Tag Archives: Get rid of student loans

Can Bankruptcy Discharge My Student Loans?

The Student Loan Debt Crisis

It seems that no matter what angle we view student loans from these days, the picture never looks pretty. This blog from Consumer Finance Protection Bureau documents how there are 27.8 million student loan borrowers making use of the direct federal lending program totaling more than $1 trillion in debt. Only 10.8 million of these borrowers are currently repaying these loans. That is, only 38.8% of the borrowers are in repayment. That does not mean the other 61.2% are in default; actually 2.1 million people or 7.6% of borrowers are in default.

Other borrowers are in some sort of suspense mode: 5 million borrowers (18%) are in deferment or forbearance. 7.9 million borrowers (28.4%) are still in school. And 1.9 million (7.2%) are in a six month grace period given to borrowers after graduation.

I see a lot of clients that owe $50,000, $100,000 and sometimes in excess of $250,000 that are hoping to discharge these loans in bankruptcy. I hardly blame them for seeking shelter given the powers granted to the government as the lender of student loans. First, there is no statute of limitations, meaning the loan stays with you for life. Second, the Direct Loan servicing program can intercept your tax refund if you default. Third, the Direct Loan program can garnish your wages without a court order if you default on your student loans.

Bankruptcy offers limited solutions. It is possible to buy time or even discharge student loans in bankruptcy. But an actual discharge of these loans is far different from something like a credit card. In Chapter 7 bankruptcy, a typical credit card debt is listed in the bankruptcy filing and discharged by operation of law if the person filing bankruptcy complies with all requirements such as attending the meeting of creditor and taking the post filing debtor education course.

Student loans are different. The person filing bankruptcy must file an adversary proceeding against the student loan lender. This is essentially a lawsuit which can take a lot of time and expense. If student loan borrowers could afford to pay an attorney to litigate a student loan debt all the way to trial in bankruptcy court, chances are the client could pay the student loan in the first place. And the courts have set standard for discharge so high, it adds another incentive to avoid filing such an action. Discharging student loans through this route is therefore often just an illusion.

So federal student loans are standing at over $1 trillion. Add private loans, we reach $1.2 trillion. Anyone else sense a bubble? As the great economist — okay, I really mean Barry Gibb from the Bee Gees — stated: “[A]ll bubbles have a way of bursting or being deflated in the end.” Congress needs to reform the loan forgiveness for federal loans, and/or revise the bankruptcy code to make student loans dischargeable to some extent.

I’d rather manage a slowly deflating balloon than go for the ride we took in 2008 and 2009 with a full burst.

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Can bankruptcy help with student loans?

Written by San Francisco Bankruptcy Lawyer, Jeena Cho

Can bankruptcy help with student loans? - This is a frequent question I get and a common situation. Most unsecured debts such as credit cards are dischargeable through bankruptcy. However, student loans, both federal and private have an immunity card. In general, student loans will not be discharged after bankruptcy. So, what should you do if you have too much student loans and do not have any realistic hope of ever repaying? There are a few options to consider.

  1. Contact the lender. Most student loan programs have either deferment or forbearance programs where you can temporarily suspend repayment of your debt. In my experience, private student loans either do not have such programs or makes it almost impossible for students to qualify for such programs. It’s important you reach out to the lender as soon as possible. Many of them will refuse to work with you once you’re in default.
  2. Go back to school. This may sound like a crazy idea but most student loans will allow borrowers to put the loan into deferment or forbearance if you go back to school and take more than a certain credit hour. Many local community colleges have nominal fees per credit and it may be one option to keep the student lenders at bay.
  3. File for Chapter 13 bankruptcy. Bankruptcy won’t get rid of student loans but it can stall the repayment. By filing for Chapter 13 bankruptcy, we may be able to lock you into a manageable repayment amount for up to 5 years. The downside? The interest and penalties (if the minimum payment is not met) will continue to accrue during your Chapter 13. It’s not a great solution but it may be the only one available to many people whose wages are being garnished or for those who are unable to work out a reasonable repayment amount. At the end of the 5 years, hopefully your financial situation has improved and you can make the full monthly payment. Otherwise, you can start a new Chapter 13 plan.
  4. Exploring “Hardship Discharge.” Student loans are dischargeable if you bring what’s known as an adversary proceeding in bankruptcy court. This is where you bring an action against the student loan to show that you have an undue hardship. In order to win, you would have to show that there is no hope of you ever being able to repay this debt. It’s an extremely difficult burden to meet and very few cases are ever granted. Additionally, you would have to pay an attorney to bring this action, which will also be very costly.

There is at least one legislation which would make private student loans dischargeable, which would be a welcomed relief to those who have overwhelming student debts.

Disclaimer: Unfortunately, it is impossible to give legal advice over the internet, no matter how well researched or written. Before relying on any information I give, contact a lawyer to discuss your particular situation. I am a San Francisco bankruptcy attorney. The information given is based on California law.

 

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