Discharge Student Debt Through Bankruptcy

Student Debt & Bankruptcy

We had a client a few years back who soon after leaving college was diagnosed with an illness that is not curable. He’s going to live with this illness forever, and therefore he was unable as a result of this illness to go into the workforce he had planned. On top of it, his elderly father had co-signed his student loans with him.

We’re gonna talk a little bit about how his journey went through the bankruptcy process, he did ultimately get not all but most of his student loans discharged in the bankruptcy.

He had filed Chapter 7 and we’re going to kind of talk about how John’s journey pops up through some of these topics.

A Stop To Student Debt

It’s a huge topic, it’s probably one of the biggest, and most quickly changing topics in bankruptcy courts right now.

One in eight Americans have student loan debt, and most of those people who have the debt are between 35 and 49 years old.

What is happening right now is we have seen college costs rise faster than wages, in other words, college is harder to afford than it used to be.

Families could carve out a little bit of tuition money for their students, and the student would leave college without any student loan debt but that’s not the case anymore, college is harder and harder to afford but at the same time more careers than ever require a college degree.

Most of the people who are holding this debt are in their prime working years, these are the people who should be buying houses, saving for retirement, contributing to the economy in significant ways, but they’re held down because they are weighed down by student loan debt.

As a result, people are seeking a fresh start in bankruptcy, we’re grappling with the dischargeability of student loan debt and providing relief for these people.

Can Bankruptcy Discharge Student Debt?

It is often to hear people say: Well, I have student loans but I know they’re not dischargeable. In that person’s case, it might be non-dischargeable but for some people, it is possible to discharge that through bankruptcy.

It’s very difficult right now, there’s a very high bar to be able to prove that you would benefit from this but it is possible.

What Chapter Of Bankruptcy Can Help Me To Discharge My Student Debt?

Somebody who’s in Chapter 13 bankruptcy will probably have a harder time convincing a court that they can’t afford to make their Chapter or their student loan payments.

Chapter 13 has a monthly repayment, it’s a reorganization of debt, lasting 3 to 5 years.

If you are in a monthly payment you can afford to make some kind of monthly payment, it’s harder to make the argument to the court that you can’t also afford a student loan payment.

Chapter 7 on the other hand, helps people who are below the state median income, and they’ve been able to show the court that their budget shows that they have no leftover money to pay debts.

Since we have to discharge student loan debt, one of the pieces that we need to prove is that they just can’t afford it. It would be a hardship.

Generally speaking, Chapter 7 is a better option if you’re looking to discharge your student loan debt.

Can You Discharge Private Student Loans In Bankruptcy Or Only Federal?

Under the law, they’re treated the same, so it’s not much of a difference, in our experience discharging private student loans in bankruptcy is slightly easier than federal, just because when you’re fighting to have federal loans discharged, you’re fighting the federal government.

You’re dealing with the local attorney, and that can be difficult, or the U.S attorney who’s in our jurisdiction, so when you’re fighting the Government, you have a steeper hill to climb but it’s possible.

What Circumstances Does A Person Need To Prove To Have Their Student Loans Discharged?

Most of the country uses what’s called the Brunner test, it’s based on a case from the 80s that laid out the qualifications to be able to have your student loans discharged.

You have to show these 3 things, the first circuit and the eighth circuit do not use the Brunner test, they use a different test but ours does.

One is that at some point you have made a good faith effort over a while to repay your student loans, you’re not just walking away from graduation straight to your bankruptcy attorney’s office, you’ve tried to repay them for some time.

The second prong is that based on your current income and expenses, your current budget, you cannot even maintain a minimal standard of living for yourself and your dependents, if you were to repay your student loans it would throw you into poverty, you wouldn’t be able to keep even just the most basic standard of living.

The third problem that you have to show is that your current financial situation is not going to change, you’re going to be in this situation, and it’s forever going to be this situation.

If we go back to our client John, we were able to show these 3 things, he left college and he started making his loan repayments, he did exactly what he was asked to do and what he had intended to do, and then once he had this illness was diagnosed.

With this illness now all of a sudden he can’t work, so we presented doctor’s notes evaluations, all kinds of things showing that he is truly unable, with the treatment of this medication, with the medication the treatment of the illness, that he could barely maintain a standard of living.

In fact, in his case he had to move back in with his father who could take care of him, his budget showed he has some disability income coming in from social security disability but it was very minimal, and then thirdly, we were able to show that this is not an illness, that gets better, this is his life, this is what it’s going to be.

We know that moving forward his financial situation is unlikely to change for any period during the repayment period of those loans, so that’s the Brunner test, basically you tried to pay it back, you can’t pay it back, and you’re unlikely to ever be able to repay it in the future.

There is running around the courts these days, a very interesting new approach.

Student loans by definition are for education, under the bankruptcy code there is a definition of what student loans are, you have to show that these loans were used for an educational purpose but as we probably know, there are people who sometimes take out student loans cover tuition and books.

Sometimes people take out student loans to also pay for living expenses or travel expenses while they’re going to school, so if you can show that the loans are more than what we’re required to pay for books and tuition, then, the amount that was used for living expenses, that is not an educational expense, that’s a living expense.

Some folks are having success discharging that portion that is non-educational, the portion of the loan, that’s a very interesting and exciting strategy and we’re watching courts around the country to see how this is all going to play out, and if it’s going to get thrown into some kind of law or rule out there right now, it seems to be successful.

Can You Discharge A Federal Student Loan Without Filing Bankruptcy?

Absolutely, and we would recommend that people try this before they try it in bankruptcy, it’s a little bit easier to do it outside of bankruptcy.

Every lender for student loans has some kind of repayment program, with federal student loans you have public interest loan forgiveness if you work in the public sector for 10 years, then, at the end of that, the rest of your loans get discharged.

You can have an income-driven repayment plan which has a discharge attached to it, or if you’re on disability, then, you can get a disability discharge.

There are ways there are strategies that are trying to make it possible for people to be able to repay all or part of their loans.

How Do Bankruptcy Courts Determine Undue Hardship?

The undue hardship test is one of the three of the Brunner elements that you would have to prove, providing that if you were able to show that it’s an undue hardship, but also that it would continue to be an undue hardship in the future, and if you’ve made a good faith effort to repay those loans then combined with the undue hardship, you’re always going to have an undue hardship, you’ve tried to repay them, then, your student loans could get discharged in a bankruptcy proceeding.

One of the nice things that we like about bankruptcy courts is they take a very personalized approach, each debtor in a bankruptcy case is different, everybody’s circumstance is different, and the courts can look at every case on a case-by-case basis.

To determine undue hardship, the court is going to look at lots of factors, including your income, and the income that you might be able to earn.

Maybe you’re unemployed now because you’re at home caring for children but when they grow up, you might be able to go back to work.

They look at possible future income, they look at your health, they look at whether you are raising children, the health of your children, all sorts of things, it’s a question of whether you’ve tried to repay your student loans, and whether you can now repay all or part of them, or whether there’s any hope in the future of you repaying all or part of them.

Going back to our client John, we had a lot of doctors’ letters, reports, studies, and all kinds of things that we had to submit to show the state of his health, why he can’t work, and what is the success of somebody with this condition being able to work in the future, what are the side effects of the medication he was on, all kinds of very personal things had to be proven in court.

Why Should I Hire An Attorney To Help Me Declare Bankruptcy For My Student Loans?

We always want people to understand that it is possible to do all these things on your own, but it is harder to be successful at it.

One of the great tragedies about this kind of work is trying to get a student loan discharged, which costs the attorney money in time, and resources.

We’re dealing with people in bankruptcy who don’t have money, it’s tricky, you have to strike that balance of, can you afford to pay your lawyer to fight this for you? or have somebody in your family who can help you? or do you just let it go and do your best and take your chances?

If you can afford to pay your lawyer to do these things, you would have a much more chance of success. You hear us using these blood buzzwords like undue hardship, discharge, and good faith, but all of these things have very specific meanings in a legal context.

If you want someone advocating for you, who knows how to navigate the court system, and knows how to argue for you using the very best legal arguments, you’re going to have more chance at success that way.

Why Is It So Difficult To Discharge Student Debt?

It has not, and the reason is Congress. They’re so easy to beat up on but in this case, we think it’s valid.

The first bankruptcy laws in the United States were enacted in 1800, for almost 200 years student loan debt was not as big as it is now but it did exist, and then upright around 73, 74, 75, there started to be these rumblings that people were abusing the system.

These students were going to school, and then turning around and filing bankruptcy.

There was nothing that showed that this was a big problem, and in fact, there were two studies, one in 73 and one in 76, showing that there wasn’t that kind of abuse in the system but in 1976, Congress said: Well, this is a big problem despite what the studies say, we’re going to go ahead and make it harder.

They passed this law that said student loans could be discharged, and they were only federal student loans, could be discharged but only if you’ve made payments for 5 years.

You have this 5-year repayment, and then in 1984 they expanded the definition, it wasn’t just government-backed student loans but also private student loans, so those you have to be in the five-year repayment, and then in 1990, they expand that 5 years to 7 years, you have to repay for 7 years, and then, you have to prove undue hardship.

Then, in 1998 they got rid of that 5 years and 7-year rule, all of a sudden 1998, they had some amendments that said: okay you can only discharge these debts if you can show undue hardship, and then, in 2005 there was this enormous overhaul of the bankruptcy rules, it is called the bankruptcy abuse and prevention act.

By that point, just about all student loans were accepted from discharge.

The banking lobby is very strong, so now it’s very hard to discharge student loans.

What Can I Do If The Bankruptcy Court Doesn’t Discharge My Loans But I Can’t Afford The Payments?

In that case, you absolutely should be contacting your student loan servicer for repayment options, all of the servicers have these options.

There are things like deferments, forbearance, income-driven repayment options, something called pay as you earn, where it’s a step-up program.

Ignoring it is not a good solution, the ostrich technique where you put your head in the sand, that’s not good because if you have federal loans, they can offset your tax refunds to pay the student loans that you’re behind, but if you’re in contact with them, they can almost always find something that works with your budget.

I Cosigned My Daughter’s, Private Student Loan. Am I On The Hook If She Declares Bankruptcy?

It depends, this is similar to what happened with our client John, remember his father had co-signed on these loans.

Legally no matter what your daughter does, you are on the hook for the student loans but if she’s making those payments, then it’s not impacting you very much, you’re fine, you can file a Chapter 7 and not seek to discharge your student loans.

You can file your Chapter 7, your daughter keeps making her student loan payments but if she seeks to have her student loans discharged, and if she’s successful at that, then the lender will go to you for payment.

This is exactly why lenders like having cosigners, if something happens with the original borrower the cosigner can be on the hook, and they get their money.

We would recommend looking at the lender’s requirements for dropping the cosigner, there’s always a way if you’ve been in repayment for some time, there’s a way for the co-signer to get dropped from the loan, definitely worth looking into.

In John’s case, his father was retired by this point, and he had only social security income, these were not wealthy people by any stretch.

We were able to eliminate John’s debt because of all those factors we talked about, and then, we were able to greatly reduce the remaining loan that the dad was responsible for.

When we reduced that, that was with a calculation of what can he afford to pay for a while, and it was a very low amount, the dad was still on the hook but he had to pay a much lower amount, not the full amount because we had gone through this whole process for both John and his father.

Do Student Debt & Student Loan Forgiveness Affect Every American Equally?

It doesn’t, people of color are disproportionately burdened by student loans.

We already know that there is a wealth gap in this country, white families have 10 times the wealth of black families, and that gap is shrunk just a little bit for those with college degrees.

White families with college degrees have 7 times the wealth of black families with less wealth, there’s less money for the family to contribute to education, black and brown families take out more student loans to pay for college.

After college, black and brown graduates are using their income to pay for student loans, whereas white graduates are using their income for purchasing homes, travel, or luxury expenses, and then, that just perpetuates that wealth gap.

President Biden Had Canceled $15 Billion Of Student Loans. Is It In The Interest Of The Federal Government To Discharge Student Debt?

This isn’t a political issue, it’s an economic issue as far as we’re concerned, and many economists have agreed that canceling debt up to $50,000 would have a great big impact on our economy.
On one hand, we know that black and brown families are more burdened by student loans, for giving a certain amount of student loan debt would have an equalizing impact, but more importantly and what’s good for the whole country, is that if people are not paying student loans, then, they’re contributing to the economy.

College costs are outpacing our earnings, then, we can plug that money back into the economy and maybe bring down some of that inflation that we see going on the cancellation of 15 billion dollars of student loans,  that’s not just with the wave of the executive pin that he’s saying I’m getting rid of all of this, it’s because of these programs that we’ve been talking about, like the public interest loan forgiveness.

There’s a strategy for teachers: if you’ve been teaching for some time, then you can apply to have your loans forgiven.

It’s not just he’s just doing away with it, it’s these programs where people pay for some time, they’re giving something back to society, and then they get their loans forgiven, that’s the big thank you at the end it.

We agree with many economists that say that canceling student loan debt up to $50,000 would have a good impact on society and the economy.

Will It Become Easier To Discharge Student Debt Through Bankruptcy?

We are seeing some judges, some courts, and some districts where judges have broadened the undue hardship standard.

You have to be practically homeless and never have any hope whatsoever of being able to feed your family, it’s a ridiculously high bar but a lot of judges now are saying that that undue hardship they’re making a little bit easier, a kinder gentler version of the undue hardship standard, we have not seen it happen in Texas courts yet.

New York is one example where we’re seeing it become a little bit more attainable. We don’t think that Congress is going to do anything to make it easier.

It’s going to be up to the courts to be kinder and gentler to borrowers, the bank lobby is really powerful and they’re working hard to keep Senators and representatives from passing legislation that will make it easier to discharge the debt.

We don’t vote for bankruptcy judges, they’re appointed by district courts, and district court judges are appointed by the President.

This is why it’s so important to vote, not just on the presidential ticket but down-ticket as well, because our courts are where a lot of this change is going to happen, but we’re hopeful it just makes a lot of sense, and it’s getting a lot more attention, it’s a big deal right now.

If you’re struggling with student loans and need professional advice, contact an experienced Texas bankruptcy lawyer to see how bankruptcy can help you get a fresh start.