Living With Non-Dischargeable Student Loans
The federal bankruptcy code states that a debtor may obtain a discharge of a government-sponsored student loan only if repaying the loan would impose an “undue hardship” on the debtor and his dependents. Most bankruptcy courts interpret “undue hardship” as meaning that the debtor cannot repay the loan and maintain a minimal standard of living. As a result of this very high bar, it is rare that a student loan is discharged during bankruptcy.
Consequently, many bankruptcy debtors are caught in a student loan trap of being unable to pay on the student loan and the interest continues to accrue. While discharging the student loan may not be possible, there are options for dealing with a student loan during and after bankruptcy.
First, the student loan lender or collection agency is strictly forbidden from engaging in any collection action during the bankruptcy. This protection (known as the “automatic stay”) may last from a few months during a Chapter 7 to several years during a Chapter 13 repayment plan. Interest may continue to accrue and will be tacked-on at the end of the bankruptcy case.
Second, if the student loan was not defaulted prior to the bankruptcy filing (meaning no payment for more than 270 days), the account will usually be re-aged and is considered current upon the conclusion of the bankruptcy case. This is a good time to negotiate with the lender for a payment plan you can afford. If the student loan was defaulted prior to the bankruptcy, the lender may offer a loan rehabilitation program.
Finally, your student loan lender has many repayment options after your bankruptcy case ends, including the Income Based Repayment Plan which limits your loan repayment to 15% of your income and offers loan forgiveness after 25 years of repayment (or 10 years for public service employees).
If you are struggling with student loan debt, speak to an experienced bankruptcy attorney and discuss your options. Your attorney can explain the many ways for dealing with student loan debt and can help you decide on a course of action that is best for you and your family.
Discharging Student Loans In Bankruptcy
Recently the House of Representatives Judiciary Subcommittee on Commercial and Administrative Law held a hearing to initiate legislation to change provisions of the federal bankruptcy law that give student loan lenders an advantage over other consumer loans. Current bankruptcy law provides that student loans are generally not dischargeable under any chapter of the bankruptcy code unless the debtor can show that repayment of the loan creates an “undue hardship.” Unfortunately, Congress did not define “undue hardship” in the bankruptcy code, so this interpretation has been left to the individual bankruptcy court judges.
During the Committee hearing Rafael I. Pardo, an associate professor at the Seattle University School of Law who has studied the discharge of student loans in bankruptcy, challenged Congress “to clarify the undue hardship standard.” Many courts view “undue hardship” as a high bar that is only met by a showing of exceptional circumstances (like physical or mental disabilities, or poor or no future earning potential) that result in an inability to both repay the student loans and provide a minimum standard of living for the debtor and the debtor’s family. This is a very difficult burden for most debtors to meet, and consequently bars the discharge of student loans in most cases – even while other consumer debts like auto loans, credit cards, medical debts, mortgages, and even taxes are discharged in the debtor’s bankruptcy.
Consumer bankruptcy attorney Brett Weiss, who testified on behalf of the National Association of Consumer Bankruptcy Attorneys and the National Consumer Law Center, called the situation “unfair” when other consumer loans are forgiven in bankruptcy proceedings while student loans are not. As a result of these hearings, Rep. Steve Cohen (D-Tenn.) announced his plans to file legislation to “give private student loan borrowers more equitable treatment during the bankruptcy process.”
For the time being it remains extremely difficult to discharge student loans. However, there are other non-bankruptcy programs for debtors unable to repay their loans. In some cases debtors may qualify for reduced payments, deferment, forgiveness or cancellation. Chapter 13 bankruptcy can also provide a way to cure defaulted student loans, or pay them off during the bankruptcy. If you have student loan debt, discuss your situation and options with a qualified bankruptcy attorney.