Student Loans

This Week’s Topic: Student Loans

Most people will tell you that student loans can’t be discharged in bankruptcy, but that’s not necessarily true.

Student loans can be discharged, in whole or in part, if repayment would cause undue hardship to the debtor. Once a person files bankruptcy, the burden is on them to ask the court to determine if repayment will cause undue hardship. The request is made by filing an adversary proceeding in the Bankruptcy Court (a lot like filing a lawsuit in any other court). You will have to invest some money in added attorneys’ fees, but if you meet the criteria, it’s well worth doing.

The Department of Education’s guidelines for establishing undue hardship are:

· You can’t maintain a minimal standard of living and pay back the student loan;

· Your current financial condition is likely to continue for a significant portion of the loan payment period; and

· You’ve made a good faith effort to repay the loan.

In an effort to simplify the process, the Department has formulated an Attestation form to be filled out by the debtor, as well as guidance for the Department’s attorneys on how the forms are to be evaluated. It encourages its attorneys to stipulate to the facts whenever possible.

To show that you can’t maintain a minimal standard of living if you pay back the loan, the Department (and presumably the Court), uses much the same income and expense criteria as does the Means Test that applies to the initial bankruptcy filing. As with the Means Test criteria, there are opportunities for adjustments when called for.

As for future ability to pay, there is a rebuttable presumption that someone will not be able to pay in the future if:

· They are 65 or older;

· They have a disability that adversely affects their ability to earn an income;

· They have been unemployed for at least five of the last ten years;

· They did not earn the degree for which the loan was used;

· They have been out of school for at least ten years (these loans are currently being evaluated by the Department for loan forgiveness).

Presumptions make it easier for you to show future ability to pay (or lack thereof). They don’t mean you can present other evidence of a continuity inability to pay.

You should try to establish “good faith” before you file your bankruptcy case. Some things that will help include making a payment (or more than one), seeking a payment modification, discussing modification options with your loan servicer, and entering into an Income Driven Repayment Plan (IDRP). If you haven’t made any efforts to pay, then it’s unlikely that you can meet this requirement once you’ve filed.

You should also determine if your student loan is the kind that is not dischargeable. Some loans are not government loans and may not qualify for protection in bankruptcy. Your employment as a teacher or government employee may also provide opportunities for forgiveness of some or all of the loan amount.

Government programs on student loan forgiveness are changing rapidly. The Biden Administration’s first plan to forgive up to $20,000 in student loan debt was struck down by the Supreme Court but many other initiatives are being discussed. First, a review of IDRP agreements is resulting in corrections in accounting and reduction of outstanding debt. Regulatory improvements to Public Service Loan programs are reducing outstanding indebtedness. Relief is available to those with disabilities through the Total and Permanent Disability Program. Adjustments are being made where there was misconduct by the subject school. Do a little research.

Tip for the Day: if you have student loans, consult an attorney who is up to date on the dischargeability of student loans. It’s worth the investment.

Next week’s topic: What to expect at your 341a.