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

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…]

Can Long Term Unemployment Support a Claim for Hardship Discharge of a Student Loan

With the economy headed south, I am hearing from more and more people who have either lost their jobs or who have been unemployed for a while with little hope of finding employment soon.  Some of these folks have outstanding student loans and they are not happy at all when the U.S. Department of Education or other student loan servicer grabs their tax refund to pay all or part of an outstanding student loan.

Unlike other creditors, student loan creditors do no have to sue you and obtain a judgment in order to collect from you.  Blog reader Nancy describes a disheartening scenario:

I am dealing with a student loan that’s 25,000.00 and the Department of Education took my tax return from me. I am a single mother with a special needs child and needed every bit of that money. I have been on unemployment since Jan of 08.  Things are not looking up for me in finding employment in my area. I am roommateing with a friend just to make ends meat here and I was told that maybe filing for a chapter 7 would be good for me. I have no credit card debt but I do have some hospital bills. Not sure what I need to do, I know that I can not afford this 25,000 student loans which by the way started out only 15,000. Interest has taken over and made it an impossible dept to pay off.  Please tell me what I should do. I also cant afford to have my taxes taken away every year from something that will never be paid off due to those interest rates.

Here is my response: As a general rule, bankruptcy is not a good tool to reduce or eliminate student loans.  [Read more…]

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