Do you know that doctors and lawyers discharge student loans? In fact, three studies show it can be done. So, even though it’s hard to obtain the undue discharge of student loans—it isn’t impossible. If you are unable to discharge your student loans it is still possible for you to use bankruptcy to manage student loans. In fact, you are about to learn step by step how to make your student loans affordable.
How to Bankrupt or Discharge your Student Loans
This article covers bankruptcy and other programs to use for lowering your student loan payments or even eliminating them. You can apply for the Income-Based Repayment (IBR) for free with the Department of Education. However, if you are being sued and need a lawyer to file to prevent the garnishment then please call us. Servicers only get a 16% commission on what they collect so they might be unwilling to process your IBR application if they don’t make a profit from processing it.
Take an hour or two to read the step by step information below 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 help students make their student loans more affordable by filing bankruptcy or defending lawsuits. 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.
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Confirm the Loan is Non-Dischargeable in Bankruptcy
When a lawyer assumes that a student loan is non-dischargeable, it might be malpractice. You simply have to wait for the correct amount of time. Normally, it is extremely hard to discharge student loans under the Brunner test but it is done when undue hardship applies. The truth is, some student loans are just as dischargeable as income taxes or 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. Unfortunately, about 35% of student loans are in default. Additionally, the number of persons losing their social security to student loans is tripled, and that should never happen. So, if you think you can’t manage, bankrupt, or discharge your student loans think again.
The website for the get-out-of-debt guy reports 2012 data shows that for the bankruptcy cases filed for a student loan discharge, 47% are 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 might 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.
Analysis of Discharging or Managing Student Loans
The following is our four-part analysis of how to discharge or manage your student loans.
1. Qualified School Loans
Until 1998 student loans were dischargeable just like any other debt if they had been due for 7 years. However, after 1998, loans insured by the Department of Education or a state agency to students attending “qualified schools” were made non-dischargeable unless that loan was an undue hardship. Since then, a special lawsuit called an Adversary Proceeding must file 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 is “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. So, only loans through accredited schools receive protection from discharge.
2. Private Student Loans
From 1998 to 2005, private student loans were discharged just like credit card debts. At that time, to discharge private student loans, it was not a separate requirement that you file an adversary proceeding and prove that your student loans are an undue hardship. If you filed bankruptcy prior to 2005 any private loans were discharged automatically. Then, if a debt collector makes an attempt to collect for these loans he is violating 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 is qualified and the student proves undue hardship.
3. VA and Troops to Teachers Loans
Presently VA school loans are dischargeable in bankruptcy without filing an adversary after five years under 38 USC 7634. 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 the Department of Education, state agencies, and private loans require proof of repayment being an undue hardship to discharge student loans.
4. The Heal Loan Standard
The Heal loan standard is even harder than the undue hardship and requires that requiring payment is “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 debt for tuition. Only educational loans are not dischargeable unless undue hardship is proven. Unless you sign a loan for an ordinary debt (such as your dorm rent), it is as dischargeable as a credit card.
Government Programs in Which You Manage or Discharge the 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. Then, you will know if the loan is a government loan or not. Some government loans made in the 1970s might not show in those results but if the loan is Government or private gives you the advantage of knowing who governs the loan.
If the loan has a cosigner 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. Additionally, the requirement is only to send the notice, however, it is not a requirement that you receive 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.
How to 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 that are sometimes as low as five dollars. Generally, by making 9 of 10 on-time payments, your credit history gets a new notation that you are paying “on time”. This program also allows you to purchase a home if a student loan default is hampering your credit history.
Normally, you may only rehabilitate a loan one time but you also have to rehabilitate a loan in default 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.
Student Loan Debt Collectors
The problem in getting rehabilitation through the system is that bill collectors process the rehabilitation application. They are paid 16% of anything they collect and they are often paid well over $100,000 per year in commissions and bonuses by re-writing these loans and collecting payments. The IBR loan is granted if you make 9 of 10 on-time payments. It is worth noting that if you are on social security and can only pay five dollars per month the whopping commission check from doing three hours of work is only $.80.
However, the commission from a doctor with a $3,000 per month payment is $480 for the same three hours of work. That’s why rehabilitation applications for minorities and the poor end up in the trash. However, if you file a Chapter 13 and ask for a hardship discharge due to poverty, you suddenly receive approval for IBR loans while the processing through rehabilitation rushes through.
These student loan debt collectors also receive payment for every single letter and phone call. They also receive payment for wage garnishments and tax seizures. Interestingly, social security check garnishments tripled from about 2009 to 2014 and are rapidly increasing for the very poor which should never happen. Instead, senior citizens on social security should have zero repayments in an IBR for their government loans. However, unfortunately, they are the least likely to process their documents.
Combine Government Loans into IBR, IDR, or ICR
An IBR or income-based repayment plan allows you to combine government loans into an affordable repayment which is never more than 15% of income. They base this on a sliding scale of 0% at the poverty level to 15% at the highest income for the worst IBR program. Also, please note that some IBR programs cap at 10% others at 12%. At the end of 20 years, the balance is forgiven (discharged) if the loan remains in a good payment status until it discharges. Payments are as low as zero 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. IBR is income-driven and based upon your disposable income and never more than 10%.
For the years you have zero income, 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. However, 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.
Here are four examples of jobs that qualify:
1. Military Personnel
Every military branch also offers veterans and current military employees partial or complete student loan repayment.
2. 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.
3. PeaceCorps or AmeriCorps
Volunteering for PeaceCorps or AmeriCorps, or similar organizations qualifies for partial student loan debt forgiveness.
4. 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.
Various Government Loans Programs to Discharge Loans
Not only does rehabilitation and IBR exist for government loans but several other programs also exist to discharge government loans. Some programs even defer payment. In the cases of deferment, the government pays the interest. However, in forbearance, interest continues to accrue. Additionally, if a school closes a program and it is impossible for you to complete the program you might be able to discharge the debt as a closed school discharge.
Other discharges also exist such as a discharge for parents when a child or student dies, or for identity theft. The common administrative discharges are disability, Public Service Loan Forgiveness, death, and school closing. But, several other administrative discharges exist such as stolen identity and failure to benefit. You may review these discharges on the DOE website. A person that can’t possibly benefit from the training might qualify for an administrative failure to benefit. An example is if the person doesn’t qualify for the certification or job when he attends 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? We also appreciate your sharing our site with others!
Private Loans, the Statute of Limitations (SOL), and Other Defenses
Private student loans are basically no different than a credit card with one exception. Since 2005, they can’t be discharged without filing an adversary proceeding for undue hardship. However private loans are much easier to discharge as undue hardship since they have no programs that allow the debt to be discharged upon disability, failure to benefit, or other conditions. Private loans are only discharged in bankruptcy, go into default, or get paid on time. It is therefore much easier to prove that the private student loan creates an undue hardship.
What Applies to Student Loans?
Private loans depend either on your voluntarily paying or upon suing for the debt. However, they can’t administratively attach tax refunds or wages without suing, just like the Department of Education. Just like the statute of limitations, all of the normal defenses you make against a credit card apply to private student loans. Common defenses like the statute of limitations and infancy do not apply to government loans. The fair debt collection practices act only applies to loans in default. This happens to government student loans when they are about 270 days overdue. For private student loans, it happens when they are one day overdue.
Debt collectors who are attempting to collect a private loan often claim that the loan is a government loan. They do this in an effort to claim that the statute of limitations does not apply to them. Another defense might include a “real party in interest.” All of the defenses in use against any common debt also apply to private student loans. Don’t you think these are all good reasons for checking to see if the loan is government or private?
Student Loans and the Statutes of Limitations
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. However, this is based on state law in the state in which you live. In some states, the promise must be in writing in order to reset the statute of limitations; while in others, an oral promise is enough. Do you see why debt collectors record the call?
Additionally, 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 charges off after 180 days of non-payment. Also, if the loan is paid for five years, most collections stop. After 7 years of no account activity, it has less relevance to your credit score.
Discharging Student Loans and 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 advantage of filing bankruptcy with student loan debts is that it places collections on hold during Chapter 13. Yes, the balance increases but it stops collections. Often it allows you to find alternative ways to deal with the lender. It also forces an unreasonable lender to modify the loan if the lender won’t rehabilitate, modify, or convert the loan into an IBR loan.
Even the federal government normally skips steps to quickly grant an IBR or ICR. They do this 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 in finding an attorney to do these cases. Most attorneys don’t know how or won’t work file these cases.
What You Need to Prove
To prove undue hardship and discharge a student loan in bankruptcy, a debtor must prove that he “would be unable to maintain a minimal standard of living if forced to repay student loans”. This requires you to document past, present, and future good faith efforts along with the inability to repay. The following is a list of requirements.
- The inability to pay the minimum student loan payments.
- Your income.
- Your required and basic expenses such as food, health-care, housing, and transportation.
To prove it, you must gather the evidence of undue hardship that “makes it unlikely your situation will improve.” This includes evidence that shows you are unable to pay a student loan over a long time. One such example is if you have a disability. Remember, obtaining the undue hardship discharge 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.
“A Good Faith Effort”
You must prove that you made “a good faith effort to repay your loans”. This 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.
However, to receive an undue hardship discharge, you must prove that it is the only option left. This is very difficult to do. But, 40-80% of the people filing for undue hardship from 2005 to 2012 discharged these debts or got better terms than they had prior to filing.
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Do you need help managing your student loan? Contact my office right away to start the conversation. Nick C. Thompson, Attorney: 502-625-0905