Manage Bankrupt or Discharge your Student Loans

Doctors and lawyers have discharged student loans. 3 studies show it can be done. It is hard to obtain the undue discharge of  student loans but it isn’t impossible. If you can’t discharge your student loans you can still use a bankruptcy to manage student loans if you need to. You are about to learn step by step how to make your Student loans affordable.

This article covers bankruptcy and other programs you can use to lower your student loan payments or eliminate them. You can apply for the IBR for free with the Department of Education. If you have been sued and need a lawyer to file to prevent the garnishment then please see us. Servicers only get a 16% commission of what they collect so they may be unwilling to process your IBR application if they cant make a profit from processing it.

Take an hour or two to read the below information step by step to make your student loans affordable, or discharge them in bankruptcy. We only take bankruptcy cases in Kentucky and Southern Indiana. Our website and office helps students make their student loans more affordable by filing bankruptcy or defending lawsuits to make them affordable. If your student loan lender will not negotiate with you or rehabilitate the loan with reasonable payments you may wish to file bankruptcy and an adversary to force them to negotiate your loan. Download our Salt manual for over 60 different programs to manage or discharge your student loans. We wont ask you to give us your email address and send you spam. We wont ask for money. You can help out other students by sharing or liking our website with Facebook, Google Plus, Twitter or LinkedIn and help spread the word. Thanks.

First confirm the loan can’t be discharged in bankruptcy

When a lawyer assumes that a student loan cant be discharged it may be malpractice. Some student loans are just as dischargeable as income taxes you just have to wait the correct amount of time.  Normally it is extremely hard to discharge student loans under the brunner test but it can be and is done when undue hardship applies. Some “student loans” are just as dischargeable as a credit card. But the tactics that work for private loans don’t work for government loans and you have to get this right. If you assume it is not dischargeable and fail to do the analysis the student loan debt will not be discharged. About 35% of student loans are in default. The number of persons losing their social security to student loans has tripled and that should never have to happen. If you think you can’t manage, bankrupt or discharge your student loans think again.

The website for the get out of debt guy reported 2012 data showing that of the bankruptcy cases that filed for a student loan discharge 47% were discharged in full, 21% resulted in a better payment, and 12% settled for less than was due. That is an 80% success ratio. Three prior studies on student loan discharges in bankruptcy including those from Iuliano and Pardo and Lacey show similar results with about 40-50% success rates. The reason for these high ratios may be that lawyers are getting better at spotting what student loans qualify for the undue hardship. Some cases were won by default simply because the lender failed to file an answer and other studies show the case for partial discharges Bayuk. Here is the Student Loan Undue Hardship Flowchart showing how to analyze a Student loan. What follows is our 4 part analysis of how to discharge or manage your student loans.
Until 1998 student loans could be discharged just like any other debt if they had been due for 7 years. After 1998 loans insured by the Department of Education or a state agency to Students attending “qualified schools” were made non-dischargable unless that loan was an undue hardship. A special lawsuit called an adversary proceeding had to be filed in bankruptcy court to discharge the student loan. This is extra work for the attorney which clients often don’t want to pay for.  How do you know if your school was “qualified”. Look at the list of qualified schools. If your school isn’t on the list of qualified schools, the loan is just as dischargeable as any credit card debt. Only loans through accredited schools are protected from discharge.

From 1998 to 2005 private student loans were discharged just like credit card debts. It was not separately required that you file an adversary proceeding and prove that your student loans would be an undue hardship to discharge private student loans. If you filed a bankruptcy prior to 2005 any private loans were discharged automatically.  If a debt collector makes any attempt to collect for these loans he has probably violated the fair debt collection practices act and also is in contempt of the bankruptcy court. Bankruptcy cases filed after 2005 made loans from private banks non dischargeable unless the school was qualified and the student could prove an undue hardship.

Presently VA school loans can be discharged in bankruptcy after 5 years under 38 USC 7634 without filing an adversary. Military service loans generally also have a 5 year waiting period under 37 USC 303a(e)(4) but the Troops to Teachers program totally bars any discharge 20 USC 6674(f)(3) even if it is an undue hardship. Only Department of Education, State agencies and private loans require proof of repayment being an undue hardship to discharge student loans. The Heal loan standard is even harder than the undue hardship and requires that requiring payment would be “unconscionable” 42 U.S.C. Section 292f(g). A debt for rent or any other service from a school is not a loan and is dischargeable even a debt for tuition. Only educational loans are not dischargeable unless undue hardship is proven. Unless you signed a loan an ordinary debt such your dorm rent is just as dischargeable as a credit card.

Second, Government Loans have programs that allow you to manage or discharge their loans.

Fortunately the government has many programs that allow you to discharge or get a government loan out of default. Always check to confirm if the debt is government or private by signing into the National Student Loan Data System and creating an account and looking up whether the loan is a government loan.  Some government loans made in the 1970s may not show in their results but how to handle the loan is governed by whether or not the loan is Government or private. If the loan was cosigned or has an adjustable or high interest rate it is probably a private student loan. Some of the private loan rates are at credit card levels. Government loans have administrative powers that allow garnishments by merely sending a notice. Notice is only required to be sent it is not required that you received notice to garnish wages or bank accounts. Look at the companion student loan book for  60 different programs to manage or discharge your student loans.

You can rehabilitate Government loans

Government loans can be brought up to date by the rehabilitation program but generally not while in deferment. This requires applying for the rehabilitation program which must offer you affordable payments which are as low as 5 dollars. Generally, by making 9 of 10 on time payments your credit history will have a new notation that you have been paying “on time”. This program will allow you to purchase a home if a student loan default has been hampering your credit history. You can normally only rehabilitate a loan one time but normally you have to rehabilitate a defaulted loan to get an IBR loan. Both 20 U.S.C. § 1078-6(a)(1)(C) and 34 C.F.R. § 682.405(b)(3)(i & ii) require guarantor and prior lender to both “remove the record of default from the borrower’s credit history” which immediately increases your credit score. The problem in getting a rehabilitation through the system is that bill collectors process the rehabilitation application.  They are paid 16% of anything they collect. These bill collectors are often paid well over 100,000 a year in commissions and bonuses by re-writing these loans and collecting payments. If you make 9 of 10 on time payments the IBR loan is granted. If you are on social security and can only pay 5 dollars per month the whopping commission check from doing 3 hours of work is only 80 cents. The commission from getting a doctor with a 3,000 per month payments is 480 for the same 3 hours of work. Rehabilitation applications for minorities, and the poor are often thrown into the trash can. File a Chapter 13 and ask for a hardship discharge due to your poverty and you are suddenly approved for IBR loans and the processing through rehabilitation is rushed through. These student loan debt collectors are also paid for every letter and phone call.  They are paid for wage garnishments and tax seizures. Social Security check garnishments have tripled from about 2009 to 2014 and are rapidly increasing for the very poor and it should never happen. Senior citizens on social security should have zero repayments in an IBR for their government loans. However they are the least likely to have their documents processed.

Combine Government loans into IBR IDR or ICR

IBR or income based repayment plans allow you to combine government loans into what should be an affordable repayment which is never more than 15% of income based on a sliding scale of 0% at the poverty level to 15% at the highest income for the worst IBR program. Some IBR programs are capped at 10% others at 12%. At the end of 20 years the balance is forgiven (discharged) if the loan is kept in a good payment status until it is discharged. The old IBR program was for 25 years. Payments are as low as 0 dollars for IBR and since the program rewards you for every year the loan is repaid you never want to use an unemployment deferment or forbearance for IBR and public service loan programs. IDR is income driven and based upon your disposable income and never more than 10%.

For the years you have zero income just send in your zero payment while you are on unemployment or social security. Parent Plus loans need to look at the ICR program which is very similar to the IBR. The ICR has a difficult formula and the IBR generally has lower payments. If you work for the government or a non profit entity like a Hospital, Charity or School the public service program allows you to pay off the IBR loan within 10 years with 10% of the loan repaid for every year of public service. Church employees that do non religious work qualify for the public service program. Even doctors qualify. Just fill out the Public Service Loan Forgiveness form. Examples of 5 jobs that qualify include:

Military personnel:  every military branch also offers veterans and current military employees partial or complete student loan repayment.

Public sector positions: working for a state or federal agency allows continuing work to pay off student loans currently in 2014 once you’ve made your first 120 student loan payments the government pays the rest.

PeaceCorps or AmeriCorps:  Volunteering for PeaceCorps or AmeriCorps, or similar organizations qualifies for partial student loan debt forgiveness.

Teaching or healthcare in needy areas:. If you’re willing to work in needy or Native American areas, almost $18,000 of your student loan debt may be forgiven by the government.  This applies to nursing programs or providing healthcare for low-income areas.

Government loans have various programs to discharge loans closed school, death, disability

Not only does rehabilitation and IBR exist for government loans but several other programs to discharge government loans exist. Some programs defer payment. In a deferment the government pays the interest in a forbearance interest continues to accrue. If a school closes a program and you can’t complete the program you may be able to discharge the debt as a closed school discharge. Other discharges exist such as a discharge for parents when a child/student dies, identity theft exist. The common administrative discharges are disability, Public Service Loan Forgiveness, death and school closing. But several other administrative discharges do exist such as stolen identity and failure to benefit and these discharges can be reviewed on the DOE website. A person that can’t possibly benefit from the training may be able to qualify for the administrative failure to benefit if the person could not qualify for the certification/job when he attended the school such as a blind student who attends a truck driving school for a CDL license. Oh did I forget to tell you to look at the companion student loan book for  60 different programs to manage or discharge your student loans. If you forgot to like and share us that social share thing is still on the right.

Third, Private Loans the Statute of Limitations and other defenses

Private student loans are basically no different than a credit card with one exception.  Since 2005 they cant be discharged without filing an adversary proceeding for undue hardship.  However private loans are much easier to discharge as an undue hardship since they have no programs that allow the debt to be discharged upon disability, failure to benefit, or other conditions.  Private loans can only be discharged in bankruptcy, go into default or paid on time. It is therefore much easier to prove that a private student loans creates an undue hardship.  Private loans depend on your voluntarily paying or upon suing for the debt. They cant administratively attach tax refunds or wages without suing like the Department of Education.

All of the normal defenses you can make against a credit card such as the Statute of Limitations apply to private student loans. Common defenses like the SOL and infancy do not apply to government loans. The fair debt collection practices act only applies to loans in default which happens to government student loans when they are about 270 days overdue and to private student loans when they are 1 day overdue. Debt collectors who are attempting to collect a private loan will often claim that the loan is a government loan in an effort to claim that the statute of limitations does not apply to them. This is another reason for checking to see if the loan is government or private. Other defenses may include real party in interest. All of the defenses that can be used against any common debt apply to private student loans.

States have 3, 5, 6, 7, 10 and 15 year Statutes of Limitations. Kentucky has a 15 year SOL and any payment restarts the 15 year period. Acknowledging the debt, admitting you owe the debt, refinancing or even making partial payments towards the debt might “revive” the debt, meaning that the statute of limitations period starts over. This is based on state law in the state you live in.   In some states the promise must be in writing in order to reset the statute of limitations; in others an oral promise is enough. There is a reason why debt collectors record the call. Filing Bankruptcy under 108-C may or may not toll the statute of limitations depending on the district where you live.  However generally the loan is charged off after 180 days of non payment and if the loan has not been paid for 5 years most collections will stop. After 7 years of no account activity and as the account become older it has less relevance to your credit score.

Fourth Discharging student loans in Bankruptcy the Undue Hardship Standard

It is hard, it is not impossible to get an undue hardship discharge. After all they gave me one in 2001. Currently the advantages to filing bankruptcy with student loans debts is that it places collections on hold during a Chapter 13. Yes the balance increases but it stops collections. Often it allows you to find alternative ways to deal with the lender. It can also force an unreasonable lender to modify the loan if the lender wont rehabilitate, modify or convert the loan into an IBR loan.  Even the federal government will normally skip steps and quickly grant an IBR or ICR to avoid an adversary lawsuit in bankruptcy court to prove undue hardship. The government and private lenders hate litigating these adversary cases. The problem is how do you find an attorney to do these cases. Most attorneys don’t know how or wont work file these cases.

To obtain the undue hardship a Debtor is required to prove that he “would be unable to maintain a minimal standard of living if forced to repay student loans” to prove an undue hardship and discharge a student loan in bankruptcy. This requires you to document past, present and future good faith efforts and inability to repay. This includes:

  1. your inability to pay the minimum student loan payments.
  2. your income
  3. your required and basic expenses such as food, health-care, housing, and transportation

If there is proof of undue hardship and you have a condition that “makes it unlikely your situation will improve” gather the evidence to prove it. This may be any evidence and condition showing your income or expenses will prevent you from paying a student loan for a long time such as disability. Remember that obtaining the undue hardship discharge for student loans is possible if you qualify but it isn’t easy. Even if you don’t qualify for the hardship discharge you can force the lender to make these loans affordable.

You will have to prove that you have made a “a good faith effort to repay your loans” which often includes at least attempting to place government loans into an IBR income based repayment plan. Private loans are much easier to discharge in bankruptcy, because there are few or no programs to enable private loans to be affordable. The only available options for private loans are pay in full or default. Proof that you made good faith efforts and requests include proof of the telephone calls, letters, applications, deferments and forbearances. It’s your burden to prove that you made every effort to repay. You have to prove that an undue hardship discharge is the only option left to get the undue hardship discharge. This is very difficult to do but 40-80% of the people filing for undue hardship  from 2005 to in 2012 were able to discharge these debts or get better terms than what they had prior to filing.

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