The Surprising Benefits: Deal with Student Loan Collection with Chapter 13

Qualifying for “undue hardship” to discharge (write off) student loans is not easy. But Chapter 13 gives you powerful help over the timing.

 

The Much Better Chapter 13 “Automatic Stay”  

Last time we explained how bankruptcy’s “automatic stay” immediately stops student loan collections against you. But if you file a Chapter 7 bankruptcy this protection from collections lasts only the 3-4 months that the case lasts. If you qualify under “undue hardship,” you could discharge (write off) your student loan debt during your case. Then the student loan creditor could no longer collect that debt.

But if you can’t show “undue hardship,” Chapter 13 buys you much more time, and more timing flexibility.

Chapter 13 Simply Buys More Time

Chapter 13 buys more time because a typical case lasts 3 to 5 years. The “automatic stay” prevents collection actions this entire length of time.  A student loan creditor could try to persuade your bankruptcy judge to allow it to collect before the end of your case.  But usually this doesn’t happen. So regardless of anything else, Chapter 13 puts off your student loan creditor(s) for a fairly long time.

Chapter 13 May Buy Time Until You DO Qualify for “Undue Hardship”

To discharge a student loan you (or your dependent) must be experiencing an “undue hardship” at that time.  Chapter 13 gives you the flexibility of waiting for up to 5 years until you meet that condition. You file the case, and throughout its life your student loan creditor(s) is (are) prevented from collecting. Then, as soon as you do qualify for “undue hardship,” your bankruptcy lawyer would file the discharge petition.

For example, assume you or a financial dependent had a worsening chronic medical condition. But that condition was NOT YET preventing you from working, so that you were not yet in the circumstances that your student loan(s) was (were) preventing you from maintaining even a minimal standard of living. You could not petition for “undue hardship” discharge yet. But Chapter 13 would allow you to wait as long as 5 years after filing the case. This would give you time for your condition to worsen until you did met this requirement.   

Conclusion

Chapter 13 prevents your student loan creditor(s) from chasing you for years. And it also allows you to delay asking to discharge your student loan debt(s) until the point when you’d qualify. In the right circumstances these could be huge advantages.

 

The Surprising Benefits: Stop Student Loan Collection

Chapter 7 “straight bankruptcy” stops student loan collection actions for a few months. Sometimes it can stop these actions permanently. 

 

Bankruptcy gives you tools to deal with special debts—including those you can’t easily write off. Last week we got into income taxes. Today we discuss student loans, focusing on this special kind of debt in Chapter 7 “straight bankruptcy.” Next week, we’ll cover student loans under Chapter 13 “adjustment of debts.”

Let’s assume you owe a student loan that you can’t afford to pay. Here’s how Chapter 7 can help.

Student Loan Collection

Student loan creditors and collectors have extraordinary collection powers. Often they don’t need to sue you first and get a legal judgment against you, as most creditors must. These creditors and their collections have very aggressive collection procedures available to them. Besides the usual garnishment of bank accounts and paychecks, these special creditors can often grab your tax refund or a portion of a Social Security benefit check.

The “Automatic Stay” from a Chapter 7 Filing 

Student loans are special in a number of ways. However, just like ordinary debts, student loan collections are immediately stopped by the “automatic stay” imposed by your bankruptcy filing. It doesn’t matter whether or not the student loan would be discharged (written off) in your Chapter 7 case.

The “automatic stay” stops “any act to collect, assess, or recover a claim against the debtor.”  (Section 362(a)(6) of the U.S. Bankruptcy Code.) (A “claim” is a “right to payment”—essentially, a debt. See Section 101(5).) More specifically, the “automatic stay” stops “the commencement or continuation…  of a[n]..  .   administrative…  proceeding against the debtor. (Section 362(a)(1).) “Administrative proceedings” include the non-judicial collection actions mentioned above that don’t include a lawsuit. The Chapter 7 filing also specifically stops “the setoff of any debt” owed to you, such as a tax refund or Social Security setoff. (Section 362(a)(7).)  So, filing bankruptcy stops all student loan collection actions.

This break from collections lasts throughout the 3-4 months that most consumer Chapter 7 cases take to finish. But unless you deal with the student loan appropriately in the meantime, after that its collection can continue.

Dischargeability of Student Loans

Bankruptcy permanently discharges some student loans. A dischargeable student loan must meet just one condition, albeit a tough and confusing condition. The student loan must cause you an “undue hardship.” As the Bankruptcy Code puts it, you can’t discharge a student loan unless that loan “would impose an undue hardship on the debtor and the debtor’s dependents.” (Section 523(a)(8).)

What does “undue hardship” mean? How much harder must it be than just a simple “hardship”?

You may feel like your student loans are causing you a great financial hardship. However, the federal courts have interpreted this phrase very narrowly.  The details are beyond the scope of today’s blog post, but just keep in mind this condition is challenging to meet.

During the Chapter 7 Break in Collections      

During the 3-4 months of your Chapter 7 case you want to take steps to make the temporary break in collections a permanent one. Here are three ways to accomplish this.

  • If you and your bankruptcy lawyer believe you meet the “undue hardship” condition, your bankruptcy lawyer would file an “adversary proceeding” during your Chapter 7 case. That’s a specialized lawsuit designed to determine whether you qualify for “undue hardship.” If you persuade the bankruptcy judge that you do, the student loan debt would be permanently discharged. Then the temporary break in collections would become permanent. There would be no more collection on a debt once you no longer legally owe it.
  • The bankruptcy judge may give you only a partial discharge of your student loan(s). In this situation the judge is determining that repaying all of the loan(s) would cause you an “undue hardship.” But paying back only a portion would not. So you’d make arrangements to pay the remaining student loan debt, probably at a reduced monthly payment. As long as you made the payments your student loan creditor would take no further collection action against you.
  • If you don’t qualify for a full or partial “undue hardship” discharge, your Chapter 7 case would still at least discharge all or most of your other debts. That should leave you better able to pay the remaining student loans. Hopefully you’d be in a position to make payment arrangements. This may be done through a payment-reduction program which are available for various student loans. If so, then your situation would hopefully be resolved by the end of your Chapter 7 case. Then, at the time that the automatic stay would expire you won’t be facing any more student loan collections.

Avoiding Default and Preserving Options

Even if you don’t qualify for “undue hardship,” the bankruptcy pause in collections can be extremely helpful. It could maybe even be critical. That’s because you can only qualify for most student loan workout programs before you are too far behind on payments. So filing a Chapter 7 case before you’ve fallen too far behind could allow you to take advantage of these programs. But if you waited too long you could lose out, and be seriously disadvantaged.

Conclusion

It’s really crucial to talk with an experienced bankruptcy lawyer about all this. Student loans are complicated and often very challenging to deal with. This is true both outside and inside bankruptcy. You need a lawyer on your side who deeply understands both bankruptcy law and student loans.

 

Student Loans in Bankruptcy

Student loans can sometime be written off in bankruptcy, but it can be quite hard to meet the necessary conditions to do so.

 

The Discharge of Student Loans

Student loans are NOT among those debts that can NEVER be “discharged”—legally, permanently written off on bankruptcy. Bankruptcy law does totally exclude certain kinds of debts from being discharged–one example is unpaid child support.

Instead student loans are among those debts that are discharged IF they meet certain conditions. They are somewhat like income taxes, which can definitely get discharged. With income taxes there is a list of conditions; with student loans there is only one to meet. Yet, discharging a student loan can be much more difficult than discharging an income tax debt. That’s because the conditions for discharging income taxes are mostly straightforward, compared to the much vaguer condition for student loans.

The Vague Condition of “Undue Hardship”

Bankruptcy law allows a student loan to be discharged if “excepting such debt from discharge… would impose an undue hardship on the debtor and the debtor’s dependents.” Section 523 (a)(8) of the U.S. Bankruptcy Code. So if you can show that your student loans are causing “undue hardship,” you can discharge those loans.

What’s “Undue Hardship”?

The problem is in figuring out what that phrase means.

In practical terms what does the statute consider a “hardship”? And what more does it take for a “hardship” to rise to the required level of an “undue” hardship?

The phrase “undue hardship” did not originate in Congress. It came from a Commission on the Bankruptcy Laws created by Congress way back in the early 1970s to help guide a total overhaul of our bankruptcy laws.

When Congress used that term in the statute on student loan discharge quoted above, it did not define it. Many other important terms used in the Bankruptcy Code are directly defined within the Bankruptcy Code. See Section 101 on “Definitions.” But not this one.

A Practical Standard for “Undue Hardship”

Congress left it to bankruptcy judges and courts of appeals to apply this term to people’s circumstances. They’ve focused on coming up with practical conditions required to have a hardship that is serious enough to be considered to be “undue.”

Over the decades most of the bankruptcy courts in the country have largely settled on three hurdles to jump for undue hardship:

1. To make the required payments on the student loan under your current income and expenses would leave you unable to maintain even a minimal standard of living.

2. This current situation of being unable to maintain a minimal standard of living is expected to continue over all or most of the repayment period of the student loan.

3. You’ve made a real effort at paying the student loan and/or qualifying for programs to address the debt responsibly.

Important Considerations

  • You must ask for a hardship discharge during your bankruptcy case or you’ll continue to owe your student loan(s). This is done through what is essentially a lawsuit in the bankruptcy court. You must convince the bankruptcy judge that you’ve jumped the above three hurdles to get a decision in your favor. 
  • The timing of your request can make all the difference. You may not qualify for undue hardship now, but you may do so in the future. An example would be if you have a worsening chronic medical condition. Talk with your bankruptcy lawyer about reopening your bankruptcy case later when you better qualify for undue hardship.
  • Consider filing a Chapter 13 “adjustment of debt” bankruptcy now if you may not qualify now but will in the next few years. You could likely not make any student loan payments for a few years. Then later in your 3-to-5-year case, or as soon as you’d qualify, you’d ask the court for an undue hardship determination, while your Chapter 13 case is still open.

Conclusion

It’s often not easy to meet all three conditions of the undue hardship standard. It can be a rather lengthy and expensive legal process. But an increasing number of people have large student loans as a major portion of their debts. If that’s you, get legal advice from an experienced and conscientious bankruptcy lawyer. The bigger your student loans, the bigger their impact on your future, and all the more important to understand your rights and options.

 

Can Bankruptcy Get You Out of Student Loans?

To “discharge”–legally write-off—a student loan in bankruptcy you have to show “undue hardship.” What does that take?

 

The total amount of student loan debt in the U. S. surpassed $1 trillion dollars ($1,000,000,000,000.00) a couple of years ago. For many people it is their biggest debt. For others the burden of student loan debt is preventing them from buying a home. Student loans are a large part of why for the first time in many generations many people fear that their financial well-being will be worse than that of their parents. Student loans are threatening the American Dream.

It All Turns on “Undue Hardship”

The relevant part of the Bankruptcy Code states that a student loan is only discharged if it “would impose an undue hardship on the debtor and the debtor’s dependents.” What does that mean?

Congress didn’t explain what would is a “hardship,” nor the difference between an ordinary “hardship” and an “undue” hardship which would get you out of paying a student loan.

“Undue” means “unreasonable; going beyond the limits of what is normal.” So Congress seemed to say that while you cannot discharge a student loan that is causing you a hardship, you can if is causing you an abnormal, unreasonable hardship.

But that still doesn’t help much. Practically speaking how can you tell if the hardship caused by your student loan is abnormal or unreasonable?

Court-Devised Three-Part Test

During the last several decades that this statute has been on the books, bankruptcy courts all over the country have tried to apply this “undue hardship” standard. Although there are some subtle differences among courts in different regions of the country, there is a general consensus that you must meet three conditions to qualify for “undue hardship”:

1. If you were now required to pay on the student loan, under your current income and expenses you would be unable to maintain even a minimal standard of living.

2. Your current inability to maintain a minimal standard of living while repaying the student loan is expected to stretch out over all or most of the loan repayment period.

3. You had previously made a meaningful effort to repay the loan, or to qualify for appropriate forbearances, consolidations, and administrative payment-reduction programs.

Important Considerations

#1: Meeting all three “undue hardship” conditions is not easy. Most people’s student loans don’t qualify. It often takes careful planning with the help of an attorney experienced in discharging student loans.

#2: With many kinds of debts which might not be discharged in bankruptcy the burden is on the creditor to challenge the discharge of the debt. But with student loans the burden is on the borrower to raise and show “undue hardship” during the bankruptcy case. Otherwise the student loan will continue to be owed.

#3: “Undue hardship” has to be shown through an “adversary proceeding,” in effect a lawsuit within a bankruptcy case that is ruled upon by the bankruptcy judge.

#4: If your hardship is progressive in nature—through a worsening physical disability, for example, you may not qualify for “undue hardship” until well after your bankruptcy case is completed. If so, you may be able to reopen your bankruptcy case so the bankruptcy court can make that determination. Or another option may be to file a Chapter 13 case, which generally lasts 3 to 5 years, and only try to qualify for “undue hardship” towards the end of your case. That may allow you to avoid making any payments on the student loans for the first few years of the case, and then take the opportunity to discharge the student loan only when the facts of the case better support doing so.