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18

Feb 2010

Can bankruptcy help with my student loans?

Posted by / in Chapter 13 / 17 comments

If you read the law, it says we can get rid of the student loans in bankruptcy if we can show “undue hardship.”

“Undue hardship” doesn’t sound so bad. It is. What most bankruptcy judges take that to mean is there is absolutely no hope that you will ever make enough money to pay anything toward the student loans.  “Certainty of hopelessness” is what they want to see.

As long as you are young and in good health, you can’t prove undue hardship. Meaning you can’t get rid of student loans.

Certainty of hopelessness needed to discharge student loans

In most bankruptcy courts, you can only get rid of student loans, if there is “certainty of hopelessness.” No chance that you will ever work again.

My recommendation, which I don’t like, is to put people into a Chapter 13 payment plan where you make a small to the bankruptcy court for five years.   The court sends that payment to the student loans. At the end of the five years the student loans are still there–bigger than ever–and you do it again.  

Maybe do that three or four or five times until we can get to the point where we can tell the judge there’s no hope of you making enough to pay much of anything and you have been paying under court supervision for fifteen or twenty years.  

At that point you should win, although plan B is another five year Chapter 13. Have I said I don’t like this? I don’t like it.   But especially for people with large “private” student loans, it can be your only hope of having a normal life.  (I like this a lot better for a married couple where only one has the student loan, so the other can do things like finance a car.)

(Michelle Singletary, consumer finance advisor, had a good article about this problem in the April 20, 2010 Washington Post.  She didn’t have any solution though.)

Before October 2005, the only government guaranteed and charitable student loans survived a bankruptcy.  Private student loans were like any other debt. I can see no good reason why Congress changed the law, but I do see a political reason: Rep. John Boehner, Republican Leader in the House of Representatives, always raises a lot of money from the student loan lenders–and passes it around to other Republicans.

These private student loans have a much higher interest rate than the government guaranteed student loans; and they do not offer the income sensitive payment plans that the government guaranteed loans do. If you get behind with them, they can wreck your life.  Thanks, Congressman Boehner.

PS A few bankruptcy judges have lightened up on the undue hardship requirement. That requirement goes back to a Ms Brunner, who tried to get rid of her student loans just one year after she finished grad school.  You can imagine the courts were not real sympathetic to her.

Especially because back in 1985, bankruptcy could get rid of your student loans like any other debt, if you had been in payment status for five years.  So you only needed to show that “certainty of hopelessness” is you wanted to use bankruptcy to get out of student loans in the first five years.

The five year rule is long gone, student loans are NEVER like a regular debt. But for most judges the “certainty of hopelessness” is still what you have to show.

Some judges are looking at that again, and saying an easier rule should apply now. The New York Times wrote about those judges, here. 

PPS  President Obama tried to change the Department of Education policy on student loans.  The Department to Education uses “loan servicers” to collect the student loans.  (Navient and Fedloan Servicing are the one I see the most.) Those servicers are the people who come to the bankruptcy court and argue, when people try to prove “undue hardship” to the Judge.  If nobody’s there arguing, then undue hardship should be easier to prove.  

The Obama White House asked The Department of Education to come up with a new policy.  Didn’t work.  

Department of Education came back with new instructions.  Same as the old instructions. They told the loan servicers to keep fighting the undue hardship cases.  The exact opposite of what the White House–and the bankruptcy lawyers–and you, probably–wanted.  

 

UPDATE  The Washington Post had a good article in August 2015, on the government’s income-driven repayment plans.  

MORE  If bankruptcy can’t get you out of student loans, can the student loans at least get you approved for bankruptcy on your other debts?  This case shows the few courts that have decided that, either way.  IRM 5.15.1.10 lists student loans as a necessary expense–if Federal and being paid.  (Before 11/17/2014 it referred to student loans “secured” by the Federal government.  Now it says, guaranteed by the federal government.  Since the bankrutpcy law is supposed to follow the IRS, that change should means something, but it’s not clear what.  The problem is in 707(b)(2)(A)(ii) “Notwithstanding any other provision of this clause, the monthly expenses of the debtor shall not include any payments for debts.”

UPDATE  The Washington Post has a good article about how the student loans collection agencies are allowed to garnish you, without first going to court.  

UPDATE  The Consumer Finance Protection Bureau has a lot of good info on student loans.  Their page on the Obama Public Service student loan forgiveness program is the best I’ve seen anywhere.  You can see it here.  They estimate that 25% of Americans work in occupations eligible for that program; and they think most don’t know it.  I’ve talked to a lot of people who don’t know they are eligible.  

UPDATE: This morning, heard a talk by Hon. Stephen St John, Chief Judge of the Bankruptcy Court here. He said, until the Supreme Court does something about it, the door to getting your student loans discharged in bankruptcy is “nailed shut.” You might consider moving to another part of the country, but here in the 4th Circuit it is impossible to win on a student loan case.

UPDATE: The College Republican Federation of Virginia (I was state chairman of that group, more than 40 years ago) posted this “Valentine.” Apparently it was first published February 2016 by the College Republican National Committee.

student loan valentine

This “Valentine” was first published by the College Republican National Committee, in February 2016.

UPDATE:  Eugene Wedoff, a retired bankruptcy judge, took over the appeal, pro bono, of a Ms Conniff on a student loan in bankruptcy.  Ms Conniff is a school teacher in a poor county in Alabama; she has advanced degrees but has not been able to move into a position where the advanced degrees would mean more money; she has two children at home, and gets $500 a month in child support.

The bankruptcy court allowed her to get rid of the student loans in her bankruptcy, saying it was obvious she couldn’t pay them.  EMC appealed and the US District Court applied the “certainty of hopelessness” rule, and overruled the bankruptcy court.  Judge Wedoff, who is now Ms Conniff’s lawyer, was one of the best known bankruptcy judges in the country.  He has taken it to the 11th Circuit Court of Appeals. We’re hoping the Court of Appeals listens to him, and other judges start to lighten up on this, a little.  

You can read what Judge Wedoff said, hereappellants-brief-alexandra-elizabeth-conniff-wedoff

 

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Robert Weed has helped twelve thousand people file bankruptcy in Northern Virginia. Robert Weed is a frequent panelist and speaker at the meetings of the National Association of Consumer Bankruptcy Attorneys. He is one of Northern Virginia’s most experienced personal bankruptcy lawyers. As an expert on changing consumer bankruptcy laws, Robert Weed has been interviewed on local and national TV and quoted in newspapers across the country.

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17 comments
  • Robert Weed

    April 22, 2010, pm30 11:27 PM
    01

    Update on this student loan blog. I saw good news in the American Bankruptcy Institute daily post of April 22, 2010.

    Congress is considering undoing the damage done by Congressman Boehner and allow PRIVATE student loans to be discharged like any other private loan in bankruptcy. Favorable action would be a nice surprise. Here’s what the ABI reported.

    “The House Judiciary Subcommittee on Commercial and Administrative Law today weighed a bill to amend the Bankruptcy Code to allow private student loans to be discharged. Witnesses at the hearing on H.R. 5043, http://www.abiworld.org/e-news/HR5043.pdf the “Private Student Loan Bankruptcy Fairness Act of 2010,” included Deanne Loonin of the National Consumer Law Center, John A. Hupalo of the investment firm Samuel A. Ramirez & Co., Inc., consumer Valisha Cooks and Adrian M. Lapas representing the National Association of Consumer Bankruptcy Attorneys. “

  • Chapter 13 bankruptcy: Why it’s picked by only 5% of my clients

    February 6, 2011, pm28 12:08 PM
    02

    […] I have a whole website on how we can use it to get rid of second mortgages.   And I have a blog post on innovative use of Chapter 13 bankruptcy for people with overwhelming student loans. […]

  • Robert Weed

    February 6, 2011, pm28 12:16 PM
    03

    Update: Now that Congressman Boehner is Speaker of the House, the chances for reform on these private student loans is not very good.

  • Robert Weed

    August 18, 2011, pm31 7:51 PM
    04

    Here’s an update from the Wall Street Journal. Student loans are the only form of consumer lending that has increased since the recession began. And student loan default rates are also way up. http://blogs.wsj.com/economics/2011/08/16/more-student-loans-are-past-due/tab/print/.

    I still don’t like the solution I have here. But I think more and more people will need it.

  • Robert Weed

    Robert Weed

    October 26, 2011, am31 10:50 AM
    05

    I saw today that Americans owe more on student loans total than on credit cards. That took me by surprise.

  • Robert Weed

    May 25, 2012, pm31 2:10 PM
    06

    The bankruptcy court in Maryland this week allowed a 63 year old, disabled woman to discharge her student loans in a Chapter 7 bankruptcy. The woman owed over $300,000 in student loans, having gone to one school after another (often on the advice of counselors) hoping against hope she could some day qualify for a job.

    She had never held a job and her doctor testified she never could. She lives on $768 a month social security disability.

    The judge said that the bankruptcy law requires a “certainty of hopelessness” http://robertweed.com/resources/Todd%20v%20Access%20Group%20ORDER%20discharging%20student%20loans.pdf for him to allow the loans to be discharged.

    This lets you know how hard it is to use a Chapter 7 bankruptcy to help you with your student loans. “Certainty of hopelessness.”

  • Robert Weed

    August 7, 2012, pm31 6:31 PM
    07

    Here’s a link I saw to the Federal Department of Education page on the various ways you can try to handle your student loans.

    It’s a good link because it explains things clearly.

    http://studentaid.ed.gov/repay-loans

  • Robert Weed

    August 11, 2012, pm31 5:48 PM
    08

    The Obama Administration is trying to help people with private student loans. The Consumer Finance Protection Bureau, has recommended to Congress to take another look at the 2005 law that made private student loans non-dischargeable in bankruptcy.

    You can read that report here. http://files.consumerfinance.gov/f/201207_cfpb_Reports_Private-Student-Loans.pdf

    There’s some logic to treating government-guaranteed student loans differently from other debt. There’s no logic for treating bank loans for college any differently than bank loans for cars.

  • Robert Weed

    September 7, 2012, pm30 6:56 PM
    09

    Here’s a new article in the New York Times, about how hard it is to prove “undue hardship.” http://www.nytimes.com/2012/09/01/business/shedding-student-loans-in-bankruptcy-is-an-uphill-battle.html?_r=4&pagewanted=all

  • Robert Weed

    December 28, 2012, pm31 12:59 PM
    10

    Rep, Steve Cohen (D-Tenn) has a good article on this in the current edition of US News. http://www.usnews.com/opinion/articles/2012/12/26/allow-private-education-loan-debts-to-be-erased-in-bankruptcy_print.html.

  • Robert Weed

    Robert Weed

    May 25, 2013, pm31 4:11 PM
    11

    The Ninth Circuit–out on the West Coast–may have loosened up the standard on student loans a little. On May 22, 2013, the 9th Circuit Court of Appeals released its opinion in Hedlund v. The Educational Resources Institute, Inc., and Pennsylvania Higher Education Assistance Agency, Case 12-35258 (D.C. 6:11-cv-6281AA). That opinion (and other pending decisions) may have made it a little easier on student loan debtors to have their student loans discharged in bankruptcy.

    Don’t want anyone to get excited but maybe there’s some hope at some point.

    Also Senator Elizabeth Warren introduced to bill to LOWER the interest rate on student loans to the rate the banks paid on the bailout money–which was next to nothing. That bill is NEVER going to become law, but it’s another small sign that pressure is building to get some kind of relief for people trapped in impossible student loans.

  • Robert Weed

    Robert Weed

    May 31, 2013, am31 11:22 AM
    12

    A good decision on the west coast in May 2013 by the 9th circuit. Offering some hope that some student loans can sometimes be discharged in bankruptcy. circuit.http://www.abajournal.com/mobile/article/9th_circuit_oks_student-debt_discharge_for_law_student_who_locked_keys/?utm_source=maestro&utm_medium=email&utm_campaign=weekly_email

  • Robert Weed

    May 19, 2014, pm31 7:19 PM
    13

    A handful of people in Congress have asked the Secretary of Education to state a definition of “undue hardship.” Whether that would persuade bankruptcy judges is up in the air, but it’s worth a shot. You can read more about that here http://thestudentloanlawyer.com/715/dear-ed-clarify-undue-hardship/–posted by Joshua Cohen, a lawyer in CT that I know by reputation.

  • Robert Weed

    July 22, 2014, pm31 3:55 PM
    14

    We are now seeing scammers move into this field. They promise to negotiate a reduction in your student loans, charge an upfront fee, and do little or nothing. You can read more about that, here. http://thestudentloanlawyer.com/745/student-loan-assistance-companies-sued/.

  • Robert Weed

    Robert Weed

    March 11, 2015, pm31 10:08 PM
    15

    The White House yesterday announced they were looking at whether they should push to change on law on student loans in bankruptcy. A first, baby step toward reform. http://www.marketwatch.com/story/white-house-studying-new-bankruptcy-options-for-student-loan-borrowers-2015-03-10.

  • Robert Weed

    November 3, 2015, pm30 10:47 PM
    16

    I’ve now done 12 hours of classes this year! trying to figure out what can be done about student loans.

    Materials:

  • Robert Weed

    Robert Weed

    July 2, 2016, pm31 5:07 PM
    17

    IMPORTANT:

    The First Draft of the 2016 Democratic Platform calls for restoration of bankrutpcy protection for student loans. This is enormously important. The draft platform is here. https://demconvention.com/wp-content/uploads/2016/07/2016-DEMOCRATIC-PARTY-PLATFORM-DRAFT-7.1.16.pdf.

    You can comment, here.https://demconvention.com/platform/.

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