Can bankruptcy help with my student loans?
Posted by Robert Weed / in Chapter 7 Bankruptcy / 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.
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.
November 2022, the Biden Administration Turns Policy Upside Down
At least for some people, the government will now support your effort to discharge your student loans
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 220.127.116.11 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.
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, here. appellants-brief-alexandra-elizabeth-conniff-wedoff
UPDATE: May 2017, Congressman John Delaney (D-MD) and Congressman John Katco (R-NY) introduced a bill to allow student loans to be eliminated in bankruptcy, just like any other debts. Their bill is H.R. 2366. This is an important first step.
UPDATE: June 2017. Bankruptcy Judge in Pennsylvania opens the door a little. He says it’s not necessary to show you can NEVER afford to pay the student loans—forever is a long time. Just that you can’t afford to pay for a “significant portion” of the repayment period on the loan. The student borrower in this case, Ms Price, was divorced with three small children. The judge said it didn’t matter that maybe when the kids were grown she’d make enough money to start to pay. Can’t pay now, can’t pay any time soon, and that’s all she needed to prove. Bad News: January 2018, the US District Court overturned this bankruptcy court decision. Ms Price still has to pay her student loans. What does this mean? Even if you can persuade the bankruptcy judge, who has to listen to what you say and look you in the eye, the next judge, on appeal, just reads the papers and decides you lose.
UPDATE: After November 2018, Can Bankruptcy Help with my Student Loans?
The results of the recent election give us some hope that Congress may change the law on student loans in the next couple years. The top two Democrats on the key committee in the House of Representatives should be friendly. I remember hearing each of them speak at past national meetings of the National Association of Consumer Bankruptcy Attorneys.
UPDATE: For people in public service–meaning government or a hospital, mainly–the Consumer Finance Protection Bureau has published improved instructions on the Public Service Student Debt Relief. Here. Several December 2018 news articles talked about how poorly understood and badly run this program is. Over 40,000 people have tried to qualify, and only 206 have been approved. Here’s a great article from USA Today.
I see four or five people a month I think are qualified who have never heard of it.
UPDATE: Can bankruptcy help with my student loans? February 2019. I went to Capitol Hill with about two dozen bankruptcy lawyers from around the country, to support H.R. 770, by Congressman John Katco (R-NY) to allow student loans to be eliminated in bankruptcy, just like any other debts. There’s some chance it passes the House of Representatives this year, although action in the Senate is doubtful. Now that the Democrats control the House, our chances in committee are much better. And Rep. Katco is one of only five Republicans who got re-elected in a district Donald Trump lost in 2016. I hope that means other Republicans will pay some attention to what he has to say. Long term success likley depends on election a Democratic President in 2020.
UPDATE: American Bankruptcy Institute Calls for a Change.
Consumers picked up a key ally in the battle to restore the bankrutpcy discharge for student loans. A commission of the American Bankruptcy Institute issued strong recommendations on the side of people struggling with student loans they can’t pay. This is big news, because the ABI is dominated by “tall building lawyers” and bankruptcy judges, and is not usually friendly to consumers. You can read more here.
November 2022, The Biden Administration opens the door to allow millions of people to discharge their student loans in bankruptcy.
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
[…] 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. […]
Update: Now that Congressman Boehner is Speaker of the House, the chances for reform on these private student loans is not very good.
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.
I saw today that Americans owe more on student loans total than on credit cards. That took me by surprise.
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” https://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.”
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.
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.
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
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.
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.
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
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.
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/.
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.
I’ve now done 12 hours of classes this year! trying to figure out what can be done about student loans.
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/.