Recently, Anton Nikolai gave an informative presentation regarding student loans to bankruptcy attorneys at the Lou Jones Breakfast Club. You can read the full text of the presentation, but I wanted to share some bullet points.
Most people are aware that student loans are non-dischargeable in bankruptcy under 11 U.S.C. § 523(a)(8), which can be broadly interpreted to any sort of debt incurred for an educational purpose or benefit. I’ve even seen arguments in the past that credit card debt incurred to pay off a student loan could be held non-dischargeable – similar to the reasoning for making credit card debt for payment of taxes non-dischargeable (which is expressly provided for by statute at § 523(a)(14) and (14A). The non-dischargeability of educational benefits applies to both governmental and private student loans.
There is an exception carved out by statute – undue hardship. But this is more than your ordinary hardship standard. In fact, the 7th Circuit has adopted one of the most stringent tests for undue hardship in these circumstances, called the Brunner test (from Brunner v. New York State Higher Educ. Serv. Corp., 831 F.2d 395 (2d Cir. 1987)). The test requires:
- Debtor cannot afford to maintain a minimal standard of living if forced to repay student loans. (This is a tough burden, but not impossible to prove.)
- Circumstances exist indicating that this inability is likely to persist for the majority of the repayment period – a certainty of hopelessness. (This is almost impossible to prove.)
- Debtor has made good faith efforts to repay the loan.
The automatic stay does stop student loan collection practices, but those collection practices may resume after discharge once the case is terminated and the automatic stay is lifted.
Federal student loans have powers that private student loans do not. They do not need a state court judgment to garnish wages. They may do so automatically through an “administrative garnishment”. But this garnishment, too, would terminate while a bankruptcy case is pending.
In Chapter 13 Bankruptcy, student loans are considered general, non-priority, unsecured debt. Meaning they get paid at the same rate as your other general unsecured debts (e.g. credit cards and medical bills).
Unless your Chapter 13 plan proposes to pay such creditors in full, you will have an unpaid balance on your student loans. Upon exiting bankruptcy, your student loan account may be in default, and subject to default interest rates.
There have been some instances of debtors in bankruptcy proposing to pay their student loan creditors separately, outside of their Chapter 13 repayment plan. To do so requires that the student loans be treated as a special class of creditor. This can only happen if the last contractual due date of the loan is after your last scheduled Chapter 13 plan payment. While the bankruptcy code does permit for special classes of creditors to be created, it also prohibits debtors from creating special classes that discriminate unfairly. At this time, there is no judicial consensus that student loans can be a special class. Some judges allow it. Others do not.
If your plan does not provide for payment in full of your student loans, you will want to make sure that your student loan creditors file proofs of claim in your Chapter 13 bankruptcy. Although they are stayed from collecting while you are in bankruptcy – whether they file a claim or not – if they don’t file a claim, it means that they will not get paid and your other creditors who do get paid will be paid more money. Since student loans are non-dischargeable, it is in your interest that they get paid during your bankruptcy plan.Don’t rely on your attorney to determine if your student loan creditors filed claims. First of all, your attorney is probably handling dozens or hundreds of cases at a time, each with dozens or hundreds of creditors. It’s tough to verify a negative under these conditions. Also – particularly with private student loans – it’s not always simple for your attorney to distinguish a student loan creditor amongst your list of other creditors. Creditors have 90 days from the date of your first meeting of creditors to file a proof of claim. If they don’t, your attorney has another 30 days to file claims on their behalf under Rule 3004 of the Federal Rules of Bankruptcy Procedure. If there is anyone you want to get paid, you’ll want to make sure your attorney is aware.There are four types of federal student loans: Stafford, Parent Plus, Graduate Plus, and Perkins. To determine which of your student loans are federal, check out http://www.nslds.ed.gov/
There are a few ways to have a student loan administratively discharged (outside of bankruptcy), but these are rare: school closure, disability, unpaid tuition refund, and false certification.Student loans are in one of five repayment statuses: in-school deferment, repayment, other deferment, delinquency, and default.In a default, a federal student loan can intercept tax refunds, wages without a court order, and social security benefits.In a loan is in default, you can rehabilitate the loan to exit default status – but this is a once in a lifetime event. You must make 9 out of 10 payments to do this.There are various repayment plans you can explore to pay your student loans in a manner that is more affordable.
- Standard Repayment (fixed payments for 10 years)
- Graduated Repayment (10 years, starts out small, then increases every 2 years)
- Extended Repayment (25 year term, fixed or graduated, must have more than $60k in student loan debt)
- Income Contingent Repayment (25 year term, based on income AND student loan balance, balance at end is forgiven)
- Income Based Repayment (25 year term, based solely on income, $0 payments are possible, unpaid balance is forgiven, pay 15% of calculated discretionary income (income beyond 150% of poverty guidelines), payments adjust each year based on prior year’s taxes)
Note: any forgiven balances in ICR or IBR are taxable income.