Can Student loans be discharged?
Yes, it depends on the specific situation of the client. Student and educational loans are not discharged automatically through bankruptcy. Clients (in bankruptcy proceedings also called Debtors) need to file a specific proceeding which is called Adversary Proceeding and provide the reason why the student loan should be discharged. A student loan may be discharged if the repayment would impose an undue hardship on client and client’s dependents.
Federal loans can be federal, state and school loans, such as Perkins Loans, they are federally funded. This includes foreign student loans, such as from Canada. They might be dischargeable in Canada but not in the US.
Military tuition such as for military academy if the client does not finish the academy and does not serve, may be considered as educational benefit and not dischargeable under 823a8A(ii) of the Bankruptcy Code. If the client finished academy and serves, according to military provisions it may be dischargeable after 5 years.
Under 823A8B, educational loans incurred to pay education expenses might be not dischargeable, such as books, room and board, tuition, travel to and from campus, even child care cost (“Cost of attendance”).
But, it must be a Title IV accredited school. Not accredited may be for example schools such as some of the scam school, or cosmetology school, helicopter schools, trade schools, high school, Bar exam loans, medical residency school.
How can private educational loans be discharged?
- We look up the cost of attendance through the schools website or the Department of Education database.
- Then add up all federal student loans received for the that particular year.
- Then we look at the private loan received for that year and ask whether the private loan added to all federal loans would exceed the cost of attendance? If yes, the private loan might be dischargeable in it’s entirety.
- In this scenario, the loan would not fall into the nondischarge provision and could possibly be discharged.
Private Loans might also be discharged if the person who received the loan did not have a high school or GED diploma. Also, the student must be enrolled at least half-time, if it is less, it might be dischargeable.
Also, in some cases private loans may be discharged for the co-signer if there was not a dependency relationship between student and co-signer. For example grandma (or girl friend) co-signs but grandson is not her dependent, grandma may file bankruptcy and discharge the student loans. What about the cases in which son goes to graduate school and is not dependent on parents. If parents co-signed, they might get out of it.
How to handle cases in which loans do not qualify student loans in bankruptcy?
There are two ways, the client could procced. First file an adversary proceeding and obtain a declaratory judgment stating that the loan is does not qualify as an education loan and is therefor dischargeable. The second approach is, if the situation is pretty clear, no to do anything. If the creditor tries to collect after discharge, client may proceed with a discharge violation action. Creditors have been more aware of the situations in which loans are dischargeable and will not try to collect to avoid discharge violation actions. Those actions are less common now. Clients and counsels might want to be aware of the Supreme Court decision that stated it is not a discharge violation if the creditor had fair grounds to believe it was not dischargeable. To be safe an adversary proceeding might be a preferred option.
In chapter 13 cases, clients/ counsels might want to look at the claims filed by student loan creditors. Sometimes, the creditor includes language in the claim that the debt is non-dischargeable. If that is the case and the client disagrees, it can be objected to and dealt with through a faster claim objection than doing a adversary for a declaratory judgment.
If client can’t maintain a minimal standard of living for the debtor and dependents. The situation is likely to last and debtor tried to repay. This so called Brunner test is adopted by all courts besides of 2nd and 8th circuit. St. Louis area is the 8th circuit.
“Totality of circumstances” 8th Circuit
Can on negotiate down the amount with the Department of Education outside of bankruptcy?
Not in our experience. It appears that they don’t have the authorization and/or proceeding in place to do so. Federal loan creditor may negotiate a better deal as they often want to avoid negative case law, such as in the First District, In re Nash in 2006.
Who has student loans: in the first quarter of 2019 35.5 million people had student loans with a total of 1.1633 Trillion in outstanding federal loans.
What about administrative discharge? Normally clients need to have 100% disability for the next 5 years. For clients older than 65, they might be able to receive a physician certification. What if the client filed a bankruptcy and received a prior administrative discharge? Creditor will file a claim that may be objected to in a chapter 13.
Where can one obtain information about student loan details for a client: NSLDS (Studentaid.gov), that is the National Student Loan Data System for federal loans. Should be accessed by the Borrower. Private loan information has to come from other sources, the client or credit reports for example.
Client should address Income Driven Repayment Plans (IDR). One may use the repayment estimator at https://studentaid.ed.gov/sa/repay-loans
Federal Student loan servicers for Directloans are Nelnet, Navient (SallieMae, service also private loans), FedLoan Servicing, Great Lakes, Cornerstone, Mohela, Granite States, HESC/ Edfinancial, and OSLA servicing.
Private loans are not eligible for administrative discharge or IDR plans. Usually co-signed by parents.
Service of the adversary based on Rule 7004 Bankruptcy Rule: First Class Mail (officer at corporation’s headquarters and registered agent, to be sure sure by certified mail) unless it’s a bank (insured depository institution, certified mail to officer).
When is a corporation insured. Look at their website for N.A., FDIC Insured, Member FDIC. Office of the Comptroller of the Currency maintains a list http://www.occ.gov/topics/licensing/national-banks-fed-savings-assoc-lists/index-active-bank-lists.html
Also at https://research.fdic.gov/bankfind/ but: this list is not exclusive, that means if an institution is listed the officer needs to be served, but if it’s not listed, it may still be insured.
To find a Credit Union: http://www.ffiec.gov/nicpubweb/nicweb/searchform.aspx
Serve the Officer by naming:
- Name of the Institution
– name of officer, title
– Headquarter address
To find the Headquarter address, google, bloomberg, are good recourses.
Serving an Agency of the US (Department of Education): US Attorney in the District of the AP and Attorney General of the US at Washington (First Class mail)
Attorney General of the United States
U.S. Department of Justice
950 Pennsylvania Avenue, NW
Washington, DC 20530-0001
U.S. Department of Education
Education Department Office of General Counsel
400 Maryland Ave SW, Room 6E353
Washington DC 20202-2110
Chapter 13 and Income Driven Repayment plans
In general, it is always a good option to review the possibility of trying to discharge or re-negotiate student loans during bankruptcy if reasons are present. Client should be aware of that Department of Education will put the student loan in an automatic forbearance during the bankruptcy. That means collections activity stops but interest continues to accrue. In chapter 7, which normally lasts about 4 months, payments made during that time will normally be considered as voluntary and thus don’t count towards the time for income driven repayment or period of forgiveness. It’s important to take actions so that payments made count towards the cancellation or forgiveness period. If a client has 100K student loans debt and files a chapter 13 bankruptcy cases, most clients don’t have the funds to make payments towards the student loans. However, calculating with a 8% interest, the client would owe after a 5 year plan nearly a total of 150K. Considering that the average client discharges around 40K in debt, not taking care of the student loans in one way or the other can make the financial situation worse. Delinquency in student loan cases may have similar collection activities as regular debt, such as wage garnishment, intercepting tax refunds, or law suits.
Debtors in a chapter 13 may continue or enroll in an Income Driven Repayment Plan. Some information about the specific program should be included in the non standard provision of the plan. It should state which calls those payments are and if the trustee is making the payments. If a client is in default of the loan, the plan should provide that the client is entitled to consolidate the loan. It also should provide that the client waives any stay violation causes of actions. The US Trustee’ s office published a template with the details