan debt far in excess of $100,000, with monthly payments over $1,000.

In a bankruptcy context, student loan debt is not dischargeable except in cases of “undue hardship.”  In the Northern District of Georgia, “extreme hardship” has essentially been limited to student loan debtors who have a medical issue that prevents them from working.   At this point in time, debtors in the Northern District have not been successful in arguing for hardship discharge on the grounds that they cannot find a job that pays enough to support their student loan obligations.  There was a recent Supreme Court decision involving student loans and bankruptcy, but that case did not address the substantive issue of what constitutes “undue hardship.” [Read more…]

Student Loan Discharge Case Heard by U.S. Supreme Court

student loanEarlier this month the U.S.  Supreme Court heard arguments in a case involving the question of discharge of student loans in a Chapter 13 case.   The case arose from a Chapter 13 petition filed in 1992 by Francisco Espinoza, an American Airlines baggage handler.

Mr. Espinoza’s story began in 1988.  Sensing that airline baggage handling was not a great long term career, Mr. Espinoza enrolled  in a technical school to learn computer drafting and design, and he financined his education with a student loan.  Unfortunately, he was not able to find a job using his new education and he found himself in a financial bind when American Airlines froze wages and reduced his hours.

By 1992, Mr. Espinoza found himself living paycheck to paycheck and unable to pay down his $13,000 student loan.  At that point, he contacted a lawyer and filed a Chapter 13 bankruptcy.   The Chapter 13 plan prepared by Mr. Espinoza’s lawyer provided for full payment of the balance due on the student loan over the term of the plan but it did not provide for payment of $4,000 in accrued interest or for future interest.

[Read more…]

Student Loan Debts – Bankruptcy Won’t Help Much

I have been getting a lot of calls and emails lately about student loan debt.  Perhaps with the economy in recession, student loan creditors are becoming more hard line about collecting, and student loan debtors have good reason to be worried.

Federal government involvement in the student loan business means that collection resources not available to regular creditors come into play.   There is one statute that permits student loan creditors to garnish wages without the need to first go to court.   Student loan claims can also offset tax refunds.

Blog reader Janet describes an all too common scenario as follows:

I am unemployed and have defaulted student loans.  I was married last April and my husband’s tax return was offset as a lovely wedding gift.  I am researching how to file for bankruptcy for my other debts and [Read more…]

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