Bankruptcy Attorney | Student Loan Debt and Bankruptcy Law Changing (Pt. 2)

Bankruptcy Attorney | Current Attempts At Discharging Student Loan Debt in Bankruptcy

Yearly, fewer than 1,000 people nationwide attempt to discharge their student loans via bankruptcy. According to a Wall Street Journal analysis, 713 such lawsuits were filed in 2014. But that process is both expensive and uncertain. A debtor must file a lawsuit in federal court. Often this means employing a bankruptcy attorney, which can mean thousands of dollars upfront.

Additionally, bankruptcy lawyers are hesitant to take on such cases because of the wide range in results they receive. There is little to no consistency in how a judge will rule. During the bankruptcy trial, the lawyers for a bankrupt student-loan borrower has to convince a judge that the borrower will never be able to afford their monthly payment, and that this student loan debt presents an “undue hardship.” This is often a hard case to prove.

According to the National Consumer Law Center, this process of proving “undue hardship” is surprisingly arbitrary.

Because bankruptcy code does not clearly define “undue hardship” with an actual definition, the ruling that paying student loan debt back will constitute “undue hardship” is entirely up to the court. That means each individual court decides if a borrower meets the standard, and that of course, can vary from judge to judge and court to court.

Student Loan and Bankruptcy: The History

Before 1976, student loans could be discharged in bankruptcy. Amid concern regarding high default rates, Congress passed legislation in 1976 that was intended to safeguard federal investments. Which means that, starting in 1976, federal loans were automatically dischargeable in bankruptcy after a borrower had performed five years of repayment. There was an additional “out clause” that said borrowers could get out of repayment earlier than five years if repayment caused them an “undue hardship.”

Two years later, lawmakers proposed a new bill that, had it passed, would have returned the right of discharging student loan debt via bankruptcy to borrowers. But it failed, and the initial bill of the required five years of repayment stood.

In 1990 that five-year rule was extended to seven years. Eight years later, in 1998, the law was once again revised: there was no longer any set time frame for allowing discharges. From that point on, borrowers were forced to establish “undue hardship” no matter how many years of repayment they had made.

At the time, this only applied to federal student loans. In 2005, lawmakers included private student loan debt in an amendment to bankruptcy law, thus making it impossible to discharge student loan debt in bankruptcy, regardless of the form of student loan debt a borrower holds, without proving “undue hardship.”

Proving Undue Hardship

Proving undue hardship can be difficult. But it is not impossible. Here are some things you need to know if you are considering bankruptcy because of student loan debt.

Ask for Forgiveness

A lot of people that have student loan debt who file bankruptcy do not ask for their loans to be forgiven because they have heard it is impossible. Here are some statistics you must know:

  • According to a Harvard law school study, 99.9% of bankruptcy filers that have educational debt don’t ask for forgiveness.
  • 40% of debtors who do request for relief from student loans in bankruptcy are granted partial or total discharge of the student loans.
  • Every year 70,000 debtors that file bankruptcy actually qualify to discharge some or all of their student loan debt.

You Have to Qualify

To be eligible for student loan debts to be discharged, you must first qualify. The first test to gauge this is the Brunner standard. Here are three circumstances you must meet to qualify:

  • Repaying your loans will make you unable to maintain a minimal standard of living for you and your family.
  • The financial circumstances that led to you being unable to afford your student loans are likely to continue through the remainder of your repayment term.
  • You have made good faith efforts to repay your student loan debt.

Extra Steps

Other debts that are a part of the bankruptcy filing will be included in your repayment schedule. Student loan debt is different. Your bankruptcy attorney will need to file an adversary proceeding, which is actually a separate lawsuit from your bankruptcy filing. Essentially, this filing means you will be suing the student loan creditor(s) to get some or all of your debt forgiven.

Three Common Characteristics

According to the Harvard study, debtors who were successful in discharging some or all of their student loans through bankruptcy had at least one of these common characteristics: they were unemployed, had a medical hardship, or had a lower income the year before filing for bankruptcy.

You Must File for Chapter 7 Bankruptcy

If you are filing for bankruptcy to try and discharge student loan debt you must file for Chapter 7 bankruptcy. Chapter 7 bankruptcy allows immediate forgiveness of all unsecured debts. This is different from Chapter 13 bankruptcy, which establishes a debt repayment plan that allows you to discharge your debts over a period of three years. – Simon Resnik

Specializing in bankruptcy and foreclosure law for over 20 years. Call attorney David Pinkston for a free consultation today: (904) 389-5880. #FloridaBankruptcyAttorney #FloridaBankruptcy

If you are thinking about #bankruptcy or #foreclosure in the Jacksonville, Florida area, you should call attorney David Pinkston. David is very experienced with all aspects of bankruptcy law yet very personable and easy to talk to. Call Us Today! (904) 389-5880