Getting a personal loan after bankruptcy discharge

Student loans after bankruptcy discharge

Before we delve into the specifics of getting credit in bankruptcy,.

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Student loans after bankruptcy discharge

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Discharging Student Loans -- the Unicorn of the Bankruptcy World?

I attended a free student loan webinar in March of 2014 entitled "Student Loans: The Next Big Thing for the Collection Industry." I'm not a collection lawyer but I wanted to see what collection companies were saying about my student loan clients. I submitted a written question during the webinar asking what percentage of student loans face a discharge in bankruptcy and received this response:

Bankruptcy discharges of student loans are the unicorn of the bankruptcy world

I thought it telling a student loan collector would compare the discharge of student loans in bankruptcy to a mythical creature no one ever sees. I couldn't think of a better metaphor to explain why collectors believe they can afford to be arrogant in collecting on student loans. Unlike mortgages, credit cards, and IRS debt, student loans will never be automatically discharged in a bankruptcy. A separate lawsuit is necessary requiring a borrower to engage in litigation against the Department of Education, an organization noted for taking intransigent positions even in marginal cases. Outspending an impoverished litigant is a familiar collection tactic.

I was reminded of this assessment while listening to oral arguments in Murphy v. Department of Education at the Federal First Circuit Court of Appeals in Boston on December 10th. He represented himself until recently provided pro bono representation because he could not afford a lawyer. This case has national implications, prompting the National Consumer Law Center and the U.S. Department of Education to submit amicus briefs and appear at oral argument.The dispute revolves around what Congress meant when it said a borrower had to prove "undue hardship" in order to discharge student loans in bankruptcy. Murphy, unemployed and now age 65, owes more than $250,000 in Parents Plus loans to put his children through school. At his bankruptcy meeting, the trustee told Mr. Murphy he was more likely to be hit by a bus than have his student loans discharged. Indeed, after listening to the Department of Education's lawyers argue at yesterday's hearing, the trustee may have gotten it right -- at least if the Department of Education has its way.

The Department of Education's position reduced to its essence is that if Mr. Murphy can qualify for a payment plan he should never be able to qualify for a bankruptcy discharge. Judge Thompson pointed out a debtor would never be entitled to a discharge if the government's position were accepted as this would effectively read a student loan discharge out of the Bankruptcy Code. Citing the hypothetical possibility Mr. Murphy could earn $30,000 to $40,000 per year in the future, the government argued the court should ignore the fact Mr. Murphy was earning nothing now, and at age 65 had been unemployed for several years. The government claimed it was not requiring a "certainty of hopelessness" as a prerequisite to a student loan discharge, part of the archaic Brunner test used by some courts. The Department of Education offered no explanation for its optimistic assessment for Mr. Murphy's future employment opportunities beyond age 65. Judge Lynch was particularly hostile towards Mr. Murphy's position even though the government admitted Mr. Murphy and his family were facing a foreclosure and his wife's income was woefully inadequate to meet minimal living expense. Judge Torruella did ask the Department of Education attorneys at one point if being unemployed at age 65 with no job offers in the future was not enough, what more should be required. After fumbling for a response, causing Judge Thompson to repeat the question to muted laughter, the government finally pointed out Mr. Murphy is in good health and might continue to work for another 15 years. The government failed to explain why it believed working until age 80 was a realistic scenario.

The government could not dispute Mr. Murphy's present financial difficulties so its strategy was to point out how some future scenario might permit him to repay his student loans. Crystal ball gazing to construct future scenarios invites enough uncertainty that borrowers find it difficult to prove a negative. Given the Obama admininstration's professed interest in helping struggling student loan borrowers, this was a sad performance. This is a three judge panel, however, a split decision appears to be a best case scenario for Mr. Murphy.

Can You Discharge Your Student Loan Debt In Bankruptcy?

  • How most bankruptcy courts determine financial hardship.
  • The elements of the Brunner Text.
  • What to discuss with your bankruptcy lawyer.

Student loans after bankruptcy discharge

Under certain circumstances, borrowers may be eligible to have their student loans reduced or eliminated altogether ("discharged"). These instances can include death, total and permanent disability, and identity theft. But what about filing for bankruptcy?

The bankruptcy discharge option for student loan borrowers is often misrepresented. Perhaps you've heard that this cannot get rid of your student loans? Well, here's a little secret: it can—it's just not easy to do. Here's how it works.

To have your loans discharged through bankruptcy, you need to prove to a bankruptcy judge that repaying your student loans would cause you and your dependents an undue hardship. Bankruptcy courts typically use the Brunner Test to determine this.

All of you law students out there may be familiar with the Brunner Test, but here's an explanation for us non-law aficionados. This test involves showing the judge three things:

  1. You made a good faith effort to repay your student loans. (You have a history of making payments even if they were less than the required amount.)
  2. You can't maintain a "minimal" standard of living if you have to repay your student loans based on your current income and expenses. (Basically, you run the risk of becoming homeless if you have to pay these loans back.)
  3. Your financial situation is unlikely to improve over the life of the student loan. (You're probably not going to earn a whole lot more 10 or 20 years from now.)

If you can satisfy these requirements, you may have a case for discharge. You will want to work with a bankruptcy attorney to discuss your options; also, keep in mind that different courts may apply the Brunner Test in different ways—or may use a different criterion all together.

Bankruptcy is not something to enter lightly—it will impact how you access credit for years to come. If you are thinking about filing for bankruptcy, start by talking to a bankruptcy lawyer. It's important to note that seeking a discharge of your student loans requires you to not only file a bankruptcy petition, but also to initiate an adversary proceeding against your loan holder on the basis of undue hardship.

After you have made the decision to file bankruptcy based on your whole debt and credit history, discuss with your bankruptcy lawyer the possibility of qualifying for a federal student loan discharge on the basis of undue hardship. Bankruptcy decisions are very specific, so only your bankruptcy lawyer will be able to advise you about how your student loans may be treated. In 2010, 99.9% of debtors who filed for bankruptcy did not even attempt to have their student loans discharged. Of the 0.01% who tried, 40% succeeded in getting all or a portion of their student loans discharged.

How you handle a difficult situation with your student loans (or your personal finances) will be up to your best judgment. Bankruptcy may affect you for many years to come, including impacting your ability to borrow new loans, interfering with job opportunities, and losing some of your assets.

Remember that federal student loans offer many repayment options. including income-driven ones that will base your payment on how much you make, your family size, and the amount of your student loan debt. You may want to look at these repayment options or forgiveness programs before filing bankruptcy.

Student Loans: Maybe They Can Be Discharged After All

Section 523(a)(8) of the Bankruptcy Code states that student loans cannot be discharged, unless payment of the student loans would impose an undue hardship upon the debtor or his dependents. This section has been part of the bankruptcy law for over twenty-five years. It was also amended in 2005 to include private student loans.

However, not all loans incurred in connection with education costs are student loans. For a loan to fall with this section, (1) it must have been made under a government or nonprofit student loan program, or (2) it must be a qualified educational loan under section 221(d)(1) of the Internal Revenue Code, for attending an eligible education institution as defined in section 221(d)(2) of the Internal Revenue Code, and incurred for costs of attendance as defined in section 472 of the Higher Education Act.

If you have a student loan and are filing for bankruptcy, it would be wise to discuss with your attorney whether your student loan falls within these definitions. Perhaps your student loan bill arrives from Sallie Mae and you attended a public university; in such a case you probably can conclude that your student loan qualifies under definition (1) above. If so, you cannot discharge the student loan in bankruptcy unless you can prove undue hardship.

On the other hand, if you attended a for-profit trade school and obtained a private loan from the school, or from a financial institution to which the school referred you, maybe none, or only part, of such a loan qualifies under definition (2) above. Remember, if a private student loan does not qualify under the extensive legal provisions referred to in definition (2), the loan is dischargeable without your having to prove undue hardship.

For example, perhaps you were not an “eligible student” at the time the private student loan was made to you; or maybe the loan was not incurred to pay “qualified education expenses”; or perhaps the loan was not for attendance at an “eligible education institution” because the school was not accredited under Title IV of the Higher Education Act. All these are requirements imposed by section 221(d) of the Internal Revenue Code. Failure of a private student loan to meet any of these criteria means that the loan is fully dischargeable, because it would not qualify under section 523(a)(8) of the bankruptcy law.

Because section 523(a)(8) incorporates requirements contained in section 221(d) of the Internal Revenue Code, persons filing for bankruptcy and owing private student loans should carefully review section 221(d) with their attorney to determine if such loans are dischargeable. Section 221(d) is lengthy, and it imposes many requirements which must be met before a loan can qualify as a student loan. If your loans fail to meet these criteria, you may be able to discharge them in your bankruptcy.

How can I tell if my student loan debt is dischargeable in bankruptcy?

The topic of student loan debt and bankruptcy: most every bankruptcy and personal finance related website out there has written about it on numerous occasions. However, the rules are worth repeating because it is still an unreasonable area of the law that was created to address the concerns of a different era.

Regardless of whether the debts are public or private, student loan debt is not dischargeable in bankruptcy absent a showing of undue hardship. How do you show undue hardship? Well, if you can get out of bed in the morning it’s pretty difficult. Most courts rely on the 3 part Brunner test to evaluate whether a debtor can demonstrate undue hardship sufficient to part ways with their student debts. if you can satisfy each of the following 3 requirements, your student loan debt may be dischargeable.

(1) You cannot maintain, based on current income and expenses, a minimal standard of living for the debtor and dependents if forced to pay off student loans;

(2) additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans;

(3) You have made good faith efforts to repay the loans.

Although courts tend to interpret the Brunner test strictly, whether you qualify for a hardship discharge will ultimately be a function of the individual facts and circumstances of your case as well as the attitudes toward student debt which are prevalent in your jurisdiction. It is very difficult, but not impossible to discharge student loan debt in bankruptcy. One bankruptcy court in Pennsylvania has recommended the following approach to the undue hardship test:

“[w]here a family earns a modest income and the family budget, which shows no unnecessary or frivolous expenditures, is still unbalanced, a hardship exists from which a debtor may be discharged of his student loan obligations.” Correll v. Union Nat’l Bank of Pittsburgh (In re Correll ), 105 B.R. 302, 306 (Bankr.W.D.Pa.1989).

Other cases, Such as In re Hornsby out of the United States 6th circuit Court of Appeals, have reversed findings of undue hardship, and instead called for partial discharge of student loan debt, where the debtor’s monthly disposable income was less than $200 after expenses. Pretty strict.

Must I exhaust administrative remedies before seeking discharge of my student loans?

Okay, so perhaps you’ve read the Brunner test and still think that you have a shot at a hardship discharge. Must you exhaust your administrative remedies prior to seeking forgiveness of your student loans? A new case out of the United States Bankruptcy Court for the District of Kansas has ruled that this is not a requirement. The case of In Re Cagle involved a debtor who owed $94,000 of student loans dating back to 1992. He suffered from a condition described as “asthmatic bronchitis, severe sciatia and paresthesia of the legs, cervical osteoarthritis with bilateral radiculopathy, chronic fatigue syndrome/fibromyalgia, and renal colic from gout.” Based on severe illness, the debtor argued that he was completely dependent on his wife, had no realistic prospects for earning income in the future and, as a result, he was entitled to discharge of his student loan debts. The student loan lender, a company called Educational Credit Management Corporation (ECMC), argued that the debtor’s attempts to discharge his student loan debts were premature because he had not yet exhausted his administrative remedies. ECMC’s position was that the debtor was obligated to seek a disability discharge under the Federal Family Education Loan Program (FFELP) before he was ineligible to have the loans discharged in bankruptcy. The court did not buy ECMC’s argument. In ruling in favor of the debtor, the court ruled that he was under no obligation to exhaust his administrative remedies prior to seeking discharge of his student loans in bankruptcy:

A FFELP discharge is an administrative matter, handled by the Department of Education (DOE), and is completely separate and distinct from a bankruptcy discharge based on § 523(a)(8)’s undue hardship standard. A student debtor could be entitled to a § 523(a)(8) discharge without qualifying for a 34 C.F.R. § 682.402(c) discharge and vice-versa FFELP and its implementing regulations explicitly provide for bankruptcy as an alternative ground for a student loan debt discharge. Debtors who choose to pursue a FFELP discharge do not have a private right of action under 20 U.S.C. § 1087 in bankruptcy, but there is no prohibition on seeking a § 523(a)(8) discharge.

When it comes to student loan debt, the bottom line is this: for most people bankruptcy is simply not an option. Having said that, there are hardship cases where a court would order student debt to be discharged. On the positive side, there is a growing sentiment in both the consumer bankruptcy world as well as the public at large that believes student loan debt should be fully dischargeable in bankruptcy. As we inch closer and closer towards a student loan crisis, there are many beating the drums to change the legislation so that those facing financial difficulty can shed their student loans and start over. My feeling is that it will not be too much longer until the legislation is modified in some way to make it easier on the average consumer to handle their student loan burden.