This article is a handout I give to my bankruptcy clients which explain how to handle your student loans. The idea is to survive the student loans or have them die off and expire. Often it is impossible to repay the balance. But you can ensure they are unable to collect from you.
Federal Student Loan wage garnishments
The Federal government does not have to file a lawsuit to collect for federal student loan debt. They have to send notice to the last known address they have for you and send their garnishment to your work or bank. This often is a shock to find an unannounced garnishment of your wages or bank account. You can stop the garnishment and may get the money refunded by filing bankruptcy. Money attached shortly before you file is subject to being recovered as a preferential or fraudulent transfer to the servicer or department of education. The government loans do not have to sue to garnish wages or bank accounts, so they rarely sue unless they wish to attach and sell real estate property. Still, a lawsuit with DOE is possible.
Private student Loan wage garnishments and Chapter 7 or 13 bankruptcy
Private student loans have to sue and win to collect. Often a good attorney can prevent collections. If they have gotten a judgment however their collection can still be stopped by filing bankruptcy. The problem is that a Chapter 7 bankruptcy normally only stops the wage garnishment for 4-6 months while the temporary stay court order is in effect. The stay order is much stronger than the discharge order which normally does not discharge student loans. Because Chapter 13 lasts for five years the private student loans often starve and are paid little or nothing for five years. Eventually, they charge off and look for more collectible accounts.
How to make your student loan dischargeable in bankruptcy
Sometimes the student loan does not qualify as a non-dischargeable student loan. The loan has to be made to attend one of the schools which is qualified and the student has to also be able to benefit from the program of instruction. There are closed school and other defenses. You can download our list to analyze the loan for dischargeability.
It is not correct to say student loans are never dischargeable in bankruptcy. It is very difficult but not impossible to get an undue discharge of your student loans. To get an undue hardship discharge of your student loans you have to file an adversary proceeding in your bankruptcy.
The cost of filing an adversary to get the undue hardship in bankruptcy is normally cost prohibitive. You have to file a motion to reopen the case if you do this after the case closes. You can file this after the case closes. But an attorney normally bills 300 to 500 dollars plus the filing fee just to reopen a bankruptcy case to add debt or file a late reaffirmation agreement. The filing fee may be waived for an indigent to reopen a case. There is no fee for you to file an adversary to determine dischargeability during the case. But any adversary case is additional work for the attorney.
The attorney fees for an adversary proceeding which goes to trial start at about 5,000 to 15,000 dollars. There is that much work when you file the complaint, discovery, pretrial compliance, and go to trial. The cost of doing an undue hardship adversary properly might be a little less than other adversary actions. But it still is a very large expense and a lot of work. Imagine shutting down a law office for one or two weeks to do your hardship case and not working on any other person’s case. Think 80- 120 hours at 250 per hour or $20,000 to $30,000. If a lawyer charges half price, that is still 10,000 to 15,000 dollars.
Every year about 500 people file for the student loan hardship discharge in America. About half of them get a partial or complete discharge. That is right they win about 50% of the time often without an attorney. Many of them settle their cases and get better terms on their student loans without going to trial. Most bankruptcy attorneys refuse even to attempt it.
The Brunner test makes it very hard to prove and qualify for this discharge. I have done them and won about half or more of the cases I have attempted. One example of a case that qualified for the undue hardship was a young man who owed child support to two women. Each ex-wife took 20-25%, and he had taxes taking another 40% of his pay. There was only about 10% of his pay left to live on. The judge was forced to choose whether child support or student loans was more important, the judge chose child support. The test is whether a student loan made repayment a hardship on the debtor or his dependents. In this case, the judge was attempting to collect child support in her divorce case when she ruled. Timing is sometimes everything.
Filing for the undue hardship pro se
Because of the cost, many people attempt to file an adversary themselves and sometimes get the undue hardship without an attorney. If your loans are federal, it is difficult to get this discharge. There are income based programs which let you repay based on your income for federal loans. If your income is zero, your payments are zero in an IBR income-based repayment student loan. The private loans are much easier to discharge because there is no program to make the private loans affordable. Therefore, private loans for low-income persons are often an undue hardship to the debtor and their dependants.
If you have government loans, you must exhaust the administrative remedies and discharges first. Disability or IBR (income based repayment) programs are examples of the administrative discharges. Sometimes IBR is also called IDR (income dependent repayment) If the servicers deal with you fairly, you should get a 0 or close to 0 repayments if your income is poverty line. If you work for the government or a not for profit organization like a school you should be able to pay it off in 10 years under that program.
There are over 100 programs for government loans listed on our website and the Salt website. If you don’t exhaust all of your other options, first, a judge will not even hear the case. Applying for the administrative discharges or programs first is required to have the judge consider a hardship discharge for federal loans. Administrative law requires the case be dismissed unless you exhaust all your other options first before submitting it to a court.
How to deal with Federal student loan collections
Never take a deferment or forbearance if you are on an income-based plan. Schools lose the ability to receive federal student loans if too many loans default within the first two years. Schools and servicers are happy to put your loan into a deferment status to avoid going out of business for worthless degrees.
Examples of income-based repayment plans for federal loans are the Paye, Repaye, and IBR programs. The form to get an income based program is a simple form, but you never want to take a deferment or forbearance. If you can’t afford a payment during a year because your income will be zero, then your payment should be zero. That year of payment at zero counts as one of the 10 to 25 years to discharge the loan even though you paid zero. IBR may not include spouse income as household income. Paye and Repaye generally do include spousal income as household income. Social security is not AGI income and is excluded.
How to deal with Private student loan collections
If your loans are private loans and you can’t afford them, you should just not pay them. I know that is shocking advice. But you have an obligation to yourself and your dependants first. You must provide medical food shelter and even retirement needs you have first before repaying any creditor. Private loans have to sue to garnish and collect.
Private student loans may make collection calls but rarely sue. It is expensive to sue someone who can’t or won’t repay. The lender incurs expenses and often remains unpaid. If you don’t repay the loan is often charged off and taken as a tax deduction. The loan may be sold to a debt buyer, but if it remains unpaid, the statute of limitations expires and makes the debt uncollectible. If you make a payment or otherwise admit you owe the debt, the statute often starts all over again. That is why collectors record your phone calls or attempt to get a small payment or other evidence you admit the debt. In Kentucky, the statute of limitations is 20 years. Other states have 3, 5, 10 and 15-year statutes of limitations.
If private loans file IRS form 1099 to get their tax deduction, it may cause a tax debt unless you were bankrupt or insolvent at the time of the charge off. There is a simple form to help you avoid this. Income taxes are dischargeable after three years. Student loans are not generally dischargeable unless you prove the three parts of the Brunner test for undue hardship. It is better to have a tax debt than a student loan debt.
If a private student loan does sue, it is rare for them to win if you use a qualified attorney to defend the case. If you are defending a private student loan, the cost is low for an answer, discovery and summary judgment motion. Defending a private student loan with these items will often cause a case to be dismissed.