Student Loan Assistance with Counsel

Upon filing bankruptcy, student loans go into an administrative forbearance.  In addition, interest will continue to accumulate on the underlying debt, and participation in an income-driven repayment plan terminates.  Debtors in bankruptcy must be strategic about entering into bankruptcy and existing out of bankruptcy with student loan debt.  This particularly important in chapter 13 proceedings.  This is a developing practice area and developing mindset—student loan debt must be addressed.  Independent of filing bankruptcy, student loan assistance is available through legal counsel.

Amount and Type of Student Loan Debt

The obvious starting point is assessing the amount of student loan debt and the type of student loan debt.  Federal student loans can be viewed on the National Student Loan Data System (NSLDS) website.  Borrowers must have an FSA identification number, which can be found here.  Private student loans can possibly be found on credit reports.

Status of Student Loan Debt

Student loan debts can be current, delinquent (less than 270 behind on payment), or in default (more than 270 days delinquent).  Once a student loan is in default status, the loan is handled by a collection company and subject to the Fair Debt Collection Practices Act. 

Student Loan Repayment Options.

Deferment and or Forbearance

Payments on student loans are temporarily suspended.  However, interest continues to capitalize on the principal.  Forbearance is helpful but not a long-term strategy for resolving student loan debt.

Income Driven Repayment (IDR) Plans

Federal student loans offer repayment options based on income and provide forgiveness after 20 or 25 years, depending on the type of income-based repayment plan.  Student loans can be consolidated to qualify for an income-based repayment plan and must be current or delinquent (i.e, not in default).  The various repayment programs can be income-driven, income-based, income-contingent, or pay as you earn.  The key is getting into the correct program.  Once the program is initiated; it’s reviewed annually thereafter. 

Chapter 13 Bankruptcy and Student Loans

Student loan payments are not a line-item deduction on the Mean’s Test, but can be used as an expense on Schedule J.  Student loans are not give “priority” treatment and can be paid inside or outside the plan, depending upon how the attorney chooses to treat the claim(s).  In some instances, it makes sense to include the student loan debt inside the plan, which then intercepts dividends that would otherwise be paid to other general unsecured creditors.

Chapter 13 cases are developing with a trend toward pushing student loans into an IDR program through Court oversite. The goal in a chapter 13 bankruptcy should be to protect the ongoing IDR participation or to use the proceeding to enroll in the IDR program.  Language in the plan should 1) allow for the continuance of IDR, or 2) allow for enrollment into an IDR plan.

Discharging Student Loan Debt

Discharging Student Loan Debt

This is a very difficult and expensive task.  The Court requires a showing of “undue hardship”, however, most or all debtors are suffering financial hardship.  That said, there is no underlying rule for determining dischargeability and the analysis is tremendously fact sensitive.  See Roth v. Educational Credit Management Corporation (page 9).  Many clients have read student loans can be discharged and even reference the “Brunner” test for determining undue hardship.  See In Re Pena (analyzing the prongs of the Brunner test)(page 10).  The three areas of inquiry for undue hardship are 1) the minimal standard of living, 2) additional circumstances, and 3) good faith.

Research and broad statistics show that debtors are filing bankruptcy with student loan debt and with the existence of “undue hardship.”  Yet, attorneys do not file adversarial complaints to try and discharge student loan debt.  From a practical standpoint, many bankruptcy practitioners make a living off of “volume” with each case generating a modest fee.  Whereas litigation is very expensive and time-consuming.  Most small offices and most clients collectively cannot afford the risk and cost of litigation. 

The good news is that there is a growing belief that that the undue hardship threshold is more ascertainable than previously thought.  In addition, filing an adversarial complaint may conclude with a settlement of a partial student loan discharge. 

Legal Help with Student Loans

If you’re overwhelmed with student loan debt, our office now offers student loan consultations to assist client with workout options.  Clients must have their FSA identification number (which allows our office to download the information) and clients must know the balance and account information for each private student loans.  We walk clients through the various student loan repayment options and look into possible discharging student loan debt.  As mentioned above, this is an emerging area of law and now provides optimism in and out of bankruptcy relief.