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Student Loan Debt Relief

The question of whether bankruptcy can provide student loan debt relief is certainly a very hot topic of discussion.  Never before in history have so many people been in so much student loan debt with such devastating financial consequences.

The current answer to this question is that almost all student loan debts are not wiped out unless there is a severe hardship and you must prove the hardship in bankruptcy litigation.  And, if you are one of the few that succeed at this, it takes a tremendous effort (a lawsuit must be filed against the Department of Education or a private lender) in the bankruptcy itself.

Lawsuits inside of bankruptcy typically cost thousands of dollars upfront to pay for the legal fees and costs that most certainly will be extensive, including a trial. There are some successes, but no one should expect a simple and easy path to this result if it occurs at all.

Therefore, any person hoping to discharge student loan debt in bankruptcy must have a very clear and realistic view of what lies ahead if an attempt is made to wipe out these types of debts.

Currently, the way a person could potentially obtain student loan relief through bankruptcy is not practical and full of agony. While the potential is there, the reality is not good for all but a very few.  The law puts the burden of proof on the debtor to show an extreme hardship as relevant cases have pointed out.  The proof that is necessary to show “undue hardship” is also subjective, and the courts apply a standard of the “totality of circumstances.”

Thus, you have no reliable idea of whether your attempt to wipe out your student loans in bankruptcy is worth the cost and effort before you start.

Chapter 7 Bankruptcy and Student Loans

Chapter 7 bankruptcy cases don’t automatically provide for student loan debt relief.  As mentioned above, the Debtor must sue the student loan creditor if there are overwhelming facts that would likely result in the bankruptcy court making a determination that an undue hardship exists. If a debtor decides to take a chance and has funding for the lawsuit, this process can be started during the bankruptcy proceeding, which is open for about 4 months.

It is also possible to ask the court to reopen a “closed” bankruptcy at a later date. The court has the discretion to grant a Motion to Reopen, even if it is years into the future. A motion to reopen a bankruptcy in order to file a lawsuit against the educational lender may be appropriate if something serious happens to a debtor in the future that makes repayment of the student loan an incredible hardship at that time.

Chapter 13 Bankruptcy and Student Loans

There is not any substantial difference between attempting to discharge a student loan in a Chapter 13 bankruptcy compared to a Chapter 7 bankruptcy.  It is clear, however, that any attempt to file an Adversary Proceeding (which is really a lawsuit of sorts filed in the bankruptcy matter) should be considered or reviewed near the end of the completion of the Chapter 13 plan. If an attempt to discharge a student loan is made too early into the plan, the lender will most certainly make the argument that the court should take a “wait and see” approach as to whether an undue hardship exists at that time.

Help May Be On the Way

Help may be coming as Congress introduces new legislation. Since December 2020, at least two new separate bills have been introduced.

The first bill is called the Consumer Bankruptcy Reform Act of 2020, sponsored by Sen. Elizabeth Warren on December 9, 2020, S. 4991. This bill completely dismantles both Chapter 7 and Chapter 13 bankruptcies and creates a new, single, Chapter 10. This proposed legislation is incredibly generous to debtors and would include the ability to wipe out student loans! No one should get too excited at this point because this is just a proposal and it is unknown what will really happen in 2021 and beyond.

There has also been a second bankruptcy reform act proposed as of February 2, 2021. This bill is called the Medical Bankruptcy Fairness Act of 2021. This bill is a potential break-through for people filing bankruptcy because of too many medical bills and, if that is the reason that they are filing (there is a qualification test), it also would allow for the discharge of student loan debts.  Keep in mind, this is just a proposed bill, and nothing has been approved to date.

Student Loan Debt FAQs

If you never pay your student loans, they continue to accrue interest and will remain a debt you owe. The debt just gets larger until you determine a course of action to help pay them off.

Student loan debt can be collected through wage garnishments, bank garnishments, and the government may even take your tax refunds.

It is important to not ignore this problem. If you find yourself getting garnished due to student loan debt, a chapter 13 bankruptcy can stop the garnishment and get you onto a more affordable payment plan.

Student loans can be discharged if you can show that repayment would cause an undue hardship. Proving you have an undue hardship does not just mean that you are having a hard time paying off your loans. The Eighth Circuit court (which includes Nebraska and Iowa) has held that a variety of factors added together, or in other words, the totality of the circumstances must prove undue hardship.

Congress has intentionally made the bar for proving undue hardship very high and it has generally been granted only in rare or special circumstances. Courts have generally been reluctant to grant student loan discharge, often finding reasons that the standard has not been met.

Many people have a hard time keeping on top of their student loan debt. If it was easy to discharge in bankruptcy, everyone would be doing it!

A bankruptcy attorney can analyze your situation to determine if this is a feasible option for you. Even if you aren’t a good candidate for a student loan discharge, bankruptcy can often solve other debts to free up room in your budget for student loans. There are also many programs available to help cut down on your monthly student loan bill, such as income-driven repayment plans, that may help get you onto a less stressful path.

There are two ways to discharge private student loans in bankruptcy.

Similar to federal student loans, private student loans can be discharged upon a showing of undue hardship, which is harder to prove than it sounds. Courts have generally been reluctant to grant student loan discharge, often finding reasons that the undue hardship standard has not been met. In a few select cases, such a discharge has been granted. A bankruptcy attorney can assess your situation to see if you could qualify for such a discharge.

A second way to discharge private student loans is to file bankruptcy once the statute of limitations has passed. Many state laws provide a five-year statute of limitations in breach of contract actions. So, if you haven’t paid on your student loans for five years (not even a single penny), you may be able to get rid of your private student loan debt because the debt is too old to be collected on. A review of your payment history and a copy of the student loan contract can help determine if the statute of limitations has run in your case.

If you file a Chapter 7 bankruptcy when you owe student loans, collections and student loan payments will be temporarily suspended during the pendency of your case. This is due to what is called the “automatic stay” in bankruptcy, which prevents creditors from collecting on your debt, even non-dischargeable debt, during your case. Many Chapter 7 cases will close about three months after the day you file. Therefore, your student loan payment may only be suspended for a few months. Once your case is closed payments and collection can start up again.

A Chapter 13 bankruptcy enables you to restructure debt. What creditors you do or don’t pay back and the amount you have to pay is different in every case.

If you are currently getting garnished by a student loan provider, have run out of deferments or forbearances, or your income-driven repayment plan is too high, Chapter 13 may be able to get you onto an affordable payment plan to help manage all debt, included student loans.

During the term of the Chapter 13 plan, many people pay little to nothing back on their student loans while they work on resolving other debt. In other cases, it may be beneficial for you to keep paying on your student loans outside of bankruptcy.

Your bankruptcy attorney can review your budget and situation to determine the best option for you.

Student loans can be discharged if you can show that repayment would cause an undue hardship. Proving you have an undue hardship does not just mean that you are having a hard time paying off your loans.

The Eighth Circuit court (which includes Nebraska and Iowa) has held that a variety of factors added together, or in other words, the totality of the circumstances must prove undue hardship. Factors such as your ability to pay (including your ability to pay on an income-driven repayment plan), ability to earn income, necessary living expenses, disability, age, and other factors can all weigh in on whether the court will award an undue hardship.

The standard is meant to be a difficulty so that everyone doesn’t rush to seek a discharge of their student loan debt.

When you file bankruptcy, student loans will not be discharged unless your attorney files a special action as part of your case called an “adversary proceeding” specifically seeking a discharge of student loans. In this action, your attorney must alert your student loan providers so that they can make the case on why your student loans should not be discharged. Ultimately the judge will hear the case and decide which side will win.

To be granted a student loan discharge your attorney must prove that repaying your student loans would cause an undue hardship. The Eighth Circuit court (which includes Nebraska and Iowa) has held that a variety of factors added together, or in other words, the totality of the circumstances must prove undue hardship. Congress has intentionally made the bar for proving undue hardship very high and it has generally been granted only in rare or special circumstances. Factors such as your ability to pay (including your ability to pay on an income-driven repayment plan), ability to earn income, necessary living expenses, disability, age, and other factors can all weigh in on whether the court will award an undue hardship. Your bankruptcy attorney can review your budget and situation to determine the best option for you.

Even if you aren’t a good candidate for a student loan discharge, bankruptcy can often solve other debts to free up room in your budget for student loans.

There is no statute of limitations for the collection of federal student loans. However, various programs, such as income-driven repayment plans, may lead to student loan forgiveness after you have met the parameters of the program. However, there is a statute of limitations for private student loans.

The statute of limitations for private student loans is the same as the statute of limitations for a breach of contract. If you have not paid on your student loans for five years or more, you may have a statute of limitations defense to paying your private student loans.

A student loan discharge in bankruptcy means that you no longer owe anything related to the student loans that were discharged. Alternatively, student loan forgiveness, like from a twenty-five-year income-based repayment plan, will get rid of the student loans forgiven but may have a tax consequence following the forgiveness.

For example, if you get forgiveness of $30,000.00 of student loan debt, when you go to file taxes for that year, you may have to claim the forgiven amount as income and pay taxes on it.  In some cases, this could lead to a significant tax burden. However, a student loan discharge in bankruptcy does not become taxable.  You simply don’t owe the debt.