Blog
Law Offices of Chance M. McGhee

Call Today for a FREE Consultation

210-342-3400

Archive for the ‘Student Loans’ Category

Chapter 13 Timing to Discharge Student Loans

November 2nd, 2020 at 8:00 am

  

Discharging a student loan requires meeting the difficult condition called undue hardship. Chapter 13 can help through more flexible timing.

 

We’re in a series on the best timing for filing your bankruptcy case. Two weeks ago we introduced the special condition you have to meet to discharge (write off) student loans: undue hardship. Last week we focused on how to better meet that condition with smart timing of a Chapter 7 “straight bankruptcy” case. Today we get into doing that with a Chapter 13 “adjustment of debts case.

Undue Hardship Requirements

We’re focusing on the phrase “undue hardship” because the law clearly establishes that as a condition for discharging student loans. The U.S. Bankruptcy Code says you can’t discharge a student loan unless paying it “would impose an undue hardship on the debtor [you] and the debtor’s dependents.” Section 523(a)(8). Generally bankruptcy courts have interpreted “undue hardship” to include three requirements. Each has a timing consideration. We’ll look at these three, showing how the timing benefits of Chapter 13 case can help you meet them.

Crucial Benefit of Chapter 13: the Long Automatic Stay

But first we need to introduce a crucial benefit of Chapter 13. It’s actually a benefit of all bankruptcy cases, but is especially strong in Chapter 13. And it provides you major advantages with student loans.

We’re talking about the “automatic stay.” This is the federal law that immediately stops almost all collection actions against you. It goes into effect the moment you and your bankruptcy lawyer file your case.

What’s crucial for our purposes here is that this protection usually lasts the length of your case. That’s not very long in a Chapter 7 case: only 3 or 4 months most of the time. In contrast, a Chapter 13 case generally lasts 3 to 5 years. So its automatic stay protection lasts that long. Meaning that your student loan creditors would be stopped from collecting throughout those 3 to 5 years of your Chapter 13 case. This is a huge benefit on its face; it can be even more so for meeting the undue hardship requirements.

1. Presently Inability to Pay

This long period of protection from collection allows you to delay establishing the required present inability to pay the student loan. You have to be experiencing “undue hardship” at the time your bankruptcy lawyer asks the bankruptcy court for the discharge of your student loan. With Chapter 13 you can file the case, imposing immediate automatic stay protection against your creditors, before qualifying for undue hardship.  In particular you can file when anticipating that you would be able to qualify within the following 3-to-5-years.  In the meantime your student loan creditor(s) is (are) prevented from requiring payment and taking other collection actions.

For example, assume you have a worsening chronic medical condition. But that condition doesn’t currently prevent you from maintaining a minimal standard of living if you paid the student loan. Filing Chapter 13 now would protect you from the student loan(s) and the rest of your creditors. Then you could wait as long as 5 years for your condition to worsen until you did meet this requirement.   

2. Extended Inability to Pay

The second requirement of undue hardship looks into the future. Your inability to maintain even a minimal standard of living must be predicted to last throughout most of the student loan repayment period. The advantage in Chapter 13 here is similar to the first requirement just discussed. Being able to wait to file the request for an “undue hardship” discharge as much as years after filing the Chapter 13 case increases your ability to meet this second requirement.

For example, assume you were in a serious vehicle accident a few months before filing the Chapter 13 case. You are receiving short-term disability payments. You need bankruptcy protection from all your other creditors now. But you do not yet know your long-term medical prospects, and thus your financial prospects. Specifically you don’t know whether you will be able to maintain a minimal standard of living throughout the student loan repayment period. Filing Chapter 13 now would protect you from all your creditors, including the student loan one(s). And it would keep you protected as your medical condition stabilized and your financial prospects got clearer. If you qualified for long term undue hardship then, your bankruptcy lawyer could file the request then. You’d more likely qualify because the future would be clearer then.

3. Prior Effort to Pay or Make Other Arrangements

The third requirement is that you must have taken certain action in the past before requesting a student loan discharge. You must have made a meaningful effort to repay the loan. Or else you must have applied for appropriate administrative programs for deferring or reducing payments on it.

In the midst of a Chapter 13 case you may or may not make any direct payments to the student loan creditor. This depends on the rules of your local bankruptcy court. Same with your ability to apply for the administrative fixes. Talk with your local bankruptcy lawyer about this.

If there isn’t great urgency to file the case, your lawyer may well counsel you to apply immediately for the administrative payment-delaying or reducing programs. That way you can better position yourself to meet this part of the test before filing the Chapter 13 case.

Even Without an “Undue Hardship” Discharge, Get Collection Protection

In these Chapter 13 scenarios, at the time of filing you’ll likely not know whether you’ll eventually qualify for hardship discharge. Time will pass while you’re in your case, and your medical/financial circumstances may deteriorate. Or they may improve, so that you don’t qualify for undue hardship. But the automatic stay would protect you from your student loan creditor(s) in the meantime. At some point during the case you may qualify for undue hardship.  But if eventually you don’t, you still would have gotten relief from your student loan creditor(s) during that time. 

 

Chapter 7 Timing to Discharge Student Loans

October 26th, 2020 at 7:00 am

Discharging a student loan requires showing undue hardship. The timing of your Chapter 7 filing can determine whether you succeed in this.   

 

We’re in a series on the smart timing of your bankruptcy case. Last week we introduced the special condition you must meet to discharge (write off) student loans: “undue hardship.”

Bankruptcy discharges other special forms of debt—such as income taxes—after the passage of a certain amount of time. But student loans are different in that there is no explicit time period laid out in bankruptcy law. Rather “undue hardship,” the condition you must meet to discharge a student loan, often has timing considerations within it. That is, qualifying for “undue hardship” may require timing your bankruptcy case right.  You may not be in “undue hardship” at one point but could be earlier or later.

Today we show that can play out under Chapter 7 “straight bankruptcy.”(Next week we’ll do the same under Chapter 13 “adjustment of debts.”)

Undue Hardship Requirements

The U.S. Bankruptcy Code says you can discharge a student loan if it “would impose an undue hardship on the debtor [you] and the debtor’s dependents.” Section 523(a)(8). Generally bankruptcy courts have interpreted “undue hardship” to require meeting the following three conditions. Each has a timing consideration. We’ll look at each of these three, showing how they can affect the timing of your Chapter 7 case.

1. Presently Inability to Pay

You first need to show that if you had to repay the student loan under your current income and expenses, you would be unable to maintain even a minimal standard of living.

This focuses on the present. It asks whether, as of the time you are asking for the “undue hardship” discharge, you meet this condition.

The timing issue here should be obvious. You might be able to meet a minimal standard of living while paying your student loans at one point. But then you can’t after your life circumstances change. Or maybe it’s the other way around. You can’t meet that condition now but you may be able to do so in a few months after your circumstances improve.

For example, a person may have a chronically worsening medical condition. For the moment he or she may be able to work and pay the student loan. (This may be after discharging all of his or her other debts through a Chapter 7 case.) But the person may be able to realistically anticipate being unable to work in the future.

Here it likely makes sense to wait to file a Chapter 7 case until her or she can no longer work. That’s especially true if that transition is happening reasonably soon.

2. Extended Inability to Pay

Then you need to show that you expect that your present inability to pay is going to last for an extended period.

This second condition focuses on the future. It asks whether any present “undue hardship” is expected to last through a significant part of the loan repayment period.

This is a more challenging condition because it involves predicting the future and convincing a bankruptcy judge about it.

Here’s an example. Imagine if someone was in an extremely serious vehicle accident a couple of months ago. He or she is presently medically incapacitated and unable to work. Assume that for now the person absolutely can’t afford to pay anything towards his or her student loan(s). But it’ll take a while until the doctors can reliably predict the person’s long-term health prospects. Also, if another driver allegedly caused the accident there may be litigation to determine fault and the amount of damages. So currently this person’s future financial prospects are very unsettled. It’s an open question how long he or she will continue to be unable to pay the student loan(s). In particular it’s unknown whether this inability will persist for much of the remaining term of the student loan(s).

Here it could make sense to wait to file a Chapter 7 case until knowing better whether the physical disability and financial incapacity are expected to continue for that length of time.

3. Prior Effort to Pay or Make Arrangements

And third, you need to show that you previously made a meaningful effort to repay the loan. Some other available arrangements may also qualify.

This last condition focuses on the past. It asks whether you’ve reasonably addressed your student loan debt(s), by making payments when you could and/or trying to get some kind of administrative relief before asking for the “undue hardship” discharge.

Here we’re looking backwards instead of forward. You can’t change the past. But you may be able to take appropriate steps now so that in the future the past will be different. Then you could more likely meet this condition when filing a Chapter 7 case in the future.

 For example, consider a person who has recently started being obligated to pay a student loan and can’t do so. He or she likely needs to first try to defer and/or reduce payments before qualifying for “undue hardship.” Or, consider another person who’s been in repayment mode but has not looked into the administrative possibilities lately. It will likely be necessary to do so to show this effort and then file a Chapter 7 case afterwards.

Timing Choices Can Be Tough

Almost always the timing of a bankruptcy case involves the weighing of different pressures. Does it make sense to delay filing to improve your likelihood of qualifying for “undue hardship”? Or are there other immediate and looming creditor problems that press for an earlier bankruptcy filing?

This is one of the most important benefits of having a bankruptcy lawyer. He or she will enable you to understand the timing options, and the advantages and disadvantages of each. The options will likely be impossible to weigh realistically otherwise.

 

Bankruptcy Timing to Discharge Student Loans

October 19th, 2020 at 7:00 am

  

Discharging—permanently writing off—student loans can be difficult. You may be able to make it easier to do with good bankruptcy timing.   

Discharging Student Loans in Bankruptcy

It takes certain circumstances to discharge student loans. Those circumstances can involve the right timing of your bankruptcy case.

Bankruptcy discharges most debts. But it “does not discharge” you from a student loan unless not discharging that debt “would impose an undue hardship.” “[I]mpose an undue hardship” on whom? “[O]n the debtor [you] and the debtor’s dependents.” Section 523(a)(8) of the U.S. Bankruptcy Code.

What does that mean and how is it affected by the timing of your bankruptcy case?

“Impose an Undue Hardship”?

What does it take for you and your dependents to suffer an “undue hardship”? The Bankruptcy Code defines many terms (See Section 101, Definitions), but not this one.

Often when Congress deliberates and passes a statute there is discussion about the meaning of a term within the statute. That’s its “legislative history.” But there is no such helpful written explanation here. “The legislative history…  also fails to precisely specify how courts should determine whether a debtor qualifies for a discharge based on an undue hardship.” Ashley M. Bykerk, Student Loan Discharge: Reevaluating Undue Hardship… , 35 Emory Bankr. Developments J., 509, 512-513 (2019).

So the bankruptcy courts have been left to figure out, case by case, what qualifies as “undue hardship.”

The courts start with those two words. Congress added “undue” apparently to create a standard that is beyond or more than a simple hardship. “Undue” means “exceeding what is appropriate or normal; excessive.” So Congress seemed to say that to discharge a student loan it’s not enough if it’s causing you a hardship. It must be causing you a more-than-normal, excessive hardship.

But how is such a level of hardship determined in practice?

The 3-Part Test

As bankruptcy courts throughout the country have interpretted “undue hardship,” over time they’ve settled on a 3-part test. There are some differences among the courts but generally you need to meet the following three conditions:

1. If you had to repay the student loan under your current income and expenses, you would be unable to maintain even a minimal standard of living.

2. This inability is expected to last for a significant part of the loan repayment period.

3. You previously made a meaningful effort to repay the loan, or to qualify for appropriate forbearances, consolidations, and payment-reduction programs.

The Timing Considerations of the 3-Part Test

When you look at these three conditions you can see that each has a timing component:

1. The first condition focuses on the present. It asks whether, under your income and expenses as of the time you are asking for the “undue hardship” discharge, you’d be unable to maintain even a minimal standard of living if you had to repay the student loan.

2. The second condition focuses on the future. It asks whether any present “undue hardship” is expected to last through a significant part of the loan repayment period.

3. The third condition focuses on the past. It asks whether you had made a meaningful effort to repay the loan or to qualify for appropriate administrative relief before asking for the “undue hardship” discharge.

Whether or not you qualify under these conditions can shift over time. For example, you may be expecting worsening health which will reduce your income and increase expenses. So you may be currently able to maintain a minimal standard of living but won’t when your health worsens.  So you may not meet the first condition today but expect to later. Thus, whether you qualify for an “undue hardship” discharge can turn on when you file your bankruptcy case.

Next

The next two blog posts will show how you and your bankruptcy lawyer can use these principles to your benefit. We’ll look at pertinent timing issues when filing a Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts.” Feel free to call us, your bankruptcy lawyers, in the meantime.

 

Is Student Loan Debt Dischargeable in a Texas Bankruptcy?

June 1st, 2020 at 7:51 pm

TX bankruptcy attorney, Texas student loan debt attorney Student loan debt is something that is becoming an issue in the United States. According to the latest statistics from Forbes, there are currently an estimated 45 million borrows who collectively owe about $1.56 trillion in debt for student loans. Of those, around 11 percent are delinquent on their loans, which means they are 90 days or more late on a payment. For many borrowers, student loan payments are expensive and they are struggling to make ends meet. Many have inquired as to whether or not student loan debt is dischargeable in bankruptcy, but the answer is not quite as simple as a “yes” or “no.”

Is it Even Possible?

Many people believe that student loans are ineligible to be included in a bankruptcy and they would be correct — but only in most situations. It is not impossible to discharge your student loan debt in a bankruptcy case, but it will make your bankruptcy more difficult because you will have to file an adversary proceeding to determine whether or not you are eligible to have your student loans discharged.

Determining “Undue Hardship”

During the adversary proceeding, the court will determine whether or not you have demonstrated that paying your student loans has caused you “undue hardship.” The difficulty with this determination is that it was never actually defined and was therefore left up to individual courts and judges to determine. The most commonly used test to determine eligibility for student loan discharge is called the Brunner Test and consists of proving three simple points:

  • You cannot maintain a minimal standard of living in addition to supporting your dependents if you continue to pay the debt
  • Your financial distress is likely to exist for a majority of the repayment period of the loan
  • You have made good faith efforts to repay the loan thus far

Contact a San Antonio, TX Bankruptcy Attorney

If you are having difficulties making your monthly student loan payments because you also have other types of debt, such as credit card or auto loan debt, you still may have options. At the Law Offices of Chance M. McGhee, we can help you determine whether or not you should pursue bankruptcy and include your student loans in your discharge, or if your best option would be to take another route. Our skilled New Braunfels, TX bankruptcy lawyer can help you through the bankruptcy process from beginning to end. Call our office today at 210-342-3400 to schedule a free consultation.

 

Sources:

https://www.studentloanborrowerassistance.org/bankruptcy/#:~:text=Home%20%C2%BB%20Bankruptcy-,Bankruptcy,has%20shown%20an%20undue%20hardship.

https://studentaid.gov/manage-loans/forgiveness-cancellation/bankruptcy

https://www.forbes.com/sites/zackfriedman/2020/02/03/student-loan-debt-statistics/#f9cfa89281fe

Student Loan Changes in the CARES Act

April 20th, 2020 at 7:00 am

The recent coronavirus relief law includes help for some student loan borrowers—suspending payments, interest, collections, credit reporting.  

 

The 880-page Coronavirus Aid, Relief, and Economic Security Act (“CARES”) has 4 pages of help for certain student loan borrowers. Section 3513 of CARES. It provides meaningful albeit temporary help, for those who qualify by having the right kind of student loan.

The Kinds of Student Loans Covered

First, the relief applies only to federal student loans, not to private student loans. The private loan portion of student loans has been growing but still only consists of about 8% of student loans. Nevertheless, private student loans total about $125 billion. The CARES Act does not help if you owe any of this.

Second, not all federal student loans are included. Direct Loans—those made directly by the federal government’s Department of Education—are covered. Federal Family Education Loans—FFELs—are covered if they’re currently owned by the federal Department of Education. FFEL loans held by commercial lenders and campus-based Perkins loans are not covered. These non-covered loans amount to only about 12 percent of federal student loan dollars, so most federal student loans are covered.

The Key Benefits

For the applicable federal student loans, CARES accomplishes the following:

  1. Suspends all loan payments through September 30, 2020.
  2. Waives interest during this suspension period.
  3. For credit reporting purposes, the lender must treat each suspended payment as if the borrower actually paid the payment.
  4. Student loan creditors must suspend involuntary collection during the suspension period.
  5. The payment suspension time counts for purpose of loan forgiveness and loan rehabilitation.

1. Payment Suspension

The new law suspends “all payments due for [applicable student] loans… through September 30, 2020.” Section 3513(a), CARES Act. The law did not specify when this non-payment period started. But since then the U.S. Department of Education has specified that the “administrative forbearance will last from March 13, 2020 through September 30, 2020.” (Administrative forbearance means a “temporary suspension of payments.”) Coronavirus and Forbearance Info for Students, Borrowers, and Parents.

If you’ve already made a payment during the same March 13 through September 30, 2020, your student loan servicer should refund it to you. This includes auto-debit payments, which are supposed to stop automatically during this same period. Coronavirus and Forbearance Info for Students, Borrowers, and Parents.

2. Interest Waiver

“[I]nterest shall not accrue on a[n applicable student] loan… for which payment was suspended for the period of the suspension.” Section 3513(b), CARES Act. So no interest will accrue during the March 13 through September 30, 2020 period. This should happen automatically, without requiring any action by you. Coronavirus and Forbearance Info for Students, Borrowers, and Parents.

3. Credit Reporting

“During [this same] period… , for the purpose of reporting information about the loan to a consumer reporting agency, any payment that has been suspended is treated as if it were a regularly scheduled payment made by a borrower.” Section 3513(d), CARES Act. The suspended payments should show as actually made payments on your credit reports.

4. Collection Freeze

“During the [same ]period [the loan servicers] shall suspend all involuntary collection related to the loan.” Section 3513(e), CARES Act. The law lists three specific types of collection that are explicitly included: wage garnishment, tax refund offset, and administrative offset by “a reduction of any other Federal benefit payment.” But it also broadly adds “any other involuntary collection activity.” Section 3513(e)(1-4), CARES Act. So during the March 13 through September 30 period, no collection activity of any kind should happen on the applicable student loans.

5. Non-Payments Count

“[E]ach month for which a loan payment was suspended [counts] as if the borrower of the loan had made a payment for the purpose of any loan forgiveness program or loan rehabilitation program… for which the borrower would have otherwise qualified. Section 3513(c), CARES Act.

This means that if you are now in an Income-Driven Repayment (IDR) plan, these months of non-payment count towards loan forgiveness as if you had made the payments. The same is true for monthly credit towards Public Service Loan Forgiveness (PSLF). Also, if you are working on “rehabilitating” your defaulted student loan, the suspended payments count as payments made for that purpose. Coronavirus and Forbearance Info for Students, Borrowers, and Parents.

 

Note: Please see our last several blog posts for information on other relevant aspects of the CARES Act. Contact your local bankruptcy lawyer to apply these to your own unique circumstances.

 

Bankruptcy Can Write Off a Student Loan, IF it Causes Undue Hardship

March 18th, 2019 at 7:00 am

Writing off student loans is not easy. You must convincingly show that paying the loan causes you undue hardship, a tough condition to prove. 

 

 

Criminal fines and restitution and child and spousal support are types of debts that bankruptcy essentially never discharges. Income taxes can be discharged but only after meeting certain conditions. We’ve covered these in our last few blog posts. Today we cover student loans.

Student loans are more like income taxes than criminal or support debts in that they CAN get discharged in bankruptcy. Like an income tax, a student loan just needs to meet certain conditions.

But unlike an income tax debt, the conditions for discharge of a student loan are much vaguer. Most of the income tax conditions are clear. These conditions require a precise understanding of the law and a thorough knowledge of the facts of your case. But if you and your bankruptcy lawyer are careful, you should know before you file your bankruptcy whether you can discharge a tax debt.

Discharging student loans, in contrast, require meeting an ambiguous condition called “undue hardship.” Its ambiguity means that it’s much harder to predict whether or not a student loan will be discharged in bankruptcy.

Furthermore, because of this vague condition it’s possible to get a partial discharge. You may continue to owe some but not all of a particular student loan debt. Or if you have multiple student loans you may discharge some but not all of them.

“Undue Hardship”

Bankruptcy law states that an educational loan or benefit overpayment is not discharged in bankruptcy unless it “would impose an undue hardship on [you or your] dependents.” Section 523(a)(8) of the U.S. Bankruptcy Code.

Can you show the bankruptcy court that paying a student loan causes you “undue hardship”? If so bankruptcy can forever discharge that debt.

A More Precise Meaning of “Undue Hardship”

How does your bankruptcy court decide whether or not a student loan causes you a hardship?  

How bad does a hardship need to be to qualify as an undue hardship?

In most parts of the country “undue hardship” requires you to establish all three of the following:

1. You currently cannot maintain even a minimal standard of living (for yourself and any dependents) if you pay the student loan.

2. This present financial situation is realistically anticipated to continue through the loan’s term of repayment.

3. You have acted responsibly in the past regarding the student loan, by making a serious effort to pay it and/or to attempt to qualify for any of the available programs to reduce or manage the loan.  

The Student Loan Survives Unless You Establish “Undue Hardship”

It can be difficult to meet all three of these. If you don’t, you continue to owe the student loan.

Furthermore, the student loan creditor does not have to take any action itself. You and your lawyer have to raise the issue yourself. It’s up to you to start the ball rolling.

Generally you do so by filing an “adversary proceeding” during your bankruptcy case. This is a legal proceeding focusing exclusively on whether you qualify for a “hardship discharge” of the student loan.

If you believe you qualify, you could file a Chapter 7 “straight bankruptcy” case. Then your lawyer would file an adversary proceeding during the 3-4 months a basic Chapter 7 case usually lasts.  The student loan creditor would most likely object. There would then be a trial with evidence on whether you meet the necessary factors to show undue hardship. There’s no jury—the bankruptcy judge decides.

You can do the same thing within a Chapter 13 “adjustment of debts.” Because this kind of bankruptcy usually lasts 3 to 5 years, it gives you more timing options. Chapter 13 would usually allow you to avoid making student loan payments at least temporarily. Then once you think you qualify for undue hardship your lawyer would file the adversary proceeding. This could be especially helpful if you have a deteriorating medical condition or an anticipated reduction in income.

Summary

Student loans are dischargeable in bankruptcy, but undue hardship is an ambiguous and often tough condition to prove. The law of undue hardship as interpreted by the courts is constantly adjusting, and can be slightly different in different bankruptcy courts. So it’s crucial to get highly competent legal advice about what’s best for you.

 

Can I Discharge My Student Loans in Bankruptcy?

January 25th, 2019 at 10:48 pm

bankruptcyThere are over 44 million young adults in the United States who currently have student loan debt. Those 44 million people owe a combined total of $1.52 trillion, with the average borrowing being $37,000 in debt by the time they graduate. Student loan debt is a rising issue, especially since many have trouble making their payments. One of the most searched questions online is, “Can I discharge my student loans in bankruptcy?” In short, no, you usually cannot, but as with many things, there are a few exceptions to that rule.

The Brunner Test

In 1998, a law was passed that stated you could not discharge student debt unless you could prove that repaying that debt would cause you undue hardship. In 2005, that law was extended to all types of student debt, including private student loans.

Proving undue hardship can actually be quite difficult. The test that is most commonly used in court to determine whether or not you would be experiencing undue hardship is called the Brunner Test. The test is actually quite simple and consists of three elements. These are:

  • Making student loan payments would not allow you to maintain a minimum standard of living because of your current income and expenses;
  • You have extenuating circumstances that make it likely that you will be in the same financial situation for most of the duration of the repayment period; and
  • You have attempted to repay the loan by seeking alternative repayment options and limiting your expenses as much as possible.

This is the basic formula that most courts will use to determine if you are experiencing undue hardship. Some courts will take into account other facts, like age, income, health, other financial circumstances and other factors.

A New Braunfels Bankruptcy Lawyer Can Help You Choose Your Best Course of Action

It can be difficult to know when you need to file for bankruptcy. There are many other options for student loan repayment than a bankruptcy. For federal loans, there are income-driven repayment plans and many private loan servicers will also work with you to create a repayment plan. Bankruptcy should be used as a last resort, but sometimes it is necessary. If you are thinking about filing for bankruptcy, contact us at the Law Offices of Chance M. McGhee. Our skilled Kerrville bankruptcy attorneys can help you go over your finances and choose which type of bankruptcy would be best for your situation. Call our office today at 210-342-3400 to schedule a free consultation.

 

Sources:

https://www.forbes.com/sites/zackfriedman/2019/01/09/student-loans-bankruptcy-discharge/#3230fc0e6d56

https://www.forbes.com/sites/zackfriedman/2018/06/13/student-loan-debt-statistics-2018/#774d1c7310fa

https://www.nerdwallet.com/blog/loans/student-loans/student-loans-bankruptcy/

The Surprising Benefits: Deal with Student Loan Collection with Chapter 13

July 9th, 2018 at 7:00 am

Qualifying for “undue hardship” to discharge (write off) student loans is not easy. But Chapter 13 gives you powerful help over the timing.

 

The Much Better Chapter 13 “Automatic Stay”  

Last time we explained how bankruptcy’s “automatic stay” immediately stops student loan collections against you. But if you file a Chapter 7 bankruptcy this protection from collections lasts only the 3-4 months that the case lasts. If you qualify under “undue hardship,” you could discharge (write off) your student loan debt during your case. Then the student loan creditor could no longer collect that debt.

But if you can’t show “undue hardship,” Chapter 13 buys you much more time, and more timing flexibility.

Chapter 13 Simply Buys More Time

Chapter 13 buys more time because a typical case lasts 3 to 5 years. The “automatic stay” prevents collection actions this entire length of time.  A student loan creditor could try to persuade your bankruptcy judge to allow it to collect before the end of your case.  But usually this doesn’t happen. So regardless of anything else, Chapter 13 puts off your student loan creditor(s) for a fairly long time.

Chapter 13 May Buy Time Until You DO Qualify for “Undue Hardship”

To discharge a student loan you (or your dependent) must be experiencing an “undue hardship” at that time.  Chapter 13 gives you the flexibility of waiting for up to 5 years until you meet that condition. You file the case, and throughout its life your student loan creditor(s) is (are) prevented from collecting. Then, as soon as you do qualify for “undue hardship,” your bankruptcy lawyer would file the discharge petition.

For example, assume you or a financial dependent had a worsening chronic medical condition. But that condition was NOT YET preventing you from working, so that you were not yet in the circumstances that your student loan(s) was (were) preventing you from maintaining even a minimal standard of living. You could not petition for “undue hardship” discharge yet. But Chapter 13 would allow you to wait as long as 5 years after filing the case. This would give you time for your condition to worsen until you did met this requirement.   

Conclusion

Chapter 13 prevents your student loan creditor(s) from chasing you for years. And it also allows you to delay asking to discharge your student loan debt(s) until the point when you’d qualify. In the right circumstances these could be huge advantages.

 

The Surprising Benefits: Stop Student Loan Collection

July 2nd, 2018 at 7:00 am

Chapter 7 “straight bankruptcy” stops student loan collection actions for a few months. Sometimes it can stop these actions permanently. 

 

Bankruptcy gives you tools to deal with special debts—including those you can’t easily write off. Last week we got into income taxes. Today we discuss student loans, focusing on this special kind of debt in Chapter 7 “straight bankruptcy.” Next week, we’ll cover student loans under Chapter 13 “adjustment of debts.”

Let’s assume you owe a student loan that you can’t afford to pay. Here’s how Chapter 7 can help.

Student Loan Collection

Student loan creditors and collectors have extraordinary collection powers. Often they don’t need to sue you first and get a legal judgment against you, as most creditors must. These creditors and their collections have very aggressive collection procedures available to them. Besides the usual garnishment of bank accounts and paychecks, these special creditors can often grab your tax refund or a portion of a Social Security benefit check.

The “Automatic Stay” from a Chapter 7 Filing 

Student loans are special in a number of ways. However, just like ordinary debts, student loan collections are immediately stopped by the “automatic stay” imposed by your bankruptcy filing. It doesn’t matter whether or not the student loan would be discharged (written off) in your Chapter 7 case.

The “automatic stay” stops “any act to collect, assess, or recover a claim against the debtor.”  (Section 362(a)(6) of the U.S. Bankruptcy Code.) (A “claim” is a “right to payment”—essentially, a debt. See Section 101(5).) More specifically, the “automatic stay” stops “the commencement or continuation…  of a[n]..  .   administrative…  proceeding against the debtor. (Section 362(a)(1).) “Administrative proceedings” include the non-judicial collection actions mentioned above that don’t include a lawsuit. The Chapter 7 filing also specifically stops “the setoff of any debt” owed to you, such as a tax refund or Social Security setoff. (Section 362(a)(7).)  So, filing bankruptcy stops all student loan collection actions.

This break from collections lasts throughout the 3-4 months that most consumer Chapter 7 cases take to finish. But unless you deal with the student loan appropriately in the meantime, after that its collection can continue.

Dischargeability of Student Loans

Bankruptcy permanently discharges some student loans. A dischargeable student loan must meet just one condition, albeit a tough and confusing condition. The student loan must cause you an “undue hardship.” As the Bankruptcy Code puts it, you can’t discharge a student loan unless that loan “would impose an undue hardship on the debtor and the debtor’s dependents.” (Section 523(a)(8).)

What does “undue hardship” mean? How much harder must it be than just a simple “hardship”?

You may feel like your student loans are causing you a great financial hardship. However, the federal courts have interpreted this phrase very narrowly.  The details are beyond the scope of today’s blog post, but just keep in mind this condition is challenging to meet.

During the Chapter 7 Break in Collections      

During the 3-4 months of your Chapter 7 case you want to take steps to make the temporary break in collections a permanent one. Here are three ways to accomplish this.

  • If you and your bankruptcy lawyer believe you meet the “undue hardship” condition, your bankruptcy lawyer would file an “adversary proceeding” during your Chapter 7 case. That’s a specialized lawsuit designed to determine whether you qualify for “undue hardship.” If you persuade the bankruptcy judge that you do, the student loan debt would be permanently discharged. Then the temporary break in collections would become permanent. There would be no more collection on a debt once you no longer legally owe it.
  • The bankruptcy judge may give you only a partial discharge of your student loan(s). In this situation the judge is determining that repaying all of the loan(s) would cause you an “undue hardship.” But paying back only a portion would not. So you’d make arrangements to pay the remaining student loan debt, probably at a reduced monthly payment. As long as you made the payments your student loan creditor would take no further collection action against you.
  • If you don’t qualify for a full or partial “undue hardship” discharge, your Chapter 7 case would still at least discharge all or most of your other debts. That should leave you better able to pay the remaining student loans. Hopefully you’d be in a position to make payment arrangements. This may be done through a payment-reduction program which are available for various student loans. If so, then your situation would hopefully be resolved by the end of your Chapter 7 case. Then, at the time that the automatic stay would expire you won’t be facing any more student loan collections.

Avoiding Default and Preserving Options

Even if you don’t qualify for “undue hardship,” the bankruptcy pause in collections can be extremely helpful. It could maybe even be critical. That’s because you can only qualify for most student loan workout programs before you are too far behind on payments. So filing a Chapter 7 case before you’ve fallen too far behind could allow you to take advantage of these programs. But if you waited too long you could lose out, and be seriously disadvantaged.

Conclusion

It’s really crucial to talk with an experienced bankruptcy lawyer about all this. Student loans are complicated and often very challenging to deal with. This is true both outside and inside bankruptcy. You need a lawyer on your side who deeply understands both bankruptcy law and student loans.

 

Stop Student Loan Collections to Discharge or Deal with the Loan

January 31st, 2018 at 8:00 am

Filing Chapter 7 stops a student loan garnishment and other collection activities. Then use “undue hardship” or focus on the student loan.  

 

Our last blog post was about a Chapter 7 bankruptcy stopping a tax garnishment only temporarily. In that situation this was OK because it gave time to set up a payment program with the IRS/state. With the bankruptcy discharging (writing off) all or most other debts, the taxpayer could afford a reasonable monthly payment to pay off the tax debt over time.  

Today we deal with a somewhat similar situation. Assume you owe a student loan that you don’t have the cash flow to make payments on. Here’s how this situation can be greatly helped through a Chapter 7 filing.

Student Loan Collection and the Chapter 7 Filing

Similar to the tax authorities, student loan creditors and collectors have extraordinary collection powers. In most situations they don’t need to sue and get a legal judgment against you to begin aggressive collection procedures. These can include wage garnishment, tax refund setoff, and Social Security benefit capture. (This is true of federal student loans; private student loan lenders must first sue you and get a judgment.)

Also like income tax debts, student loan collection is immediately stopped by the “automatic stay” imposed by your bankruptcy filing. It doesn’t matter if the student loan would not be discharged in the Chapter 7 case. During the 3-4 months that most consumer Chapter 7 cases last, you get a break from student loan collections.

The automatic stay statute stops “any act to collect, assess, or recover a claim against the debtor.” (See Section 362(a)(6) of the U.S. Bankruptcy Code.) More specifically it stops “the commencement or continuation…  of a[n]..  .   administrative…  proceeding against the debtor. (Section 362(a)(1).) This covers the non-judicial collection actions mentioned above that are administrative in nature. The Chapter 7 filing also specifically stops “the setoff of any debt,” such as a tax refund or Social Security setoff. (Section 362(a)(7).)                             

Dischargeability of Student Loans

Somewhat similar to income tax debts, student loans can be permanently discharged under certain circumstances. An income tax is almost always discharged as long as it meets certain timing conditions. (These are based on how long ago the pertinent tax return was due and was actually submitted.)

In contrast, the condition that almost all student loans must meet for discharge is much more ambiguous. And the condition, called “undue hardship,” is often quite difficult to meet. You can’t discharge most student loans unless that loan “would impose an undue hardship on the debtor and the debtor’s dependents.” (Section 523(a)(8) of the Bankruptcy Code.)

While it may very much feel like your student loan(s) is (are) causing you a huge financial hardship, the federal courts have interpreted this phrase very narrowly.  So “undue hardship” is, as we said, a difficult condition to meet to discharge your student loan(s).

What You Can Accomplish During the Chapter 7 Pause in Collection      

The goal during the 3-4 months of no collection is to make that pause permanent. This can happen three ways.

First, IF you believe you do meet the “undue hardship” condition, your bankruptcy lawyer would file an “adversary proceeding” soon after filing the Chapter 7 case in order to persuade your bankruptcy judge that you qualify for “undue hardship.” If you’d be completely successful then the pause in collection would become permanent because you’d no longer owe the debt(s).

Second, sometimes in this situation the judge gives only a partial discharge of your student loan(s). In effect the judge decides that repaying all of the loan(s) would be an “undue hardship” but paying back a portion would not be. In this situation you’d make arrangements to pay the student loans at a reduced monthly payment. Your student loan creditor(s) would agree to no further collection action against you as long as you made those payments.

Third, if you don’t qualify for “undue hardship” your Chapter 7 case would discharge your other debts. That should leave you better able to pay the remaining student loans. You’d make arrangements to make payments, maybe through one of the various payment-reduction programs potentially available to you. Assuming you’d do so, they by the end of your Chapter 7 case when the automatic stay would expire your situation would be resolved and you wouldn’t be facing student loan collection actions.

Avoiding Default and Preserving Options

Even if you don’t qualify for “undue hardship,” the bankruptcy pause in collections can be extremely important for student loans. Again, there are various programs that help you deal with student loans, depending on exactly what type(s) you have. Some of these programs can be extremely helpful.

However, most of these programs require you to apply for them before you are too far behind on payments. So filing a Chapter 7 case sooner could enable you to take advantage of these programs. Whereas if you waited and filed later you may very well miss out because you’d no longer qualify.

Conclusion

Talk with an experienced bankruptcy lawyer about all this. Candidly, student loans are challenging to deal with, both outside and inside bankruptcy. You need a seasoned lawyer who understands the interplay between bankruptcy law and student loans, in detail.

 

Call today for a FREE Consultation

210-342-3400

Facebook Blog
Back to Top Back to Top