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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.

 

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210-342-3400

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