Manage, Bankrupt, or Discharge your Student Loans

Do you know doctors and lawyers have discharged student loans? In fact, four studies show it can be done. In fact people who file for the undue hardship discharge are able to obtain a partial or total discharge 50% of the time. So, even though it’s hard to obtain the undue discharge of student loans—it isn’t impossible. If you are unable to discharge your student loans it is still possible for you to use bankruptcy to manage student loans. Chapter 13 can force servicers to make student loans affordable. In fact, you are about to learn step by step how to make your student loans affordable.

How to Bankrupt or Discharge your Student Loans

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This article covers bankruptcy and other programs to use for lowering your student loan payments or even eliminating them. You can apply for the Income-Based Repayment (IBR) for free with the Department of Education. However, servicers will often place you into the loan program that makes them the most profit. They don’t put you into the program that is best for you. If you are being sued and need a lawyer to file to prevent the garnishment then please call us.

Servicers get a 16% commission on what they collect so they might be unwilling to process your IBR application if the program has a 10 dollar per month payment. They don’t make a profit from processing such applications. Plus they only get 16% if they apply it to penalties and interest. Private loans may pay collectors up to 40% of what they collect. I presume you can see why you never get out of a student loan default.

Take an hour or two to read the step-by-step information below to make your student loans affordable, or discharge them in bankruptcy. We only take bankruptcy cases in Kentucky and Southern Indiana. Our website and office helps students make their student loans more affordable by filing bankruptcy or defending lawsuits. If your student loan lender will not negotiate with you or rehabilitate the loan with reasonable payments you may wish to file bankruptcy and an adversary to force them to negotiate your loan.

Download the Salt manual for over 60 different programs to manage or discharge your student loans. We won’t ask you to give us your email address and send you spam. We won’t ask for money. You can help out other students by sharing or liking our website with Facebook, Google Plus, Twitter, or LinkedIn and help spread the word. Thanks.

⎆ Confirm the loan is non-dischargeable in bankruptcy.

When a lawyer assumes that a student loan is non-dischargeable, it might be malpractice. You may simply have to wait for the correct amount of time for a private student loan. Normally, it is extremely hard to discharge student loans under the Brunner test but it is done when undue hardship applies. But the truth is, some student loans are just as dischargeable as income taxes or a credit card.

The tactics that work for private loans don’t work for government loans and you have to get this right. If you assume it is not dischargeable and fail to do the analysis your student loan debt will not get out of default, be managed or be discharged. Unfortunately, about 35% of student loans are in default. Additionally, the number of persons losing their social security to student loans has tripled, and that should never happen with government student loans. So, if you think you can’t manage, bankrupt, or discharge your student loans think again.

The website for the get-out-of-debt guy reports 2012 data shows that for the bankruptcy cases filed for a student loan discharge, 47% are discharged in full, 21% resulted in a better payment, and 12% settled for less than was due. That is an 80% success ratio. Three prior studies on student loan discharges in bankruptcy including those from Iuliano and Pardo and Lacey show similar results with about 40-50% success rates. The reason for these high ratios might be that lawyers are getting better at spotting what student loans qualify for undue hardship. Some cases were won by default simply because the lender failed to file an answer and other studies show the case for partial discharges Bayuk. Here is the Student Loan Undue Hardship Flowchart showing how to analyze a student loan.

⎆ Analysis of discharging or managing student loans.

The following is our four-part analysis of how to discharge or manage your student loans.

1. Qualified School Loans

Until 1998 student loans were dischargeable just like any other debt if they had been due for 7 years. However, after 1998, loans insured by the Department of Education or a state agency to students attending “qualified schools” were made non-dischargeable unless that loan was an undue hardship. Even then the student has to be qualified and the courses have to be qualified. Since 1988, a special lawsuit called an adversary proceeding must be filed in bankruptcy court to discharge the student loan. This is extra work for the attorney which clients often don’t want to pay for or cant pay for.

How do you know if your school is “qualified”? Look at the list of qualified schools. If your school isn’t on the list of qualified schools, the loan is just as dischargeable as any credit card debt. So, only loans through accredited schools receive protection from discharge.

2. Qualified Students

Also, the student must be qualified to benefit from the enrollment. In one case a blind man was talked into a truck driving school and the debt was discharged in bankruptcy. Many of these cases involving the inability to benefit come from persons who did not finish high school or who didn’t obtain a GED enrolling in college.

Additionally, the student must not receive too much money under the loan program because if the loan is in excess of the cost of attendance the loan becomes dischargeable without the need of proving undue hardship. All of these automatic discharges are explained in the NCLC manual.

3. Private Student Loans

From 1998 to 2005, private student loans were discharged just like credit card debts. During that time, to discharge private student loans, it was not a separate requirement that you file an adversary proceeding and prove that your student loans are an undue hardship. If you filed bankruptcy prior to 2005 any private loans were discharged automatically. Then, if a debt collector makes an attempt to collect for these loans he is violating the fair debt collection practices act and also is in contempt of the bankruptcy court. Bankruptcy cases filed after 2005 made loans from private lenders non-dischargeable unless the school is qualified and the student proves undue hardship.

4. VA and Troops to Teachers Loans

Presently VA school loans are dischargeable in bankruptcy without filing an adversary after five years under 38 USC 7634. Military service loans generally also have a 5-year waiting period under 37 USC 303a(e)(4). But, the Troops to Teachers program totally bars any discharge 20 USC 6674(f)(3) even if repayment is an undue hardship. Only the Department of Education, state agencies, and private loans require proof of repayment being an undue hardship to discharge student loans.

5. The Heal Loan Standard

The Heal loan standard is even harder than the undue hardship and requires that requiring payment is “unconscionable” 42 U.S.C. Section 292f(g). A debt for rent or any other service from a school is not a loan and is dischargeable—even debts you have to a school for tuition. Only educational loans require undue hardship proof. Unless you sign a loan for a student loan, any debt to a school is just as dischargeable as a credit card.

Government programs in which you manage or discharge the loans.

Fortunately, the government has many programs that allow you to discharge or get a government loan out of default. Getting out of a government student loan default normally requires consolidation or rehabilitation. Always check to confirm if the debt is government or private by signing into the National Student Loan Data System and creating an account. Then, you will know if the loan is a government loan or not. Some government loans made in the 1970s might not show in the NSLDS database. Knowing if the loan is Government or private gives you the advantage of knowing who governs the loan.

If the loan has an adjustable or high-interest rate it is probably a private student loan. Some of the private loan rates are at credit card levels. Government loans have administrative powers that allow garnishments by merely sending a notice. Additionally, the requirement is only to send the notice. It is not a requirement that you receive notice to garnish wages or bank accounts. Look at the Salt companion student loan book for 60 different programs to manage or discharge your student loans.

How to rehabilitate government loans.

Government loans can be brought out of default by the rehabilitation program. This requires applying for the rehabilitation program which must offer you affordable payments that are sometimes as low as five dollars. Generally, by making 9 of 10 on-time payments, your credit history often gets a new notation that you are paying “on time”. This program may allow you to purchase a home if a student loan default is hampering your credit history.

Normally, you may only rehabilitate a loan one time but you normally have to rehabilitate a loan in default to get an IBR loan. Both 20 U.S.C. § 1078-6(a)(1)(C) and 34 C.F.R. § 682.405(b)(3)(i & ii) require guarantor and prior lender to both “remove the record of default from the borrower’s credit history” which immediately increases your credit score.

• Student Loan Debt Collector Salaries

The problem in getting rehabilitation through the system is that bill collectors process the rehabilitation application. They are paid 16% of anything they collect and they are often paid well over $100,000 per year in commissions and bonuses by re-writing loans and collecting payments. The IBR loan is granted if you make 9 of 10 on-time payments. It is worth noting that if you are on social security and can only pay five dollars per month the whopping commission check from doing three hours of work is only about $.80 for hours of the debt collectors work.

However, the commission from a doctor with a $3,000 per month payment is $480 for the same two to three hours of work. That’s why rehabilitation applications for minorities and the poor end up in the trash. However, if you file a Chapter 13 and ask for a hardship discharge due to poverty, you suddenly receive approval for IBR loans and processing through rehabilitation rushes through.

These government student loan debt collectors also receive payment for every letter and phone call. They receive payments for wage garnishments and tax seizures. Interestingly, social security check garnishments tripled from about 2009 to 2014 and rapidly increased again from 2014 to 2020 for the very poor which should never happen. Instead, senior citizens on social security should have zero dollar repayments in an IBR for their government loans. However, unfortunately, servicers are unlikely to process their documents.

⎆ Combining government loans into PAYE, REPAYE, IBR, IDR, or ICR.

An IBR or income-based repayment plan allows you to combine government loans into an affordable repayment that is never more than 15% of income. They base this on a sliding scale of 0% at the poverty level to 15% at the highest income for the worst income-based repayment program. Also, please note that some IBR programs cap at 10% others at 12%. At the end of 20 years, the balance is forgiven (discharged) if the loan remains in a good payment status until it discharges. Payments are as low as zero dollars for IBR and since the program rewards you for every year the loan is repaid you never want to use an unemployment deferment or forbearance for IBR and public service loan programs. IBR is income-driven and based upon your disposable income and never more than 10%.

⎆ Deferment forbearance parent plus.

For the years you have zero income, send in your zero payment while you are on unemployment or social security. Never go into forbearance when a zero payment would eliminate another year of payments. Parent Plus loans need to look at the ICR program which is very similar to the IBR. However, the ICR has a difficult formula and IBR-type programs like PAYE and REPAYE generally have lower payments than the IBR program. If you work for the government or a non-profit entity like a hospital, charity, or school the public service program allows you to pay off the IBR loan within 10 years with 10% of the loan repaid for every year of public service. Church employees that do non-religious work qualify for the public service program. Even doctors qualify. Just fill out the Public Service Loan Forgiveness form.

Here are four examples of jobs that qualify:

1. Military Personnel

Every military branch also offers veterans and current military employees partial or complete student loan repayment.

2. Public Sector Positions

Working for a state or federal agency allows continuing work to pay off student loans currently in 2014 once you’ve made your first 120 student loan payments the government pays the rest.

3. PeaceCorps or AmeriCorps

Volunteering for PeaceCorps or AmeriCorps, or similar organizations qualifies for partial student loan debt forgiveness.

4. Teaching or Healthcare in Needy Areas

If you’re willing to work in needy or Native American areas, almost $18,000 of your student loan debt may be forgiven by the government. This applies to nursing programs or providing healthcare for low-income areas.

Various government loans programs to discharge loans.

Not only does rehabilitation and IBR exist for government loans but several administrative programs also exist to discharge government loans. Some programs even defer payment. In the cases of deferment, the government pays the interest. However, in forbearance, interest continues to accrue. Additionally, if a school closes a program and it is impossible for you to complete the program you might be able to discharge the debt as a closed school discharge.

Other discharges also exist such as a discharge for parents when a child or student dies, or for identity theft. The common administrative discharges are disability, Public Service Loan Forgiveness, death, and school closing. But, several other administrative discharges exist such as stolen identity and failure to benefit. You may review these discharges on the DOE website. A person that can’t possibly benefit from the training might qualify for an administrative failure to benefit. An example is if the person doesn’t qualify for the certification or job when he attends the school such as a blind student who attends a truck driving school for a CDL license.

⎆ Other resources for student loans.

Oh, did I forget to tell you to look at the companion student loan book for 60 different programs to manage or discharge your student loans? You may also want to use Studentloanify to calculate obtain the best program. Here is the professional version of studentloanify for lawyers who like to use the service. Servicers work for DOE and their shareholders. They have no duty to put you into the best loan programs. If you sue them for fraud and putting you into the worst loan possible they will defend by saying they didn’t owe you any duty to put you into the best program. This is why it is best to use Studentloanify software to obtain the best loan possible.

We also appreciate your sharing our site with others! If you are outside Kentucky and you need a lawyer trained to litigate or manage student loans look up Josh Cohen for a local attorney or just hire Josh who also trains lawyers.

⎆ Private loans, the statute of limitations (SOL), and other defenses.

Filing a Chapter 13 bankruptcy practically eliminates the private student loan debt. Unless the private student loan can obtain a judgment they cannot enforce payment or collections. Chapter 13 reduces private student loans to begging and asking for repayment. Most often they give up even asking. Federal loans can collect by simply attaching a bank account or wages. Federal loans can even attach social security checks without going to court. But private loans have to sue and win a judgment to collect. If you file a Chapter 13 they will often be repaid zero 0 for 5 years. Their court cases will be dismissed for lack of prosecution and then the lender will rarely file a second case.

Defending a private student loan lawsuit is basically no different than a credit card with one exception. Since 2005, private student loans can’t be discharged without filing an adversary proceeding for undue hardship. However private loans are much easier to discharge as undue hardship since they have no programs to make them affordable. They have no programs which allow the debt to be discharged upon disability, failure to benefit, or other conditions. Private loans are only discharged in bankruptcy, go into default, or get paid on time. It is therefore much easier to prove that private student loan create an undue hardship.

• What Applies to Student Loans?

Private loans depend either on your voluntarily paying or upon suing for the debt. They can’t administratively attach tax refunds or wages without suing like the Department of Education can . All of the over 100 normal defenses you make against a credit card apply to private student loans. Common defenses like the statute of limitations and infancy do not apply to government loans. The fair debt collection practices act only applies to private loans in default and collections by a debt collector. A private loan is in default weeks after a payment is overdue. Default happens to government student loans when they are about 270 days overdue. For private student loans, it happens when they are one day overdue.

Debt collectors who are attempting to collect a private loan often claim that the private student loan is a government loan. They do this in an effort to claim that the statute of limitations does not apply to them. Your defenses might include “standing and not being a real party in interest”, laches, novation, fraud, truth in lending and over 100 other regulations, laws and defenses. All of the defenses in use against any common debt also apply to private student loans. All of these are good reasons for checking to see if the loan is government or private?

• Student Loans and the Statutes of Limitations

States have 3, 5, 6, 7, 10, and 15-year Statutes of Limitations. Kentucky has a 15-year SOL for loans made prior to 2014. After July 15 2014 the SOL became 10 years in Kentucky. But for negotiable instruments which are all of the private loans the SOL is 7 years in Kentucky under UCC Article 3. Any payment restarts the 15, 10, or 7 year period. Acknowledging the debt, admitting you owe the debt, refinancing, or even making partial payments towards the debt “revives” the debt, meaning that the statute of limitations period starts all over. However, this is based on state law in the state in which you live. In some states, the promise must be in writing in order to reset the statute of limitations; while in others, an oral promise is enough. Do you see why debt collectors record the call?

Additionally, filing Bankruptcy under 108-c may or may not toll the statute of limitations depending on the district where you live. Generally, most loans charge off after 180 days of non-payment and it goes into default. If the loan is unpaid for five years, most collections stop. After 7 years of no account activity, it has less relevance to your credit score and any private loan becomes uncollectible in the state of Kentucky. The statute of limitations and most other defenses do not apply to Federal loans and they dont have to sue to collect.

⎆ Discharging student loans and the undue hardship standard.

It is hard, it is not impossible to get an undue hardship discharge. After all, they gave me one in 2001. Currently, the advantage of filing bankruptcy with student loan debts is that it places collections on hold during a Chapter 13 for five years. Yes, the balance increases but it stops collections. Often it allows you to find alternative ways to deal with the lender. It also forces an unreasonable lenders to modify the loan if the lender won’t rehabilitate, modify, or convert the loan into an IBR loan.

Even the federal government normally skips steps to quickly grant an IBR or ICR. They do this to avoid an adversary lawsuit in bankruptcy court to prove undue hardship. The government and private lenders hate litigating these adversary cases. The problem in filing these cases is in finding an attorney to do these cases. Most attorneys don’t know how or won’t do the added work which has to be done in filing these cases.

• What You Need to Prove to get an undue hardship

To prove undue hardship and discharge a student loan in bankruptcy, a debtor must prove that he or his dependants “would be unable to maintain a minimal standard of living if forced to repay student loans”. This requires you to document past, present, and future good faith efforts along with the inability to repay. The following is a list of requirements at a minimum.

Proof of the inability to pay the minimum student loan payments.
Proof of your income.
Evidence that your income would not cover the required and basic expenses such as food, clothing, health-care, housing, and transportation.

To prove it, you must gather evidence of undue hardship that “makes it unlikely your situation will improve.” This includes evidence that shows you are unable to pay a student loan over a long time. One such example is if you have a disability. You may not be disabled enough to qualify for the disability discharge with Social Security or the Department of Education but disabled enough to discharge the debt with the bankruptcy court. Remember, obtaining the undue hardship discharge is possible if you qualify, but it isn’t easy. Even if you don’t qualify for the hardship discharge filing the case will often force the servicer to make a federal loan affordable. With private loans, you can often discharge the loan because there are few or no income-based repayments plans for private loans.

• “A Good Faith Effort”

To obtain the undue hardship you must prove that you made “a good faith effort to repay your loans”. This often includes at least attempting to place government loans into an IBR income-based repayment plan. There are several types including PAYE and REPAYE. Private loans are much easier to discharge in bankruptcy because there are few or no programs to enable private loans to be affordable. The only available options for private loans are pay in full or default. Proof that you made good faith efforts and requests include proof of the telephone calls, letters, applications, deferments, and forbearances. It’s your burden to prove that you made every effort to repay.

However, to receive an undue hardship discharge, you must prove that an undue hardship discharge is the only option left. This is difficult to do. But, 40-80% of the people filing for undue hardship from 2005 to 2012 discharged these debts or got better terms than they had prior to filing.

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